Brookfield Infrastructure Partners LP (BIP) 2016 Q2 法說會逐字稿

Thank you for standing by. This is a conference call operator. Welcome to the Brookfield Infrastructure Partners 2016 second quarter conference call and web test. As a reminder, all participants are in a 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 would like to turn the conference over to Melissa Low, Vice President Investor Relations and Communications. Please go ahead, Ms. Low.

Thank you, operator and good morning. Thank you all for joining us for Brookfield Infrastructure Partners second quarter earnings conference call for 2016. On the call today is Bahir Manios, Chief Financial Officer and Sam Pollock, Chief Executive Officer. Following their remarks we look forward to taking your questions and comments and at this time I would like to remind you that in responding to questions and talking about our gross initiatives and our financial and operating performance, we may make forward-looking statements. These statements are subject to known and unknown risks as 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 Bahir Manios. Bahir?

thank you, Melissa and good morning, everyone. In the second quarter we maintained the great momentum that we started the 2016 year with. We generated funds from operations, our FFO of $230 million or $1 on a per unit basis which is an 11% increase over the prior year. These results were driven by solid performances for most of our businesses in particular our energy operating group. While we are pleased with our financial results to date, we believe that we're on the cusp of further significant growth. One contributor to this growth will come from a large portion of our capital backlog that should be commissioned and online over the next few quarters. In addition for the past 12 months, we've maintained substantial liquidity on our balance sheet in anticipation of executing a number of investment opportunities. We're now deploying that capital into several outstanding investments.

We recently closed two transactions in the transported energy sectors deploying $310 million. Furthermore, this month along with our partners, we're closing on the acquisition of Asciano's port business. And lastly, we're in exclusive negotiations to make investments in Brazil's gas and electricity transmission sectors which will meaningfully expand our utilities operating group. We expect all of these initiatives to generate meaningful growth in our FFO per unit. Since we last wrote to you, the most significant and unexpected event to take place was the United Kingdom referendum vote to leave the European Union. While most markets have rebounded quickly from the initial shock a number of questions remain unanswered and we anticipate a period of uncertainty over the next few years while the UK and the EU sort out their relationship. As long-term value investors, we have experience in managing and prospering during periods of economic uncertainty.

Our belief is that the UK will continue to be an appealing country to invest in given its excellent (inaudible) it's culture that represents capital, favorable tax and regulatory regime for foreign companies, and its central location globally. Consequently, we will monitor the investment landscape for missed price opportunities should investors pull away from the market temporarily as these situations can often be used as good entry points to earn greater returns on capital than one might have otherwise earned in a normal environment. In the meantime, we're confident that our current UK business will navigate well through these near-term uncertainties given the highly regulated and contractual nature of our operations. From a currency perspective, we hedged entire value for sterling denominated investments ahead of the Brexit vote through a combination of FFO and balance sheet hedges.

The FFO hedges are matched estimated cash flows from the businesses over the next two years. Our balance sheet hedges were designed to protect our investment values by effectively locking in the present value of the future cash flow streams that our businesses are expected to generate over the long term at the hedge grades. So that is overview. I'll now take you through our financial results and operating performance for our various operating segments and then conclude my remarks by touching on a few corporate matters that we're pleased to report on. First off on financial results and specifically our utilities business generated FFO of $100 million for the quarter, an increase of 8% from the prior year.

These results were driven by yet another strong period of connection activity at our UK regulated distribution operations, incremental earnings or growth capital commission into our rate of base and inflation an indexation across a number of our businesses. Our UK regulated distribution operation continue to report exceptional results driven by increased year-over-year connections. In the first half of the year we more than doubled our fiber connection sales compared to the previous period. Largely as a result of the increased market demand for our ultra-fast broad band connectivity solutions. Fiber connections are currently a small component of our broad product mix within the business. However, the current level of connection activity, fiber to the home sales should be a more meaningful contributor to the business going forward. So far this year, we also completed the adoption the nearly half of the 700,000 smart meters from the contract we were awarded last quarter. Subsequent to quarter end our Chilean transmission business raised $350 million of 12.5 year bonds and an all-in rate of 3.875%. This was one of the lowest rates ever achieved for an U.S. dollar bond by a power and utility issuer in the region.

The proceeds of this issuance will be used to repay upcoming maturities and fund future growth projects. Our transport segment generated FFO of $102 million in the second quarter. Slightly lower than the $104 million recorded in the prior year. Our results benefited from higher tariffs across the majority of our operations. Greater volumes at our rail logistics business in Brazil. Strong light vehicle traffic on our Chilean tow roads and cost savings at our Australian rail operation. Unfortunately these positive factors were offset by $8 million of foreign exchange conversion to US dollars, lower vehicle traffic in our Brazilian tow road business and impact of tariff relief that we extended to one of our clients in Australia.

Our energy segment performed very well, generating FFO of $43 million in the second quarter compared to $23 million last year. This improvement primarily reflects a higher contribution from our North American natural gas transmission business and a better spread environment at our gas storage business. The commissioning of several organic growth initiatives in our district energy operations also added to results in the quarter. The improvement in our North American natural gas transmission operating results reflects our increased ownership in the business. The impact of deleveraging and contributions from new contracts. The backlog of expansion projects in the business is robust.

The most imminent is the Chicago market expansion which entails the construction of additional compression facilities on our Gulf Coast line. This project should add long-term contracted capacity into Chicago from our existing interconnection with the Rockies express pipeline. We plan to invest an additional $80 million or $40 million at our share and expect the project to be completed by year-end. We've also completed the first phase of our southbound Gulf Coast reversal project and we expect to see further expansions for the business associated with extensive development of natural gas pipeline infrastructure into Mexico in 2017 and 2018 timeframe. Our French communications infrastructure business generated FFO of $19 million which is relatively consistent with the prior year.

From a organic perspective we've been actively pursuing a number of opportunities to expand our network in France. During the quarter we agreed to a Tuchan acquisition of a small communications infrastructure business which will be funded with cash retained in the business. We're also participating in a French government-led initiative to provide lower population density areas in France with access to ultra-fast broadband through the deployment of fiber to the home networks. Investments in these fiber to the home networks present a unique opportunity for our business to leverage its existing assets and technical expertise operating a hide speed fiber backbone. I would now like to report on two corporate matters that were both recently approved by our Board of Directors.

First off, in just in our distribution levels, given our strong performance during the first half of the year, and a significant amount of growth opportunities that we're currently progressing which Sam will be discussing in his remarks, we're pleased to announce that the Board of Directors has approved a distribution increase of 3.5% commencing with the distribution schedule to be paid on September 30th. Combined with the increase announced in February, our quarterly distribution has grown by 11% on a year-over-year basis which is consistent with the guidance previously provided of 11% to 13% growth that was contingent on achieving certain capital deployment targets.

The Board of Directors will reveal our distribution level again in the first quarter of 2017, and should we continue to execute on our current growth initiatives as anticipated, we believe that our next increase may be at the higher end of our annual distribution growth target. We also announced today a three for two unit split of Brookfield infrastructure's outstanding units. The split will be effective on September 14, 2016 for unit holders of record at the close of business on September 6. We think that this unit split will ensure that our units remain accessible to individual unit holders and to improve the liquidity of the units. It's important to note that this unit split will not dilute our existing unit holders equity and will not be taxable in Canada or the United States.

So with that, thank you and I will turn the call over to Sam.

Thanks, Bahir. And good morning, everyone. In my remarks I'll make a few brief comments on our various strategic initiatives and our corporate finance strategy and then I'll conclude with an outlook for the business. Let me begin with the two long-standing strategic initiatives. Pleased to say that we've recently cleared regulatory hurdles on both Niska Gas Storage and Asciano. We completed the acquisition of Niska in July along with our institutional partners, deployment total $440 million of capital of which our share was $180 million.

Niska has well located storage facilities in key producing and consuming regions including the ACEO hub in Alberta and the Wild Goose facility in California. With this acquisition, we doubled our gas storage capacity to about 600 billion cubic feet are now one the largest independent owners and operators of natural gas storage in North America. We acquired this portfolio of gas storage facilities well below replacement cost which should allow us to earn attractive returns over the longer term. As you may have heard mention on earlier calls and probably many earlier calls, we entered into a partnership agreement with an Australian ports operator and other institutional investors to acquire Asciano, a leading Australian port and rail logistics business for Australian $12 billion.

Our Brookfield consortium will own a 50% stake in Asciano's container terminal business known as Patrick Terminals and 100% interest in a port services operation. Patrick Terminals is one of the leading container terminal operations in Australia with capacity to handle 3.9 million TEU's annually and have two fully automated facilities in Brisbane and Sydney that have industry-leading performance.

Brookfield Infrastructure will invest approximately $350 million and the transaction is set to close August 19. During the quarter, we also closed on $130 million vat that will expand our transport business. Along with institutional partners, we acquired a 57% stake in Rutas de Lima, a portfolio of urban toll roads in Peru which was for the total value of $430 million and as I said earlier, our share of that was $130 million. Rutas is comprised of three road segments totaling 115 kilometers and these roads are key arteries within the Lima road network serving as main access to the city from the north, south and east. The Peruvian economy which is one of the most robust in Latin America has experienced strong GDB for growth leading to 12% compounded growth in this business in the past decade.

The roads operate under favorable long-term 30-year concessions and generate stable cash flows under a fixed tariff regime escalating annually by inflation. As Lima has experienced significant growth in recent years but has low urban investment, we have identified further expansion projects that would provide a creative return. We are enthusiastic about this transaction because it will further expand our South American toll road portfolio and establish an operating presence in Peru. In addition, we are also advancing several new opportunities where we will deploy approximately $700 million to meaningfully grow our utilities and transport businesses.

These investments should deliver after tax returns on equity at the higher end of our target return threshold. Over the past year, we've been evaluating a number of exceptional opportunities across various sectors in Brazil. While the country is experiencing political turmoil, and a severe economic downturn, it's an economy with significant growth potential, solid underlying fundamentals and a strong democratic regime that is well positioned for good recovery in the medium term. Brookfield has been in Brazil for over 100 years and we have a successful record of investing counter-cyclically. So while investors sentiment has generally been negative on the country, we are taking a contrarian view and investing in high quality franchises that is a normal periods would not be available at a reasonable value.

Our focus in recent months has been on gas and electricity transmission assets as these are low-risk utility businesses underpinned with availability-based revenue frameworks and full inflation and dexation. In that regard, we are in exclusive discussions to acquire natural gas transmission company in southern Brazil from Petrobras. These are long life natural gas pipelines, they're well located and represent the sole infrastructure that brings natural gas to the core economic regions and the highly populated states of Sao Paulo, Rio de Janeiro and Minas Geraisuth in south-central Brazil.

This business is 100% contracted under long-term shipper pay agreements. We expect to invest a minimum of $700 million into a Brookfield-led consortium alongside other institutional partners capital. We're also excited to re-enter the country's electricity transmission sector for the third time, given our positive experience from 2006 to 2009 and prior to that, as one of the early investors in establishing many electricity concessions in the country many years ago. We were recently awarded a portfolio greenfield transmission line and are now in discussions with several sellers to acquire operating assets with a view to establish the business with substantial scale in the country. These are long life 30-year concession assets that earn cash flows under stable availability-based regulatory framework.

With approximately 2800 kilometers of greenfield projects underway in Brazil, and over 10,000 kilometers of transmission lines in Chile, we're an industry leader in the South American transmission sector. We expect to deploy approximately $200 million over the next several years to complete these electricity transmission projects. Before I close my remarks with an outlook on our business, I'll make a few comments on our corporate finance initiatives. For the past several years, we've been highlighting our strategy around capital recycling.

We view the sale of our mature assets as a very low-cost source of financing to grow our business on an accretive basis and as an effective way to increase returns to unit holders by avoiding dilution on our high growth businesses. Over the past several years, we have successfully monetized eight investments for proceeds that exceeded $2 billion generating returns on equity that are greater than 25%.

The next phase of our capital recycling plan is well underway. In the second quarter we received approximately $135 million from the sale of our European gas distribution business and in the second half of 2016, we expect to close on the sale of our Ontario transmission business and dispose of our investment in the shares of Asciano that we acquired on market on 2015.

In aggregate, this will generate further cash proceeds of $1.1 billion and these proceeds will be used to fund our $350 million investment in Asciano's port business and the balance representing about $700 million will be invested into our Brazilian gas and electricity transmission investments. We're already preparing for our next capital recycling initiatives and with the maturing profile the number of our companies, we expect to generate proceeds from asset sales of $500 million to $1 billion on an annual basis for at least the next three years.

Now turning to our outlook overall our FFO momentum going into 2017 looks strong. Our current cash flow run rate is solid and we can look forward to FFO growth from a number of areas. First, we have the continuation of robust same-store growth that has averaged 11% over the past two years. Which we further augmented by the commissioning of a large portion of our capital backlog. Second, we have the addition of FFO commencing in the second quarter from the closing of our $660 million of investments in Australian ports, the Peruvian toll roads and North American gas storage assets.

And third, we have the addition of substantial FFO from the (inaudible) transmission assets in Brazil which we are optimistic we can sign or chose by year-end or by first quarter of 2017. On the acquisition front we've not seen this level of proprietary deal flow in years. We are pleased with the numerous high quality opportunities we have to expand pour various operating groups. In light of our favorable operating outlook and the positive investment environment, we believe we are well positioned for a longer period of out performance. And with that, I'll turn the call back over to the operator to open the line for questions.

We will now begin the question-and-answer session. (Operator instructions). The first question comes from Frederic Bastien with Raymond James. Please go ahead.

Good morning.

Good morning.

Sam, you sound quite comfortable that you can push this Petrobras deal past the goal line. What makes you so comfortable and confident?

Hi, Frederic. Obviously I can't comment specifically on the stage we're at had in negotiations but, you know, it's pretty common knowledge that we've been in discussions with them for probably six months, and we've had exclusivity for the past close to three months. So, these are, fairly advanced discussions and, I just feel that, we have a fairly good level of confidence that we can get across the line

Okay. Now during maybe turning this next question to Bahir, during the first quarter you loosely quantified the impact at both the rate reset and the extended tariff relief would have on your Australian operations. Are you still comfortable with these estimates?

Hey, Frederic, yeah, those are still pretty good levels going forward.

Okay. And just another one on the NGPL business. After your additional investments in the compression facilities that you expect to have completed by year-end, what would you reckon your FFO run rate will be on the NGPL?

So, I think this quarter's run rate is a good one expansion project that's coming online in the fourth quarter, so if you use that as the base and then add to it probably about $3 million to $4 million relating to that project, I think that would be a good run rate going forward.

Okay.

Until we bring on line a number of the other projects that we're working on.

Okay. Understood. And I do have one last one. There have been reports suggesting that Brookfield has been considering new investments in India. Do these involve Brookfield Infrastructure at all?

Frederic, this is Sam here. You know, as I mentioned, I'm sort of loath to comment specifically on transactions. I know there was, an article on a transaction with the State Bank of India, and that one doesn't relate to us. That's a private equity transaction in relation to I think some distress loans. But otherwise, you know, there are a number of initiatives that we are looking in the country and I just can't comment on them right now.

Okay. But generally speaking, I mean, what's your view on India? You do have very strong views on specific countries and how does India stack within that?

I actually just got back from India a couple weeks ago, and, you know, it's a country that, you know, we as an organization have been in probably for about six years now. You know, we approach the country quite cautiously for the first couple of years. We thought it was a bit I guess exuberant in the enthusiasm and I guess, you know, given that it was a new market for us, we wanted to be cautious. So I think our approach at that time was wise, and then going back probably about two or three years ago our real estate group made a couple investments and we got to know the market better and we formulated a strategy of investing in the country as operators and generally as 100% owners of assets which is probably quite different than other people would have done it in the past. We think it's a much better way to run businesses in that country and not be dependent on local promoters.

And so, you know, last year I guess we secured a transaction with Gammon, which we closed on earlier this year. It's a relatively modest investment in toll roads but that was a sector that we liked because of a regulator that was very welcoming to foreign capital and, there are assets that, we think require capital and people are appreciative of the quality of roads that private operators provide in the country. So it has a lot of the same dynamics as what we've seen in South America and I would say generally I think the country is slowly improving and I think with the new government that's in place, they're very welcoming of foreign capital and have market oriented policies. I guess I generally realized I probably went longer than you expected but I would generally say it's a positive place to do business these days.

Great. Thank you, Sam, that's very useful.

The next question comes from Cherilyn Radbourne with TD securities

Thanks and good morning. I wanted to ask a question on NGPL first. You've got a very impressive existing backlog of projects in a that business but you also mentioned some opportunities add connectivity into Mexico. I was just hoping you could give us a bit more color on the scale of those potential projects and just confirm those are not in the current backlog

Hi, Cherilyn. It's Sam here. Maybe I'll start and Bahir can jump in if he wants to add anything. So to answer your second question first, there are no projects in our backlog today that relate to initiatives going into Mexico. But it is a region where and I think we might have mentioned this on earlier calls that, the amount of gas going into Mexico, continues to increase and I think, we're expecting anywhere between increased demand of two to three bcf per day going in there probably in the next couple years by 2020. So I think, you know, we see substantial growth. You know, there's been a number of projects that both CFE and Pemex have started, to build infrastructure to facilitate that demand growth into Mexico, and so our business through NGPL and also through our gas storage facility we have in Texas as well, you know, are looking for connections, you know, from the various headers that we have to see if we can take advantage of new projects to deliver gas into that market. So it's little bit of early days. I would says this one of the new developments that's underway. There's definitely -- it's not one that I think it's matter of if, it's just a matter of when and we're just encouraging our teams to make sure that they're closely following it and taking advantage of those opportunities.

Great. And this just in terms of Brexit, the markets have rebounded pretty nicely from the initial shock as you noted. What's your sense of how investors are reacting? like do you expect them to pull back for a while? Or is the level of appetite pretty much the same as it was before?

So, it's probably a little early to make a definitive call on the direction of people's views. You know, what we have seen is that a number of transactions that people were preparing for, prior to Brexit and that they were just waiting for the vote to take place before they launched them have been deferred or shelved for the time being and so there's probably fewer transactions in the market today than what we would have expected six months ago. And so, you know, because of the, limited supply, that's probably helped balance the investment market a bit. You know, in my discussions with a number of institutional investors, I think, some of them are looking to get, feedback from their investment committees as to whether or not their investment stances have changed. So I would say that will probably take for those institutional investors, you know, probably six months to a year before they formulate their views but having said that, I think generally most of them still see the UK as a good place to do business for all the reasons that Bahir annunciated earlier. So I guess our view and I think where most people will end up is that the UK will, find a way through this in a reasonable manner with the EU and that, , investment activity on the long-term basis will probably maintain in that part of the world.

Great, thank you. That's all from me.

Okay, thank you.

The next question comes from Rupert Merer with National Bank. Please go ahead

Good morning, everyone. You mentioned that the returns from your recent investments or investments that is are coming up are at the high end of the your return targets, 12% to 15%. If I look at Niska, Asciano, and the Peruvian toll roads, are the returns on those investments all in that range, and can you given us a little more color on FFO impact we can anticipate in the near term from those investments.

Hey, Rupert, it's Bahir. I'll start and maybe Sam jumps in. So from a-- I would say from an IRR perspective, the three investments that you noted would all be in the target of the 12% to 15% range biased to the upper end of that range. And then as far as the going in FFO yields, we would expect Niska and to (inaudible) be at the high single digits FFO yield going in and then ramping up over the short to medium term to get into that range that I noted. And as far as the Patricks Terminals or the ports business of Asciano, we would expect it to be, you know, low double digits going in from a FFO yield and then ramping up over time as well.

Okay, excellent, thank you. You also mentioned your deal flow is very strong right now and of course you have a strong liquidity position and Brookfield recently closed its private equity fund. Can you give more color on the importance and advantages to the public end of the Brookfield infrastructure of co-investing with these private equity funds and of other potential say differences between the returns that you might see versus your private equity partners

Sure, thanks, Rupert. Look, I think it's a critical element of our strategy and our capabilities. What it allows us to do is particularly for, larger transactions, be able to very quickly and confidently pull together the capital to close on these deals. And, you know, the two I guess, you know, great examples from our business would be both Asciano and this Petrobas transaction which we hope to get done. These are transactions that, face, modest amounts of competition and if it wasn't for the fact that, we had this additional, fire power, if you want to call it from our partners, to move quickly and take advantage of them, we probably couldn't get them done. And, we think as a result we're getting unbelievably high quality assets and we're getting them at attractive returns. And, it allows us to kind of avoid, some of those, what we describe as those mid market cost to capital shootouts which you read a lot about in the papers particularly in Europe where, you just don't see attractive returns. And so I think that's just a great advantage and, I think the second thing I would say is, the fact that we were able to secure all that committed capital from institutional investors in a very short timeframe of about nine months and, for the broad mandate that we were looking for, just reinforces the fact that we've got a great track record and a lot of sophisticated investors who support the investment strategy. So all in all, I would say we're really pleased with how that went.

Great. And in the past we've talked about the difference between valuations and public and private markets and infrastructure. Is there a different hurdle rate between your private equity funds and the public funds?

No. It's the same investments. So we don't, there is no difference in the investments that we're pursuing. You know, what we -- as I think you know, we look to acquire assets and Brookfield infrastructure participants in those purchases so they're effectively the same returns. I think that maybe the question you were alluding to is just the differentiation between, valuations of publicly traded companies versus the private markets. And I would say that discrepancy still does exist. Particularly in European and some North American sectors, not all North American sectors but some. Where you'll, you know, you'll have the private market bidding at a much higher levels than what we think we can privatize some public companies at. So we continue to monitor the public landscape for opportunities. They're not easy transactions to execute. But that's still part of our investment strategy.

Great. I'll leave it there. Thanks very much

Okay. Thanks, Rupert.

The next question comes from Robert Kwan with RBC Capital Markets. Please go ahead.

Good morning. If I can just maybe start on, follow on the private funds behind of questioning. Is the plan with the new fund the same with respect to 40% participation and what I will call normal deals and larger deals may be open to different structures?

Hi, Robert. It's Sam here. It's exact same structure although this time it's approximately 30% not 40%. Just given the scale of the fund. But similar to prior funds, the extent that larger transaction than, the public company will participate in co-invest and take up additional portions of the deal.

Okay. And just with, capital commitments from or just kind of the make-up of the group obviously I'm sure you don't want to get into your specific investors. Are there a number of capital commitments from investors from previous funds? I guess what I'm getting at is how comfortable are you with the willingness of the parties in the new fund to write additional direct co-invest checks that have been helpful in some of the acquisitions that you've done to date.

I would say very, very comfortable. Because that's exactly what they're looking for. In fact, many of these groups and we have probably some of the largest most sophisticated investors that are out there in infrastructure, and they are looking to participate in transactions, alongside of us and want that I additional co-investment. So that Definitely is not a concern at all, quite the opposite.

Okay. And then just turning to capital recycling and future asset sales and some of the guidance you've given, given those processes tend to take time, are there any new processes that are underway and with respect to kind of your contemplated structure, are you thinking of selling assets outright, or should we also think about the potential of selling down a percentage interest in some of your assets you may still retain control but maybe just sell down a percentage ownership.

That's a good question. To answer your first question, the answer is no. There's no process that I could comment today that has been started. But, we are internally, preparing for a number of them. And I think our strategy as far as, recycling assets, could entail both approaches that you mentioned. Some of them could be businesses that we might outright sell. Others could just be a sell-down of a percentage of the business where we would just maintain control. So I think it will be balanced. The one thing that again I'm trying not to go on too long but since you sort of got me going here, the one part of the market that's very interesting which I'm quite excited about is the fact that, there is just a huge market today for minority stakes in infrastructure. And there's no discount when you go to sell these minority stakes. What these investors want is, good strong minority protections, but they're happy to, to invest alongside people like ourselves who have a lot of comfort in operating the assets. And so, that dynamic has just given us so many opportunities to consider in how we recycle capital. So it's a great dynamic and I think one that will help us ensure we get high value for our assets but also maintain our presence and businesses to the extent that's what we're trying to achieve.

Understood and maybe if I could just finish on NGPL. I heard you mentioned around the run rate for the quarter being a good one with the addition of the compression expansion. Has the way you've contracted the pipeline taken the seasonality then out of the system?

Robert, maybe I can follow up off-line because, maybe I'm thinking about the annual, to your point, annual run rates so let me follow up off-line on how the seasonality will work going forward with the contracts.

Okay. And then just the last thing, compression expansions typically have quite high returns and it sounds like based on what you had, Bahir, that seems to be the case here. I just wanted to confirm with the new amount of contracting looks like or at higher rates plus these high return expansions, are there any issues as you calculate your earned ROE or are you good given you had a pretty recent section 5?

I'll touch on that one. I think that -- given what happened a number of years ago, it's obviously an issue that we watch very closely with kinder and I think that with the amount of capital that we're deploying and the run rate EBITDA that we will be generating, you know, in 2017, I think we feel that we're into a comfortable level and that today, you know, there's no requirement for us to do any more section 4 I think it's called applications. So I think we're in good shape. Obviously, we're always, at the whim of the review of the regulators and their views, but I think we feel that we're in good shape.

Okay. That's great. Thank you very much.

The next question comes from Bert Powell with BMO.

Thanks, I'm jumping into the call a little bit late so I hope I'm not tilling ground that's already been tilled. Couple questions. One, Sam or Bahir, the relief for iron ore in Australia that was a bit of a headwind in the quarter, was that really because we had a dip in iron ore at the beginning and it kind of went down below 50 and has now come back up. My understanding from the way that works is you kind of get close to 60, there's no relief below, is that -- am I understanding how that was working correctly?

Yeah, Bert, it's a tiered structure and just simplistically here is you're absolutely right. There was a dip and that caused and that caused us to accrue an amount for the quarter. We've seen iron ore prices since then recover a little bit so if they hold at these rates, that relief will be hopefully smaller in the third or fourth quarter but again it's all dependent on the price but to your point, it was the dip that created that relief amount.

I would just add one thing to what Bahir said is that there's also an exchange rate component to it. So, our relief is calculated in Australian dollars and so it also depends on what happens with the US, Australian FX rate.

Okay. That's great. Thanks. And the volumes that drove VLI in the quarter, can you just given a little color in terms of what was going on there?

Yeah, VLI, Bert, it's Bahir again, VLI had a great quarter. You know, we saw revenues there probably up I think if I recall correctly about 15% and driven again same theme by agree volume increases that we saw as well as tariff increases so a nice mix of both that created for strong revenue growth year-over-year and with some good cost containment as well. Our EBITDA saw big increase year-over-year.

Okay. That's great. Thank you.

Thanks, Bert.

Thanks, Bert.

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

Great, thank you operator and thank you to everyone who joined us for today's call. We look forward to reporting our progress here next quarter.

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