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Executives

Vern Yu - VP, Enterprise Risk

Patrick D. Daniel - President and CEO

J. Richard Bird - EVP, CFO and Corporate Development

Stephen J. Wuori - EVP, Liquids Pipelines

Colin Gruending - VP and Controller

Analysts

Linda Ezergailis - TD Newcrest

Sam Kane - Scotia Capital

Robert Hastings - Canaccord Adams

Matthew Akman - Macquarie Research Equities -

Robert Kwan - RBC Capital Markets

Steven Paget - FirstEnergy Capital

Andrew Kuske - Credit Suisse

Daniel Shteyn - Desjardins Securities

Andrew Fairbanks - Merrill Lynch

Ramin Burney - National Bank Financial

Enbridge Inc. (ENB) Q1 FY08 Earnings Call May 7, 2008 9:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Enbridge Inc. 2008 First Quarter Financial Results Conference Call. I would now like to turn the meeting over to Mr. Vern Yu.

Vern Yu - Vice President, Enterprise Risk

Thank you, and good morning. Welcome to the Enbridge Inc. first quarter 2008 earnings call. With me this morning are Pat Daniel, President and Chief Executive Officer; Richard Bird, Executive Vice President, Chief Financial Officer and Corporate Development; Steve Wuori, Executive Vice President, Liquids Pipelines and Colin Gruending, Vice President and Controller.

Before we begin, I should advice you that during this call we may refer to certain information that constitutes forward-looking information. Please take note of the legally required forward-looking information disclaimer in our slides, which generally states that you should not place undue reliance in our statements about the future, since we necessarily acquired certain assumptions to reach conclusions about future outcomes and future outcomes are always subject to risks and uncertainties affecting our business, including regulatory parameters, weather, economic conditions, exchange rates, interest rates, and commodity prices. A more fulsome discussion of these risks and uncertainties is included in our security's disclosure filings, which are publicly available both on SEDAR and EDGAR.

This call is a webcast and I'd encourage those listening on the phone line 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 a transcript will be posted to our website shortly thereafter. The Q&A format will be the same as the Q4 call. The initial Q&A session is restricted to the analyst community. When we have concluded the Q&As for the analyst community, we will invite media on the call for further Q&A.

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

And at this point, I'd like to turn the call over to Pat Daniel.

Patrick D. Daniel - President and Chief Executive Officer

Thanks very much Vern. Good morning everyone. I'm very pleased you're all able to join us. As we reported earlier today, our adjusted operating earnings of the first quarter of 2008 were $239 million or $0.67 per common share, which exceeds the $0.65 consensus forecast, and this provides us now with a very solid basis for meeting our full-year adjusted operating earnings guidance of $1.80 to $1.90 per common share. So, we're very pleased with the start to the year.

Liquids Pipelines and Gas Distribution Services segments both had strong quarters, and I'm very pleased with the results also reported by our affiliate Enbridge Energy Partners where adjusted quarterly net income per unit was over 40%… up over 40% from quarter one 2007. And this resulted in significant increase in the contribution to Enbridge Inc. of course. Richard Bird is going to review the quarterly financials in more detail in a few moments.

I'm going to keep my remarks on the strategic update relatively brief this morning as I'm going to be speaking again later today at the Annual General Meeting in a little more detail. So, what I would like to do is focus on key developments since our year-end conference call.

I'm sure you all know that these are very exciting times at Enbridge, as we are in the midst of the largest growth program in the history of the company. Our very strong geographical positioning, particularly in the crude oil pipelining business is allowing us to expand and extend our delivery networks to reach new markets for our customers, and this is largely driven by the growing oil sands production in Western Canada.

To implement this strategy, as you know, we have some $12 billion in capital expenditures for projects that are commercially secured and are underway today. And I'm very pleased with the progress that we have made in construction and regulatory activities in several of these projects during the quarter.

Let me give you a few examples, starting with… on April 1, we completed Phase I of our Southern Access Expansion on schedule and the pipeline is now ready to accept linefill. Phase I of course added 190,000 barrels per day of net capacity to the Enbridge System and involved building 321 miles of new 40-inch pipeline... 42-inch pipeline from Superior, Wisconsin down to Delavan, Wisconsin.

Stage two of Southern Access Expansion will add an incremental 210,000 barrels per day of capacity to the entire system by the end of quarter one 2009. The second phase of course consists of additional upstream pumping capacity and 133 miles of a new 40-inch pipeline from Delavan, Wisconsin to Flanagan, Illinois. We expect to begin construction on that stage two in June of 2008.

Moving on to the Waupisso pipeline, it is now more than 90% complete and it may actually be in service a month ahead of its June 30 target completion date. And I think you'll agree that given all of the construction delays that we have seen in our industry that we should be very proud of this achievement of bringing a project in a month early in this environment.

Waupisso will have an initial capacity of 350,000 barrels per day and move crude oil from Cheecham terminal, which is south of Fort McMurray, Alberta down to Edmonton. With the addition of pumping stations, Waupisso can be expanded to an ultimate capacity of 600,000 barrels a day. So, we are very well positioned now at Waupisso.

Construction of our Southern Lights diluent return line continues to proceed as plan. Over 90% of the pipeline between Superior and Delavan, Wisconsin has been completed and we continue to expect this project to be in service late in 2010.

Also in the quarter, we received regulatory approval from the NEB that allows us to proceed with the Canadian portions of Southern Lights and the Alberta clipper through pipelines, as well as Line 4 Extension Project, which as you may recall, is between Edmonton and Hardisty, Alberta.

While most of the growth initiatives have been in the crude oil side of the business, we are also pursuing a number of significant initiatives in our Gas division and we've made excellent progress on those as well over the quarter. We completed the Neptune Pipeline in March, and we now have the capacity to move an incremental 60,000 barrels a day of crude oil, and 200 Mcf of natural gas from the Neptune oil and gas field, which is in the Green Canyon in the offshore Gulf to our existing of offshore Gulf of Mexico Pipeline system. We expect production to commence from these fields in the third quarter of 2008, but in the meantime, we do earn standby fees having put those facilities in place.

Construction on our 190-megawatt Ontario Wind Project near Kincardine is also progressing well. We now expect the facilities to begin producing electricity by the start of the first quarter of this year and then we expect that to be fully operational by the end of the year. The most significant news in our Gas segment really was the Ontario Energy Board's approval in February of this year of an incentive regulation plan for Enbridge Gas distribution and this is going to encompass now the next five years.

We are pleased to be operating under incentive regulation, as this will allow us to earn returns in excess of the allowed utility rate of return on equity. And in this instance, the first 100 basis points of savings are going to accrue directly to Enbridge, and the next 200 basis points of savings will be shared 50-50 with our customers. So, we believe that we are going to be able to generate an incremental, probably somewhere in the range of a 100 basis points to 150 basis points improvement in return for our shareholders. At the same time, we've passed significant savings on to our customers.

Now that I have covered a brief summary of the progress on the commercially secured projects of the first wave of growth of Enbridge, let me remind you that we also have an additional $15 billion worth of growth opportunities, which are forecast to come into service after 2007. We’ve labeled this the second wave of potential projects and this includes additional regional infrastructure in Alberta, further mainline expansion, developing new market access, and then… by new market access, we are thinking here primarily the US Gulf Coast and then expansion in the eastern part of PAD II, and then, what we call, longer-term new market access, for example, the Gateway Project of the West Coast and the US East Cost had one access, and on top of all of that, some incremental contract terminal. I think it's fair to say that it’s unlikely that we are going to win all $15 billion worth of that work, but we do expect to win our fair share of it.

Maybe I can spend a few minutes addressing the US Gulf Coast and our Texas access initiative, primarily because transportation of Western Canadian crude oil to the US Gold Coast is a pretty hot topic in our industry today, and it's timely that we do bring you up-to-date on where we are.

First of all, coming back to the fundamentals. Getting Canadian heavy crude to the Gulf Coast will enhance netbacks for Canadian producers and provide a secured source of heavy crude oil to the US Gulf Coast refineries. So, it's got duel benefit. This will allow Canadian producers and Gulf Coast refineries to sharing the economic benefit of what is a converging heavy crude oil price differential between Canadian heavy crude priced in Alberta and Mexican mine crude priced in the Gulf Coast. On a quality basis, these two crudes are the same, but Canadian heavy traded on average at about $11 a barrel discount to Mexican mine in the last quarter of 2007, and that's after taking into account transportation into the Gulf.

So, assuming 400,000 barrels a day, that represents about $1.5 billion per year of economic benefit that can be shared between Canadian producers and Gulf Coast refineries. Canadian producers should see a further economic benefit as the pipeline will improve netbacks on all barrels as they move to other markets as well, it could very well do that.

So, let me just give you a quick update as to where we are in this strategy. First, we have projects underway that will expand our mainline system by 400,000 barrels a day from Western Canada to Patoka, Illinois. And that's two-thirds of the way to the Gulf Coast, right off the path. These projects which are Southern Access Expansion, Southern Access Extension, and Alberta Clipper, all of which I've already talked about have been approved by our shippers and are now either under construction or they're proceeding into construction.

So, given this starting point, we believe that most economic and competitive solution to accessing the Gulf Coast for a volume of 400,000 barrels a day is our Texas Access Pipeline joint venture with ExxonMobil. Here we will extend a large diameter line due south from Patoka to the Gulf Coast at a capital cost of about $2.6 billion. And this is significantly cheaper than building a complete new line from Western Canada at a cost that would be in excess of $6 billion.

Not only that, when our current system expansions are complete, we'll be able to expand the entire Enbridge System all the way to the Gulf on a very cost-effective basis. Basically, all we need to do at that point is add additional pumping stations. We can add another 400,000 barrels a day at system-wide capacity to the Gulf at a quarter of the cost of our current system expansion and we don't need to add any additional pipe. So, for either 400,000 barrels a day by 2012 or 800,000 barrels a day at any time thereafter, the Enbridge mainline is the most economic solution for shippers.

We remain in discussion with potential shippers on the scope and timing of the US Gulf solution. Obviously, one that best fits their needs, bearing in mind that they will need to provide long-term contract commitments to utilize any new infrastructure. Based on these discussions, we believe that the best approach may well be a phased approach, where we refigure existing infrastructure to handle, say, 150,000 to 200,000 barrels a day of transportation, possibly as early as 2010, and then moving on to a new large diameter pipeline south from Patoka when the volume reaches that 400,000 barrel a day threshold sometime after 2011.

Finally, there is a lot of activity in the regional pipeline infrastructure segment in the second wave as well. And these new pipelines will move oil sands crude from the cruiser [ph] projects in the oil sands to the mainline pipeline hubs both at Edmonton and Hardisty.

Beyond our Fort Hills project, there are three other large projects that will be looking to secure pipeline transportation within the next six to 12 months, then a couple more that come further down the road from that. With our existing regional pipeline systems and here I'm including Athabasca and Waupisso, Waupisso about to start operations, Fort Hills under development, delivering to both mainline hubs, we're in the strong position to provide the highest value solution to our customers.

We can provide the benefits of economies of scale and flexibility of multiple delivery points. We can also serve early phases of production using existing capacity until those projects achieve the critical volume thresholds required to support dedicated facilities.

So, those are my comments, at this point, on the status on waves 1 and 2 of development. What I like to do now is turn the call over to Richard Bird to review the quarterly financials, and then I will come back for a very brief summary at the end. Richard?

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

Good morning everyone. I will begin with the review of the first quarter results, and then conclude with an update of our financing strategy. As Pat mentioned, we released our first quarter results earlier this morning. Reported net income was $251 million or $0.70 per share, up from $227 million or $0.65 per share in 2007.

The significant increase in reported earnings is mainly due to the following nonrecurring factors. Weather in Enbridge Gas distribution's franchise area was substantially colder than normal in the first quarter of 2008, resulting in increased earnings from EGD. Higher earnings at Aux Sable, which reflected unrealized fair value gains on derivative instruments. These positive variances were partially offset by the recognition of an income tax liability, resulting from an unfavorable court decision related to the tax basis of previously owned pipeline assets in Kansas.

Excluding the one-time and non-operating factors summarized in the news release, our adjusted earnings for the first quarter of 2008 were $239 million or $0.67 per common share, an increase of 4% in adjusted earnings and a 3% increase in earnings per share over the first quarter in 2001. So, a solid start to the year and better than what we had expected for the first quarter.

While the quarter was strong, the significant appreciation of the Canadian dollar since the beginning of 2007 has caused the earnings generated by our US operations to be lower than what they were in Q1 2007. Overall, year-to-date earnings were lower by approximately $8 million or $0.02 a share when compared to Q1 2007 as a result of movement in the currency. As we noted on the previous quarterly earnings calls, we do hedge our economic exposure to the US dollar and we received after-tax hedge payments of $5 million cash in the first quarter of 2008. Unfortunately, on GAAP, we’re not allowed to record these settlements as net income. However, these payments are recognized on our statement of cash flows and on our balance sheet.

In the first quarter, we saw a number of business units perform very well. Let's start with Liquids Pipelines. First quarter earnings rose $7 million to $76 million when compared to 2007. Most of the increase was due to the contribution from AEDC on Southern Lights, which is currently under construction. As well, Enbridge System earnings benefited from AEDC on the Canadian portions of the Southern Access Expansion and Alberta Clipper projects. This was partially offset by increased taxes in the carrier segment.

Earnings from Spearhead were higher this quarter due to increased throughputs, while Olympic Pipelines earnings decreased as a result of the timing of planned maintenance expenses. Enbridge Energy Partners, as Pat mentioned, continues to be a very good news story. After adjusting for dilution gains and mark-to-market gains and losses on derivative financial instruments, Enbridge's earnings contribution from EEP increased by $3.5 million over the prior year comparable quarter, that even in the face of the foreign exchange rate variants going in the other direction.

This increase was due to higher incentive income, and outstanding operating performance within EEP underpinned by all-time high deliveries on the Lakehead System, stronger natural gas throughput and improved gas plant reliability and expanded capacity. These were partially offset by Enbridge's modestly lower average ownership position in EEP of 14.9% in the first quarter of this year, compared to an average of 16.6% in the first quarter last year.

Looking forward, the future for EEP remains bright. In the second quarter, we will begin to see earnings from the first phase of the Southern Access Expansion, which as Pat just mentioned was completed at the end of the quarter. But we won't see a full three months worth from Southern Access given the timing of the associated toll increase. And like Enbridge, Enbridge Energy Partners is well positioned for further earnings and distribution growth as it completes its current suite of organic growth projects.

Gas Distribution and Services had an excellent quarter as earnings were up almost $7 million over 2007, after adjusting for whether and unrealized derivative fair value losses. The increase was due to better earnings from Tidal as improved market fundamentals enabled higher margins to be captured on storage and transportation contracts.

Enbridge Gas Distribution's adjusted earnings were flat to prior-year, that’s despite a shift in rate structure, which will tend to move earnings into the latter part of the year. This together with gains from incentive regulation bodes well for the rest of the year. Aux Sable's first quarter reported earnings of $22 million include a mark-to-market gain of $19 million associated with the financial derivatives used to eliminate commodity price risks associated with this asset.

We've entered into transactions the lock in Aux Sable earnings in the order of $20 million for 2008, both hedges don't qualify for hedge accounting and as such the quarterly changes in the mark-to-market value of the hedges are booked earnings. After adjusting for those mark-to-market gains in the first quarter, Aux Sable recorded earnings of a little over $3 million.

Strong fractionation margins during the first quarter resulted in the earlier recognition of earnings pursuant to the contingent upside sharing mechanism included in the BP agreement. This was an unexpected positive, to be recording those earnings as early in the year, and that should contribute to higher annual earnings for Aux Sable.

Finally in corporate, our corporate expenses are in line with last year after adjusting for nonrecurring items, including a $5 million asset gain and a $32 million income tax expense resulting from that unfavorable court position. Although the decision resulted in a significant impact to reported earnings, the cash impact of that decision is minimal. Tax expense in the first quarter combined with amounts previously recorded provided fully for the liability associated with that decision. Enbridge is appealing the decision and a final resolution of the matter is expected next year.

I'll move now to update you on the financing plan that supports our investment and earnings growth. Starting with our liquidity perspective, we continue to carry a significant amount of unutilized bank credit. At the end of March, our committed facilities for Enbridge and its subsidiaries totaled $6.7 billion, of which only $2.4 billion is either drawn or allocated to backstop commercial paper programs. The remaining $4 billion plus of unutilized capacity is available to provide funding for our capital programs, prior to putting in place permanent financing. We don't plan to dip into this liquidity in any material way or for any material length of time, but it has been sized to absorb a full year's funding requirements plus cushion. This will allow us the flexibility to optimize permanent financing alternatives and to write out any capital market disruptions.

Our updated permanent financing plans are summarized in the flow charts that we've used in the past, starting with capital expenditures of $11.6 billion, and deducting free cash flow of $5.1 billion over the four-year period, we're left with a net funding requirement of $6.5 billion. This breaks down into a debt requirement of $4.6 billion and a gross equity requirement of $1.9 billion to be funded between 2008 to 2011. On the debt side, most of this will be funded on the balance sheet of either Enbridge or Enbridge Pipelines Inc. However, we do intent to utilize project financing for Southern Lights and structuring of that financing is on schedule to be placed in the third quarter of this year.

Turning to the equity side of the chart on the right, we will need to add about $1.9 billion of additional equity over this four-year period. Our initial equity needs will be primarily met with our enhanced dividend reinvestment program and asset sales and monetizations. On the DRIP, earlier this year we introduced a discount of 2%, and actually saw our shareholder participation in that program increase from roughly 4% to 31% in the first quarter.

With investors continuing to participate at this rate, we expect that we would raise roughly $800 million through the DRIP over the next four-year period, and so we've updated our financing plan to reflect that higher participation rate. As such, our remaining equity need is on the order of $1.1 billion over this period of time. And we will use a variety of alternative sources to meet this requirement as noted on the bottom right of the slide.

As I noted on the Q4 call, a conventional equity issue is at the bottom of the list. This is because, we believe that our share price is not yet reflecting our growth outlook, and therefore is currently undervalued. So, issuing shares is definitely not a preferred financing strategy. On the other hand, we have a range of other alternative sources through which we expect to be able to secure capital, fund more favorable terms, including asset sales and monetizations.

In February, we announced our intention to sell our interest in CLH and that sale process is well underway. We have received strong interest from potential purchases, despite the recent uncertainty in the capital markets. Recent sales precedence indicate that we could expect up to $1.3 billion Canadian before tax from the sale of this asset.

Of the after-tax proceeds, we will need to set aside about $400 million to repay the debt financing associated with this asset, leaving a contribution of up to $750 million toward our equity requirements. As such, we expect that the sale of CLH combined with continuing higher DRIP participation, we will take care of all of over 2008 equity needs along with a significant portion of 2009 as well.

Beyond CLH, we are examining several other asset sale or monetization alternatives, which appear to offer favorable valuations and economics. We're also actively examining hybrid securities in order to achieve a lower cost for equity funding in a world where we anticipate progressive improvements in our share price. This type of security has the advantage of providing us with a significant amount of equity credit from the rating agencies, yet results in no earnings dilution to our current shareholders.

A mandatory convertible debenture appears to be the most attractive of these securities. A hybrid security issuance or a further asset sale or monetization would provide a valuable degree of flexibility and cushion to the financing plan at a favorable economic cost, looking after the remainder of our current financial requirements, and in anticipation of success in securing additional growth programs.

In summary, we see the funding of our growth program to be very manageable over the next four years.

And on that note, I'll turn it back to Pat.

Patrick D. Daniel - President and Chief Executive Officer

Great. Thanks, Richard. So the next four years, as Richard has just indicated, should be a very exciting time of significant earnings growth for Enbridge. We are now fully engaged in building the $12 billion in commercially secured Liquids Pipeline projects that will start to come into service this year and through 2011. Beyond these projects, of course, we are actively developing the second wave of growth opportunities.

We started the year off very solidly. Our financial results for the first quarter were very strong, and we remain confident that we're going to be able to meet our annual guidance range of $1.80 to $1.90 per share. More importantly, we've continued make significant progress on the construction of this first wave of growth. As these growth projects come into service, primarily 2009 and 2010, we expect a steep ramp-up in our earnings and cash flow. These projects will allow us to deliver a compound annual growth rate of 10% for the next four years, 2008 to 2011.

So on that note, I think we can open up for the Q&A session.

Question and Answer

Operator

The first question-and-answer session is restricted for the analyst community. [Operator Instructions]. The first question comes from the line of Linda Ezergailis from TD Newcrest. You may proceed.

Linda Ezergailis - TD Newcrest

Thank you. Just have some questions on Southern Access Extension. The decision I guess is still pending, still expected in Q2, but I'm wondering if there... what sort of risk there is if even further delays and what the issues are?

Patrick D. Daniel - President and Chief Executive Officer

Linda, I'll maybe just briefly speak to that and ask Steve Wuori to add to it. It's difficult to assess. We doubt that we will see a delay beyond the second quarter on it. We are of course looking for two approvals regulatory approval from FERC with regard to rates and from the Illinois Commerce Commission with regard basically the right to eminent domain. And both processes have taken longer than expected. We've had some very strong industry interventions in support of us, but of course, every time there is an intervention, then it takes time for the regulator to consider the evidence filed. So, we think things are moving in the right direction, would expect second quarter, but we can't guarantee we are going to have it through in that time. Steve?

Stephen J. Wuori - Executive Vice President, Liquids Pipelines

Yes. I don't think I have anything to add to that Linda. I think Pat has pretty well described what the two approvals are and I think everything is in it’s needed. So, now it's just a matter of the Illinois Commerce Commission and FERC finishing their decision process.

Linda Ezergailis - TD Newcrest

Can you give us an update on the capital spend profile? Previously I had $400 million… I can't remember what I had, but can you give us an update on the CapEx spend?

Patrick D. Daniel - President and Chief Executive Officer

On the Southern Access Extension?

Linda Ezergailis - TD Newcrest

Timing, yes.

Patrick D. Daniel - President and Chief Executive Officer

It hasn't changed.

Linda Ezergailis - TD Newcrest

It has not changed and you are earning AEDC in the meantime?

Stephen J. Wuori - Executive Vice President, Liquids Pipelines

[inaudible] No.

Patrick D. Daniel - President and Chief Executive Officer

No AEDC on Clipper, Southern Access Expansion, and Southern Lights.

Linda Ezergailis - TD Newcrest

Okay. So there's no AEDC on the expansion.

Patrick D. Daniel - President and Chief Executive Officer

Correct.

Linda Ezergailis - TD Newcrest

Can I just ask a quick follow-up question on CLH? Your… at what point would you consider moving it to discontinued operations, and is your annual guidance of $1.80 to $1.90 inclusive of CLH for the full year?

Patrick D. Daniel - President and Chief Executive Officer

Collin, do you want to speak to that?

Colin Gruending - Vice President and Controller

Sure. Yes, Pat. My name is Colin. The accounts for CLH are on an equity basis, so it's a one liner on our balance sheet, as you know. So, we will not be required to break it out on a discontinued operations basis. And your second question is that…

Patrick D. Daniel - President and Chief Executive Officer

I can take that one Colin. So, the original guidance range didn't incorporate the sale of CLH, but did incorporate an equity issue. So, you have to effectively take the equity issue out and put the sale of CLH in to true it up with a scenario where the CLH sale procedure is expected.

Linda Ezergailis - TD Newcrest

Great. Thank you.

Patrick D. Daniel - President and Chief Executive Officer

Thanks, Linda.

Operator

The next question comes from the line of Sam Kane from Scotia Capital. You may proceed.

Sam Kane - Scotia Capital

Thank you. I will stay with CLH, you’ve had some problems with euro hedge now. I am just wondering, hypothetically, if say the euro fell 10% against the C dollar. What would be the kind of the financial/economic impacts?

Patrick D. Daniel - President and Chief Executive Officer

Richard, do you have a sensitivity on the euro?

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

The hedge that you are referring to is a hedge of the earnings anticipated for the year. So, a significant unfavorable move in the value of the euro versus the value of the Canadian dollar wouldn't impact the earnings that we expect to record up to the point of sale. But, it certainly would impact the gain that we would recognize on conversion back into Canadian dollars from the disposition.

Sam Kane - Scotia Capital

Okay, that's helpful. And just with respect to that, if I heard you correctly, if some folks out there at $1.3 billion pre-tax for that value, whatever they choose at the time to do that vis-a-vis that currency and you are assuming $1.15 billion, presumably the tax rate you are expecting to pay is 12%, 13% or something like that?

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

I think the tax rate would be a little bit higher than that, Sam.

Sam Kane - Scotia Capital

Okay, because you're using $1.15 billion, if I heard you correct, $400 million for debt and $750 million for equity, that's $1.15 billion, maybe you're assuming a higher price?

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

Yes. I'm not sure that we're going to pin it down quite that precisely for you.

Sam Kane - Scotia Capital

Okay. Just wanted to get some flavor on that. Thanks.

Patrick D. Daniel - President and Chief Executive Officer

Okay, thanks Sam.

Operator

The next question comes from the line of Bob Hastings from Canaccord. You may proceed.

Robert Hastings - Canaccord Adams

Hi, thank you. Just on the EGD incentive, you give some guidance there that you hope to be getting 100 basis points to 150 basis points improved return with customer also benefiting. Can you give a little more clarification on the timings of how long it takes to get there? Because you did mention it will be over five years.

Patrick D. Daniel - President and Chief Executive Officer

It's probably a little early to provide that forecast, Bob. On the basis of our experience going back to the Liquids Pipelines days, when we first moved into incentive totaling, it takes a little while to kind of reorganize and to a certain extent adjust the culture to the new operating environment. So, it's not that you're going to see it quarter-over-quarter right out of the gate, but I would expect that by end of this year we should pretty well have things moving along pretty much as we like and hopefully build to that kind of improvement in turn through the year next year. But, it's a little difficult to tell, because it does impact and it can impact the entire organization.

Robert Hastings - Canaccord Adams

Okay, thank you very much.

Patrick D. Daniel - President and Chief Executive Officer

Thank you.

Operator

The next question comes from the line of Matthew Akman from Macquarie. You may proceed.

Matthew Akman - Macquarie Research Equities

Thank you very much. I wanted to follow-up, Pat, on your comments on the Gulf Coast line, because I think it’s important to future growth and I agree you guys seem to have gone most of the distance and so it seems almost obvious that the lower cost options has to continue on Enbridge. But, I guess there was an open season held and I'm not sure exactly what happened there, but maybe you could talk about what your thoughts are on why that open season wouldn't have been successful of about and is there something you can do to address shippers’ concerns in the near-term that could kick start that line again?

Patrick D. Daniel - President and Chief Executive Officer

I'll give you the best reading that we can at this point, Matthew. First of all, I think it's fair to say that probably the upstream producers who are providing the main drive and incentive for this project have experienced some delays in terms of either mining operations or SAGD operations, and hence their timelines may be a little push back from what we originally thought when we started the open season, and hence some hesitancy to make big commitments at a time when they're working out operational challenges in their own upstream operations. As those come into… in the line, I think we're going to find they are more likely to commit. So, I think that upstream timing is probably the prime issue. At the same time, as you know, we're involved in a competitive project and there are two or three or four other alternatives out there that I know that customers want to evaluate and rightfully so. So, I think the important thing from our point of view is to make sure that they do have the full and complete data set and that's one of the reasons why I spent the time on it that but I did this morning to explain that there is no expansion required of our system up to Patoka, it's only new-build $2.6 billion from there down and it’s a much lighter commitment to new capital for them, and significant delivery options and flexibility along the way in our system. But, I think the prime reason for the delay lately is just upstream delay.

Matthew Akman - Macquarie Research Equities

Okay, thanks, that sounds very logical. Can I shift on Tidal for a second? You guys are making more money in energy marketing, and while I know you don't take significant risks there, it's nice to get more profit, is that sustainable especially because you'll be doing more around tankage and bringing more daily rent into the province? So, is it possible that actually the profitability for that business could be pretty attractive going forward without taking more risk?

Patrick D. Daniel - President and Chief Executive Officer

Maybe I could ask Richard Bird to respond to that Matthew.

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

I think, Matthew, the market conditions that contributed to that opportunity in the first quarter are ones that are going to happen occasionally. So, it would be a little too optimistic to assume that level of profitability from Tidal on an ongoing basis. Particularly a good part of it was due to a particularly nice spread that opened up between the receipt point and the delivery point of some pipeline capacity that Tidal had under contract. It normally delivers a nice tidy profit on a running basis, but in that case, they were able to take advantage of that spread and do very well. But, that condition will recur from time to time, but not on a predictable or a sustainable basis.

Matthew Akman - Macquarie Research Equities

Okay. Thanks very much.

Patrick D. Daniel - President and Chief Executive Officer

Thank you.

Operator

The next question comes from the line of Robert Kwan from RBC Capital Markets. You may proceed.

Robert Kwan - RBC Capital Markets

Good morning. Just wondering, can you provide a break-down of the increase just in the major buckets on the Enbridge System earnings and between AEDC and then the offset on the Terrace taxes and then anything else going on there?

Stephen J. Wuori - Executive Vice President, Liquids Pipelines

Steve here. Robert, I think the pattern that we'll see through the year is generally AEDC moving the system earnings up from Clipper and Southern Access and that being offset by Terrace tax. In the quarter, it's around $3 million to $4 million in increased AEDC over the prior-year quarter offset by about $2 million in increased Terrace tax. Those are the big pieces. There is also some smaller things moving around in terms of O&A costs and so on. But, those are the big items, AEDC up $3 million to $4 million, Terrace tax up about $2 million.

Robert Kwan - RBC Capital Markets

So, with the Terrace being $2 million, has your outlook changed in terms of the guidance you provided coming out of Q4 about the impact at Terrace taxes for '08?

Patrick D. Daniel - President and Chief Executive Officer

I think it's a little early in the year to do that. I think at the end of the year, on the year-end call, we walked through that whole dynamic and it's too early to say. As you know, as the throughputs go up in a given year in the year of transition with Terrace tax, so also the tax and throughputs are up, they're not up at exactly the pace that would have brought us to the overall guidance of about $20 million that we talked about on that last call. But, it's too early in the year to say as volumes are ramping up coming off the Athabasca Pipeline and other things, it's too early to say. So, I think we'll leave it at where we left it there for now.

Robert Kwan - RBC Capital Markets

Okay. Just my last question here. On the CLH, your referenced the debt repayments. Does repaying that debt free up debt capacity somewhere else to finance the project portfolio?

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

Yes, that's right Robert. In fact probably the best way to look at that debt repayment is it’s not really repayment per se, it's displacing a portion of the debt that we otherwise would be raising.

Robert Hastings - Canaccord Adams

Okay. Great. Thanks Richard.

Patrick D. Daniel - President and Chief Executive Officer

Thank you.

Operator

The next question comes from the line of Steven Paget from FirstEnergy. You may proceed.

Steven Paget - FirstEnergy Capital

Thank you. Good morning. Two questions. First, could you comment on where the light versus heavy amounts that Southern Access will be shipping. The second question is on your outlook on steel prices given the rise in the cost of coking coal.

Patrick D. Daniel - President and Chief Executive Officer

Okay. First of all, Southern Access split, light to heavy. Steve?

Stephen J. Wuori - Executive Vice President, Liquids Pipelines

It’s Steve. I don't have a specific split. I mean certainly the expansions are all targeted to the heavy crude capacity of the system. Southern Access though is adding 45,000 barrels a day of light capacity downstream through what's called the LSr or the Light Solar Project, actually it’s part of Southern Lights. So, it's certainly targeted more very much to heavily oil movements with some addition, and that's the 45,000 barrels a day of additional light capacity, because there's flexibility needed that is going to depend on how much upgrading is done, and how much synthetic it will move versus heavy. But, certainly Clipper, Southern Access generally targeted to heavy oil.

Steven Paget - FirstEnergy Capital

Great. Thank you.

Patrick D. Daniel - President and Chief Executive Officer

Maybe just on the second part of your question, Steven, with regard to steel cost, the arrangement that we have with major pipe provider has largely held us immune from significant increases in steel costs. But, either Steve or Richard or either one of you in a position to comment on the general market?

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

I can comment on that because I know we've looked at what the pricing for steel is for potential second wave projects. We have all the first wave projects locked in as Pat just mentioned. Generally, we're looking at steel prices of 30% to 50% higher than they were at the time when we locked in pricing for the first wave projects. But, that won't, as Pat said, have any impact on those that are commercially secured through 2011.

Patrick D. Daniel - President and Chief Executive Officer

I think the main value in that Steven is to realize the significant value of that long-term supply deal that we did on Wave 1. So, we've seen quite a significant increase from the time that that was locked into to what way two price would be.

Steven Paget - FirstEnergy Capital

Thank you. I was just looking for your outlook on the very long term in steel.

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

Okay and thank you.

Operator

The next question comes from the line of Andrew Kuske from Credit Suisse. You may proceed.

Andrew Kuske - Credit Suisse

Thank you, good morning. You've got a number of pipelines coming on stream for a while, I'm just wondering if you can give us some clarity and just some idea of the linefill that would be required for those lines? And then on top of the linefill question, just the relationship between the linefill and then official commissioning where you are earning cash earnings off of those pipelines?

Stephen J. Wuori - Executive Vice President, Liquids Pipelines

It's a very good question, Andrew, because certainly linefill is a commitment that the industry makes to expansion projects and then needs to fill. The one probably that is the most immediate… well there is two, I guess, Waupisoo and Southern Access. On April 1, we notified the industry that we’re ready to accept linefill on Southern Access from Superior South to a place called Delavan, Wisconsin that is about 320 miles and at the same time because of the agreement we have on Southern Access, Enbridge Energy Partners apply the system full surcharge that applies to the Southern Access capacity. So, each started to earn on that per the agreement as soon as we were ready to accept linefill. I don't have a total number for you. I guess, we could do the calculations, but we don't have a total number of barrels of linefill required for all of Waupisoo and Southern Access, which are the two that are this year as far as linefills are concerned, about obviously a significant amount of crude is required for that.

Andrew Kuske - Credit Suisse

And then just as a follow-up question. If you were to look at the comparative amount of linefill on your system running all the way down… proposed system all the way down to the Gulf of Mexico versus any competitor pipelines or even an Enbridge type proposal that would be new builds running more directly down say the express corridor and then down to Texas. What would that comparative be roughly, if you have that?

Stephen J. Wuori - Executive Vice President, Liquids Pipelines

I think roughly in terms of incremental commitments, as Pat mentioned, we’re two-thirds of the way there at Patoka. So, you could argue that two-thirds of that linefill has already been accounted for through other expansion projects. And that's one of the issues as we looked at a bullet line or a direct line from Alberta to the Gulf Coast, linefill is one of the concerns because it's pretty significant in terms of incremental linefill that shippers need to come up with. Other things like transit times, line flow rates, and other factors come into a too. I think our rough proxy would be about two-thirds less incremental linefill required to get to the Gulf via Texas access.

Andrew Kuske - Credit Suisse

That's great. Thank you.

Patrick D. Daniel - President and Chief Executive Officer

Thanks, Andrew.

Operator

The next question comes from the line of Daniel Shteyn from Desjardins Securities. You may proceed, Mr. Shteyn.

Daniel Shteyn - Desjardins Securities

Good morning everyone. First one the tap to the Gulf Coast. I guess what... certainly there is a lot of issues such as flexible delivery and so on that impact it, but ultimately a lot of the shipper decision revolves around the toll. And I guess my question is, how competitive do you believe your toll would be for shippers from Alberta versus Greenfield Park going from Alberta to the Gulf Coast?

Patrick D. Daniel - President and Chief Executive Officer

We obviously think it would be very competitive. In fact, we find it a challenge to see how anyone can compete with the advantage of already being two thirds of the way there, Daniel, and having the significant economies of scale associated with our existing system and existing right of away. I'm sure, as you can appreciate in our case, we removed the construction risk around two-thirds of the routing and in terms of right of away access and control of capital cost, we will be using ExxonMobil right of away all the way down and hence not only in terms of the absolute toll number, but the uncertainty, the potential volatility around that as you actually get underway and truly build this thing significantly lower with our system. So, we feel we can compete quite comfortably with all newcomers on this as a result of already being two-thirds of way there.

Daniel Shteyn - Desjardins Securities

Right. Just to quantify that a little bit, do you believe that a toll using your facilities could be… I'm not asking of what the toll actually is or that you've offered, but is it maybe, could it be half, two-thirds, a-third of comparable route for a Greenfield pipe?

Patrick D. Daniel - President and Chief Executive Officer

That's hard to quantify. There are so many assumptions depending on volumes etcetera. Steve or Richard, I don't know whether you want to take a stab at that.

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

It wouldn't be anything more than that and I'd rather not do that. It's going to depend on CapEx assumptions in a pretty major way. As we've looked out at Alberta to Gulf Coast project, and the cost of it, I think, as Pat mentioned, from Patoka south, we're looking at about $2.6 billion, then you can extrapolate that to 2.5, 3 times that distance and come up with a pretty large CapEx number, which would drive a full that is going to be fair bit higher than what it is through the existing systems in Texas Access. Exactly what that is though, Daniel, it's probably too early to say.

Daniel Shteyn - Desjardins Securities

Okay. In terms of the market capacity to absorb the incremental pipeline capacity to the Gulf Coast, what would be your view for a total requirement, you're proposing, I guess, 400,000 and increasing it potentially later on to 800,000 by extending the whole of the Enbridge System. Am I understanding that correctly?

Patrick D. Daniel - President and Chief Executive Officer

Yes. Those would be the basic parameters, 400,000 would be the base Texas Access expandable to 800,000 barrels a day. And I think that we're pretty comfortable that a 400,000-barrel a day demand, which obviously involves displacement of Mexican and Venezuelan crude in the Gulf is quite realistic. Frankly, an 800,000-barrel a day figure starts to challenge the imagination a little bit more, as to exactly how much will be displaced in the Gulf, and frankly where else Western Canadian barrels are going to move, Eastern PADD II. We've talked about PADD I and then the Gateway Pipeline concept that we are also pursuing that would move barrels to California and Asia. I think that's the interplay that would really weigh into the issue between 400,000 and 800,000 barrels a day into the Gulf Coast. I mean, certainly the Gulf refining capacity is there, but recognizing that it's all displacement barrels, it's displacing of foreign barrels from elsewhere, it really is going to depend on pricing relative to pricing that's available in other markets like PADD II, Easter PADD II and off the West Coast.

Daniel Shteyn - Desjardins Securities

Okay. Under this scenario, it's probably unlikely that there could be appetite for any more than 800,000 barrels per day capacity from Alberta to the Gulf Coast well into the middle and the latter part of the next decade, at least from the point of view of availability of Canadian oil sands proved?

Patrick D. Daniel - President and Chief Executive Officer

Yes. I don't think that's an unfair way of looking at it. Obviously, a lot of things could play into that, including supply disruptions from other sources and other factors. But, timing is I think the issue both from a production perspective and also development of that market perspective. So, that's not bad. I don't think I would say definitively that that will absolutely be the case. But, indicatively, I think that's not bad.

Daniel Shteyn - Desjardins Securities

Okay. Thank you for your time.

Patrick D. Daniel - President and Chief Executive Officer

Thank you.

Operator

The next question comes from the line of Andrew Fairbanks from Merrill Lynch. You may proceed.

Andrew Fairbanks - Merrill Lynch

Hi, good morning guys. Just had a question on the construction cost pressures as you build out the system, do you find that labor productivity is holding up well in most of the various regions? Are there any real areas we should be watching closely as you proceed down the build out?

Patrick D. Daniel - President and Chief Executive Officer

Andrew, I think it is fair to say that, from the start of Wave 1 to where we are right now, we have noticed significant upward cost pressures and also very significantly lower productivity from the last major round of pipeline construction that we did. However, I think it's fair to say that that has leveled off. We're no longer seeing continued dramatic escalation in costs and we've seen the productivity has kind of established a new level and we are not seeing kind of lower level of productivity that we did in the early stages. And that's largely because many of the companies have now gone out and have got the crews, have got the guys trained up, after many years of not doing a lot of pipeline construction, and hence, we are seeing more of a leveling out in that productivity. So, we anticipate going forward a much easier job. I hardly like to use that word easy in terms of controlling capital costs these days, but a much easier job in terms of keeping these projects on budget.

Stephen J. Wuori - Executive Vice President, Liquids Pipelines

I think the other factor Andrew is that we're going to have these crews working year-round for several years, which also improves productivity as opposed to the usual pipeline construction way, which is a seasonal type of approach. So that's going to help also to have the crews engaged in working year-round.

Andrew Fairbanks - Merrill Lynch

All right, it's excellent. Thank you.

Patrick D. Daniel - President and Chief Executive Officer

Thank you.

Operator

The next question comes from the line of Ramin Burney from National Bank Financial. You may proceed.

Ramin Burney - National Bank Financial

Good morning everyone. I just have a couple questions here. Can you please provide the status of discussion, if any, with ConocoPhillips and BP regarding their new proposal Alaska Pipeline and if there has been any discussions actually with the Alaska Government?

Patrick D. Daniel - President and Chief Executive Officer

Very, very informal discussions and nothing substantive at this point. I mean, we did receive a call from the BP/ConocoPhillips Consortium or JV prior to their public announcement of their intent to proceed with plans to build the pipeline and with an indication that there will be a point in their process where they will be interested in either inviting third-party pipelines and/or putting out an RFP for third-parties to participate. So, we maintain contact with them to ensure that we're ready when they're ready for us to come forward, but nothing formal at this point.

Ramin Burney - National Bank Financial

All right. Thank you. As far as future plans for your interest in CustomerWorks, now that AGD is no longer a customer for a while now, is that probably maybe your asset sale plan?

Patrick D. Daniel - President and Chief Executive Officer

CustomerWorks?

Ramin Burney - National Bank Financial

Yes.

Stephen J. Wuori - Executive Vice President, Liquids Pipelines

It could possibly be... it's going to be a smaller source of earnings in the future than in the past, and it's probably not a critical asset any longer, that's not a big value asset item.

Ramin Burney - National Bank Financial

All right. Thank you.

Patrick D. Daniel - President and Chief Executive Officer

Thank you.

Operator

We have a follow-up question from Matthew Akman from Macquarie. You may proceed.

Matthew Akman - Macquarie Research Equities

Thanks. Just a quick detail here. Richard, when you provide sort of the generalized earnings guidance of 10% growth, is that 10% off of '07, so '07 through '11, is that what you're thinking about?

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

Yes.

Matthew Akman - Macquarie Research Equities

Okay. Thank you.

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

Thanks Matthew.

Operator

Another follow-up question from Sam Kane from Scotia Capital. You may proceed.

Sam Kane - Scotia Capital

You mentioned that there was some form of shifting going on in Enbridge Gas Distribution earnings throughout the year, can you just give us a little color on that, dollar vice?

Colin Gruending - Vice President and Controller

It’s Colin here. There is an interest in the customer that you see a more predictable monthly rate and a good mechanism to achieve that is to increase the fixed charge of the bill and reduce the variable part of the bill. So, there is a scheduled five-year progressive shift in that which basically increases the fixed charge each year. So, that will move our earnings seasonality from the winter quarter into the summer quarters. In terms of Quantum, it was just over $10 million in the first quarter, which you will see come back in Q2 and Q3. And if you're modeling that out five years, for now… form a similar expansion of that now.

Sam Kane - Scotia Capital

So, $10 million, $20 million, $30 million, $40 million, $50 million?

Colin Gruending - Vice President and Controller

No, $10 million earnings last in Q1.

Sam Kane - Scotia Capital

I am saying within Q1 for years two, three, four, five.

Colin Gruending - Vice President and Controller

Something like that for now.

Sam Kane - Scotia Capital

Okay. With respect to incentive within what OEB has approved, is there some form of corollary or side-by [ph] into demand side management incentives, is part of that as well or is that a separate stand-alone?

Patrick D. Daniel - President and Chief Executive Officer

Yes. With regard to the demand sign management, we are protected on that sense or to the extent that we encourage customer conservation, there is a protection mechanism associated with us so that we were held… hold on it.

Sam Kane - Scotia Capital

Okay, thank you.

Patrick D. Daniel - President and Chief Executive Officer

Thank you.

Operator

Now, we are going to open the session for the media to ask questions. [Operator Instructions] The first question comes from [inaudible]. You may proceed.

Unidentified Analyst

Hi. There is just a couple of quick clarifications. Pat, you talked about $2.6 billion now for Texas Access, previously it was $3 billion, what's the difference in price and what did the $2.6 billion include?

Patrick D. Daniel - President and Chief Executive Officer

Basically, the reason for the difference is just the endpoint of the line and effectively the $2.6 billion is a new line from Patoka, Illinois to Nederland, Texas.

Unidentified Analyst

And that’s the 150,000 to 200,000 barrels or is that the 400,000?

Patrick D. Daniel - President and Chief Executive Officer

That's 400,000 barrels a day.

Unidentified Analyst

Okay. Do you have an estimate what it would cost to modify your existing infrastructure to get that 150,000 to 200,000 by 2010?

Patrick D. Daniel - President and Chief Executive Officer

If we were look at a short-term solution… in terms of our system from Edmonton all the way to Patoka, nothing, everything is already underway. Those projects are under construction. From that point south there are a number of different alternatives that we're looking at. Steve, I don't know whether you want to try to elaborate a bit further. It's pretty early stage.

Stephen J. Wuori - Executive Vice President, Liquids Pipelines

Yes. It is early stage. One of the projects that we have been discussing with the industry is the reversal of our Line 9 and also the Portland Pipeline system that would move crude through Sarnia, Ontario through Montreal south to Portland, Maine and then off the dock at Portland, and that would make capacity available to move heavy oil to the Gulf Coast in possibly the 2010 timeframe. So, that's the other nearer term solution for moving barrels to the Gulf that we are examining together with the industry. The total expenditure on something like that would be, and this is rough, something under $500 million in total for all of what's required to achieve that. So that gives you some idea of one of the possibilities. We're also looking at other infrastructure that maybe available in the southern corridors that move south to the Gulf Coast. But, Line 9 in Portland is one of the first things we're looking at.

Unidentified Analyst

Okay. Thank you. Richard, one question on sale of CLH, I am sorry, [inaudible] do you have a timeline for when the sale will be closed? Given what you said of $1.3 billion, I'm assuming the whole stake is going to be sold, is that correct?

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

Sale of the whole stake would be our objective and timing would be sometime third quarter, possibly front end of third quarter. But third quarter for sure.

Unidentified Analyst

Thank you.

Operator

Next question comes from [inaudible]. You may proceed.

Unidentified Analyst

Hi. Just looking for a bit more information on the Alaska discussions. Have BP and Conoco given you any indication on the timing, when you say there will be a point in the process where they invite you in or launch an RFP, any expectations on when you'll see that?

Patrick D. Daniel - President and Chief Executive Officer

No, not really Scott. I think it's probably a little bit too early for them to tell at this point in time. So, I think the purpose of the original contact was just to make sure that they wanted us to know that there would be an opportunity for us to put forward our cases to, you know, what our credentials are to participate. But, difficult for them to know the timing.

Unidentified Analyst

Thank you.

Patrick D. Daniel - President and Chief Executive Officer

Thank you.

Operator

At this time, we don't have any further questions in the queue. I will pass the call over to management for closing remarks.

Vern Yu - Vice President, Enterprise Risk

Thank you everyone. I think that's it for the call today. And I guess, if you have any more detailed follow-up questions, please either call myself or [inaudible] in our offices. Thank you very much.

Patrick D. Daniel - President and Chief Executive Officer

Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes the presentation for today. You may now disconnect.

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Source: Enbridge, Inc. Q1 2008 Earnings Call Transcript
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