Brookfield Infrastructure Partners LP (BIP) 2010 Q2 法說會逐字稿

(Audio begins in progress) At this time I would like to turn the conference over to Michael Botha, SVP Finance. Please go ahead. Mr. Botha.

Thank you all for joining us for Brookfield Infrastructure Partners second quarter 2010 earnings conference call. On the call today is Chief Executive Officer Sam Pollock, who will discuss highlights for the quarter, provide comments on our strategy and the outlook for our business. Also joining us is John Stinebaugh, our Chief Financial Officer, who will review our financial results. Following their remarks we'll look forward to taking your questions and comments.

At this time I would like to remind you that in responding to questions and in talking about our growth initiatives and our financial and operating performance we may make forward-looking statements. These statements are subject to known and unknown risks and future results may differ materially. For further information on known risk factors, I would encourage you to review our annual report on Form 20-F which is available on our website.

With that I would like to turn the call over to Sam Pollock.

Thanks Mike. Good morning everyone and thank you for joining us this morning. Let me begin by providing a brief overview before turning it over to John to review our results.

As we began the second quarter, signs of a sustained global economic recovery have begun to take hold across our business. In addition, the equity markets are pricing [and the] firm recovery and significant liquidity had returned to the debt markets. However, as the quarter was ending, the mood was more cautious as the sovereign debt crisis spread throughout Europe and questions over longer-term growth levels in China surfaced.

In the past month, concerns of a widespread (inaudible) seem to have subsided. However, given the fragility of the economies in the developed world, we'll likely remain in a period of high volatility and uncertainty for some time.

Within this context, we've made a major step forward to expand our business and generate higher cash flows for unit holders through the prime recapitalization last year and we continue to pursue the growth opportunities it provides. Over the past year we've also positioned ourselves to be more resilient to economic turmoil. We've continued to reduce risk in our portfolio by actively managing our businesses and proactively refinancing our maturities.

As a result, we believe that Brookfield Infrastructure is well-positioned to perform in these current economic circumstances. Today approximately 77% of our cash flow is generated from regulated businesses or under long-term contracts, which serves to reduce the impact of economic fluctuations on our results. Furthermore, our global footprint mitigates our exposure to any one economy.

For example, approximately 50% of our cash flow is generated in Australasia and South America, markets that have considerably less leverage than Europe and the United States and they benefit from the continued strength in commodity. While we own some businesses in Europe and the United States, we believe that these ones will benefit not only from an ultimate economic recovery but from other factors specific to their respective industry sectors and they will generate attractive returns when measured over the long-term.

As we look forward, there remains a significant need for investment in infrastructure in virtually all of our markets. We're focusing our attention on our proprietary organic investment projects and a select number of external investment opportunities that meet our investment objectives and where we have competitive advantages due to our operating platforms.

Now let me turn it over to John to review our performance for the quarter.

Thanks Sam. Now I would like to spend a few minutes walking through our results of operations. In my remarks I will focus on FFO which is equal to net income plus depreciation and amortization, deferred taxes and other items. We highlight this metric because we believe it is a good proxy for the cash flow from our operations.

I will also focus on AFFO yield, which is equal to FFO less maintenance capital expenditures divided by partnership capital, which is a measure of how effectively we deploy our capital.

In the second quarter we recorded FFO of $52 million or $0.49 per unit compared with $45 million or $0.42 per unit in Q1 of 2010. This increase in per unit FFO of 17% compared to the prior period was largely due to better results from our timbre businesses which benefited from strong fundamentals in the domestic forest products sector for most of the quarter. Weaker results at our North American gas transmission business were offset by a nonrecurring cash refund.

Overall we generated an annualized AFFO yield of 9% on our investment capital. Our utility and fee for service businesses continue to earn very strong returns on capital while we remain patient for our timber business to return to its full potential. After eliminating the nonrecurring revenue, our FFO payout ratio was 61%, which is at the low end of our targeted range of 60% to 70%.

Our utilities platform delivered another solid performance in the second quarter. We recorded FFO of $32 million compared with FFO of $27 million in Q1. This increase was primarily due to seasonal factors.

During the quarter our rate base decreased by 6% to $1.8 billion due to the impact of foreign exchange, which more than offset capital expenditures. Our return on rate base was 11%, which was consistent with Q1. As a result of our low cost capital structure and favorable tax position, our utilities platform generated an AFFO yield of 16% for the quarter.

In our Ontario Transmission business we finalized our rate settlement with the regulator, which will increase our ROE from 8.6% to 9.85%. While this outcome was expected, we're pleased to resolve this regulatory uncertainty.

During the quarter we continued to progress the rate review at our Australian coal terminal. In accordance with the formula that was agreed to in the draft access undertaking for [DAU], our regulatory weighted average cost of capital would increase from 8.9% to 10.2% based upon current market conditions. This would result in additional cumulative cash flow of AUD70 million over the next 5.5 years commencing January 2011.

The Queensland Competition Authority is reviewing the DAU, and will make its decision final decision prior to December 31 of this year. These favorable regulatory outcomes will increase our return on rate base once fully implemented.

In the quarter our fee for service platform earned FFO of $26 million compared with $26 million in Q1. Our port and rail businesses posted strong volume growth as a result of recovery of the global economy. In the first six months of 2010 we handled 129,000 TEUs at our UK port, a 50% growth in volume compared to the first six months of 2009.

Profitability in our Australian Railroad exceeded expectations in part due to the timing of maintenance expense which will be caught up in the second half of the year.

Our North American gas transmission business performance was somewhat below expectations after adjusting for a $4 million nonrecurring tax refund. As a result of the significant development of natural gas resources shale resources and the buildout of the gas transmission grid, both natural gas prices and locational basis differentials have been weak in the first half of this year impacting our sales of retained natural gas and market sensitive capacity.

After taking into account maintenance capital expenditures, the AFFO yield in our fee for service business was 16% for the quarter. On July 30 the United States Federal Energy Regulatory Commission, or FERC, approved a settlement agreement which resolves all issues set for hearing in the rate review that was initiated in November of last year. The settlement, which will be finalized after a 30 day comment period, calls for a 45% reduction of retained fuel, an 8% reduction in transportation rates and a 3% reduction in storage rates. These reductions are being phased in beginning July of 2010 to July of 2011.

The financial impact of the settlement is expected to be a reduction of our FFO by approximately $7 million per year once fully implemented. However, prospectively, we will have greater stability of cash flow due to a five-year term in which our customers cannot initiate a rate case. Additionally our cash flow from this business will predominantly be generated from sales of gas transportation and storage capacity, which are typically under medium term contract with minimal volume risk.

In our timber business we took full advantage of improved market conditions during the quarter in order to optimize the value of our business. We ramped up our harvest level by 13% versus Q1 and our average realized price increased by 7% to $80 per cubic meter. As a result of the higher sales volume and improved prices, our EBITDA margin increased to 45% versus 36% in the prior period. For the quarter our platform generated FFO of $6 million, representing annualized FFO yield of 4%.

During the first two months of the quarter prices for Douglas fir increased towards historical trends level due to a pickup in demand from sawmills as they restocked inventory. Additionally, we were encouraged by increased demand for high-quality logs from China.

In the quarter China represented 13% of our sales compared to negligible amounts two years ago. However, beginning in June, demand for logs in the domestic market began to soften. We anticipate that these conditions will persist for the remainder of the year.

During the quarter we renewed our corporate credit facility for a three-year term and increased its availability from $200 million to $400 million. We can draw on this credit facility to fund acquisitions and investments as well as general corporate purposes.

In addition our share of cash in our operations is approximately $230 million. Over the coming quarters we plan to use this liquidity to refinance debt, invest in organic growth projects at certain of our operating subsidiaries and fund new business initiatives.

One final point, effective as of the upcoming record date we have introduced a distribution reinvestment plan that provides our registered and beneficial unit holders an opportunity to acquire additional units without paying commissions by reinvesting all or a portion of their cash distribution. Information on the new plan can be found on our website under investorrelations/trip.

That concludes my remarks. Now I will turn the conference over to Sam to walk through growth initiatives and our outlook.

Thank you John. As John mentioned, let me now turn to our growth initiatives.

The growth in our FFO which supports increases in our distributions is largely driven by investments we make in organic capital projects. We currently have a solid pipeline of investments in our backlog of approximately $200 million that are very accretive to our results. We plan on reinvesting cash from our operations to fund a substantial amount of this backlog.

We'll also continue to progress a number of larger scale projects that have arisen due to the competitive position of certain of our businesses. While several of these projects are in the early stages given the capital required, we have begun evaluating strategies to finance the acquired equity investment.

Beginning with our UK port operation at Teesside, here we have commenced an GBP11 million investment to expand its container handling facilities. This is the first phase of a 19 million investment that we intend to make in a project that will increase the port's capacity from 235,000 TEUs to 450,000 TEUs. With the growth in volumes we've experienced over the past year, the port is operating at virtually full capacity.

The first phase which will commence in November and take approximately 10 months to complete will focus on reconfiguring the existing container terminal layout and installing new rubber tire (inaudible) cranes. This expansion will be funded through cash generated by operations and a credit facility that we're putting in place within our UK port operations.

We're also progressing projects at our Australian Railroad operation. With strong demand for steel from Asia there's a wide array of iron ore projects in the [Midwest] region of Western Australia in various stages of development. As our Australian Railroad connects a number of existing months to ports along the west coast, it is a critical link in the logistical chain that provides access to the expert markets for these mines.

We have begun work on expansions of our network to support two large-scale projects that have online date scheduled in 2011. We've executed a contract with one of the mining companies to support a $35 million investment and we're in negotiations with a second mining company to support a further $160 million investment. In light of this project's timing, we've begun front end engineering work that [we would paid for] by the mining company.

Lastly we've also advanced expansion projects at our Australian coal terminal. Since we are unable to significantly increase capacity within the current footprint we've been lobbying to secure the right to develop Dudgeon Point, an adjacent site located 4 km north of our existing site in Queensland. In July we were appointed one of the two preferred potential developers of a coal export facility at this site.

As our development plan is to interconnect is that with our existing key, we believe we have a substantial cost advantage over a greenfield project. In 2011 we anticipate that our customers will begin financing a feasibility study to further vet this project.

Now, turning to our outlook, in addition to the progress we've made on internal growth initiatives, we're actually working on a number of new investment initiatives particularly in Latin America. In this region we believe there's considerable opportunity to make investments that will generate attractive risk adjusted returns. In Brazil, Chile, Colombia and Peru we have very strong local relationships that provides a competitive advantage versus other investors.

In addition, with tightening liquidity in Europe we're seeing attractive opportunities to partner with or buy assets from some of the strategic players who are among the largest owners of infrastructure in Latin America. Due to the demographics and robustness of the Latin American economies we're targeting, investment opportunities tend to fit our thesis of investing in very strong franchises that are positioned to capture future organic growth opportunities.

In conclusion, we remain committed to owning and operating businesses that deliver sustaining and growing cash flows while ensuring that we are well protected from volatile market conditions. With the businesses we own, we continue to target distribution growth of 3% to 7% per annum as a result of the opportunities within our portfolio to grow FFO. We're also optimistic about our ability to find new businesses in which to invest that will lead to further growth.

Operator, I would like to now turn the call back to you to open the call for questions.

(Operator Instructions) Linda Ezergailis, TD Newcrest.

Thank you. I have some more questions about the Dudgeon Point terminal that has been proposed. You mentioned that feasibility studies would start in 2011. At what point might you expect an in-service date and what sort of size are we looking at in terms of capital cost?

This is Sam. As we talked about in the past, there's been sort of two types of expansions that have been contemplated. One was a relatively modest expansion of maybe 5% or 4 million to 5 million tons. And it's looking less and less likely that that is the alternative that the users will go down. And so this larger expansion which could be in the order of 40 million to 50 million tons is the one being contemplated. And as a result, that's the reason for the need to have a facility at Dudgeon Point.

Given the scale of that type of expansion, an in-service date is probably not going to happen until 2014, 2015 at the earliest I would say. The range of dollars required are very preliminary but they would be anywhere between $3 billion and $5 billion.

Would you bring in other partners in that or--?

It is too early to comment on the exacting exact financing strategy. Obviously that number is a gross capital number. And given the quality of the cash flows and the regulatory system, we could probably obtain plus or minus 70% leverage for that particular investment. And so the -- for 100% of that investment you are looking at maybe an equity requirement of plus or minus $750 million. I think we could easily source partners if need be at that point in time.

Now, can you help me understand Dudgeon Point's economic situation? Is it economically depressed? Is it already largely industrial or would there be some high income vacation properties that would oppose this? What sort of environment would there be locally in terms of support?

Sure. I was actually just there less than two months ago and toured the site. So I will try and give you a visualization of exactly what it looks like.

The good news about it is it's land that is currently owned by the government, so there wouldn't be they need to expropriate land from individuals. And the amount of houses that are situated on the particular area is a relatively modest amount. In between where we are currently located at Hay's Point (sic), there is a bit of a -- I don't know if I would call it a nature zone, but an area clearly where you could not build a facility and thus that is the reason why we would have to go around -- basically it's like around a bend to this other point that sticks out.

And we can access it with our railroad and tie it in relatively efficiently and build a new stockyard over there, which it's basically scrubland is how I would describe it. As far as connecting it to our berth, the advantage of doing that is that we have already dredged the -- within, in and around our berth and so we would not have to do any further dredging to expand our berth by one or two more slots. So, it fits in quite well with our scheme.

It's still -- we would have to build an additional jetty to connect the site to our berth. That is where large part of the capital costs would come from, as well as the building of a fairly large footprint to store the coal on ground. Hopefully that was a little helpful.

No, that was very helpful. Have the local governments and media and people been initially supportive or has there been any reaction so far?

It's quite well publicized there. The governments are obviously quite supportive. They -- the coal either -- there is limited areas where the coal can go out of. There would be some possible expansions up at Abbot Point and there is talk about privatizations up there, but there's limitations as to how much can go through that port.

There is also a port down at Gladstone. It's not really economic to move the metallurgical coal from the Bowen Basin down there. There is some coal that goes down there but it's mostly thermal and they don't like to mix the two types of coal. So really this is the area where more than likely that has to go through.

As far as the locals, I would say there would be -- if you wanted to do a site to the south of where we are, that would probably be more problematic because that is where most of the population is. But in this particular area, it may be 50 to 100 houses that are affected. I think most of them are renting their land, so you know I think we think there is a very strong possibility that the -- or a very low likelihood that it would be impeded by complaints.

So what do you view to be the main bottleneck to getting this over the finish line? Would it be just commercial agreements, then?

It's probably rail. So the biggest issue with capacity constraints at the port today is the lack of rail infrastructure. As you may be aware, the user -- the mining companies have bid to acquire the rail from Queensland Rail. And to the extent that they do that, I think they would be comfortable that they could meet the time frames and achieve their logistical objectives. To the extent that they don't, then Queensland Rail may have its own views as to where it wants to spend its capital and when. That could impact the timing and/or scale of this project.

That's helpful. Just a short follow-up, the draft access undertaking, final ruling by the end of the year. Again, what would you expect to be kind of the main potential bottleneck in getting approval? Or is there some risk that maybe it would be a watered-down approval?

As you are aware, it is a -- the one that was submitted to the QCA was fully supported by the mining company. I think the only two interveners or letters that went in afterwards really related to the expansion -- potential expansion projects and whether or not there would be differential pricing or a socialized pricing over the current facility versus the new facility.

But as it relates to the cost of capital, at this stage we can't foresee any reason why the regulator wouldn't approve it. But we've had no indication one way or another at this stage.

That's helpful. Just a final modeling question, what sort of DRIP run rates might you expect?

It's John. At this stage it is a little bit early for us to tell. So we're implementing it. This will be the first quarter that people are available -- or able to access it. So it's going to take a little bit of time for us to get a sense as to what the run rate is going to be.

Would you cap it at a certain rate?

We're not contemplating capping it. We think that it is a benefit to unit holders who are interested in reinvesting the stock and we don't anticipate the need to cap it.

Okay, that's great. Thank you very much.

Brendan Maiorana, Wells Fargo Securities.

Thanks good morning. Question on the PD ports in Dalrymple Bay in terms of the reduction in interest that is likely. Is this a situation where you guys at the BIP level will be giving up a little bit of interest in this, and then let's just say those proceeds may be reinvested into investments that the BAM infrastructure fund may make? Is that how we should look at this?

It's John. The way that this works is that there is an amount of DBCT and PD Ports that is in a private partnership. And to the extent that new investors come in, which they're able to come in until September of this year, then what will happen is they will put money in and it will reduce the ownership of the other partners in the fund. So we will get capital back that we can reinvest in other initiatives that we have.

Okay. So, is BIP's -- is BAM's interest in the fund just exclusively via BIP?

BAM's interest in the fund has been transferred to BIP.

Well, maybe just to clarify that, we have first right to them.

So you don't have the obligation but you have the right of first offer I suppose.

That's correct. And with respect to these assets, it has been transferred to BIP.

So as we look out at all of the growth projects that you have elaborated on, and let's just put it DBCT aside for a moment but we look at the other ones, UK ports and WestNet Rail and Transelec we know about, the Texas transmission, a few of the other ones, do you think there is -- is it possible that the BAM private fund, that the investors in that may take a portion of the interest that BIP currently has in some of these assets such that the growth projects from the BIP level, there may be a reduced amount of investment and then a potentially reduced amount of return?

Brendan, first of all let me just kind of go back and talk through what our financing strategy has been for capital projects.

We have a variety of what we would call more organic projects that we anticipate funding through cash flow. And then there are some of the larger scale projects that you mentioned. And for some of the larger scale projects, first of all, we have quite a bit of liquidity with a combination of the retained cash we have on the balance sheet of over $200 million as well as the $400 million our credit facility. So we have quite a bit of liquidity in the near-term to fund those.

From a longer-term perspective, how we ultimately fund those, we have said that larger scale projects may require external capital to fund. And to the extent that they do, we will look at a number of alternatives. We could look at raising equity. If we do so, then we would want to make sure that they are yielding enough to cover the cost of the equity that we would raise.

We could also look at other alternatives such as bringing partners into discreetly fund certain initiatives. So we'll look at a variety of funding alternatives and do what we think is best from a funding strategy standpoint for BIP unit holders.

I appreciate the color. But there -- I guess what I'm trying to drive at is that the opportunity set that is in front of BIP today, as we look at the projects that have been disclosed, is at the option of BIP as we look at it today to kind of participate in all of the upside of those projects if that is the best use of capital.

Now, it is your option to bring in potential partners if you so choose. But there is not the likelihood that the BAM fund, those partners have a right to participate in some of these projects.

That is correct. The projects that you have mentioned WestNet Rail, the DBCT, PD Ports, those are BIP investment projects. So there is no right to invest in those by the private fund.

Okay, that's helpful. And maybe for Sam, somewhat related but a little bit of a different question. You've got -- BAM is raising capital for infrastructure, for private infrastructure partners. And then you have BIP has the option to participate in that.

We've seen that a lot of private investors have reduced their return expectations over the past 12 to 18 months or so. That seems to be as little bit in competition with the typical BAM or BIP outlook which is -- I would characterize as a bit of against the grain type of investor. How do you kind of offset the pressure of maybe your partners asking you to kind of put money out versus holding true to your own return standards?

Well, as we -- I think we have been successful in attracting partners to invest alongside of us. I think the success in that regard has been because we have set out for them an investment philosophy that is one I would call us a value add investor. We like to buy core assets but we like to acquire them on a value basis.

As a result, when they join us they know we aren't targeting 10% to 12% returns. We're targeting something that is in the order of magnitude 15% returns even though they are high-quality assets. And we think we can successfully do that because we leverage our operating platforms or we tend to target somewhat more complicated situations where we can utilize our restructuring expertise or other capabilities.

And so they know that. We don't feel any pressure whatsoever to invest in a different type of investment philosophy. And frankly I think with the scale, the money we have in front of us over the next couple of years, I think we see plenty of opportunities to accomplish what we set out to do.

So all of the projects that are being -- I guess not evaluated, but all the projects that you're pulling the trigger on make sense from a BAM/BIP owned capital perspective and it just so happens that you're able to leverage the fees from your partners?

At the end of the day, we're investing our own capital and that is what drives our investment decisions. BAM may make some additional fees but it is driven first and foremost by the returns on capital. That is where 95% of the value accrues to BAM and ultimately to BIP as well.

Andrew Kuske, Credit Suisse.

Thank you. Good morning. I guess a question for Sam, and it's just stepping back at a 30,000 foot level. When you're looking at your allocations of capital into the future, are you really basing part of your capital allocations on an inflationary view in the world or a deflationary view in the world?

That is a good question. I'm not sure it's quite articulated in that particular way. I think we look at a number of factors to assess where we invest capital.

I would say we take a view on inflation on an asset by asset and country by country perspective. However, we also look at the other investment characteristics around a particular business, namely potential growth rates, stability of regime, ability to capture inflation and growth within a regulatory environment, and then obviously the competition for the investment in the first place because that can often drive -- what you pay (inaudible) at the outset will often dictate what your ultimate return is.

So, how we get in is is often just as important as what the -- how the future will play out with respect to the assets. As we look -- and I think where you're going with the question is our current interest in South America. We particularly are attracted to that market for a number of reasons. Probably the main reason is just the economic and demographic situation that in particular the four countries we're looking at are faced with.

With respect to their balance sheets, they have some of the best fiscal situations around the world. They have generally very young populations and with just an intensification of the use of energy and just a growing middle class. We see a tremendous need for infrastructure and a strong growth in everyone's availability of infrastructure going forward.

We think that will not only provide the investment opportunities, but will provide the future engine to utilize those to a tremendous extent and two grow it. And so it is a market that we're comfortable with. I would say the challenges with the market, obviously with growth you do see lots of new supply come onstream and so we need to be very careful which sectors we do go into.

We also need to watch the political environment, as the mood down there can change from government to government. But all in all we do see a very market oriented government in Brazil and in the Chile, Columbian crew. And we think for the foreseeable future it remains an excellent place to invest.

Just as a follow-up to that, as that commentary is very useful, but when we look in Latin America what would be your particular asset focus? Because earlier this year we've seen some electricity transmission assets change hands in South America as also with some toll roads. So I was just curious as to what other assets you would be looking at, either to bulk up your existing platforms or to step into new ones.

We're looking at a number of different types of opportunities down there Andrew. We are looking at some port opportunities and some toll road opportunities. The transmission we haven't been so focused on.

What we found is that returns for either greenfield concessions or more recently there was one transaction where the Chinese State Grid bought a portfolio transmission asset. Those tend to go at pretty low returns, less than our threshold. But we found in the other areas we can get pretty attractive returns. Another sector we like is the pipeline sector.

That's very helpful. Thank you.

(Operator Instructions) Robert Kwan, RBC Capital Markets.

Great. Maybe touching on that last point you made on electric transmission and what you're seeing about low discount rates out in the market, would you ever consider monetizing your interest in Transelec to help fund to the extent something big like DBCT, that expansion came along?

It's Sam again. I would say today we don't have any plans on disposing our interest in Transelec. However we are constantly evaluating all of our assets. And to the extent that we have an opportunity to realize good value from an investment, and particularly one that may be less core than another, then we would absolutely consider that.

I would not say Transelec necessarily is on top of our list of assets to dispose of, but at some point in time that could be the case.

Maybe if I can ask it a little differently, in terms of the discount rates you're seeing out there is it materially different than what you might be looking at on the acquisition side?

In terms of the discounts we've seen for transmission projects, I would say that they have been in low teens in Brazil as well as in Chile and Peru. And for us to invest in those jurisdictions we would not invest at low teens, so we would need at least probably a couple hundred basis points if not more, higher than that, to deploy capital in new investments in that asset class.

But maybe just to add to that, Transelec today is generating a good source of reinvestment opportunities that we are able to invest at return levels that are attractive to us. And so today we are able to, I think, leverage this investment and this platform to grow our business. If we ever found that was not the case and that someone would buy it at a very low return threshold, then that is probably the environment at which we would then consider selling it.

Moving to the potential Dudgeon Point project, can you talk about what some of the main criteria you think with respect to the selection of yourselves or the other party on proceeding to build?

There will be a number of factors. In fact, I guess at this stage we expect the government probably to come up with a master plan for the site. And that master plan could in fact provide enough of a footprint for each party to put up their own facility.

At that stage, really it would be a matter of the other party and ourselves coming up with customers who would sign up for the capacity and underwrite, for all intents and purposes, the expansion. It is because of that that we think we are particularly well-placed, because when it comes to approaching the users for a contract, we think we can provide them the lowest cost alternative because of the ability to leverage our existing facilities.

What is your willingness to take a lower return, i.e. not be fully contracted on day one? Could you talk about how much ramp up here you might be looking for, what your minimum percentage of that capacity contracted might be?

As of today, based off the interest that we have seen, we would size it to the interest that we have -- submissions we currently have on additional capacity. I don't think at this stage we are contemplating at all taking on any risk with respect to uncontracted capacity.

That's basically how we've done the expansion at DBCT to date where it's been based on customer demand which is backed by long-term contracts. And that supported the expansion and it has basically been regulated expansions under a regulated framework.

It just sounds like this could be a little bit more of a competitive situation where you might either want to or need to sacrifice a little bit of uncontracted capacity to kind of win the customer or win the project. Is that fair or is it a different dynamic?

I don't think that is the case, because I think depending on the type of scheme the other party proposes, if they're looking to do an open access system such as what we have currently at DBCT and what we propose to do here, then it will be a regulated utility. To the extent that they try and do some sort of merchant facility, first of all we're not sure that the regulator would allow them to do that because that may not meet the regulator's desire. But also it would -- they would be taking on a different level of risk.

I think right now on the basis that the government is probably looking for something along the lines of what we have at DBCT, i.e. open access and cost socialized over the system, I just don't think it is going to develop any other way.

The last question I have is, in the past you've talked about large infrastructure opportunities, or kind of the (inaudible) the restructuring nature, i.e. prime, might come up every few years just based on the cycles. As we saw what looked like an improving market and you kind of mentioned higher volatility and uncertainty seems to be taking hold here. So, do you think there might be an acceleration of any of these new opportunities based on what you're seeing out there right now?

It is -- I'd say it's too early to tell. We are monitoring a few situations in Europe that could lead to something interesting. But I would say at this stage everything is in relatively early days. But I do think there is a possibility over the next year or two something could arise.

Just in terms of the organic opportunity as it seems like you have more clarity on what is going on here, are you still very interested though, should these large opportunities come up, to try to take advantage there?

I didn't quite follow the question. The large opportunities are referring to our --

Restructuring type acquisitions. Just looking at kind of where you see your access to capital for something like that, given you've got I'd say more visibility and potentially a nice size of what we will call the organic opportunities within the portfolio?

Let me just come back to our priorities. I would say our number one priorities are deploying capital in our internal organic investment opportunities. Those are the best returns for the lowest risk that we have in front of us. That is where, as we prioritize, those are number one priorities.

Our second priority, then, are new initiatives in and around North America and South America that are sort of ancillary to our current operations; businesses that we can get our head around and ones that are probably somewhat smaller in scale.

I would then say our third priority then would be maybe a prime-like opportunity that is larger, good value and of greater scale. But they come along every couple of years and I would not say that we are day to day out targeting those types of situations. But in the course of our business activities, we do occasionally come across them and to the extent they make a lot of sense then we will evaluate them at that time.

But I would not want to leave you with the impression that that is our number one priority. Our number one priority is sticking to the internal projects, then sort of the investments in and around our operating platforms.

That is great color. Thank you.

There are no more questions at this time. I will turn the call back over to Mr. Pollock.

Thank you operator. With that I would like to thank everyone for joining us today and we look forward to updating you on our progress next quarter. Have a good summer.

Ladies and gentlemen this concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.