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Enbridge Inc. (NYSE:ENB)

Q4 FY07 Earnings Call

February 6, 2008, 9:00 AM ET

Executives

Vern Yu - IR and Enterprise Risk

Patrick D. Daniel - President and CEO

J. Richard Bird - EVP, CFO, and Corporate Development

Colin Gruending - VP and Controller

Stephen J. Wuori - EVP, Liquids Pipelines

Analysts

Robert Hastings - Canaccord Adams

Matthew Akman - Macquarie

Linda Ezergailis - TD Newcrest

Andrew Kuske - Credit Suisse

Robert Kwan - RBC Capital Market

Karen Taylor - BMO Capital

Steven Paget - FirstEnergy

Sam Kanes - Scotia Capital

Jeremy Rosenfield - Desjardins Securities

Operator

Good morning, ladies and gentlemen. Welcome to the Enbridge 2007 Year-End Financial Results Conference Call. I would now like to turn the meeting over to Mr. Vern Yu of Investor Relations and Enterprise Risk. You may now proceed, sir.

Vern Yu - Investor Relations and Enterprise Risk

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

During this call we may refer to or speak to certain forward-looking information. Statements made with respect to forward-looking information are subject to variety of risks and uncertainties pertaining to operating performance, regulatory parameters, weather, economic conditions, and commodity price.

A more full discussion of these risks are included in that Securities filing, which are publicly available on both SEDAR and EDGAR. This call is webcast and I encourage those listening on the phone lines to view the supporting slides, which are available on our website at www.enbridge.com/investor. A replay of the call will be available later today and the transcript will be posted to our website shortly thereafter. Q&A format will be same as the Q3 call. Initial Q&A session is restricted the analyst committee. We have concluded the Q&A for the analyst committee. We will invite media on the call for further Q&A.

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

And at this point I would like to turn the call over to Pat.

Patrick D. Daniel - President and Chief Executive Officer

Great. Thanks Vern, and good morning everyone. Thank you very much for joining us. I am pleased to report an excellent quarter across all business segments in Enbridge and overall strong year continuing our track record of consistent earnings growth in the company.

Reported earnings for 2007 were $700 million, which is $1.97 per share up from $615 million or $1.81 per share a year ago. Adjusted earnings for 2007 increased 7% to $637 million, and EPS grew to $1.79 per share, which is the middle of the guidance range that we provided a year ago for you. We were able to accomplish all of this despite a very strong headwind of a rapid appreciation in the Canadian dollar, which had about a $0.03 negative variance impact on our EPS.

Our success in mitigating the impact of the dollar on our earnings reflects in our view the strength of the core businesses of Enbridge and the substantial benefits of both the operational and geographic diversification of the company. Richard Bird, our newly appointed CFO will review the 2007 financial result and our 2008 guidance in more details in just a few moments. But, prior to that I would like to discuss the key developments over the past year, and then also update you on the status of the major growth initiatives that we have underway.

First of all although 2007 was a successful year on many fronts. We were very saddened by two tragic accidents, one of which claimed the life of a customer in Toronto, and the other the lives of two Enbridge employees near Clearbrook, Minnesota. We are continuing to investigate the cause of these accidents internally, and we are also assisting the regulatory authorities with their ongoing investigations.

Turning to the update on our major growth projects. As many of you know several years ago, we embarked on the strategic path to develop initiatives to broaden access to markets for Canadian crude oil. These new markets are needed in order to accommodate the growing oil sands production, and also to maximize net-back pricing for our customers. So we've been working towards advancing these initiatives, which currently total some $12 billion in capital expenditures in commercially secured projects.

I am pleased that our efforts in securing these projects have come to fruition and we now are really focused on execution of the major constructions laid. During 2007 we completed the number of smaller projects, and we made excellent progress in construction and commercial activities, and several other larger projects that we have underway.

The completion of this way one project will allow Enbridge... to grow its earnings at compounded annual growth rate of 10% over the next four years. So starting with the projects completed in 2007. We finished construction of the $100 million expansion of the Athabasca pipeline, along with the associated pipeline laterals and the tank facilities that serve the Surmont and Long Lake projects. The Surmont facilities are in service and contributing the cash flow, and Long Lake is expected to be placed in service in early 2008.

Vector pipeline expansion, which has increased capacity by 200 million cubic feet per day was placed in the service in the fourth quarter of 2007. We've also made significant progress on a number of the other large growth projects, and let me just first of all start by updating you on the major liquids projects.

Approximately two-thirds of the Waupisoo pipeline has been installed, and the project remains on track for completion in mid-2008 at a cost of about $600 million. This pipeline, as you know is going provide about 350,000 barrels per day, the crude oil capacity from Cheecham down to Edmonton.

Construction of the 320 mile Phase 1 of our Southern Access mainline expansion from Superior to Delevan Wisconsin is also nearing completion. Phase 1 is going to add approximately 190,000 barrels per day of capacity, and is scheduled to be in service early in the second quarter of 2008, and an additional 210,000 barrels per day is slated to come into service in 2009 for a total of 400,000 barrels a day of capacity when that expansion is complete.

We've also made good progress on Southern Lights and this is a daily online from Chicago to Edmonton. Over 95% of the welding on the line between Superior and Delevan Wisconsin has been completed, and over 90% of this pipe has been laid in the ground, and that's about Delevan by the way is about three quarters of the way from Superior down to Chicago. We expect the $2.2 billion project to be in service in late 2010.

The National Energy Board has concluded hearings on Enbridge's application to construct the Alberta Clipper Pipeline, and we expect a decision in the first quarter of 2008 on that project. The cost of the Canadian segment is anticipated to be $2 billion, while the U.S. segment, which is going to be undertaken by Enbridge Energy Partners is estimated to be U.S. $1 billion. The target completion date of Alberta Clipper of course is mid-2010.

Moving on the $100 million Spearhead Pipeline expansion received FERC approval, which told [ph] at the end of last year. Construction is expected to commence in early 2008 with an early 2009 in-service date. This expansion will increase capacity from Chicago with Cushing by 65,000 barrels per day initially with the ability to increased capacity up to 190,000 barrels per day to additional pump stations.

Although this project involves a relatively modest capital costs, its impact to Canadian producers is very significant as it allows them to receive more attractive pricing for the crude oil through access to new markets.

We had also made significant progress on a number of projects in the gas division of the company. Enbridge Energy Partners expects the third stage of the $635 million project Clarity to be completed in February. When complete, Clarity will have a capacity of 700 million cubic feet per day, and that's to move rolling gas production from East Texas to major pipeline interconnects and the markets in the Beaumont Texas area.

Current throughput is approximately 240 million cubic feet per day and is expected to climb around 600 million cubic per day by the end of 2008. In Enbridge offshore construction of the Neptune Oil and Natural Gas Pipelines was completed in late 2007, and we began now to earn standby fees on the pipelines. The project is awaiting completion of the final subsea connections prior to start up, which is expected here early in 2008. Construction has also begun on our $500 million Ontario wind project in Kincardine and we anticipate the facilities to begin producing electricity during the latter half of 2008.

Now in addition to this portfolio of commercially secured projects, there is a second wave of growth opportunities, which is now forecast to come into service beyond 2011. The second wave could be in the range of $14 billion to $15 billion of opportunity would include additional regional infrastructure, mainline capacity including Phase 2 of Alberta Clipper at developing new market access pipelines including Texas Access, and expansion in the Eastern part of PADD II, and then longer-term new market access pipelines like Gateway, and additional contract terminating all in that Wave 2.

The most prominent of our Wave 2 projects of course is the Texas Access joint venture with ExxonMobil, which will bring Canadian heavy crude oil to the Texas Gulf Coast by 2011. This project will enable Canadian producers and Gulf Coast refiners to share the heavy crude price differential between Canadian heavy crude price in Alberta, and Mexican Mayan crude priced in the Gulf Coast. And on a equality basis these two crudes are pretty much the same, but Canadian heavy traded on average about $10 per barrel discount to Mayan in the last quarter of 2007, and that after taking into account our expected pipeline tariff.

So if you take that $10 differential, and at $400,000 barrels per day, that represents about 1.5 billion worth of economic benefit that can be shared between Canadian producers and Gulf Coast refiners, and that's without counting the fact that the pipeline could collapse the differential, and an improved net-back pricing on all western Canadian heavy crude. So the Texas Access joint venture can deliver this benefit to our customers much sooner than any other alternative by taking advantage of our existing mainline system, and also ExxonMobil's existing multi-pipeline right-of-way all the way to the Gulf. So we are in the process of finalizing, binding shipper commitments right now, and we expect to complete the successful open season by the end of February.

Up to now, I have spoken at length about our growth projects that are primarily focused on bringing additional Canadian crude oil to U.S. markets. Almost all of this incremental crude oil will come from the Canadian oil sands, as you know. Oil sands production is both in energy and greenhouse gas intensive process and it's for that very reason that I am very pleased that Enbridge is leading the Alberta Saline Aquifer CO2 Sequestration Project and we expect that this project will help address the CO2 emission issue for our customers and need the potential pipeline investment opportunities for Enbridge, as well.

Before turning matters over to Richard for the financial review, I wanted to just comment very briefly on the senior management changes that we announced in early January. Given this unprecedented growth program in the company with $12 billion of secured projects and another $14 Billion to $15 billion of projects under development, it's very important for Enbridge to focus not only on the current operations of the company, but also on the successful execution of these projects.

Therefore, as you probably know, we have separated the project execution and operating functions and have created a major projects group headed by Al Monaco. This group will be responsible for the execution of both liquids and gas projects that have capital costs in excess of $100 million. We believe that by having a group dedicated to project execution, we can place greater emphasis on this very key area for the future growth of the company.

The operating functions of course is the bread and butter of the company and this new organizational structure will allow them to continue to focus on maximizing the efficiency of our existing operations and assets, and at the same time developing growth initiatives and successfully integrating new projects, when they are complete, which is a major undertaking as well.

As you know there have been other changes to see the management team. Steve Wuori has moved in to the role of Executive Vice President, Liquids Pipelines, and Richard Bird became Executive VP, CFO and Corporate Development.

So those are my comments at this point, and I will now turn it over to Richard to review the financial results in a little more detail. Richard?

J. Richard Bird - Executive Vice President, Chief Financial Officer, and Corporate Development

Thanks, Pat. I will begin by commenting on our full year and fourth quarter 2007 results. Then I am going outline our 2008 guidance. I will discuss the dividend increase and conclude with the recap of our financing strategy.

So as Pat mentioned, 2007 was another year of strong financial performance, both on a reported and an adjusted operating basis, continuing our track record of consistent earnings growth. 2007 reported earnings of $700 million or $1.97 per share compares with last year at $615 million or $1.81 per common share. So breaking that down a bit a significant increase in reported earnings is primarily attributable to solid contributions from all our business units, plus two non-recurring factors. Those being higher earnings from EGD due to colder than normal weather in 2007, while 2006 had experienced a warmer than normal winter, and a non-reoccurring gain, which was reported in our fourth quarter from the revaluation of future income tax balances due to tax rate reductions enacted in 2007.

The fourth quarter reported results reflect essentially the same factors, as the full year results, and we have removed the onetime and non-operating factors, those are summarized on page 8 of the earnings release to provide a clear picture of the sustainable results. After normalizing for these factors, our adjusted earnings for 2007 were $637 million or $1.79 per common share, representing an increase of 7% in adjusted earnings, and 3% in earnings per share over 2006. And as Pat mentioned, the 2007 earnings per share of $1.79 is about a midpoint of our guidance range.

There were a few factors that provided headwind earnings in 2007, and I will touch on those. The dramatic appreciation of the Canadian dollar had a negative impact on earnings from our U.S. operations. Overall, that impact was about $10 million or $0.03 per share. As Steve Wuori noted on our third quarter earnings call, we do hedge our economic exposure to the U.S. dollar, and we did receive in 2007 after-tax hedge payments of $25 million in cash.

These payments are reflected on our statement of cash flow and on our balance sheet, but do not get booked to earnings under Canadian and U.S. GAAP. Aux Sable's adjusted earnings of $10.6 million in 2007 are down by $15 million from 2006 in the fourth quarter earnings at $8 million were down by -- were 8 million lower than 2006.

In light of our significant capital expenditure program, we believe that cash flow predictability is extremely important for Enbridge and as such in 2007, we chose to eliminate the commodity price risk associated with Aux Sable early in the year. Therefore we entered into financial derivative transactions to hedge Aux Sable's earnings at the $10 million level for 2007.

And going forward, we have taken advantage of the record high forward fractionation curve, and once again locked in Aux Sable's earnings for 2008 in the order of $20 million, as compared to the $10 million that we locked in for 2007. When you look at Aux Sable's reported results, loss of approximately $18 million. That includes the $10.6 million of operating earnings, plus a mark-to-market loss of $28 million associated with the 2008 hedges. The 2008 hedges do not qualify for hedge accounting and as such the quarterly changes in a fair market value of these hedges are booked earnings. That's one of the things that we backed out in the adjusted operating earnings table.

Energy service earnings are down $4 million for the year and $9 million for the quarter. This was primarily due to longer-term storage transactions at Tidal Energy that overlapped the year-end. Tidal is currently holding crude oil inventory in storage that was previously purchased and has been resold for a locked in profit. However, the crude oil and storage must be revalued for accounting purposes in each period and because the value of crude oil has fallen since the third quarter, we have booked the non-cash loss at Tidal that loss will reverse when the crude oil is delivered to the customer later in 2008 at that locked in profit.

So 2007 contribution from CustomerWorks is lower by $12 million, compared to 2006, and you will recall pursuing to an OEB recommendation CustomerWorks, lost its major client EGD, and now derives its revenue from smaller third party clients. Note that we include CustomerWorks in the other category under gas distribution and services. So we face some challenges in 2007, but as Pat noted earlier, we have a portfolio of assets that is well diversified geographically and operationally.

There were several assets that performed very well over the year and I'll touch on some of those highlights now. Liquids Pipelines full year earnings were up approximately 4% in the fourth quarter of 2007 earnings increased by 25% when compared to 2006. The year-over-year increase was primarily driven by strong performance from Olympic and Spearhead pipelines, compounded by the fact that these systems contributed a full year of earnings in 2007, compared to a partial year in 2006. As well Liquids Pipelines earnings were positively impacted by the recording of allowance for equity funds earned during construction for AEDC related to the Southern Lights Pipeline, which is currently under construction. The AEDC will be collected in total, once the pipeline is in service.

The 25% quarter-over-quarter increase in Liquids Pipelines was driven by the factors I just mentioned, but also more significantly by strong performance from the Enbridge System, which accounted for half of the improvement in the quarter. Mainline earnings reflected higher ITS, metrics bonuses, and a higher contribution from SEP II increased throughput on the system allowed us to earn a higher return on equity under SEP II Tooling Agreement. And finally, Athabasca System earnings in the fourth quarter reflected contributions from new projects placed in service such as the Surmont facilities and a new tankage.

Enbridge offshore earnings were up over 2006, despite the stronger Canadian dollar, after adjusting for the onetime impact of the insurance proceeds Enbridge offshore was up by $5.5 million quarter-to-quarter and $3.7 million year-over-year. The Neptune Oil & Gas laterals were completed early in the fourth quarter and have been collecting standby fees since there completion.

As well, the Atlantis platform which deliver significant volumes was connected into our system in December and these volumes began to contribute earnings. We expect volumes from Atlantis to ramp up in early 2008. Atlantis was one of the major third party owned projects that had been delayed as a result of the after mass of the hurricanes. So it feels good to see significant volumes being connected. Another major project that has been delayed is Thunder Horse, which its operator expects to be in service in the fourth quarter of 2008.

Moving to Enbridge Energy Partners, EEP continues to deliver a strong performance, after adjusting for dilution gains, mark-to-market gains and loses on derivative financial instruments that do not qualify for hedge accounting treatment, and a gain on the sale of the Kansas Pipeline, our earnings contribution from EEP improved by $11 million year-over-year and $2.5 million on a quarterly basis, again despite a stronger Canadian dollar. The increase is due to a number of factors including higher Lakehead System crude oil volumes, stronger margins and increased volumes in the natural gas segment.

In addition, we had a higher average ownership position in EEP of 15.4% in 2007, compared to an average of 12.5% in 2006. And therefore, received a greater percentage of EEP's earnings. We remain excited about EEP's prospects and expect further growth in its earnings and distributions as it completes its suite of expansion projects. Enbridge gas distribution earnings were up by 16 million over the year while fourth quarter was up by 8 million relative to 2006 same quarter that's after adjusting for weather impacts.

EGD had an excellent year primarily as a result of continued customer growth and higher operating margins. EGD also earned a benefit, which was approved by the OEB for exceeding its targets and promoting energy efficient use of natural gas. In international after adjusting for a gain on the sales of land and earnings increased by $7 million year-over-year, primarily from increased performance at CLH. CLH, its improvement was driven by higher volumes an increase in higher margin businesses such as aviation and oil product sales, lower personnel costs, and lower tax expense due to reduction in tax rates.

The growth in CLH results is underpinned by rising demand for refined products due to strong economic growth that's being as continuing to experience. And lastly with respect to the results corporate costs were lowered by $19 million year-over-year and were down by $7 million on a quarterly basis. This was primarily due to lower interest expenses as we used the proceeds of the February 2007 equity issue that paid down debt.

I will now move on to our guidance for 2008. We are guiding to an adjusted operating earnings per share range of $1.90... sorry $1.80 to $1.90 for 2008. This may seem like a bit of sand bagging coming of $1.79 in 2007 with some of our major projects starting to kick in this year, so I'll elaborate a little. First, it's true that we are moving into a period of rapid acceleration in earnings as our $12 billion Liquids Pipelines projects late comes into service over the next four years and as Pat mentioned, we do expect to achieve compound annual average growth rate in earnings per share of 10% on average through that 2007 to 2011 period. It's also true that 2008 is the transition year as we move into this higher growth period with Waupisoo going into service by midyear and some phases of southern access expansion as well, although we will only pick up a partial year impact from these, so we won't hit full stride with earnings growth acceleration until 2009.

Another factor reflected in our guidance is the temporary impact that double taxation of Terrace earnings is expected to have in 2008. This is something we have previously pointed out during the years in which Terrace capacity has been unutilized through 2007 we have been paying taxes a year in arrears on our Terrace earnings. With Terrace capacity expected to be highly utilized in 2008, we will pay taxes on both 2007 and 2008 income in 2008.

To dimension this for you our guidance reflects expected Terrace earnings of about $70 million in 2008 compared to about $100 million in 2007. A sustainable earnings rate for Terrace is expected to be about $90 million. The difference between our doubled taxed earnings in 2008, and the expected sustainable level is about $20 million, so but for the doubled taxation, our guidance range would have been a nickel higher at $1.85 to a $1.95, which is likely more in line with what you might have expected for this transition year.

Next I'll touch on the dividend increase of $0.215 per share or 7.3%. This is the same percentage increase as last year. It is certainly below the growth rate in dividends per share that we expect to average over the next four years, but it is above the expected earnings per share growth rate for 2008. As a result our payout ratio will increase slightly and temporarily in 2008, maybe even slightly above the upper-end of our target range before declining as we hit our earnings per share growth stride in 2009.

So you can expect to see a dividend growth profile that accelerate in step with earnings per share over the next four years, but with a smoother shake than earnings. The potential temporary excursion above the 70% payout ratio in 2008, is something we think is appropriate given the acceleration in earnings thereafter, which will allow us to trend the ratio down to the mid-point of the range as early as 2010.

Next I'll update you on the financing plans that support our investment and earnings growth plans. I would like to emphasize that our financing plan over the next two years is very manageable. Let's start with our liquidity perspective, which entails significant amount of unutilized bank credit.

During 2007 and the first week of 2008, we secured additional committed credit facilities of $3.3 billion. This brings us to a total for Enbridge and subsidiaries of 6.6 billion of which 2.4 is either drawn or is allocated to back stop our commercial paper programs. The remaining $4 billion of unutilized capacity is available to provide bridge funding for our capital programs. We don't plan to dip into this liquidity by much or for a long rather it's provide a temporary bridge to permanent financing, which I'll come to in a moment.

However, it has been sized to be able to absorb a full years funding requirements plus a bit to allow us the flexibility to optimize permanent financing sources and costs, and a writ-out in capital market disruptions.

Our updated permanent financing plans are summarized in the flow charge in the format that we've used in the past. Overall capital expenditures remain the same, as those presented during the Q3 2007 call. In this update, we've removed the capital spent in 2007 just focusing on the go-forward picture. The total capital expenditures reflected in the chart include $1.7 billion of probability weighted development capital over and above the capital for the commercially secured projects.

Starting with capital expenditures of $11.6 billion and deducting free cash flow of $5.1 billion, we are left with the net funding requirement of $6.5 billion over the four year period. This leaves us with the debt requirement of $4.6 billion, and a gross equity requirement of $1.9 billion again over the four year period. Most of this debt will be funded either at the parent company level or at Enbrige Pipelines, however we intend to pursue project financing for the Southern Lights project.

Turning to the equity column, after deducting new equity from our dividend reinvestment and stock option plans, and proceeds from the net throughput assets sales, the net amount to be funded over the next four years is $1.5 billion. This can be met with asset sales, asset monetizations, hybrid securities, and common equity. The list of equity funding sources, you will notice lists issue in common equity at the bottom of the list, and there is a reason for this. Part of Enbridge's value proposition has always been the source capital at the lowest possible cost. That's why Enbridge Energy Partners was initially created likewise by the Enbridge income fund was initially created.

The selection of sources of equity funding quarter will be guided by the same principle and at present, we view our common shares to be undervalued, and therefore not a preferred source of equity funding.

On the other hand, we have a range of other alternative sources through, which we expect to be able to attract capital on more attractive terms. This may include outright sale of selected assets, or in some cases a monetization structure in which we introduce direct infrastructure investors in the selected assets withdrawing a portion of our capital, but maintaining operating and strategic control.

We are progressing with the development of a number of such alternatives from which we will select those with the most attractive terms. So, the total financing plan involves some large numbers, but when you break it down into its components, and manage it over a four year period, it remains very manageable.

And on that note I will turn it back to Pat for his concluding comments.

Patrick D. Daniel - President and Chief Executive Officer

Great. Thanks, Richard. So, these are a very exciting times for Enbridge. We are continuing to execute on our $12 billion of existing crude oil expansion projects, and are now close to securing another second wave growth opportunity with the Texas Access Pipeline joint venture with ExxonMobil. So while these projects will contribute modestly the 2008 earnings in cash flow, we still expect to grow earnings per share by up to 5% in 2008, as Richard has indicated.

When the bulk of the growth projects come into service, which is primarily in 2009 and 2010, we expect a steep ramp up in earnings and cash flow. These projects will allow us to deliver a compound annual growth rate of 10% for the next four years from 2008 to 2011. Supporting this of course is a very diversified business platform that continues to deliver very strong, and operating, and financial results.

So, with that we will now move on to the Q&A session.

Question And Answer

Operator

[Operator Instructions] Your first question comes from the line of Bob Hastings with Canaccord. Please proceed. Bob Hastings your line is now open.

Robert Hastings - Canaccord Adams

Sorry. Looking out to 2008 you mention that you are looking at certain financing options including selling some assets, and that might be better or lower costs source of capital than doing an equity issue at current levels. For the buyers of course we're seeing higher debt costs, and also maybe higher equity costs for them as well, have you... how far long the process are you and how optimistic might you be that in terms of timeframe of selling assets?

Patrick D. Daniel - President and Chief Executive Officer

Well we are still in, while I was going to figure early stages in the process Bob, we have identified some potential assets by looking at the market, and demand for energy infrastructure assets, which continues to be very strong. And, but of course timing is very important to move on to ensure that what we do is to maximize price on any assets we might sell or monetize. So, we are into the process, but premature at this point to indicate what assets might be available.

Robert Hastings - Canaccord Adams

: Okay. Thank you. Do you have any idea as to the sort of timing if that run into any kind of issue in terms of when you make a hard decision of going either of asset sell or an equity issue?

Patrick D. Daniel - President and Chief Executive Officer

No, first of all, as you'll probably recall from previous sessions, we don't really required new equity until third or fourth quarter of this year. So, we've got time is definitely in our favor, and that's put us in a very good position of being able to time the market to ensure that we maximize on pricing. So, we are not, it's not an urgent need, and something that we are going to able to manage quite comfortably.

Robert Hastings - Canaccord Adams

: Now you've got the debt facilities to handle it. Okay. Thank you very much.

Patrick D. Daniel - President and Chief Executive Officer

Thanks, Bob.

Operator

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

Matthew Akman - Macquarie

Macquarie, but somewhat close. Thank you very much. On gas distribution union gas is already on a multi-year incentive deal. And, I noticed the earnings from gas distribution for you guys were quite solid this year. Does that provide a base for a multi-year deal for Enbridge, and when can we expect that your potentially more news on that?

Patrick D. Daniel - President and Chief Executive Officer

Yes, it obviously provides that basin is... as you know Matthew that's something we've been trying to put in place for a number of years, and we're in negotiations right now with regard to a settlement on those that incentive system, and probably we'll expect some news towards the end of this week, if not the first part of next week.

Matthew Akman - Macquarie

Okay, that sounds good. Can I follow-up on the guidance Richard that you provided for 2008, just to clarify what does that assume about any new common equity or financing the gap that you guys have for 2008?

J. Richard Bird - Executive Vice President, Chief Financial Officer, and Corporate Development

It assumes as a base that we would be issuing a similar level of equity, as we did in 2007 towards the end of the year.

Matthew Akman - Macquarie

Okay, about an equity issue, wouldn't be highly dilutive to earnings, I guess in the sense that it offsets debt financing cost in the numbers. Is that correct?

J. Richard Bird - Executive Vice President, Chief Financial Officer, and Corporate Development

It wouldn't necessarily be highly dilutive to earnings, but we certainly view our equity as being undervalued, and therefore it would be dilutive from a fundamental value of perspective.

Matthew Akman - Macquarie

Okay. Thanks.

Patrick D. Daniel - President and Chief Executive Officer

And Matthew just to note Richard said that's what we've assumed in our base case, don't take as a signal that we're going to issue equity.

Matthew Akman - Macquarie

Right I'm just looking for what sort of... you left up something in your model, so I'm just looking for what that is. Thank you very much.

Patrick D. Daniel - President and Chief Executive Officer

You're exactly right, that's exactly what it is.

Operator

Next question comes from the line of Linda Ezergailis with TD Newcrest. Please proceed.

Linda Ezergailis - TD Newcrest

Thank you. Moving further to Matt's question on your 2008 guidance, can you clarify what sort of allowance for equity under construction is being incorporated into the guidance, and for what assets?

Patrick D. Daniel - President and Chief Executive Officer

Richard can you comment.

J. Richard Bird - Executive Vice President, Chief Financial Officer, and Corporate Development

Yes. I don't think, we are going to quantify specific amounts, because as usual we don't dive down into the details of guidance of one exception being the information I provided on Terrace just because that's a such an unusual event, but we will be recording AEDC on Southern Lights, Alberta Clipper, Southern Access Expansion in Canada that's the Canadian portion of Alberta Clipper, and also the line for extension.

Linda Ezergailis - TD Newcrest

Okay. And perhaps we can just talk on a high level as well. In the quarter your Enbridge system had quite an impressive quarter, and can you help us breakdown the year-over-year between the various incentives on the ITS costs? And then what sort of ROE and volumes did you achieve on SEP II for both the quarter, and the year?

Patrick D. Daniel - President and Chief Executive Officer

And I guess even though Steve Wuori is here and he is now the Liquids pipeline guy, I probably will ask Richard to respond to that or call on, Richard can you.

J. Richard Bird - Executive Vice President, Chief Financial Officer, and Corporate Development

Sure, incentive earnings.

Patrick D. Daniel - President and Chief Executive Officer

Yes.

J. Richard Bird - Executive Vice President, Chief Financial Officer, and Corporate Development

So, we'll take a stab at that. On the ITS, our earnings were $11 million with respect to bonuses, our metrics bonuses were $11 million that's a couple of million higher than the prior year on SEP II, we hit the top end for utilization of SEP II capacity, and so we generated the return of just shy of 12%, which is as per the formula multiplied pipeline plus 300 basis points.

Linda Ezergailis - TD Newcrest

And that was in the quarter not the year, or for the year?

J. Richard Bird - Executive Vice President, Chief Financial Officer, and Corporate Development

That was for both the quarter and the year.

Linda Ezergailis - TD Newcrest

Where there maybe the quarter had some element the full year benefit, it was at timing thing or was it..?

J. Richard Bird - Executive Vice President, Chief Financial Officer, and Corporate Development

Yeah, there would have been some catch up during the quarter reflecting the full year results.

Linda Ezergailis - TD Newcrest

Great. Thank you.

Patrick D. Daniel - President and Chief Executive Officer

Thanks, Linda.

Operator

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

Andrew Kuske - Credit Suisse

Thank you. Good morning, if you look at your segmented financial information. I'm just curious on the decline that you have in your operating and administrative expenses in a number of segments and particular on Liquids Pipelines. Would you just give a bit of color on that?

Patrick D. Daniel - President and Chief Executive Officer

Colin, can you take that decline in O&A and liquids pipelines.

Colin Gruending - Vice President and Controller

Sure. Good morning, Andrew. It's Colin. Yeah it is bucking a trend a little bit in Q4, we have had higher cost generally through Q4 last year and through the first three quarters of this year. One factor which is improving is our experience with lower well loses Andrew and I think we have talked about that from time to time when we made a favorable quarter within just the next quarter.

Andrew Kuske - Credit Suisse

And what will be the magnitude of the lower oil loses in the quarter is, if memory serves me correctly in the past that would tend to be sort of $5 million to $8 million sort of the top end?

Colin Gruending - Vice President and Controller

Yeah. I think it's probably the lower end of that range Andrew for the quarter.

Andrew Kuske - Credit Suisse

And then if I may just ask another question liquids related, if you look back on the ITS now you are about 2.5 years in from the point you struck the deal, where are you tracking right now relative to your expectations?

J. Richard Bird - Executive Vice President, Chief Financial Officer, and Corporate Development

Pretty close to expectations, we are I think the max is in terms of the bonuses in the $20 million territory. We like to have that upside but never really expect that we will likely capture it. Also we are capturing a little bit more than 50% of the potential on that. Dimension we will maybe able to grind out a bit more, but it's about where we expected to be at this point in time.

Andrew Kuske - Credit Suisse

Okay, that's great. Thank you.

Patrick D. Daniel - President and Chief Executive Officer

Thanks, Andrew.

Operator

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

Robert Kwan - RBC Capital Market

Good morning. If I can actually just quickly follow-up on Linda's question, in terms of if you look at the Enbridge system and the increase of just under 10 million, how much whether it's ITS or SEP II was catch up for the say the first three quarters, that was booked into the fourth quarter?

Patrick D. Daniel - President and Chief Executive Officer

Well we booked virtually all of the ITS in the fourth quarter. So all of the annual difference in fact probably more than all of the annual difference would have been captured in the fourth quarter on that front. Yeah, with respect to SEP II, Colin can you help me out with that?

Colin Gruending - Vice President and Controller

I don't have it handy, but it's probably in the range of $1 million dollars, Robert.

Robert Kwan - RBC Capital Market

Okay. And then so the ITS a year ago was that booked fairly evenly through 06 then?

J. Richard Bird - Executive Vice President, Chief Financial Officer, and Corporate Development

No it would have been, the bulk of it would have been booked in the final quarter as well we might even have had some minor penalty amounts that we were booking earlier in the year in 2006 which is swinging in the fourth quarter numbers relative to the full year numbers.

Robert Kwan - RBC Capital Market

Okay. Maybe you can follow-up offline then just in the full variance. The other question I had, looking at the release and you both provided in elaboration on the gateway project and one line is talking about, you secured some third party funding support to advance the regulatory processes, I was wondering if you could provide some more color around that, and to the third party might be?

Patrick D. Daniel - President and Chief Executive Officer

With regard to the latter part of the question Robert we are not able to disclose that at this point, but we've indicated that Enbridge has invested significantly in this project, up into this point. But, that we were reluctant to proceed until we were sure we had strong support from a number of parties to ensure the ongoing success of the project and through 2007, we have been able to pull that support together, and are able to resume work on gateway. So we are quite encouraged by the level of support and feel that this line is very, very important in the longer term to Western Canadian producer is to maximize the net-back pricing. But, so suffice that to say we are pleased with the support that not able to divulge the other parties at this point.

Robert Kwan - RBC Capital Market

I guess Pat is it possible, if we can talk about the parties, are you able to say kind of, are they shippers or groups of shippers or is it potential investor?

Patrick D. Daniel - President and Chief Executive Officer

And more of the former, shippers both producer push and refiner pull.

Robert Kwan - RBC Capital Market

Okay, great. Thanks, Pat.

Patrick D. Daniel - President and Chief Executive Officer

Okay. Thanks, Robert.

J. Richard Bird - Executive Vice President, Chief Financial Officer, and Corporate Development

And Pat, if I could just elaborate on your answer a little bit, it's not so much that we are resuming progress on gateway, because of course we never have been doing anything other than continuing to develop gateway in the interim. This is basically I think in line with our expectation that somewhere between 2012 and 2014, is the point in time, when it will become desirable from the commercial prospective to have gateway in place and this just is a natural step in the progression towards that ultimate objectives. So I wouldn't read into this a major change in the development of the gateway. It's consistent of what we've said in the past.

Operator

Next question comes from the line of Karen Taylor with BMO Capital. Please proceed.

Karen Taylor - BMO Capital

Thanks. I have two questions. One talks about the competitive situation to the Gulf, so BP back in December, announced that their open season for their Viridian Pipeline had not been successful, so to reconfiguring that, can you just talk about the competition to the gulf, how much of the time advantage, excuse me, do you have, and are there proposals that are floating around by Kinder Morgan and/or TransCanada and BP at this point material? And then secondarily, just on this monetization opportunity to mitigate the 2008 equity requirements and I know I have ask this before, you've got a very complex corporate structure with Enbridge Income Fund, which appears stranded and EEP, can you talk about how much more complexity you are willing to introduce into your corporate structure, and what exactly you're contemplating?

Patrick D. Daniel - President and Chief Executive Officer

Okay, let me start out with the first one with regard to competition to the Gulf. First of all, we know there are competing proposals to move crude oil to the Gulf. I can't speak for those proposals, I can only speak to ours Karen and as you know, just about every project that we're involved in, we have some level of competition, but we feel we're in a very strong position and to answer part of your question, we think we have at least a year, if not two years of opportunity in terms of being online before any competitive alternative and one of the reasons for that is that we're already effectively or we will be effectively two-thirds of the way there by the time the Southern Access extension down to Patoka, Illinois is complete and not only that, from that point down, we'd be working on existing right away on ExxonMobil's right away.

So, when I refer to the very significant benefit of narrowing that differential by $10 a barrel, after toll times 400,000 barrels a day. That benefit can accrue only if the individual alternative is sort in, for a year to two years ahead of any competing alternatives. So we think that, that economic value is going to be incentive enough for shippers to favor our alternative, not only that when you think of the shipping commitments required to support the different alternatives that could be out there, in our case you're only going to have to support the capital from Patoka, Illinois, down to the Gulf, about a third of the distance that other initiatives would be looking at, so in terms of shipping commitment, it would be a much lighter shipping commitment and hence we think very logically going to result in an easier project to support and on a toll basis, we don't see how anybody can beat us. And as you know, we've got significant economies to scale with the existing system. So we feel we've got obviously, a competitive advantage with a great partner and huge economic benefits that can accrue the producers and shippers if they get this system in place hurry.

So that's kind of our assessment of the competitive situation. Coming back to the monetization opportunity, you are right, we do have a complex corporate structure, and I think it's fair to say that the monetization opportunities that we have are not likely to dramatically alter that corporate structure and of course straight out asset sales wouldn't impact on the complexity at all. We undoubtedly will look at opportunities to utilize the existing structure to maximize on value, but I doubt that we will look at significantly increasing that complexity. So it although complex is as you know it results in a very effective and low cost of capital for us, very competitive cost to capital.

Karen Taylor - BMO Capital

Thank You.

Patrick D. Daniel - President and Chief Executive Officer

Thanks, Karen.

Operator

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

Steven Paget - FirstEnergy

Good morning, looking at your drift plan and your expectation of $300 million in funding from 2008 to 2011, do you see a potential for possible upside, now that you have implemented a 2% discount?

Patrick D. Daniel - President and Chief Executive Officer

Yes, yes we do Steven. I think we are assuming we could have upside up to a couple of $100 million dollars in terms of reduced funding requirements as a result of that, to your program.

Steven Paget - FirstEnergy

Okay. Thank you.

Patrick D. Daniel - President and Chief Executive Officer

Thank you.

Operator

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

Matthew Akman - Macquarie

Thanks very much. A follow-up question on financing obviously Enbridge Energy Partners, as a big part of your growth plans. And, we haven't talked about the financing there, but I guess that is about $1 billion financing gap there, as well this year. And, it seems like the stock market just doesn't want to really recognize the value of that partnership, and the future growth there. So, in the past you have done more a kind of private placement type deal. Is this something that would still be consider going forward, or how do you plan to I guess to meet that gap at the partnership level?

Patrick D. Daniel - President and Chief Executive Officer

Maybe I can have Vern Yu speak to the partnerships funding objectives, Matthew. I think it suffice to say in general terms though that we'll use any and all available sources whether it's private placements or common equity, but Vern can you give a little more specific.

Vern Yu - Investor Relations and Enterprise Risk

Sure, I think here on the EEP conference call Mathew last week they expressed that they needed roughly about $800 million of equity equivalence this year to keep their credit metrics with the BBB net level. I think that would be sourced from all the different sources of equity whether it is private equity, hybrid equity, or to the issuance of Class-A common unit. I think, when you are actively were looking at, we were working with private investors to see if we can potentially put through a sizeable transaction and take off the equity overhang and probably exists on units based on the fact that we had pull that $200 million offering late in November.

Matthew Akman - Macquarie

Okay. Thanks very much. It just seems like that is under valued situation that the market hasn't recognized. Can I just ask one last clean up questions. For CustomerWorks now given the OEB decision and you guys have changed the segmentation of it, does that mean, Richard that it's effectively going to generate next to zero in earnings going forward. Is that what you guys are effectively saying?

J. Richard Bird - Executive Vice President, Chief Financial Officer, and Corporate Development

No I don't think it will be, it will be zero Mathew. We are still going to see some earnings, but certainly not at the level that we have in past, probably in the vicinity of a million bucks a quarter.

Matthew Akman - Macquarie

Okay. Thank you very. Those are all my questions.

Patrick D. Daniel - President and Chief Executive Officer

Thanks, Mathew.

Operator

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

Sam Kanes - Scotia Capital

Thank you, question in general on costs inflation pressure within your project base, and more specifically the Ontario wind farm now. I guess Pat's 500 not 450. Can you just comment on how the pressure... are they abating at or is it still as they, as it worse.

J. Richard Bird - Executive Vice President, Chief Financial Officer, and Corporate Development

I think on that one, Sam things are now pretty well in hand. We've been under construction, since about September or August. So I think on that one, we are feeling quite good about, about where the costs are coming in right now, as we move through the year.

Sam Kanes - Scotia Capital

That respect to all projects including wind?

J. Richard Bird - Executive Vice President, Chief Financial Officer, and Corporate Development

Well you specifically are asking about wind, and actually I think more broadly on all the projects, we certainly think, we've seen the worst in terms of what we announced up for costs increases a quarter or two ago, so yes, I think things are settling down considerably.

Sam Kanes - Scotia Capital

Thank you. That's what I was looking for a color wise with follow-up on this Alberta Co2, ASAP consortia I guess is the right word to start with. Do you have a preliminary view on the shape size dollars of our pipeline network all to be probably still fleshed out, and you've got a lot of pipeline partners in there. TransCanada, Pembina, and of course now ConocoPhilips that has JV with TransCanada and Keystone, surprise that Kinder is not there, but that doesn't matter, how is that kind of shake out or flush out evolve as to who owns what of this project if it goes to pipe, and will you also be looking at I guess sequestration capital, as well as been extension of that your own account?

Patrick D. Daniel - President and Chief Executive Officer

I'm going to ask to Steve Wuori to respond to that. Sam, but just before he does and to maybe just elaborate a little bit on the point, which was made regarding to the wind farm employed that the costs you are going from $450 million to $500 million. I think we just rounded the $450 million to $0.5 billion and that wasn't due to cost increase, so the cost estimate is still $450 million. Steve, can you talk about the CO2 project and partners and where that...

Stephen J. Wuori - Executive Vice President, Liquids Pipelines

Sure, yes, that's I think really Sam an exciting development that is coming along. There's probably three things to think about. One is this idea of our major backbone system in Alberta for CO2 presumably sourced at Fort McMurray and/or Fort Saskatchewan or possibly Joffrey. And we certainly are involved in those discussions and interested in them. We think those as there may solution that don't involve a major backbone that may come first, including this ASAP project that we announced the other day. And this one, the other two things I think about are what about enhanced oil recovery in some of the ageing oil fields, versus the sequestration in this case of Saline Aquifer. So we think that both of those are possibilities, we see more immediacy right now with the Saline Aquifer idea. And so we are going to pursue that and look for the right within the 19 partners look for the right opportunity. There obviously, our interest would be in pipeline ownership and operator ship.

We are pretty unlikely to take decisions in CO2 itself, although we will look at that as part of the overall commercial proposition. We're also continuing discussions on the EOR front and looking for parties that are in the aging oilfields and then sources of CO2, the issue there been, you have to have fairly clean CO2 in order to do in EOR effectively. So that's one of the other issues, but there's a lot happening there, and I think its time really well when you consider the whole debate of our low fabs production and environmental issues connected to it.

Sam Kanes - Scotia Capital

Thanks, Steve.

Patrick D. Daniel - President and Chief Executive Officer

Thanks, Sam.

Operator

[Operator Instructions] And your next question comes from the line of Jeremy Rosenfield with Desjardins Securities. Please proceed.

Jeremy Rosenfield - Desjardins Securities

Desjardins Securities Thank you very much. Good morning, everybody. I just have a quick question on the guidance range that you've projected 180 to 190. I wanted to know what your foreign exchange assumptions for 2008, were for that guidance range, and if you are not assuming parity assumption for the base 2008, where do you see EPS following within that range given parity?

Patrick D. Daniel - President and Chief Executive Officer

Vern do you want to respond to that.

Vern Yu - Investor Relations and Enterprise Risk

For our forecast we use 95 Canadian dollar if our guidance which is effectively 105, CAD to U.S. using foreign exchange nomenclature.

Jeremy Rosenfield - Desjardins Securities

Okay. If we were going to assume parity, you would guide to somewhere in towards the lower range end of that guidance range or?

Vern Yu - Investor Relations and Enterprise Risk

A $0.01 change in the CAD U.S. exchange rate is worth about $1.3 million of after-tax earnings.

Jeremy Rosenfield - Desjardins Securities

Okay, perfect. Thank You very much.

Patrick D. Daniel - President and Chief Executive Officer

Thank you.

Operator

: I show no further questions. And now I'd like to turn the call over for any closing remarks.

Patrick D. Daniel - President and Chief Executive Officer

Thank you, operator. And before I thank you all for attending, I would like to recognize Karen Taylor. I understand that Karen that this is going to be your last call, and that you are going be retiring from BMO. We at Enbridge very much appreciate the diligence, the thoroughness, and the fairness with which you have analyzed and covered our company over the years. We know that the industry and investors that are going to miss your very well thought out analysis and guidance. So we very much appreciate that, we wish you and your family a very well, and thank you for your years of time and attention paid to at Enbridge. And with that Vern are there any other concluding.

Vern Yu - Investor Relations and Enterprise Risk

I think I would like to invite people if you had any more detailed questions. So please give me a call in my office and Colin and I will be available to answer those detailed questions. Thanks everybody.

Operator

This concludes the presentation. You may all now disconnect. Good day.

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Source: Enbridge, Inc. Q4 2007 Earnings Call Transcript
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