Brookfield Infrastructure Partners L.P. (NYSE:BIP) 2014 Investor Meeting Conference September 15, 2014 1:00 PM ET
Sam Pollock - Chief Executive Officer
Ben Vaughan - Chief Operating Officer
Bahir Manios - Chief Financial Officer
Alfredo Zamarriego - Managing Partner, Europe
Andrew Kuske - Credit Suisse
Bert Powell - BMO
Dave Noseworthy - CIBC
Pat Dorsey - Dorsey Asset Management
Bill Van Arnum - Principal Global Investors
Andrew Gundlach - First Eagle
Frederic Bastien - Raymond James
Cherilyn Radbourne - TD Securities
David Henle - DLH capital
Robert Kwan - RBC Capital Markets
Brendan Maiorana - Wells Fargo
I think we are all set. Its 1 o’clock and we wills start our Investor Day, if I can ask everyone just to sit down. Good afternoon. And welcome to Brookfield Infrastructure’s Second Annual Investor Day. My name is Sam Pollock, and I am the CEO of Brookfield Infrastructure.
Ours is the first of four presentations in the Brookfield family of seminars that we are having over the next two days. We are going to run from about 1 to 3 p.m. and then we’ll break for about 15 minutes and then Brookfield Renewable Energy will run for two hours after that. Tomorrow, I believe we’ll start at 8 o’clock and both Brookfield Property Partners and Brookfield Asset Management will present two hours respectively as well.
This afternoon after the Brookfield Renewable Energy presentation, we are going to have a reception upstairs and so, we would invite everyone to join us upstairs and if you like to have some quite and casual conversation with us we would be pleased to do that.
So I’m going to begin today with just a quick update on the business. Brookfield Infrastructure is one of the largest owners and operators of infrastructure assets globally. Our business is diversified across three sectors, the Utility sector, Transportation and Energy, and our business model is to own assets that generate predictable and sustainable cash flows and to continue to invest in them, so that over time they continue to appreciate and value.
Last year when we hosted our Investor Day was a bit of a smaller group, but we settled our plans and goals for the year. This year we’re back and I am pleased to report that we have met or exceeded most of our goals.
One of our key objectives is long-term distribution growth in the range of 5% to 9%. This year we increased our distributions by 12% and our FFO per unit on LTM basis is up 16% year-over-year, largely driven very strong same-store FFO growth about 12% and that’s a key part of our story, which you are going to hear about a lot more today.
The impact of our strong results is that we are operating at a conservative payout ratio about 61%, was at the low end of our target payout ratio of 60% to 70% of FFO. This means that we have lots of capacity to increase distributions in the future.
From the unit price perspective, our units are up about $4 in New York and about $7 in Toronto and this provide our unitholders with the return over the year anywhere in the range of 12% to 20% depending on what currency you're looking at.
We are also pleased that we achieved a number of initiatives over the past year, which have positioned our business for future growth. First, we have substantially increased our organic growth backlog to about a $1 billion and this compares to about $300 million that we had this time last year.
We have also secured $700 million of new investments. The largest of which is our investment in VLI. This is an integrated rail and port business in Brazil and the business that we closed on just in August. Not only this is a great asset but the sellers provided with the minimum return mechanism, which reduces our risk if the Brazilian economy underperforms.
And while the performance for the last 12 months has been solid, we don't run our business quarter-to-quarter or even year-to-year. Our goal is to profitably grow our business for the long run and particularly extend our track record of steady distribution growth, and we have been able to achieve this since we launched back in 2008. In fact, over the past six years, we have increased distribution on average 13% and as I mentioned already, we believe we are well-positioned for further increases.
Okay, so that’s the quick recap on the year and so now I am going to say out the agenda for the rest of the day. Our objective is to answer the question, why invest with Brookfield Infrastructure? We recognize as investors, you have a lot of options to choose from when you are selecting stocks to invest in. So today we decide to tackle that question by focusing on four attributes of our business, which we think differentiate Brookfield Infrastructure from our peers.
We want to highlight the quality of our assets and in particular do a bit of a spotlight on our Utilities business. We want to focus on our internally generated growth engine, which we think sets apart from most other investors -- most other companies out there.
We want to discuss our global business development franchise and we are going to talk about opportunities that we are seeing today in Europe. And last, I am going to come back and discuss our full cycle investment strategy and in particular how we recycle capital.
I am going to let each one of our speakers introduce themselves and at the end of each section we will take just a few questions. If there is any questions left over, we will take them at the end and I'd be happy to make sure the proper person answers them.
With that, I’d like to turn it over to Ben to take you through the quality of our assets.
Thanks, Sam, and good afternoon, everyone. My name is Ben Vaughan and I am new to this event. So I will take a minute to introduce myself. I'm the Chief Operating Officer of our Infrastructure Group and my job is to drive our operating performance across the entire portfolio to make sure we meet and exceed all the targets we set for ourselves and while I am new to the Infrastructure Group, I have been with Brookfield for over 13 years and spent most of my career overseeing operations in the Renewable Power business.
As many of you already know, our portfolio consists of a diversified set of mainstream and easy-to-understand infrastructure assets. We own electrical utilities, toll roads, ports, railroads and gas pipelines, so nothing exotic or complicated, these are simple businesses with reliable and transparent cash flow streams.
Our asset base is not only well-diversified in terms of asset type, but also geographically with businesses across four continents. And each year at these sessions we highlight one of our key segments. In prior years, we highlighted our Energy and Transport sectors, so this year, I'll spend a significant amount of time talking about our Utility business.
I'll start with a review of the businesses that we own in the Utility sector and I'll pick up the pace a little bit at the end and talk about two topics that we think may not be very well understood, which are growth and value. We have a solid growth story and we’d like to do a better job of explaining it. And in addition, I’ll walk through some recent market transactions and explain how using similar views on value would relate to the overall value of our franchise.
Before I get to the fund stuff and the numbers, starting with an overview of the business, our utility assets include regulated terminal, electricity transmission assets and regulated distribution assets. We have a total rate base of about US$4.4 billion and we've invested over $2 billion of capital in this segment. These assets would be considered core holdings in any quality portfolio and are diversified holdings as I mentioned at the outset further reduces risks or exposures to any single asset or jurisdiction.
We like these businesses because when they can be acquired at attractive prices, they are just outstanding long-term investments. If you run them right and have a long-term view, they can deliver consistently appreciating cash flow streams indexed to inflation and drive very attractive real returns over time.
The majority of our assets effective we have perpetual franchise rights and as long as we are focused on delivering a high quality service to our ratepayers, we have a constructive relationship with the regulator and we’re only investing capital and reinvesting in the business, once it’s been authorized by the regulator or properly underwritten. You have very long-life cash flow streams with significant barriers to entry.
We operate only in stable regulatory environments. Our assets are located in Australia, the U.K., Chile and in North America, so some of the best regulatory frameworks out there. And on growth, I will make several comments on growth in the coming slides but we have commissioned over 1.1 billion of organic growth projects into our rate base since 2009. And as I mentioned before predominantly, all of our revenue streams are indexed to inflation, which provides a further trajectory to our growth.
So the first asset I’ll talk about specifically is our regulated terminal, which is located on the northeast coast of Australia in Queensland. This is a critical asset in the global metallurgical complex and handles almost 20% of the seaborne metallurgical coal exports predominantly destined for markets in China and in India. This is a state-of-the-art modern facility and to give you an idea how state-of-the-art it is, it operates on a daily basis with only 25 operating personnel on site.
If you have the time, I’d encourage you to check our website. We do have a virtual tour of this business and it will give you a sense if you do check it out at the overall quality of the asset. A couple of other comments I’ll make. This asset is very well supported by both the regulator and its users mostly because it’s the lowest cost provider of this transportation service that’s available. And it connects the prolific Bowen coal basin to the world markets.
At today's current rate structure, the cost of this terminal for our users is not significant in their overall cost structure of delivering their product to market. And earlier this year, the facility set a record for throughput. So we believe we are well positioned to invest in expansion projects in the future to meet our users’ needs.
On the electricity transmission side, we own assets both in North America and in South America with the majority of our asset base being in Chile where we deliver electricity to 98% of the population in that country. The amazing thing about our franchise in Chile is that every four years our rate base is set and it recognizes the replacement value of the assets that are in the ground.
So unlike many traditional North American rate basis which depreciate over time. Over a long period of time, our rate base in Chile should actually appreciate as the cost of copper and steel and cement and construction services rises over time. The quick protocol for this very attractive regulatory framework we have is we’re held to very high operating standards and we consistently meet and exceed those standards year-after-year with our excellent team on the ground that runs this business.
The Chilean economy is a relatively high growth economy and this business also benefits from the fact that electricity growth has grown in Chile at a compound annual growth rate of about 4% for the past 10 years and looking forward to the next 10 years. Experts peg the growth at somewhere between 4% to 6%, the high end of that range being estimates by the government and the mid and lower points being industry expectations.
So we expect continued ongoing growth in the electricity grid in Chile to continue to drive our need to have projects to grow this franchise. And while Chile is a very stable and reliable country, the regulatory framework is further enhanced because our rate of return is actually enshrined in the laws of the country which just further enhances the stability of the business.
On the regulated distribution side, we operate electricity distribution -- we operate an electricity distribution business in Colombia and we own a last mile gas and electricity connections business in the United Kingdom. Our U.K. business is a particularly attractive franchise. In this business as I mentioned, we provide last mile connections on gas and electricity and we’re able to operate much more efficiently and at a much lower cost than the incumbent utilities.
And while we’re able to operate at a lower cost, we get the benefit of the regulatory framework and we get to charge the same regulated rates that they are able to realize. So we effectively capture the arm between our cost structure and theirs for the benefit of ourselves to generate very high returns for our investors.
In addition to that, this business is also very well supported by our client base. Our clients are predominantly property developers and property owners and they ascribe a very high value to the service that we offer. We’re able to execute our jobs in a very flexible manner and in a very timely manner compared to their other option which is to go directly to the incumbent utility. So we have a very unique and attractive business here in the U.K.
So with that, I’ll move on and make some comments about our growth and our track record and our backlog of projects. Our average backlog since 2009 has been on average about $400 million and we commissioned about $200 million a year into our rate base. So we have an average duration in our backlog of about two years.
What this chart shows is we've been able to consistently replenish that backlog over time. And what that really means is in Chile, general economic growth drives more need to connect new sources of generation, the new sources of load and we’re called on to reinforce the grid and ensure reliable service.
In the U.K., housing starts continue to grow and we’re called on to connect new homes and new developments for both gas and electricity. And in Australia, new investments on the part of our users continue to put increasing demands on the throughput of our terminal, providing us with opportunities to invest in increased capacity.
And this growth is extremely attractive for us, as I'll show you in a couple of slides many utilities we trade in the market at a multiple of rate base, at a premium to the installed rate base they have. And these projects allow us to invest at one time’s rate base or directly at replacement cost. So we’re able to earn excellent returns on these project and we would choose to do them all day everyday, if we could.
One of the comment I have on our backlog, we’ve noticed that our definition of backlog is conservative. We only include projects in our backlog that have achieved authorization and approval by the regulator or have been underwritten with long-term signed contracts.
And we’ve noted that other infrastructure peers, particularly in the energy and pipeline sector, provide much longer-term views of their pipelines, and they therefore capture projects that are achievable but not necessarily in the bag or that have a high degree of certainty around them. So because some of our peers quote those longer numbers, we often get asked what our pipeline would look like on that basis.
So on this slide. If you were to take up 5 to 10-year view, our pipeline would increase to between $1 billion to $2 billion. And this is what I would describe is just regular growth, that’s inherent in our -- in our asset base that we have a proven track record of delivering on. It really wouldn't necessarily include any large mega projects that we’re able to achieve.
Some of those projects would include things, for example like in Chile there are projects on the table to connect the northern part of the Chilean electricity grid to the southern part, that would be a significant step change investment for our Chilean investment.
A large step change in capacity at our regulated terminal in Australia or ongoing renewable connection projects in the United States, similar to the one that we commissioned earlier this year. All those would be examples of projects that would be additive to this kind of backlog.
So now I will move on, we’ve talked about our assets, a background on our assets and their attributes, and we’ve talked about our backlog of projects and our track record on growth.
So now we will get to the fun part and talk about value. Publicly-traded utilities are often valued based on metrics that include EBITDA multiples, dividend yields, P/E ratios, and these metrics are necessary really for two reasons.
First of all, they do allow some form of comparison between different companies in the same sector and often there is limited information disclosed about the long-term cash flows of the businesses. So the issue that we’ve seen is the differences in regulatory frameworks can make these comparisons using only these kind of metrics a little bit misleading.
When we acquire or participate in underwriting assets, we always use a long-term discounted cash flow approach to valuation and calculate internal rates of return on a long-term basis. And we think that this way of valuing businesses is really the only way to get a true comparison between different kinds of assets in the sector.
So I mentioned that sometimes it's hard to get long-term transparency in the cash flows from public disclosures. The good news is recently there have been a number of high profile transactions, where long-term cash flows can be modeled and valuations are known or have been disclosed. So three examples on this page include either recent completed deals or proposed transactions around AltaLink, Oncore, or Pepco, these are all North American transactions.
As you can see from the slide the premiums paid for the rate base for these deals were generally between 1.5 to 1.7 times. And our analysis of these transactions shows that not only did they get transactions at high multiples of rate base, but the assets generally traded at going-in cap rates of between 5% to 6% and all-in returns on an IRR basis of between 6% to 7%. So the 5% to 6% going-in cap rate that I am referring to actually slightly overstates the real going-in cap rates because many of these businesses had large CapEx programs in the very near term.
So my 5% to 6% usually reflects within a 2 to 3-year window. The completion of those CapEx programs and the incremental cash flows that come out of them. So it’s sort of a 2 to 3-year forward cap rate if you think of it that way.
And then the incremental returns between the going-in cap rate and the IRRs of between 6% to 7% really reflect the fact that these business owners have the same opportunity we do to invest at one times rate base in some ongoing growth and are able to increase their returns a little bit as time passes and they are able to invest at that higher one times rate base rather than the 1.5 or 1.7 that they are going with.
So what does all that mean for our business, our LTM AFFO was about $330 million across our utilities platform. And if you use the going-in cap rate approach of between 5% to 6%, you will get an implied net asset value for our franchise of between $5.5 billion to $6.5 billion. This may be a little conservative as I'm using an LTM approach on our AFFO in a forward-looking going cap rate.
But what we have done is I am providing a going-in cap rate analysis here and some fun with numbers, but we have run the long-dated cash flow models for all these businesses and we obviously have long-dated cash flow models for all of our assets and the math works just the same on a long-term IRR basis as well.
So here, I think this is really the interesting part and the thing that we think may not be recognized. The Street consensus for our NAV is about $3.9 billion and using the midpoint of the range we discussed on the prior page of $6 billion would suggest that there's about $9 per unit value in our utility franchise. That’s really not being recognized in our unit price today.
So with that, I'll conclude my comments on our utility business. And as Sam mentioned, I would be happy to take any questions anyone has, if there are any.
Andrew Kuske - Credit Suisse
Andrew Kuske, Credit Suisse. Just curious with that slide that you got up. What's your focus then on trying to collapse this perceived valuation, discount or delta that you have with how the street’s model and getting what you believe the implied valuation is?
Yes. I think we have to just continue to executive as we’ve been executing on our growth, and as I said start to explain our growth a little bit better and have a dialogue about these kinds of valuations that we’re seeing in the market.
Hi. What kind of rates are you charging for on a dollar per ton basis for the coal approximately and who is the regulator for the port in Australia?
What I can do -- let me -- I can get back to you on that at the end. We are going to warehouse some of the questions. I don't know the answer to that off the top of my head. But before we’re done today, we have a around up Q&A session, so we will answer that for the group at the end.
So just know what the term of the take-or-pay contract is?
Absolutely. We can fully address those three issues before we done this session. Seeing no other questions, I'll introduce Bahir Manios who will walk through some more of our growth track record.
Thank you, Ben, and good afternoon. My name is Bahir Manios and I am the CFO of Brookfield Infrastructure. Sam noted earlier in his remarks that one of the distinguishing features in one of our overall key strengths of this business is this internally generated organic growth that we’re able to achieve in this business on a year after year basis. I'm here to talk to you about this growth and to demonstrate really the strong engine that we've been building up over the last few years and that will serve us well in the future in achieving our growth targets.
Last year, we were here around the same time. And we announced an increase to our long-term distribution targets, taking them up to 5% to 9% from our original estimate of 3% to 7%. And as part of that presentation, we took folks through the slide, which helped walk through the various components of our overall growth story and to explain why we thought our long-term targets were achievable.
As you can see from this slide, organic growth represents the main component of our overall growth strategy. And as it represents about 6% to 9% of our overall 10% goal of FFO per unit growth that we’re aiming to achieve in this business and is really the main underpinning for our long-term distribution target that we have set out for ourselves, which is at 5% to 9%.
Our business today benefits from a strategy of identifying assets that provide us with three key important growth features. The first is we have inflation linked revenues. Today about 70% of our EBITDA is indexed to inflation, either through the various regulatory frameworks that we operate within or through the long-term contracts that we have with solid counterparties.
Second, we have a committed CapEx backlog that is funded by internally generated cash flows. Ben just walked you through in his section what this CapEx backlog is all about and our ability for our businesses to replenish this backlog on a year-after-year basis. And this backlog earns us very attractive risk-adjusted returns.
Lastly, a significant part of our business has revenue streams that are linked to GDP growth and will benefit commensurately with any pickup in GDP or any increase in the various countries that we operate in. In addition to these three features, we’re always also looking for ways to optimize our margins in this business.
We deploy an operations-oriented approach that constantly seeks to optimize our cash flows and increase values over time. We do this by doing solid financings, utilizing many capital markets around -- various capital markets around the world and different sources of capital, which allows us to be very competitive from our cost of borrowing perspective.
We also look to utilize our structuring and negotiating expertise, constantly seeking ways to enhance the various contract profiles that we have in many of our businesses and lastly through cost reduction mechanisms. So how have we done on this front historically? So, to answer that question, we thought we’d do a bit of work and showcase to you how our business has done from an organic growth perspective over the last five years and show you the significant growth opportunities that we have in this business today as well.
This analysis goes through our business on a same-store basis. We’ve made two assumptions in pulling it together. The first is we’ve assumed that we owned all the assets that we have today in our portfolio, since January 1, 2009. And the second adjustment is we've adjusted for ownership changes as well that may have occurred over the last five years to ensure that the messages is as clean and simple to understand as possible.
I’ve got about five slides on this to walk you through just for various businesses to help showcase this growth. The first is our utilities business, which Ben just took you through. First, our regulated terminal increased by an average of 10% a year since 2009 and this is all FFO that I’m speaking to here. Three drivers here impacted our results.
The first, we spent almost a $100 million expanding this terminal since 2009 and given that the rate base for this asset grows by inflation each year. We’ve benefited from average inflation in Australia for around 3% per annum since 2009. And from an overall perspective and Ben touched on this earlier, we benefit here from the strength of the regulatory framework that we operate in for this asset that provides us with tremendous security and stability of our cash flow streams.
The future also looks great for this business. We already have identified $75 million of CapEx opportunities that currently fit in our backlog today, which will be investing in over the next 12 to 24 months and commission into our rate base shortly thereafter. And in addition to that we will continue to be benefiting from inflation indexation going forward for this asset.
Next is our electricity transmission business. This business much like our regulated terminal increase its FFO by on average 9% since 2009. And this impressive growth in this business was driven by three factors. The first is we’ve deployed almost $380 million to expand and upgrade our various systems in Chile, United States and in Canada. We've also implemented several margin improvement programs in our businesses, aimed at making our operations more efficient that led to us being able to reduce our overhead quite significantly, especially in the last three years.
And lastly, we benefit here as well as especially the business in Chile from inflation indexation where we've enjoyed roughly about an average of 4% of inflation in that country since 2009. Not this similar to our regulated terminal, the future here also looks strong. We already have identified $100 million of expansionary projects that today is included in our backlog. And we're confident that over the next five years we should be able to at least match that level of expansionary CapEx that we've done in this business in the last five years.
And finally in our utilities businesses as our regulated distribution business, which has grown its FFO on average by 25% since 2009. The outsized returns here that we've achieved in this business were predominantly driven by several factors. The first being very strong connection activity in the U.K. as the home-building sector in that country has continued to recover from its flows of 2008 and 2009.
In the past five years, we've installed 400,000 new connections in this business that earns us very strong and attractive returns. We've also been able to realize in significant synergies, since we completed the merger of our existing business that we owned since 2009 with its largest competitor in 2012. This has significantly improved our margins for the overall business that we have in the U.K.
We’ve completed two very large and long-dated financing as well in this business, since we’ve owned it and we've lowered our cost of borrowing by almost 200 basis points. Our cash flows in this business are also indexed inflation and we've seen average inflation in the U.K. of about 3% in the last five years that’s benefited and aided our results.
And lastly, we've also been very successful in developing new product offerings. The incumbent business that we’ve owned since 2009 was a dominant player in the gas connections business and then got into doing electricity connections in 2011, which has served for a lot of our growth since then.
Our largest competitor that we bought in 2012 has been a dominant players as well in gas and electricity but what they’ve also been doing is advancing a lot of other products, such as fiber to the home, district heating and water, which we hope to be selling through our sales channels to existing and new customers going forward.
Next five years for this business also looks very strong. We already have 550,000 new connections that are in our backlog, which we’ll be hoping to install over the next 12 to 18 months that exceeds what we have done in the last five years in total.
Next step is our transport business. Our Australian railroad FFO has grown on average by 33% since 2009. In 2011and 2012, we embarked on an approximately $600 million expansion project on that terminal that generated outsized returns, adding approximately $150 million of incremental annual EBITDA to our business.
That EBITDA was underpinned by long take-or-pay contracts with solid counterparties. In addition to that, most of our cash flows in this business are also indexed to inflation and over the last five years, we've enjoyed 3% average inflation in Australia which has benefited our result. And lastly we’ve seen GDP growth in Australia for also approximately 3% since 2009, which has increased general freight and cargo that just goes through our network and in addition to that, we’ve benefited from stronger grain harvest.
For this business, we certainly don't have currently CapEx backlog of growth projects that’s similar to what we've been able to do in the past. But what we do have is optionality with a dozen or so customers in that region, should they be pursuing any growth plans of their own, they would require our support in investing in our system further that should drive very attractive returns going forward.
Our total business increased its FFO by 24% since 2009. Three drivers impact this business. The first, there's been about $750 million of expansionary capital that's been put into this business to expand its various networks. Second, our tariff here grow by inflation every year and in Brazil, we've enjoyed about 6% average inflation over the last five years and in Chile of somewhere between 3.5% and 4% on average.
And then lastly, traffic generally in this business grows commensurately with GDP. And in the past five years, we've seen a blended average of growth in that region of 3.5% between the two countries we’re operating.
Going forward, we expect to deploy about $1 billion of expansionary CapEx in this business. So again exceeds what we have done in the past five years and with that should be able to do is debottleneck our roads and expand them further, which should lead to increased traffic and cash flows over time.
Lastly, in our Transport segment, our ports business increased on average by 13% since 2009. The growth here was driven by the addition of key new customers, especially in our business in the U.K. Our recovery in volumes over the past five years of the situation in Europe has gradually improved.
We've implemented various cost saving programs in that business as well over the last three years to five years to deal with the general pressures that we were facing and that positively impacted our results as well. And finally, we completed a large financing in our European business that decreased our cost of borrowings by 300 basis points.
The future for this business also looks strong. The business in Europe, we think Europe in the next five years should be better than the Europe of the last five years. And in addition to that, we've invested in a couple of terminals on the West Coast of the United States that are currently undergoing a significant modernization program. Once complete, this will become a state-of-the-art facility, which should lead to very strong cash flow growth in the future.
With all that said, we don’t always hit the ball out of the park and occasionally remits a pitch. Our energy business suffered in the last five years with this FFO down by 12% on average since 2009. This was led by a negative regulatory outcome that happened shortly after acquiring this asset which we purchased in 2009 as part of a broader transaction. We saw this regulatory outcome happening. We forecasted forward in the value that we’re ascribed to the business back then. However, it did negatively impact our financial results. So it's been reflected for in this analysis.
However, what we didn't see happening was the challenging natural gas spread environment, that's been affecting this business since 2010 and more pervasively since 2013. So with the negative regulatory outcome and the challenging natural gas price environment, it’s also led to very tough financings that we've had to do in this business where our cost of borrowings have gone up very significantly in this segment.
Okay. So let me now pull all these together. I’ve talked about our various businesses, so now it’s time to consolidate all of these which is kind of my job, what I do in to have. We've experienced and pulling together our various businesses, we see that we've grown our utilities business on average by 15% in the last five years. We've experienced 26% growth in our transport business. And then we’re impacted by the 12% decline in our energy business.
So when you sum it all up together you see that on average in the last five years we've achieved 15% growth, same-store growth in this business, which exceeds the 6% to 9% target that we have set out for ourselves last year and that I mentioned earlier.
Another way to come out this all is we knowledge there's been a few one-time events that have happened in the last five years. And so we wanted to exclude those from the analysis to as much as possible avoid any potential distortions in the numbers and just to keep it simple.
Within one overly complicated analysis, so we just made three adjustments. The first is we’ve excluded from the analysis the impact of the Australian railroad expansion just given the size of that project. While it is our aim and hope to be doing similar projects in the future, we just thought it would be appropriate for the purposes of this analysis if we excluded it out. Second, we normalize for the negative regulatory outcome that happened in our natural gas transmission business just given the fact that we saw this coming and it was reflected in our valuations. And third, we also felt that using a constant foreign exchange rate would also strip out a lot of the noise as well.
What we did was used current foreign exchange rates and reflected for those since 2009. And essentially what we’re reflecting here is the decline or the depreciation in the Brazilian real, the Chilean peso and Australian dollars that if happened really over the past year or so. So after doing all of that, you can see that our CAGR of growth has dropped from 15% to 13% which is still impressive and ahead of our long-term targets of 6% to 9%.
So in conclusion, I wanted to leave you with three key takeaways. The first is we’ve delivered consistent organic growth over the past five years in this business. Second, the 6% to 9% growth target that we set out for ourselves is definitely achievable. And finally, we can exceed those targets should we find ourselves operating in a period of higher growth and higher inflation.
So before turning it over to Alfredo, I’d be happy to take few questions from the audience.
Bert Powell - BMO
Thanks Bahir. Bert Powell from BMO. Bahir, can you just give us a little bit more color on what you think the margin improvement expansion opportunity is going forward versus what it’s been in the last few years. How much is that going to contribute do you think to your FFO growth targets?
Thanks Bert. The three key drivers that will definitely be -- that will benefit. The results will be the organic CapEx, the inflation and the surplus capacity. The margin improvements, I would say, would be a smaller part of this. That being said, it is something that we've got a great track record on. But it’s not going to be as a significant contributor as -- as the other three elements have been or what we think they will be in the future.
Dave Noseworthy - CIBC
Good afternoon. Dave Noseworthy from CIBC. I guess, two questions. First is just on your very first slide we talk about how you get your growth target and you separated out cash was reinvested from new investments. Are these actually different sets of projects that you are investing in and if so how do you differentiate the two other than how you're funding them?
Thanks David. The 2% relates to mergers and acquisitions activity which Alfredo is going to be going through in his section whereas the 2% to 3% relates to the organic CapEx opportunities that Ben spoke to in his section. So it's just projects that we keep doing in our businesses day in, day out versus M&A activities.
Pat Dorsey - Dorsey Asset Management
Pat Dorsey, Dorsey Asset Management. Now a couple of thoughts, you noted that the results have been improved by lowering the cost of borrowing. Can you give us some feel for how long you locked those lower costs in?
Sure. Thanks for that. On average, our portfolio today has average term of maturity of 10 years. And 90% of our total debt has been fixed. So if I look in the -- over the next five years, our maturities are not as significant as they've been in the past. So the cost of borrowings -- some of the cost of borrowing initiatives and how that's been driving our results may not be representative of the future. But I think, I am getting, okay, fair anyway and good time. Any more questions?
[Robert Zacharias] (ph), I’m a shareholder. I have my own firm. You mentioned a 15% compound annual growth rate. Now what is that based on because in most of these projects you've invested some additional money. So is that based on, what is it total amount invested, is it per-share, how should we take a look at it?
Yeah, it’s 15% FFO per unit growth. That's been driven by all the factors I have been discussing. So additional capital that’s been deployed to all the various projects, that's been funded predominantly by cash flows from the business itself and through the other various streams, whether it's picking up GDP growth or picking up on inflation indexation et cetera.
But it is per unit?
It is per unit.
Bill Van Arnum - Principal Global Investors
Bill Van Arnum, Principal Global Investors. I noticed when you normalized for your consolidated annual growth rate for the natural gas business and energy. It’s still negative 4%, I guess, so besides the natural gas environment, what is the problem or what has been the problem in the energy side?
It’s been challenging environment that we had been operating in which is the compressed natural gas basis spreads that we had been earning in this business. We think this business has troughed out and should do a bit better in the future but it will be a slow recovery. I think that’s the last one.
Andrew Gundlach - First Eagle
Thank you. Thank you for taking the question. Andrew Gundlach, First Eagle. On the first slide, the 2% to 3% organic growth target, I’m just trying to understand the -- how you get to that number in terms of the CapEx that's required to get there, the IRR or the spread over cost of capital. And then the other element of that question is if interest rates would say go up 300 basis points, just double that would then be at negative in the sense would pullback on that growth target as well as -- in other words, implicit in this assumption as kind of constant borrowing costs and leverage assumptions?
Yeah. Sure. Thanks. So the 2% to 3%, the assumption on this has been $400 million of CapEx backlog that Ben Vaughan walked through in his section. The financing assumption that’s gone in -- went in to this number is that we would fund that with 65% on average debt and 35% equity and that equity is funded by internally generated cash flows in their various businesses. And on average for these businesses, we’re earning a going in FFO yield if you average out over the first three to five years or so for about 12% FFO yield.
Okay. So with that I -- can I take one from Frederic?
Frederic Bastien - Raymond James
Frederic Bastien, Raymond James. But here you’re just wondering how the relatively young district energy business has done, mean, I appreciate that the overall energy businesses has been negative. But how has that one performed?
Thanks for that for bringing that one up. So that's a business that we loved and for those of you that attended our session last year, Jim Reid who heads up that business did a pretty good dive into that business last year. The business has done very well. Cash flows in this business are rock solid. 90% of it are basically take-or-pay type minimum -- or capacity charge type payments.
It’s a smaller part of our portfolio today. And that's why you can't see the overall impact of this business in our numbers but the whole business as we build out this platform, it should be a more material contributor and should drive that negative 4% results that you're seeing there tomorrow in the positive territory should NGPL continue to be going at least flat.
Thank you, Bahir. Good afternoon to everyone. I’m also new to this audience, so if I can introduce myself very quickly. My name is Alfredo Zamarriego. I’m a Managing Partner in Brookfield Infrastructure. I’m a member of the European team. I’m also new to Brookfield in the sense that I joined only in January this year, so less than a year ago. One of the very specific tasks that I was given was to help establish an office in Spain in Madrid which we successfully did in May of this year. So we have an office that is being now up and running for four months.
The purpose of my presentation is to talk about two things. One is how global investment platform, but also to talk about Europe in particular because this is a market where we are increasing our focus on, where we are spending more and more time these days.
And before I do so and in order to put everything in context, Bahir was talking about the organic part of the business, which represents the 6% to 9% FFO growth rate, I am going to be focusing on the new investments on the M&A activity, which explains a still 2% of our total target of 10% FFO growth. And what is important to bear in mind, it translates into around $500 million of new investment that we need to find on a global basis and on a non-global basis in order to deliver this target.
We believe we have a very attractive business development platform with that and very different to what all the competitors have in the market. There are three things I would like to highlight of our platform. First one it’s a global one and that allow us to deploy the resources and move them around depending on where we see the attractive opportunities, investment opportunities are that is very unique, I believe.
It’s also very local. We have up to 16 offices, which are located in some of the key markets that we see across the world and as you can see most of the focus has been so far in the North American countries, in South America and increasingly Europe.
And the third thing that I would like to highlight about our platform that is very sizable. We have a total of 100 employees working on the infrastructure side and out of this 100 around of 60 of them they are front line executives looking to originate and execute investment opportunities across the globe.
Finally, I think it’s important to mention that this platform has a proven track record and when you look at the average investment that we've managed to accomplish in the last five years is around $1 billion. Clearly above the $500 million that I was talking about before as a target, which make us feel comfortable that our targets are realistic and achievable.
When I say that we want to increase our focus in Europe, doesn’t mean that we’re going into a market that is completely new to us. We know the market already very well. We’ve been in Europe since 2009, since we acquired Babcock & Brown Infrastructure. It’s been five years already.
We have a total of $4.3 billion of assets under management in that region and we have a portfolio of infrastructure assets which is very diversified in terms of sectors, both Transportation and Utilities and also geographies. We have a presence in eight countries already across Europe.
During this time, we also manage to form some very strategic relationships with a number of operators in Europe that we think will be very helpful for us in terms of looking other opportunities in the future.
I always like to mention the example of Spanish company, given that I’m from that country called Abertis. It’s one of the biggest toll road operators in Europe, also very strong in telecom infrastructure and a company with whom Brookfield has developed a very strong relationship through our JV in Brazil through Arteris. So this is not a new market for us.
So far we’ve been covering the European market through our London office. The London office is equipped with a seven infrastructure employees or executives. As I said before, in May this year, we decided to open a new office and we chose Madrid.
This office will be in charge of looking for opportunities in that given market, both the Spanish and also Portugal. It will also be responsible to make sure that we coordinate very well between Spain and Latin America, because as you may know, there is a large number of corporates in Spain with very interesting infrastructure assets in that region and we think we can benefit from having a closer relationship with those Spanish corporates.
The Madrid office is already equipped with two professional, one of them myself, which are permanently based in that country and the reason why we chose Spain as our second office in Europe is twofold. First, we see a lot of opportunities -- infrastructure opportunities in the market, interesting ones not only in terms of volume but in terms of expected returns.
And the second reason is because we came to the conclusion that to cover the Spanish market it was important to have local coverage. It was important to have local people with local presence and so we decided to open the second office in Madrid.
But why we are focusing Europe, why is this increase of attention for that market? Firstly, because it’s too big to be ignore. If we have a global investment mandate like we have. It is natural that Europe becomes a key part of that strategy.
Here you can see some comparison between the European market and the U.S. market. European Union is one of the single -- one of the largest single market in Europe, its 28 countries, more than 500 million people and around $16 trillion of GDP, very sizable market.
But what I like as well is that in some market where there is a significant amount of infrastructure assets already in private hands. If you look at airports, places like Portugal, Italy, the U.K. they’re all in private in hands. Toll roads, Spain, Portugal, France, Italy, the vast majority are already in private hands. If you look at water networks in the U.K. they have been privatize for ages.
This is important because we don’t have the same political clash or obstacles to invest in this type of assets that we find in other regions in the world. There is already a very strong track record of private investment in infrastructure which is very important. So we like Europe, its big, very sizable.
The second reason is because we think is the right timing to do that. The right timing from a macroeconomic perspective and also from a political perspective. From a macroeconomic perspective, there is no doubt, everybody believes and we can see that that Europe is getting out of the crisis, is on recovery path.
If you look at the graph on the left hand side, you will see that the expectation is that Europe will be growing by 1% GDP growth in 2014. After two years of negative growth -- after two years of contraction and these rate will be going up to 1.5% by 2015. So things are getting better from a macro perspective.
But also in terms of political stability, there is no noise these days compared to what we saw two years ago about the European market being broken up or the euro currency disappearing. That is gone. The political support for Europe is there, much more different compared to two years now. So we have now a context of improvement, which creates enough investment visibility for us to focus even more on these markets to look for opportunities.
What we also like is that things are getting better but they are not getting better too fast, so we are not too late and people are not getting too crazy about it. The economic recovery is still need to consolidate further and you might have seen two weeks ago the Central Bank in Europe reducing the interest rates to almost 0% to boost economic activity even further and we need to see an economy recovery that is more consistent amongst all the different countries within Europe.
There is still a big gap in terms of the strength and the timing of the recovery when you compare what we call the peripheral countries Spain, Portugal, which are doing very well to what we called a core countries, France, Italy, which are doing much worse in terms of growth.
So we need to see that recovery being consolidated. We need to see that recovery being more consistent to see things really happening. That is the right timing. Things are getting better now.
Third reason for us to focus on Europe now much more is because there continues to be a significant infrastructure deficit in Europe, which is mainly driven by the fact that we have very old asset infrastructure assets in this region and that needs a significant amount of investment.
I was reading a report published by one of the leading consultancy firms, where they have estimated that around $250 billion of projects will require private investment in Europe, infrastructure projects over the next five years. The amount is really, really massive. Most of these will have to be financed by the private sector. There is no doubt about it.
We see regulatory frameworks in place now which are more long-term and sustainable than they were before, because some of the reforms that have happened to these regulatory frameworks in the last couple of years as I refer to the crisis have been pre-fundamental. So we think that these regulatory reforms are there to stay. And I said before, there is already a very strong track record of private investment in infrastructure, which will help. So this infrastructure deficit is huge and it has to be financed by the private sector, very interesting for us.
The last reason I would say is that we are seeing an increasing pipeline of opportunities in terms of asset disposals, both on the public sector side but also on the private sector side. And the drivers are the ones that you’ve seen for many years and that you know very well. If you look at the private sector, it needs to deliver further, it needs to sell non-core assets to focus on the strategic sectors. And in many cases, these companies need growth capital to continue investing.
On the public side, governments need to reduce the levels of debt. They need to reduce the deficit. They need to bring in private expertise in many cases. The drivers have been there for many, many years. For me the key difference is that these drivers have been magnified exponentially as a result of the economic crisis. The levels of debt are its maximums. I was looking at a report published again by one of the leading U.S. investment banks with a estimate in the average leverage for the European utility sector and he was basically concluding that these are reaching maximums only now by the end of 2014. These companies will have to continue this portion of assets.
If you look at the public sector and you look at some of the recent statistics in Europe, you will see that the public debt still accounts on average for around 100% of GDP, so very big numbers. All these drivers have been magnified and they will lead obviously to more and more disposals, both on the public side and on the private side.
So how big is the opportunity? Where are we focusing now a time? How big is the pipeline? I mean, if you look at this page, you can see there is five sectors that we think are driving the pipeline these days; toll roads, airports, utility networks, telecom infrastructure, and water. The volume of opportunities over the next five years is quite sizeable. We have quantified this in excess of $50 billion asset values. And if I may give you a bit more flavor of the kind of opportunities that we see across each of the segments.
Toll roads, most of the opportunities that we see are basically portfolios of brownfield assets in Europe, in many cases with long-standing track records in terms of traffic. These opportunities are mainly driven by recapitalizations, distressed assets, distressed sellers, people that need to refinance, but they don’t have -- they cannot find the debt to refinance, they need to capitalize further, they need to restructure their balance sheets. And we see a lot of these opportunities in the south of Europe; Spain, Italy, and Portugal. These are quite a sizeable segment of opportunities for us, close to $7 billion of assets values.
Airport is another sector that we see being very active right now in Europe. Here the driver is mainly privatizations. And in terms of geographic focus, it’s mainly Southern Europe as well, Spain and Italy, quite sizeable because some of these assets that are privatized are the key airports within these countries.
The sector by far the largest one is the utility networks. Here the kind of assets that we see been available in Europe are mainly electricity and gas distribution assets. We see very little on the transmission side. There is mainly distribution. The drivers of this pipeline are sell sides from private operators that need to reduce the level of debt. In some cases, they are not selling, they want to have a partner to continue growing these businesses, and we see these opportunities not focalize on any particular region, we see these opportunities across all Europe. Big area for us to look into.
And the last two are two sectors which are relatively new for us, for Brookfield, Telecom Infrastructure. The kind of assets that we are looking at are mobile, towers, and to a lesser extent, TV towers. The driver here are basically all the telephone companies, all the telecommunication operators who want in to divest these assets which they see as non-core and they need to reinvest all those proceeds in other more strategic areas, like 4G deployment and the likes. We see an increasing number of opportunities across all Europe, and this is a very interesting sector where we have done a significant amount of work to understand the risk profile of this business and where we see clearly less competition than in other infrastructure sectors, so we want to spend more and more time on this market.
And here the driver of these opportunities which are mainly downstream and upstream type of assets is partnerships. There is a few very big leading operators in Europe that do not have a capital to grow and they don’t want to invest only themselves in growing the business and there you see good opportunity for us to team up with one or two of these leading operators and invest in this sector which is becoming more and more strategic for us.
So the opportunity is big and it happens across all different sectors as we can see. We need to be very smart about where we spend our time. We don’t want to get into situations where we are competing with too many people and it’s just a course of capital shoot out type of transactions. So we need to choose very well the situations where we can bring to bear our expertise, our strengths, and these are three situations that we are constantly pursuing in Europe. First one is growth partnerships. Situations where a leading corporate who wants to continue growing but they need a partner to provide the equity. We think we have very good credentials in this area. We have a number of partnerships that we formed in the past. We have a like-minded approach to some of these operators and we have capital that they need, so we can play our cost very strongly and very wisely in this sector.
Recapitalizations, they continue to be very topical in Europe. Distressed assets with plenty of data needs to be refinanced. Distressed sellers that need to sell also. And here we also provide not only capital but very strong expertise in this kind of transactions, very important area for us.
And finally what we call multi-faceted assets sales. These are complex exposures. These are situations where either the assets are too big or they have multiplicity of assets within them or they have multiplicity of geographies, not everybody feels comfortable going through due diligence as complex as that. We feel we have the expertise to do those and we have seen a number of opportunities right now particularly on the utilities side, they have in Europe. So we need to choose all but those to make sure that we are in situations where we compete with less people but in a more and we achieve our targeted returns.
And at this stage, I think this is my presentation. I hope I convinced that Europe is a good area to focus on and we have ready skills to do it and that the opportunity potentially is very sizeable. Thank you very much. I will take some questions if you have any now.
Andrew Kuske - Credit Suisse
Andrew Kuske from Credit Suisse. Just curious about your view as a U.S. dollar reporter and investing in Europe. So if you think about the U.S. dollar distribution, how you think about the euro relative to the U.S. dollar, where are we today? Obviously there has been a pretty big devaluation in a very short period of time, but how do you think about that structurally? And then maybe stepping back a little bit just tactically allocating capital in the Europe versus other areas around the world?
Andrew, maybe, I’ll tackle that one. Not very fair question for Alfredo. The great news about Europe is that the cost of hedging back to euro to U.S. dollar is actually very minimal. And so for most of our U.K. pound investments and our euro investments, we actually have them virtually fully hedge. And so I would suspect that, we will probably take the same approach going forward. So it’s not really a currency concern for us.
Andrew Kuske - Credit Suisse
Okay. Here is just a follow up, do you anticipate being a lot busier in Europe relatives where we were in the last two years with arguably euro over valuation versus the U.S. dollar? Thus you have Madrid office now?
Yes. I guess, the short answer is, we have always expected that Europe would represent around 35% of our overall global activity just because the size of the market. There is probably a chance that over the next couple years given all the things that Alfredo mentioned that it could be a bit larger than that.
I mean, we always do expect to represent big part of the business. But with the number of recapitalization, the number of assets sales underway and with probably more competitive environment in North America, I think, the fair assumption to make.
Cherilyn Radbourne - TD Securities
Thank you. Cherilyn Radbourne, TD Securities. I wonder, if you could just speak to the issue of how much other capital is chasing the $50 billion of opportunities you mentioned. You did signal -- single out telecom and infrastructure one area where you are seeing a bit less competition? Wondering if you could just run through the other segments from that point of view?
Sure. Okay. I think, the two key types of competitors that we normally face in any situation in Europe right now are either directly institutional investors i.e. pension funds, which are increasingly investing directly into infrastructure assets in Europe. And the second type of competitor is infrastructure funds like ourselves.
I think what we see as well is that our competition is mainly focused on let’s say the more straight forward markets, where is more of a cost of capital should out, that would include the U.K. or some of the Northern European countries where is more difficult for us to really find a special angles to compete against these other competitors.
But when it comes to markets like the Spanish market where have been local is absolutely key in terms of having the local relationships with the banks, with the corporates, where things like language is important and being on the ground is important. That’s why we feel we are in a different field compared to some of these competitors. I think that answers your question. Thank you.
Bert Powell - BMO
Yeah. Bert Powell from BMO. These new categories on here for Brookfield airports and telecom and water, but looking at airport, what kind of capital commitment would you be feel, would you feel comfortable with, putting into airports given that this would be your fairly new category for Brookfield?
I think, we would be looking at some of these investments in new sectors, I think it’s fair to say, initially in partnership with an existing operator, probably, to address I think the issue that you are rising, which is, is new sector for us, we want to get familiarize with it gradually, not in one shot. So that’s one thing to bear in mind.
But I think some of the situation that we have been looking at on the airport side is have investments in the region of $300 million to $400 million equity check. But again, we could look at them on our own or we can look at them together with an existing operator to take in account that this is a new sector for us.
Dave Noseworthy - CIBC
David Noseworthy, CIBC. You mentioned political stability being one of the considerations for investment? I was wondering if you can talk about increasing popularity of non-Eurozone parties and how that factors into your analyzes?
Sure. I think that’s third point, we have seen that in a number of markets including the Spanish market. But these -- relatively these projects in many cases continue to be minority projects in the overall scheme of things.
And in some cases we have seen these anti-Europe approach by these minority parties as a way to punish and complaint about the existing governments in the respective countries as a punishment both by the population against some of these governments that have applied very strong austerity programs.
So we don’t see this as a phenomenon that is, one, too much real to be concern about. We don’t see this phenomenon as being something that is long-term and sustainable. I think we see that as a short-term manifestation of lot of people being angry with respective government right now. Sure.
Andrew Gundlach - First Eagle
Thank you again for taking the question, Andrew Gundlach from First Eagle. Two really quick questions if I can. First is on airports, do you view airport is captive retail or do you view it as something else, what…
Yeah. It’s a good question, yeah and second one…
Andrew Gundlach - First Eagle
The second one is, when you look at the $500 million of spend to get 2% of growth versus the $400 of internal spend to get to your 3% growth. I guess, I was thinking that the 2% versus $500, what you are responsible for, is really the cost of entry? But when you acquire it, you are acquiring it from sellers that frankly don’t have the good management as you do? So ones it becomes under your umbrella, does it then acquire the characteristics of 6% to 9% FFO growth that walk through in the previous section? Thanks.
Okay. I can respond the first one, I think, probably, Sam, will take the second one. But, Sam, why don’t you go ahead.
You go ahead and continue.
I think the airports, it depends. That’s the answer. In some cases, absolutely, there more of retail assets with when we attach to them and I can respect the view of the world, because for example they have -- they do all feel regulation which basically separates the two activities completely, they are [identical and non-identical] (ph) and they have very well developed retail activities. I am thinking about Amsterdam as an example of that.
But we also see a number of assets which are more infrastructure assets where the retail activities are not as developed. You still have a signal feel, you put all the revenues whether (indiscernible) not into a single box and those assets are in my view much more infrastructure like than the others. So it depends and we have that in number of countries in Europe. So we need to pick and chose and be selective. I don’t think we can generalize for all the airports.
So just to answer your second question. I think, you have actually described it pretty well, which is, we generally find that the return on capital on internally generated projects tend to be higher than when we are investing capital from M&A perspective. But we are always looking for businesses and you are still on the business under for my script coming up.
But we're always looking for businesses that have the same growth characteristics of our existing portfolio where we can invest further capital going forward into the business to generate those high returns and often, to be honest, that is baked into our investment analysis and our investment returns. Hopefully we haven’t baked in too much and so we get some upside once we own it. And as you said, hopefully from better management.
Hopefully we’re doing well so far and we’re actually on time. So that’s a rarity for Brookfield event. Alfredo, thanks a lot. That was a great.
The last attribute and again we’re just dealing with the theme of providing you attributes that we think separate us from the rest of our peers that we want to cover off is our investment strategy. And the question we get asked all the time and I think I touched on a bit in our last letter to unitholders is when the market gets a bit frosty, do you change your strategy and the answer to that question is always no.
Irrespective of where we are in the cycle, we continue to execute the same strategy. And we’ve touched on lots of these themes throughout the presentation. So I’m just going to hit them briefly and then I’m going to touch on the one at the bottom in a little more detail. But first of all, as Alfredo described, our goal was such a large business development team is to go out and create proprietary deal flow.
The last thing we want to do is just be one of those investors who just participates in cost of capital shootouts and the only differentiating factor would then be what lower return you’re prepared to accept. What we’re trying to do is find situations where we can use our expertise to participate in recapitalizations, participate in multifaceted transactions or be a partner of choice for companies that want to grow their business. And if we can do that and that's where we can be extremely successful.
The second part of our strategy is we have very strong and tight return requirements, whether it was six years ago or whether it’s today, we’ve always had a 12% to 50% return target and while it would be much easier for us just to drop that target today and make it 8% to 10% or something like that, like many of our peers have done and we could grow our business much quicker in the long run, our business would not be nearly as profitable as it is and it will be. So we hold to our return thresholds and we think that is something that differentiates us.
The next thing that we think we do quite well is we maintain very strict underwriting around our business. And this again is something that in a more frosty market, you can start to believe a lot of the growth expectations that a seller will lay out for you in his memorandum or in his management presentations to you.
We take a very disciplined approach to evaluate in these forecast. We use the expertise we have of running businesses for a long period of time. And we evaluate in particular the risk associated with the regulatory environment and the economics of new market entrants which could also impact the business going forward. And we think that we've got great capability in doing those things.
The fourth thing and both Ben and Bahir touched on this was a follow-on investments. Our best returns are where we can deploy capital within our existing businesses. We've done that for six, seven years, strong now and they’ve delivered strong returns. And so we continue to mind our existing networks for opportunity to invest or to complete some tact on acquisitions where we can leverage synergies across the business.
And then the last thing, I want to touch on, it’s going to be in the next couple of slides, it’s just our thoughts around recycling capital because I think again this is something that is not very common out there with businesses. Most people once they buy an asset, like to keep it forever. We actually see ourselves as someone who are not only good buyers but also good sellers.
Now, one of the characteristics of today's investment environment is that we operate in a period of low interest rates. And I think it was touched on before by how we’ve been able to take advantage of that to drive FFO growth. And it's not just in extending existing debt at lower rates but we find that probably by far the cheapest cost of capital we can create is upfinancing our assets when leverage levels have dropped as a result of strong performance levels or cash flows increasing.
And we've done that on many cases and the benefits of this is not only that you're able to surface capital you can that costs you 5% on a pretax basis and deploy that at 12% to 15%. But it’s also good because we get to retain the asset. We have minimal friction cost when we can upfinancing that asset and it's by far more efficient from a tax perspective.
And our ability to take advantage of that usually takes place around maturities or just after we completed a large capital investment program and to give you example of how we’ve successfully done that in three of our businesses over the last three years, we have [serviced] (ph) about $600 million of capital by upfinancing these assets.
The second way we recycle capital is through asset sales. And we do that when we think we can achieve an attractive valuation on a low-growth mature business. You may recall that over the last few years, we sold five businesses and we realized proceeds of about $1.5 billion. And this yielded gains to us of over $500 million.
The reasons we sold these assets was because we thought the market for timber and some low-risk utility assets were strong. And we thought that we’re exiting businesses at values with an embedded IRR probably around 8% whereas we’re buying businesses where we felt we can earn 12% to 15%. So it’s a very good value ARP.
Also, I guess, one more part of that analysis is because we often get asked the question, well if you’re trading at good price, why not just issue equity supposed to selling assets. And we know that we have that option. The simple answer to that question and really the effective truth is that when we issue equity, we are selling our assets. The difference is when we issue equity, we’re selling a piece of all our assets whereas when we’re selling our low growth mature businesses, we avoid the dilution on our high quality, high growth businesses.
So obviously just from a theoretical perspective, it's a better thing to do. We’ve also tried to just show you in quick math, how it works. And I realized it’s a bit simplistic but hopefully it's telling. So today Brookfield Infrastructure trades a dividend yield of about 4.5% and if you look at the growth rate of our dividends, if you backed out new investments, we probably could grow our business at 3% to 7%. And this will provide our total return to our unitholders in the 7.5% to 11.5% range, these all have based up our growth targets.
The midpoint of that range is 9.5% and as an example, we think the assets we sold had an embedded IRR of about 8%. So the benefit of this capital recycling is about 1.5%. And if you take that 1.5% and you look at over illustrative example of $1.5 billion that we just sold, the annual value accretion to the business is around 3%. And so if you look at just as part of our overall strategy, we think that with our cost of capital, we can profitably grow our business if we issue equity investor 12% to 15%, but we can enhance our returns even more if we can recycle capital at attractive buys like we did.
So this leaves the obvious question which I know Andrew probably is going to ask if no one else does. Can you do it again? Sorry to pick on you, Andrew. And the answer is yes. As we look at our business today, we think that there could be net proceeds of approximately $1 billion from asset sales over the next three to five years and this represents 10% to 20% of our asset base.
Now the other question I might come up is okay what assets are you looking to sell? And so I'm not going to tell you that and I could be very specific, but I will run through the criteria that we would look at before we sold the assets. And there is really three characteristics that come to mind. The first one is obviously we look at the growth profile. If it’s a business where we can invest lots of capital at great returns, then we are going to want to hold onto that. But if it’s a business that has a very low growth profile and very contracted cash flows, then that’s one that’s probably going to achieve a good return and we’re not really giving up much by selling it.
Similarly, we’re going to look at what business it operates in. And depending on the sector, there is some sectors that are highly sought after by the market and some sectors that are less sought after. But if it’s in the business sector where we can achieve opportunistic pricing which generally mean someone value the asset more than what we it at, then we will look at as well.
And thirdly, and this one is a little bit more difficult to describe. But we obviously know our assets pretty well and we have a view of the various risk dynamics within the business and that could be risk dynamics around competition, regulatory environment, or some other factor. And if we think that the business has a risk dynamic that we’re not get appropriately paid for and someone else would paid to us, then we might sell it as well. So those generally are the three things we will look at.
So that basically brings us to the conclusion of our presentation and how we want to end up was really answer the question for you again, why you should invest in Brookfield Infrastructure? And here is our value proposition. First, we think we have a very disciplined and tight investment strategy that works throughout the business cycle, whether it’s a weak market where we can invest for value or whether it’s a frothy market where we can recycle capital and generate value that way as well.
Second, we have a business that generates 4.5% distribution yield for unitholders. It’s underpinned by regulated and contractual cash flows from high-quality assets. And as hopefully Ben was able to demonstrate to you, not only do they demonstrate great value, but there's also value that's probably not recognized in the market today compared to what others are out there buying for. So these are high, high quality assets.
Next, we have a 5% to 9% distribution growth target and it's really focused on two elements. The first is our internally generated organic growth engine and that’s something that is very different from many of our peers who require M&A activity to help drive their business and where it’s not very visible at all where our business. We've demonstrated year after year we can source attractive way to deploy capital within the business and without competitor pressures.
In addition to that, we have I think one of the best and largest business development franchises globally in infrastructure sector. We are in all the main markets and we’ve got the skills where we can take advantage of large-scale transactions, which aren’t really even embedded in that 5% to 9% target range. And we think of next couple years there should be some great opportunities we can capitalize on. So all-in-all from your management team effort for infrastructure, we think it’s a great time to invest in for infrastructure.
So with that, I will take some questions. And I think before I do, I also want an answer. I think I will have people to answer. So I think the questions were, I think there is three. One was, who is the regulator of DBCT? And it’s the Queensland Competition Authority, QCA. The second question I think was, what your charge or customers? And so our charge basically comes in two components. There is a infrastructure charge which is around $3 a ton and most of our customers are selling metallurgical coal at around $100 a ton. And then second component of our charge is the operating charge which is again around $3 a ton. So all-in, cost of taking the coal through the port is around $6.
DBCT is probably if not the lowest, one of the lowest cost terminals in all of Queensland and probably in all of Australia. I think another question was, what type of contract you have? And so I will give you the full sales speech on DBCT. We have a contract with about 16 coal companies. They are all the major mining companies, plus a few smaller ones. The take-or-pay contracts are 5 to 10 years in length. They are generally evergreen contracts. What is unique about this business is that as we mentioned earlier it is regulated. Every five years the regulator provides us allowable return which we charge to the customer. If a customer does not live up to its contract, then all the costs associated with that person gets socialized over all the remaining customers, so it’s much like a transmission system in that regard.
Our contracts effectively have no force majeure provision in them. So if there is a flood and the mines don’t operate or if there is any act of god often in Australia there is a always hurricane or something that’s going on, it doesn’t matter, we still get paid. And so it's one of these wonderful assets that we earn a return that is very predictable. In addition to that, our costs, maintenance costs are a full pass-through to the customer. So we take no operating cost risk and no maintenance cost risk. So it’s a fabulous asset. Sorry for going too long about that one, but if I can brag it by that, I will.
Are there any other questions? Okay, there is few.
(Indiscernible). I would like to listen for you about investment in telecom infrastructure and airport station in Brazil?
Okay. So yes, we looked at both airports and to a lesser extent telecom in Brazil. I would say first off on the airports in Brazil, we have found them to be extremely competitive and mostly suited for the construction companies that there is massive works that need to be undertaken there and the construction companies in Brazil have fought over each other to be the one selected for that. In fact, the first three airports that were privatized, the large construction companies weren’t even successful because the smaller ones went and overbid for them So I don't see us actually in the near-term, until it becomes more of a brownfield type of asset sale program for us being successful on airports in Brazil. I think they are interesting assets, but it's probably not for us in the near-term.
With respect to the telecom sector, there has been a recent sale and there are some competitors who have paid big prices for telecom towers down in Brazil. And again, we’ve just not found them to be attractive from our perspective. It’s not been our return targets. So I would say, as Alfredo pointed out, we think the opportunity in telecom is more likely in Europe. It’s a bit more fragmented. The telecom providers haven’t divested many of their towers yet. And we think we’re at the early stages and so far companies like American Towers haven’t really been too active there. So that’s it, that’s where our focus is.
David Henle - DLH capital
Sam, David Henle from DLH capital. Could you go back to coal for a second and just give us a sense for what percentage of FFO comes from coal-related activities? And are you thinking differently about that area as an opportunity set, given kind of environmental and political wins going forward than you have thought about in the last five years?
Okay. So the percentage of our FFO -- sorry, yeah, it’s political. Okay, so 20%. And I think the short answer to your question is, we think the likelihood of a near-term expansion is relatively low. Two years ago, we were here and we had a big backlog of interest from users to develop further expansion at the port. Today, there is no real backlog, the market is very weak.
I’d say on the positive side, the Australian producers have done a great job in reducing their costs. I think I've heard numbers that they’ve reduced their costs by over 20% in the past year so. And so they’re far more competitive and obviously, the Bowen Basin is the most prolific resource for metallurgical, probably in the world. So we feel very comfortable with the stability and the fact that our terminal will be the one that will be used. And in fact, we’ve seen higher throughput this year than we've seen throughout our ownership of the asset.
I think as far as the future, if there is going to be an expansion in Queensland for more coal capacity, I think we have a very good shot of being that provider because we have spots for both that are already dredged and we already have an existing terminal, one that’s operating. I think for a new green field terminals to be established with all the environmental issues that you’ve alluded to, I think will be very, very difficult.
So I think, in fact we have something that’s very unique. I don’t want to predict whether or not we'll get those approvals because it is something now take some time. I think what probably will happen is that in the near-term our user base will come to us and ask to very small expansions, 5 million tons, 10 million tons. And while that doesn’t sound like a lot, a 5 million ton expansion could be $250 million to $500 million of capital. So we’d be happy to do that and I don’t think that’s going to raise the ire of too many bimetals. Andrew, I thought I answered your question.
Andrew Kuske - Credit Suisse
I’ve got a related one. It’s slightly different. So on the monetization issue, if you look at your portfolio of assets, do you see any opportunity in the future to say, segment the capital market even further and let’s just say have something underneath that yield co that’s the port assets and something that’s maybe utility outfit or if there is a valuation delta on the utility assets as we saw on one of the previous presentations. Is that one way to service that value and then still retain control over the assets over a period of time and maybe put a fee structure on top of it also?
Well, we haven’t been thinking about that. So that’s not in our strategy right now. We’ll add it to our list of things to debate the strategy session. But I don’t think we will be looking to add to the complexity of the business. I think the only thing that maybe one day we could do and again this is not something that we plan to do anytime soon is if we think there is a business within Brookfield infrastructure that on and so might be valued higher than as a whole, then possibly we could split Brookfield infrastructure into multiple companies. But today, I think we get a lots of benefits from having the scale, the diversity of assets and so. It’s not something we’re doing today.
Robert Kwan - RBC Capital Markets
Sam, just coming to the billion dollars and potential asset sales and the criteria you use to have or may still as lack of control or lack of the path to control. So the couple of assets in the portfolio that fit that bill, is that something that would be contemplated in the billion? And if you look at other assets you maybe contemplating in that $1 billion. Are there any that fit currently the opportunistic pricing or the change in risk profile today or is that just something that you’re highlighting as a potential driver of an asset say on the future?
So to your first question regarding businesses where we don’t have full control. I think that goes to those risk dynamics that I mentioned. So that’s the qualitative factors that we would consider and obviously, if we can’t control our destiny or we don’t have the ability to influence operations away we like than that’s something that definitely get factored in. As far as assets today that might fit some of these criteria so some of that could fit these criteria.
Bert Powell - BMO
Bert Powell, BMO Capital Markets. Sam, in the past you’ve touched on two things that haven’t been touched on today, which is ports and assets or non-core assets for mining company. I just wonder if you could give us an update in terms of how you're thinking about those assets today? And I'm not sure if they’re purposely left out or just the -- there was just a different focus you’re trying to hit today but appreciated getting at update on your thoughts there.
Thanks, Bert. And as a great question because our focus has not changed. We think there is tremendous opportunities with carve-out infrastructure opportunities from large industrial, like mining companies that need capital to reinvest back their business and who are becoming -- far more aware of the financial benefits of selling off lower risk infrastructure assets from their portfolio. So we’re continuing to have those kind of conversations. It tend to take long because mining companies, they don’t like to give those up.
They are concerned about the impact. It could have on their operations and some of the competitive advantages. We think we can deal of all those issues but nonetheless, that is a, I think, an opportunity that still remains for the next couple of years. A couple over here, [Tracy] (ph).
Bill Van Arnum - Principal Global Investors
Bill Van Arnum, Principal Global Investors. You mentioned on assets sales, Timber Assets. I was wondering if you could compare your thoughts on Timber versus Brookfield Asset Management, which seems to be building its Timber Assets? Is there any consistency or is it just a case of the price was too good to be true? Do you have a competitive disadvantage in those assets? What is the case there?
So, maybe, I think, the difference really has to do with the types of investors that are looking for Timber exposure. So from Brookfield Assets Management perspective, we provide various types of investment vehicles for people to invest in various asset classes, whether its infrastructure timber, property or power.
And in the case of Timber, it was initially combined with the infrastructure businesses and I think it serves to provide us the scale to begin our business, but as we look at it last year and year before, we recognize that there was a bit of the divergence in return expectations from that sector versus our general business and we still think Timber is a great place to invest.
We raise -- Brookfield Assets Management raise number of funds for Timber investors, but the return expectation in those funds for North America that would be 8% to 10% and if we are getting 10%, you are doing really well. And if you look the investment Timber in Brazil you might do a bit better, you might get 14%, 15%. But it went for a different investor and we thought that it was best to sell it and focus purely on infrastructure within BIP.
Brendan Maiorana - Wells Fargo
Brendan Maiorana, Wells Fargo. Sam, you guys have grown pretty aggressively since you spin-out in 2008? Do you feel like there is a capacity limit at some point in time from a size perspective that might make it difficult to deliver on that 5% to 9% growth that you've exceeded over the past few years, but could come where the base become so big that getting 5% to 9% growth per year would be tough?
So today I don't see any issues with meeting those targets. I think, overtime, our goal is to achieve growth on a per unit basis. And so that means we need to recycle capital more aggressively and continue to reshape the business to achieve that, we will do that. At the end of the day, we are trying to achieve our per unit growth, not growth just for sake of growth.
[Robert Zacharias] (ph). Ben, earlier you talked about value per unit of Utilities? I believe you said that, BIP was valued at $19 per unit, but that using one other companies we valued at, it would be $28 per unit? And I would like to know if you have similar figures for Transport and Energy, and how you decided what broke down the components of BIP as to what they were valued at?
Okay. So the short answer is we don’t have those numbers for you for Transport, Energy today. That wasn’t the objective. The reason we decided to showcase Utilities today was last year we did Transportation and Energy, and we've decided to take a different business today.
But we also have the benefit of a number of very sizable comparable transactions, which made that fun with numbers pretty easy to do. And you as Ben said, look, we've always felt that our Utility business was second to none and I think with the transactions that have taken place this year, we have a really good indicator of what they are worth.
Andrew Gundlach - First Eagle
Andrew Gundlach again from First Eagle. Thanks for taking the question. I’m just trying to understand this page target distribution growth versus an earlier page about the history and the spread between FFO growth per unit and distribution growth per unit, where that earlier page has the dollar FFO growth growing of three times the distribution growth and two times in CAGR percentage terms?
And I am, if you look forward, your materials show that the FFO and the target are basically one and the same. Just trying to understand how that spread will -- how you see that spread developing in the future and what it means?
Is it what you are referring to?
Andrew Gundlach - First Eagle
I am referring to this as the baseline for what we should expect of that spread going forward in dollar or percentage terms and what it means to you have -- to have spread, what is it $0.80 odd or say, $0.90 on the bottom over five years and $2.50 or so on top?
Okay. I am -- so, I am not sure, fully understood the question, but let me take a stab at it and if you think I [budgeted] then you can correct me. But so, I’d say the first thing, we had tremendous growth. There is a mix of what, be here to describe, which is our same-store growth that we achieved, which we've assumed more conservative growth levels going forward than what we have achieved in the past. And we have also had some large scale acquisitions, which again on a much smaller business had a very meaningful impact on our business.
So doing $2 billion investment on a market cap of in 2009 which was maybe a billion or less, obviously, had pre-transformational impacts. Today, because we are much bigger to the point that Brendan was mentioning, it’s little tougher to move the needle even with large scale acquisition. So that’s why we are taking a bit more of a conservative view going forward.
The other thing that’s going on here is, we were pretty tight from a payout ratio perspective when we started off and a lot of that reflected the depressed Timber result that we had going through 2009 and ’10.
And we’ve managed to get ourselves back to where we really like to be which is at a very conservative payout ratio of around 60%. I don’t think that will grow anymore. I think we are at the level at the bottom amount of a level that we would payout. So we are always going to be in that 60% to 70% and today you're seeing the chart diverge at 60%.
Andrew Gundlach - First Eagle
Just to make sure, I understood, so that means you view the topline and bottom-line from this base having more or less 10% type of target growth rate, is that…
Andrew Gundlach - First Eagle
Okay. Thank you very much.
Yes. Okay. One last question. Okay, Bert.
Bert Powell - BMO
You got it. Sam, you’ve closed on VLI and that fits in one of those assets where you don’t control it, you have a minimal return and that’s probably not why you are there? And as I recall that had something like $5 billion [reais] (ph) backlog or pipeline, I might have that number wrong? Can you talk to us about, what that looks like today, what the opportunity is for you to take your interest and you are control up in that asset overtime by maybe taking more of that that CapEx obligation on?
Sure. Thanks. Thanks, Bert. So for everyone in the crowd you maybe not familiar with that investment, I touched on it very briefly at the outset. We bought 26% of a very large rail import integrated infrastructure owner in Brazil.
Our partner -- main partner and of course, we bought the business from is (indiscernible) a large mining company in Brazil, mostly produces iron ore and this is a general cargo business. So this to has -- this is basically part of their business has nothing to do with iron ore and they saw as a non-core. But they were blessed with these assets as result of them being basically one of the state-owned champions at one point of time and they are now public company.
And so, given the dynamics in the iron ore market with prices coming down and with them having large debt, they decide to break in investors, reduce their ownership and that’s where we came in.
So this was a bit of a challenging discussion. They held a bit of a, I called a private auction, wasn’t a big auction but a few people were invited and they had pretty high return or value expectations for the business.
And as a result it didn't sell and so they were stuck with potentially not having got this off their balance sheet and bring in new capital and so this where we came in. We went to them with some unique ideas of how we could bridge a value gap between what they want it and what we have prepared to pay and basically we came up with a return mechanism that protected our downside. So even if the forecast don't turn out to be the way they expected to, we will still get our return.
What we really like that it was the fact that you we put in capital on, what should be one of the great scale infrastructure businesses in Brazil on a protected basis with an owner that over time actually this is not their core business and probably want to sale.
And so, as Bert was alluding to, we’ve got our foot in a door here, we hope overtime to look to sell down and we will be the one best positioned to buy up a controlling stake and then, that will provide us an opportunity to further drive the business and build into hopefully a great company.
And then we will have two railroad operations, one in Brazil, a country of 200 million people and one in Australia, smaller number of people, but again blessed with lots of commodities and we think that’s going to be hugely value down the road.
So, with that, I think we will wrap up Brookfield Infrastructure’s Investor Day. I just want to thank everyone for coming. Brookfield Renewable Energy Partners is going to start in 15 minutes at 3.15. We hope you can off the around for that and as I mentioned before, we are going to have a reception upstairs afterwards and my partners and I would be pleased to talk many of you. Thank you very much.