Brookfield Infrastructure Partners LP (BIP) 2016 Q3 法說會逐字稿

Welcome to the Brookfield Infrastructure Partners' 2016 third-quarter conference call and webcast.

(Operator Instructions)

The conference is being recorded.

(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' third-quarter earnings conference call for 2016.

On the call today is Bahir Manios, our Chief Financial Officer; and Sam Pollock, Chief Executive Officer. We also have Ben Vaughan, our Chief Operating Officer, joining us this quarter as a guest speaker. Following the 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 risk factors, I would encourage you to review our annual report on Form 20F, 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. I'm pleased to report today on another solid quarter for our business from both a financial and operations perspective. We generated funds from operation, or FFO of $235 million in the quarter, or $0.68 on a per unit basis, which is up 12% year over year.

Our financial performance continues to reflect the diversification of our business and the regulated and contractual nature of our cash flows. The majority of our operating groups are performing well. And our outlook remains positive for the balance of the year and beyond.

Our results benefited from solid organic growth across the business and contribution from new assets acquired in the past year, partially offset by impact of foreign exchange. Our ability to access substantial amounts of capital in the past year has enabled us to move quickly to secure and close several exciting investments. Last quarter we indicated that approximately $660 million of capital was to be deployed into three new investments that will expand our transport and energy businesses.

These transactions have all been successfully completed. We also announced a large scale transaction that will meaningfully expand our utilities operating group. We are investing a minimum of $825 million into a high quality, fully contracted gas transmission business in Brazil.

Upon completion, our cash flow from regulated frameworks, or long-term contracts, will increase almost to 95%. And our inflation linked cash flows will increase to approximately 75%. We are working towards completing this transaction by the end of the year. And Sam and Ben will touch more on this during their remarks later on the call.

With that as an overview, I will now take you through our financial results and operating performance for our various operating segments. Our business delivered another solid [performance]. (Technical difficulties) same-store constant currency growth of 9%, which is at the high end of our long-term target range. More specifically our utility segment generated FFO of $102 million for the quarter compared to $99 million last year.

Results from the segment increased as a result of the strength and connection activity in our UK regulated distribution business, inflation indexation across our operations, and the commissioning of capital inter-rate base over the past 12 months. The impact of these positive results were offset by lower contribution from our regulated terminal that experienced a reduction in its return as a result of its recent regulatory reset. Within the utilities operating group our UK regulated distribution business has been an outstanding performer in the past few years.

We believe the business is well-positioned to achieve solid growth going forward, with an increasing contribution coming from the fiber to the home product offering, which we established a few years ago. We have doubled the fiber to the home sales volume achieved in the comparable period in 2015, as we continue to see increased market demand for our ultrafast broadband connectivity solution which was publicly endorsed by the Housebuilders Federation at the end of the second-quarter 2016. This business is also currently pursuing two smart meter opportunities, requiring up to GBP200 million of capital that together could add up to 1 million meters to its growing asset base.

Our transport segment generated FFO of $112 million in the third quarter, which was 9% ahead of the prior year. These results were driven by higher tariffs and volumes across a number of operations. Our results also reflect the contribution from the incremental interest we acquired in our Brazilian toll road business in May, new toll road investments in India and Peru, and partial contribution from the recently acquired ports business in Australia that closed mid-August.

The impact of these positive factors were slightly offset by foreign exchange and tariff relief that we extended to one of our Australian rail clients. Within the transport operating group there are two business updates that I wanted to highlight. The first being at our Brazilian logistics business where results were impacted by reduced agricultural volumes due to dry weather conditions across most of Northeastern Brazil earlier this year.

While we expect that these conditions will dampen volume growth for the next two quarters, we're pleased with excellent progress the businesses is making on its multi-year growth and expansion program. This business is well placed to capture upside in the coming years as we utilize additional capacity that has recently been construct. To that end our expansion project at the Tiplam Port in Santos is now about 95% complete, and commissioning activities have started on both the fertilizer and grain handling systems.

While we anticipate the facility to be fully operational by year end, we expect the asset to reach its full potential towards the latter half of 2017 once dredging activities are completed. The deeper channel will allow us to dock larger grain vessels, which will enable us to fully utilize the expanded terminal.

Second, our UK port operations reached financial close with the renewable power developer that is building a 300 megawatt power generation facility on our land. We have started to receive rental income, which will contribute moderately to our results, while the facilities being constructed. Once fully completed in 2020, rental income conservancy of other revenues generated from this client should increase our run rate EBITDA to this port by approximately 20%.

Our energy segment generated FFO of $40 million in the third quarter compared to $19 million last year. This improvement reflects the incremental contribution from increased ownership and reduced leverage in our North American natural gas transmission business as well as contribution from our newly acquired gas storage business in North America and same-store organic growth of 15%.

And last but not least, our French communications infrastructure business had a solid quarter generating FFO of $19 million during the quarter. And continues to perform in line with expectations. From an operations perspective, you will recall that over the past couple of years we have been working closely with multi-network operators in the country to support their coverage obligations and network densification efforts.

Through these discussions we have secured this quarter contracts to construct more than 200 towers over the next 12 months. We expect this trend to continue, as demand for data in the country increases in the coming years. And so with that, thank you. And I will now turn the call over to Sam to take you through our growth initiatives.

Thanks, Bahir. Good morning, everyone.

Before I provide an update on our strategic initiatives, I just wanted to remind people that we had our annual Investor Day in New York in late September. We'd like to take the opportunity to thank everyone who was able to join us in person or on our webcast. For those who weren't able to participate, our presentation and audio playback is available on our website.

Our theme this year was why Brookfield Infrastructure is an attractive investment for all business cycles. The gist of what we covered is that while our investment thesis of security plus growth isn't new, we felt it was important to remind our unitholders and potential investors of our full cycle investment attributes, as rate hikes could be on the horizon in the United States. In a rising rate environment, businesses with [internally] generated growth and capital discipline should be highly sought after by yield-oriented investors.

Over the past few months we have been focused on a number of strategic initiatives that we've made good progress on. As a result our efforts going into 2017 puts us with good momentum. Our cash flow run rate should benefit substantially from the following three areas of growth.

The first area of growth is our significant capital backlog. Today we have the potential to meaningfully outperform our 6% to 9% same-store growth target range due to a greater level of capital projects underway than we have had in the past. Our backlog has more than doubled in the past two years.

As a result, up to $1.5 billion of our $2 billion CapEx backlog should be commissioned in the next 12 to 18 months. This includes a substantial portion of our projects in our utility segment, which will increase our rate base and our smart meter connections.

We're also expanding our Brazilian rail and toll road businesses, thereby increasing the capacity of our networks. And we are investing in our projects at our North American natural gas transmission business in response to customer demand. Furthermore, we estimate there's an additional $2 billion of projects that have not yet been included in our backlog that may be secured in the next 12 to 24 months.

These include fiber to home opportunities in France where the required investment of the next decade is over EUR13 billion, and further contracts in the UK smart meter initiative which total over GBP12 billion. Also the Brazilian government has announced a large-scale infrastructure program which includes BRL5 billion of projects associated with concessions we own. Although all these opportunities are in their early stages, we believe our businesses are well positioned to secure significant shares of projects.

Our secondary growth will come from our recently completed transactions. As Bahir mentioned, in recent months we've closed on three investments totaling $660 million of capital consisting of a group of Australian ports, [improving] toll roads, and a North American gas storage business.

These transactions were completed either at the end of the second quarter or in the third quarter and will contribute a full quarter of results beginning this quarter. We expect the transactions to generate attractive going-in yields of approximately 8% to 10% on a combined basis.

Last but certainly not least, our last area of growth will come from the build-out of our gas and electricity transmission business. We plan to deploy over $1.1 billion in the gas and electricity utility sectors. Given the attractive nature of the assets, we expect they will be very accretive to our overall results.

We recently announced a transaction to acquire 90% controlling interest in NTS, which is a natural gas transmission system in Brazil, with our institutional partners for a total of about $5.2 billion. Brookfield Infrastructure's investment will be a minimum of 20% of the total transaction. And this represents approximately $825 million of the consideration payable on closing.

NTS owns the backbone natural gas transmission system that serves the core economic regions in Sao Paulo, Rio de Janeiro, and Minas Gerais in South Central Brazil. These are uniquely positioned long-lived assets which will earn revenues that are indexed to inflation and have no volume risk.

In addition we expect to invest approximately $300 million in the business that is developing approximately 4,200 kilometers of greenfield electricity transmission lines, including projects that were awarded to us just recently in government auctions. These are attractive 30-year concession assets that earn cash flows under stable availability-based regulatory framework. Construction on these projects is underway and they will be commissioned over the next five years.

This quarter we thought we would do something different and have a member of our management team participate in the call and review some of these key initiatives. As a result, we have Ben Vaughan, our Chief Operating Officer, with us. And he's going to provide more details and background on the recent utilities initiatives in Brazil I just mentioned. Ben?

Thanks Sam. We have been working on a number of growth initiatives in our utility segment. And today I wanted to walk you through our rationale and strategy to create value. And also provide some color on the assets we are buying and why we think these are great investments for our utilities portfolio. I'll also contrast some of these new investments to our capital recycling initiatives in the same sector.

At a high level, we made the strategic decision in the past two years to try to reduce our exposure to interest sensitive bond-like assets with low growth potential and no inflation protection, and try to replace them with similar low risk assets, but ones that have inflection indexation and higher growth potential. And we felt comfortable that we could exit some of our bond-like assets, as we were seeing valuations for good utility businesses in North America trading at all-time highs. Around the same time, in late 2014, many of you will recall that we started highlighting in our letters and communications that we were seeing interesting opportunities in Brazil, as capital was coming very constrained in the country.

The background here is that a few years ago the economy in Brazil started to turn down as commodity prices fell. The downturn then accelerated as the country started dealing with a corruption scandal and a political crisis. And we noticed that sentiment had turned extremely negative.

Brazil lost its investment-grade status. The currency and local equity markets traded way off. And in general investors were heading for the exits and capital was getting very scarce.

And I'd say the most interesting and important dynamic that we saw in the markets at this time is the markets just stopped differentiating between great assets, good assets, and not so good assets. And everything was just getting painted with the same brush. Essentially assets with no volume risks and availability based inflation linked revenue frameworks were getting valued the same as businesses with GDP linked revenue and volume exposures and operating risks.

And furthermore we saw an increasing number of opportunities to acquire assets and a growing need on the part of the government to attract private investment to build out new infrastructure. So regulators and the government in Brazil were increasing returns and lowering risks for new investments across many infrastructure segments. One example was in the electricity transmission sector where the government increased regulated real returns on an after-tax basis from the high single digits into the low double digits, and at the same time reduced various risks, for example risks relating to environmental permitting and financing.

So all in all, returns are going up and risks were going down. And as I mentioned before, at the same time derisked utility assets in North America in a very low rate environment were trading at all-time highs. And we were seeing valuations in the 1.5 to 1.8 times rate-based type of range.

So in short our strategy was to surface strong value from the low growth assets in North America and redeploy the capital into higher growth inflation linked assets in South America that are of the same or better quality. So we spend a lot of time focusing on both the electricity and gas transmission sectors. And let me get into discussing the electricity transmission business a bit.

As background, Brazil has a huge need for new investment in their electricity sector. To put this in perspective, the country has a population of a little over 200 million people and an emerging middle class. So it has about two-thirds of the population of the United States, but still only about 10% of the installed power generation capacity.

So there's a significant build-out of the power grid that is needed. And to compound this need, the country embarked a number of years ago on a plan to build several large hydroelectric plants in the north of the country and these plants are now progressing, and in some cases being commissioned. So there's a huge need to invest in the transmission infrastructure to bring this power to markets further south.

Electricity transmission is a very attractive asset class in Brazil. Essentially you get very long life concessions. So these are 30-year concessions, with full life of concession contracts for your revenues under a well-established regulatory regime.

There are no volume risks. All of the costs of the system are socialized across the entire power grid. So it's a very low risk framework.

You get full inflation indexation. And there really are no rate cases during the life of the asset. So essentially, there's no regulatory reset risk.

So what we did is, we partnered on a 50/50 basis with ACS, which is a highly reputable and capable European construction firm with a lot of experience in electricity transmission in Brazil. And over the past 1.5 years we have secured almost 4,200 kilometers of projects that will be built out between now and around 2021.

All of our lines are very well located in the center east of the country. They are in relatively flat and straightforward areas to build. So it's a no complicated terrain to cross.

And in our partnership with ACS, they have agreed to take on all the construction risk. And they've backed this commitment with credit support and also by contributing 50% of the equity during construction period. So when the projects are complete, we have the option to buy them out at a pre-agreed return. And we expect that we will ultimately on 100% of this business.

Construction has been underway since earlier this year. And we have already commissioned two small segments of line. So we are making progress on delivering on time and on budget.

And to translate all this into returns and how it relates back to our results, as I mentioned before we have been monetizing some of our North American assets. We sold both the Cross-Sound Cable in New England and our Ontario Transmission business. We sold these at mid single-digit returns and surfaced a little over $200 million of net proceeds for BIP.

So essentially we are taking the $200 million of proceeds we received that was generating AFFO yields to us in the 5% to 7% range. And we are reinvesting it in new lines in Brazil that when commissioned will deliver AFFO yields above 15%, and should then escalate over time with inflation. So we think this is a good trade and will create good value over time for unitholders.

I think on the natural gas transmission side, we talked about these assets at Investor Day. And Sam provided a bit of background earlier on the call. We are working with Petrobras towards a closing towards the end of this year.

These assets have very attractive and similar attributes to the electricity transmission business. The cash flows are locked in under long-term contracts under a solid regulatory regime. The revenues are availability based so we have no volume risks and our revenues are fully inflation indexed.

And also as with the electricity transmission business, there is no rate case during the life of our contracts. So we see this as a relatively low risk framework, even compared to regimes like in North America where, generally speaking, every four to five years you're back in front of the regulator. So with that, I'll conclude with a few general comments on Brazil.

In terms of where we see the markets today, we see signs that the Brazil economy is bottoming out. Sentiment has definitely started to turn much more positive. The local stock market is up about 45% this year and the currency is up over 25%.

Inflation, which has been running close to double digits (technical difficulties) years, has started to come down. And the government recently initiated an interest rate reduction program. These are all good signs that the economy should continue to recover in the coming years.

And on the political front we see the new administration that's going to be in place until 2018 putting in place several fiscally responsible initiatives. So we think that's positive and bodes well for the country as well. So with that, I will pass the call back to Sam.

Great. Thanks, Ben. Let me conclude the brief outlook for our business.

Our primary focus for the balance of the year is to close on our Brazil strategic initiatives that Ben just talked about, fully integrate our recently acquired businesses into our various operating groups, and start positioning a number of businesses for sale in the next six to 12 months to fund our future growth.

Looking ahead to 2017. While we expect that global macroeconomic uncertainties will continue to dominate the headlines, we believe that business conditions are generally good. And consequently the outlook for our various businesses should be very positive.

We are seeing excellent opportunities to expand our business. And we have tremendous flexibility and financial resources available to pursue these initiatives. There are number of exciting large-scale opportunities, particularly in the communications sector in Europe and Asia where mobile network operators are divesting of tower networks to recycle capital into their core businesses.

We will evaluate a number of these situations, as we believe they have the potential to enhance the overall quality and embedded growth in our Company. In conclusion, I would like to thank all unitholders for their ongoing support, and for those who were able to joining us on the call today. I look forward to updating you on our progress next quarter.

With that, we will turn the call back over to the operator to open the line for questions.

(Operator Instructions)

Cherilyn Radbourne, TD Securities.

Thanks very much, and good morning. Wanted to start by picking up on your comments around Brazil. You expressed a view at your Investor Day that the economy likely bottomed in early 2016. It sounds like your conviction in that has only increased. Do you think that's becoming a more generally accepted view? And can you just comment on what you're seeing in terms of institutional interest returning to that market?

Maybe I'll start and then turn it over to Ben. Thanks for your question, Cherilyn. I would say while are optimistic that things are turning, and we are definitely seeing that in our businesses, there's lots of green shoots all across various parts of the country. We wouldn't want to be overly optimistic, say that all their problems are in the past. There are a number of risks that could take place. I'd say we are calling the bottom with guarded optimism.

But as far as others, I think it's generally a held views that the country is turning. We are seeing more people in various transactions. We are definitely meeting a lot more investors who have an interest in the country. And I guess the most recent proof of that would have been the auction that was held last week where we secured some more transmission lines, which was pretty well attended. And I think the government was pretty pleased with the number of participants.

All in all, I'd say yes, things are turning around. And people would agree with our assessment. Ben, anything to add?

No, I think that covers it. And I think the attendance at last week's auction is a good indication that people's interest in the country is coming back.

Great. And I'm going to bounce a little bit. Wanted to ask you, just given the recent turmoil in the shipping industry, including a major bankruptcy, can you just comment on the positioning of your existing portfolio as new alliances start up next year and what you see is the potential for acquisitions in that space?

Sure. Again I'll tackle this one, and maybe Ben or Bahir want to add some comments. First, just talking about the bankruptcy of Hanjin. From that perspective of our existing operations the impact was relatively immaterial. We had a few receivables in our Australian business that I guess we may have some challenges in recovering. But the number was small. And the impact in our North American operation was virtually zero. On a longer-term basis, that's not really impacting us.

One of the things that is going on is the whole realignment of alliances that have been taking place. Obviously there's the big merger with K Line, NYK and MOL that was just announced this past week. That will have maybe some shorter-term impact on some services. As the new alliances get formed it means where particular services go to various ports may change.

However, the amount of volumes that we will see transported between the various countries shouldn't get impacted. And we feel very comfortable that our facilities are the best place, in fact, in each of their markets. I guess the two critical factors, one is whether a facility can handle the larger ships that are taking place. And our TraPac facility in LA, I think, is one of the few that can handle ships over 12,000 TEUs. It's really well placed for the long term.

There are also, because we have some of the most technologically advanced facilities because they are automated, it means that from a cost perspective we're also well positioned. We should be able to compete for boxes with any terminals in any of our ports. So while there will be in the near term maybe some shifting, I'd say longer term, because we have some of the best facilities, I feel very comfortable. I don't know, Ben, if you hear anything to add to that?

I think I feel very comfortable.

Hope that answer your question.

The second part of the question was acquisition opportunities. Do see some assets coming to market as a result of all of this on the port side?

The short answer is yes, there are some opportunities that are coming up. But the thing with many of these terminals is they are not all the same.

It kind of comes back to the point I was just making. Our facilities are well positioned. They have the investments in automation. And some of the terminals that are going to come up from some of these weaker carriers don't check those boxes. Today I wouldn't say there's any particular opportunity that has us overly excited. But we will continue to monitor what takes place. And to the extent that a premier facility does surface, then we will definitely look at it.

Thank you. That's all for me.

Rupert Merer, National Bank.

Hi. Good morning, everyone. I'll start with a question for Bahir. Looking at your hedges on the British pound. What's the average duration on the existing contracts? And how much of a headwind is the depreciation of the pound in the next year?

Good morning, Rupert. So we've got the pound, in addition to all the other currencies that are outside of LatAm, essentially hedged up until the end of 2008 -- sorry, apologize, 2018. And the way you should forecast for that going forward is that for 2017 and for 2018 from a headwind perspective, our hedge rates are about 5% lower each year compared to 2016.

Okay. Great. The UK could start to see some inflation. How well could that translate for you? What percentage of your returns there have indexation?

Hi. It's Bahir again. Our entire BU UK, our regulated distribution business, receives inflation indexation. So we'd definitely benefit from that. And a significant chunk of our EBITDA, probably about 40% to 50% in our ports business, as well is inflation linked. So also could benefit from that.

Thanks. I'll switch gears here for -- and look at acquisition potential. You talked about communications space and the potential for acquisitions in Asia. If you look at investments in India, for example, how might they compare to opportunities in Europe on a risk-weighted basis in your view?

The markets are obviously very different. The European market is more developed and the number of new tower sites being developed is much lower than what you see in India, for instance. Most of the growth is around co-location and adding additional equipment to existing sites. But there is some. We are -- we do have some rollout opportunities with our French business.

And in India, you've got different factors at play. At the end of the day from a risk perspective what we tend to look at is the quality of the underlying tenants. And I think there are some very strong counter-parties in India. And the growth there is very good. However it is a market that is under consolidation. There is probably 8 or 9 MNOs in India versus in most of Europe there's probably 3 or 4 in most of the markets. And so you have less churn, or risk of churn, in your tenant base. And so those are all factors that we would take into account in our underwriting.

Long story short, we would expect to earn higher returns for our India business. But the growth potential is better and the competitive dynamics are probably more favorable because there's not as many strong third-party operators there today. And so our ability to become a leading a third-party operator is higher there than, say, in Europe. Although I'd say Europe is different than the US where you've got a couple of really established third-party operators. I'd say both are good opportunities, just slightly different.

And how is the market for M&A there? Would you see much competition in investing in communication infrastructure in Asia at this time?

There's always competition. I don't want to say there's no competition. But the competition is reduced in both Asia and Europe compared to, say, the United States. In the United States you've got, as I just mentioned, a couple of very strong third-party operators. You have structures, they all have tax advantages that make them very competitive. And they have low cost to capital.

In Europe and Asia, you don't -- those strategics in the US don't have the same competitive advantages. It's not quite as tax efficient for them. The institutional investors aren't as familiar with the communications sector as they are for some other sectors. The competition from the pension funds and sovereign wealth funds, while they are interested in the space, they just don't know it as well and so they tend to look to partner with people like ourselves who know it better.

I would say I feel comfortable that we are well positioned in both those markets. And that the competition relative to a number of other asset classes is lower.

Thanks very much. I'll leave it there.

Bert Powell, BMO Capital Markets.

Thanks. Good morning, everybody. Sam, just question on, or maybe for Ben as well, on NTS. As I recall, part of the 90% still has to be syndicated. Would you look to take your interest up there beyond the 20%? And also just in terms of the timing, $825 million on close. But I think the total commitment's over $1 billion. So just in terms of the extra cash to go into that business, timing around that would be helpful. Thanks.

Okay. Just on the second point there, the deferred consideration gets paid in five years' time. The cash flows from the business more than offset what that deferred payment is. I wouldn't really call it a funding issue in five years' time.

Then on the second piece, we don't have any information for you today as to how much, if any, of that syndication, further syndication, that's available to us that we'll take up. The order of magnitude, though, it's not another $1 billion. It's probably in the order of magnitude of plus or minus plus $400 million. So relatively modest in the scheme of our balance sheet

Okay. With all the opportunities in front of you, Sam, does this accelerate your capital recycling program? Do you push harder on that to bring maybe some of the lower mature assets, get that -- repatriate that cash sooner rather than later?

The pace of our recycling initiatives, I'd say it's the same as we have set out a couple of quarters ago. We identified that we are looking to realize proceeds of about $1 billion a year over the next 2 to 3 years from asset recycling initiatives. I think that's a realistic target. And it's really more related to the development of a number of our businesses where they are fairly mature. Some of them don't have the same growth profile that we'd like to have for our overall portfolio. And we think in today's market we can achieve valuations that would surpass what we would value them on their own.

So we are pressing ahead. I wouldn't say it's necessarily dependent on these initiatives. But having said that, I feel really great about the rotation that Ben talked about in his piece, where we were able to sell assets at what in effect on the IRR basis would be mid-single-digit IRRs. And we're investing them at effectively comparable risk assets at double-digit, almost mid-teens IRR. The pick-up is huge. Any time we can do that, we will do it all day long.

Okay. Thanks, Sam. And Bahir, any update on the Invepar loan?

It's Ben speaking. On the Invepar loan, we expect that loan will get repaid some time towards the end of this year. I think that's probably consistent with what we said before.

As far as the corporate income pick-up, you will probably see another full quarter contribution, Bert, not dissimilar to this quarter. And that may decline going forward into 2017.

Do you get cash back, or are you able to swap for assets, Bahir?

No, we are going to get cash back, Bert.

Okay. Thanks.

Frederick Bastien, Raymond James.

Good morning, guys. Two-part question for me. First one is, is the environment for game-changing transactions still strong out there? And secondly, given that you have already acted on some of those, is your appetite for game-changing transactions equally strong than it was at the same time last year?

Hi, Frederick. I'll talk to that one first and then Ben or Bahir can chip in. I'd say the environment is still, I think, conducive to game-changing transactions. We are seeing it in many geographies today and many sectors. Obviously, North America here just with the Enbridge and TransCanada transactions being good examples. There's no doubt that we are in an environment where large, high quality businesses are available.

The only caveat is, we are value investors. It needs to make sense for us. I think we have done probably some of the larger deals that we are going to do in Brazil. I'm not sure there's any material big transactions that we are looking at today in that market where we saw the best value. I think we are kind of telegraphing to the market today is that where we see exciting opportunities is in the communications sector, either in Europe or Asia.

I don't know what's the definition of game-changing. But I think they would definitely meaningfully expand that sector for us, and we would be very excited to grow in that sector. I'm not sure that fully answers your question. But hopefully it gives you flavor for what we're thinking about

It sort of does. I just didn't know -- I'm not that familiar with the construction -- the telecom space to appreciate how big the transaction might be for you to pursue. So the clarification does help. Probably be more looking at a year like 2014, then, when you did have some good acquisitions there. But it sounded like your focus on capital recycling initiatives is really going to pick up a bit in 2017. Is that fair to say?

Yes. Look, I think the capital recycling's going to be important this next year. Some of these telecom transactions could be fairly large, though. I don't want to say that they are small. These are -- we probably have opportunities to deploy $1 billion or more in the telecom sector in the next year or two.

Great. That's helpful. Okay, thanks. That's all I have.

Andrew Kuske, Credit Suisse.

Thank you. Good morning. I guess the first question is for Ben. It relates to just the Petrobras disclosure either earlier this week or late last week where they fairly delineated what they perceived to be the cash flow profile from NTS heading into the future. Is that fairly representative or similar to the view you have taken?

Yes, Andrew. I don't think we would view it as materially differently. I think, as we have talked about, the cash flows of this asset are fairly transparent and locked in under contract. A big part of our thesis here, as we have discussed -- we discussed at our Investor Day especially, was the underlying returns come from the cash flow. And we think we have underwritten it on a fairly conservative basis. The returns could be fairly exciting for us if we get a rewrite of the country or of the asset during our ownership piece. But from the underlying cash flows, they are fairly transparent.

Okay. That's helpful. And then keeping within gas pipelines world, but just shifting geographies. There's a Western Canadian gas producer that committed to a contract in NGPL. And I would like to explore, is that contract, the two-year contract with a 10-year option, is that something you'd like to replicate more of to just fill NGPL to a greater degree southward? And then what kind of expansion opportunities do you see on NGPL?

I don't know, Ben, you want to do that or want me to do it?

Andrew, it's Ben again. I'd say the short answer to your question is yes, we do want to essentially find more volumes to fill the pipe moving down to the south. Our view is that over time more LNG is going to move out of the south and the markets in Mexico are going to develop and start to pull gas out of North America. We are looking. And we see a pretty decent amount of potential supply that will move through our pipe down south. And we're looking to commercialize it in the coming years and fill the capacity.

And maybe just adding to that. In fact, our energy team out west was pretty instrumental in working with the NGPL sales people in coming up with that contract. The thesis is that things are going to get fairly congested going into the Midwest and Chicago market. For producers to have access to other markets is going to be critical to them. NGPL is just really well placed to help access those markets down, as Ben said, to the LNG terminals being developed and the Mexican pipelines being built. I am hopeful that there could be other producers who have the same foresight that Seven Generations in securing that capacity.

That's helpful enough. I may have just one final question on the topic. How much excess capacity do you have in the out years? And then what low-hanging fruit is there from just compression additions before you get into looping pipe?

Look, I don't think we have the exact numbers for you. Look, what we have talked about is for the first reversal we've got most of the capacity contracted, I believe. And we've talked about investing further capital for a second-stage expansion to deal with further capacity. There probably is going to be some additional capital required. And these are things the team at NGPL and Kinder are working on.

Very helpful. Thank you.

Robert Kwan, RBC Capital Markets.

Good morning. If I could just start with NTS, and you are buying the asset unlevered. I'm just wondering if there was any update on the plan for debt at the OpCo?

I don't think -- Robert, it's Ben. I don't think there's any plan -- there's no change in our plan today. Our intention is to close the asset funded with 100% equity. And when lending markets in Brazil fully normalize, we look to put a normalize capital structure in place. And as I described in my comments, it feels like the markets have bottomed and are heading in that direction. But at this point the plan is to -- there has been a change in the plan.

Okay. And if the market conditions don't come around anytime soon to finance down at the OpCo, what type of debt mix, and maybe this is for Bahir, what kind of debt mix would you be comfortable allocating at the HoldCo level?

Robert, I think that's probably -- I'm not sure we have the answer to that question right now. But we will continue to monitor this going forward.

But maybe I could just add to that. At this stage, Robert, we just assume that it remains unlevered. And so that sort of our conservative going-in assumption. I see it just as upside if there's opportunities to add leverage on an accretive basis down the road. We will see how things develop. My sense, it's unlikely that we would think of financing that at a corporate or HoldCo level, just given the currency mismatch. We will wait to the capital markets and interest rates get down to a more interesting level in the next couple of years, and then evaluate at that point in time.

Fair enough. If I can ask, just as you focused here on the opportunities that you have had in Brazil, you have decades of experience in that market. And I'm just wondering, as you think about the deals that you have done, how important was this? And how much comfort did having that history, the local and political knowledge have to be able to move quickly and confidently on the transactions that you have done? And ultimately, I guess, I'm just wondering if you saw a similar scenario play out where you had capital constraints or political turmoil in another emerging market, how quickly or confidently would you feel you would be positioned to move somewhere where you didn't have that type of long history?

Robert, it's Ben speaking. I think being local in these markets is important to us. We do have a longer history in Brazil than in some of our other markets. But in many of the markets that we are in we have many years of local -- of good local presence. So in the other markets outside of the OECD, Peru, Colombia, India we have had local presence there for now over eight years with teams on the ground.

I would say it's an important part of getting comfortable with the dynamics that are going on and making sure that we have well-informed views about where the countries are headed, rather than just getting the views from the headlines in the papers at any given moment. And so that -- I'd say that program for us hasn't changed and isn't going to change. And so our offices in all the countries that we operate in, especially in the more emerging markets, are mature. And if new opportunities came up where we saw the fundamentals of the country not changing, or even in some cases changing for the better, but some headline risk because of short-term events, I think we would obviously consider, as value investors and as contrarian investors, looking at it opportunities in those environments.

Okay. So the pace that you've moved in Brazil and the amount of capital you've committed was more a function of the opportunities in the country rather than, say, your comfort level, at least relative to other emerging markets where you have had a multi-year presence? Is that fair?

I think that's fair. There was a relatively unique window in Brazil where sentiment was particularly negative and the country was undergoing some dynamics that were different than the other countries. So there was a unique window in the last couple years.

That's great. Thanks very much.

This concludes time allocated for questions on today's call. I will now hand the call back over to Mr. Pollock for closing comments.

Okay, thank you. Thank you, operator. Thanks for everyone who listened on the call and for all the questions. I know this was probably one of our longer calls. So appreciate everyone's attention. And we look forward to reporting on our progress to you next quarter.

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