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Brookfield Infrastructure Partners L.P. (BIP - Snapshot Report) posted second-quarter 2012 loss per unit of 14 cents compared with earnings per unit (“EPU”) of 17 cents in the year ago-quarter and Zacks Consensus Estimate of 58 cents.

The significant year-over-year decline was due to a loss at the Transport and energy and higher Corporate and Other expenses as well as a fall in profits at Timber resulting from weaker demand from China and South Korea.

Operational Update

The partnership generated total revenue of $493 million, up 15.2% year over year. General and administrative expenses during the quarter were $22 million, up 46.7% year over year.

Key Performance Measure Update

The partnership’s funds from operations (“FFO”) were $111 million, up 8.8% year over year from $102 million. The robust results were driven by significant increase in FFO from the partnership’s Infrastructure’s transport and energy and utilities segments. However, this was partially offset by a decline in performance in its timber business.

On a per-unit basis, FFO was 60 cents, down from 65 cents in the year-ago period due to an equity issuance in October 2011. Adjusted funds from operations were $80 million, down from 82 million in the second quarter of 2011.

The Partnership’s other performance measure of earnings before, interest, tax, depreciation and amortization (“EBITDA”) was $201 million, up 8.6% year over year.

Segment Performance

Utilities: The segment generated FFO of $78 million, up 18.2% year over year driven by increased connections revenue from its UK regulated distribution business and the contribution from its Colombian regulated distribution company that was acquired in January 2012.

Transport and Energy: FFO from the segment was $53 million, up 35.9% year over year. The results reflect doubling of FFO from its Australian railroad due to contribution from its three expansion projects and an increase in grain volume as a result of record harvest in Western Australia. The partnership had used the equity proceeds for the expansion of Brookfield Infrastructure’s Australian railroad.

Timber: Segment generated FFO of $6 million, down 53.8% year over year due to weaker demand from China and South Korea that led to downward pressure on log prices in both the domestic and export markets.

Corporate and Other: Segment loss from operations was $26 million versus $16 million in the year-ago quarter.

Financial Update

Cash and cash equivalents as of June 30, 2012 were $128 million, down 45.3% year over year. Non-recourse borrowings at the end of June 30, 2012 were $1,252 million versus $4,752 million at the end of June 30, 2011. Net-debt at the end of the quarter was $5,593 million, up from $5,193 million at the end of the previous-year quarter.

Distribution Declaration

The quarterly distribution rate of the partnership is 0.3750 cents per unit, payable on September 28, 2012. During the quarter, the partnership’s payout ratio was 63%, which is between its expected range of 60% to 70%. This target range would lead to annual growth in distributions in the range of 3% to 7%.

Acquisition Update

Post quarter, on August 6, 2012, a joint venture between Brookfield Infrastructure consortium and Abertis Infraestructuras, S.A. (“Abertis”) entered into definitive agreements to acquire 60% interest in Obrascon Huarte Lain Brasil S.A. (OHL Brasil) for $1.7 billion.

The amount comprises of $1.1 billion of equity and $600 million of assumed liabilities. Brookfield Infrastructure and its institutional partners will own 49% of the joint venture and Abertis will own the remaining 51%.

In order to acquire the remaining 40% of OHL Brasil, the joint venture plans to issue a tender offer, if needed. Post acquisition, Brookfield Infrastructure expects to invest approximately $250 million, with the possibility of a follow-on investment pursuant to the tender offer. The acquisition is expected to be closed in fourth quarter of 2012.

Our Take

The partnership missed the quarter miserably. However, going forward, the partnership’s strategic initiatives and acquisitions will set up a leading South American toll road platform and also double the size of its UK regulated distribution business, acting as a key driver for growth.

Moreover, with the completion of Australian railroad’s expansion program, partnership’s five expansion projects will be on line by the end of full-year 2012. Over the long term, the company expects a total return in the range of 12% to 15% on the infrastructure assets.

However, reduction in demand for natural gas, minerals or timber, changes in economic or government policies, and foreign currency risk, pose a matter of concern for the partnership. The partnership presently retains a short-term Zacks #3 Rank (Hold) rating.

Based in Hamilton, Bermuda, Brookfield Infrastructure is primarily engaged in ownership and operation of premier utilities, transport and energy, and timber assets in North and South America, Australasia and Europe. It operates high quality, long-life assets that generate stable cash flows and require relatively minimal maintenance capital. It also seeks acquisition opportunities in other infrastructure sectors with similar attributes.

Some of its main competitors are Ecofin Ltd. and PSEG Resources L.L.C, a unit of Public Service Enterprise Group Inc. (PEG - Analyst Report).

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