Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Enbridge Inc. (NYSE:ENB)

Q1 2010 Earnings Call

May 5, 2010 9:00 AM ET

Executives

Vern Yu – Investor Relations

Pat Daniel – President and CEO

Richard Bird – EVP, Chief Financial Officer and Corporate Development

Colin Gruending – VP and Controller

Analysts

Robert Kwan – RBC Capital Markets

Sam Kanes – Scotia Capital

Andrew Kuske – Credit Suisse

Matthew Akman – Macquarie

Bob Hastings – Canaccord

Petro Panarites - CIBC World Markets

Steven Paget – FirstEnergy

Sam Kanes – Scotia Capital

Linda Ezergailis – TD Newcrest

Carrie Tait - National Post

Jeff Lewis - Venture Publishing

Operator

Good morning, ladies and gentlemen. And welcome to the Enbridge Incorporated First Quarter 2010 Financial Results Conference Call. I would now like to turn the meeting over to Mr. Vern Yu. Sir, you may proceed.

Vern Yu

Great. Thank you. Good morning. And welcome to Enbridge Inc.’s 2010 Q1 earnings call. With me this morning are Pat Daniel, President and Chief Executive Officer; Richard Bird, Executive Vice President and Chief Financial Officer and Corporate Development; and Colin Gruending, Vice President and Controller.

Before we begin I’d like to point out that we may refer to forward-looking information during the call. By its nature, this information applies certain assumptions and expectations about future outcomes, so we remind you it is subject to risks and uncertainties affecting every business including ours.

Our slides include a summary of more significant factors and risks that may affect the future outcomes for Enbridge, which are fully disclosed in our public disclosure filings available on both SEDAR and Edgar.

The call is webcast, I encourage those listening by phone to view the supporting slides on our website at www.enbridge.com/investor. A replay and podcast of the call will be available later today, and a transcript will be posted shortly thereafter.

The Q&A format will be the same as we’ve done most recently. The initial Q&A will be restricted to the analyst community and once we are completed we will invite questions from the media.

Finally, I’d like to remind everyone that both Pat Murray and I are available after the call, if you have any detail follow-up question.

With that, I’d like to turn the call over to Pat Daniel.

Pat Daniel

Great. Thanks, Vern, and good morning, everyone. Thank you for joining us on a very snowy Calgary day to review our first quarter results. We were very pleased to announce just a few short hours ago adjusted earnings for the first quarter of 2010 of $318 million, or $0.86 per share, which is a 16% increase in earnings per share over last year.

These results now place us well on our way to meeting our 2010 guidance range of $2.50 to $2.70 per share. Richard of course, he’s going to walk you through the results in a little more detail shortly. But first let me talk to those areas where we see some very substantial opportunities for further growth in the future.

Over the last seven or eight months, we’ve been referring really to four key areas, where we’re seeing substantial activity and potential for growth, and where Enbridge also enjoys strong strategic advantage through the existing infrastructure that we have in our proven expertise in those areas.

The areas that I’m referring to include the Alberta regional oil sounds, the ultra deep offshore oil and gas, North American oil and gas shale plays and then our newest business unit, renewable and green energy.

Let me go through those one by one, starting, first of all, in the oil sands. We’ve been very encouraged with the continued series of announcements from major producers of the advanced new or expanded projects in the oil sands, examples like Statoil. We’re ramping up operations at their Leismer site, announcements by Cenovus and Conoco Phillips are going ahead with future phases of Christina Lake.

As you’re aware Enbridge has won the business to serve both of those projects. When you add the Leismer and Christina Lake projects to our work on the Woodland Pipeline to connect Imperial Oil, Kearl project, Enbridge has now secured three oil sands related projects in less than a year.

With renewed activity and production forecast by major producers including Suncor, Husky and [Sunrise] that just to name a few, you can expect to hear more from us as we continue to pursue additional opportunities.

Our existing regional infrastructure gives us a strategic advantage in terms of being able to scale solutions to their near, medium and long-term needs. So just to give you an example of that, in the near-term, as the initial phases of large-scale projects come on stream, Enbridge is able to offer bridging capacity that minimizes capacity commitments by the customer.

And then as production grows and as new phases are brought into service, we have the ability to expand our services up to and including transportation on a fully dedicated pipeline.

This kind of flexibility is a direct result of having the most comprehensive system in the area that is very cost effective expansion options in order to accommodate new volumes as and when they come on stream.

Much like the oil sands region, there have been numerous announcements in the U.S. Gulf Coast ultra deepwater in the past year. As you know, we have announced 750 million in new projects to connect both the Jack, St. Malo and Big Foot gas projects into our existing gas pipeline systems.

As the primary transporter of ultra deep gas and a proven player in construction and operation of ultra deep facilities, we have an advantage when bidding on new projects in that area.

We continue to focus on building out significant asset base in the region and at the same time to leverage our gas expertise in an attempt to further expand our liquids transportation infrastructure in the Gulf, much like we did with the Big Foot oil pipeline.

We see substantial opportunity for not only expansion of these systems to serve new customers, but expansion of our return on our existing systems as we increase the volumes with the new connections that are being made.

The third exciting growth area for Enbridge is the various oil and gas shale plays within North America. I’m going to begin with the Bakken formation where Enbridge is already the primary oil pipeline provider. I think we’re all ware of the significant growth projections for oil and gas production at the Bakken.

Even the most conservative estimates indicate tremendous potential for companies like Enbridge and we’re actively working to expand our systems on both sides of the border. On the Saskatchewan side we placed into service a large expansion in June of 2008, and we’re currently in the midst of another $120 million expansion, which will add a further 129,000 barrels a day of capacity to that system on the Canadian side.

On the U.S. side, we placed the North Dakota expansion into service on January 1st of this year and this 51,000 barrel a day expansion has been full from day one. We have presented a number of potential capacity expansion opportunities to our producers and expect to secure anchor commitments that will support the next project in the near future on the U.S. side.

On the gas side of the shale story, we’re very well positioned to take advantage of infrastructure opportunities nearer within our current Texas footprint. So in the last few months, Enbridge partners announced two separate projects. And of course, our Texas assets are located very close to the exciting Hainesville shale play.

We’re also well connected in relation to the Montney play through our alliance pipeline, which is actively extending the reach of that system to better serve the growing gas play in Eastern D.C.

And just recently, we announced a new potential project that would transport NGLs from the Southern Pennsylvania and Northwest Virginia areas of the Marcellus play to the Aux Sable extraction plant. I think you’re aware the Aux Sable plant has approximately 20,000 barrels a day of excess production capacity that could be well serve by this pipeline.

The final growth platform, I’ll speak to is our renewable Green Energy opportunities. We’ve announced $1 billion in projects over the last seven months and we believe there is substantial opportunities in this area due to government and public support of this gradual shift to a less carbon-intensive economy.

We currently have interests in more than 560 megawatts of green generating capacity, either in operation or under construction and we’re actively working to secure additional projects, which align with our risk reward profile.

While Ontario offers a very favorable environment for investment and renewables, we’re open to opportunities in other areas where there are favorable commercial churns across North America and as you look quite broadly.

Our Green Energy business has also provided us with insight into opportunities in upgrading North America’s electrical infrastructure. New electrical transmission and distribution infrastructure is needed to relieve transmission grid congestion arising from increased green energy power generation.

Also additional gas-fired generation will be needed and added to provide power when wind and solar are unavailable. And of course, all of these investment opportunities will be of interest to Enbridge, so long as they fit into our tried and true investment triangle, which I know you’ve heard a lot about over the years.

I should also quickly mention one area of our business will grow by improving the return on its capital. In 2009, Enbridge gas distribution was able to increase its allowed rate of return above the embedded regulatory rate by approximately 120 basis points to around 9.6%, and we’re aiming to increase the premium above the embedded regulatory rate to more than 200 beeps in 2010, so rate promise an opportunity there.

All of these growth opportunities, the $6 billion that we have already secured to come into service in 2012 and thereafter, as well as the numerous opportunities we’re actively working on will allow Enbridge to achieve its target to grow EPS by 10% per year on average into the second path of the decade.

In addition, and Richard is going to speak to this in a little more detail shortly, you can assume that cash flow growth will be even stronger than earnings per share growth over the same time period and that puts us in very sound financial position.

Before turning the call over to Richard, I would also like to briefly cover status of tolls on our mainline system. In the first quarter, Enbridge reached agreement with producers on the key turns of a new incentive tolling settlement, which as you know we referred to as ITS on the Enbridge mainline system and we filed final tolls with the NEB. The new ITS is for one-year and is extendable if agreed by both parties.

I think it’s fair to say that Enbridge and its customers continue to realize significant benefits under the ITS agreement, which really reaffirms the advantages of working cooperatively and in partnership with our customers.

In relation to the tolls for the Alberta Clipper Project, the NEB has approved our interim tolls and has set a hearing date for this November to address our final toll applications and the charges made by a few of our shippers in relation to inclusion of Alberta Clipper costs in our tolls. I think, it’s fair to say that hearing of this nature is standard procedure in the context of shipper complaints regarding a carrier’s toll filings.

Similar shipper applications made to the FERC challenging Alberta Clipper tolls were rejected by the FERC near the end of the first quarter and we’re optimistic of a similar decision on the Canadian side.

So that’s a very quick review of what will drive our growth over the next several years. And let me now pass it off to Richard to review the quarterly financial results in little more detail. Richard?

Richard Bird

Okay. Thanks, Pat, and good morning, everyone. So picking up on slide 12 of the slide package for those that are following that, as Pat mentioned earlier this morning, we released our first quarter results and reported net income was $342 million, or $0.93 per share, that’s a decrease from 2009, where we reported $558 million, or $1.54 per share, but of course, this year-over-year decrease was due to the 2009 year, including the one-time gain on our sale of the investment in the Columbian Pipeline, OCENSA, which played off a $329 million after-tax gain in the 2009 first quarter.

Excluding non-recurring and non-operating factors, our adjusted earnings per share for the first quarter increased from $0.74 to $0.86, or 16%, and that’s actually slightly ahead of where we thought we would be by this time of year and puts us in a very good position to meet our 2010 guidance range. So let’s walk through each of our segments in a little more detail.

Moving on to slide 13, Liquids Pipelines, adjusted earnings rose $37 million, as compared to 2009. This 38% increase was primarily from recognition of AEDC on our Southern Lights project and within the Enbridge System from the Alberta Clipper. The Enbridge System also benefited from a higher rate base as a result of placing line for in the service last year and from operating cost savings.

The Spearhead Pipeline increased as well as a result of the expansion, which was placed into service in May of last year. It should be noted that this quarter should reflect the peak of our AEDC earnings as Alberta Clipper came into service on April the 1st, and Southern Lights will come into service in July of this year.

With natural gas delivery and services, results were slightly lower in the first quarter of 2010, primarily due to the sale and investment in OCENSA in Q1 of last year, and a decreased earnings contribution from our Energy Service business, which performed well this year, but did not have the same level of opportunities as it did last year when the commodity markets experienced greater changes in the price of oil and gas and that was allowing for more arbitrage opportunities.

On the positive side, within this segment, offshore results were once again strong and the contribution of Enbridge gas distribution was similar to the same period in 2009, even though the change in our customer billing practice where a larger portion of the customer’s bill is shifting to a fixed component and a lesser amount will be a variable, reduced earnings by approximately $7 billion for the first quarter. So earnings for EGD were flat despite that $7 million reduction from the change in the billing practice. And as you will recall, this change only affects the distribution of earnings across the year as among the quarter it has no impact for the full year on the bottom line of EGD.

In fact, as Pat mentioned and as the first quarter would bear witness to our full year results from EGD should increase significantly versus last year as we continue to generate cost savings, which in turn increase Enbridge’s return to shareholders and also increase the savings that we are passing on to our gas distribution customers.

Sponsored investment earnings continue to be very strong. Enbridge energy partners’ contribution increased by 50% year-over-year and this exceptional performance was the result of increased rates on April 1, 2009, as a result of completion of phase II of the Southern Access expansion, as well as placing into service Phase VI -- the Phase VI expansion of the North Dakota feeder system on January 1st of this year and that was ahead of schedule and on budget.

As a result of this strong performance and Enbridge energy partner’s confidence in its future cash flows, a $0.05 increase in the annual distribution was just announced. And this is very good news for Enbridge, as this is the first increase that Enbridge will be entitled to 50% of, as a result of the partnership distribution level now being in the high split range.

Alberta Clipper U.S. also favorably impacted earnings. The U.S. portion of this project was completed late in the quarter and placed into service on April 1st, so the earnings that you see in the quarter reflect 67% of the after-tax earnings of the AEDC converted to Canadian dollars. And finally corporate costs were basically in line with the prior year and consistent with our expectations.

So before I hand it back to Pat, I did want to spend a little time focusing on the strong cash flow growth that we will experience over the next few years. The expected growth in cash flow will be larger than our expected growth in earnings and that’s as a result of the fact that our depreciation is expected to be higher than the maintenance capital on our systems following our significant expansions. Depreciation up, but maintenance capital not so much.

Therefore, even as we maintain our earnings payout level at the midpoint of the 60% to 70% of earnings, our payout of distributable cash flow, which we define as funds from operations, less maintenance capital, is expected to decrease from its current level of approximately 45% to even less than that.

This will allow Enbridge to self fund all commercially secured projects as well as have the capacity to fund numerous development opportunities we have in front of us, which Pat mentioned earlier and that without the need to access the equity markets.

Thanks, everyone, for your time, and I’ll pass it back to Pat.

Pat Daniel

Great. Thanks, Richard. So let me just very quickly summarize. We’re very encouraged, not just by our success in capturing a number of new projects, but by the increasing level of activity in the key resource basins, where we have a strategic advantage. Additional growth will also come from improving returns in existing businesses, such as Enbridge gas distribution.

And as Richard mentioned, not only was this quarter very strong, but our cash flow growth over the next few years will be exemplary and will provide Enbridge financial flexibility that very few companies will be able to match over that time period.

So with that very quick summary, let’s move on to the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Robert Kwan with RBC Capital Markets. Please proceed.

Robert Kwan – RBC Capital Markets

Good morning. Just in the offshore segment. When you first announced the Big Foot Project it was term the letter of intense. I’m just wondering what the state of the agreement is today and do you see any risk to the project in light of the oil spill?

Pat Daniel

Well, first of all, let me just respond generally that from what we’ve been able to determine, Robert, the Chevron permits are valid stand and the development will proceed as scheduled. As you know, it’s early in the development of the issues in the Gulf to no longer term what the impact maybe, but we don’t expect there to be any impact on this project.

Robert Kwan – RBC Capital Markets

Okay. Is it a hard agreement or is it still in the LOI stage?

Pat Daniel

It’s still in the LOI stage at this point, Robert.

Robert Kwan – RBC Capital Markets

Okay. And then just second question, if you look at the dividend policy, you mentioned that dividend growth should follow earnings growth, and Richard, you mentioned that with the AFFO growth the payout ratio would move down. Are you considering a modest move out in the payout ratio, is that something you’d examine in the few word, what are just, some of key factors that would cause you to make, I think, I guess, would be any permanent range?

Pat Daniel

We’re comfortable with that range of 60% to 70% at this point, Robert. And, I think, you can expect to see us within that range. We always assess the appropriateness of that range relative to our peers and investor preferences. But that -- at this point, we’re comfortable with them, I think you can expect this to stay in the 60% to 70% range.

Robert Kwan – RBC Capital Markets

Okay. Thank you.

Pat Daniel

Thanks, Robert.

Operator

And your next question comes from the line of Sam Kanes with Scotia Capital. Please proceed.

Sam Kanes – Scotia Capital

Good morning, and congratulations on a strong quarter. This Marcellus NGL backhaul line, I guess, yeah, there’s room for 20,000 barrels per day in Chicago to say, but that’s an awful small line.

Are you envisioning this could possibly be rolled out with the potential of Marcellus and Sarnia as well, like backing up filling NGL requirements there or what would be the minimal size that makes economic fundamental, I guess, principle sense in the context of pipelining backwards NGLs -- raw NGLs?

Richard Bird

Sam, it’s probably too early to tell in answering most of those questions. You know, we’re seeing, of course, in the Marcellus liquids rich gas that logically positions us very well with regard to Aux Sable. That’s what we’re trying to capture with regard to announcing the potential project to determine what level of interest we are able to term up.

The potential could be there to move it northward as well rather than over to Aux Sable, but it’s far too early for us to speculate on that. It would be small diameter in that the volumes are not likely to be large at least in the near-term, but still too early to be definitive.

Sam Kanes – Scotia Capital

Okay. And second question, with respect to your increasing cash flow over earnings going forward your post 2012, going to be a great position here back in the acquisition market potentially again.

You’ve been acquiring projects pre-construction in renewals. I’d imagine, based on your principles, you did (inaudible), given that your total rates mapped. In that area or any other area or do you have an increasing focus now within renewables in general and specifically. Is there any hypothetical logic for Enbridge to pull in the Enbridge income fund 28% minority as one of your competitors or colleagues did this week?

Pat Daniel

Yeah. I’m going to -- when we come to the Enbridge income fund, I’m going to ask Richard to comment on that. Because -- but let me, first of all, just address your general point with regard to growing cash – the cash flow and therefore, well positioned for acquisition and further growth. I certainly agree with that and we’re very pleased with the way now, as a result of the project built over the last number of years, we see a very rapid escalation in that cash flow. And as you probably know from our Investor Relations presentation we pretty much doubled cash flow over that five-year period. So it puts us in a very strong position.

We are open to looking for opportunities in any one of our key areas of development and as I mentioned, we obviously have got a lot of opportunities on the liquid side and see some significant future growth particularly in oil sands region in the Bakken and on the gas side. They’re very involved in the shale play. So we’ll be looking at a number of opportunities there.

Specifically your question around renewables, we continue to like the returns. They fit well in our investment proposition and we do see a continuing number of good renewables opportunities coming at us. So we’ll be involved and possibly, as I mentioned in my remarks, looking at some areas that have come to our attention as a result of the involvement in the renewables whether it’s gas-fired power generation or distribution and transmission to release some of the congestion that has become obvious. Richard, can you comment on the income fund and…

Richard Bird

Sure. Yeah. I don’t think, Sam, there’s any prospect that we will want to be buying in the minority, if we were going, we would have done that, it would have been something we would have done instead of converting it to a corporation. So that was successfully completed on Monday of this week.

The fund is well positioned. Its unit price is strong and it does have its own organic growth opportunities, but its well position to -- continue to fund those effectively and continue to contribute growth to Enbridge through our 25% incentive share of cash flow distribution growth within that entity. So status quo looks pretty good.

Sam Kanes – Scotia Capital

Thanks, Richard. Thanks, Pat.

Pat Daniel

Thanks, Sam.

Operator

And your next question comes from the line of Andrew Kuske with Credit Suisse. Please proceed.

Andrew Kuske – Credit Suisse

Thank you. Good morning. Given the massive pipeline expansions that you’ve done over the last few years and what one competitor has done. There has been a significant movement in light to heavy differentials, which was somewhat predictable. But when you think about the light to heavy movement and really that collapsing and what we’re seeing in global refining markets with, the new-age refineries being essentially a million barrels a day and a lot of refiners in the U.S. now being regarded as just generally small. How do you think about counterparty risk? Secondly, the future movements accrueds and really that light heavy differential overtime and how that translates into tolls?

Pat Daniel

So there are a number of questions there, Andrew, and that probably could be the subject of a full day discussion, which it actually recently has been with the management team. Yeah, very significant changes in global refining and with regard to the counterparty risk, the first part of your question. I’m assuming you were referring to counterparty risk with regard to U.S. refiners in light of the changing global refining dynamics?

Andrew Kuske – Credit Suisse

Yeah. That’s correct. Especially the smaller scale ones?

Pat Daniel

Yeah. Yeah. And I think, it’s fair to say and I’m looking for Vern to response on this, that we carry very little exposure to the downstream refiners, since the majority of toll paying and commitments are with the upstream producers. Vern, can you…

Vern Yu

Yeah. That’s correct. When we do have exposures to the lower-grid -- lower-rated smaller refiners, generally we have significant credit assurance.

Pat Daniel

And so, sorry, Andrew, give me the second part of your question, also the counterparty risk part of it?

Andrew Kuske – Credit Suisse

So just on future movements, if we look ahead and there’s a glut of excess pipeline capacity out of Alberta for a period of time. The gateway foreseeable gets pushed off for a period of time, but could you give any comment truly about the viability of that and then, really with the light-heavy, how that translates into tolls?

Pat Daniel

Yeah. So we continued to be comfortable with the economic case that can be made for gateway, as our customers and shippers and you’re right. The light-heavy differentials have come in significantly. And probably will stay tight for a very long period of time due to the success now of downstream, heavy crude processing capacity. And until we see a very significant uptake in bitumen production in Western Canada, it will keep differentials very narrow.

But we do see still a significant offshore premium for Canadian crude oil and the ability to move into another market and improve the negotiating leverage that Canadian producers have with U.S. -- their U.S. customers and refiners. And we have undertaken third-party reviews of our theories around that pricing and have also confirmed them with our customers and the expectation is that the economics remain attractive of being able to reach the offshore markets for that reason.

Andrew Kuske – Credit Suisse

And then just finally if I may, just on, the declines on the Enbridge system from Spearhead from Q4 to Q1, is that just largely relate to the line fill activities on Keystone?

Pat Daniel

Or is that at least what you believe? Let’s see, Vern or Colin, can you…

Colin Gruending

Yeah. So, Andrew, it’s Colin, so just looking in the highlights section of the news release, we’ve been referring to Spearhead volumes, 112,000 barrels a day, which is actually up from Q1 of last year.

Vern Yu

And down from 129 in Q4 of ‘09.

Colin Gruending

Yeah. It does very little bit with season and with the various contracted shippers movement. But I think you can attribute some of that to the line fill issue.

Pat Daniel

Probably Keystone and Clipper line fill would be part of it, Andrew, yeah.

Andrew Kuske – Credit Suisse

Okay. Appreciate that. Thank you.

Operator

(Operator Instructions) And your next analyst question comes from the line of Matthew Akman with Macquarie. Please proceed.

Matthew Akman – Macquarie

Thanks a lot. On April 1st Aux Sable booked $7 million of earnings versus $6 in the prior year. I’m just wondering if the $7 reflects some holdback as you usually do until year-end?

Pat Daniel

Vern.

Vern Yu

Yeah. It does, Matthew.

Matthew Akman – Macquarie

Approximate magnitude?

Vern Yu

For the full year, on a worst case basis, you should expect the Aux Sable earnings will come in in line with 2009. And there is still upside available to us beyond that.

Matthew Akman – Macquarie

Okay. Thanks. In terms of the capacity you have on Alliance Pipeline, can you remind us how much capacity that is and when that expires?

Pat Daniel

Enbridge’s capacity -- do you have that number, Vern?

Vern Yu

Are you looking for Enbridge’s capacity or total capacity?

Matthew Akman – Macquarie

Enbridge capacity, because you disclosed obviously in Energy Services, there’s been a bit of downdraft on the value of the capacity that Enbridge actually owns?

Pat Daniel

We have to get back to you on that one, I think, Matthew. That’s okay. Because Vern, we’ll have to give you a call back after.

Matthew Akman – Macquarie

Was it material in the quarter?

Pat Daniel

No.

Vern Yu

No.

Matthew Akman – Macquarie

Okay. Thanks. Because you did talk about it in the disclosure, so that’s why I’m raising it. That’s all I have. Thanks.

Pat Daniel

Okay. Thanks, Matthew.

Operator

And your next question comes from the line of Bob Hastings with Canaccord. Please proceed.

Bob Hastings – Canaccord

Hi. Thank you. The Bakken play is really obviously developed into a very large significant opportunity for you and we’re seeing some expansions around that. One of the regulatory principles in Saskatchewan prior to that was that the reserves weren’t that great in the area and as a result, there were incentives for companies or Enbridge to put in gathering systems, which you absolutely needed. I’m just wondering, with the development of the Bakken play, do you see any changes to the regulation there to reflect the change level of reserves?

Pat Daniel

I don’t think there is any indication of changing regulation Bob, no. As you know, there’s a great deal of optimism around, short, medium and long-term. And I haven’t heard any indication of regulatory change. I’m not, Richard, do you…

Richard Bird

I’m not aware of anything and, there’s a pretty hot competition between Saskatchewan and North Dakota on the Bakken, so I doubt that Saskatchewan would want to do anything to discourage further development on the north side on the border.

Bob Hastings – Canaccord

Yeah. No. It’s more or less on the pipeline pulls that could actually come down, given the, given that there doesn’t need to be the fast depreciation rate?

Pat Daniel

No. I rather doubt that there’s such a clamoring for incremental pipeline capacity right now, that I think the producers are doing everything they can to incent us and others to ensure that we’ve got capacity in place for them on time and on budget. So I sure haven’t heard anything that way, Bob, but I’ll follow-up on it and either myself or Steve Wuori will give you a call back.

Bob Hastings – Canaccord

Okay. Thank you, Pat. I appreciate that. And just a general question. On gateway, you’re into the process now, originally or not originally, but you had an agreement with the some of the producers and refiners to fund that development work in $100 million. I’m just wondering if we’re through that yet and what the process is if we go beyond that. Hard to believe we can go through $100 million, but I guess we can?

Pat Daniel

Yeah. Richard, can you respond to that?

Richard Bird

Sure. Yeah. You know, we’re not through the $100 million, Bob. That $100 million was intended to be sufficient to take us well through the approval process, not justice up to the filing point. So we wouldn’t have used it all up. It may ultimately require more than that to get to the finish line on the filing process. But at the moment, we still have cash in bank.

Bob Hastings – Canaccord

Okay. Great. Thank you. One last question, Richard. On IFRS, have you made a decision on whether you’d go that way, we had one utility in Canada to say this week that they were going to go to U.S. cap and avoid that IFRS issue, at least for now?

Richard Bird

Yeah. I noticed that this morning in your notes, Bob. But, no, we’re still on course and our intent is to go the IFRS route.

Bob Hastings – Canaccord

Yeah.

Pat Daniel

With the caveat that we continue the monitor IFRS with respect to rig regulated accounting, which we expect will ultimately be resolved in a favorable direction, but that’s our course.

Bob Hastings – Canaccord

Yeah. That would be great if it was. If not, have you looked at, what impacts that might have given the difference we’re seeing in rate regulatory accounting and IFRS at least and then referring to the balance sheet here?

Pat Daniel

Yeah. We have looked at it. We’ve looked at it very closely and we’ve also have reserved the potential to go to U.S. cap if we conclude that we’re not going to get rate regulated accounting.

Bob Hastings – Canaccord

Okay. Great. Thank you. I appreciate that.

Pat Daniel

Yeah. Thanks, Bob.

Operator

And your next question comes from the line of Petro Panarites with CIBC World Markets. Please proceed.

Petro Panarites - CIBC World Markets

Thank you. Good morning. Just back to Aux Sable for a second. Can you give us an update, please, on the extent of the hedging you have in place for 2011?

Richard Bird

We have about 25% of 2011 hedged right now, Petro.

Petro Panarites - CIBC World Markets

Okay. So do you think you’re going to step that up in the near-term and lock it in, give more frac spreads are? And, suppose you did that today, what kind of margin or year-over-year margin comparison would we see in ‘11?

Richard Bird

We look at that frac spread every day and look at whether we want to lock it in pretty much on a daily basis. Right now, if we were to lock in ‘11, it would be slightly below where we are in 2010, so we haven’t found that to be attractive quite yet.

Petro Panarites - CIBC World Markets

Okay. Thank you.

Operator

And your next question comes from the line of Steven Paget with FirstEnergy. Please proceed.

Steven Paget – FirstEnergy

Good morning, everyone. On possible gas-fired power generation transmission and distribution investments, would these be long-term tolling arrangements or power purchase agreements and where might these be located?

Pat Daniel

Very early to say, with regard to the latter part of it, Steven, we just have noticed some opportunities, as I think most have and the market has in general with regard to areas of congestion as a result of a lot of the renewable development and they would not be merchant. They would be long-term agreements very similar to and fitting within the Enbridge investment proposition.

Steven Paget – FirstEnergy

And located somewhere in North America then?

Pat Daniel

Yeah. Yeah. Sorry. That would be in North America.

Steven Paget – FirstEnergy

Okay. Thank you.

Pat Daniel

Thank you.

Operator

And your next question comes from the line of Sam Kanes with Scotia Capital. Please proceed.

Sam Kanes – Scotia Capital

It has to do with your commentary that oil storage and transportation margins were down. Could you describe, with the progress of what’s happening in the oil sands, how long of a cyclical low you’re expecting? Is it supply and demand classic commodity storage until such time as demand exceeds supply again or how does that roll out or perhaps some kind of color to that would be helpful?

Pat Daniel

Sam, are you referring to the light-heavy differentials and…

Sam Kanes – Scotia Capital

No. I’m referring to your own infrastructure, which, at least that’s how I read it in your press release and maybe I read it wrong that?

Pat Daniel

Vern, can you respond?

Vern Yu

Sam, I think, you’re referring to the quarter-over-quarter.

Sam Kanes – Scotia Capital

I am.

Vern Yu

Gross margin at the Energy Services solution.

Sam Kanes – Scotia Capital

Yeah. I am.

Vern Yu

2009 was an exceptional year for that group, because there was a tremendous amount of entanglement in the market in the first quarter of 2009, and so we were able to effectively book significant profitability without taking any risk just through the Contango and the Kearl. And that’s pretty much the bulk of the difference between Q1 2010 and Q1 2009.

Sam Kanes – Scotia Capital

Okay. So it’s not a supply and demand thing. It’s just simply the curve has flattened out relative to job opportunities?

Vern Yu

Yeah.

Sam Kanes – Scotia Capital

Got it. And congratulations to your Clipper coming in on time on budget. Could you give a very brief overview of everything else that’s going on in progress on time, on budget, any under run potential or overrun for that matter for all of your other projects?

Pat Daniel

I think it’s fair to say that everything that we’re involved in, we’re either on or under budget and I, Verne is just having a quick scan through.

Vern Yu

For Southern Lights, Sam, we’re now expecting to come into service in July. So it’s well ahead of budget.

Sam Kanes – Scotia Capital

In terms of time schedule?

Pat Daniel

And I think Clipper U.S. is coming in at or slightly under budget. So, I think, things are looking very good on that front, Sam. We think back to the time when we’ve reorganized and established that major project management function in order to ensure that we had very effective control on the scheduling and costs on that huge capital program that we had underway and we’re very pleased what we are in, which we set that up and the outstanding work that that group has done and keeping us on schedule and on budget.

Sam Kanes – Scotia Capital

Yeah. Remember the issue with Moody’s. Last for me, IFRS, I guess, we’re going to shift to some form of, if we have presentation a year from now and if you do move forward with IFRS, would you show cash flow, cash flow is cash flow.

I’d imagine, in terms of restructuring your presentation to the investment community, you must have some thoughts on that by now. How would it look in Q1 ‘11, if when I ask in terms of presentation?

Pat Daniel

Colin, do you want to take that.

Colin Gruending

Yeah. Thanks, Sam. Yeah, precisely, the cash flow is cash flow under any of these GAAPs whether it’s IFRS or U.S. GAAP or Canadian GAAP. So that’s important to remember.

Presentation-wise, there maybe a few balance sheet extra lines. Things like pension assets or derivatives, things that are broken up in their own lines, but by and large the financials should look pretty similar to what you’re used to. Any (inaudible) things we’ll try to breakout for the investment community in our NB&A and adjusted payable.

And you’ll likely see enhanced disclosures consistent with what the experience has been elsewhere in the world so far in the IFRS. Does that help?

Sam Kanes – Scotia Capital

Yeah. It helps. Thanks Colin.

Pat Daniel

Thanks Sam.

Operator

And your next question comes from the line of Linda Ezergailis with TD Newcrest. Please proceed.

Linda Ezergailis – TD Newcrest

Thank you. Just a follow-on question from Steve’s with respect to your renewables. Would potentially a corporate transaction serve to bolster growth in your renewables or would you see direct investments in assets and projects as more attractively valued?

Pat Daniel

Generally speaking, the latter and we see the investments at the project level to be most economically attractive at this point in time. That doesn’t mean to say that we wouldn’t do a corporate acquisition on the renewables side.

But generally speaking, it has worked best to come in and buy at the project level. And we’ve had very good success in doing that. So that tends to be where we’re looking most right now.

Linda Ezergailis – TD Newcrest

And geographically in North America, that’s a pretty broad scope. Are there any highlight regions that are of most interest to you?

Pat Daniel

Well, it’s easy to narrow down in the renewables business because you tend to go where the state or provincial incentives either through feed-in tariffs or some level of subsidization make the projects economic. So that’s obviously screening criteria number one.

Number two, we like to be as close as we can to our existing operations. We’re prepared to step out from that for the right opportunity but we do like to operate these facilities and hence, as you probably know, we’ve tended to cluster them around existing Enbridge operations. But the incentive structure, the government incentive structure is probably the most critical part of it.

Linda Ezergailis – TD Newcrest

And where would you have build opportunities for transmission and distribution without buying into an existing utility franchise?

Pat Daniel

Well, on that issue, I would suggest that more likely it would be a buy into existing rather than a Greenfield and we would be looking for some expertise in getting started in the business. I thought you were referring to the renewables as in wind and solar where we tend to buy at the project level rather than corporate level.

Linda Ezergailis – TD Newcrest

No. I was referring to that. Okay. Thank you. And just a follow-up accounting question maybe for Richard. Can you confirm that your first quarter earnings on your Enbridge System were booked to reflect the new ITS agreement as well as reflect the original 2007 proposed tools on the Alberta Clipper, Canada?

Richard Bird

Colin, can you help me with that one?

Colin Gruending

Yeah. The answer is, yeah, to both, Linda. Clipper entered service April 1, so it’s not a Q1 issue in anyway. So, it’s, yeah, I think you have it right.

Linda Ezergailis – TD Newcrest

Okay. Thanks.

Pat Daniel

Thanks Linda.

Operator

And next we will take questions from the media. (Operator Instructions). And your first media question comes from the line of Carrie Tait with the National Post. Please proceed.

Carrie Tait - National Post

Good morning. Thanks for taking my question. I just have two big picture questions. I’m hoping you can expand a little more on what you think the fallout in the Gulf of Mexico will be following the spill?

Pat Daniel

Carrie, that’s really hard for me to comment on at this point. As you know we’re not a producer, driller and operator and hence, I think, I best leave that comment to any one of our customer companies around town who would be more knowledgeable. So it’s very hard for us to tell at this point.

Carrie Tait - National Post

Okay. And my second question, I’m just wondering what steps you’re going through right now to get your gateway opponents on side?

Pat Daniel

Well, we’re working very closely with land owners and with interested parties right across the extent of the system. And in constant consultation, working with them to try to make them aware of the opportunities available to them as a result of gateway and to try to address concerns that they might have with regard to the environmental issues around a major construction project like this and the offshore tanker traffic. So I won’t say we’re in constant meetings, but we certainly are in weekly meetings with various interest groups across the entire system.

Carrie Tait - National Post

Are you finding that there is one specific area of concern that you keep bumping up against or is it just more general sort of just say no blanket approach they’re taking?

Pat Daniel

Well, I think the primary concern, as we see it, is oil tanker traffic off the West Coast and that is the primary issue, the one that’s brought to our attention most often.

Carrie Tait - National Post

Okay. Thank you.

Pat Daniel

Thanks Carrie.

Operator

And your next question comes from the line of Jeff Lewis with Venture Publishing. Please proceed.

Jeff Lewis - Venture Publishing

Hi, gentlemen. Thanks for taking my call. I just had a couple quick questions again with regard to the Pacific exports. First, what signals or interests have you received from upstream producers that they’d like to see this project go forward?

And secondly, I was hoping you could talk about how involved Chinese refiners or other sort of Asian receivers of product are in getting this project off the ground.

Pat Daniel

So, Jeff, I guess, to answer the first part of it, probably the most obvious signal that we’ve got from upstream producers, in addition to just general support, is the fact that they’re providing this $100 million worth of funding that was referred to in order to take the application through the approval phase.

And I think that represents a pretty big commitment from them and it gives them the right up to 50% of the capacity on the pipeline, as well. So we see strong engagement from that group and strong support for the concept. That’s the most obvious and quantifiable signal. Obviously, we continue to have discussions with producers and find strong support even for those that aren’t in the group.

And secondly with regard to downstream and Asian refiners, we do have interest. And the way that I have phrased that in the past that we have interest all the way from Japan to Singapore and various points in between, we’re not able to disclose the signatories to the sponsoring support packages that we have but it is broad Asian support for the project.

Jeff Lewis - Venture Publishing

Okay. Can you disclose who’s behind the $100 million?

Pat Daniel

No. We can’t. It’s subject to CIA, I would, a confidentiality agreement. I’m assuming that at some point during the two-year regulatory process with the National Energy Board, that would be disclosed.

Jeff Lewis - Venture Publishing

Okay. Thank you.

Pat Daniel

Thank you.

Operator

And this concludes the question-and-answer session of the conference today. I would now like to turn the call over to Mr. Vern Yu for closing remarks. Please proceed.

Vern Yu

Well, thank you very much, everyone, for participating today and I’d just like to remind you that both Pat, Murray and I are available now for any other follow-up questions. Thanks.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. And have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Enbridge Inc. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts