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Enbridge Inc. (ENB)

Q2 2007 Earnings Call

August 01, 2007, 9:00 AM ET

Executives

Bob Rahn - IR

Patrick D. Daniel - President and CEO

Stephen J. Wuori - EVP and CFO

J. Richard Bird - EVP of Liquids Pipelines

Colin Gruending - VP and Controller - 7

Analysts

Karen Taylor - BMO Capital Markets

Linda Ezergailis - TD Newcrest

Robert Hastings - Canaccord Adams

Sam Kanes - Nova Scotia Capital

Andrew Kuske - Credit Suisse First Boston

Daniel Shteyn - Desjardins Securities

Robert Kwan - RBC Capital Markets

Andrew Fairbanks - Merrill Lynch

Zaheer Khan - Baker, Gilmore & Associates

John Chen - Davis Selected Advisors

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2007 Enbridge Earnings Conference Call. My name is Sean and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. [Operator Instructions]

I would now like to turn the presentation over to your host for today's call, Mr. Bob Rahn, Director of Investor Relations. Please proceed.

Bob Rahn - Investor Relations

Thank you, Sean. Good morning and welcome to the Enbridge Inc. second quarter 2007 earnings call. With me this morning are Pat Daniel, President and Chief Executive Officer; Steve Wuori , Executive Vice President Chief Financial Officer and Corporate Development; Richard Bird, Executive Vice President of Liquids Pipelines; and Colin Gruending, Vice President and Controller.

During this conference call, we may refer to or speak to certain forward-looking information. Statements made with respect to forward-looking information are subject to a variety of risks and uncertainties pertaining to operating performance, regulatory parameters, weather, economic conditions and commodity prices. A more fulsome discussion of these risks is included in our securities filings which are publicly available on both SEDAR and the EDGAR systems.

I would also note that our supplementary financial information package for the period 2002 to 2006 is now complete and available on our web site under Financial Information - Additional Resources. This call is web cast and I encourage those on the phone lines to view the supporting slides which available on our web site. A replay 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 the same as the Q1 call. The initial Q&A session is restricted to the financial analyst community. When we have concluded the Q&As for the analyst community, we will invite media on the call for a brief further Q&A session.

For both Q&A sessions, we ask that you limit your questions to one follow-up and rejoin the queue. I would also remind you that Colin and myself will be available after the call for any detailed follow-up questions that you may have.

At this point, I would like to turn the call over to Mr. Pat Daniel.

Patrick D. Daniel - President and Chief Executive Officer

Thanks, Bob, and I would like to wish you all a good morning and welcome you to this second quarter 2007 conference call.

As you know, earlier today, we announced year-to-date adjusted earnings of $358.9 million, which is up $30.7 million, or 9.4% over the first half of 2006. For the quarter, adjusted earnings were also up by approximately 9% compared to the second quarter of 2006, so a very good quarter and a very good half.

These results are right in line with our expectations and we remain comfortable with the full-year guidance that we provided earlier this year. Steve Wuori is going to review the quarter in more detail in just a moment.

There's no question that the key driver of our medium-term growth in this Company is the expansion of our crude oil pipeline system and I'm going to come back to that in a moment. But I don't want to lose sight of what is going on in the rest of our business.

The increase in financial performance in the quarter is really the result of steady performance and incremental growth contributions from a number of sources across the very diversified business platform that we have at Enbridge, and this is particularly important as it provides a base level of growth as we move through the massive buildout of our crude oil expansion program.

Now in the quarter one call, we referenced the major liquids projects that are commercially locked in and moving forward to the construction phase, and this portfolio of course includes the big three of the Southern Access project, Alberta Clipper and Southern Lights. The cost estimate for the entire portfolio of projects now stands at approximately $9 billion.

Procurement of critical materials and services represents a very significant project execution issue for us, and given the labor situation today, we've had to be very proactive in securing contractors and materials. The commercial arrangements underpinning this portfolio of projects affords us a significant degree of protection with respect to cost overruns, but it does not insulate us entirely, nor would we want it to insulate us entirely.

Obviously, you cannot expect in this business to earn returns in excess of the multi pipeline return without taking some of level of risk. Our goal of course is to limit that risk to areas that we can control, and that's represented by the deals that we put in place.

So key execution variables now will shift to the areas of overall project coordination and management and items that are within our control from this point forward.

We spent quite a bit of time on the Q1 call discussing the risk return features and characteristics of our liquids projects, and I don't want to rehash all of that material now. However, we have included again this slide from the Q1 call with updated cost estimates for your reference.

That said though, where does this $9 billion portfolio of projects take us in terms of earnings? In early July, we did address the earnings growth acceleration associated with the liquid projects portfolio and it really is quite dramatic.

We expect this portfolio of projects to contribute to an average earnings growth rate of about 16% per year over the 2006 to 2011 period, and that is for the Liquid segment of the business, and that also amounts to about 20% in the EEP Liquids segment, the Enbridge Energy Partners segment in the US. So very significant growth in the Liquids business.

That gives me and also the full management team the confidence that we will meet our overall Enbridge medium-term goal of 8% to 10% average EPS growth over the next five years for the Company in total. For the latest status of all of our projects, liquids and gas, is included in the in MD&A for your reference.

The focus right now of course is increasing the capability of our Liquids Pipelines system to move more barrels into both traditional and non-traditional markets. We see another 2.1 million barrels per day of oil sands production coming onstream by 2016, and it continues to be our view that these volumes cannot been absorbed entirely in the traditional markets without very large discounts for heavy crude.

So on this note and similar to convictions that we had with respect to the value of our Spearhead project, by the way, we will continue to advocate the need for access to new markets, particularly the US Gulf Coast and the West and East coasts of North America.

With regard to that, as you know we're working with ExxonMobil to provide access for Canadian crude to the US Gulf Coast. Thus far, discussions with potential shippers have been very positive and we will keep you abreast of developments on this project as we go along.

Before turning matters over to Steve to discuss the quarterly results, I would like to comment on recent developments at Enbridge Gas Distribution as well. In terms of the core utility business, customer growth continues to be strong and natural gas is becoming a very important part of the power generation supply mix in Ontario with the two biggest recent projects being Gorway and Portlands project, which will be among our largest customers going forward.

In addition to that, we have received two important positive regulatory decisions, the first of course related to deregulated new storage developments in Ontario which provides a new growth opportunity at Enbridge Gas Distribution.

And then also in conjunction with some settlements earlier this year, the OEB's recent rate case decision concerning the Company's proposed volume forecasting methodology will decrease the forecasting risk with regard to weather. So that was very positive. And as well of course, the equity thickness was increased from 35% to 36%, so we're very pleased with those decisions.

Finally, Enbridge Gas Distribution will shortly file evidence for a comprehensive incentive regulation plan for a five-year period beginning January 1, 2008. As you know, at Enbridge, we have long advocated that incentive regulation that encourages productivity gains and reduces regulatory burden; Enbridge has been very successful in performing under IR and we're looking forward to applying that experience to Enbridge Gas Distribution.

Staying with Ontario, 182 MW wind project in Bruce County is moving forward. As the Ontario Municipal Board and the Ontario Ministry of the Environment have removed the final hurdles now for construction of this project. So construction has commenced and will be completed in 2008.

And then, finally, a comment on our affiliate Enbridge Energy Partners where the gas business continues to be very strong. Throughputs on our principal gas systems are up dramatically, driven by developments in the Bossier Sands and Barnett Shale plays, two of the most active in North America.

EEP's largest gas initiative to date, which is the 700 Mcf Project Clarity, is now well advanced. Stage one is in service, stage two completion is imminent and the final stage is scheduled for completion in February of 2008. So that project is going extremely well.

So that concludes my prepared comments. I'm now going to turn matters over to Steve Wuori to discuss the financial and operating highlights for the quarter, and Steve is also going to comment briefly on our financing activities so far this year as we continue to fund this big growth program in the Company. Steve, over to you.

Stephen J. Wuori - Executive Vice President and Chief Financial Officer

Thanks, Pat, and good morning everyone. Looking first at the quarter, net income was $146.5 million, or $0.41 a share, compared with $157.9 million, or $0.47 per share in the second quarter of 2006. The prior-year quarter included a larger non-cash future income tax benefit due to the reduction in federal and certain provincial tax rates.

Adjusting for this and the other items as noted, earnings of $129.5 million are up $10.8 million, or about 9% relative to the second quarter of 2006. And as Pat noted, the diversity of the business really underpins this strong performance as modest decreases in the adjusted earnings from Liquids and Gas Pipelines segments were more than offset by solid contributions from the Distribution, Sponsored Investments, International and Corporate segments.

In Liquids Pipelines, segment earnings were $65.8 million for the second quarter, off modestly compared to 2006. As was the case in the first quarter of 2007, this is primarily due to be Enbridge System, which was impacted by higher labor and pipeline integrity costs, as well as increased taxes in the tariff segment of the Enbridge System line.

In Gas Pipelines, quarterly earnings are down slightly compared to the prior-year period. The decrease is mostly related to be Enbridge offshore operations in the Gulf of Mexico where earnings have been impacted by lower deliveries to the gas pipes resulting from the expected and continued natural production declines in that area.

These declines have not yet been offset by the startup of gas production from new deepwater development projects as these have been delayed by the aftermath of the hurricanes in 2005. We don't expect significant increases over current earnings levels until the 2008-2009 timeframe when projects such as Atlantis and Thunderhorse come onstream.

We are constructing the Neptune Crude Oil Offshore Pipeline, which has a capacity of 60,000 barrels per day and is anticipated to be in-service in September of 2007. The Neptune Pipeline represents Enbridge's first crude oil pipeline in the Gulf of Mexico offshore and positions us to pursue other crude oil opportunities in the region.

Looking at Sponsored Investments, Enbridge Energy Partners and the Enbridge Income Fund, the contributions from each were modestly ahead of last year. The increase in EEP's earnings was primarily attributable to Enbridge's higher ownership interest, which averaged around 16% this quarter versus 11% in Q2 of 2006.

We remain optimistic about the growth in the EEP's future earnings contributions from both our general partner and limited partner interests as the many greenfield oil and gas projects are placed into service... the Barnett Shale and Bossier and Clarity that Pat talked about, as well as all of the crude oil system development projects underway at EEP.

Moving to Gas distribution and Services, adjusted operating earnings from EGD were up $3.5 million quarter over quarter. The increase was mainly due to customer growth and improved expense management. Customer Works is down $2.2 million from the prior year because Customer Works in the longer provides customer care services to EGD, which is pursuant to an OEB recommendation. Customer Works will retain its other clients and also look to add new customers in the future.

Looking at Aux Sable, it was up $2.2 million on an adjusted basis quarter-over-quarter. Strong positive fractionation margins in the first part of 2007 resulted in earnings from the upside sharing agreement which were recognized partially in the second quarter. I would note that it is somewhat back-end loaded, so we will be recognizing more in the third and fourth quarters of the year.

Earnings for the International segment were up slightly over 2006, mostly due to higher earnings from CLH which were positively impacted by a 2% increase in volumes, higher average transportation tariffs, lower operating costs and also a stronger euro.

Corporate costs in Q2 were lower by $5.3 million compared to the similar quarter in 2006 due to decreased interest expense resulting from lower corporate debt which we repaid from the net proceeds of the equity issuance in February. In addition, the prior year included debt carrying costs for several projects under development which had not yet been capitalized at that time.

Before discussing our financing activities, I would like to comment on the impact of changes in foreign currency rates on our earnings, and certainly we have seen some major moves in the Canadian dollar in the course of the second and early third quarter. Although US-Canadian exchange rates have been relatively flat year to date, we have seen the large moves recently.

We do expect that this will affect us for the remainder of 2007 from an earnings perspective. Just to give you a sensitivity, a $0.01 move in the Canadian dollar to US dollar exchange rate translates into an after-tax earnings impact of about $1.1 million. Just as a reminder though, we do have hedges in place to protect foreign currency denominated cash flows.

Just looking at financing activities so far, the strategy is unfolding pretty well as we set out during the first quarter conference call. We currently have just under $4 billion of standby credit facilities on a consolidated Enbridge-wide basis, which includes the backstop for our commercial paper programs.

We are also well positioned from a liquidity standpoint and will maintain at least $1 billion of available liquidity to manage through adverse market conditions or for unanticipated expenditures and will consider other dedicated credit facilities as necessary to support individual construction projects.

Enbridge continues to have solid access to the capital markets. Just to review quickly, year-to-date in addition to $0.6 billion of equity issued in February, we have issued over $1 billion of debt, primarily in the US market. And in doing so, we are able to take advantage of attractive opportunities to term out debt in order to manage our exposure to interest rates.

The proceeds of these debt and equity issuances were used to repay maturing debt, pay down short-term borrowings and also to fund corporate and growth expenditures. We still anticipate that we will be looking to issue additional debt and equity in the 2008 timeframe when a number of projects approach their in-service dates. As an example, the first major project coming into service will be the Waupisoo Pipeline, which is expected to be in service in about mid-2008.

So those are the highlights, Pat, and I will now turn it back to you for concluding comments.

Patrick D. Daniel - President and Chief Executive Officer

Thanks, Steve. So we at Enbridge are really sitting now on the cusp of a very significant acceleration in earnings growth in the Company. This growth of course is being driven primarily by the buildout of our crude oil pipeline system. While those projects are going to contribute modestly to 2007 and 2008 earnings and cash flow, earnings growth is expected to ramp up steeply in 2009 and thereafter as we have indicated to you.

Supporting this of course is a very diversified business platform that continues to deliver strong operating and financial results as you can see by the quarter and six-month results to date in the Company. It's very important to note that earnings growth is for the most part locked in commercially, some of it is subject to regulatory approvals and generally with limited exposure to couple expenditure overruns along the way.

So in closing as we build and grow our business for the long-term, we're going to continue to employ best practices, consult extensively with shareholders and work very closely with regulators. So on that note, maybe we can close, Bob, and move onto the Q&A session.

Bob Rahn - Investor Relations

Move onto Q&A.

Question and Answer

Operator

[Operator Instructions]

Your first question comes from the line of Karen Taylor with BMO Capital Markets. Please proceed.

Karen Taylor - BMO Capital Markets

Thank you. I have two questions this morning. The first is relating to the Enbridge Offshore, and you said in the revenues that year-to-date, you have $5.3 million of insurance payments for equipment, and then an additional $6 million for business interruption. How much of that in each category was taken in the second quarter?

Stephen J. Wuori - Executive Vice President and Chief Financial Officer

Zero.

Patrick D. Daniel - President and Chief Executive Officer

It was first quarter.

Karen Taylor - BMO Capital Markets

I couldn't find my notes. The second question relates to the OEB's decision for Enbridge Gas, and particularly what I will call the financial aspect of that decision and the discussion around the deemed equity. Do you plan to challenge that decision? Is the first part of the question.

Patrick D. Daniel - President and Chief Executive Officer

The decision with regard to the equity component, Karen?

Karen Taylor - BMO Capital Markets

Yes.

Patrick D. Daniel - President and Chief Executive Officer

No, we don't. As you know, we applied for 38%. We were sitting at 35, they have given us 36. We don't think we would appeal it.

Karen Taylor - BMO Capital Markets

And just as an adjunct to finish that, so are you confident then that the negotiation of an incentive tolling agreement for 2008, because the Board told you to do quite frankly a bunch of stuff that was ridiculous in terms of mismatching your book and just things that from a financial point of view we would frown upon in a material way.

So we're not entirely confident in the arguments that they put forth. So are you confident that, come January 1, 2008, your incentive arrangement with the Board will mitigate the 200 basis point ROE differential, as well as the deemed equity differential between you and your US comps?

Because this is a huge opportunity cost for shareholders, and without a light at the end of the tunnel, I don't know why you continue to hold this asset. So can we get there with an incentive arrangement or are we just looking at sub par returns?

Patrick D. Daniel - President and Chief Executive Officer

Karen, let me have Steve address the first part of that, and then I would like to come back and just address the why do we hold this asset part of it.

Stephen J. Wuori - Executive Vice President and Chief Financial Officer

Karen, there were a number of things in the decision that probably were positive, but also some that were surprising and maybe even a little disappointing. Certainly going from 35% to 36% equity thickness is positive. However, we believe that a higher number is warranted and we're not entirely happy that the arguments put forward to justify the higher equity number really resonated.

I think one of the surprises was, no more commodity price hedging. We do not think that that is terribly prudent, to just let the customer float in the spot market, but that's the decision that was made. We were pleased with the degree day methodology that was employed.

And just by way of reviewing all of this, I think what we're going to do is consider the decision and all of the logic that seemed to go into it as we now apply for an incentive regulation agreement and seek to have the best connection we can with the OEB and the various stakeholders in the process so that we can raise the return in this business and really operate it in a way that we think we should, which is to be incentivized, to be maximally efficient and give the best customer service.

So there were a number of things in the decision that we probably don't have time to parse through completely today, but it's things that go both ways. But we will be looking at what went into those and understanding as best we can as we move into the IR negotiation process.

Patrick D. Daniel - President and Chief Executive Officer

And Karen, just to address the latter part of the question with regard to the more strategic issue as to why we hold the assets, and I know you've heard me say this before, so I'm really not going to say anything new, but as you know, this asset is credit rating agency friendly.

The rating agencies like it, and in part due to the relatively low risk, low volatility associated with the asset. It of course generates significant free cash flow to the Company, which is very important right now as we have a very big capital requirement on the crude oil expansion side of the business.

And then in a more general but strategic sense, we still feel that ultimately at some point, using the load associated with this asset to anchor upstream development is going to be in the very best interest of downstream consumers to help with price protection.

So we think that it could lead to some strategic opportunities for this company down the road. So we do consider it a hold and an important asset, even though as Steve has indicated, it is one of the lowest returning segments of our business but will improve under PBR. So it's a hold for us.

Operator

Your next question is from Linda Ezergailis with TD Newcrest. Please proceed.

Linda Ezergailis - TD Newcrest

Thanks. A question with respect to your Enbridge System earnings. In the release, three reasons were cited for the year-over-year decline... labor, pipeline integrity and tariff taxes. Can you just break down maybe what the contribution of the decline was for each of those components and give us some sense of an outlook for the second half of 2007 with respect to those components? I don't know how much of that might have been timing related.

Patrick D. Daniel - President and Chief Executive Officer

Linda, I will have Richard Bird address that.

J. Richard Bird - Executive Vice President of Liquids Pipelines

Sure. So I think we're roughly $7 million lower in the Enbridge System year-over-year for the first half. I would sort of parse that out into two broad chunks. One is generally... costs higher with respect to the incentive tolling component of the earnings stream, and that is a combination of things as identified in the news release.

Higher compensation and costs associated with integrity and leak repairs that we experienced this year that we didn't experience in prior year as well as a number of smaller items, and the other big chunk being tariffs tax. And they would be roughly equal. The higher cost bundle and the tariffs tax bundle would be roughly equal.

In terms of where we go from here on there, I think our experience on the cost side in the second half is likely to be better than it was in the first half. We'll have some components of those costs in the first half that shouldn't be recurring in the second half, or at least we wouldn't expect to be recurring.

The tariff tax in the second half is dependent on volumes in the system and I would not necessarily expect that to be a great deal different in the second half. Of course, there are other things that will come on in the second half, and so generally we would expect the second half stronger than the first half.

Linda Ezergailis - TD Newcrest

And 2008?

J. Richard Bird - Executive Vice President of Liquids Pipelines

In 2008, we would expect to continue to pick up momentum.

Linda Ezergailis - TD Newcrest

Okay. Just a follow-up question, moving back to Ontario. Is there an updated capital expenditure estimate for your wind projects? I guess the latest that I have as $400 million. I'm just wondering with some of the delays, etc., that maybe it's a bit higher now.

J. Richard Bird - Executive Vice President of Liquids Pipelines

We expect that it's going to be higher than that, Linda. We're just looking at what the disclosure documents talk about. We're now underway with construction, and so I wouldn't want to just throw out a number there because now that we have a decision and we are underway, we can refine the final cost estimates.

Probably as we think about what's happened and what we have going forward, somewhere in the neighborhood of $440 million is probably closer to the what the final cost will be.

Linda Ezergailis - TD Newcrest

Thank you.

Operator

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

Robert Hastings - Canaccord Adams

Hi. Thanks. Just to sort of follow-up on Linda's question on the compensation issues and general cost pressures in Alberta and in the construction industry. I know you are not that impacted on that in a lot of your pipeline expansions, or you've mitigated or limited the exposure to those increases.

But in your existing systems with incentives, once you are behind the 8 ball, if you will, isn't it more difficult to sort of recover from that? And, could we see that this will be a continuing drag going forward until you hit your next incentive five-year plan in 2010?

Patrick D. Daniel - President and Chief Executive Officer

Richard can you comment on the current IR deal and the impact on rising labor costs?

J. Richard Bird - Executive Vice President of Liquids Pipelines

I think what you're saying is correct, Bob, to the extent that we have higher compensation costs in the incentive tolling section of the existing system. That is something that's going to carry on through the next several years until our next reset of the incentive tolling settlement. But on the other hand, we do have quite significant other growth contributors coming on in the next couple of years that will dwarf the impact of compensation.

Robert Hastings - Canaccord Adams

Okay, so what we're seeing in the quarter, and you broke it out of sort of it was equally a third, a third, a third, so it's a couple million on the quarter or something. That is the kind of drag, if you will, that we should be looking at going forward?

J. Richard Bird - Executive Vice President of Liquids Pipelines

Yes. I think what I said was, within the ITS cost segment, which covers operating cost, it covers power and it covers integrity, in combination we are looking at about half of the variance from the prior year being attributable to cost performance on those three items, and the other half of the variance being tariff tax.

And part but not all of that half is attributable to cost performance I think is going to stick with us as a continuing source of variance in the unfavorable direction. But, again, as we move ahead, that will tend to be offset hugely by the other sources of growth.

Robert Hastings - Canaccord Adams

Right. So it's just sort of maybe $1 million a quarter then or something like that? One other thing is the FEC [ph] in the quarter that you were booking, I guess it came through corporate, can you give us an idea of how much that was? Maybe that's for Steve?

Patrick D. Daniel - President and Chief Executive Officer

Colin?

Colin Gruending - Vice President and Controller

That was essentially all capitalized interest and I think we are at about $22 million for the six months '07 versus about $9 million for the six months '06. The delta would obviously relate to the number of construction, projects we now have underway.

Robert Hastings - Canaccord Adams

Right. Now just how much would it have been in the second quarter?

Colin Gruending - Vice President and Controller

I don't think I have that in front of me. I have the six months, but it would be probably more than half of the six months because construction has--.

Robert Hastings - Canaccord Adams

Okay. Thank you.

Colin Gruending - Vice President and Controller

Thanks, Bob.

Operator

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

Sam Kanes - Nova Scotia Capital

I would be remiss if I didn't ask you something on Frontier Pipelines. You have been quite on that and your LNG project competitor had a milestone announcement a few weeks ago. Any status update there? Level of interest, waning, waxing?

Patrick D. Daniel - President and Chief Executive Officer

By Frontier Pipelines, are you referring to Mackenzie in Alaska?

Sam Kanes - Nova Scotia Capital

Yes, because there was some kind of deadline a few weeks back where folks had to throw some sort of hat in the ring conceptually with the new governor up there.

Patrick D. Daniel - President and Chief Executive Officer

This is with regard to the AGIA process in Alaska. We have been working closely with the state and with the producers, Sam, and continue to believe that the Agea process as proposed by the state won't work effectively because it does not allow for... I shouldn't say doesn't allow for --- but doesn't require the support of the producers. And we just simply don't see how that project can go ahead without long-term shipping commitments from the resource owners in the north.

So we continue to advise the governor and the state that, unless we can get a consortium of producers together to file under AGIA that we won't be a participant in that process. And as far as I know, they don't have a lot of active interest as a result of this issue of trying to mount a project without producer support.

With regard to the Mackenzie Valley, we're not as involved there, but I think... and we are certainly not aware of any issues other than what you read in the press these days with regard to constant regulatory delays. And neither project is moving at the pace that we would like to see.

And, again, I say that primarily with the interest of the consumers in this country in mind in that we need to get that gas onstream because we have seen very little gas... new gas come onstream in North American for some time. So we would like to see both projects go and we would like to see them move along a little more quickly. But they don't seem... there's really nothing new to update on that.

With regard to the LNG project, we also have had very good progress in our Rabaska project. With regard to the permitting, we're very confident that we will not have any permitting or citing issues, and the only issue remains one of lining up upstream supply. And neither a facility, at least not our facility or Rabaska, do we have that long-term supply in place.

We're working very hard to do that. We're not going to spend much more money on that project until we have that long-term supply lined up though, because that is the key to making it go. As you know, right from the outset, we had very good market in place. And like I say, we have very strong cooperation from the community and are very confident with regard to all of our permits. It's just a case of lining up supply.

Sam Kanes - Nova Scotia Capital

Thanks, Pat. One small follow-up. Athabasca, almost looked like a typo, production... sorry, throughput... fell to 236,000 a day from 315,000, yet the contribution was similar year-over-year. Is there something funny in there, or why was it down? I presume it must have been some form of hookup or something. Was there anything there of any consequence?

Patrick D. Daniel - President and Chief Executive Officer

The Suncor operating problem, but Colin?

Stephen J. Wuori - Executive Vice President and Chief Financial Officer

Yes, I think largely it was Suncor. Suncor's upstream operating production trouble that I think really caused that, Sam.

Sam Kanes - Nova Scotia Capital

And they are committed to you presumably whether or not they deliver or not, I guess, because your return was constant?

Patrick D. Daniel - President and Chief Executive Officer

Yes, that's right. It's ship-or-pay commitment.

Sam Kanes - Nova Scotia Capital

Got it. Thank you.

Operator

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

Andrew Kuske - Credit Suisse First Boston

Thank you. Good morning. This is a question for Steve. You mentioned that you plan on going to the capital markets in 2008 for additional debt and equity. What is your outlook on asset dispositions, and in particular as it relates to Enbridge Income Funds and Enbridge Energy Partners?

Stephen J. Wuori - Executive Vice President and Chief Financial Officer

I think, Andrew, are you thinking in terms of... in the case of Enbridge Energy Partners of Enbridge corporate assets rolling into EEP?

Andrew Kuske - Credit Suisse First Boston

Yes, and also to Enbridge Income Fund, and then also as it relates to Income Fund, selling your stake in Income Fund down to the level that you described a few years ago?

Stephen J. Wuori - Executive Vice President and Chief Financial Officer

Yes, well, I think that still remains an objective. We really don't plan to hold the large interest we have in the Enbridge Income Fund right now, which sits at 72%. So I think that really remains an ongoing objective of ours. So, we now have the legislation enacted regarding the tax fairness plan.

However, the rules around it are still not entirely clear. And so we are looking at a number of different options involving the Enbridge Income Fund. One of them is not rolling more corporate assets into the Fund, though. So just maybe to close that question off pretty clearly, that is not one of the things that's on the table at the moment.

We're looking at a bunch of different options for it, but really until we get better clarity around the rules and also the SIF [ph] legislation and exactly how many entities the SIF legislation could touch, we really aren't going to be in a position to know for sure what to do.

We hope to have that later this year. So in terms of fund raising or capital raising versus capital consuming though, I would say that our overarching view with regard to the Enbridge Income Fund is that, whatever we do with it should be a capital raising event for Enbridge as opposed to a capital-consuming event.

Enbridge Energy Partners is really loaded full with growth, organic growth right now, to build on to fund and so we really are not contemplating in the near-term any asset roll-downs from Enbridge corporate into EEP at this time.

Andrew Kuske - Credit Suisse First Boston

And then just in general as a follow-up, do you contemplate any really pruning of the Enbridge portfolio to become a bit more capital efficient? This does go to a bit of an earlier question with I know Pat answered as it relates to EGD. Do you see yourself divesting any partial interest in certain assets?

Patrick D. Daniel - President and Chief Executive Officer

That's a consideration. We certainly haven't come close to concluding anything on that. But, we do have... in the scenario we are in the large growth that we are experiencing, we do have the opportunity to look at the entire portfolio that we have, and we are doing that.

The problem is that all of the assets are good. There really isn't anything that is a sore thumb that's sticking out that we would want to get rid of. So in one way, that's a pleasant problem to have. But we certainly look at that, Andrew, as to what should be in the portfolio and remain in the portfolio as we build out the crude oil system.

Andrew Kuske - Credit Suisse First Boston

That's great. Thank you very much.

Patrick D. Daniel - President and Chief Executive Officer

The problems is that everything is good, Steve.

Operator

Your next question comes from the line of Daniel Shteyn with Desjardins Securities. Please proceed.

Daniel Shteyn - Desjardins Securities

Yes. Good morning, everyone. First off, I would like to start in the South. Now you have announced your joint venture with ExxonMobil to provide a solution to take Canadian Oil Sands crude all the way to the Gulf. Now as I don't need to tell you of course, yours is just one of the several competing projects that are out there.

So my question is... how much capacity do you think the Gulf Coast refineries currently have to take Canadian Oil Sands crude sometime by 2010, given of course that Mexico is declining and Venezuela is almost down as well?

Patrick D. Daniel - President and Chief Executive Officer

Well, there is a lot of capacity there, Daniel, and I will ask Richard to maybe quantify that. You specified 2010. As you know, many of those Gulf Coast refineries are already too old to be able to process heavy, whether it's Mexican minor or Venezuelan heavy, and that is one of the real advantages of this initiative to move to the Gulf Coast, because otherwise, we are seeing a fair bit of capital that is going to have to be invested in the Midwest refinery's to be able to process Canadian heavy.

We plan on our initiative to move in the range of 400,000 barrels a day by 2010. Certainly, there is significant refining capacity there. And, Richard, I don't know whether you can quantify that at this point.

J. Richard Bird - Executive Vice President of Liquids Pipelines

No, I don't have that at the tip of my fingers, but I think the key point is, as Pat said, it's not really a question of how much heavy refining capacity there is in the Gulf Coast because that's a huge number. It would be several millions of barrels per day.

From our perspective, it really is more of a question of... how much supply from Western Canada is going to be excess to that which can be absorbed in the traditional markets? And as Pat said, our estimate of that is about 400,000 barrels a day by 2010.

Daniel Shteyn - Desjardins Securities

So in other words, would it be fair to say that chances are, US refining capacity in the Gulf Coast would take pretty much all of the Oil Sands crude that would be piped down there with your project potential with another one or two projects?

J. Richard Bird - Executive Vice President of Liquids Pipelines

That is correct.

Daniel Shteyn - Desjardins Securities

So that is questionable number one. Question number two, you had an interesting slide on the earnings growth acceleration in your package for today. Looking at the Enbridge Liquids Pipeline segment, a new business net income contribution, I just wanted to clarify that all the stuff that's in there is actually just the Enbridge Inc.'s interest and earnings and doesn't include, for instance, what you have in the other little graph, which is the EEP side.

The first... the left-hand side doesn't include anything that's Enbridge interest in EEP earnings. Is that correct?

J. Richard Bird - Executive Vice President of Liquids Pipelines

That is correct. So, the contribution from the graph on the right side would be a separate contribution which flows through the incentive tolling mechanism of the partnership and is not reflected in the graph on the left side.

Daniel Shteyn - Desjardins Securities

Got it. And, and do you have a view as to what Enbridge Inc.'s share in EEP's earnings growth would be on the right-hand side? Is it kind of towards... the bottom half, the middle, or the bottom third, the middle third or the upper third of the graph?

J. Richard Bird - Executive Vice President of Liquids Pipelines

Well, Enbridge's equity share of the partnership is currently 16%, but of course the key thing, they key driver there is the --.

Daniel Shteyn - Desjardins Securities

Incentives.

J. Richard Bird - Executive Vice President of Liquids Pipelines

Is the incentives and the 50-50 split threshold which the partnership is approaching, and which my expectation is that very strong contribution from the liquid side of the partnership together with the organic gas growth that Pat described earlier will kick us over that 50-50 share.

Daniel Shteyn - Desjardins Securities

Okay. So, do you have any base on expectation on what would be Enbridge's, call it for lack of a better word, override on EEP's earnings growth, including the incentives and your 15% interest?

Patrick D. Daniel - President and Chief Executive Officer

Well, under that incentive deal, Daniel, the 50% of any incremental distributions will come to Enbridge. So after we cross the 50-50 threshold, it will be 50% to Enbridge, even though we only on the 16% interest.

Daniel Shteyn - Desjardins Securities

Okay. All right. That's fine. Thank you.

Patrick D. Daniel - President and Chief Executive Officer

Okay. Thank you.

Operator

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

Robert Kwan - RBC Capital Markets

Good morning. Just maybe following up on Andrew's question or a similar question, is there an advancement if your thoughts on the '08 financing plan with respect to the common equity and the potential use of hybrids?

Stephen J. Wuori - Executive Vice President and Chief Financial Officer

I think it would be very similar, Robert, to what I said on the Q1 call, and that is that we do expect to be in the equity market sometime in 2008 and in a size not too dissimilar, I guess I would put it, from 2007. We certainly will look at hybrids as a possibility and compare that to the efficiency of issuing common equity. Hybrids have some appealing characteristics and we'll certainly be looking at that. But, we have not included anything on that, for sure.

Robert Kwan - RBC Capital Markets

Thanks, Steve. And then just turning to that chart on slide 7 on the Inc. side, is the earnings... are the expected earnings contributions there net of any the debt or preferreds that you might use to finance the deemed equity component of your projects?

Patrick D. Daniel - President and Chief Executive Officer

That earnings is all net of the debt that's allocated to those projects. But, it wouldn't reflect any of the corporate financing activities with respect to equity or hybrids.

Robert Kwan - RBC Capital Markets

Okay. Great. Thank you.

Patrick D. Daniel - President and Chief Executive Officer

Thanks, Robert.

Operator

Your next question comes from the line of Andrew Fairbanks with Merrill Lynch. Please proceed.

Andrew Fairbanks - Merrill Lynch

Hey, good morning, guys. I wanted to get your current thoughts on the Gateway project. It will be a very long-term project, but it might have PetroChina's decision to not necessarily advance at this point. What are your thoughts for that project?

Does it just go into the deep freeze, or are your customers still telling you, look, the Gulf Coast is our primary market, but we still think we do need some form of Pacific relief valve, if you will. There's one question. And the second portion to that would be, what is the outlook for the diluent line that was going to be associated with Gateway as well at this point?

Patrick D. Daniel - President and Chief Executive Officer

Okay, thanks, Andrew. Let me go back to the start here with regard to Gateway. And as you know, back in November, we announced that we were going to put it on a back burner because of huge demand to build south and east on the system, and that is still the priority, to answer part of your question.

Customers are definitely telling us that their first priority is to get the capacity into the US Midwest and all the way to the Gulf of Mexico. As you also know, back a few weeks ago, there was a fair bit of media attention to some remarks made from an individual from PetroChina with regard to dwindling interest in Gateway.

We have still got a very good relationship with PetroChina and PetroChina continues to express interest formally in the project.

Not only that, we're seeing a broadening of interest in Southeast Asia, and we've mentioned this going back a long ways, that we see this as more than just a project to move crude oil into China, but possibly to Korea, to Japan and to Singapore as well. And we are seeing a broadening of interest there.

In the meantime, Western Canadian producers continue to tell us that, ultimately, they do need that relief valve, as you're calling it, in order to maximize the net back pricing that they are getting for their crude oil. So the fundamentals of Gateway remain very strong. We're confident the project will proceed and we're still comfortable with the 2013-2014 timing that we indicated back in November when we set the project aside.

The fundamentals are good. And the main reason why it has not been on the fast-track is that no Southeast Asian refining company has been able to make a significant advancement in the oil sands so they have the molecules to move back to Southeast Asia. If that were to happen, we would accelerate the project; if that doesn't happen, then we would expect 2013 or '14 when the Canadian producer push will really require it to improve their netback pricing.

Andrew Fairbanks - Merrill Lynch

That's great. Thanks. And the diluent line?

Patrick D. Daniel - President and Chief Executive Officer

In the diluent line, we still see a need for additional diluent coming in. Richard, could you address the specifics around the diluent project.

J. Richard Bird - Executive Vice President of Liquids Pipelines

Yes, pretty much the same story, the same way that the focus on the US market moved Alberta Clipper out in front of Gateway. That same focus really moved the Southern Lights Midwest diluent return line into the first slot in terms of diluent requirements for the Western Canada sedimentary basin.

So Southern Lights will look after imported diluent requirements until sometime in the 2012-2014 timeframe, at which point there will be a need for another tranche of similar size to Southern Lights, which logically again for diversification purposes, would be the Gateway diluent line.

Andrew Fairbanks - Merrill Lynch

Thanks a lot. Thanks, guys.

J. Richard Bird - Executive Vice President of Liquids Pipelines

Thanks, Andrew.

Operator

[Operator Instructions]

Your next question comes from the line of Zaheer Khan with Baker, Gilmore & Associates. Please proceed.

Zaheer Khan - Baker, Gilmore & Associates

Hi. Good morning, Pat and Steve. I just want to check basically your spending plans. You mentioned $9 billion worth of spend going forward. What's the timeframe on that?

And secondly, I think this is quite a hard thing, given that previously as much as $18 billion of plans were announced. How far you now are you now moving ahead with these plans and whether the rating agencies are now comfortable with this spending initiatives, which Enbridge sees in its growth plan?

Patrick D. Daniel - President and Chief Executive Officer

The 9 billion is crude oil projects that are underway right now, and I think you referred to the 18 or $19 billion that we've made reference to in the past. That is the company-wide, Enbridge-wide number that includes not only the liquids projects that are under contract and moving forward right now, but additional perspective liquids projects, such as the Gulf of Mexico, a couple of regional projects in Alberta, Gateway, and then also takes into account the spend in the gas division, the gas distribution business and gas pipes.

And that was where the $19 billion number comes from. The $9 billion is really over the next five years, approximately.

Stephen J. Wuori - Executive Vice President and Chief Financial Officer

And just to address the issue of the rating agencies, we're in pretty close contact with them on exactly what our growth plans are going to be. I think we've really tried to make sure that they understand what the spend profile looks like and what the projects will produce once they are in service.

And also, really emphasizing the credit strength of the agreements that are... that have been put into place that last for a long time on a take-or-pay basis for the capacity, so very little risk in regard to low utilization over the time of the projects.

So we are really emphasizing that and making sure that we do everything we can to have them understand the picture in the build period now. So I guess I would say that, at the moment, I cannot speak for the agencies, but I believe that they're comfortable with the plan that we have laid out for them going forward in the next few years as we build these projects.

Operator

And your next question comes as a follow-up from Daniel Shteyn with Desjardins Securities. Please proceed.

Daniel Shteyn - Desjardins Securities

Yes, thank you. Regarding dividends, I'm just wondering whether you're going to be sticking to your stated target earnings payout ratio in terms of paying dividends over the next year or two. Or, would you also kind of take a look forward a couple of years in terms of your increased earnings power starting maybe 2010 and kind of set your current year dividend based on forward earnings, or are you really going to be looking only one year out?

Patrick D. Daniel - President and Chief Executive Officer

I think we will stay with the 60% to 70% payout ratio that we have established a few years ago. And as we have analyzed the look forward, that seems to make the most sense, and we certainly wouldn't try to get into prepaying on the certainty of earnings in the future. So you will see us remain in that range.

Daniel Shteyn - Desjardins Securities

Okay, and onto the financing that you've sort of mentioned that could happen next year, I believe a couple of quarters back, you... or maybe a quarter back... you mentioned potentially the size of an equity financing for next year on the order of maybe 400 million... is that kind of still the number that you gentlemen are thinking of?

Patrick D. Daniel - President and Chief Executive Officer

I wouldn't want to be that specific. I think what I have said is that it wouldn't be dissimilar is size to what we did this year, which was just under $600 million. But I don't want to pin that too early as we analyze the financing plans going forward.

So, that's roughly the quantum. And I really want to be clear about that because I don't want people to be thinking that we are coming for $1.5 billion or something like that. And, there are also sources of funding for the projects that we're analyzing as well.

The question was asked earlier about asset sales, and obviously, that's in our minds is also. There's also hybrid equity that we could look at. So I think it's too early to lock in on an exact number of an equity issuance size. But notionally, that's what we're looking at for 2008 as kind of a Plan A going forward.

Daniel Shteyn - Desjardins Securities

Okay. That's good. Thank you.

Patrick D. Daniel - President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions]

And you have a follow-up question from the line of Bob Hastings with Canaccord Adams. Please proceed.

Robert Hastings - Canaccord Adams

Yes. Pat, I think in your early discussion, you mentioned that you would like to obviously move your pipe... or get the pipe down to the Gulf Coast, but also you're focused I think you said on the East and West Coast as well. And we know about the West Coast Gateway, and I assume that's what you're referring to. But I wasn't sure of the East Coast. Did I hear that right?

Patrick D. Daniel - President and Chief Executive Officer

Yes, you did get that right, and let me expand a little bit on the east movement, because we indicated, I think it was about six months ago now, the fact that we had had discussions with some East Coast refineries about the potential for moving Canadian heavy crude there.

And if you look at the map, Bob, we're a good distance towards getting there. We're already reaching as far east as Buffalo, and to be able to get into the Philadelphia area isn't a big stretch.

So we've continued to work that with some East Coast refineries, very early stage of development. Nothing at all prospective at this point. But of course, in between basically the Midwest area and the East Coast are also a series of refineries primarily operated by Marathon.

And as you may have noticed yesterday or I guess it was late the day before, Marathon announced that they have done a deal to acquire the Western Oil Sands interest here, which suggests to me that they will have Canadian heavy crude that they quite possibly will want to move into their Midwest refineries, Detroit, Catlettsburg, Robinson.

So that provides further eastern movement. And of course, the Husky deal at Lima and indications that they're going to expand the Lima refineries state Canadian heavy means that there should be some good Eastern movements off of our system as well. And we are of course very well positioned to be able to provide the pipeline facilities and doing any of those new refineries.

Robert Hastings - Canaccord Adams

Yes. So I guess, [inaudible] Rick, I've heard you say before about the Eastern refineries, but it seemed like it was very, very, very preliminary stage and I wondered now if we're getting a little closer to that.

Patrick D. Daniel - President and Chief Executive Officer

No, I think I would still put three very's on it... very, very, very. We might knock another very off by the end of the year or so, Bob. But it's very early state, very, very early stages.

Robert Hastings - Canaccord Adams

Great, thank you. And the offshore pipeline, maybe you said this and I missed it. I noticed the volumes were down and obviously the hurricane impacts from a couple of years ago have lessened. What is it looking like going forward now? Are we getting closer to the returns that you would have hoped for?

Patrick D. Daniel - President and Chief Executive Officer

Yes, we are. And what you're seeing is decline in volume primarily due to the natural decline in the reservoirs, which we had expected would have been arrested by new volume coming onstream from some of the projects like Atlantis and Thunderhorse. But of course, the repairs of those facilities have taken longer than expected.

So we're seeing the natural decline not being offset by those new projects, but they are getting closer to being onstream and will start to contribute significantly going forward.

Stephen J. Wuori - Executive Vice President and Chief Financial Officer

And I think, Bob, the ones to watch are the Neptune oil & gas laterals in probably September of this year, followed by Atlantis tie-in fourth quarter; and then Thunderhorse, which could be 2008 or 2009. That, of course, has been a moving target. And then the Shenzi tie-in, in mid-'09. So that's kind of the profile of large new discoveries that are moving to commercialization that will be tying into or have tied into. So those are the things to look for.

Robert Hastings - Canaccord Adams

And so if they happen on schedule, you would be expecting obviously a much better 2008?

Patrick D. Daniel - President and Chief Executive Officer

Yes, a better 2008. I don't know that I would say a much better 2008 until we really see the large ones tie in, but I would say a better 2008, yes.

Robert Hastings - Canaccord Adams

Okay. Thank you very much.

Patrick D. Daniel - President and Chief Executive Officer

Thanks, Bob.

Operator

Your next question comes from the line of John Chen with Davis Selected Advisors.

John Chen - Davis Selected Advisors

Good morning, everybody. I had a quick question, just sort of going back to... someone mentioned prior about competitor's pipelines going down. If we were looking and we were to assume that a lot of your competitors, you know, Trans-Canada, Kinder-Morgan, et cetera, go ahead and we look 10 to 15, 20, even 20 years down the road, all of the pipelines get built, your pipelines get built, everything gets channeled down to the Gulf.

How does that excess capacity from your competitors from your point of view sort of the affect your throughput projections? Does it? I guess I'm trying to understand, given crude oil forecasts, is it a case of, this is enough for everybody to go around, it's not really going to be a problem. Or, do you foresee, if all those other projects ramp up that will really significantly impact your pricing ability and things of that nature?

Patrick D. Daniel - President and Chief Executive Officer

John, first of all, we generally carry volume protection on all of our pipelines. So the basic premise upon which we develop is that we don't take the volume risk. So that certainly if the pipeline capacity were overbuilt... and by the way, I think that producers' concerns are exactly the opposite, that there won't be sufficient pipeline capacity... but if it were to be overbuilt, that certainly wouldn't negatively impact on our financials.

Obviously, every pipeline that a competitor builds to a market takes away future growth opportunity for us, and hence, we want to win as much of that business as we can and have been very successful in doing that to date. But certainly, it won't leave any stranded asset, and... because we don't carry volume risk on the pipes.

John Chen - Davis Selected Advisors

Okay. Great. Thanks.

Patrick D. Daniel - President and Chief Executive Officer

Thank you.

Operator

And you have no other questions at this time.

Bob Rahn - Investor Relations

Nothing from the media?

Operator

[Operator Instructions]

Patrick D. Daniel - President and Chief Executive Officer

Sean, I guess if we have no other questions from analysts, I believe we were going to allow any media questions at this point, if you would like to proceed and see if there are any media questions.

Operator

[Operator Instructions]

Bob Rahn - Investor Relations

It doesn't appear as though that is the case. So I guess we can close it off. Pat, any further comments?

Patrick D. Daniel - President and Chief Executive Officer

No, we thank you all very much for attending, and obviously feel free, if you have any follow-ups, to contact any of us. We're available at any time and we would be pleased to answer follow-up questions. So thank you, and if we don't talk to you before, we'll talk to you at the end of the third quarter.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Enbridge Q2 2007 Earnings Call Transcript
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