Nov 4, 2016
Operator
Welcome to the Brookfield Infrastructure Partners’ 2016 Third Quarter Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions. [Operator Instructions] And at this time, I’d now like to turn the conference over to Melissa Low, Vice President, Investor Relations and Communication.
Please go ahead, Ms. Low.
Melissa 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 their remarks, we look forward to taking your questions and comments. At this time, I would like to remind you that in responding to questions and in talking about our growth initiatives, and our financial and operating performance, we may make forward-looking statements.
These statements are subject to known and unknown risks, and future results may differ materially. For further information on known 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?
Bahir Manios
Thank you, Melissa, and good morning, everyone. I am pleased to report today on another solid quarter for business from both the financial and operations perspective.
We generated funds from operations or FFO of $235 million for the quarter, or $0.68 on a per unit basis, which is up 12% year-over-year. Our financial performance continues to reflect 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 the 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 the large-scale transaction that will meaningfully expand our utilities operating groups.
We're 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 to almost 95% and our inflation link cash flows will increase approximately 75%.
We’re 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’ll now take you to our financial results and operating performance for various operating segments.
Our business delivered another solid period of same store constant currency growth of 9% which is at the high end of our long-term target growth. More specifically our utilities segment generated FFO of $102 million for the quarter compared to $99 million last year.
Results from this segment increased as a result of the strength in connection activity in our UK regulated distribution business, inflation indexation across our operations and the commissioning of capital into rate base over the past 12 months. The impact of these positive results was offset by lower contribution from our regulated terminal that experienced a reduction in its return as a result of its recent regulatory reason.
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 increase in contribution coming from the fiber to the home products offering which we established the 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 ultra-fast broadband connectivity solution which was publicly endorsed by the Housebuilders’ Federation at the end of the second quarter of 2016. This business is also currently pursuing two smart meters’ opportunities requiring up to 200 million pounds 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 the number of operators.
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 the partial contribution from the recently acquired ports business in Australia that closed mid-August. The impact of these positive factors was slightly offset by foreign exchange and tariff release that we extended to one of our Australian rail clients.
Within the transport operating groups there are two business updates that I wanted to highlight. The first seeing 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 expected, these conditions will dampen volume growth for the next two quarters, we’re pleased with the excellent progress that business is making on its multiyear growth and expansion program. This business is well played to capture upside in the coming years as we utilize the additional capacity that is recently been constructed.
To that end, our expansion project at the Tifton port in Santos is now about 95% complete and commissioning activities have started on both the fertilizer and drain 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 stretching activities are completed.
The deeper channel will allow us to dock larger drain vessels which will enable us to fully utilize the expanded term loan. And second, our UK Ford operations reached financial close with the renewable power developer that’s building a 300-megawatt power generation facility on our land.
We started to receive rental income which will contribute modestly to our results, while the facility is being constructed. Once fully completed in 2020, rental income can serve us other revenues generated from this client which increased our run rate EBITDA this quarter 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 communication infrastructure business had a solid quarter generating FFO of $19 million during the quarter and continues to perform in line with expectation. From an operations perspective, you'll recall that over the past couple of years, we've been working closely with most our network operators in the country to support their coverage obligations and network densification effort.
Through these discussions, we've secured this quarter contract 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'll now turn the call over to Sam to give you through our growth initiatives.
Sam Pollock
Great. Thanks, Bahir and good morning, everyone.
Before I provide an update on our strategic initiatives, I just want to remind people that we had our Annual Investor Day New York in late-September. We like to take the opportunity to thank everyone who has able to join us in person or on our webcast.
For those who weren’t able to participate, a presentation and audio playback is available on our website. Our theme this year was why Brooklyn Infrastructure is an attractive investment for all business cycles.
That gist of what we covered is that while our investment thesis has security plus group is a new. We thought it was important to remind the unitholders and potential investors of our full cycle investor attributes as rate hikes could be on horizon in the United States.
In a rising rate environment, businesses within internal generated growth and capital discipline should be highly sort out after by yield oriented investors. Over the past few months, we've 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 a potential to meaningfully outperform our 6% to 9% same store growth target range, due to a greater level of capital projects underway than we've had in the past.
Our backlog is more than doubled in the past two years, and 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 the substantial portion of our projects in our utility segments, which will increase our rate base and our smart meter connections.
We're also expanding our Brazilian reais and toll road businesses thereby increasing the capacity of our networks and we are investing at our projects at our North American natural gas transmission business in response to customer demand. Furthermore, we estimate there is an additional of $2 billion of projects that have not yet been included in our backlog that maybe secured in the next 12 to 24 months.
These include fiber-to-the-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 totaled over 12 billion pounds’ terms. Also, the Brazilian governments has announced a large-scale infrastructure program, which includes 5 billion reais 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 share of the projects. Our second area of growth will come from our recent completed transactions.
As Bahir mentioned in recent months, we've closed on three investments totaling $660 million of capital consisting of a group of an Australian ports, Peruvian toll roads and a North American gas storage business. These transactions were completed either at the end of the second quarter and third quarter and will contribute a full quarter of results beginning this quarter.
We expect the transaction to generate attractive growing yields of approximately 8% to 10% on a combined basis. Last and certainly not least, our last area of growth will come from the build out of our gas and electricity transmission business.
We planned to deploy over $1.1 billion in the gas in the electricity utility sectors. Given the attractive nature of the assets, we expect that it will be very accretive to our overall results.
We recently announced the 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. Brooklyn Infrastructure's investment will be a minimum of 20% of the total transaction and this represents approximately $125 million of a consideration payable on closing.
NTS owns the backbone natural gas transition system, that serves the core economic regions in Sao Paulo, Rio de Janeiro and Minas Gerais, in South Central Brazil. These are uniquely position long life assets, which were in revenues that are index to inflation and have no volume risk.
In addition, we expect to invest approximately $300 million in the business as developing approximately 4,200 kilometers of greenfield electricity transmission lines, including projects that were warned to us just recently in government auctions. These are attractive 30-year concession assets, that are in cash flows under stable availability base regulatory framework.
Construction of these projects is underway and they’ll be commissioned over the next five years. This quarter, you know we thought we do something different and have a number member of our management team, participating the call and review some of these key initiatives.
As a result, we have Ben Vaughan, our Chief Operating Officer with us and he is going to provide more details and background on the recent utility initiatives in Brazil I just mentioned. Ben?
Ben Vaughan
Thanks Sam. We have been working on a number of growth initiatives in our utility segment and today I want to walk you through our rational and strategy to create value and also provide some color on the assets we’re buying and why we think these are great investment 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 once that have inflation indexation and higher growth potential and we feel 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 times high. So, around the same time in late 2014.
Many of you will recall, that we started highlighting in our letters and communication, that we were seeing interesting opportunities in Brazil, as capital was becoming 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 than accelerated as the country started dealing with the corruption scandal and a political crisis.
And we notice that sentiment had turned extremely negative. Brazil lost his 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 an important dynamic that we saw in the markets at this time, is the markets just stop 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 link revenue frameworks, we’re 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 that new infrastructure. So, regulators and the government in Brazil were increasing returns and lowering risks for new investments across many infrastructure sectors, 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 digit and at the same time reduced various risks for example a risk relating to environmental permitting and financing.
So, all in all, returns were going up and risks were going down. And as I mentioned before at the same time derisk utility assets in North America in a very low environment, we’re trading at all-time highs and we were seeing valuations in the 1.5 to 1.8 times rate base type of range.
So, in short, our strategy with the surface strong value from the low growth assets in North America and redeployed the capital in the higher growth inflation linked assets in South America that are the 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 perceptive, the country has a population of a little over 200 million people in 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 is a significant build out of the power grid that’s 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 is a huge need to invest in the transmission infrastructure to bring this power to markets further so.
Electricity transmission is a very attractive asset class in Brazil, essentially you get very long life concessions, so these are 30-year concession with a 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 the really are no rate cases during the life of the asset.
So, essentially, there is really no regulatory reset risk. So, what we did is, we partnered on 50-50 basis with ACS, which is highly reputable and capable European construction firm with a lot of experience in electricity transmission in Brazil and over the past year and a half we've secured almost 4,200 kilometers of project that will be built between now and around 2020-2021.
All of our lines are very well located in the center east of the country, they're in relatively flat and straightforward areas to build, so no complicated across. And our partnership with ACS, they’ve 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 the 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 will ultimately own a 100% of this business. Construction has been underway since earlier this year and we’ve already commissioned two small segments of line, so we're 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've been monetizing some of our North American assets, we saw both across Cable and New England and our Ontario transmission business, and we saw these mid-single-digit returns and surfaced a little over $200 million of net proceeds for bps. So, essentially we’re taking the $200 million of proceeds we’ve received that was generating AFFO yields to us in the 5% range to 7% range and we’re reinvesting it in new lines in Brazil when commissioned will deliver AFFO yield above 15% and should then escalate overtime with inflation.
So, we think this is a good trade and we’ll create good value overtime for unitholders. I think on the natural gas transmission side, we talked about are these assets for the Investor Day and Sam provided a bit of background earlier on the call and we’re working with Petrobras towards the closing - towards the end of this year, these assets have 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 risk 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 we're generally speaking every four years to five years 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 a 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 currencies up over 25%, inflation which has been running close to double-digits for the past two years has started to come down and the government recently initiated an interest rate reduction, so these are all good times of 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 a positive and bodes well for the country as well.
So, with that I’ll pass the call back to Sam.
Sam Pollock
Okay. Thank Ben.
Let me conclude the brief outlook for the business. Our primary focus for the balance of the years to closing our Brazilian 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 communication sector in Europe and Asia, where mobile network operators are divesting of tower networks to recycle capital into their core businesses.
We will evaluate 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’d like to thank all unitholders for their ongoing support and for those who are able to join us in the call today.
I look forward updating you on our progress next quarter. With that, we’ll turn the call back over to the operator to open the line for questions.
Operator
We will now begin question-and-answer session. [Operator Instructions].
The first question comes from Cherilyn Radbourne with TD Securities. Please go ahead.
Cherilyn Radbourne
Thanks very much and good morning. Wanted to start by picking up on your comments around Brazil, you expect that do you with your Investor Day that the economy likely bottom generally 2016 and it sounds like your conviction and analysis only increase, do you think that’s becoming a more generally expected to you and can you just comment on what you are seeing in terms of institutional interest returning to that market?
Sam Pollock
Maybe I’ll start and then turn over to the Ben, and thanks for the question Cherilyn. I would say the - while we are optimistic that things are returning and we are definitely seeing that in our businesses is lot to green chutes all across various parts of the country.
We would have wanted just be overly optimistic sale all the problems are in the past. There are a number of risk that could take place and so, I’d say we are calling to bottom with guarded optimism.
But as far as others, I think it’s generally help views that the country is turning and we are seeing more people in various transactions, we’re 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 help 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.
So, all-on-all I’d say, yes, things are turn it around and people would agree about our assessment. Ben, anything to add.
Ben Vaughan
No, I think that covers it and I think the attendance of last week’s auctions have good indication that people interest in the country is coming back.
Cherilyn Radbourne
Great, and I’m going to bounce a little bit. I wanted to ask you just given the recent turmoil in the shipping industry including a major bankruptcy, can you just comments on the positioning in your existing portfolio as new alliances startup next year and what you see as the potential for acquisition in that space?
Sam Pollock
Sure, again all pass this one and maybe Ben or Bahir might want to add some comments, but yeah first just talking about the bankruptcy pungent from the 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 operations was basically zero. So, on a longer-term basis that’s not what impacting us, one of the things that is going on is the whole realignment alliances that’s been taking place obviously, there’s a big merger with K-Line, NYK and MOL that was just announced this past.
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 make change, however the amount of volumes that we’ll 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 they’re taking place and our trade pack facility in LA, I think is one of the few that can handle ships over 12,000 TEUs and so it’s really well placed for the long term.
There are also because we have some of the most technologically advanced facilities because they’re automated it means that from a cost perspective we’re also well positioned and so 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.
Bahir or Ben you have anything to add to that?
Ben Vaughan
No, it’s okay.
Sam Pollock
Hope that answer your question.
Cherilyn Radbourne
Just a second for the question was acquisition opportunities you sort of see some assets coming to market as a result of all of this on the port side?
Sam Pollock
So, the short answer is yes, there are some opportunities that are coming up. But the thing with may these terminals is they’re not all the same so it kind of comes back to the point I was just making our facilities are well positioned, they had the investments in automation and some of the terminals that are going to come up from some of these weaker carriers don’t tick those boxes.
And so, today I wouldn’t say there is any particular opportunity that has it’s overly excited but we’ll continue to monitor what takes place and to extent that a premier facility does surface then we’ll definitely look at it.
Cherilyn Radbourne
Thank you. That’s all from me.
Operator
The next question comes from Rupert Merer with National Bank. Please go ahead.
Rupert Merer
Hi. Good morning, everyone.
I’ll start with the question for Bahir looking at your edge is on the British pound what the average duration on the existing contracts is and how much of a headwind is the depreciation of the pound in the next year?
Bahir Manios
Good morning, Rupert. So, we’ve got pound in addition to all the other currencies that are outside of LatAm, essentially hedged up until the end of 2018 and the way you should forecast for that going forward is that for ‘17 and for ‘18 from a headwind perspective our hedge rates are about 5% lower each year compared to 2016.
Rupert Merer
Okay, great. So, on the UK good start to see some inflation, how well could that translate for you what percentage of your returns there have indexation?
Bahir Manios
Bahir again. So, our entire UK regulated distribution business receives inflation indexation, so we definitely benefit that from that.
And the significant chunk of our EBITDA probably about 40% to 50% in our ports business as well as inflation linked and so also could benefit from that.
Rupert Merer
Hey thanks. So, I'll ask switch gears here for and then look at acquisition potentially you talked about communication space and either potential for acquisitions in Asia.
If you look at investments in India for example, how might they compare to opportunities in Europe on a rest weighted basis in your view?
Sam Pollock
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 core location and adding additional equipment to existing sites. But there is some 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 counterparties in India and the growth there is very good. However, it is a market that is under consolidation, there is probably 8 or 9 M&Os in India versus in most of the Europe just 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 have taken into account in our underwriting.
So, long story short, we would expect to earn higher returns for India business. But the growth potential is better and the competitive dynamics are probably more favorable because there is not as many strong third party operators there today.
And so, our ability to be to become a leading third party operator. It's higher there than say in Europe.
Although I'd say Europe it's different than U.S. where you've got a couple of really established third party operator.
So, I'd say both are good opportunities just slightly different.
Rupert Merer
And how is the market for M&A there would you see much competition in investing in that communication infrastructure in Asia at this time?
Sam Pollock
There is always competition I don't want to say there is no competition. But the competition is reduced in both Asia and Europe compared to say the United States.
In United States, you've got as I just mentioned the couple of very strong third party operators. You have structures that 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 strategic in US don't have the same competitive advantages and not quite as tax efficient for them. The institutional investors are as familiar with the communication sector as they are for some other sector.
So, the competition from the pension funds and software wealth funds while they're interested in this space. They just don't know what is well and so they tend to look to partner with people like ourselves who know what better.
So, I would say I feel comfortable that we are well positioned I both of those markets and that the competition relative a number of other asset classes is lower.
Rupert Merer
Hey, thanks very much. I'll leave it there.
Sam Pollock
Okay.
Operator
The next question comes from Bert Powell with BMO Capital Markets. Please go ahead.
Bert Powell
Thanks, and good morning, everybody. Sam, just question on or maybe for Ben as well, on NTS U.S., is that recall part of 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 nearly 25 on close but I think total commitments over a billion dollars. So just in terms of the extra cash to go into that business timing around that would be helpful?
Thanks.
Bahir Manios
Okay, so just on the second point there. The deferred consideration gets paid in five years’ time and the cash flows from the business more than offset with that deferred payment is.
So, I wouldn’t recall a funding issue in five years’ time.
Bert Powell
Okay.
Bahir Manios
And then on the, the second piece - we don’t have any information for you today as to how much of any of that syndication further syndication that’s available to us that will take up. The order of magnitude though it’s not another billion dollars, it’s probably in the order of magnitude of plus and minus $400 million.
So relatively modest in scheme of our balance sheet.
Bert Powell
Okay, and then with all the opportunities it for you Sam. Does this accelerate your capital recycling program, do you kind of push harder on that to bring maybe some of the lower mature assets get that repatriate the cash sooner rather than later?
Sam Pollock
The pace of our recycling initiatives I say, it’s the same as we’ve set out a couple of quarters ago, so we identified that we’re looking to realize proceeds of about a $1 billion a year over the next two or three years from asset recycling initiatives. I think that’s realistic target and it’s really more related to the development of a number of our businesses where there fairly matures someone don’t have the same growth profile that we’d like to have for our overall portfolio and we think and says market we can achieve valuations that would surpass what we would value them on our own.
So, we’re pressing ahead, I wouldn’t say it’s necessary dependent on these initiatives, but having said that I feel really great about the start of the rotation that Ben talked about in his piece where we were able to sell assets. Letting that fact on an IRR basis would be mid-single digit IRRs and we’re investing them at - that could be comfortable risk assets at double digit almost mid-teens IRR.
So, that the pickup is huge. So, anytime we can do that, we will do it all day along.
Bert Powell
Okay, thanks Sam. And Bahir just any update on the ENV par loan?
Ben Vaughan
Yeah, it’s Ben speaking. On the ENV par loan, we expect that loan will get repaid sometime towards the end of this year.
So, I think that’s prior consistent with what we said before.
Bahir Manios
So, it shows for the benefit corporate income pickup, you’ll probably see another full quarter contribution but not the similar to this quarter. But and that may decline going forward into 2017.
Bert Powell
Do you get cash back or are you able to swap for assets Bahir?
Bahir Manios
No, we’re going to get cash back Bert.
Bert Powell
Okay. Thanks.
Operator
The next question comes from Frederic Bastien with Raymond James. Please go ahead.
Frederic Bastien
Hi, 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 that it was at the same time last year?
Sam Pollock
Hi, Frederic. I’ll talk to that one first and then Ben or Bahir can get in.
The - I’d say the environment is still I think conducive to game changing transactions; I mean we are seeing in many geographies today and many sectors obviously North America here just with the Enbridge and TransCanada transactions as being good examples. So, there’s no doubt that we’re in an environment where large high quality businesses are available.
The only caveat is we are value investors and so it needs to makes sense for us. I think we’ve done probably some of the larger deals that we’re going to do in Brazil so I'm not sure it is any material big transactions that we’re looking at today in that market where we saw the best value.
But we’re and I think we’re kind of telegraphing to the market today is that where we see exciting opportunities is in the communication sector either in Europe or Asia and I don’t know what the definition of game changing but I think they would definitely meaningfully expand that sector for us and we’d be very excited to growing that sector. Yeah, I'm not sure of that pull at the end of the day, answer your question but hopefully gives you a flavor for what we’re thinking about.
Frederic Bastien
All right it sorts of does I just didn’t know I'm not that familiar with the construction, the telecom space and just going to appreciate how big the transaction might be for you to pursue so the clarification does help so. Probably be more looking at year like 2014 then when you did have some good acquisitions there, but sounded like your focus on capital recycling initiative is really is going to pick up a bit in 2017 that’s fair to say?
Sam Pollock
Yeah, look I think the cap recycling is going to be important in next year. some of these telecom transactions could be fairly large though so I don’t want to say that they are small, these are we probably have opportunities to deploy a billion dollars or more in the telecom sector in the next year or two.
Frederic Bastien
Great, that’s helpful. Okay, thanks.
That’s all I have.
Operator
The next question comes from Andrew Kuske with Credit Suisse. Please go ahead.
Andrew Kuske
Thank you. Good morning.
I guess the first question is for Ben and it relates to just the Petrobras disclosure either earlier this week or late last week were they fairly delineated what they perceived to be the cash flow profile from NTS and the future, is that fairly representative or somewhat to the view that you’ve taken?
Ben Vaughan
Yeah, Andrew I don’t think we would view it as materially definitely, I think as we’ve 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’ve discussed at our investor day especially was the underlying returns come from the cash flow and we think we’ve underwritten it on a fairly conservative basis.
The returns could be fairly exciting for us if we get a rewrite of the country of the asset during our ownership piece but from the underlying cash flows, they are fairly transparent.
Andrew Kuske
Okay. That’s helpful.
And then keeping within gas pipelines where the shifting geographies, there’s a Western Canadian gas producer that committed to a contract in NGPL and I just like to sort of explore is that contract a two-year contract for the tenure option does that something you’d like to replicate more of to just fill NGPL to a greater degree Southwards and then what kind of expansion opportunities do you see on NGPL?
Sam Pollock
Maybe I don’t know if anyone …
Ben Vaughan
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 overtime 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 and so we are looking and we see 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 so fill the capacity.
Sam Pollock
And maybe just adding to that. In fact, our energy team at west was pretty instrumental in working with the NGPL sales people in coming up with that contract.
And the thesis is that things are going to get fairly congested going into the Midwest in Chicago market. And so, for producers to have access to other markets is going to critical to them.
And - is just really well placed to help access those markets to down as Ben said to the LNG term was being developed and the Mexican pipeline is being built. So, I'm hopeful that there could be other producers who have the same four site that the Seven Generations did in securing that capacity.
Andrew Kuske
That's helpful and if I may 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.
Sam Pollock
Look, I don't think we have the exact numbers for you. What we've 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. So there probably is going to be some additional cap requirement and these are things that the team and NGPL and kinder are working on.
Andrew Kuske
Okay, very helpful. Thank you.
Operator
Next question comes from Robert Kwan with RBC Capital Markets. Please go ahead.
Robert Kwan
Good morning. If I can just start with NTS, and you're buying asset unlevered.
I'm just wondering if there any update on the plan for the debt at the OPCO.
Ben Vaughan
I don't think Robert, it's Ben, I don't think there is any plan there is no change in our plan today. Our intention is to close the asset with funded with the 100% equity.
And when lending markets in Brazil fully normalized look to put a normalized capital structure in place. And as 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 is no change in the plan.
Robert Kwan
Okay. If the market conditions don't come around anytime soon to finance down with the OPCO, what type of debt mix and maybe this is for a Bahir what kind of debt mix would you be comfortable allocating at the Holdco level?
Bahir Manios
Robert, I think that's probably I'm not sure we have the answer to that question right now. But we'll continue to monitor this going forward.
Sam Pollock
And maybe I can just add to that. At this stage Robert, we just assume that it remains unlevered.
And so, that sort of our conservative goal in assumption. And I see just as upside if there is opportunities to add leverage on an accretive basis down the road.
So, we'll see how things developed. My sense is, it's unlikely that we would think of financing that at a corporate or Holdco level just given the currency mismatch.
So, we'll wait to the capital and interest rates get down to a more interesting level in the next couple of years and evaluate at that point in time.
Robert Kwan
Fair enough. If I can ask just as you've focused here on the opportunities that you had in Brazil, you have decades of experience in that market.
And I'm just wondering as you think about the deals like you've done how important was this and how much comfort did having that history of the local and political not all have to be able to move quickly and confidently on the transactions that you've done. And ultimately, I guess I'm just wondering if you saw a similar scenario play out where you had capital constraints or political term oil in another emerging market.
How quickly or confidently would you feel you'd be positioned to move somewhere you didn't have that type of long history?
Ben Vaughan
Robert, I would - 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’re in we have many years of local, of good local presence, so in the other markets outside of the OECD Peru, Columbia, India. We have had markets; we have had local presence there for now over eight years.
With teams on the ground, so I’d say we - it’s an important part of getting comfortable with the dynamics that are going on and making sure that we have views, 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 to that program for us hasn’t change, and isn’t going to change.
So, our offices in all the countries that we operated in specially 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’d obviously consider as value investors and those can turn investors looking at opportunities in those environments.
Robert Kwan
Okay, so the pace that you have moved in Brazil and amount of capital you have committed was more is the function of the opportunities in the country rather than say your comfort level at least relative to other for emerging markets that’s what you have had a multi-year presence to that, fair?
Ben Vaughan
I think that’s fair, I think that was a relatively unique window in Brazil, where its 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 last couple of years.
Robert Kwan
Thanks very much.
Operator
This concludes time allocated for questions on today's call. I would now hand the call back over to Mr.
Pollock for closing comments.
Sam Pollock
Okay, thank you. Thank you, operator and 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.
Operator
This concludes today's conference call. You may disconnect your lines.
Thank you for participating. And have a pleasant day.