Good morning, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookfield Infrastructure Partners Q1 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
I would now like to turn the call over to Rene Lubienski, Senior Vice President, Corporate Development.
You may
begin. Thank you, and good morning. Thank you all for joining us for Brookfield Infrastructure Partners' 1st quarter earnings conference call for 2018. On the call today is Bahir Manios, Chief Financial Officer and Sam Pollock, Chief Executive Officer. Following their remarks, we look forward to taking your questions and comments.
At this time, I'd like to remind you that in responding to questions and 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'll turn the call over to Bir.
Great. Thank you, Rene, and good morning, everyone. We're pleased to report that the business is off to a good start in 2018. We generated funds from operations or FFO of $333,000,000 or $0.85 per unit, representing a 20% increase over the same period last year. During the quarter, distributions were raised by 8% to $0.47 per unit, which translated into a payout ratio of 68%, in line with our long term target range of 60% to 70%.
Entering the year, a key focus for us was to build up our corporate liquidity in response to signals suggesting a period of greater volatility. Even though economic conditions are quite favorable in most jurisdictions where we operate, we often source some of our best investment opportunities when markets are volatile. Consequently, heading into 2018, a major priority was completing the sale of our Chilean electricity transmission business. We're pleased to report that the transaction closed on March 15 and Brookfield Infrastructure received net proceeds of $1,100,000,000 putting us in excellent financial condition. Our results in the period reflect contributions of new investments as well as organic growth of 9% across the company.
A stronger U. S. Dollar has negatively impacted our results in the quarter by approximately $13,000,000 predominantly relating to lower hedge rates on our Australian dollar and pound sterling cash flow hedges. Our FFO hedging program is designed to lock in currency rates over a period of 12 months to 24 months to reduce volatility in our cash flows, provide visibility into our results and enhance our planning capabilities. Our contracted hedge rates will naturally reflect the prevailing market conditions at the time the hedges were entered into.
Consequently, from time to time, changing market conditions may result in a lower locked in hedge rate relative to the spot rates in place at maturity. However, when this situation occurs, it typically reverses in a year or 2. This dynamic is evident in our current pound sterling hedge rate profile with our near term hedges reflecting post Brexit rates and longer dated hedges going into the latter part of 2019 2020, reflecting the recent strengthening of the Sterling. I'll now take you through a quick overview of the results for each of our operating segments, then I'll pass it off to Sam to discuss the status of some of our some of the strategic initiatives we're working on and the current outlook for our business. Our Utilities segment contributed FFO of $169,000,000 compared to $100,000,000 in the prior year.
This step change increase was primarily attributable to the contribution from our Brazilian regulated gas transmission business acquired in April 2017 and to a lesser extent an increase in our rate base and upward inflation adjustments in our utility businesses, which were offset by movements in foreign exchange. At our Brazilian Electricity Transmission business, we're making substantial progress in constructing our lines. At our first project, the first segment received its operating license in early March and the concession is now earning 100% of its regulated revenues. Discussions have commenced to acquire the 50 percent equity interest in this project held by our joint venture partner, which we expect to occur in the second half of twenty eighteen. Our Transport segment reported FFO of 130 $7,000,000 in the period compared to $123,000,000 in the previous year.
This increase was driven by higher tariffs and volumes in our Brazilian Rail and South American toll road businesses. Results were partially offset by lower contribution from our ports business and also due to foreign exchange. Our transport operations in South America continued to benefit from improving macroeconomic conditions. Results in our toll road business in local currency terms were up by 10%. This was a result of 4% growth in traffic levels, higher tariffs and the commissioning of an expansion project at one of our roads that was completed in 2017, which has already experienced a 7% increase in its traffic levels in the 1st 3 months of the year.
Our integrated logistics business activity at that business activity levels are ramping up after brief delays related to the soy harvest. We have now received all licenses that are required to be fully operational, our newly expanded Tiplam port. And despite the delay in the soy harvest this year, we anticipate a record harvest, which should positively impact results for the business for the balance of the year. While we're benefiting from strong GDP linked growth in our transport assets in South America, we might we may experience headwinds at our Australian Rail business in the second half of the year due to potential closures or production curtailments at 2 of our iron ore customers. We do not as of yet have a clear picture of the timing or scale of these curtailments as consolidation among industry players is being explored, which may result in certain existing operations remaining in production for several more years.
The business will respond to any volume reductions with operating and capital cost reduction programs. If all announced curtailments do take place, the impact on our FFO in the second half of the year would be in the range of $20,000,000 to $25,000,000 with lower impact if consolidation occurs. On a more positive note, several of our large customers are evaluating expansions at their operations to take place over the next several years that would largely replace drop offs that may occur in near term revenues. Our Energy segment generated FFO of $66,000,000 compared to $62,000,000 in the same period last year. This improvement captured the incremental contribution from new contracts, higher gas transport volumes and further equity invested into our North American natural gas transmission operations.
Results were partially offset by lower contribution from our gas storage business that is being impacted by a weaker spread environment. At our District Energy operations, the City of Toronto approved a strategic partnership with our business to develop several large scale low carbon thermal systems in key communities throughout the city. As part of a competitive process that began in 2016, our business was selected to help the city achieve its long term energy and climate goals using district energy. To date, 8 communities have been identified for potential development. This is a very exciting initiative for our business with the potential to drive significant growth in the future.
Additionally, the business finalized planning for a second combined heating heat and power facility in London, Ontario that is underpinned by a 20 year fixed capacity contract with Ontario's independent electricity system operator. The project involves $35,000,000 of total capital investment and is expected to come online in the Q3 of 2019, generating attractive risk adjusted returns. Our Communication Infrastructure segment currently comprised of operations in France contributed FFO of $19,000,000 for the period, which was consistent with the prior year. The business delivered results in line with expectations due to its stable and predictable cash flow profile. The business has been working closely with the mobile network operators to help achieve their license coverage obligations by building new telecom towers.
In the last 18 months, the business has delivered over 150 new sites and has a good backlog of sites to be built over the next 12 months. The momentum in this segment should continue as the French government recently announced an agreement with MNOs to accelerate and improve 4 gs coverage across France, which will require more points of presence. I now wanted to touch on our balance sheet and overall funding plans for the organization. Our strategy with respect to funding is very diversified. It is designed to ensure that our business is protected against potential periods of weakness in capital markets and has the flexibility to capture attractive investment opportunities.
Core elements of our funding strategy include maintaining a strong level of corporate liquidity, recycling capital from mature assets when market conditions are strong and funding our recurring organic growth pipeline with retained cash flows and asset level non recourse investment grade financings. We completed the period with over $4,000,000,000 of total liquidity, of which $3,000,000,000 is at the corporate level. This liquidity is expected to be further bolstered in the coming weeks with proceeds starts of about $500,000,000 on an up financing at our Brazilian regulated gas transmission business. The company is finalizing discussions with lenders to issue 5 year bonds in the local market at an approximate rate of 7%. This financing evidences the dramatic rebound being experienced in Brazil, which has led to a significant decline in interest rates and improvement in capital market conditions.
We're very pleased with this outcome. Also during the period, we launched a sale processes from other mature businesses. We expect to see significant demand for these assets given their high quality cash flows, growth potential and the attractive jurisdictions they reside in. We're hopeful that these processes will close before the end of the year, generating further meaningful proceeds for Brookfield Infrastructure. And finally, with respect to our committed capital backlog of growth projects, which currently stands at $2,500,000,000 approximately $500,000,000 of which has already been invested, but not yet commissioned.
The remaining $2,000,000,000 to be invested can be broken down into the following 2 categories for which we have different funding approaches. The first category, which will require approximately $800,000,000 of new capital spend over the next 2 to 3 years, consists of small recurring mandates within our operating groups. Projects in this category include the home connections we complete in our UK regulated distribution business and debottlenecking expansions of our various port, rail and energy networks. These mandates are typically financed through a combination of project level non recourse debt sized investment grade metrics, on average with 50% debt to capitalization and equity with the latter component being funded by operating cash flows generated and retained within our business. To illustrate, we currently have close to $1,200,000,000 of annual FFO and generally retain 15% to 20% of this amount in our business or approximately $200,000,000 per year to satisfy such funding requirements.
The 2nd category, which currently stands at $1,200,000,000 consists of larger scale in projects, multi year network expansions or new business lines that we establish. These initiatives arise on a less frequent basis and take place over a finite period of time. Projects that fall into this category include the establishment of our electricity transmission business in Brazil, our smart meter portfolios to be adopted in the UK, the fiber to the home business line we established within our French communication business and several toll road expansions we're working on. We typically finance these mandates with an amount of debt sized investment grade levels and the balance through equity. The equity component is generally funded by new capital injections from Brookfield Infrastructure through proceeds from asset sales and capital market issuances.
For the next year, we anticipate that approximately $500,000,000 will be required to fund the equity component of these projects. This equity capital has already been raised and set aside. So in summary, the year is off to a great start as demonstrated by our strong results and our balance sheet is in the best shape it's ever been in. With that, thanks for your time this morning, and I'll now turn the call off to Sam. Great.
Thank you, Bahir, and good morning, everyone. Today, I'm going
to provide an update on a few of the strategic initiatives we have underway, walk you through the history of our investments in TransAlect as an example of our full cycle investment outlook for the business in the current economic environment. Let me begin with our strategic initiatives. Our previously announced acquisition of a controlling interest in Gas Natural Colombia, the 2nd largest gas distribution network in that country is advancing well. This business services almost 3,000,000 customers including the city of Bogota. It generates predictable cash flows within a favorable regulatory environment that we have significant experience with given our initial investment in an electricity distribution company in 2012 in the country.
We initially acquired 11% of the company late last year and are currently progressing the 2nd phase of the acquisition, which we expect to complete during the Q2. Upon completion, this will result in Brookfield Infrastructure and its institutional partners owning a controlling interest in the company. In early April, we received antitrust approval and once approvals have been received from the local securities regulator, we will launch the tender offer. Close to the home, we've been observing market dislocation in the North American energy sector. In particular, there has been a stock market sell off in listed energy infrastructure companies and the sentiment is relatively negative.
We have monitored this space for many years and experienced that competition to deploy capital by both financial and strategic investors has driven asset return to levels we viewed unattractive. Moreover, the amount of leverage out of line many of the historic acquisitions seem to leave low margin per year should market conditions change. As the U. S. Transitions to become a net exporter of energy, there's also significant need for capital to invest in infrastructure to extract transport and process energy resources.
This has led to an opportunity set that includes potential asset carve outs, take privates and partnership arrangements with owners of energy infrastructure assets. We are in various stages of discussions with large midstream energy companies and are encouraged by a number of the interesting opportunities in front of us. The recent market volatility has presented us with a greater set of opportunities and we are hopeful we can work with some of the industry players to partner with them or acquire their assets. We believe that we are well positioned given our solid balance sheet, proven operational track record and ability to act as a single counterparty for large transactions. Now I'd like to talk about our full cycle investment strategy.
A key part of our funding strategy for organic growth and new investment opportunities includes capital recycling. The cycle begins with acquiring high quality core infrastructure assets for value. We do this by focusing on situations where we can leverage our competitive advantages of scale, local presence and operating expertise to source and execute on proprietary transactions. Next, we implement an operations oriented approach to de risk the business and enhance cash flows. Finally, once the business reaches maturity, we seek to opportunistically exit strong valuations in order to redeploy the proceeds into higher returning investments.
We believe that the recent sale of Trans Select, our Chilean electricity transmission business provides a good example of this full cycle investment strategy. Now just going through the history a bit. In 2006, we led a consortium to acquire Transelect, which was the largest electricity transmission company in Chile for enterprise value of about $2,700,000,000 or $1,300,000,000 of equity. At that time, Chile was generally viewed as an emerging market economy and capital from foreign investors was relatively scarce. Assets in the country were not valued the same by investors relative to those in North America or Europe, which were valued at premiums given the abundance of capital in those regions seeking similar utility assets.
In that environment, we were disciplined and contrarian and acquired TransLect with the view that Chile would emerge over time as an excellent country to invest. The fundamental need for the country to grow its electricity infrastructure would drive attractive organic growth opportunities over time. And employing our operating capabilities, we can improve asset performance and margins and reduce the cost of capital during our holding period. During our ownership of Trans Select, Chile achieved both sovereign debt rating upgrades and emission as an OECD member country. As demand for electricity and improved reliability increase, we work closely with management to ensure that we are well positioned to bid on and execute highly attractive growth projects.
In that regard, we were able to grow the business from about 8,000 to over 10,000 kilometers of electricity lines and increase the number of substations by approximately 20%, growing our rate base from about $1,600,000,000 in 2,006 to approximately $3,500,000,000 this year or last year. In addition, we added value by implementing our risk based maintenance program that resulted in lower line losses. With respect to cost of capital, we implemented non recourse project financing on a selective basis and extended debt maturities opportunistically to reduce our cost of debt. At the time of our sale, the nearest debt maturity in the business was 2023. So I know the question we get often from Beeple is what prompted us to sell the asset.
1st, as an OECD country with an investment grade credit rating, foreign investment has grown dramatically and the market has continued to mature since our acquisition. Today, Chile is viewed extremely favorably by foreign investors and return expectations are very comparable to those in the United States and Western Europe given the country's solid institutions and respect for private capital. 2nd, TransLect is a high quality asset in the mature phase of its life cycle. It has revenues based on a regulated rate of return on its asset base and a stable capital expenditure program that supports consistent and predictable growth. Consequently, we were very confident that we could achieve a strong valuation for this mature de risk asset with regulated revenues.
We closed on the sale of our 28% interest in the company for $1,300,000,000 or $1,100,000,000 net of tax achieving the compound internal rate of return of approximate 18% over 11 years and a multiple capital of over 3 times. The sale was opportunistic and that we were able to realize an attractive valuation which took into account future growth expectations. Now while TransLink provides us with strong and predictable cash flows, we felt that we saw opportunity to reinvest the net proceeds from the sale into investments that generate significantly higher returns. Now to wrap up, I'll just shift gears a bit and talk about our outlook for the rest of the year. Global economic conditions are generally good and upward trending driven by the U.
S. And Chinese economies that appear to be steadily expanding. We believe that global economic growth will be strong for the balance of the year, which should allow our business to continue to perform well. The U. S.
Federal Reserve has increased interest rates twice in the past 6 months and has telegraphed that a few more hikes are likely to occur in 2019. As a result, notwithstanding the favorable economic conditions I just mentioned, a number of indicators are suggesting that there is potential for market volatility. We are fortunate to have a strong balance sheet and substantial liquidity positioning us to react quickly to value opportunities should they arise. Our significant liquidity however may act as a partial drag on our near term FFO until we deploy that capital. However, the flexibility to respond to uncertainty in a period of market volatility is far more valuable to us in the long run.
We have a solid high quality pipeline of new investments currently being progressed by our teams particularly in Europe and North America, but also in other parts of the world. In addition, our strong internally generated capital backlog is expected to result in attractive returns and should provide for strong organic growth in the foreseeable future. With that, I'll now pass it back to the operator and open the line for questions.
Your first question comes from Cherilyn Radbourne. Cherilyn, your line is open. Thanks very much and good morning. So you're certainly amassing an impressive amount of liquidity, particularly given that you've launched several other sales processes. Then maybe you can just kind of elaborate on what in addition to stock market volatility suggests to you that on the one hand, it's the right time to be a seller of some of these mature assets, but also that we could be on the cusp of opportunity here?
Okay. Good morning, Sheryl and thanks for the question. Let me begin by saying in relation to the timing of our asset sales, we have a philosophy that we like to sell assets when it makes sense to sell the assets and not do it when we need the capital. Usually, if you try to sell assets when you're short of cash, you end up being more of a distressed seller and you don't get optimal prices. And so our focus and what we're trying to demonstrate with our full cycle investment strategy is that there's a time and a place when you should undertake these processes and that's our philosophy and that's what we've been doing throughout our existence.
So that's how we approach that sort of part of our liquidity strategy. In relation to your second part of your question, which is why we think there could be some interesting opportunities coming along. Look and I'll caveat by saying that we don't have a crystal ball and so we can't predict when the market may shift on us. But we have noticed over the last little while that the market has started to move sideways. The volatility indexes have changed and that often suggests that there could be periods of illiquidity in the market.
And we do think that there is a bit of buyer fatigue in relation to asset valuations. And so all those things to us suggest that at some point in time in the near term there could be some opportunities. And in the short run, where we're seeing the most fire fatigue is in relation to opportunities in the energy infrastructure sector in the U. S. Now I realize in the last 2 to 3 weeks, we've seen a bit of recovery in the stock market for those types of assets.
But for the most part for the last 18 months, we've seen a general decline. And we do think that there could be some interesting opportunities in that part of the market segment.
Great. And second one really is for Bahir. Certainly, the quarterly materials hint at a few short term headwinds with liquidity the most obvious of those. Maybe you can just give us some help to how to think about that for the balance of the year?
Good morning, Sheryl, and thanks for the question. So like I'd start off and say, notwithstanding some of the volatility comments that Sam made, business conditions are good. Global economic growth is strong. It's also trending upwards. And as a result of that, our operations have a pretty strong outlook because we do tend to outperform in these kind of under these kind of market conditions.
And you could see it in our connection activity in the UK that continues to be very robust. Our GDP sensitive businesses are performing well. And we continue to add great projects to our capital backlog. But we do note in the letter that in the very short term, we do have a number of specific, I'd call them dynamics that we allude to that may impact our short term results. The first one would be the drag on results that you note.
And so that will obviously have a short term impact on our results, but we now have this great opportunity to deploy that capital into great opportunities that our teams are advancing and also capital projects in our business as well. In addition to that, there's on the foreign exchange side of things, our hedge contracts in 2018 and specifically for the pound and Australian dollar have lower rates compared to the prior year. And so that will create some year over year variances. Good news on that is looking into latter part of 2019 2020, we do have those currencies hedged at significantly higher rates than the ones which you'll be observing in the latter part of 2018. And then just finally, we made some comments with respect to some customer related issues at our Australian Rail business, which will get sorted out over the next little while.
So a couple of short term things that are happening, but the longer term impact outlook for the business is very, very strong.
Thank you. That's all for me.
Thanks, Jeremy.
Your next question comes from Devin Dodge. Devin, your line is open.
Hey, good morning, guys.
Good morning, Devin. Good morning.
I just wanted to come back to the Australian Rail operation. You mentioned there could be a $20,000,000 or $25,000,000 hit from the closure of or potential closure of a couple of sites there. Were there not take or pay agreements for these sites? And or do they just roll off in the second half?
I'll answer that. And the in relation to these two customers, one had a very relatively short notice period that it could provide us and that was because the mine life was near end. And in fact, the issues that we had with that particular customer was that they hadn't planned on getting some new mines up and running that were adjacent to their existing facilities and they didn't get the environmental permits. And I think we mentioned that on some previous calls. In relation to the other customer, there are some minor amounts that they would owe us under the contract.
But I think our expectation with that customer is in fact that this is the one that we're alluding to the consolidation that's underway. Our hope is in fact that they won't shut and that a number of other players in the market will take on that operation and extend it for another couple of years. That mine itself as well has a finite life to it. I think the current resource probably runs out at the run rate today in about 2 to 3 years.
Okay. Okay. That makes sense. And then then switching to TDF, the backlog continues to build there. Can you provide some color on the opportunities you see beyond the contracts that you've already secured?
I think the letter mentioned an announcement by the French government to accelerate the rollout of 4 gs. Just trying to get a sense for how the backlog could evolve over the next couple of years for that business?
Okay. Unfortunately, I don't have a lot in the way of specifics. I think the opportunities for that business really relate to the potential sell off of customer owned towers. We see that today with Altice. And it's possible that opportunities could come out of that as well as some other customers may divest of some of their towers.
It's a little unclear exactly how the rollout related to the government will pan out as far as future capital deployment for us. But we are well positioned. We're the dominant or largest tower operator in the country. And I'd say lastly, the other area that we're focused on in the country is the fiber to the home business. And we continue to build out the 4 concessions that we won.
And that should provide growth in the near term for us.
Okay. And then maybe one last one for me. We saw that in a recent interview, Bruce Flatt was talking about how China could develop into a pretty sizable market for Brookfield over the next several years. But do you feel these comments are relevant for BIP? And I guess what sectors do you think would be interesting?
So from a band perspective, we do think that obviously given the scale of the Chinese market that there's huge opportunities. And it's obviously a big focus for us. And we have a number of people on the ground trying to source those for us. In relation to infrastructure and I've been there myself in the not too distant past and met with various owners of infrastructure to see what the opportunities would be for us. I think in relation to the other parts of Brookfield, it may be a little bit outward in sort of the years before we have a meaningful investment in the country.
The reasons for that are primary due to regulation. It's a country that is just transitioning into a market economy. The regulatory framework is relatively new. And many of the market participants, particularly in the regulated sectors, are state owned companies. And so the number of businesses for sale as well as just understanding how the regulator operates in relation to the state owned companies is still a bit uncertain.
So to maybe stay in a bit of a shorter answer, I think it's it won't be a market for us in the near term, but it's one that in the next 3 to 5 years hopefully something will surface.
Okay. That makes sense. Thank you very much.
Thanks.
Your next question comes from Frederic Bastien. Frederic, your line is open.
Hey, good morning, guys.
Good morning, Brent.
I was wondering if you could provide a bit more granularity on the opportunities that are in front of you in the midstream sector? Okay, Frederic. Obviously, I can't name specific situations. I guess what I can tell you is that they fall into 3 categories. There's JVs, there's carve outs and there's take privates which are I'd say those are the 3 areas we're focused JVs really are I would describe them as various midstream companies, whether it's Canadian or U.
S. Who because of their unit price today can access the capital markets in the traditional way. Typically, they would have just issued equity, but they find that it's unaccretive to do that. And so there's a number of examples in the market where you've seen companies basically established joint ventures where others invest in its funds, the growth capital and we earn a preferred return on that.
Your next question comes from Robert Catellier. Robert, your line is open.
Hi. I just wanted to follow-up on Frederick's question there. You mentioned the categories of types of investments you might be interested in making. But I wondered if there's a specific asset class where you see the best opportunity or you find has strategic value.
Okay. And so and maybe just dealing with Frederic. So I apologize about what happened with Frederic. I think there must have been noise on his end. And so we the operator must have shut down his line.
So I didn't quite finish my answer there, but then I'll answer yours Robert as well. So the I was just going through the three examples. On the JV, it was just bringing in or investing alongside an existing player and funding their growth capital. Carve outs is a situation where there's just a number of midstream companies that are selling distinct businesses and we can buy platforms that would be great businesses for us to continue to grow. And lastly, with the drop in the number of prices and we've seen some of the MLPs in particular in the U.
S. Drop 50% to 75% over some of their highs. And so we think that there's some good value in those particular situations. Now coming to your question which is the various asset classes that we like, I guess we're focused across the whole midstream sector. So I think each situation is specific to its own dynamics.
We probably have a bias to the gas sector because it's one that we understand well given our investment in NGBL. And we think the long term sustainability of that business is quite robust. We also probably have a preference for more in relation to liquids, more downstream assets that are closer to the demand center and maybe less reliant on some of the supply basin issues that exist. But having said that, we are looking at I'd say a whole host of opportunities. So I realize that's quite general, but I hesitate to point you in any one direction.
Well, that was actually the characterization I was looking for. So you have an open mind, but I get the idea of what where you stand now. And just on the liquidity, dollars 4,000,000,000 is a lot and there's a little bit more on the way. So I'm wondering how much of that is targeted for investment versus maybe just buffering up the liquidity in anticipation of the market volatility that you alluded to?
I'll start there and Bahir might jump in. I think the our general approach would be that as we see interesting opportunities, we'll deploy our capital in a consistent manner. So our strategy is to invest in business that provide us an internal rate of return of 12% to 15%. To the extent that we find an incredible opportunity like we did last year with NTS where we felt we could invest at much higher risk adjusted returns then we will invest a significant amount of our liquidity. So I think it depends on the type of opportunity in front of us.
If it's one that just meets our general return requirements, then we'll invest, but maybe not back up the bus. But if there's just an incredible opportunity because of the market dislocation that I referred to earlier, then we may be far more aggressive.
And Robert, I'll just add to that. At the corporate level, which would be sort of the dry powder to do those deals that Sam would be was alluding to, That today sits at $3,000,000,000 We'll probably be using about $500,000,000 of that to fund some of the larger projects we have in the business. So that will happen in a staggered fashion for the remainder of the year. And there's probably another $200,000,000 to $250,000,000 that will go towards funding transactions that have already been secured to some of that are some of the Indian toll roads that we secured last year and the gas natural opportunity that Sam alluded to that earlier.
Okay. That's helpful. And then just I wanted to sort of get an understanding of the strategic partnership with the City of Toronto. You said 8 sites were identified, but what type of scale are we talking about in terms of capital and timelines? And is there any what's the level of commitment by each party?
Is there an idea of a minimum capital spend or is it on a case by case basis?
Look, it's basically a framework agreement. And it requires that developers in each of those 8 nodes need to come to us on an exclusive basis to install district energy for those districts. And so basically it provides us with the first opportunity to build the systems. And so the actual amount is really market dependent though. So long as Toronto continues to grow at the pace it does and the number of the areas where we have the exclusivity like Liberty Village or the Port Lands area are up by Scarborough Centre.
Those are all areas that we think we'll see good development over the foreseeable future. We think that the scale could be quite large. As far as aspirational dollars over a medium to long term basis, I think it could be $1,000,000,000 but it's not happening tomorrow. This is obviously something that
business. You gave a second half twenty eighteen possible impact. Is it are we to take this as a 2018 phenomenon only? Or is there an expectation that that will effectively be the run rate in terms of headwinds unless your customers might mitigating unless there's a mitigating circumstance?
So what Bahir provided was basically a worst case scenario to the extent that both operations shut down and but factored in the cost reductions that we've identified in the business related to those activities. Our hope is that one of the operations will continue to run. Our expectation is that it may run at a lower rate than what it operates at today. And hence rather than trying to predict what that would be and get into probabilities, we thought we'd just give you the worst case scenario. And so hopefully it will be somewhere in between where we run at today and the case that Bahir gave you.
The other thing though that I did want to make sure no one forgets is that these businesses are dynamic. And while there is these two operations that are coming to the end of their lives, we are seeing expansion proposals in other parts of the network. And in particular, the aluminum bauxite producers are looking to expand their operations to growing need. And they're one of the lowest cost biggest suppliers around the world. So those are very vibrant and successful businesses.
In addition to that, our Chinese customer who has for many years talked about growing the scale of its operation now has its business running quite well. They earn a premium for their product because they upgrade magnetite. And so our expectation is that over the next couple of years they'll look to potentially double the size of their business. And so we see these as more near term issues as opposed to long term issues for the business.
Okay. Thanks for taking my questions.
No. Thank you.
Your next question comes from Andrew Kuske. Andrew, your line is open.
Thank you. Good morning. Sam, I appreciate the context on TransAlact and maybe just going back on that a little bit that TransAlc was done at the Brookfield Asset Management level back in 2006, so prior to your existence and has been a great monetization for you. I just wonder if you could compare your thought process on TransAllect and how you look at the fund model you have now where you have effectively 10 year long funds or 10 year life funds that do come to a point where you have to make monetization decisions that you don't necessarily control the same way you did TransAlact?
Sure. So the you're right. Most of the investments that we have today are through the funds. The funds have a 12 year life with several opportunities for extensions. I think the interesting thing to note, which may be what you're alluding to is the fact that in the case of TransAlac, this was an asset we held on balance sheet.
It was prior to when we established the fund business. And so irrespective of the fact that we did not have a fund expiry, we still chose to exit. In fact, all the initial five businesses that we spun out with Brookfield Infrastructure, we've now exited even though none of them had really expires. And I think it just goes to the fact that it really isn't a matter of having a certain life associated with an asset. It has to do with the fact that we have a business plan that each business was bought with, how we think we can create value with it and then ultimately realize it, realize on it.
And typically, that business plan is usually over a 7 to 10 year period. So I think that would be our expectation for most of our businesses. Now sometimes we just get an incredible business that just continues to give, give, give. I would put our at this stage BUK business in the U. K.
Obviously in that category where it continues to exceed our initial expectations for it. But otherwise, I'd say whether or not we have the business in the fund or whether or not everything was on balance sheet, we would still take the same approach.
Okay. That's helpful. Maybe just on BUK, as you mentioned that obviously, the growth there continues to be at a very high rate and has been a great acquisition from when you got Babcock, I got it through Babcock. When we look at some of the U. K.
Distribution assets, they tend to trade at pretty hefty premium to RAB. So how should one really think about the valuation of your connections business given the growth that it has and given the similarities to your regulated construct?
Well, it's a good question. It's on the back of the envelope, it is tough to value because it's a unique regulatory business in a sense that it has extremely high growth. That owes itself to the fact that it is a in some respects a market driven regulated company. So we have regulated contracted cash flows, but we compete in a on a competitive basis to acquire those regulated cash flows. And so it's a business that given its high growth rate would trade at multiples on an EBITDA basis far higher than traditional distribution businesses.
So I would expect and what we've seen in the past is these generally trade in the high genes multiples. If you want to do it on a DCF basis, I think given what we've seen, you would probably discount this business in a 5% to 7% range. And so that's why when we think about it and I know we don't give sort of valuation guidance on individual assets, but for a company that we now have an invested cost base in of probably $0,000,000 to $100,000,000 it's probably worth to us well over 3,000,000,000 maybe more.
Okay. That's extremely helpful. Thank you.
Your next question comes from Robert Kwan. Robert, your line is open.
Good morning. If I can come
back to just your thoughts on mid stream and do you have a preference for rate regulated versus unregulated?
So I would say it all depends on what price we're paying for it. So I like regulated and a consistent stable cash flow if I can buy them for value. And if I have to pay a 5 percent to 6% or return for them or at least that's what the I would achieve then it doesn't fit our business philosophy. So in that case then if I can earn in a very well contracted business with great barriers to entry and it's unregulated, then that would be a more interesting proposition for me. So I realize I'm being a little weasely there in that response.
But I think it really depends on how much we pay for it and some of the specific attributes of the company.
Understood. And obviously, it does come down to price and value. I guess just continuing with that, just general, do you have any thoughts or concerns to just some of the decisions that have come out of the FERC as it would relate to rate regulated? Does cause you some pause? And as well as you think about rate regulated, while it may not be strictly kind of traditional North American cost of service, How do you think about that with your business with respect to not really having a real or a strict real return component?
And what a declining rate base over time might do? Or are you looking for assets like you've seen here with the NGPL where it may be rate regulated but lots of opportunities to put capital into the
system? Okay. So I don't know if I have time to answer that in great in full detail, Robert. That's a lot of stuff there. It's interesting.
Yes. Let me start by saying that I think too many people when they hear rate regulated or regulated they think that there's no risk. And we have never felt that way. We understand that regulated businesses actually have lots of risk because you have someone who's always looking at the tariffs and has control over what you can charge and can change their mind on how it works. And we've seen that in many jurisdictions over the years.
And so there's so many other factors that you have to take into account when looking at it. And primarily, you need to look at your what you're earning and does that earnings make sense in relation to the amount of capital that's been invested historically or the amount of capital you invested. So we take that view. We look at the fairness between what we're earning and how the customers may look at that and take that into account in buying any business in relation to the risk of those tariffs. We so hopefully that answers your first part of your question.
And on the second part of as what businesses we would favor, we look, I don't know if we have a preference per se, Because I think even in the case of say, NGPL where we have a regulator which determines max rates and then it's more of a competitive environment and we can transact with customers based off of market conditions and deploy capital where it makes sense. Even there over time, we recognize that what we can earn is dependent on the rate base. And so I think ultimately it comes back to that. I would just say look without going on too much longer just that all the businesses make sense. We just need to look at the underlying attributes.
Understood. If I can just finish with the NTS financing and Bahir, I think you had mentioned looking at a 5 year term roughly 7%. And I apologize if you talked about the size. What is the expected size of the financing? And do you expect that to be dividended back up?
Or are there capital needs to retain that in the business?
Hey, Robert. Yes, so the total financing is about it's a little over BRL 5,000,000,000 on a 100% basis. And so net to bp in U. S. Dollar terms, it would be around $500,000,000 and the expectation is hopefully that this will close sometime in May and that this cash would be dividend up to BIP.
VIP. We have reached the end of our question and answer session. I will now turn the call back over to Sam Pollock for closing remarks.
Okay. Thank you, operator. And I know that was a long call today. So thank you for everyone for listening in. And we look forward to providing further updates next quarter.
Go Raptors.
This concludes today's conference call. You may now disconnect.