May 2, 2013
Executives
Tracy Wise - Vice President, Investor Relations John Stinebaugh - Chief Financial Officer Samuel Pollock - Chief Executive Officer
Analysts
Cherilyn Radbourne - TD Securities Andrew Kuske - Credit Suisse Robert Kwan - RBC Capital Markets Brendan Maiorana - Wells Fargo Bert Powell - BMO Capital Markets Frederic Bastien - Raymond James
Operator
Welcome to the Brookfield Infrastructure Partners' conference call and webcast to present the company's 2013 first quarter results to unitholders. (Operator Instructions) At this time, I would like to turn the conference over to Tracy Wise, Vice President, Investor Relations.
Please go ahead, Ms. Wise.
Tracy Wise
Thank you, operator, and good morning. Thank you all for joining us for Brookfield Infrastructure Partners' first quarter 2013 earnings conference call.
On the call today is John Stinebaugh, our Chief Financial Officer, who will review our financial results; and Chief Executive Officer, Sam Pollock, who will discuss highlights for the quarter, provide comments on our strategy and the outlook for our business. Following their remarks, we look forward to taking your questions and comments.
At this time, I would 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 future 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 turn the call over to John Stinebaugh.
John Stinebaugh
Thanks, Tracy. I'll start by spending a few minutes walking through our results.
In my remarks I'll focus on funds from operations or FFO. We highlight this metric because we believe it's a proxy for cash flow from operations.
I'll also focus on AFFO yield, which is equal to our FFO less maintenance CapEx divided by invested capital. This is a measure of how effectively we deploy our capital.
In the first quarter of 2013, we posted strong results that began to fully reflect the investments that we made over the past two years. Our FFO increased by 48% to $160 million driven by our Australian railroad extension project that was commissioned during the past year as well as acquisitions in our utilities and transport platforms that closed in the fourth quarter of 2012.
Our FFO per unit was $0.80, a 38% increase over the prior year, as all the investments funded by our August 2012 unit offering meaningfully contributed to cash flow. Including a 50% increase in our distribution in February of 2013, our payout ratio was 59%, below our target range of 60% to 70%.
During the quarter, our utilities platform generated FFO of $92 million compared with $65 million in the first quarter of 2012. The year-over-year increase in FFO was primarily attributable to the recently completed merger and recapitalization of our U.K.
regulated distribution business, which doubled its size and the increase in ownership in our Chilean electricity transmission system. Excluding these investments, results from our utilities business increased due to inflation indexation in additions to the rate base of our existing operations.
Our utilities platform generated an FFO yield of 14%, which is very attractive in light of the low risk profile of these businesses. Our transport platform generated FFO of $67 million in the first quarter compared to $38 million in the first quarter of 2012.
The significant increase in FFO was driven by the commissioning of our Australian railroad's expansion program, as well as the contribution from the South American toll roads that we acquired in the fourth quarter of 2012. For the quarter, FFO from our ports business declined nominally as a result of lower volumes at our bulk and container terminals due to the recession in much of Europe.
Overall, our transport platform produced an AFFO yield of 13%. We expect FFO from this platform to increase over the balance of the year as our largest railroad customer commenced service on the last of its four contracted train paths in the beginning of March of this year.
Our energy business generated FFO of $22 million in the first quarter compared to $24 million in the first quarter of last year, despite investments of equity to deleverage our North American natural gas transmission system and an acquisition of our first district energy asset. As a result of weak market fundamentals, we expect that our natural gas transmission system will continue to face headwinds in the near term.
However, we're confident in its longer-term outlook due to supply growth from the emerging shale basins served by our system as well as increased demand from gas-fired power generation as the U.S. economy recovers.
Overall, this platform produced an AFFO yield of 7%, which is below long-term expectations. Our Timber business had a strong first quarter, reporting FFO of $11 million versus $6 million in the prior year.
Excluding the impact of the divestiture of a portion of our Canadian timber operation, our results were more than double the prior year, driven by price increases in both the domestic and export markets. In the first quarter, the recovery of the U.S.
housing market continued to gain momentum with seasonally adjusted, annualized U.S. housing starts reaching over 1 million in March, 47% above prior year levels.
In order to take advantage of such conditions, we leveraged the flexibility of our operations to ramp up production in the winter months, when many of our competitors where unable to increase their harvest levels. For the quarter, our log exports were 45% of total sales consistent with the prior year and our AFFO yield for this platform was 10%.
I'll now touch on some of our financing initiatives. During the last few months we completed several refinancings at our operations capitalizing on the opportunity to issue long-term debt in this historically low interest rate environment.
At quarter end, our Australian railroad raised $1.2 billion of permanent financing comprised of $500 million drawn term-loan and $700 million of notes issued in the U.S. private placement market.
These financings, which have a BBB rating from S&P have an average Australian equivalent coupon of 6.2% and an average maturity of seven years. Upon closing, we repatriated $300 million of capital for use in future investments.
Subsequent to quarter end, we also completed the refinancing of a bridge facility at our U.K. regulated distribution business.
We raised approximately £600 million of U.S. private placement debt with an average term of over 13 years and an average GBP equivalent rate of 4.4%.
The notes have a rating of Baa2 from Moody's. In April, we also closed an approximate $40 million financing at our Ontario transmission operations.
Over the past several years, we have equity funded the growth of its rate base, and this business is now able to support more debt, while maintaining its investment grade credit metrics. The proceeds of the financing will be repatriated for use in future investments.
Now, I will turn the call over to Sam to walk through our growth strategy and outlook for the business.
Samuel Pollock
Thanks, John, and good morning everyone. Since year-end, we've been very focused on our asset recycling and capital raising initiatives.
As John mentioned, we recently closed two asset-level, debt financings that resulted in repatriation of approximately $350 million. We also sold a non-core asset, the Peterborough Hospital public private partnership for $40 million.
With many of our initiatives now complete, we are focused on advancing growth opportunities throughout our business. One of our current organic growth projects is the construction of our Texas transmission system, which is currently at its peak level of activity.
As of now, we have set 86% of the system's foundations and 56% of the towers have been erected. Transmission wire has been strung over 76 miles of the system's 376 mile path, and 30% of the total cable is now in place.
All three of the substations for the first two line segments have been assembled and are undergoing final testing. This project is expected to be commissioned in the third quarter.
Another example of organic growth is in our energy segments at our North American district energy business. In December, we executed a long-term contract with data centre for volume that exceeded our underwriting assumptions.
Data centre customers are particularly attractive as they require year-round cooling due to heat that is produced by their equipment, and they have loads that are four times the typical weather-sensitive cooling customers. We expect the level of organic growth within our business will accelerate with the global economic recovery that is underway and we believe that these organic growth initiatives will support our 3% to 7% target distribution growth.
We also believe that we can meaningfully add to our growth through acquisitions. Our business development teams have been actively working to originate new investment opportunities, and we believe that our deal pipeline is currently as attractive as 2012.
Last year during the period of uncertainty in the global economy we successfully invested over $1.4 billion of equity to acquire high quality infrastructure assets in our utilities, transport and energy platforms. Entering 2013, we believe that the global economic recovery is accelerating, albeit unevenly across regions due to varying levels of consumer confidence, government austerity and exposure to commodities.
For the most part, we have an optimistic view of the long-term outlook of markets in which we operate. In such an environment, we have found that capital flows tend to vary considerably by region and by sector.
This provides an opportunity for us to originate acquisitions by leveraging our international presence and access the capital to invest in sectors and regions where capital is constrained. Over the past few years, we have built-out our platforms such that we now operate over $20 billion of assets with scale in the utilities, transport and energy sectors.
Furthermore, within Brookfield's infrastructure group, we have over 100 professionals, including business development originators in each of our targeted regions. In order to generate deal flow, each of our local teams identifies high quality assets that we would like to acquire and develops relationships with the owners of these assets.
As a result, we have considerable flexibility to be opportunistic and make investments by sector and by geography that offer the most attractive risk adjusted returns. Thus, while certain sectors such as the midstream sector in North America appear to be richly priced, we are well positioned to capitalize on attractive opportunities in such areas as the port, rail and toll road sectors in a number of different geographies.
Over the years, this opportunistic approach has enabled us to successfully invest on a value basis. While we will continue to organically spend our operations, we expect that mergers and acquisitions that result from these proactive business development initiatives will drive near-term growth in the current market environment.
In summary, we continue to be very excited about the prospects for Brookfield Infrastructure. With that, I'd like to turn the call over to the operator to open the line for questions.
Operator
(Operator Instructions) The first question is from Cherilyn Radbourne of TD Securities.
Cherilyn Radbourne - TD Securities
I was wondering if you could just give us a bit of perspective on the Australian market in particular, in terms of both the outlook for organic expansion opportunities as well as the M&A landscape. I mean, it seems like the economy is cooled, but core infrastructure deals continue to attract pretty high multiples their?
Samuel Pollock
I'll talk about that question and maybe John can add to it. First of, I guess with respect to the market conditions in Australia, I think your first comment that the economy has cooled somewhat, it is correct.
Obviously, it is sensitive to commodity prices. I would say that we do see a number of the large industrials continue to progress the projects that they have underway.
But there has probably been a slowdown in the new developments of projects and that would be consistent with our own Dudgeon Point, where we have probably slowdown activity in reaction to the reduction in new mine openings in that region. With respect to prices in the market, I think the conditions there are similar to most other markets.
I think for certain assets that are well contracted and in the utility sector, I think they are trading at values that are relatively richly priced. Having said that, we still see some good value in that market as well as other markets around the world.
So I think really as I mentioned in my remarks, it comes back to our business development approach of developing relationships with sellers of assets, who are looking to structure transactions that made a number of objectives. And if we can do that, we can tend to invest at better returns than what others might do.
Cherilyn Radbourne - TD Securities
And can you speak about the outlook in terms of the deal in pipeline in Europe. Should we still be thinking mostly about divestitures of non-European assets by those owners or are we getting closer to something actually happening in Europe?
Samuel Pollock
I'd say, our current focus generally with regard to M&A activity is to focus on European industries and construction companies that are looking to sell off assets to delever themselves. We're also having discussions with a number of shipping companies, who may consider selling terminal operations again to reduce their leverage across their various businesses.
And again, there is probably opportunities in the mining sector as well with various companies looking to sell off their infrastructure assets to delever their balance sheets. I think with regard to Europe, we still have higher riches in acquiring assets outside of Europe from these companies.
Having said that, we are seeing a number of opportunities to invest in Europe, but we are approaching that market with caution, as you're aware there is quite a bit of sovereign risk that we need to be mindful of.
Cherilyn Radbourne - TD Securities
Maybe just a smaller question, when did or when does the new data center contract kick in for the district energy segment? And can you just give us a sense of the term and whether it includes minimum volume commitments?
John Stinebaugh
The contract is going to kick in later on this year and it basically would be a long-term contract. And the way that we structure the contract is to have a significant component of revenue comprised of demand charge, and then there will be a variable charge.
So because of that we would do mitigate the volume risk that we end up taking. But with the case of the data center, because it's basically going to be a base flow to client, and the volume risk is less there than it would be for other types of customers, particularly one that are focused on cooling.
Operator
The next question is from Andrew Kuske of Credit Suisse.
Andrew Kuske - Credit Suisse
Just on the capital that's sitting on your balance sheet today from the recycling initiatives than your liquidity. What do you think about deal size, what you think is possible just on the current balance sheet that you have?
And then, any kind of access you would have through say a BAM private fund that would look to invest in the infrastructure space?
Samuel Pollock
Our current liquidity is probably plus or minus $500 million on our balance sheet. And we are doing a number of things to bolster our liquidity so that we can be opportunistic for transactions.
We are continuing to look at the sale of some non-core assets. We will over time expand the capacity on the lines that are available.
And as we've done in the past, we've opportunistically gone through the capital markets to increase our liquidity. And I think all of those are available.
And so that combines with the partnerships that we have in place on the private side. I think we can take on transactions of a very large nature.
And as an example, we did the Babcock transaction back in 2009, that was plus or minus $2 billion equity transaction. And we did that with a much smaller balance sheet.
So I think today, we can do transactions even larger than that.
Andrew Kuske - Credit Suisse
And then just as far as Europe goes, you're clearly having a lot of conversations with companies and just owners of assets, but to what degree are you actually having conversations with, say, banks that are effectively long the debt. Because if we looked at the European banking situation, a lot of corporate lending activity is just really done by the banks as oppose to the public markets, which is very different than we see in the U.S.
experience? So to what degree have you talked to banks that don't want to essentially take an assets via foreclosure process?
Samuel Pollock
Andrew, we've probably been talking to banks in Europe for the past two to three years, regarding loans that are on their books, to see if there are opportunities to buy debt to create transactions. That is one of the tools in our tool kit as far as M&A investments.
Historically, we had found it difficult to pry loans of the banks in Europe. I think there maybe some listening up in that regard.
I think over the last couple of years, what we've noticed is that they've sold off all the low-hanging fruits, all the higher grade facilities. We do know that they still have some troubled loans on their books and we continue to talk with them.
But it's very hard to assess the prospects of whether or not we will find opportunities there, because there is generally a reluctance for those banks to take losses.
Andrew Kuske - Credit Suisse
And then just one final one, if I may, and it's related. But when look at Europe and really what we call core Europe versus a peripheral, is the focus really on companies that have, say peripheral European exposure, but with assets sort of elsewhere in the world, and as you've done with the Chilean acquisition and other things in Latin America.
But I guess to the degree that you're also interested in peripheral Europe in an outright sense, just because the valuations in some of those assets and rates look relatively high.
Samuel Pollock
I'd say we're doing all of the above. We are looking at assets that European companies own outside of Europe.
We're looking at some of the assets they own within some of the northern countries, where there is less sovereign risk. And I'd say for those assets within the more trouble there is, we're trying to be creative in our approach and come up with some structured solutions that can protect ourselves in the event of a calamity, such as a euro breakup.
So I think we're pretty good at being creative. And I think if we were to do something in the more trouble there is at this point in time, it would probably more of a structure type transaction as oppose to a direct investment.
But it all depends on situation.
Operator
The next question is from Robert Kwan of RBC Capital Markets.
Robert Kwan - RBC Capital Markets
Just on coming back to acquisition and you've mentioned some of the asset classes that look attractive to your teams like it's a GDP sensitive stuff. But when it comes to regions, is it still Latin America where you're seeing a lot of those potential opportunity?
Samuel Pollock
Robert, we're actually seeing them all over the world. I think we see them in Latin America for sure.
We're seeing them in North America, and we're seeing them in Australia. Again, and there is lots of opportunities in Europe as well.
My only caveat on Europe is that we are looking to structure them a little more carefully than in some of the markets where we don't have some of the sovereign issues. But I would say our deal pipeline is robust in all markets.
And I think that themes are very similar, they're coming from construction companies that are challenged because they don't have the order book they used to have. It's coming from mining companies and it's coming from shipping companies, those are clearly the three areas that are probably the most challenged and have the least amount of access to capital today.
John Stinebaugh
And just to add on to one of Sam's comment, well, we are looking at all geographies, but in certain geographies, certain sectors might be more favorable than others. So we're taking a targeted approach and trying to find what we pick the value is in the particular geographies by targeting sectors, where there is not as much capital that are going after opportunities.
Robert Kwan - RBC Capital Markets
Any specific examples, John, to some?
John Stinebaugh
One example would be to look at, as an example, shipping companies own container terminals. We have seen some opportunities in North America for those types of assets, district energy assets to continue building on the acquisition that we made last year, though there is some opportunities we are pursuing.
And then also in South America as well as Australia to acquire infrastructure that's owned by mining companies, which has got less access to capital then they would have had a year ago.
Robert Kwan - RBC Capital Markets
And then just for the acquisition parameters; are they still the same, and I'm almost thinking it from why you'd want to divest? You still want to have control of the asset?
John Stinebaugh
We're very much looking at either control or co-control.
Robert Kwan - RBC Capital Markets
And just the cautiousness that you have on Europe that kind of felt maybe coming out of the last quarter that you thought things might have been turning a little bit. Are you a little more cautious at this point than maybe you were three to six months ago?
Samuel Pollock
No, I don't think our views have really changed. We do are spending a lot of effort into that market.
It's probably been a little bit slower as far as that the number of opportunities that we see there versus other markets. And clearly, it's more challenged than other markets, but it is a focus for us and I am pretty confident over the next couple of years, we will make some significant investments in that market.
So the short answer is we like the market and it is the focus for us.
Robert Kwan - RBC Capital Markets
Just last question here on the Australian rail assets and specifically just the way you look at contracts. Just wondering at what level would you be signing those contracts?
Is it the mine level or is it do you have a corporate guarantee? And I just kind of overwriting, what type of security would you have for when you're signing those long-term deals?
Samuel Pollock
Each situation is different. Some of the contracts would have corporate guarantees.
In some cases, for instances, with our largest customer on the expansion, we had them provided the letter of credit for over half of the investment we made, to protect us against any unforeseen situations. So it's a combination of corporate guarantees, letters of credit, and depending on the operation and it could be down to the mine as well.
Robert Kwan - RBC Capital Markets
And just kind of overwriting on that, are there any other contracts there that are particularly concerning to you at this point?
Samuel Pollock
No. So far everyone is performing.
As expected they are all continuing to ramp up and we've been quite pleased with the way the expansion has gone. I think the results from that effort has been exactly what we expected so far.
Operator
The next question is from Brendan Maiorana of Wells Fargo.
Brendan Maiorana - Wells Fargo
So I wanted to ask a little about balance sheet strategy, as you're thinking about the new investment opportunities that are out there. As you sort of look at the balance sheet today and you look at the growth opportunities as you grow going forward, and it sounds like there is good investment opportunities that are out there.
Do you think this is done in a leverage neutral way? Do you think that leverage moves up or do you think that you'd use it as an opportunity to take leverage down a little bit?
John Stinebaugh
The financing velocity is basically the same as what we've articulated in the past, where we are predominantly financing at the asset level, and we're going to size that based on investment grade metrics. So it's going to vary, whether it would be utility or a port asset as to how much leverage we're going to have on a debt-to-cap basis.
But that's primarily going to be how we're going to finance the debt side of the capital program. We're not looking to use any meaningful amount of corporate debt as part of the financing strategy.
The equity side of things would be financed through a combination of proceeds from asset sales and equity issuances.
Brendan Maiorana - Wells Fargo
So if I just look at your overall metrics right now, you're probably at around somewhere between 7 and maybe 7.5 times kind of debt-to-EBITDA that sort of strikes me as high. And so how do you kind of think about that number and leverage if I sort of look at leverage compared to gross assets values, it was probably in the mid-50% to maybe even 60% depending on how aggressive or conservative you want to get with asset values.
But that seems high also, and given that your shares are trading at a nice premium to I think most people's NAV estimates or value estimates. Wouldn't this be a reasonable opportunity to go ahead and try to reduce leverage as you're growing by sort of over funding the new investments and it could be still be done in a way that's accretive to AFFO and FFO?
Samuel Pollock
Brendan, so first of all regarding the leverage, one of the things that impacted the debt-to-EBITDA multiple over the past year is we had invested a fair amount of capital in the expansions, which we're starting to fully see the benefit this year of the cash flow. So the debt-to-EBITDA multiple is going to come down from the levels that you mentioned.
But in terms of just generally how we're looking at financing is that if you look at the underlying operating assets that we've got, they are by and large at strong investment grade levels. So the way we end up kind of thinking about the capital structure, we don't really manage it to any specific debt-to-capital raw, but we're managing Dalrymple Bay to it's a BBB+ rating.
The rail is BBB, the BUUK is Baa2. So we're managing basically the underlying operating assets to strong investment grades.
And I think what you're seeing in terms of the debt-to-cap, reflects the stability of the underlying cash flow that we've got within our business.
Brendan Maiorana - Wells Fargo
I completely agree with you on that, when it looks at sort of thinking about appropriate interest rates and getting an attractive cost of capital and interest rates there. But you're also a public company, as equity gets mark-to-market on a daily basis.
And the closest peer set is probably U.S. MLPs, which are at around 3.5 times debt-to-EBITDA and leverage is lower.
And since kind of '09, when the BBI recap happened, asset values have gone up, overall fundamentals have gotten better. But if that reverses and the interest rates are low, then certainly asset values could get worse over the next few years, if interest rates rise significantly.
It strike me that your equity would be more at risk and that currency could become less attractive. I'm just interested as why you wouldn't use this as an opportunity to bring leverage down a little bit and maybe not at the level where peers are, but at least a little bit closer.
Samuel Pollock
First of all, I guess one of the questions is part of the MLPs is really good peers on a credit standpoint. If you look at our businesses we've talked about before, 85% of our cash flow is either regulated are under long term contracts.
And much of that doesn't have volume risk. So if you take a look at that compared with the cash flow profile of the MLPs who have got volume risks who in some cases are going to have commodity risk, I think its two different profiles that we're referring to.
On a run rate basis with the current cash flow to the business, the leverage is going to come down into the 6 and 6.5 range. So it's definitely coming down from the number that you mentioned.
But on a going forward basis, we feel that the underlying businesses are strongly capitalized. And as you know, the only corporate debt that we've got is the $400 million bond issue that we did.
So it's all basically non-recourse at the level of financing that comprise our balance sheet.
Brendan Maiorana - Wells Fargo
Maybe related to that, this could be either John for you or for Sam, where do you think we are sort of in the innings of if you look at where asset values are today from a, not in your own portfolio, but just sort of deals that you're looking at from evaluation perspective, whether it would be EBITDA or IRRs or something like that?
Samuel Pollock
Maybe I'll tackle that and just to make a couple of comments just on some of your earlier comments you made, Brendan. Look I think we are very focused on insuring that we have tremendous liquidity at all times.
And we are very sensitive to having strong credit metrics, and as John mentioned, probably 70% of our cash flow has come from four businesses that are all very strongly investment grades. And the structure that we have with asset level financings that are non-recourse to the parent is something that's been tried-and-true within Brookfield for many years.
And so we're pretty comfortable with our financing strategy, but we're always looking to make it better. So we appreciate your comments.
With respect to asset values, I think it's always dangerous to take a broad brush across every asset class because I think we have demonstrated that we've been able to find value in all market conditions. Obviously, it's much easier when there is a global financial crisis because there is many asset classes that are trading at deep value.
But I think our general view is that the pricing for utility type businesses are probably closer to their peak today because they reflect a relatively low return expectation in line with where interest rates are. Having said that, we think that there is opportunities for good value in more GDP sensitive businesses because while people maybe using lower discount rates, they reflect much lower growth rates within their business.
So as far as innings, I think we're still in the mid-innings on some sectors and for others maybe a bit at the end depending on your view of interest rates. So I think obviously that's open for quite a bit of debate.
Some people think we'll have interest rates low for sometime still, others have more concerns over inflation.
Brendan Maiorana - Wells Fargo
Sam, so if rates rise and let's not say there is spike up that we get a gradual rise in rates, do you think asset valuations contract?
Samuel Pollock
I think, Brendan, it's going to depend on the type of asset because to the extent rates rise than that's probably a scenario where there is a greater economic growth in assets, so there can be GDPs sensitive or have got inflation, indexation may hold up pretty well. And overall if you look at our portfolio, I think we've got very good resiliency because we do have a lot of regulated assets that where the weighted average cost of capital reset based on the interest rate environment and we've got significant inflation indexation within our portfolio.
John Stinebaugh
And I'd also add that we have I think done a pretty good job over the last couple of years of refinancing many of our businesses on a long-term basis at these historically low rates. So we should generate very strong cash flows for sometime.
Operator
The next question is from Bert Powell of BMO Capital Markets.
Bert Powell - BMO Capital Markets
John, I just wanted to go back just maybe to the operations for a second and just looking at the return of the rate base this quarter, maybe you can help us think about maybe seasonality or what your expectations are in terms of return on the rate base, just seems a little bit lower than we would have thought?
John Stinebaugh
The recent seasonality that reflects that the biggest thing is going to be in a business like Powerco, where we are paid based on biometric usage of the system and the heating load, which drives the natural gas side of the business is going to be a big factor in terms of how the cash flow of that business materializes. So we were in a low seasonal quarter this past quarter.
The other thing it reflects obviously is just the mix of businesses. The return on rate base is going to vary a little bit just based on the mix of businesses that we've got.
So I think you can probably expect that it's going to be a little bit higher than this quarter, in light of just the mix of businesses we've got in a normal seasonal environment.
Bert Powell - BMO Capital Markets
I mean typically I think the target has been to generate an 11% return on the rate base, is that still how you're thinking about the business on the context of current mix?
Stinebaugh
Yes, that's right. We think that's still pretty fair.
Bert Powell - BMO Capital Markets
Is 11% the number or you think it can be better than 11%.
John Stinebaugh
No, I think it's in the 11% ballpark, Bert.
Bert Powell - BMO Capital Markets
And just on the toll roads in Brazil, I know it's only been a short period of time, you did mentioned that traffic activity is up in Chile. Just wondering if you can offer us some commentary around what the activity levels are like on those roads and what the prospects are for deploying capital and extending the concession lines.
Samuel Pollock
I'd make I guess two comments, I think in our Chilean operations, we continue to have quite a bit of excess capacity and so we're seeing strong growth rates over the next couple of years and obviously that will level off as the road matures and we have less capacity and we'll have to invest additional capital to de-bottleneck it. But I think for the next couple of years we'll continue to see strong growth obviously from the rates that we're able to charge there, which are inflation linked as well as real rate increases of 3.5%, but as well reflecting these strong growth rates.
In respect to Brazil, we've actually been pretty pleased with the traffic growth across the roads in general this year. As you know growth in Brazil has moderated more than we probably expected in the near-term, but the light vehicles, the commuter traffic has stayed up and hasn't really reflected the drop in those growth rates.
We've probably seen a bit more of a impact on the heavy traffic, but we are expecting that economy to pick up over the next couple of years and with that we'll see continued growth, but generally, I'd say that those markets are robust and the roads that we own are critical arteries both in the urban centers and interurban traffic.
Bert Powell - BMO Capital Markets
Is there a real possibility, Sam, to extend those concession lines?
Samuel Pollock
Yes, I think there is. But there will be some concessions required.
So to extend concession lines, it's going to require two things. One is either a reduction in tolls, which the government may want in order to make it more affordable.
And so it will be done on sort of an NPV neutral basis. We actually wouldn't mind doing that because it probably improves traffic over the long term.
So that's a trade that we would be comfortable with. In addition to that, we're able to extend concessions when we invest at additional capital.
And again, I think this is probably more of a case in Brazil, but there are opportunities in Chile as well where the government hadn't planned for certain bottlenecks to arise and the traffic to be as much that it is. So there is opportunities for us to go to the write a letter, suggest various projects, which we can then leverage into longer concession.
Operator
The next question is from Frederic Bastien of Raymond James.
Frederic Bastien - Raymond James
Just a quick one from me and I apologize if you have discussed this before, but with natural gas prices strengthening into the second quarter, do you see some upside in your natural gas transmission business in the short term?
Samuel Pollock
The business following the FERC case, which ended up being fully implemented at the end of 2009 really did reduced the amount of excess gas that we recovered. So we still do recover some excess natural gas and selling it off at higher prices will be positive for the results, but by and large, the biggest driver for our natural gas pipeline is going to be the difference in price that occurs in different locations.
So that location basis spread is going to drive how much people will pay for transportation, and as we contract and things of that nature, there are certain customers like the marketing customers that are more price sensitive whereas we're seeing with the local distribution companies that they are not really focused on the current basis spread. It's more about the liability to system and we're able to contract at full tariff with those customers.
So this a very strong franchise and we think that as natural gas demand increases that we're very well positioned because we touch a lot of a shale basins and we have got 50% market share of Chicago. So the profitability of the business is going to definitely increase.
But I think it's a function of increasing gas demand is probably going to be the biggest driver.
Frederic Bastien - Raymond James
And do you see some opportunities that you have been talking acquiring in other jurisdictions and other markets. Is that a sector that you have been focusing on as well?
Samuel Pollock
We definitely are looking at energy assets. We continue to look in North America and we're very interested, but we are trying to find situations where we can earn good risk adjusted returns.
But likewise we are looking to invest in energy assets in other jurisdictions. So that is a core area for us.
Operator
There are no more questions at this time. I'll now turn call back over to Mr.
Pollock for closing comments.
Samuel Pollock
Thank you, operator. And I'd just like to thank everyone for participating on our call today and we look forward to speaking with you again next quarter to review our progress.
Thank you.
Operator
Ladies and gentleman, this concludes today's conference call. You may disconnect your lines.
Thank you for participating and have a pleasant day.