恩橋 (ENB) 2003 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to our call. With us today to discuss our results are Pat Daniel, President and CEO; Steve Wuori, Group Vice President and CFO. Also available for the Q&A session are Scott Wilson, Senior Vice President and Controller, and Leigh Cruess, Vice President of Financial Services. Our remarks will take about 20 minutes and we'll take questions after as usual. Before we begin, though, I should remind you that this conference may contain forward-looking information which involves certain assumptions, risks and uncertainties that may cause actual results to differ from those implied by our comments. Some of those risks include weather, commodity prices, throughput volumes, interest rates, regulatory parameters and other items. These risks are disclosed more fully in our filings and are available publicly through the CEDAR system. This call is being broadly disseminated via webcast and, for those of you listening over the phone, I encourage you to view the supporting slides which will accompany our remarks. With that I'll turn it over to Pat Daniel.

Thanks, Colin, and good afternoon everyone. Thank you very much for joining us. Earlier today Enbridge reported just an excellent quarter again, which really amplifies our message of recent months that we feel Enbridge is very well positioned in the pipeline utilities sector as a fee-for-service energy delivery Company, and I'll get into some of the reasons for that in a moment. Our reported second-quarter numbers were again huge, totaling some $445 million in earnings enhanced by the benefits of cold weather at the gas distribution utility and the asset sale gain to Enbridge Income Fund which we completed at the end of June. As we've been guiding, 2003 will be another very good year, and much of that normalized growth is going to the back end weighted in the year, as you know. The second-quarter really begins to demonstrate that back end loading.

Our earnings per share for the second-quarter on a normalized basis are $1.49, which compares very favorably to the $1.40 that we posted last year. This improvement is derived from solid performances across all five business sectors in the company, and I'm going to leave that analysis to Steve Wuori, our CFO, who will speak in a few moments. But rather what I'll do is address some of the (indiscernible) events that happened during the quarter and then provide a bit of a strategic update for you as to where the company is going. In the past, I've used this car analogy with you describing Enbridge is firing on all five cylinders or five business segments. Those, as you know, are crude oil pipelining, gas pipelining, gas distribution, U.S. operations and our international operations.

Our largest business of those, our liquids transportation business continues to look very good in both North America and abroad. We outlined a lot of that segment strategy for you at our asset tour in Edmonton in June, and by the way, for those of you who couldn't attend, we have all of the presentations and the maps, etc., on our web site, and I think you'll find it very interesting reading. I'm not going to repeat everything from that session, but I think the key take away was that new market access we feel is required to protect net backs, both existing net backs and also prospective net backs for Canadian oil producers, especially incremental oil sands production which is bound for the Chicago market area. And further, as a significant shipper to that market, Enbridge has an (indiscernible) overall to play to facilitate this market access and to break some new ground for our customers.

Our SEP and terrorist expansion programs were all about expanding existing markets and market access. In addition, as you know, our Toledo expansion project into the Northeast (technical difficulty) opened up some new markets, and then more recently the Spearhead pipeline project which entails the acquisition and reversal of BP's existing pipeline from Chicago to move Canadian crude into Cushing, Oklahoma and commence operations in 2005 is another access to a new market. In this case with regard to the Chicago -- Cushing pipeline, we can optimize an underutilized asset really at a fraction of the replacement cost, and this initiative represents a very attractive industry solution to access Southern CAD2 (ph) for Canadian producers. We're currently working with industry on how to toll this economically so as to structure a win-win for all parties, and any numbers that you see referenced are at best indicative at this point.

We also have a number of other initiatives under way, as Richard Bird detailed in Edmonton, including filling the Athabasca pipeline, developing our Hardisty Tavern storage, debottlenecking the mainline pipeline, building new Fort McMurray feeder pipes and building extensions to new markets of the existing system. So we really believe that this business has lots of growth in it and we're going to very prudently lever our geography advantage to realize that growth. Moving on to our second platform, gas transmission. As you know, this is really an emerging growth platform for Enbridge. My view is that if you're going to be regulated in the business and earn a regulated return you might as well be dominant in it then. Unlike our other two main businesses, we're not as yet dominant in gas transmission.

We do have some very attractive anchor assets there and are focused on growing this segment looking at what new gas infrastructure industry needs are across the continent. And there are two very specific projects that I'd like to mention that really rise to the surface in that regard. Firstly, additional gas pipeline capacity out of the Rockies. We know that that pipeline capacity is in high producer demand today in order to fix the basis differential that results in discounting in that market for producers. As announced by the media, we're working on a concept that addresses this need head on, and that would be a bullet greenfield project from Wyoming to Chicago direct. This is at a very early stage of development and we're working with industry in the state of Wyoming to garner support for the project. The McKenzie Delta project is another important one, and we really applaud Imperial Oil and their producer consortium for progressing with what is a very challenging process on this project. As part of our project, we intend to pursue an ownership position in the McKenzie liquids pipeline down to Norman Wells to bring the associated liquids to our existing Norman Wells pipeline.

Third area here of interest is with regard to LNG, and there's a very clear need in North America and Enbridge is actively pursuing a variety of LNG involvements all at very preliminary stages, of course. Now I can't get into an awful lot of detail on some of these potential projects. But I think it's fair to say that foreign industry players that are long on natural gas are looking for strong and reputable North American partners for fee for service landing and take away gas capacity, and we think we're a great fit for that type of project. We have some gas infrastructure, and we're well positioned to take advantage of that. As you know, there are right now over 36 possible projects being considered in North America. Obviously not all of those are going to go, there are only four existing projects, but 36 under consideration and we're involved in a number of those evaluations. So that's not an exclusive list in terms of gas transmission opportunities, but it's a little bit of a highlight reel I guess you might say to demonstrate how we're progressing on building that part of our gas business.

Moving on to gas distribution, this is really our third business and one that's very core to us. Weather and customer additions are absolutely excellent, and we've already added another 46,000 customers in six months in the distribution utility, well on our way to exceed 50,000 again this year. As you can tell from that 46,000 in six months, we might well set a record this year. Aside from those continuing very strong fundamentals in gas distribution, we're still working very hard with the interveners through a number of regulatory items ahead of us. Our objective really is increase our return in this business, and what I'd like to do is just very quickly review the four primary concurrent initiatives that we have under way. The first being the 2003 rate case, which is now complete and we're awaiting the OEB's outsourcing decision which should come in September of this year and put a close to the 2003 year.

We remain optimistic that the OEB is going to see the merit of our arguments given our case that ratepayers have benefited very significantly from our outsource related cost savings in the utility, and that our operating and maintenance costs are already the lowest on the continent. Second regulatory issue in gas distribution, we have filed our streamlined 2004 rate case early in the second quarter, and that would see delivery rates and in turn our revenue requirement for 2004 simply go up by the rate of inflation. That 2004 hearing commences on August 19th and we should have a decision prior to the fiscal year end in October for the utility. Third, we have an ROE hearing underway jointly with Union Gas, and we believe that a lot of returns are too low relative to our U.S. peers, and we're currently exchanging information with the regulator. The ROE hearing will commence September 18th, and it's uncertain when and how any new rates would be applied to each utility.

And the fourth area of interest here is that we're beginning work now on our 2005 year rate case where we intend to file a multiyear application later this year, allowing nearly a whole year to work together on an incentive deal beginning in 2005. So those are our three main businesses, crude oil pipeline, gas pipeline and gas distribution and some of the organic opportunities we have in each area. As you know, we're less reliant on acquisition growth than many others. However, we are interested in select asset acquisitions in those businesses that really supplement the strategic plan and our organic growth plan that I've talked about. And we feel that we're better positioned than ever in this very capital intensive industry now that we've got both Enbridge Energy Partners and the Enbridge Income Fund with their financial readiness and very competitive cost of capital to assist on that acquisition front. So our strategy would be to pursue mature assets with those vehicles in their respective countries while Enbridge Inc. would pursue organic growth and larger packages primarily in North America.

So that's a bit of a strategic update, and hopefully it gives you a bit of an understanding of the kinds of things that we're thinking about, growing in each one of those three core businesses, but very, what we expect to be intelligent, profitable, manageable steps that we would take in growing the business and working very closely with our customers along the way, which is an Enbridge trademark obviously. Given this model and existing geography, we're really afforded the unique opportunity to pursue the growth that many in our industry don't have that opportunity right now. So with that brief strategic update, I'll now hand it over to Steve Wuori to comment on the quarterly results.

Thank you, Pat, and good afternoon everyone. I will cover the quarterly results and then I'll update you on our 2003 financing plans. Before I get to that, though, just let me remind you that in terms of disclosure documents you should have the earnings release and the MD&A, consistent with last quarter we've discontinued the supplementary information document and elevated its contents right up into the press release. In doing so we detailed out in the earnings release narrative all of the nonmaterial -- or material nonrecurring items for your consideration. The interim financials and MD&A are available, of course, on the Web site and through CEDAR. I should also confirm that Scott Wilson is now Senior Vice President and Controller and part of the Enbridge corporate leadership team. Most of you know Scott well through other Enbridge involvement and other Enbridge roles. Recently he was overseeing areas that included the controllers area, and now he will lead that area directly, and he's really assembled a pretty good quarter to discuss, I think.

Q2 is seasonally the largest for Enbridge representing roughly half of the year's total earnings contribution, and this quarter's results are also clean and quite favorable, as Pat mentioned, at $1.49 per share versus $1.40 last year. Given the Enbridge fee-based business model and guidance, there really should be no material segment surprises, and there are none. But you might be interested in an elaboration on a couple of the core assets. First of all, the Enbridge system, the quarter was in line with our expectations at around $40 million up over the prior year and the quarter due mostly to the addition of Terrace 3 capacity which was placed on April 1st and contributed to a full quarter of earnings. As you know, while Terrace is currently unutilized, Enbridge is essentially throughput guaranteed for Terrace given that the capacity was added at the request of the industry.

With regard to Alliance, as expected Alliance contributed 7 million over Q1 due to the April 1st acquisition of the Duke interest in Alliance. The year-over-year improvement is larger at 11.5 million given that the Williams and El Paso acquisitions in the Lion's (ph) interest were closed late last year. The Canadian portion of Alliance was so into Enbridge Income Fund on June 30th and the U.S. portion of Alliance will remain within Enbridge. Remember that another small portion of the U.S. portion, about 1.1 percent which relates to the Duke interest, will close to the account of Enbridge in the fourth quarter of 2003. As Pat mentioned, the gas distribution segment was favorably impacted by colder weather this year. The weather impact totals roughly 51 million versus Q2 of 2002. Weather normalized results are $3 million over Q2 '02 when you add back a $4 million, onetime tax charge relating to the large corporations tax change in legislation. That $4 million, by the way, is part of the $7.1 million net tax charge that is referred to in the news release.

Turning to Aux Sable, Aux Sable did have a difficult quarter with gas prices in the $5.00 to $6.00 range and also, remember that the Duke addition is included in this result. We see Aux Sable performance -- processing performance improving over the year as gas prices have softened and continue to remain soft not historically but certainly soft relative to what we've seen recently. In addition, given our joint control of the plant, we can and will opportunistically hedge in some gas cost and ethane sales to manage our earnings at risk and meet this year's target. The market is now providing us a few windows of opportunity to put hedges in place, and we are taking advantage of those.

Finally, our international portfolio of two investments continues to pull steady result, up 1.1 million over last year. CLH is proving to be a very good investment, driven by steady throughput growth in a captive market combined with some recent strength in the euro. And we have hedged a portion of our cash flows from CLH on favorable terms. In terms of full year 2003 we expect more of the same to complete the year, and as such we remain comfortable with our previously noted annual earnings guidance of roughly 2.80 to 2.90 per share. Which for clarity's sake is the 2.85 to 2.95 confirmed on the May 1st call less roughly a nickel from the sale of assets to Enbridge Income Fund, and I think I noted then that it's assumed that we do not redeploy by the end of the year that that 4 cents to 5 cents could come off. So that brings us to the roughly 2.80 to 2.90 range and to be clear also this range excludes weather benefits and unusual gains.

In terms of an accounting update, we have a new item that's impacting the financial statements that I should spend just a minute on. With our additional Duke interest in Alliance, we now have joint control of Aux Sable and Alliance U.S., and therefore we are proportionately consolidating these investments, which tends to kind of spread numbers all of the balance sheet, the income statement and the cash-flow statement. Canadian GAAP uniquely requires this treatment and, despite our significant historic holding, the accounting standard does not permit retroactive application. So this optically distorts a few items on the financials, the quarterly effect of which we have broken out separately in the financial statement notes. Most notably, this asset (indiscernible) 2 percentage points of debt to our balance sheet, but the rating agencies have historically already taken this into account in their analysis, and a reminder that the debt is nonrecourse.

I'd like to now just quickly review our 2003 financing plan. The balance sheet is in very good shape at June 30th, our consolidated debt capitalization is 63 percent or 58 percent adjusted to exclude Alliance U.S. debt and other typical items. And it's now at the low end of our target range of 58 to 62 percent adjusted leverage. We expect S&P to review our rating in the third quarter, and as they finish their industry regulatory review, and we believe our current A ratings are appropriate and sustainable and provide us with a relatively attractive cost of capital and ready access to capital to execute our strategic plan. The program we outlined over a year ago with all of the credit rating agencies to strengthen the balance sheet is now complete and we have met our commitment.

In terms of an update on free cash flow, it looks conservatively like we'll generate around $200 to $300 million this year and next year broken out roughly as follows. About a billion dollars in cash from operations less the common and preferred dividend requirements of about $300 million, less core maintenance and committed enhancement capital expenditures of about $400 to $500 million. We'll likely reinvest that free cash flow in the three core businesses, given the opportunities that are available to us in the industry now. So with that, Pat, it's over to you.

Very good. Thanks, Stephen, and congratulations on your first quarter as CFO, and I expect no less from you over the next two quarters going forward. Great first quarter. I don't have a lot to add. I'm just going to close by trying to put some of this into context. We've successfully addressed a number of priorities over the last two years in this company, strengthening what we thought was already a very strong position within the industry. The priorities I'm referring to are things like simplifying the business model with the sale of the retail services business in Cornwall Electric; strengthening the balance sheet, as Steve has referred, by about 10 percentage points; broadening the partnership in the U.S. with the addition of the Gulf Coast natural gas assets; and creating the income fund in Canada. Those have all been very significant events over that two-year period.

I think what's most notable, though, is that we've achieved this progress while continuing to grow earnings through that period of time, very steadily and reliably. So now with that groundwork largely complete, Enbridge is really transitioning into a slightly different mold, and I guess you might say subtly switching gears to continue the engine analogy that I've been using along the way to lever this advantaged positioning to expand and extend our core business, and I emphasize core business. We fully expect to create additional value through more of the same targeted fee-based growth with which you are very accustomed with Enbridge. So that concludes our remarks and, Stephanie, we'll now open it up to questions.

(CALLER INSTRUCTIONS) RBC Capital, Maureen Howe.

Steve, with respect to the $7.1 million and the tax recovery, you mentioned that $4 million was to be allocated to gas distribution. What about the remaining $3.1 million?

The way it breaks out is that 2.3 is for Noverco, 3.8 to Enbridge Gas Distribution and a million to corporate.

And in talking about corporate, during the second-quarter interest expense increased significantly at the corporate level. And I'm wondering if you can help us understand why that is over last year's Q2?

Just thinking about that, Maureen. Give us a minute.

Maureen, did you have a follow-up?

Yes I do, Pat. And this may be -- well, I guess they're both relevant, but the large income tax recovery at the corporate level in Q2, I'm wondering, it's up year-over-year by about $40 million, and I'm wondering if you can help us understand that?

Well, a lot of things are moving around because of proportionate consolidation as we take the Alliance U.S. and Aux Sable assets onto the books.

I would have thought that would've been mostly in gas -- like in the transmission segments -- in terms of --

No, that is attributable to proportionate consolidation, Maureen.

I'm sorry, the increase in the tax recovery is attributable to proportionate consolidation?

No, I think, Maureen, he was referring to, in that sense, the extra interest expense that you're seeing. But with respect to corporate --

And this was interest expense at the corporate level, right? That I'm referring to in the segmented note?

Right.

I hate to ask for another follow-up.

I do have another question. On the cash-flow statement, the 25.9 million in equity earnings in excess of cash distributions, what would be the primary contributor to that amount?

I think the driver there, Maureen, is Noverco this quarter. As the cash dividends from some of these equity investments do vary seasonally, but that would be the driver for this quarter.

Okay. Well, that's pretty much it for my questions. So why don't we go ahead with someone else?

Sure, and we'll try to answer you before the end of the conference, if not we'll get back to you.

Okay, thank you.

BMO Nesbitt Burns, Karen Taylor.

Now I have to find by questions, I'm madly writing. Can you talk a little bit about Enbridge Energy Partners in the U.S.? And in particular, given what they've already reported for the first quarter, can you comment on the foreign exchange rate that you used to bring that contribution on balance sheet or on the income statement anyway and the effective tax rate? The first part of the first question.

We'll have to get that.

And there's roughly $128 million of net proceeds in U.S. that have yet to come back and post closing adjustments on the midcoast transaction of another 50. From the EEP conference call, it was evident that that money was going to come back at some point before the end of the year. Can you give us a better indication of why it has not yet come back and are you using it as a war chest down there? And because you feel you have got your financial situation straightened around Canada from a leverage point of view, you can be patient?

You've hit on at least one thing, Karen. I think as noted in the press release, 434 million Canadian has come back, which is the bulk of the loan or at least the largest percentage of it, and the 128 million remains outstanding. And then as you noted, there is the $50 million working capital adjustment from the rolldown. And I think that where I would leave that is that EEP could repay the loan fully at this point, but now having demonstrated its access to the markets, both debt and equity, it is a question of whether EEP should. And I think that there's really two factors that play. One is that Enbridge really doesn't need the cash at the moment. We feel that the residual that is left on the loan is not something that we need to call in at the Enbridge level at this point for any driving need that Enbridge has right now.

The other is to retain flexibility at EEP for growth in the remainder of the year. So I think we're just going to hold off and look to probably by the end of the year getting that loan fully repaid. But there is no urgency, I might add. Even on the end of the year timing, there is no urgency to seeing that fully come back. I think it was critical that we demonstrate that EEP could do it and that is physically paid back the bulk of the loan, but the residual is now a matter of efficiency, frankly, both at the Enbridge and the EEP level.

Just before I ask my strategic question, just a technical one on Enbridge gas distribution. The 2003 rate settlement, was that taken into earnings in this quarter? And if so, I think the amount was -- I was in a bit of a rush and I might have mucked this up, but it's 6.1 million that goes to the first quarter of this year?

Yes, that's correct, Karen.

And what was the total adjustment for the settlement in the second quarter?

Scott, do you know what the total adjustment was on that?

17.8 million, inclusive of the 6.1 million.

Yes. I just wasn't writing fast enough earlier.

Back to your first question, the exchange rate was $1.38.

And then the effective tax rate?

35, I believe. Yes, 35.

I was a little off on both of those. And just on a strategic question, I guess, Pat, it comes back to your firing on all five cylinders and I guess your closing remarks were you're switching gears. So if we've been in what I'll call a refocusing mode for the last 18 months beginning with the downgrade on the bond rating in December of 2001, are we to assume now that you're going to be more acquisitive and more aggressively so over the next six months to the end of the year and going forward?

I wouldn't come to that conclusion, no, Karen. We -- it's been 18 months of the repositioning. We feel now we're very well positioned to more strongly pursue some of the organic growth opportunities and, yes, we'll look at acquisition opportunities along the way as well. But as I've tried to outline, we feel we've got one of the best slates of organic growth projects in front of us that we've ever had in this company, and that that's really where our energy is going to go. And now that we've got the balance sheet and a lot of the other issues to our satisfaction we're able to better pursue those. That doesn't mean to say there won't be some acquisitions, particularly in the U.S. where we're looking for these smaller bolt on opportunities, but I would tend to look more on the organic growth side rather than the major acquisition side.

Do you consider acquisitions in the U.S. that increase distributable cash flow and incentive fees (indiscernible) to be organic or acquisition?

Acquisition, and I will distinguish between these what I call bolt on acquisitions that are relatively small asset acquisitions that are very easy to integrate versus bigger acquisitions. But when I'm referring to organic growth I'm referring to greenfield pipeline projects, crude oil, natural gas, expansion of the distribution network, etc.

And just very quickly, one last question on the proposal for the 2004 rates for Enbridge gas distribution. Given the fact that interest rates are materially lower at this point in the year than where they were last year when we set rates, do you feel that it's something interveners are likely to accept, or will it be some sort of a hybrid where they rebase the ROE and leave all of their customer rates unchanged with the exception of the inflation adjustment?

Well, I'm not sure that I fully understood your question, Karen. But let me try to answer it, and redirect me if I am misinterpreting. The fact that interest rates are low right now will undoubtedly have an impact on the way in which the regulator looks at our application for improved ROE, as I mentioned, we're pursuing in conjunction with union. However, I think that we need to put things in context and realize that we've lived through a number of years of very low returns in Canada relative to the U.S., and we expect the regulator to take this broader context in mind rather than short-term interest rates as they set an ROE going forward. So we will do our best to point out the disadvantage that we have relative to the U.S. peer group, and the fact that they can't get too tied to short-term interest rates.

What I was just rashly referring to was the fact that there is a formula in place and that, I suppose all things being equal, we do have a rate set exercise for 2004. And you have made a proposal just simply to basically extend a revenue cap with inflation and not rebase the ROE. Is it impossible that the regulator splits a decision for '04 such that there is no rebasing on the effective revenue, O&M and G&A and so forth but does in fact rebase the ROE for '04 using the formula?

Karen, I guess anything possible. However, the proposal that we've put forward is the proposal as it sits and doesn't offer the bifurcation opportunity. I think if the regulator was -- or interveners were to come back and suggest an alternative, it would really put the entire proposal -- it would lay it open completely and we would have an opportunity to look at it in its full context.

So in other words it's -- I guess I can negotiate settlement, you have to accept all of it or none of it.

That's the way it's been put forward, yes.

Thank you.

UBS Securities, Andrew Kuske.

Pat, I'm not sure if you want to answer this one. Just in the context of the Cushing pipeline acquisition, can you give us a bit more clarity around the timeline you have as far as meetings and discussions with KAP, the shippers and then just the regulatory process you have to go through for the reversal of the line?

I will do my best, although we're in very early stages there, Andrew. We met with KAP initially the day that we announced the acquisition, and of course have been working with KAP and keeping them fully informed of our general initiatives to try to move crude further south of which they've been very supportive. So we now have been given the main name of the individual at KAP that we will work on assessing the proposed towing methodology for the project, and we are just now putting together a team of people from our side and their side to sit down and begin that negotiation. We would expect to have that done within a quarter at the longest at least in concept if not formally approved by KAP at that point. And the reason why I'm confident it will move along fairly promptly is that we've had very strong support from individual producers, the producing community here in Calgary has been very, very supportive. As a matter-of-fact, we haven't had any dissenting word at all from any western Canadian producers, and many very strong supporters of the concept. We think it will move along fairly promptly.

There were comments that I believe Steve made earlier on as far as the balance sheet goes, that you're at the lower end of your capital structure as far as the range that you've previously given. Now does this mean you go into acquisition mode? And if so, we look out to your Spanish assets which have done extremely well relative to really expectations over the last really since acquisition at the end of '01. If one looks at that, does it become logical in the Iberian market, in particular Portugal which has similar kind of dynamics as far as refined product rev?

That is one of the areas that we're looking at. Let me circle back to the start of your question, though. We've worked pretty hard to get the balance sheet in order, and we don't intend to get it out of order, for a starter. As I mentioned, though, in my remarks, we do have very good access to capital in combination to the income fund, the partnership in the U.S., and in the very strong cash-flow, free cash-flow of the company. So we do have some ability to take on additional deals. We are interested in the Iberian Peninsula and, as I've indicated in prior calls, both in expanding our presence in Spain in the gas business and also in the liquids business in Portugal. We are also conscious, though, of the fact that we generally intend to maintain our international investments in the range of 15 to 20 percent at most of net income, probably tending more towards the 15 percent end of the scale. And hence will want to see some growth in the overall pie in Enbridge before we get too heavily of leverage internationally.

If I may ask just one more question and direct it to Steve. As far as the hedging program goes at Aux Sable, if you could just clarify that a bit more as with the recent acquisitions over the last year or so? Where does the hedge program stand as far as Aux Sable?

Andrew, we're now running the risk management program for Aux Sable and have come to an agreement on the parameters of it and really what we -- there's two things we've been working on. The first is the fuel gas for the plant and we've hedged about a third of that now forward for a year. The second is the ethane output, and we have managed to hedge about 20 percent of the ethane output, but we're staying relatively short on that. We're being very careful about the hedges that we put in place to ensure that we're optimizing as the market moves around. So we are frankly grabbing hedges when they are -- when the window is open to cost effectively do that, and that's what we've done so far. About a third of the fuel gas and about 20 percent of the ethane output.

Thank you very much.

CIBC World Markets, Matthew Akman.

Just a couple questions on gas distribution and then oil pipeline. On gas distribution, at the first quarter you guys indicated there was a revenue deficiency that you were going to recover 38.2 million and then an adjustment would be recorded in the second quarter of 2003. So, and then, Scott, I think you indicated that maybe for the six months there was 17.8 million done. Could you reconcile those?

The 17.8 is what has been booked thus far in 2003. That's an after-tax number, Matthew. And 6.1 of that relates to Q1. The remainder of the deficiency will be collected over the balance of the year.

how much is left over the balance of the year after-tax?

About $7 million, Matthew.

Okay, thanks. On oil pipelining, I was a little bit surprised and maybe I was off base, but I thought the increase in the inline earnings would start to kick in in Q3. I think you had guided to those kinds of increases in the back half of the year, Q3/Q4, but we saw a big increase in mainline earnings in the second quarter. Was that different from what you had expected previously or not?

Terrace went into service about a month earlier that we had expected. It went into service April 1st Terrace 3, and so there would be an extra month of Terrace making the full quarter -- than where we had expected previously.

So it was a slight change in your expectations?

Yes, that's right.

And then, but yet guidance I guess hasn't changed. So I'm just wondering whether there's some other part of the business that isn't running as well. It seems from this quarter that everything else is running quite well. Is there anything else that we can expect in the back half that's not as good as maybe you thought?

Not at all, Matthew. I think with the guidance range that we give for an individual project like Terrace coming on a month earlier wouldn't have a material or significant impact on that guidance. So, no, we don't have any offsetting issues at all.

Okay. And then if I could just finish up with growth rates. Mainline earnings, I presume they're kind of 40 million a quarter is kind of topping out for the mainline earnings. And so going into next year maybe there's one quarter of top up that we didn't have this year in Q1. Can you just talk maybe, Pat or Steve, a little bit about growth rates that are going into next year, where you see -- what kind of growth rate, where you see it maybe coming from on the organic side?

It's a good question, Matthew, and I think it really is coming from all of the cylinders in Pat's engine. I can't point to anything -- anything individually, but just continued growth in various -- in the various businesses. So we'll be addressing that, by the way, pretty well at Enbridge Day. And I really think that that's when the 2004 focus can come into view.

Is there anything you could say on maybe for next year, how much would come from acquisitions especially because you have all this capital to redeploy from the Alliance sale on percentage terms?

As you know, in the past we've indicated that we expect high single digit growth in the Company, 8 to 10 percent per year, and we feel 4 to 5 percent of that will come from organic in the remainder from acquisitions, and at this point we wouldn't have any reason to deviate from that, Matthew.

Thanks a lot, Pat.

Goldman Sachs, David Maccarrone.

Steve, I wanted to ask you, with regard to the cash-flow or the free cash flow of $200 to $300 million, how much growth do you expect to achieve before the deployment of that free cash? Or is that simply a maintenance of earnings type number?

I think that that's -- basically that is consistent with the growth rate that we've been talking about, the generations of free cash flow and the redeployment of it is really consistent with what we've been saying about the overall growth rate. And the numbers that I laid out earlier I think really are the ones to focus on and that there's $200 to $300 million a year in free cash flow to deploy for growth.

Are you saying that the 4 to 5 percent organic growth that Pat referenced is being funded from the $400 to $500 million of maintenance and committed capital expenditures?

Well, some of that is maintenance, it is not growth, there's core maintenance in that $400 to $500 million of committed capital. So it wouldn't be accurate to say that that's all contributing to organic growth. But a portion of it is.

For example, I think probably the best example of that, the gas distribution at $300 million a year of kind of maintenance extension capital is included in that, David.

So what sort of growth would you expect to achieve before you invest the $200 to $300 million of free cash and any the other capital you access?

You mean of the 4 to 5 percent how much of that would be generated before we get dip into the $300 million of free cash flow?

Right, right.

I'm not sure -- I'm not sure if you're separating out organic versus acquisitive growth. And there's a suggestion that there's a limit -- that there's something we need to top up in terms of organic growth before we would move to acquisitive growth? Because if that's so, then I would say no. We would move to acquisitive activity whenever the window is available to us.

I guess my question is, what is the committed capital expenditures that you're referring to deliver in terms of growth? Relative to -- that is visible and that we can almost rely upon?

Colin, can you address that?

David, I think in the $400 to $500 number that Steve cited we've included in that the committed management capital and, frankly, some maintenance capital for EGD, as Pat just said. That would be a big chunk of it. The rest would be about $70 million in maintenance type expenditures in the liquids business. And, for example, we spend another like $70 million or so on terrorists in '03. And assuming that we reverse the spearhead pipeline, that would be a similar chunk of capital. So that gives you a feel for the general kind of numbers we're talking about.

And a follow-up question on a different topic, I don't know if it's Steve or Scott, but I was wondering if you'd tell me how much currency impacted you in the aggregate in the quarter, and just take us back to what your currency risk management strategy is.

David, we have a policy of hedging (indiscernible) of our known currency exposure, and we're currently, and have been, solidly within that band. We do have residual exposure to the euro as a result of our investment in CLH, although we have begun hedging the returns on that investment, and we also have some residual U.S. dollar exposure from some of our equity investments. But we do maintain all of this as well as our other market risks within a 5 percent earnings at risk limit. And I can tell you that we're sitting at 4 percent right now. We'll update that again on Enbridge day. So we do actively manage it and look to maintain it in conjunction with the other market risks like interest rates and commodities within an overall earnings at risk threshold.

How much was the impact in the quarter?

There would not have been a significant impact. There certainly was some positive earnings through CLH because of the strengthening euro. It was a little bit of an earnings decline with respect to OCENSA on some U.S. dollar net exposure there. On net balance, it would be de minimus.

So from Enbridge day in November 2002, the 0.4 percent earnings at risk on an annual basis, that is still very much consistent?

Yes, it is. Four percent, that's correct.

Okay. Thank you.

TD Newcrest, Linda Ezergailis.

Just wondering if I could get a status update on the recontracting initiatives on the Frontier Pipeline.

We may have to get back to you on that one, Linda. I don't think we -- we're going to have to get back to you if that's okay.

Of course. Just another question, in terms of orders of magnitude, how large potentially would this pipeline in the Rockies area be, the gas pipeline that you spoke about earlier in the call?

Well, recognize that we are very early stages, so I'm kind of reluctant to throw around too much in terms of numbers. But it would be roughly a Bcf a day project, and a little under 1000 miles long and close to $1.5 billion. So those are very approximate numbers and very early stage work at this point, Linda.

And that would be 1.5 billion C$?

Yes, it's about 1.2 U.S.

Thank you.

(CALLER INSTRUCTIONS) RPC Capital, Maureen Howe.

In terms of moving the hedging program of Aux Sable into Enbridge, do you see other opportunities to move more of the operations associated with Alliance into Enbridge? Is that something that you will be looking at?

We have considered that on several occasions over the years, Maureen. We don't have anything active underway to do that right now and for a couple of reasons. Number one, Alliance is a pretty lean mean operation to start with. So there aren't an awful lot of synergies there. We think there may be some. We will continue to look at those and work with the Alliance management to see whether there might be some opportunity to combine operations with Enbridge. Recognize that we do have the Alliance management pretty busy right now working on a number of opportunities around ways to address the concerns that we have at Aux Sable through heat content management or liquids management, both upstream and downstream opportunities. We also have Alliance management very busy looking at Northern Pipeline opportunities.

So we haven't spent the time, in that we feel that they are a pretty efficient operation already. But it is something that we will continue to revisit and look at over time, and I think it's fair to say that along the way there will be opportunities here and there that will work best for both ourselves and Alliance and, of course, the other Alliance owner, Port Chicago.

In terms then of the organic growth, and others have asked similar questions, but when I run down the list of the various operations divisions that are contributing to earnings -- I realize that, as Steve mentioned, it's sort of across all the gears. But what would you be thinking in terms of a growth rate for '04 over '03 with respect to organic growth?

I think we would target that again to be in the 4 to 5 percent range, Maureen.

And then finally, in the normalized earnings per share number that you've given for the quarter, the $1.49, that presumably doesn't include normalizing for the 6.1 million of after tax revenue requirements that would apply to Q1?

That's right, Maureen, and conversely we didn't add it to Q1 when we cited the like number.

Thanks very much.

BMO Nesbitt Burns, Karen Taylor.

I just have a quick question on Vector. There was some -- and the financial performance quarter-over-quarter wasn't necessarily hugely up, but there was some talk in the press release at least in the segment disclosure about volume throughput and so forth. So are you getting some benefit from what I'll call interruptible volumes on that pipeline? I know that the certificate rate of capacity has been increased recently, and have you been able to I think fully contract any uncontracted volumes including the uprated throughput that was recently done?

Speaking generally first of all, Karen, it has been a good year for Vector because of the higher gas demand in the east due to cold weather, which has resulted in some interruptible supply capacity being filled up. In terms of longer-term contracting, I don't think that we have anything new in the works there at all.

I think generally what we're seeing, Karen, is just a real strengthening of the demand in that corridor and a tightening of the bases between Chicago and Dawn and a real -- a lot of interest in using Vector. So not in terms of long-term contracts necessarily, but the volumes that we're able to move shorter term.

If you could just remind me of the original 1 Bcf a day of throughput capacity, how much was contracted by long-term?

700. I think it was 700, maybe we can confirm that for you.

That was where I was thinking the answer was. Now that it's up rated theoretically any way to 1.3 Bcf a day, is it running full?

The current volume -- do you know that number, Steve?

No, I don't offhand.

These interruptible volumes, would they be anywhere near the maximum contract rate or are you discounting?

That are at the contract rate.

At the maximum contract rate?

They were at the 25 cent toll which is the current Vector toll, it's the long-term toll.

And that's U.S. per million BTU's?

I believe so.

Terrific. Thanks.

Karen, just before we leave Vector, we do have a very optimistic long-term view on Vector. And although we may not have additional contracted volumes today, we think that that pipeline will play an integral part in expanding access into the U.S. northeast. And as you recall, a few years ago there were a number of projects from Dawn eastward that kind of fell off the books when everyone thought that there was going to be a lot of northeast production coming from Sable Islands and offshore Nova Scotia. Now as a result of some exploration disappointment I guess you could say off the East Coast, we're starting to look again at initiatives to push gas further east from Chicago and Dawn, and we think that Vector will be a very important conduit to that, and will fit very well with the initiative to bring Rockies gas into Chicago as well.

Let me ask the question because Vector is -- there is a fractional interest owned in the pipeline that Duke has. I'm not sure if they control Vector, but if they don't then it's usually something, or at least if it's not a controlled position they don't run it, they usually get rid of it. Is Vector something that you would look at? In particular would you buy it through EEP or would you buy it on balance sheet, and could you give me an idea of what your target valuation levels would be on an enterprise valued EBITDA?

A lot of questions rolled in there, but let me say that we would be interested in increasing our position in Vector at the right price. And for exactly the reasons that I indicated earlier. We think it's got good long-term potential. I wouldn't want to start telling you what we think it's worth right now, though in light of the fact that we might be interested in increasing our position.

Would that be an asset that you would acquire through EEP or would it be on balance sheet corporate?

As you know, it's currently held on balance sheet and through corporate. And our expectation would be to do it the same way, recognizing, again, that we look for a certain trademark in an asset like that one that doesn't need big future capital expenditure and has the stability of cash -- or distributable cash to put into the partnership, when it has those trademarks then it would be a good asset to go there.

Terrific, thanks.

Mr. Gruending, there are no further questions at this time, I would like to turn the meeting back over to you.

Thanks for joining us and, as usual, we'll be available for after call follow-ups. Thank you.

Thank you, gentlemen. At this time we would like to thank all participants for joining us today. The conference has now come to an end. Thank you for using Bell Conferencing Solutions and have a nice evening.

(CONFERENCE CALL CONCLUDED)