Brookfield Infrastructure Partners LP (BIP) 2015 Q1 法說會逐字稿

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Brookfield Infrastructure Partners 2015 First Quarter Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. (Operator Instructions)

At this time, I'd like to turn the conference over to Tracey Wise, Senior Vice President, Investor Relations. Please go ahead, Ms. Wise.

Thank you, operator and good morning. Thank you all for joining us for Brookfield Infrastructure Partners first quarter 2015 conference call. On the call today is Bahir Manios, our Chief Financial Officer who will review our results and Sam Pollock, our Chief Executive Officer who will provide an update on our investment activities and an outlook for our business. Following their remarks, we 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 risks 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 now turn the call over to Bahir.

Thanks Tracey and good morning everyone. We began the year with solid first quarter results. Our financial performance continued to reflect the overall diversification and the regulated and contractual nature of our cash flows that underpin our operations. We generated funds from operations or FFO of $186 million or $0.89 per unit which was unchanged compared to the prior year as contribution from new investments in addition to general improvements at most of our businesses were offset by the $15 million impact of foreign exchange movements.

Our same-store growth for the period on a constant currency basis was strong as we generated an 11% increase in FFO per unit compared to the prior year. With the distribution of $0.53 per unit for the quarter, these results translated into a payout ratio of 68%, which was achieved in a period where we increased our distribution by 10% and prior to any contribution realized from our newly acquired communications infrastructure assets.

We closed on the French telecom transaction on March 31 and expect this business to make a meaningful contribution to our results going forward.

I'll now touch on our financial results and operating performance for our various segments. Our utility segment generated FFO of $95 million for the quarter compared to $89 million in the first quarter of 2014. The increase was the result of continued strength in connection activity in our UK regulated distribution operations, inflation indexation, commissioning of growth capital into our rate base and cost reductions in a number of our businesses.

Our transport segment generated FFO of $96 million in the first quarter of 2015 which is roughly in line with the results in the comparable period in 2014. Our results benefited from volume and tariff growth in the majority of our operations and contribution from our newly acquired rail logistics business in Brazil. These positive results were affected by a strong US dollar, which rose against all of our currencies and rising interest rates in Brazil.

Inspite of these challenges, our transport operations continued to deliver solid results.

I wanted to give a few operational updates pertaining to our three largest businesses in this segment. In South America, the combination of tariff and volume increases at our toll roads in Chile and Brazil resulted in a 6% increase in EBITDA for the quarter in local currencies. Furthermore, our rail business in Brazil experienced robust volume growth led predominantly by increases in agricultural and industrial product volumes.

Our UK port business experienced a 13% increase in container volumes over the same quarter last year. Higher volumes were the result of improved economic conditions, but also from efficiencies as a result of investments made in prior years to modernize our container terminal business which is now starting to contribute to our results.

And finally in Australia, the majority of our rail customers have been maximizing volumes in order to reduce their average unit costs in response to the steady decline in iron ore prices. This has resulted in volumes that are for the most part above take or pay levels and higher than the prior year as well.

While we are encouraged by the recent modest rebound in iron ore prices, given the uncertainty over prices in the short to medium term, we are looking at various cost-reduction measures. These would allow us to mitigate any potential impact from volume reductions should any of our customers decide to temporarily suspend operations or reduce volumes. As such, we do not expect any volume reductions to meaningfully affect the results of Brookfield Infrastructure on an overall basis.

Energy segment generated FFO of $28 million compared to $26 million in the first quarter of the prior year. Results in this segment, predominantly reflects the growth of our district energy platform which benefited from the full contribution of systems acquired over the past 12 months. These positive results were partially offset by lower results from our North American natural gas transmission business, which had its results impacted predominantly by a milder winter than in the prior year.

Now I'd like to turn to our organic growth initiatives. During the quarter, we advanced several meaningful initiatives and I wanted to highlight some of the progress we're making in three businesses. First, in our utilities business, our UK-regulated distribution business experienced yet another quarter of record connection sales adding 55,000 new connections to its growing backlog. These first quarter sales which were 35% higher than the same period in the prior year were driven by a larger percentage of multi-product sales as well as a stronger UK housing market. The outlook for sales activity for this business remains promising for the rest of this year and next.

Second, we continue to push ahead on our $685 million transport capital backlog with three meaningful projects in the segment that I wanted to highlight the first one being in Brazil where we advanced the expansion of our terminal at Santos port which will provide agricultural customers with an integrated rail and port solution for the export of their products and the import of fertilizers. This project is now almost one-third complete and is on schedule to be commissioned by mid 2017.

In North America, we completed the first phase of the automation project at our US West Coast container terminal operation. As a result, we expect this terminal to handle increased volume and achieve cost efficiencies over the course of this year. And in the UK, our port business has advanced its key upgrade project which is expected to be completed in the second quarter on time and on budget.

And lastly, our district energy platform is starting to become a meaningful part of our overall business as we've been successful in executing on a multi-dimensional growth strategy. Our strategy is focused on acquiring new systems, uncovering tuck-in acquisition opportunities in cities where we currently operate, connecting new residential and commercial customers to our systems and renewing existing client contracts at favorable rates.

During the quarter we were successful on all fronts. We signed agreements to add four new commercial clients, connected almost 1,100 new residential customers and renewed seven contracts at favorable rates.

We also completed the Louisiana State Universal Medical Center project, acquired a small system and Windsor and bought out our partners in our system in Las Vegas. These initiatives, in addition to projects in Australia that were previously announced, will increase our run rate EBITDA for this platform by approximately 15% once all fully on line.

And finally before I conclude my remarks and turn the call over to Sam, I wanted to touch quickly on our liquidity position. We started off the year with corporate liquidity of $1.4 billion and since then we've undertaken several initiatives to further increase it by successfully closing on three capital raises consisting of a CAD125 million preferred LP units issued in March at a rate of 4.5% annually for the initial period ending June 30, 2020. We also closed on CAD450 million seven-year medium term notes which is an offering we completed in the Canadian market with a coupon of 3.5%, which was swapped into US dollars at attractive terms. And then finally subsequent to period end, we launched an equity offering where we issued approximately 21 million units at a gross price of $45, raising gross proceeds of approximately $950 million.

Overall by getting these offerings done, we raised net proceeds of approximately $1.4 billion. We also invested $0.5 billion during the quarter primarily to close the French telecom acquisition. And so with all of that said, we are now left with total corporate liquidity of almost $2.3 billion which positions us extremely well to move quickly on a number of the capital deployment opportunities that we have on the go and that Sam will touch on in his remarks.

And so with that, I'll turn the call over to Sam.

Thanks Bahir and good morning everyone. Last quarter, in this call, we highlighted several investment themes that were giving us confidence that we would experience an active year of acquisitions. Over the past three months, we've seen a number of our initiatives advance considerably. At the same time a few such as the Australian government privatizations have become less interesting for us.

While we generally are limited in our ability to provide details on transactions that are in progress, we thought it would be helpful if we nonetheless describe at a high level the nature and status of transactions in our pipeline. In that regard, we currently have seven transactions that are quite advanced. With respect to four of these transactions, we are working with sellers on exclusive or on a bilateral basis. The assets we are looking at are located in North and South America and in Australia and involve businesses in the transport, energy and communications sectors. In addition to the seven I referred to above, we have a number of less advanced but equally exciting prospects in our pipeline.

We are using the same playbook for acquiring high-quality investments on a value basis that we have in the past. One of our primary strategies is a roll-up strategy where we identified ways to leverage one of our existing platforms to pursue similar repeatable add-ons. In some cases they can be small, which we generally refer to as tuck-ins. In other instances, the acquisitions can meaningfully add to the scale of our platforms.

Currently we are working on five prospects in district energy that in total would more than double the size of our platform should we be successful acquiring all of them. Of these, two smaller prospects are advanced while the two largest are in early stages.

Similarly, we are actively evaluating various gas storage assets that would substantially upsize this platform. These types of investments can often have the lowest risk and best returns as we can normally bring substantial synergies and operating strategies to bear that enhance cash flows and reduce risk.

Another one of the strategies we are currently employing is what we describe as a sector expansion. This is where we leverage our sector knowledge and apply to similar situations in other regions where we have a significant presence. Our ability to utilize our experience and expertise at Brookfield rail in Australia was invaluable in assisting us to complete the Brazilian rail transaction in 2014 and is a great example of the merits of the strategy.

One of our most advanced transactions is in the communication infrastructure sector which has attracted investment attributes such as long-term contracts and solid barriers to entry. While experience with the French Tower's business is in its early stages, our investment teams are now very experienced with this asset class. This gives us confidence to pursue acquisitions in the communications sector in other markets where we have a presence.

Finally, we are also focused on value-based investing and Brazilian infrastructure asset is our current best idea. In Brazil, converging political and economic factors are creating a capital shortage and market dislocation. Despite recent market volatility and economic challenges, Brazil remains a large high growth market with strong competitive advantages in the production of many global commodities. It also has an emerging middle class of attractive demographics.

We are excited by the potential opportunities in Brazil at the moment given the quality of the assets that are up for sale or that we expect will soon be up for sale and the lack of credible buyers that we need to compete with. In total, we may be able to invest up to $2 billion over the next 6 to 18 months in assets in Brazil or that are located outside of Brazil but are owned by Brazilian companies.

We've been very successful in the past when we invested on a contrarian basis in sectors and regions we know well. We currently have an attractive initiative that's well advanced. We've been in exclusive discussions with the OAS, a large Brazilian construction company since late March regarding the purchase of their stake in the large toll road airport and urban mobility company in Brazil called Invepar.

As part of the transaction, we may provide the company with a court-approved loan under Brazilian law with features akin to a debtor possession loan of up to $250 million. By providing the DIP loan, we expect to be well positioned to continue exclusive negotiations to conclude the acquisition of OAS' stake in Invepar.

Invepar owns nine high quality toll roads in Brazil and Peru, a controlling stake in Guarulhos airport in Sao Paulo, the largest of its kind in South America and an interest in two urban mobility systems in Rio de Janeiro that serve over 220 million passengers per year. We think this is a good example of where we can utilize our unique expertise and flexibility to create an exclusive opportunity. At this point in transaction I'm unable to provide any further details.

There is one last comment I wanted to make regarding acquisitions. Last week, we announced that along with our partners, we intend to make a tender offer for the public minority shares of our Brazilian toll roads subsidiary. Should we proceed and be successful in acquiring the balance of the shares held by the public, Brookfield Infrastructure will be investing up to a further $200 million to acquire shares and reduce debt in the company.

Before moving on to our outlook, I'd like to provide a brief update on our capital recycling program. During the quarter, we entered into definitive agreements to sell our 23% interest in our New England electricity transmission business. This business has generated steady and reliable cash flow since we first acquired it in 2009 but we believe we can reinvest the proceeds into higher returning assets.

Upon completion of the sales process that attracted substantial interest from multiple buyers, we agreed to sell this business for proceeds of approximately $280 million on a 100% basis. On closing this transaction will generate an internal rate of return on this investment of approximately 30%. We expect to receive approximately $30 million in net proceeds from the sale which would close in the second half of 2015. There are no further updates on capital recycling initiatives at this time.

Turning to our outlook, our business is diversified with high-quality assets that should enable us to deliver solid results in a variety of economic environments. We are currently operating in global economic conditions that are generally pretty good. The US economy has continued to show signs of higher growth and quantitative easing programs from the European Central Bank are leading to greater optimism that the euro region can improve its growth trajectory.

Economic growth is disappointing in South America and we expect the situation to persist for the next year or two. However, the impact of lower foreign currency rates should propel higher exports and we believe the fundamentals continue to support favorable growth over the longer term.

On the whole, our business should perform pretty well in this economic environment.

For the balance of the year, our primary focus is to execute on our capital deployment strategy. Our business development teams are working diligently to convert our strong pipeline into investments that will provide further profitable growth for our platforms. As we deploy this capital, we expect to add high-quality sustainable cash flows that should help us meet or exceed our FFO and distribution growth objectives.

With that, I'd like to turn the call back over to the operator to open the line for questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Cherilyn Radbourne, TD Securities.

Thanks very much and good morning. I'm sure a lot of the questions are going to be on your deal pipeline, but I did want to ask a couple related to organic initiatives. And I guess the one that seems to stand out relates to the UK regulated distribution business. And I've got to admit I'm less familiar with how these last mile connection businesses work. So I was hoping maybe you could explain in terms layman's term the opportunity associated with this meter replacement initiative and just give us a sense of how much capital you might be able to deploy to it and over what period of time?

Hi, Cherilyn, it's Sam. I'll start off and maybe be Bahir will jump in. The business that we have in the UK is very unique and I will try not to be too long-winded here, but it's one of the few, if only regulatory environments where there is this last mile business. Generally the last mile connections are done by the local distribution companies, but in the UK they decided to unbundle that from the distribution companies because they found the service levels to the different developers was lacking. And effectively what our business does is we connect within a development community the pipes from the main line that would cross from the local distribution company's system into -- we would connect to that into the system or the development -- the community that has been developed and then attach the pipes to the houses and basically own that infrastructure. And what's unique about the business is where gas and electricity generally are separate utilities, our business is a multi-product business where we connect gas, electricity, fiber and water so we can service all these different elements. And so it makes it very easy for a developer to call us up and get all of them set up as opposed to having to call four different companies. So it makes us very competitive against the local distribution companies. They still do what we do, but generally they can only hook up one connection at a time.

So and that's how the business started. What's going on in the UK today is that in order to make the country more efficient and to reduce the overall loads of gas and electricity, the government has decided to force the retailers to install smart meters in every house in the country. And it's been a program that's been discussed for a number of years and today it is running behind schedule. I think it was supposed to actually begin rollout probably about two years ago. It still hasn't really started to any large degree and supposed to be complete by 2020 and today that looks like a goal that's not going to be quite completed.

But effectively the smart meters would both allow the people in the houses to see how much uses they are incurring for both gas and electricity at all points during the day and for different machines and as a result manage that usage much more effectively. And I'm obviously describing that very simplistically, but that's essentially what it does.

And installing these meters is a huge capital program because you have to go out to each individual house and obviously carry out the work and buy the equipment. It's estimated that this could cost upwards of GBP10 billion and the retailers don't have the budget to do that. And so they are looking to hire -- or subcontract that work to different parties to do that. And today we are in a business of owning meters and we think this could be a very attractive business for us to get into to effectively own these meters and install them on behalf of the retailers. So as far as how much we could ultimately participate in this sector, if we could achieve a 10% market share that would represent up to GBP1 billion and assuming the typical leverage levels that we have in the business as a whole, that could represent anywhere between GBP300 million to GBP500 million of equity investments and we think we can earn attractive return on that. Now that will obviously be deployed over a five to 7-year time frame but nonetheless we think it would be a good add on for the business.

All right. That's extremely helpful. Thanks. And then on the district energy business, that has expanded very rapidly as well. So I was wondering if we could just get an update on how much capital from an equity perspective you've got deployed to that business at this point. And then just any more color you can provide on the initiatives that are underway that you've indicated will increase the EBITDA run rate by about 15%?

Hi, Cherilyn it's Bahir. So we've got approximately about $200 million to $250 million of equity that's currently deployed in the business. But as we noted in the past quarter when we announced some of the projects in Australia that we've been successful on which haven't closed yet obviously and then just all the initiatives that we had going on this quarter, we would expect that we would be deploying another say $100 million to $150 million. And so with the two systems or the two projects in Australia that are yet to come on line, the expansion of our New Orleans system, buying out our minority partner in Vegas, the new smaller system in Windsor along with all the contracts or the residential and commercial clients that we signed up in the quarter, what you'll see is this will all come into our results at different points in time, but all should be happening at various points in 2015. So by the start of 2016 you should have all this stuff kicking into the results.

And what we wanted to do is quantify the impact of that. So today we -- or this quarter we reported $10 million of EBITDA in the business for the quarter and we think with all the initiatives that we've announced and we've got a lot more on the pipeline that we can speak to you about later on, but with all the things that we've spoken about, we think we can grow that at least by 15% fully on line by early 2016.

Great. And then just the last quick one. I think most of your debt is fixed. I was just a bit surprised to see the comment that results in transportation were impacted by rising interest rates in Brazil. Maybe you can just hit that one?

Yes. And this relates to predominantly the debt we've got in Brazil that's mostly all floating. So if you looked at our entire debt position, I think we're about 85% fixed and essentially the 15% that's been left floating, predominantly all of that relates to our Brazilian business. And so we've seen rates in Brazil increase year over year and that's had an impact to our FFO.

Okay, understand. Thank you. That's all from me.

Thanks, Cherilyn.

Thanks, Cherilyn.

Frederic Bastien, Raymond James.

You mentioned that your appetite for assets in Australia had diminished. I suspect this has to do with valuations. But if you could provide additional color on the topic that would be great?

Sure. Hi, Frederic. It's Sam. I guess really one may think that that's happened since we've last spoken or at least it took place right around the time that we had our last call. The government in Queensland, which was a liberal government was campaigning on the merits of privatizing a number of assets. They ended up losing the election and the new government that came in decided to scrap that program.

And there was probably out of Queensland loan somewhere between $30 billion to $40 billion worth of assets that we were planning to be sold and as a result the number of privatizations that are underway has shrunk at least in half. Today there is really only two that are discussed for the balance of the year, one in Victoria, one in New South Wales. And as a result, all the energy that were released at that time being spread to probably what was maybe six transactions are now focused on two transactions.

And so while we still expected it to be a fairly competitive environment, our view is today that it's going to be even more competitive. And so that's the main reason why we're not as focused on the privatization to that market right now.

Okay, that's helpful. The second question, just like you to comment on what kind of natural gas business or natural gas asset fits within BIP's investment mandate. My impression was the Apache assets out of Western Australia would potentially fit your profile. But I understand that that wasn't the case. So could you clarify what kind of -- what makes that kind of business an investment criteria -- what makes it investable from your perspective versus what doesn't?

Sure, Frederic. And I will tackle this one. And that's a great question because the assets that you're referring to, our private equity business bought with Macquarie, definitely has some elements to it that we would describe as infrastructure. I think the difference of that business when we thought about where it might fit was that there -- it was more of a fully integrated E&P business with a relatively sizable exploration production component to it. And so while there were lots of infrastructure and hard assets related to it, we just thought that there was just too much of it that related to a typical E&P business and so didn't quite fit within our mandate.

Would it have made sense to split the business or it was too complicated?

We thought about that but because we had another partner there in the case of Macquarie and there was other components to the transaction because a large industrial company was also involved in making a prepayment for some future production commitments, it was just too many things to pull off to try and optimize it by selling off the infrastructure. But it's possible down the road that it does get broken and maybe we will have an opportunity to look at it, but with the time table we had we just couldn't do it at the outset.

Young Ku, Wells Fargo.

Just want to go back to your pipeline a little bit. You talked about $3 billion of potential acquisitions and you have another $1 billion in capital backlog. I know that you just recently raised $1 billion [in net income]. But I just wanted to see if you can comment on how you expect your leverage to trend and how you expect to fund the future investments.

Okay. Hi, Young. I'll start. I know Bahir might want to make some comments about leverage. Look, at this stage there is no certainty around how much we can invest. I think what I wanted to highlight in particular was the fact that the number of opportunities and scale of opportunities in that market are very meaningful and that we're particularly excited.

We've not seen these types of assets come out of the state champions ever before and we think that this would be a great opportunity for us if we could take advantage of these sales and buy for value in that market. So that's the main point we wanted to highlight.

As to our view on how we would fund that, obviously our strategy is to fund new investments with equity. We do finance them with local debt on an investment grade basis, but obviously the equity component, we always look to primarily invest it with equity that's raised. That could be either from asset sales or it could be from new equity we issue into the market. And on occasion we will use a little bit of corporate debt. But at this stage I think we're comfortable with the amount of corporate debt we have in the business and it's unlikely that we would raise anymore in the foreseeable future.

Hi, Young. It's Bahir. So, maybe I'll tackle the organic or the CapEx backlog question. So today we've got about $1.1 billion of CapEx if you excluded (inaudible) or put that aside for now. So how we think of that $1.1 billion going forward is that it would be financed first by putting on asset or non-recourse financing at the asset level to do a portion of that. Today that backlog is tilted heavily towards more transport and energy businesses where we would expect leverage or additional leverage there to be about 30% to 40% of those numbers and the $475 million utility backlog would be leveraged sort of with 50% to 60% debt.

So with all that said, if you assume a 50% blended leverage rate going forward for the CapEx portion, just to keep it simple, on $1.1 billion, you would expect to need about $600 million or so of equity or equity funding to go into it. And today we have $700 million of retained or available liquidity at the asset level that's been put aside to fund these various projects.

And in addition to that I'll remind you that our payout ratio is relatively conservative. Once everything comes on line generally we retain about 20% to 25% of the cash that we generate in the business each year. So today depending on where our annualized run rate is this is about $120 million to $150 million each year that we keep in the business and reinvest. So with that in addition to available liquidity that we've got everywhere we're all set to fund predominantly the equity component of that CapEx backlog that we have today.

Got it. That's very helpful. Thanks for the details. Just sticking with the deal pipeline a little bit, you guys are staying aggressive in South America and obviously foreign exchange can move away from you even further. Is there a way you guys can, when you are making acquisitions hedge that [overlay] completely and would you be willing to do that?

I guess the short answer is there is no real economically feasible way to hedge that away. It remains very expensive. But I would say today we would probably look at the other way. We would see this as an opportunity for us to invest in that market at a time when we think the currencies are very cheap and where likely in the long term obviously there could be some short-term downward drafts and volatility, but in the long run we think in fact we'll probably have a much better potential to have currency wins than a currency loss.

I see. But, Sam, I think you said in your prepared remarks that you expect South American economy to stay pretty much where it is today at least for the next couple of years, is that right? So my question why you would be interested in getting in today?

Well, everyone has their views on timing. Our experience is that to find the best value you need to be entering the market in fact when it probably even hasn't hit bottom. Once it hits bottom and turn the corner then everyone sees that and that's when all the capital rushes in and that's when currency starts to turn. So our view is that now is probably a great time to get in when people are still relatively unsure about the market and are waiting for those signals that everything has turned around.

Andrew Kuske, Credit Suisse.

I guess given the M&A focus you've got in the next 12 months plus, maybe give us a little bit of an outlook. If you look ahead, say three to five years, how do you think your business mix will be by either grouping or geography if you had your ideal set of circumstances?

Hi, Andrew. So maybe the way I'll tackle that, I'll start with the geographies first just because it's topical and then the fact that we've mentioned Brazil a few times on the call. Typically our expectation on where we deploy capital looking over a longer term time frame would be roughly 40% in North America, 25%, 30% in Europe, 20% to 30% in South America and then a modest amount, say 10%, in Australia.

What does happen and that's what we think sort of a longer-term basis what makes sense given the size of the opportunities in those markets. From a population and an economy perspective, South America is probably a little bit over weighted compared to the scale of those other markets. But because there is just so much infrastructure being built and requirement for infrastructure as opposed to North America and Europe which is relatively developed, we see South America being a bit higher punching above its weight from that perspective.

But what happens is in shorter periods of time when markets get dislocated it's possible that we could see a lot better value opportunities in one market versus another. And we saw that with Australia where we were able to do some transactions there. And we probably were I don't want to say overweight because we like the market, but we were percentage wise higher than what we would expect given the size of that market. But we expect that to decrease over time and in fact we haven't invested nearly as much in Australia over the last couple of years as we did back in 2009 and 2010.

I think we're maybe in that point today in South America where we're maybe invest a little higher than that 20% to 30% range. But that I expect once the market changes we'll get back to investing a lot more in Europe and North America from a percentage perspective then maybe for the next 6 to 12 months. So that's kind of it from a geographic perspective.

From a sector perspective, I think we expect that utilities and transports will be our largest segments on a go-forward basis. I think in the last couple of years, particularity last 12 to 18 months, investing in utilities hasn't felt like a value opportunity, primarily because of just the narrowing of returns of utility assets to where bonds are trading. So they traded very tight. We've seen that in the public markets, but we've seen it definitely in the private markets as well.

And so we tend to focus on other asset classes where we felt we could get better returns. I think in time when rates start moving up, we will see an opportunity to move back into utilities. But I think for the next little while we'd probably be focused more -- more of our time on transport, a bit on energy and then there will be -- we found obviously new asset classes for us, namely communications sector which we're quite excited about and which we think we're earning attractive returns.

So I hope that's not too long-winded or general, but maybe answers your question.

That's very helpful. And then maybe in the realm of tying it to the transportation and a bit more option value and maybe a bit more esoteric, is there any update on just the expansion potential and opportunities at Jacksonville?

I don't have any updates for you unfortunately.

Robert Kwan, RBC Capital Markets.

Just on Australian rail, you mentioned that your customers are generally or at least in aggregate moving above take or pay levels. Are you able to quantify how much of the FFO is being generated by the variable component here?

Robert, I don't have that number for you. So maybe that's something that Bahir can give you offline. But we would be -- I think generally our customers are probably in the order of magnitude 5%, 10% higher than what we would normally expect or what they would have telegraphed to us is their typical run rate. But I am being quite general in that regard because there is -- one of our customers, KML, is still not quite shipping as much as we would have expected but the rest of them are operating at higher levels.

Robert, it's Bahir. I'll follow up with you on the exact numbers, but that was more just sort of like a fact that we wanted to give that our volumes are doing well, but it wasn't a significant contributor. But I'll follow up with you in terms of percentage terms of just that piece that was over and beyond the take or pay levels.

Yes, that's great. I am just trying to get a sense of what the downside could be if volumes fall off. But you also mentioned that you're going at cost savings. I guess the upside here is how much you think you could get at i.e. if volumes don't fall off. I presume that would fall right to the bottom line.

The cost savings would, but I think some of those we would have to put back in place if the volume stayed there because really the opportunities would be we would -- we could reduce the amount of maintenance and time we spend on the track if obviously there is less volumes on it. But to the extent the volumes are there then we would have to reinstate that maintenance work.

Okay. So it sounds like they're pretty close to being tied. If I can shift to gas storage, you mentioned some opportunities that you're seeing there, amongst the lowest risk and some of the best returns. And you mentioned things around synergies and especially strategies. So I am just wondering if you can give some extra color as to what you guys think you can bring to enhance profitability that others can't in that business.

So in gas storage, I would say the comment there is mostly related to synergies because we have the other businesses today that -- where we're looking to build various trading platforms and control centers that we can leverage over additional assets. It's less relevant from a strategy perspective. Obviously everyone has different ways of creating value in the gas storage business whether or not you employ park and loan strategies or just try and contract everything.

But what we are getting to on the strategy side really related to our district energy business where I think we have a much more optimistic approach to the business where we're looking to actively connect new clients and leverage our various relationships on the real estate side of business to bring on new customers whether it's commercial properties within the Brookfield fold or just commercial property owners who we know well.

So that was really the context there, it wasn't really meant for the gas storage business.

Okay. And I guess just last on gas storage. When you're approaching a business in general you've got geographic basis spreads that are pretty tight. you've got summer-winter spreads that are pretty tight. So what types of going in returns would you be looking for? And put differently, if you think about how you might underwrite an investment with the expected kind of lifecycle IRR, how much of it is based on kind of [a bad debt] basis will improve and make the storage facility more profitable over time?

There is no doubt given where spreads are today that a significant component of it is based on the recovery. We have seen some improvement in spreads in the last three months I'd say in our businesses. So we are encouraged by that. I think they probably, at least from what we can tell, troughed back in the fall. But we would expect spreads probably hopefully on a steady state basis to probably double from where they are today. I think on a -- I think our view of monthly spreads on an intrinsic -- extrinsic basis might total $0.03 to $0.04 per month and we would hope on a steady state basis it maybe gets up to $0.06.

Okay, that's great. Just last question, if you look at the backlog it's down a little bit here in utilities and transport but up in energy, net it's down. You did comment FX rates had an impact on that. Just wondering how much of it was FX and if there's a read through particularly utilities and transport just in terms of slowing growth at least in the near term obviously you might get a pick-up here in the UK on the smart meter program, but what we should be thinking for utilities and transport?

Hey, Robert. I'll take that one. So on the utilities front we had new mandates that almost offset all the spend for the quarter. So that segment continues to chug along just fine and our expectation would be that it would remain at these levels for the foreseeable future.

In the transport business we had about $100 million of new contracts. So that was good and we've got a lot of projects that still haven't been included in this backlog as they relate to predominantly the Brazilian toll road and our Brazilian logistics business because they're just outside of the range. So as time elapses and we go from one quarter to the next, you should expect that backlog to continue to replenish. So then what happened was, you're exactly right, so even though we had all these good wins that far or exceeded the spend for the quarter, we did have some pretty significant FX just revaluations going through this backlog number and especially in our transport where it declined by $100 million and as well as our -- some in our utilities business as well. So in short everything is going well in the businesses. We just had some FX translation issues that drove that number a bit down.

Okay. And then just the temporary lull in the timing, the backlog, it sounds like there's a bunch of stuff just outside like you said that cut-off date.

That's exactly right. With our -- and especially tilted more towards our Brazilian toll roads and logistics business where there is a significant amount of CapEx there that's just a little bit outside our time period. So as you'll recall that predominantly for the utilities business it's a one to two-year backlog and then for transport and energy it's more of a one to three-year backlog. And so those projects would just be a little bit outside of that.

Bert Powell, BMO Capital Markets.

Sam, given the opportunities that are before you today, does that accelerate your view in terms of non-core assets or mature asset in recycling that capital, the push-up, the timelines or does it change your definition of mature relative to the opportunities to take that capital and put it to work for higher returns?

Hi, Bert. It's a good question because I think -- the short answer is, yes, it could. I think obviously if we see great opportunities we have to make decisions on how we're going to fund it. And to the extent that we don't feel it's appropriate to go back to the capital markets to raise that capital, then the only other opportunity to finance it would be an asset sale. So I think we'll get ourselves in a position to consider both options and obviously weigh the merits of selling an asset versus issuing equity.

So I think we -- to be honest, we're always making those decisions and we're always making sure we have businesses that if we needed to and thought it made sense to sell are ready to be sold. But I think we're very fluid in that regard.

Okay. And then sort of related somewhat, a lot of the assets or businesses that you are interested, that you purchase generally are done with Brookfield LP and typically there's been some minimum commitments that you've made. Does the opportunity change how you think about that? Do you take less to do more or are there ones that you can say what will be -- we will take more of this and less of that? I'm just trying to figure out how the opportunity flows into how you take what percentage in partnership with the Brookfield LPs?

Okay. So generally the amounts we take are very prescribed. We have a set percentage of all investments that we take and where it becomes a little less prescribed is when there are large transactions and a portion is funded outside of the fund. And usually in those situations we tend to take a large percentage and often take as much as we can because obviously we like the transactions. To the extent that our balance sheet doesn't allow us to take as much as we might normally want to, we always reserve the ability to bring in another partner and reduce that capital spend. But generally the amounts that we do, especially for smaller deals, is very prescribed and usually it's around 40%.

Faisal Kahn, Citigroup.

Just a question on the liquidity, so you talked about I think almost [$3 billion] of liquidity in your supplemental slides and then you talked about a $2.3 billion number in the letter to unitholders. So I am trying to make sure I understand where the liquidity stands today?

Hi, Faisal. It's Bahir here. I'll take this one. So the [$3 billion] is the total liquidity that we have in the system and the $2.3 billion that we referenced in the letter is available liquidity that is at the corporate level and predominantly that will be spent on new acquisitions and whereas the $700 million or so that sits down below, as I described earlier, is reserved to -- at a high level is reserved to fund the equity component that is required to fund all the CapEx backlog that we have today.

Okay. So that's what I wanted to make clear. So the $2.3 billion is really what's earmarked for acquisitions. Your operating cash flow plus the amount of debt financing you would assume that the for the backlog will fund everything else it sounds like.

That's exactly right, Faisal.

Okay. I mean is there any -- it sounds like there is no need to inject any equity into your subsidiaries. Can you just talk about what the capital needs are at the subsidiaries? Is everything sort of fully funded? I mean, it sounds that the cash position is there, the debt financing is there, but there is -- I just want to make sure there I am not missing any sort of risk factors given the gyrations in the currency market.

There is roughly $700 million of liquidity in various pockets in the subsidiaries. And I'd say as a whole they're all well funded. That's not to say that some of them have different needs coming up. And I guess the two businesses that I'd say that have longer-term capital needs obviously in our Brazilian road business will be -- we have a very large capital backlog there and developing a number of roads and it wouldn't be surprising for us to possibly put in some more capital into that business to help fund those roads as opposed to take on too much debt because the cost of debt in Brazil today is too high.

So we may over capitalize that business if we're able to privatize it just to avoid high-cost debt. And then the only other business which today is different than the Brazilian business which is not over levered, just has high cost debt is the one business that is probably low over-levered is our natural gas transmission business and we're working through the issues there with our partners. So that one I can't really comment too much on, but I think people are pretty familiar with the situation there.

Okay. And then is it fair to say that the $2.3 billion of liquidity would not be used for any of those purposes or is that a possibility that that capital could be used for the purposes you just talked about?

Well, we can use the $2.3 billion for anything. We haven't made any decisions on the gas business, the natural gas transmission business at this stage. And with the South American business, most of the investments are longer term. So I'm really referring to projects that will be funded two, three, four years from now. So it's much longer term.

Okay. Got you. And in the quarter, can you just talk about how much you generated from your FX hedges in terms of operating cash flow in the quarters? I know you guys are fully -- you're fairly well hedged with all the currency risk, but I just wanted to understand sort of how much cash you generated from this hedges in the quarter?

Faisal, it's Bahir. We don't actually break down that number, but what I could tell you is FX was a headwind to our results. You had lower hedge rates on our Australian dollar, pound, euro and Canadian dollar. That program had lower hedged rates of about 5% to 6% compared to the prior year. That led to about $7 million of headwind to our results compared -- as it relates to the $15 million number that we gave out. And then the $8 million delta came from the LatAm currencies where you saw the reis depreciate by almost 20% year over year and the Chilean peso also decreased about 12% to 13%. But as far as how much proceeds we got from the hedge contracts, we don't really disclose that on a business-by-business basis.

Okay. I was just trying to figure out for the aggregate entity how well are you protected with your hedges. It sounds like (multiple speakers).

Maybe I can help you a bit with that. I think in total we've got -- so just going forward here. Once the French telecom business comes into our results where we see the cash flows going is you'll have sort of still a good mix of about 60% coming from Australia, pound, euro and CAD and that's all been hedged for predominantly 18 to 24 months at rates that are ahead of where spot prices are.

So that in addition with 20% of our cash flows that come from the US dollar denominated businesses leaves us with 20% of the business that's exposed to LatAm currencies. So if you're trying figure that it depends on what your views are going forward. But as Sam mentioned earlier, we think the worst is behind us and while we might see fluctuations in the short term we think these currencies are poised for a comeback here.

Okay. And the New England asset sale, the $280 million. I think you talked about in your -- in the remarks or in the press release about $30 million in net proceeds from that transaction. Can you just help me bridge the gap between the $280 million and the $30 million?

So $280 million is the enterprise value. There is about -- there are some debt in that business of $150 million. And we own 23% of the business. So the $30 million relates to our proportionate share which would be the cash that Brookfield Infrastructure will receive in its bank account.

Okay. So the $280 million is total 100% and $30 million is your net proceeds interests?

That's correct.

Okay. Gotcha. That's it from me. Thanks a lot.

Thanks, Faisal.

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

Great. Thank you, operator and thank you everyone for joining the call today. We appreciate all your questions and we look forward to providing you further updates on our business next quarter. Have a nice day.

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