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Executives

Vern Yu – VP, IR and Enterprise Risk

Pat Daniel – President and CEO

Richard Bird – EVP, CFO and Corporate Development

Colin Gruending – VP and Controller

Analysts

Carl Kirst – BMO Capital Markets

Ted Durbin – Goldman Sachs

Sam Kanes – Scotia Capital

Bob Hastings – Canaccord Genuity

Matthew Akman – Macquarie Capital Markets Canada

Robert Kwan – RBC Capital Markets

Andrew Kuske – Credit Suisse

Linda Ezergailis – TD Newcrest

Andrew Fairbanks – Banc of America Merrill Lynch

Pear Macquarie [ph] – Dave Sutton [ph]

Petro Panarites – CIBC World Markets

Justin Amos [ph] – August Media [ph]

Carrie Tait – National Post

Scott Haggett – Reuters

Enbridge Inc. (ENB) Q2 2010 Earnings Call Transcript July 28, 2010 9:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Enbridge Incorporated second quarter 2010 financial results conference call. I would now like to turn the meeting over to Mr. Vern Yu.

Vern Yu

Thank you and good morning, and welcome to Enbridge Inc.’s 2010 Q2 earnings call. With me this morning are Pat Daniel, President and Chief Executive Officer; Richard Bird, Executive Vice President, 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 this call. By its nature, this information applies certain assumptions and expectations about future outcomes, so we remind you that it is subject to risks and uncertainties affecting every business including ours.

Our slides include a summary of the most significant risk factors that may affect future outcomes for Enbridge. There are more fulsome public disclosure filings available on these risk factors on SEDAR and Edgar.

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

The Q&A format will be as follows. The initial Q&A is restricted to the analyst community and once completed we will invite questions from the media. May we suggest if your questions are related to detailed updates on the leak remediation of our 6B pipeline, you save those questions for our press conference, which will take place at 10:30 a.m. Eastern Time, and that call is specifically designed to update everyone the status of the situation.

I would remind everyone, the number for that conference call is 1-800-638-4930 and the pass code is 54993380.

I would also remind everyone that Pat Murray and I are available after the call for any detailed follow-up questions.

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

Pat Daniel

Thank you, Vern. Good morning, everyone, and thank you for joining us for the review of our second quarter results. Before we get into our Q2 numbers, I want to address our continuing response to the leak on our 6B pipeline near Marshall, Michigan. Put simply, this is a serious incident and we are treating it as a top priority not just within Enbridge Energy Partners but of course across the Enbridge organization.

I'm currently in Battle Creek, Michigan near the leak site with the Enbridge emergency response teams that are working to get on top of the situation. You can find the details and the latest information regarding the leak and our response on the Enbridge Energy Partners’ Web site, but I'm going to give you just a very high-level overview here this morning.

By way of background, on the morning of July 26, we had the leak from line 6B. Our initial estimate showed that about 19,500 barrels of oil leaked and oil entered a local tributary to the Kalamazoo River and then into the river itself.

We are dedicating all of the resources necessary to contain and begin cleanup of this leak and we are working very closely with local state and federal regulators and emergency response authorities under what is referred to us a unified command structure. Our emergency response teams are working round-the-clock to contain this leak and begin to clean up the oil.

As always, of course, the safety of people and the protection of the environment and wild life are our highest priorities. We are working with the US Environment Protection Agency, the Michigan Department of Environmental Quality to assess the impacts of the leak. We also will work closely with them and with the community to complete the environmental cleanup to their satisfaction and to our highest standards.

As I committed earlier, Enbridge will do what it takes to make this right. We are also working with federal and state authorities to investigate and determine the cause of the leak and we do not expect to know that cause for several weeks.

As Vern indicated, we will be holding a press conference about the incident in Marshall following this call at 10:30 Eastern Time, and I encourage you to phone in if you would like further details about the leak and Enbridge’s response to that.

So with that brief overview, what I would like to do now is to proceed to our quarterly results. As you’ve all read this morning, adjusted earnings per share were $0.63 for the second quarter of 2010 and $1.49 year-to-date compared with $0.54 and $1.28, respectively in 2009. So based on this year-to-date performance, we are likely on track now for the upper half of our 2010 guidance range of $2.50 to $2.70 per share, and that again is an adjusted earnings by year-end.

Turning back now to the first half of the year. We placed into service two of the largest projects in the history of Enbridge; Alberta Clipper, a $3.6 billion expansion of our mainline crude oil system went into service on April 1, and the project was on schedule and on budget; Southern Lights, which is a $2.2 billion northbound diluents return line went into service early in July and it was also completed ahead of schedule and within its revised budget.

As I'm sure you’d have noticed, the last two months have also been very busy on the business development front here at Enbridge. We've recently announced projects in the Alberta regional oil sands area within our gas gathering and processing business and within our green energy portfolio. So let me just spend a few moments recapping what we have accomplished in a relatively short time in each one of those areas, beginning with the Alberta oil sands region.

The series of new project announcements over the last 12 months builds on our very strong existing asset base, namely the Athabasca and the Waupisoo pipelines. These capital announcements began with us being awarded the Woodland pipeline, which will serve the Kearl oil sands project. This pipeline has an estimated cost of approximately $500 million and expected to be in service by late 2012.

We've also won the business for the Cenovus expansion at Christina Lake where we’ve being contracted to add $250 million of lateral and terminal facilities connecting the Christina Lake project to our Athabasca pipeline and the planned-in service date for those facilities is 2011 for our facilities.

In June, we announced a $400 million expansion, 255,000 barrels per day of our Waupisoo pipeline, which was originally placed into service only two years ago, of course in (Technical Difficulty). This expansion demonstrates our ability to expand our systems on a very cost competitive basis.

The Waupisoo pipeline expansion will be delivered in phases, providing 65,000 barrels a day of additional capacity in the second half of 2012, and then further approximately 190,000 barrels a day in the second half of 2013.

The expansion is back-stocked by new shipper commitments, which allow for a three-year ramp up to the full commitment level and, then of course, with the corresponding ramp up and returns for Enbridge. We do expect to secure further opportunities in this region as shippers look for increasing or new capacity along the way.

We're also very excited about our opportunities in the Bakken oil shale region and we expect that our strong existing asset base will enable us to secure further expansion opportunities beyond those currently under construction and those that have recently been completed in the Bakken that we’ve reported on earlier.

We've also made very solid progress in our gas business and as you probably know, today we announced a $680 million acquisition of the Elk City Gathering and Processing system, and that's within the Panhandle region of Texas and southwest Oklahoma. This acquisition will be accretive to the partnership earnings and cash flow once integrated with the partnership's Anadarko system.

The assets are immediately adjacent to our existing Anadarko system and they provide us with additional processing capacity that can immediately be used to process liquids rich gas coming from the Granite Wash. So this does have benefit right from the get-go. The Granite Wash is a liquids rich-type gas play, which has had resurgence recently due to the improved horizontal drilling technology now in regular use.

This acquisition combined with the announcement earlier this year of the $140 million expansion of EEP’s East Texas assets into the Texas Haynesville as well as the announcement in April that EEP would be constructing a cryogenic processing plant on its Anadarko gathering system brings the announced capital in this region to almost $1 billion.

Also within our gas business, we are continuing to work at generating improved returns for shareholders and increased costs savings for our customers at our gas distribution franchise in the Toronto region. We anticipate that we will be able to increase our return at EGD above the allowed rate of return by approximately 200 basis points by the end of this year as a result of that agreement, which benefits not only us but our ratepayers as well.

The third area that we've announced number of projects is within our green energy portfolio. So in the last 10 months, we've announced almost $1.5 billion worth of projects, all of which will be in service in late 2011; and some as early as later this year.

Just as a very quick reminder, we announced the first 20 megawatts of the Sarnia solar project back in October of last year. Then very shortly after that with the original face up and operating, we announced that we plan to expand the site by another 60 megawatts by the end of 2010. So at 80 megawatts, this $400 million solar facility will be the largest photovoltaic solar farm in North America and it’s now forecast to be in service ahead of schedule on or around the beginning of October of this year.

We also announced Enbridge’s two most recent Ontario wind investments, the Talbot and Greenfield and projects. Each will have the capacity to generate approximately 100 megawatts of power and the total cost of the two facilities is $285 million and $275 million, respectively. Talbot is scheduled to be in service by the end of this year, and of course Greenwich will be in service by the end of 2011.

Just a few weeks ago, we’re very pleased to announce Enbridge’s first green energy project in the United States; the Cedar Point Wind Project, which is located near Denver, Colorado will have about 250 megawatts of green energy generating capacity and it will cost about $0.5 billion. Enbridge considers this project to be a beachhead in our US green energy portfolio and we are actively working on additional projects.

We are pleased with the volume of green energy investment projects we’ve secured and the fact that we’ve been able to replicate our business model for all of these projects. We’ve ensured that the risk and return profiles of these projects closely match that of our existing liquids and gas pipelines.

Through the use of fixed EPC contracts, long-term operating and maintenance agreements, and long-term power purchase agreements with highly creditworthy counterparties, we believe that we've accomplished this goal and at the same time generating returns in the range of 11% to 13% return on equity.

So with that review of what has been a very busy half year, let me pass it off to Richard Bird to review the quarterly financial results in a little more detail. Richard?

Richard Bird

Thanks, Pat, and good morning everyone. I'll pick up on slide 13 for those of you that are following along on the slide deck. And as Pat mentioned earlier this morning, we released our second quarter results, and year-to-date reported net income was $480 million or $1.30 per share, a decrease from 2009 where we reported $951 million or $2.62 per share.

This year-over-year decrease in our GAAP earnings was due to 2009 including the one-time very substantial gain on our sale of our investment in the Columbia Ocensa pipeline that was $329 million, as well as the impact of non-cash mark-to-markets on our foreign exchange and interest rate hedging programs and warm weather in the Toronto area.

So excluding those one-time and non-operating factors, our adjusted earnings per share for the second quarter and the year to date are both up by about 16%. This is ahead of where we thought we would be by this time of the year and although we don't expect to sustain this rate of growth through the second half we are confident that we will be solidly in the upper half of our guidance range for the full year.

I’ll just take a few moments now to walk you through the main drivers within each segment moving on to slide 14. Liquids Pipelines adjusted earnings rose $36 million in the quarter and $73 million year to date compared to 2009. These increases were primarily from recognition of allowance for equity funds used during construction on our Southern Lights project and within the Enbridge system from Alberta Clipper prior to its April 1 in-service date. In the second quarter, Alberta Clipper was placed into service and this combined with operating cost savings contributed to the improved results within the Enbridge system.

Spearhead Pipeline increase was a result of the expansion which was placed into service in May of last year as well as the recognition of makeup rights on that pipeline, which expired in the second quarter and were recognized in earnings.

Enbridge’s regional oil sands infrastructure results improved due to additional investment in infrastructure and higher volumes.

Within Natural Gas Delivery and Services, results were slightly lower than in 2009 primarily due to the sale of our investment in Ocensa in the first quarter of 2009 and decreased earnings contribution from Energy Services, which did not experience the same level of opportunity this year as it did in 2009 when commodity markets experienced extreme changes in prices which allowed for more arbitrage opportunities.

On the positive, Enbridge Gas Distribution continues to increase its overall return. EGD results improved in the quarter and year to date, even though the change in our customer billing practice where a larger portion of their customers’ bill will be a fixed component and a lesser amount will be variable that should have reduced earnings by approximately $6 million year-to-date. So the growth has more than overcome that headwind, but headwind as it applies to the first half of the year, but as you will recall, this rate change only affects the distribution of earnings across the year. It has no net impact on the bottom line of EGD. So we will make that up in the second half.

In fact, as we had guided late last year, EGD should increase significantly on a year-over-year basis versus 2009 as we continue to generate additional operational savings, which in turn increase Enbridge’s return to shareholders as well as savings to our customers.

Sponsored Investments earnings continue to be very strong. EEP’s contribution increased by 15% in the quarter and up by 27% in all year-to-date. This performance was a result of increased transportation rates as a result of the completion of Phase II of Southern Access in 2009 as well as the first quarter earnings from the Alberta Clipper project.

In addition, EEP placed into service the Phase VI expansion of the North Dakota feeder system in the Bakken; Pat mentioned earlier, that was placed into service in January of this year and it has been absolutely at full capacity every day since it went into service in January.

These positives were mildly offset by decreased performance within the gas segment of EEP due to decreased volumes as a result of lower drilling activity. As a result of EEP’s continuing strong performance of positive outlook, they have increased their quarterly distribution once again. This announcement increases the distribution by $0.025 per quarter per unit and when combined with the $0.05 increase announced in the first quarter – that was $0.05 for the full year, $0.0125 for the quarter – represents altogether a 3.5% increase since last year.

As we noted last quarter, Enbridge will be entitled to 50% of the increase in the underlying distributable cash flow that supports that distribution increase. That flows through our incentive distribution rights as a result of the partnership distribution level now being in the high split range, and that's over and above our pro rata 25% share of the distribution increase that will flow to us on our limited partnership interest in EEP.

Alberta Clipper US also positively impacted earnings as the US portion of this project was placed into service on April 1 of this year. The earnings within the quarter reflect Enbridge’s 67% direct interest in the after-tax earnings from Alberta Clipper US and year-to-date earnings also reflect our share of the AEDC booked in the first quarter on that direct interest.

Finally, corporate costs were higher than last year due to increasing financing costs.

Before I pass the call back to Pat, I should also quickly mention that we have had some important announcements from the Canadian Accounting Standards Board. Just yesterday, they announced that subject to finalization of an exposure draft, they will offer a two-year deferral for adopting IFRS, the qualifying entities with rate regulated activities. Enbridge is a qualifying entity for purposes of this deferral, and although we have made very strong progress on our IFRS conversion project we have decided to opt for this deferral.

This decision was made given the continuing uncertainty with respect to the application of IFRS to the rate regulated operations of the company. We've been actively supporting the standard setting body, the IASB, International Accounting Standards Board, to clarify the future of regulatory accounting within IFRS. We also know that many of you have helped us with this work and we greatly appreciate that support.

In July of this year, just last week, the IASB decided to continue its rate regulated activities project with the intention to potentially create an accounting standard but the timing of that is quite uncertain and there has been no guidance provided in the interim as to how first-time adopters would adopt IFRS with any kind of rate regulated accounting.

So with this in mind, we've decided to defer any transition to IFRS. Once more clarity is gained on the rate regulated standard within IFRS, if any, Enbridge will then decide whether IFRS or possibly US GAAP would be the better way to communicate our results to investors and analysts in the future. So no changes to our reporting in 2011 and we will keep you advised as we move through this deferral period.

Thanks everyone for your time this morning, and with that I will pass it back to Pat for a few wrap up comments.

Pat Daniel

Thanks, Richard. So just to very quickly summarize, Enbridge’s first half results were very strong and puts us in great shape to achieve the upper half of our 2010 guidance range.

In Liquids Pipelines, we’ve announced a number of additions to our Athabasca regional oil sands infrastructure. In Gas Transmission, we've announced new projects and acquisition in the Texas Shales. In our green energy business, we've expanded our wind power footprints in Ontario and the US, and we will soon be placing the largest photovoltaic solar project in North America into operations.

So looking forward, each of our business segments hold significant additional growth prospects and we are actively working to lock up those opportunities right now.

Lastly, as I mentioned, we will be holding an update at 10:30 Eastern Time this morning to give you a more fulsome review of the leak remediation status and we do encourage you to attend that conference call and any related questions please feel free to bring them forward at that time.

So at this point, we can now move on to the Q&A session.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Carl Kirst of BMO Capital Markets. Please proceed.

Carl Kirst – BMO Capital Markets

Thank you. Good morning everybody. Pat, you guys have great deployment of capital here on the green energy side as you indicated $1.5 billion over the last 10 months. As we set this beachhead into Colorado what do you think the size of the US green market is that you guys are targeting in, and as far as region is it primarily in and around the Rockies or is the US wide open in your mind?

Also give us a sense of context again over the last year we’ve seen a lot more shift into the green spaces. Differentials on natural gas have continued to remain relatively low. We’ve seen the cross pipeline kind of segue out. Do we see a lot more opportunities over the next few years in the green space versus, say, for instance the natural gas pipeline space?

Pat Daniel

So, lot of questions there, Carl. Let me address them as best I can and just follow-up if I missed some of your points. First of all, with regard to regions, we initially when we first started looking at the US, we were trying to be close to our operations, but that was back a number of years ago before we built up a level of expertise in the relationships that we’ve got. So we no longer feel it’s necessary to be near existing Enbridge operations, oil or gas pipeline operations.

So that pretty much opens up the US, as you know the primary issue when looking at green energy projects is to find jurisdictions where the level of support will make the projects economic and so that is the primary – obviously you need to be in a good wind regimen. You need to look very closely at the transmission capacity out of the region to make sure there aren’t transmission limits or at least opportunities to build incremental transmission facilities.

So, probably will depend with us more on relationships with companies like RES Americas who we had a good relationship within Canada, and had now extended that to the US than a specific geographic region. There is no doubt that we are convinced that the trend and move to a more renewable energiesly [ph] in North America and in the world is well underway. We are very pleased strategically that we were into this business at an early stage and built up a level of expertise that now allows us to take advantage of that.

So even though and you referred that to look across in the gas business, even though there might not be as many long haul gas transmission opportunities today where we do still see a lot of local opportunities in gas processing and transmission like the Anadarko acquisition, but for sure the green energy business is growing very, very rapidly for us and we expect to continue to –

Carl Kirst – BMO Capital Markets

Okay, thank you. I will jump back in queue.

Pat Daniel

Okay.

Operator

Your next question comes from the line of Ted Durbin of Goldman Sachs. Please proceed.

Ted Durbin – Goldman Sachs

Hello. Can I just ask about the Bakken opportunity? If you are looking at the amount of oil drill that’s going on there, do you see another upside in terms of the amount of infrastructure that will be need on the oil side? Then just on the natural gas liquid side, you had a couple project announcements fairly recently for pipeline capacity to take NGLs out. Is that something that you could compete for, just speak to the Bakken a little bit more?

Pat Daniel

Yes. So maybe I will address the Bakken from two points of view, Ted, first of all, oil and then come back and address the NGL part of it because that probably relates as much to our Alliance Pipeline operations. But first of all on the liquid side, we completed an expansion as indicated in mid-January of this year through North Dakota that was fully scribed immediately and has been running at capacity. We are in the process right now of trying to secure commitments to a much larger expansion over the Bakken and expect to proceed with an open season at some point in time when we got the right level of support.

We definitely agree with your general premise that production is going to increase significantly and there will be further expansion required. We also are just completing an expansion on the Canadian side of the Bakken and that will guide into service later this year, so significant ramp ups in our capacity out of both of those areas.

To come back to the NGL, the associated gas coming out of the Bakken being liquids rich is very attractive to Alliance because of its downstream processing capacity and pretty attracted to the producers to use Alliance. So we are looking at and working on to interconnect to bring that natural gas into Alliance which runs right through the Bakken as you know.

Ted Durbin – Goldman Sachs

Okay, thanks very much.

Pat Daniel

Thanks, Ted.

Operator

Your next question comes from the line of Sam Kanes of Scotia Capital. Please proceed.

Sam Kanes – Scotia Capital

Thank you. Curious about your financing position at the moment, (inaudible) restructure something you’ve given us in the past, obviously a heck of a lot of activity here last little while with respective to moving target, including the $680 million this morning of which a fraction, of course is yours. You came in last quarter with about $1.1 billion of free equity requirements, surplus I guess, obviously has been used up some. Just curious about where your position is now and you said you can kind of address that.

And EEP, how are they with financing, maybe some granularity about the synergies that could come out of that? That’s my question, I guess, or pieces thereof.

Pat Daniel

Okay. Thanks, Sam. Maybe I will have Richard speak to that. Richard, can you give an overview on an update on the financing plan relative to these recent activities?

Richard Bird

Sure. So let’s start with EEP. EEP will require additional equity to support its investment in the acquisition that was announced this morning and that’s been conveyed in prior EEP Investor Relations communications that once additional assets and growth were on the table, there would be a need for equity. EEP has a number of options for how it accomplishes that. It’s got a aftermarket offering program that is used a little bit in the first half of the year to issue shares directly on the stock exchange, so it has the option of ramping that program up.

It also has been receiving reserve inquires from intuitions for significant blocks of stock and it could respond to those reserve inquires. There will most likely be a public offering of some size to cover a part of the equity requirements for that acquisition at some point in the future. EEP has plenty of liquidity at the moment, so it’s got lots of flexibility to finance the acquisition in the interim while it puts in place the equity required to support it, and ultimately some term debt as well.

On the Enbridge side, as you mentioned Sam, we’ve been carrying a pretty significant equity cushion in excess of $1 billion. So if you translate that onto asset bases, enough equity to support in excess of $3 billion of incremental asset investment. And so, yes, some of the things that have been announced in the last few months have consumed a bit of that cushion, but relatively small amount of it. We’re still looking at a significant equity cushion, and of course as we rollover from 2009 into 2010, we’ll roll our 5-year plan out by the additional year, the magnitude of that cushion expands generally as we add a year in the future and drop one off in the past.

We will be updating that position at some point as we bring our 5-year strategic plan to conclusion in a next little while, but that equity cushion is still more than ample for the time being.

Sam Kanes – Scotia Capital

Thanks, Richard.

Pat Daniel

Thanks, Sam.

Operator

Your next question comes from the line of Bob Hastings from Canaccord Genuity. Please proceed.

Bob Hastings – Canaccord Genuity

Thank you very much. Just a clarification if you would. Regarding the mainline, you mentioned the National Energy Board has approved all the tolls in the incentive agreement. Can you clarify that with the hearing that’s happening on November 9, regarding the toll?

Pat Daniel

Yes. The hearing with November 9 is related to the Alberta Clipper intervention, largely by Suncor and IOL, is that what you are referring to Bob?

Bob Hastings – Canaccord Genuity

Yes. There is other still some 2010 tolling issues to be settled in there as well.

Pat Daniel

Yes. Richard, could you give a quick update on where we are with regard to preparation for that hearing?

Richard Bird

Sure. The Board has approved our one-year extension, our one-year new incentive tolling settlement with shippers, Bob; one year, but potentially extendable for period longer than that. We are in discussion with shippers as to what that extension might look like. So I don't think that the hearing in the fall is focused on that issue. It is focused on the Alberta Clipper issue and the Board has approved interim tolls related to that but the final tolls are to be approved through that process.

Of course, we are quite confident that our case would be sustained in front of the NEB, the same way as it was by the FERC with a corresponding issue that was dealt with through them. That’s about $0.08 of toll that in abeyance at the moment based on what they’ve granted for the interim toll, but our expectation is that ultimately that $0.08 will be granted as well.

Bob Hastings – Canaccord Genuity

Okay. So I didn’t miss anything there. What were the Clipper earnings in the quarter?

Pat Daniel

Clipper earnings in the quarter? I am not sure we have disclosed that level of granularity, Bob. So that’s not something that we are going to get into.

Bob Hastings – Canaccord Genuity

Okay. Thank you very much.

Richard Bird

As you know, Bob, Alberta Clipper project came in on schedule and on budget, and hence we are very confident with regard to that hearing this fall.

Bob Hastings – Canaccord Genuity

Okay. Thank you.

Operator

Your next question comes from the line of Matthew Akman of Macquarie. Please proceed.

Matthew Akman – Macquarie Capital Markets Canada

Thanks very much. I wanted to just ask about your intentions on the mid-stream business. Obviously Elk City was made by the MLP, but Enbridge has a significant stake in that. I am just wondering I guess first of all when the partnership talks about of being accretive. Does that dependent on frac spreads and the degree of commodity exposure there?

Second, whether you guys are thinking more about further expansion in the midstream business whether at the partnership or at Enbridge now that you’ve got the lion’s share of the big long haul oil pipelines coming into service.

Pat Daniel

So, maybe what I will do Matt is just respond to that in a general sense and then I will ask Vern to more specifically address the commodity related issues and exposures with regard to the new acquisition. But first of all a good part of the new assets acquired are percentage of proceeds and fee-for-service processing, and we are – and continue to be very strongly interested in the midstream business. As you know we are very well positioned in each of the Barnett, the Bossier, the Anadarko, we’ve always talked about as being a very strong gathering and processing region for us. And of course, we started to develop our presence in the Haynesville with the expansion that I referred to in my remarks earlier on.

So we’ve got very good exposure there. We do intend to grow and expand that business. We are very comfortable in the business. We could potentially enter that business in Canada as well, particularly when it’s done in conjunction with an operation like the Alliance Pipeline operation. So strategically, it’s very well for us. Recognizing that we always go at it a little differently maybe than some in that we tend to hedge most of the commodity exposure out and turn it into more of a consistent cash flow stream than not many operators do in the midstream business.

Vern, would you like to just elaborate a little bit on risks associated with that business?

Vern Yu

Sure. Matthew, as you know we hedge a significant portion of the commodity exposure that comes from midstream assets at the partnership. In the near year, we met our aggregate risk at the partnership to 7.5% cash flow on risk number. And beyond the first year, we have hedged ladders where we ensure that a minimum percentage of volume is hedged. So when we say it’s accretive, it assumes that we have hedged a significant portion of the commodity exposure under the EEP’s hedging program.

Then we’ve run some sensitivities as well even if we see a decrease in the commodity price. In a fairly significant decrease in the commodity price, we still expect (Technical Difficulty) accretive.

Matthew Akman – Macquarie Capital Markets Canada

Okay, thanks. Just a quick follow up for you Pat to your comment, could we see Enbridge building processing capacity around the money [ph]?

Pat Daniel

It’s possible, yes. We’ve talked about it internally, have looked at some specific opportunities and it certainly wouldn’t be outside of our strategic plan and opportunity set to do that Matthew.

Matthew Akman – Macquarie Capital Markets Canada

Okay, thanks. Those are my questions.

Pat Daniel

Thank you.

Operator

Your next question comes from Robert Kwan of RBC Capital Markets. Please proceed.

Robert Kwan – RBC Capital Markets

Right. Thank you. My questions relate to the Liquids Pipeline segment. First just on Clipper, do your earnings represent the improved cash toll or you have originally filed for, and then if you can let us know what the difference is? And then just the other one of Southern Lights, you mentioned in the MD&A you booked $14 million of AEDC, but $21 million of earnings. So I am just wondering how much of the difference was LSr for the month of April and then how much was other, and if there is any color on just what that other is?

Pat Daniel

So, Richard or Colin, could you take that?

Richard Bird

Yes. Colin, why don’t you pick that one up?

Colin Gruending

Sure, okay. Robert, so we are accruing earnings to include the full Clipper toll. I think the amount in question assuming a forecast throughput is approximately about $20 million for the nine months (Technical Difficulty). That certainly we have accrued and we expect to collect that.

Robert Kwan – RBC Capital Markets

Okay, and on Southern Lights?

Colin Gruending

Can you repeat what you are looking for there, Robert?

Robert Kwan – RBC Capital Markets

Sure. The MD&A mentions $14 million of AEDC booked for the quarter but the line item for earnings is $21 million. So I am just wondering what the breakout between LSr for the month of April and then what the other component is and if there is just some color on what that other component is?

Vern Yu

Robert, it’s Vern. Can we get back to you on that after the call?

Robert Kwan – RBC Capital Markets

Sure. Great, thank you.

Pat Daniel

Thanks, Robert.

Operator

Your next question comes from Andrew Kuske of Credit Suisse. Please proceed.

Andrew Kuske – Credit Suisse

Thank you. Good morning. I am not sure if this is really a question for Pat or for Richard, but it just relates to your view on returns against really duration. If you look at your asset investments in the past and some of the large investments recently been on pipelines which definitely have a much longer duration than, say, things like wind farms. So could you just give us a bit of color on what you think about the returns versus the duration of an asset life and really how that translates into valuation itself?

Pat Daniel

Let me – I am going to ask Richard to add to this. But specifically returns with regard to asset life that you are referring, Andrew, first of all a lot of the investments that we are now doing tend to be follow-on to major positioning that we have established in the past in expansions, and generally speaking those follow-on projects are relatively low capital with the potential for a little bit higher return. That doesn’t really address the asset life issue and Richard I wonder whether you could just comment briefly on that.

Richard Bird

Sure. Yes. So I am not quite sure how you are looking at this Andrew, but I think you are directionally correct in that we would tend to expect a shorter asset life, therefore faster depreciation rate and a faster return of the original capital investment on renewable energy investment than we would for a pipeline. Generally, our analytical approach to capital management looks the same for both types of projects and that we tend to model out 20 years, 25 years of cash flows and then apply a terminal value at the end and generally when we quote returns, we are quoting a full life return that reflects the 25 years plus some terminal value at the end of that 25 years.

So when we quote that 11% to 13% return range for renewables that’s the way that we are looking at that. But you are correct, that 11% to 13% has faster return on capital associated with it than the corresponding 11% to 13% would for a pipeline project.

Andrew Kuske – Credit Suisse

But is it fair to say, just as an extension that if you look at a wind farm for example, your terminal value and whether it’s sometime between your 20 or your 28, let’s just say 25 for argument sake. At that point in time, you might have to substantially rebuild the site itself with new towers whereas a pipeline asset, your core pipeline assets can go on 50, 60 plus years, if not even longer if properly maintained with minimal capital.

Richard Bird

Yes, that’s correct. That’s why we would tend to depreciate that capital away to a much more significant extent on a wind project over the defined modeling periods. So the terminal book value so to speak for a wind project would be very low compared to the terminal book value for a pipeline project.

Andrew Kuske – Credit Suisse

Okay. That’s helpful. Thank you.

Pat Daniel

Thanks, Andrew.

Operator

Your next question comes from the line of Linda Ezergailis from TD. Please proceed.

Linda Ezergailis – TD Newcrest

Thank you. Just a detailed question before I ask my real question. Can you give us an update on potentially quarterly run rate for corporate and other for the balance of the year and beyond? I guess the latest that I had was the end of last year you were assuming you’d realize about 10 million to 15 million run rate a quarter and we are kind of not running at that rate year to date. So I am just wondering what the second half might look like?

Pat Daniel

Colin, can you address that?

Colin Gruending

Sure. So Linda I think we ran at that in the – gave that in the first quarter. Second quarter we gave some one-time benefits which improved on that but we do expect to return to that kind of 10 million to 15 million in third and fourth quarter.

Pat Daniel

And some of that second quarter Linda will reverse itself in the second half of the year as well. So we will probably be a little above that ran rate for the balance of the year with some catch up from the second quarter.

Linda Ezergailis – TD Newcrest

Okay. And then 2011 might look like that as well?

Colin Gruending

Directionally.

Pat Daniel

I think that’s correct. Yes.

Linda Ezergailis – TD Newcrest

All right. Now I guess there is some industry momentum gaining in Western Canada with respect to potential rail caring of oil sands bitumen out to the west coast. Can you comment on that in terms of if you expect that to potentially ramp up prior to a Gateway project or potentially be I guess a less cost efficient, but potentially more environmentally viable alternative to Gateway?

Pat Daniel

Let me just address it in general, Linda. I know now for several years actually there have been a number of initiatives to look at railing crude oil off the west coast and just one of the things that we have indicated as Enbridge that we think would be positive for the industry and helping to broaden out the markets for Western Canadian crude, we don’t feel that long term that rail in enough volume will work to be able to tear the market to the extent required to improve pricing for Western Canadian producers, we’ve always said is a short-term solution, it may well work.

We are not actively involved in looking at that alternative, but certainly could understand where producers might want to do that on a short-term basis while we continue to work along on Gateway. I think it’s fair to say that if we are looking at an outlet of 500,000 barrel a day, which we are with Gateway in order to have the right market impact that isn’t really going to be feasible on a long-term basis with railcar, but certainly is an interim solution I think that could make some sense for producers.

Linda Ezergailis – TD Newcrest

Thank you. Just another clean-up question, I don't think it will necessarily be addressed in your press conference. The $5 million deductible related to your liability on spills in the US or I guess that would be an EEP deductible? Does that – would that insurance cover all business interruption or just cost?

Pat Daniel

Richard, could you speak to or maybe Vern Yu, you are in a better position to speak to the coverage on that?

Vern Yu

That just covers third-party liabilities. That doesn’t cover business interruption or the replacement cost of the pipe Linda.

Linda Ezergailis – TD Newcrest

Okay. Thank you.

Pat Daniel

Thanks, Linda.

Operator

Your next question comes from the line of Andrew Fairbanks from Banc of America. Please proceed.

Andrew Fairbanks – Banc of America Merrill Lynch

Thank you. Good morning, guys. Just a couple of smaller questions. I wanted to see what your perspective was of the key events for Gateway as it winds its way through the regulatory process. That’s my first question, and then secondly on the Pioneer CCS project, do you think it’s realistic that will have an industry user of the CO2 as part of that project eventually or do you think the CO2 will just be stored?

Pat Daniel

Okay, maybe what I will do Andrew is I will speak to the Gateway key events, and I will ask Richard who is responsible for our Pathfinders Group to comment on Pioneer CCS. First of all on Gateway, you asked for the key events. As you know, we filed the application this year. We will expect that it will be about a 2-year regulatory process and about a 3-year construction process. Those are what I would call the formal steps to be going through, and of course the full review process with the NEB will be clear as they put out orders with regard to timing and scheduling of public hearing relating to Gateway.

I think as well it would be appropriate to comment that as I indicated in our annual meeting, we have a lot of work to do with First Nations and other interested parties in British Columbia in particular in convincing them of the broad and national significance and importance of this project and in bringing them on side, as I have indicated at the meeting we want to turn their initial “no” into a “yes,” so at the same time that we are working through the formal regulatory process. We will be working very closely with the interested parties to try to win their support for this very important initiative for the country.

So those are the key events as we see them. Richard, could you comment on Pioneer CCS?

Richard Bird

Sure. So, Andrew, we would expect that the CO2 that’s captured from the project will go both to sequestration and also to an enhanced oil recovery application. That EOR, so to speak hasn’t – the commercial terms around that haven’t been finalized yet but that would certainly be the plan, and it’s a combination of both of those two deployments of the CO2.

Andrew Fairbanks – Banc of America Merrill Lynch

That’s great. Thanks, guys.

Pat Daniel

Thanks, Andrew.

Operator

Your next question is a follow-up from Carl Kirst of BMO Capital Markets. Please proceed.

Carl Kirst – BMO Capital Markets

Thank you. Just a couple of quick follow-ups, Pat, can you update me on the status of Walker Ridge and Big Foot? Have there been any shifts over the last three months, given everything that’s happened in the Gulf? Is that still in LOI format or has that been finalized?

Pat Daniel

With regard to the latter part of it, it’s still in LOI. It’s in the very final stages of formalization and I’ve been out of the office for a couple of days, so if there is any update to that I am sure Richard or Vern can provide it. But it’s in the final stages of finalization. We are in the engineering design phase on the project. We have been conducting the undersea surveys with regard to routing. We have very regularly touch based with Chevron along the way and are of the understanding that they expect no delay in their development of Walker Ridge and Big Foot.

The drilling moratorium they said would not impact their development schedule. I believe they said they had about one more well that they wanted to drill, but it wasn’t critical to starting up the operation. So we don’t except the drilling moratorium or the recent activities in the Gulf will impact on that project. Richard, do you have any further update on the LOI with regard to Walker Ridge and Big Foot?

Richard Bird

No, I think it’s as you just described with that.

Pat Daniel

Okay.

Carl Kirst – BMO Capital Markets

Great. I appreciate the color and then last question if I could. Richard, could you just remind me with respect to guidance and maybe even longer term what you’re thinking Enbridge’s effective corporate tax rate is going to be?

Richard Bird

I think our marginal tax rate in Canada for Canadian operations is pushing down to 25% and I am looking across Colin, he is nodding his head. So I think that’s the number.

Carl Kirst – BMO Capital Markets

Okay, great. Thank you so much.

Pat Daniel

Thanks, Carl.

Operator

Your next question comes from the line of Pear Macquarie [ph] from Dave Sutton [ph]. Please proceed.

Pear Macquarie – Dave Sutton

Yes, thanks very much. I was interested, Pat, to get, one, to get your high-level thinking of all the offshore, the BP oil spill and given that you have good activates over there. What is implication for you guys and if you push a little bit further on regulatory front what we could expect eventually? Or is it going to promote some of your onshore business? So just wanted to get some thoughts on this front.

Pat Daniel

Okay, Peer. I maybe try to give you my thoughts, but I probably keep it pretty brief because obviously we are not in the drilling business and therefore – or the upstream E&P business. Therefore as (inaudible) and I am sure there are others that are going to be able to give you a more accurate view as to what’s going on and what is likely to change. In our conversations with our customers, we expect obviously that there has been and will be a delay in development drilling and exploration drilling in the Gulf.

Most of what we are planning, as we’ve indicated before in the four or five key new development areas in the Gulf, will not directly be impacted by this drilling moratorium because of their stage of development. But whether this delay of six months or however, whatever length of period it might be, could delay business four years to five years down the road recognizing that it’s often that period of time from exploration well through to pipeline construction, it’s pretty hard to say at this point.

So I think we will just have to wait and see exactly how this play out in terms of the moratorium how long it remains in place and whether it does have that longer term lag effect on upstream activity.

Pear Macquarie – Dave Sutton

I appreciate that, and also I wanted to touch a little bit on EEP. What kind of – I know that might be tricky to comment on that, but what kind of strategy you might contemplate for EEP going forward given the significant growth that you have there and also your significant financial flexibility you have at the corporate level.

Pat Daniel

Well, EEP has always been a key part of the strategy for Enbridge, and it will continue to be so. The majority of our activity in the US is conducted through EEP, as you know both the Liquids Pipeline operations – most of Liquids Pipeline operations in the US and of course the Gathering and Processing business. We expect to continue to aggressively expand and grow through EEP.

We do realize that it’s maybe in a little bit different scenario than it was over much of the history of EEP where it had a significantly lower cost of capital than Enbridge Inc. We do expect to see a return to that kind of environment for MLPs in the US as they regain some of the value lost through the financial crisis.

So we expect it to continue to be a key part of our business with a relatively low cost of capital and a great way to do accretive acquisitions and organic growth. So it’s important part of the business.

Pear Macquarie – Dave Sutton

Does that include an eventual increase ownership in the EEP or –?

Pat Daniel

Well, generally with EEP, we have historically if you go way back to the initial IPO of EEP where I believe we held about 20%, but we gradually diluted down our interest over time, and worked on the basis that we liked the MLP to be self-funding within the US markets, and would expect at some point in time to return to that. So, at this point in time, we don’t have any intention to further increase our position. Hello?

Operator

Your next question comes from the line of Petro Panarites of CIBC. Please proceed.

Petro Panarites – CIBC World Markets

Hi, just a quick clarification on the last question. So, would it be your intention to maintain your current proportional stake in the context of future EEP financing?

Pat Daniel

Petro, I don’t know that, that we can comment on that. I think it will depend, it will depend on access to equity markets in the US and either we will dilute down as EEP does equity to fund such projects as the recently announced one in the Anadarko or maintain our position. That wouldn’t our intention to increase it though, but I think it will depend on the markets and the level of access to markets for EEP.

Petro Panarites – CIBC World Markets

Okay. Just to step back on a broader question on the equity cushion then, you have got 1 billion or so in equity cushion in addition to proportionately lower perhaps if not maintained equity interest in sponsored investments. So, don’t you foresee 1 billion or so of equity cushion as it sort of rolls into increases overtime? Do you see that as a permanent part of your strategy or do you see that over the next several years of sort of collapsing to zero or going higher? I mean, how do you view that?

Pat Daniel

Really again, depend on opportunities, Petro, and to tell you the truth right now, we have an awful lot of opportunity in front of us. So, that’s on the basis, the plan that we have got presented today, but if we have opportunity to redeploy that capital at the kind of returns that we are realizing, we certainly are going to do that, and like I said, the opportunity suite looks very, very positive today.

Petro Panarites – CIBC World Markets

Thank you.

Operator

Your next question is a follow-up from Sam Kanes of Scotia Capital.

Sam Kanes – Scotia Capital

You have changed your insurance coverage for hurricanes in the Gulf. That’s not cheap. I was just wondering if you can give us some idea of I guess similar to the spill, deductibles or business that kind of thing and how you have changed it and any effect on earnings?

Pat Daniel

Vern, would you like to take that?

Vern Yu

Sam, what we found this year was that the insurance market for hurricane, windstorm did improve significantly over last year. I think the deductible is still relatively high. So, we do have a reasonable amount of coverage at a relatively minimal insurance cost and that insurance cost is flowing through our earnings as at the start of this quarter.

Sam Kanes – Scotia Capital

As of Q3? So, did you state what the deductible is, is that confidential?

Vern Yu

I don’t have that with me right now, but I can get back to you on that.

Sam Kanes – Scotia Capital

Okay, gateway ramping up here obviously from an effort point of view, do you prefer to the $100 million that has been I guess an effect prefunded, are you trying to draw that down now?

Pat Daniel

Yes, we have, Sam. You are referring to the $100 million worth of sponsored –?

Sam Kanes – Scotia Capital

Yes.

Pat Daniel

Yes, we have just, I think at this point, Richard, correct me if I am wrong, we have just gone fully drawn that down.

Richard Bird

Yes, pretty close.

Sam Kanes – Scotia Capital

So, obviously if you go past that, I know it’s your predevelopment expenses are that you will be presumed expensing?

Pat Daniel

We anticipate sharing the predevelopment costs with the sponsored companies right through to approval of the application, Sam.

Sam Kanes – Scotia Capital

Okay, thank you for that. Lastly, it’s gone dead, no one is talking about your frontier pipelines anymore, LNG terminals, just wondering if there’s anything left in your books for those type of things from the past?

Pat Daniel

Frontier pipelines, you are referring to the north?

Sam Kanes – Scotia Capital

Yes.

Pat Daniel

And I don’t believe there is anything on the books, Richard, Colin?

Richard Bird

Well, of course, we still have the Enbridge NW Pipeline which is in service, so it’s on our books, but nothing beyond that, nor LNG either.

Sam Kanes – Scotia Capital

Okay. Thanks guys.

Operator

Your next question is a follow-up from Robert Kwan of RBC Capital Markets. Please proceed.

Robert Kwan – RBC Capital Markets

Just a couple of questions on the EEP acquisitions, just wondering if you have any evaluation metrics on the acquisition like EBIT, EBITDA, and then is there anymore color you can just give on the potential earnings accretion, whether it’s specific cents per share or percentages?

Pat Daniel

Richard, can you handle that?

Richard Bird

Sure. Yes, the second number is more ready to mind than through the acquisition metrics. Assuming that the accretion in distributable cash flow translates into an increase in distributions in the future associated with that asset, which I think I would be the reasonable assumption, and assuming that Enbridge doesn’t participate in the equity offering, but dilutes down the level of accretion that Enbridge is looking for would be probably in the vicinity of $0.03 a share at the Enbridge level.

Robert Kwan – RBC Capital Markets

Okay. And it would be just a follow-up I guess after the call on EBIT, EBITDA?

Vern Yu

Yes, I can get back to you on that, Robert.

Robert Kwan – RBC Capital Markets

Great, thanks Vern.

Pat Daniel

Thanks Robert.

Operator

We will now take questions from the media. (Operator instructions) Your first question comes from Justin Amos [ph] from August Media [ph]. Please proceed.

Justin Amos – August Media

Hi, thank you for taking my call. I understand Southern Lights just began service this month, but can you guys give us an update on how initial service has been and what kind of volumes have been flowing on the system? Thanks.

Pat Daniel

Okay. I don’t have the actual deliveries into Edmonton for Southern Lights at my fingertips, I don’t know whether Richard or Colin, whether you do.

Richard Bird

No, we don’t. I think we would expect that pretty close to the contracted amount, which I think the initial contract of the amount is about 70,000 barrels a day would be what would be flowing, but I don’t have a specific number as to what was delivered in the first month.

Justin Amos – August Media

Okay, thank you.

Pat Daniel

Maybe we could get back if you like to follow-up through our Investor Relations, we could get back to you on that.

Justin Amos – August Media

Okay, I will do that, thanks.

Pat Daniel

Okay.

Operator

Your next question comes from Carrie Tait from National Post. Please proceed.

Carrie Tait – National Post

Good morning. Can you tell me how the sell in Michigan as effect is going to affect your campaign on Gateway?

Pat Daniel

Thanks Carrie. I don’t, well, first of all, I am not sure what you mean by campaign, but obviously any spill is a very serious and significant matter, and we will be very openly and freely discussing this with those that are opposed to Gateway. As I mentioned earlier, we need to win their support, and so we will be spending whatever time necessary to spend, to walk through with them, the cause of the accident, what we can do to prevent similar incidents in the future through refinements on inline inspection, on inspection periods, on pipeline control. Every time we have an incident like this, we do a very long hard look back to find out what the learnings are and how we can ensure that this doesn’t occur going forward. So, that’s probably where the prime emphasis will be relating to Gateway is to take the learnings and apply them to the operation of the future pipeline, Carrie.

Carrie Tait – National Post

Thank you.

Operator

Your next question comes from the line of Scott Haggett, Reuters. Please proceed.

Scott Haggett – Reuters

Hi, with the expansion of your Hardisty storage capacity, can you tell me how much of that is leased out and how much is controlled by Enbridge itself?

Pat Daniel

Vern or Richard?

Richard Bird

Sure. So, I think what you are referring to, Scott, is the acquisition that we recently concluded of the other half of the Hardisty Caverns storage facility, the underground facility that we already owned half of, and all facility is leased on a long-term basis, leased to third parties.

Scott Haggett – Reuters

And what about the remainder of Hardisty storage, is that all leased or does Enbridge have space available to it there?

Richard Bird

Yes, so the contract terminal, the new contract terminal is a contract terminal. So, it’s all leased out as well.

Pat Daniel

Yes, and then the only other storage we have there is operational storage, which is not used for merchant purposes at all, Scott. So, I think and Richard or Vern correct me if I am wrong in this, but I think it’s fair to say that at Hardisty, Enbridge doesn’t hold any storage position, it’s all part of a fee-for-service or operational part of the business.

Scott Haggett – Reuters

Okay. Thank you.

Operator

Ladies and gentlemen, that concludes the Q&A session of today’s call. I would now like to turn the call back over to Mr. Vern Yu. Please proceed.

Vern Yu

Thank you very much. Just like to remind everyone that we are going to have a news conference in about 15 minutes on the oil spill, and if you wanted to dial into that, that again is 1-800-638-4930, pass code being 54993380, and Pat Murray and I will be available for any detailed follow-up questions for the balance of the day. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation, and you may now disconnect. Have a great day.

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Source: Enbridge Inc. Q2 2010 Earnings Call Transcript
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