恩橋 (ENB) 2004 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to the Enbridge Inc. first quarter 2004 financial results conference call. I would now like to turn the meeting officer to Mr. Colin Gruending. You may proceed,.

Thanks Jenny. Good afternoon everyone and welcome to our call. With me today to discuss our Q1 results for 2004 are Pat Daniel, our President and CEO, and Steve Wuori, VP and CFO. Also available for our Q&A session is Scott Wilson, Senior VP and Controller.

Our formal remarks should take about 20 minutes after which we will take your questions. I would remind you at this time that this conference may contain forward-looking information which involve certain assumptions, risks and uncertainties that may cause actual results to differ from those implied by our comments. Some of these risks include weather, commodity prices, throughput volume, interest rates, regulatory decisions and other items. These risks are discussed more fully in our filings which are available publicly through the [Tdar and Endar] filing systems.

The call is being live audio webcasted and for those of you listening over the phone I would encourage you to view the supporting slides. Slides are available on the Enbridge investor page. I will turn the call now over to Pat.

Thanks, Colin and good afternoon, thanks for joining us us. As most of you know earlier today, Enbridge reported its first results for 2004 and we also held our 50th annual general meeting this year here in Toronto. In case you missed it, by the way that annual meeting replay and transcript are available on the Enbridge Web site.

My overall message for that meeting and really for this one today, is that Enbridge is in excellent shape and we are going to benefit from the long-term fundamental strengths both from within the company and also the industry which is doing very well. Therefore we are well-positioned to extend that 50-year track record of steady low risk value creation that we are very proud of in this company.

The first quarter was an excellent start to 2004. Quarterly reported earnings were $112 million or 67 cents per share. So, excluding unusual items which this quarter are largely one time charges, normalized earnings were higher at $158 million, or 95 cents per share. So on a similar basis this compares with last year's first quarter of $130 million, or 79 cents per share. The increase really is due to improvements across four out of our five operating segments. And, by the way, we had expected the earnings from gas pipelines would fall due to the sale of the Alliance Canada pipeline to the Enbridge income fund in June of last year, so that's the fifth operating segment.

Steve Wuori is going to elaborate on the financial performance in just a few moments so I won't go into a lot of detail there. Let me just touch on a few of the quarterly highlights. As we outlined on the last quarterly call our 2004 strategic priorities continue to build on the progress we made in 2003. I would like to reiterate those priorities for you.

Firstly, we want to expand and extend our crude oil pipeline business along the entire oil transportation logistics chain, and that includes regional feeder and storage additions, Main line expansions, particularly at Superior Wisconsin and including access to new markets for our shippers which will ideally pull new oil sense volumes through the entire feeder and main line systems of Enbridge. During the quarter we engaged in very productive sessions and discussions with our customers on each one of those fronts. Another very important initiative is the renewal of the incentive tolling agreement which expires at the end of 2004 as you know.

Re-negotiations are actively underway on the ITA. and the during we are headed is designed to permit us to retain and potentially to improve the favorable financial performance from this very core asset. We expect to do that by delivering a combination of cost savings and enhanced service which really translates into significant value for our shippers and our customers. It would be premature at this point to comment a lot further on these negotiations since had they are underway at this time so I will stop there. But recognize of course, that we will communicate the terms of the agreement and resulting impacts on the Enbridge crude oil system when those discussions are concluded and we expect that likely will be in late quarter three or early quarter four of this year.

Thirdly, discussions also continue in oil sense feeder and storage opportunities within Alberta, and we continue to advance our well pursued pipeline proposal to Edmonton. New feeder announcements will be required within 2004 in order to facilitate the construction and to connect the next wave of oil sense projects that are underway.

Moving on to the southern access and gateway projects, our southern market access and West Coast pipeline opportunities are actively being discussed with our shippers at this moment.

We are in the process of fine-tuning estimates and alternative logistical paths and we remain very flexible as we advance these talks. The main objective is to open up broader markets.

Based on feedback from producers, our Gateway project to the west coast would have more supply optionality if it were to originate from the Edmonton hub and we already made that change and that's the kind of flexibility I am talking about in adjusting these plans. We expect some industry decisions later in 2004 on this, and we will keep you posted once again on significant milestones there.

As previously reported we have set aside our smaller spearhead initiative which is the Chicago to pushing initiative for the time being. I do emphasize 'for the time being'. We had initially expected to sequence first the development of the cushing market for Canadian crude as it really is the lowest cost alternative is to get into that market.

However, our overall market access plan was to accommodate some flex again and we will work with the industry to determine what the right outcome is for Superior. So that covers the oil, the crude oil initiatives that we've had underway in the first quarter.

Moving on to our second priority for 2004 really was to build on our presence in gas transmission. We have a number of longer term Greenfield initiatives underway to address Continental infrastructure deficiencies on energy delivery infrastructure. These include trying to coming up with solutions for Rockies gas producers to help them address the differential issues faced in the Rockies and also trying to improve access to U.S. northeast markets and also a couple of early stage LNG proposals that we are working on.

Earlier this week we also filed an application with the state of Alaska under the Stranded gas act to permit Enbridge to commence formal discussions with the state, and with producers toward building the Alaskan and Canadian portions of a much needed gas pipeline to market that Alaska production. So we have a number of emerging Greenfield projects in the gas pipeline portfolio as well as in the oil portfolio.

Again I think it's important to remind you that these are larger, longer term projects which likely involve other investors and certainly very significant stakeholder input. But we believe that Enbridge has a very natural role to play in each one of the initiatives that I've mentioned.

Our third priority in the quarter is to improve returns at Enbridge gas distribution. And we've cleared a number of outstanding items during 2003 and are now currently working through our 2005 cost of service rate case. Directionally, we are exploring a number of alternatives to set medium term rates in the distribution business, including the possibility of the multi-year incentive arrangement. As I noted before, this gas utility franchise is one of the finest in North America. It has outstanding customer growth and is one of the lowest cost structures in North America.

Before I leave the distribution segment, I want to comment on this late payment penalty decision which was recently rendered to Enbridge gas distribution. Where in the Supreme Court ruled such penalties collected in past years were excessive. By way of background, after a very longstanding legal case we are disappointed with the outcome undoubtably. And we await the financial judgment of the lower court on the issue. It's very important to remember that these penalties were never designed to economically benefit Enbridge. Rather they were the late payment penalties were designed to insure that customers who pay their bills on time are not subsidizing those who don't and we feel that's very logical. And as such the collection of the penalty was passed through to all rate payers via lower unit gas delivery rates with the annual approval of the regulator. And therefore we believe it's logical and any required repayment should be recovered through that same rate setting mechanism without impacting the Enbridge shareholder.

Moving on if I could to our fourth priority, it really is to utilize our sponsored trust vehicles in both the U.S. and Canada. The Enbridge income fund in Canada and Enbridge Energy Partners in the U. S. The initial asset seating phase from Enbridge is now complete and each entity will be very active in enhancing their existing asset bases in a acquiring mature third party assets that fit the income trust and MLT mold. During the quarter, Enbridge Energy Partners closed two asset acquisitions, [Beshell] and Mid-continent crude oil assets around Cushing Oklahoma for approximately U.S. $115 million and the [Fallodero] which is a smaller gas pipeline in north Texas for about U.S. $13 million.

The partnership also has just ordered pipe for a Greenfield pipeline from East Texas to the Carthage hub that will be about 107-mile pipeline, 36-inch and will be about $133 million U.S.

Finally, an overarching priority that we of course have had through the year '03 and the quarter '04 is the financial flexibility and balance sheet strength that Enbridge has achieved over the last two years. We will generate free cash-flow of more than $400 million this year and next, net of a projected growing dividend and roughly flat nondiscretionary capital requirements. We also have some balance sheet room and other alternatives that will further cushion any further need for additional equity capital going forward.

So in short we've got some of the best financial flexibility we've had in years in this company and we are going to protect that prudently as we redeploy retained capital. So that's a very quick strategic update and I will stop there and hand it over to Steve for comments on the numbers.

Thanks very much, Pat, and good afternoon, everyone. As Pat noted, reported earnings for the first quarter were strong as Enbridge earned $112 million, or 67 cents per share. And as usual the appropriate adjusting items are set out and compared to the prior year in our earnings release.

Adjusted earnings were up firmly to 95 cents from 79 cents last year on a comparable basis.

Before I discuss the earnings drivers I should quickly remind you about disclosure documents Enbridge has recently published.

First our 2003 supplementary information package is now posted on our Web site under financial analysis. Consistent with past years this document is a good modeling aid as it assembles our earnings by asset on a 2004 re-segmented basis and compares back annually to 1999.

Secondly our annual information form was filed on April 26, 2004 and it's also available on the Web site.

Let's now review some of the quarterly highlights starting with the liquids pipeline segment which is up about $6 million over Q1 last year. The crude oil stem generated $41 million for the quarter which is consistent with recent quarters but up over Q1 last year. This is due primarily to the Phase III of Terrace expansion project which was placed into service on April 1 of 2003 and was not included in the first quarter of '03. At the [Basta] pipeline earnings were down slightly to $11 million due primarily to higher tax expenses.

Under the feeder and other sub segment line we provided for final [Fir toll reparations] on the Frontier pipeline through a charge of $1.7 million. Frontier should be clean now going forward with an earnings run rate of about $3 million to $4 million per year.

In the gas pipeline segments, Alliance Pipeline U.S. contributed a $1 million increase over the first quarter of '03 due primarily to our higher ownership interest which we increased through the year '03. Vector pipeline earnings contribution doubled to $4 million given the additionally 15% interest that we acquired in Q4 of '03. Also improved transportation margins and higher volumes over that quarter, first quarter of '03, and we are pleased to note that Vector has been running full at one BCF per day and is fully contracted for the year 2004.

Our sponsored investment segment had a good quarter also, the Enbridge Income Fund contributed $7.5 million in quarterly earnings to Enbridge and at Enbridge Energy Partners the earnings contribution was $7 million, which reflects our lower equity interest. Both of these quarterly earnings figures represent pretty good run rates for those entities. Enbridge presently has a 72% economic interest in the Canadian income fund and a 12% interest in the U.S. partnership.

Gas distribution and services segment had a good operating quarter including about $2.1 million in benefits from cold weather. Comparing year to year on a weather normalized basis EGD's. first quarters results are better than last year because the 2003 rate increase was not included in Q1 2003, which it now is for Q1 of '04. Also some lower '04 O&M spending to date, but we do expect that will be spent later in the year so there is a bit of timing involved there.

In terms of adjustments, we recorded a $47.6 million charge for the effect on future income taxes of the Ontario tax rate increase which was enacted by the liberal government last fall. You'll recall that this charge partially offsets the benefit that we booked in 2001 to record a tax rate decline originally enacted by the previous Ontario government.

The second adjustment is the recording of the 2004 outsourcing disallowance of $4.6 million after tax and I think you would have expected those adjustments that I just talked about based on our previous disclosure.

What's new in the quarter and I'm sure has caused some of you to wonder a bit today, is the change in the accounting estimate that we made to improve the accuracy of quarterly accruals for something called unbilled revenue. This change increase Q1 earnings by $35 million and it's related to the proposed change to the EGD. year end, which I will talk about in a minute. Whether this is a permanent changes with implications for the coming quarters and years let me describe this more fully. As I mentioned it is a change in estimate and is applied prospectively under GAAP.

Unbilled revenue is the revenue accrued for the period from the last customer billing date to the end of the quarter which is typically 10 to 15 days of revenue, and in this particular case represents the period from December 16 to the 31st of 2003. In the past, we maintained a fixed quarterly revenue accrual through the year. Irrespective of the season, and then we recorded of course the actual cost of that unbilled revenue when it was billed.

But this resulted in a structural mismatch between accrual and actual, because we were not taking into account seasonal variances in that unbilled revenue in each of the quarters. The change we are making will better match revenues and expenses and it will also advance the earnings seasonality forward, particularly in this year, with the first and second quarters now capturing larger volume accruals as they should.

The income in tax is expected to reverse itself over the last quarters of the year. The adjustments necessary to compare 2003 on a similar basis to 2004 actuals, are posted on the Web site under financial analysis, also. But for comparative purposes we have added $33 million for this item to Q1 2003 adjusted earnings.

Moving then to the year end change, and I think that all and all this year end change is a positive, if we do manage to enact it, it's going to bring us in line with the Enbridge Inc. calendar FY and we will no longer have this awkward lag in consolidation and reporting that we have had. The proposal is to move it from September 30 to December 31, and this is pending the outcome of our 2005 rate case.

This would mean that Enbridge's 2004 results will have five quarters which will include the October to December of '04 period, but our 2004 guidance normalizes for this already. The 2005 year then would begin as it should on January 1 of 2005.

Together with the unbilled revenue change we believe that these changes will ultimately simplify and clarify our recording at EGD over the longer term. I hope you like them.

There are a couple of other assets in the distribution and services segment, namely Aux Sable and AltaGas, which warrant some discussion. Aux Sable was both cash-flow positive and profitable earning $1.3 million during the quarter.

This improvement was due to natural gas price hedging combined with higher liquids revenues and positive margins actually allowed us to run optional additional volumes through the plant during the January to March period.

The pricing dynamics are difficult to predict for the rest of the year but we are doing our best to risk manage the plan and have had good success so far.

Turning to AltaGas, the shareholder vote concerning it's conversion to an income trust was concluded successfully last week and Enbridge is supportive of that conversion.

We will continue to use the equity method to account for our 40% interest in AltaGas and thus expect no significant impact on our financials from the trust conversion.

Moving to international, the portfolio continues to post steadily improving results. The segment quarter earnings are up about $1 million over last year, again on the strength of CLH throughput and favorable translation on the Euro.

Finally, in terms of foreign currency translation, I would like to remind you of the continuing effect likely in 2004 from translating the earning streams flowing from our U.S. dollar denominated assets.

Given the rise of the Canadian dollar in 2003 we will likely see a continuing effect on the contributions from Alliance, Vector and Enbridge Energy Partners, [Ocenza] and to a lesser extent Aux Sable and the U.S. oil pipeline feeders. I would estimate that we incurred about two cents per share of net currency translation drag in Q1 of 2004.

Of course our cash flows are substantially economically hedged so it really is an earnings accounting issue. So those are the quarterly earnings highlights, Pat. I would conclude by saying it was a good, solid quarter all in all.

Great. Thanks Steve.

What I would like to do just by way of conclusion is to simply reiterate what I said at the outset. And that is that I certainly feel that Enbridge is extremely well-positioned within what is a critical industry in North America and an industry that has very healthy fundamentals.

So we remain focused on working with our customers to provide sensible energy delivery solutions, and as we do that, the returns on reinvested capital will follow and that will expand our record of low risk consistent earnings and dividend growth. That really concludes our formal remarks and our call and at this point I would turn the meeting back to you.

Thanks, operator we will take questions but before we do I would just like to make a request . Consistent with some of our past calls, if you could please limit your follow ons and allow other participants to register their questions.

Another note, I would add that we have time constraints this afternoon and have about 20-25 minutes from now, so if you could sequence your questions, considering that, but certainly the rest of us will stick around and handle your other questions.

In other words all the easy ones now and the hard ones after I leave.

Fair enough. Operator?

Thank you. We will now take questions from the telephone lines. [Caller Instructions]. The first question comes from Linda Ezergailis with TD Newcrest.

I wonder if you can give color with the M&A activity or screening that you've been doing recently? And specifically, of course I appreciate as much color as possible, but in terms of the quantity and quality of assets you're seeing and if you're starting to look more at corporations? And then, finally, any sort of color you can provide in terms of subregions, i.e. Australia, the U.S., Canada, perhaps even Ontario if there's any opportunities that you see there would be much appreciated.

Okay. Thanks, Linda. Let me start out with the, what kind of the latter part of the question first and then I will come back to the front end.

With regard to geography, as you've heard me say on many occasions, we really want to increase the footprint of this company in North America and that tends to be our main focus and when we look at M&A opportunities. Would like to be a little more North American and have broader exposure to some of the opportunities south the 49th than we currently do. So if there is an area of focus in our M&A activity it would be that. It tends to be more North American.

Now as you know, that doesn't mean to say, though, that we won't look at opportunities internationally and we've been rumored to be looking at an opportunity in Australia and I can confirm that we have been and continue to be interested. That has a long way to go before there's anything firmed up there. So that's our general geographic focus.

The screening, the quantity and quality of assets, there are not a lot of assets relatively speaking, available in our business right now, at least that's my feeling. And the majority of the assets that we are finding tends to be the older more mature assets that are likely to go into an income trust or master limited partnership, those that are very steady, reliable, predictable cash flow and don't have big capital requirements.

So we are finding a little bit more opportunity in those investment vehicles than we are at the corporate level at this point in time. And there seems to be a reasonable number of assets available to each of the two low cost to capital vehicles that we operate.

On the bigger side relating to Enbridge Inc. you mentioned corporations versus assets. We've always found that assets are easier to absorb and carry lower risk.

However, they often don't have quite the same strategic positioning that a major corporate deal would have. Once again if you look at the total assets in the energy infrastructure business in North America, there aren't an awful lot of major assets available today.

So we continue to look and certainly are well-positioned to be able to do a deal but will be very disciplined in anything that we do to ensure that it's accretive and that it provides good growth potential for our shareholders.

Is this a little bit of a waiting game? Do you see as interest rates rise that perhaps the debt burden would facilitate the shake off of some more attractive assets in some corporations specifically in the U.S.?

Well, yeah, I think, Linda, that probably rates would have to rise fairly significantly to endanger those that seem to have ridden out the worse of the storm around balance sheet concerns and now appear to be at kind of a steady state, I might say. I wouldn't say that they are exactly comfortable, many of those companies that have had difficult [inaudible] but they are in kind of a steady state and they are not in immediate danger. So we don't think that the small rise that you might see in interest rates really would have a significant impact on it.

Just in terms of your guidance, my understanding was that the 2004 guidance did incorporate some sort of an unannounced acquisition. Is it fair to say that that's still the case?

Yeah, in our $3.00- $3.10 guidance as we've mentioned we've assumed a certain level of organic growth and a certain level of acquisition growth. And, yes, there is some element of that that does contain acquisition growth.

I'll jump back in the Q. Thanks so much, Pat.

Thank you.

The following question comes from Maureen Howe of RBC Capital Markets. Please go ahead

Thanks very much. Pat, I wonder, I'll give a couple to you because I know you have to leave, in terms of the Gateway project, you mentioned that you thought that would you receive some decisions later in 2004. So what kind of decisions would those be? I mean, are you holding an open season now or in what, what I guess hurdle, milestone, whatever do we expect to see later this year.

We don't have a formal open season, Maureen. What we are in the process of doing right now is working very actively with downstream refiners and crude buyers, both in California and Southeast Asia, to try to determine the level of demand that there would be for Canadian heavy crude and synthetic crude.

At the same time we are working with upstream producers, and we intend to bring the two together hear through the summer and fall to see whether they can get aligned and whether there can be commitments made by the downstream guys to the long-term contracts required and, hence, provide the confidence to the producers that they need to proceed with underwriting our project.

That's what we mean when we say if by the end of '04 we would hope to have those agreements in place so that we would know we would have a base for a commercial deal. It really requires long-term commitments to take the crude oil and then long-term commitments from the producers to underwrite the investments.

When you talk about long-term commitment are you talking about some sort of [an indexed] price and if so tied to what [market]?

We are talking about index pricing and we have not been specific with the refiners nor have they as to what they want the index to be tied to. But there are several different ways of doing it as you know. It depends an awful lot on who they are reason they are currently taking their crude from as to how they are going to want to index it.

Okay. That's great, Pat. Thanks. I'll get back in the queue.

Thank you.

The following question comes from Sam Kanes with Scotia Capital. Please go ahead.

I looked at the Enbridge income fund prospectus and there was a material change in, I guess it was amortization that no longer has to be written off. I was wondering how is the $1.7 million for the quarter deferred?

Hello?

Hello?

I'm sorry, could you please queue your question, Mr. Kanes? Your line is now open.

Sam, you're back on I think.

Oh, did I just say something bad?

No, no, we didn't hear that.

On the Enbridge fund and the $1.7 million of earnings per quarter that you have to defer under those tougher CIC rules. There's a material change as to how Enbridge Income fund records its non cash expenses, i.e. down a lot and I'm wonder how that changed that deferral if at all going forward?

Pretty small I think. You're talking about the Enbridge income level, actual from prospectus we changed the purchase price allocating and therefore have, have less amortization. So in effect the equity pick up that Enbridge takes of the Enbridge income fund is not much larger, it's fairly small, I don't think it's that material.

So the $1.7 million is $1.3 million or so. Because you picked up a bit more?

I'd have to look at the numbers specifically but it's in that range.

Okay. Shifting then, one more small one, [Noverco] gas metropolitan had a 6% earnings growth and you showed a 33% pick up from Noverco, obviously that was because you did not participate in their unit issue. Do you have a target as to how much you want to sell down your Noverco position indirectly vis-a-vis gas metro?

We don't intend to sell down. We didn't participate in the unit issuance, but that wouldn't indicate any interest in selling down the interest further.

No, in fact strategically the November version company relationship, the Gaz Metro relationship is very important to us so we intend to remain very involved.

Sam, if I could add one more thing on that line item not only is there a dilution gain but there's also the impact of an Alberta tax rate reduction which impact the P. P.D. associated with Noverco that we hold at the Enbridge level. So there was something in the range of $1.6 million related to that.

Following question is from Karen Taylor of BMO Nesbitt Burns. Please go ahead.

Thank you. Just a couple of questions, Pat, in the ATM, you talked about LNG, can you talk about Enbridge's interest in the $700 million [Robusta] proposal that I guess Matt talked about today in their release in particular, what your percentage ownership is, whether you intend that the asset will be subject to its holding agreement with [Gaz du]France and whether it's intended that this asset is eventually included in [GazMet's] rate base? That's the first question.

Okay. We've been working with Gaz Metropolitan and Gaz [DURANCE] on this opportunity in Quebec, Karen, and we are looking at two different siting locations. We have not decided what the respective ownership positions would be in the project but we are working with the two other parties.

We are really going to be dependent on this project on a couple of gas fired power plant projects in addition to the distribution utilities being able to commit to the load that would be required in order to support an LNG facility. We think fundamentally it makes great sense and very important to diversify supply of natural gas to both Quebec and Ontario to be able to have that additional service. So the fundamentals are very good on the project.

We are a working very hard to address siting issues. We've got three different locations as I mentioned that we are reviewing and we are working very closely with our partner but we haven't yet decided what the interest level would be.

Okay. Just a simpler question, the effective tax rate in the quarter seemed quite high. Can you give us some guidance on what the effective tax rate is going to be for '04 given what we saw in the first quarter? Then I will get back in the queue?

Scott?

Sure. The effective tax rate looks higher, Karen, largely because of the tax rate increase in Ontario, that we have to revalue our future income tax liability on.

So it's in the taxes then?

Yes, it is. We had pretax income in the quarter of about $250 million. We paid actual taxes of 127, whereas the statutory tax rate at around 33% would indicate about 82. So there was a delta thereof about $45 million. Most of that delta is the future income tax liability change at EG D.

So if I were to back that out I would take it out of the tax paid line, or do I add it back to the income line? Where do you want no make the adjustment?

On the tax line. You don't need to normalize the tack rate.

The run rate for the year would be in the statutory range of 33?

No, we've always had some differences between statutory rate and foreign but it's going to be closer to that, Karen, that's correct.

So just to finish up on the tax, because we've seen what I will call a secular interest in the effective tax rate over the last couple years it suggests that some of your tax planning is maturing, is that an accurate description?

Tax planning maturing,.

And that benefit to you is reducing over time.

I would think that that's probably accurate, Karen.

Okay. Thank you. I'll get back in the queue.

Thanks.

The following question is from Bob Hastings with Raymond James. Please go ahead.

A lot of queued up questions Pat, good thing you're getting out of there. General question in terms of some of these big projects you are looking such as Gateway or the Alaska highway pipeline. What level of risk is Enbridge willing to take as they go through these? Do you basically want to have contracts that turn this into a pseudo regulated thing such as Alliance with a decent return or are you willing to go more the way of Vector and actually take on some additional risk for potential further upside?

Bob, I think it depends on the investment, and we fully recognize that there, we don't offer an awful lot of value to our customers if we are not prepared to take some level of risk associated with a project and we continue to get that message loud and clear from them.

So we can't expect that we are going to be able to just walk up to them and say, you need to provide us with a guarantee return on this project and you've got to choose Enbridge. That doesn't work. We need to win their favor so we need to be able to take some risk.

The way that we approach it at Enbridge is that we try to determine on each individual project what areas we feel most comfortable with and in some cases it may be taking some construction risk, or at least putting a collar on construction costs. On others it may be talking a certain level of volume risk.

But as you know, we've used kind of a trademark model that we've pointed out on the Athabasca pipeline, that has really suited us well and that is, that we are prepared to take kind of a minimal return or return along the line of the low risk or no risk multi-pipeline return allowed by the regulator at the starting point and then build on that as volumes build and when there's a sort of benefit that can be provided to the customer and the producer. So we will look at both Gateway and Alaska highway project in that sense.

But we definitely have to take on some level of risk in order to be of interest to the customer.

But only the risk being that you might get a substandard return, not take a loss?

Yeah. I would find it very hard to imagine a situation where we would, where we would enter into a project where we saw any potential to take a loss at all.

But, and, again, we are going to take what risks that we think we can effectively mitigate so the chance of taking a substandard return are very low. But that is our intent.

Would that help explain the Spearhead getting back to life, willing to take on a little bit more risk in that project?

No, the Spearhead project we really have not changed our position on it. I think it's a matter of producers determining whether the value is there for them. And that is a very important consideration for them.

We have explained our economics very clearly and they understand them and accept those. Now they need to determine whether what they would have to pay is worth it to them in order to expand market front in Chicago and that's a very important consideration I know they will give it very careful consideration.

Thank you very much.

Thanks, Bob.

The following question comes from Dominique Barker of CSFB. Please go ahead.

You mentioned that growth is through your sponsored trust vehicles and your balance sheet is in order. Why does Enbridge continue to dilute themselves down if that is the case?

To dilute ourselves down with regard to both the income trust and the MLP?

Yeah and I guess Noverco as well.

Let me address the MLP and income trust first of all and then I will come back to the latter question.

First of all with regard to the MLP, we have over the years diluted the position down from 27% to around 13% and that's because if you look at it from the perspective of us investing the capital there versus our other investment opportunities, Dominique, it doesn't provide us with the same returns as it would for a common unit holder. So the economics of making those major investments in ticking up our pro rata share are not favorable to us.

So we certainly haven't sold down the position, we just haven't taken up the interest and we've allowed ourselves to be diluted down.

In the case of the income trust in Canada, we would like to move to a position where we only own about 20% of it, so in a way it's an opportunity for to us monetize some strength in balance sheet as we move down and put more of those units in the hands of unit holders.

Okay. Can I ask a second question?

Sure.

We heard at the A G A. that you guys would consider bidding on power in Ontario. Why would you consider doing that after selling Cornwall electric back in 2002?

Yeah, the Cornwall electric investment was made because they are in the distribution business primarily. And our intent at that point was to acquire as many distribution utilities as we could in our franchise area, but the rules changed around privatization and municip electrics in Ontario and we've withdrawn from that. The comment was made at A G A. by Steve [Ludwig] related to potential for us getting involved in some gas-fired power generation in Ontario and we've always expressed interest in that in that we are in many cases the logical natural gas supplier to those gas-fired projects.

And as long we've got projects that are not merchant that have long-term contracts associated with them, we would be prepared to make some small equity investments. We would definitely have to be doing that with a partner that knows that business very well because we don't. But we think it's a logical extension to not only provide the natural gas service but also take a small equity position in the gas-fired projects.

Thank you.

Thank you. The following question comes from Matthew Akman with CIBC World Markets. Please go ahead.

You mentioned Gateway coming out of the Edmonton instead of the oil [stands] can you talk about why the change there?

Yeah, the main reason for that, Matthew, is to have access to a broader range of crude and Edmonton as you know is the main terminus in Alberta for access to just about every bit of crude that moves out of the province so it's broader access to a wider variety of crudes.

Okay. Switching subjects, Enbridge commercial services we don't talk about it a lot but it's a significant amount of your earnings and there's some interesting stuff going on in the retail energy business that could affect that, more competitive electricity selling in Ontario and Alberta, but on the other hand I guess in Ontario they've said that the competitive retailers have the right to send the bill out instead of you guys. So I'm wondering whether you see commercial services growing or shrinking? I mean are these opportunities or risk for that business?

You are talking about customer works, Matthew have.

Yes, okay, well, yeah, I think customer merchants have great potential to grow. As you know it has worked very well for us and for our customers, and it's been a very good relationship with [Excensure], who are the operators of customer works and a good relationship with [Terrason] as well as the other equity investor. As the customer works continues to work hard to grow its customer base and are going very aggressively at that I am very hopeful that they will continue to be well-received. And our feeling is that they are going to continue to grow and do very well. So I think a very logical outsourcing move to have taken that initiative in the first place and very good potential for continued growth.

Would that business potentially extent are extend to retail electricity in Alberta and Ontario?

Do you mean, Matthew, to the customer care service to those business?

Yeah.

Absolutely. When Pat noted customer works growth really not being done through [Excensure] business services who customer works outsources it's service to, and so Excensure is actively pursuing markets across North America including those in Alberta.

Following question is from Andrew Kuske of UBS Securities. Please go ahead.

If you could give us a bit of color and context just on your view of the opportunities you have with the recent mergers and the oil patch. So we had [Incanna], Tom Brown, which obviously you're very close to, and then just Pioneer and Evergreen. How do you see the outlook for the EMT industry and the opportunities that you can get from that

from all the many activities happening?

Let me address the [InCanna Tom Brown] situation first of all, Andrew. Tom Brown is a very important customer of ours in East Texas and we welcome the [Incanna] acquisition and we assume that Incanna would not be doing this deal if it didn't intend to probably increase the level of activity that Tom Brown has in East Texas.

As you know and as I mentioned in my introductory remarks we are building a new pipeline over to the Carthage hub from the Bogier gas plate in east Texas and any increased level of drilling activity level there is only going benefit that pipeline going forward and we have designed it for additional throughput. So that's very positive.

You also know that we are working on a pipeline out of the Rockies and Tom Brown has assets in the Rockies and I'm sure that Incanna s acquisition again will only speed up the level of investment there. So that will work very much in our favor I'm sure.

So I think that is positive, generally speaking I think when these mergers and acquisitions are done it does result in a higher level of activity and that will be very positive for us in the U.S.

We happen to be exposed in Texas both through the Barnett shale and Bogier gas plate, two best plays in Texas be and we would really like to be involved in the Rockies mission and we are working very hard to meld with their deep end pipeline project.

If I may just ask a follow on with respect to the Beacon project you mentioned just an amendment that you had with the Gateway project and really starting that out of Edmonton. Have you considered starting the Beacon project more on the western side of Wyoming where there is actually some customer demand to shift gas into the Chicago market?

Yeah we have and we have been working with producers there to see if we can get sufficient support to do that and as yet don't have the level of support that we require. We need to get one of the major playes like an Incanna wanting to back stop our project in order to really get it off the ground.

We are aware of that interest in being able to get further west, just haven't been able to get a sufficient level of support. There are a number of companies that are prompting us to keep going but we don't quite have the collective support that we need to make it a go project.

You mentioned sufficient level of support. What do you see that being in volume metric terms or in guaranteed returns for back stopping the pipe?

Well, Beacon is proposed to be a BCF line and I must admit I don't have the volume threshold in mind but it would have to be something that when we crank the numbers allow us to earn that ballpark 10% return on construction and then with the opportunity to move that return up into the 12 to mid-teens range as additional volumes come on, but I don't have a volume threshold for that at my fingertips, Andrew.

That's great. Thanks, Pat.

Okay. Thank you.

Following question is from Wilfred Gobert of Peters and Company. Please go ahead.

Thank you. Questions about the spearhead pipeline. Do you think that the lack of producer's support for the Spearhead reversal of that line is in part due to the competitive alternative or somewhat competitive alternative that Exxon Mobil is proposing with a line reversal from Chicago to the Gulf Coast?

Good question, Walt, and I think that that is probably one of the considerations although that's a much bigger, bolder stroke and probably at a different level of expenditure than we would be talking about here because the Cushing to Chicago line offers the roll in possibility, the financial exposure in supporting it isn't nearly as great as it would be on getting all the way to the Gulf Coast. So it might be in the back of the minds of producers, but I doubt that it is a direct one on one competition.

If I could just add to that, the Cushing market really isn't a heavy crude market it would be much more apps for Canadian synthetic whereas the Gulf Coast is a heavy crude market. So the Spearhead project as compared to the one that you mentioned does have that distinction also in the sense of crude type.

Just related to that if I can, I don't know if you saw the comment at Canadian Natural Resources in their conference call this morning but they mentioned how their blend of synthetic and bitumen, synbit, that the industry will have a capacity of 250,000 barrels per day of synbit by this fall. I think that they are targeting a lot of that synbit to get it into patent three which it would be supported by the idea of the Exxon Mobil reversal.

I didn't see the release from CNQ this morning. But I'm thinking that the producers are going to want to increment their way south rather than trying to move volume all the way to the Gulf Coast initially. I think they are going to want to gradually win over refiner by refiner as they push south. And from a pricing dynamics point of view I believe that offers them the best alternative. But I can't speak specifically to the Exxon reversal project unfortunately.

Right. I agree with you. Thank you.

Thank you.

The following question does is from Andrew Fairbanks of Merrill Lynch.

Thank you, Hi, Pat. A couple questions on the LNG opportunities, the first being with the siting challenges that the industry has come across in a couple of cases, what areas do you think are looking the most promising for actually getting a re gas terminal in? And then secondly as you look at those kinds of projects, what would be the return on capital demands would you be happy with a structure similar to Beacon where you start with a base rate and as volumes increase you move up to something along that 12% return on capital level?

Return on equity level. Yeah, to answer the first part of the question, Andrew, and unfortunately I am going to have to make this my last question because I have to skip out, but with regard to most likely the locations for LNG, we still think that the Gulf of Mexico, is in shallow water in the Gulf is the most logical place in North America in total, because it represents the fewest siting challenges.

If you are able to put a facility offshore and then use existing pipeline infrastructure to tie it into the entire U.S. northeast market so I think that's a pretty logical spot.

We happen to think that our Quebec project is also very logical in terms of market being there and relatively easy siting and I don't mean easy siting but I mean relatively easy sightly. So I think geographically those makes sense.

As you know there's been a lot of talk about Mexican projects and a couple that appear to be proceeding. One on the Gulf Coast side and one around the Baja, and I think those again, if they are able to attach to existing pipeline infrastructure make very good sense. So we will continue to work along and the second part of your question related to return.

And we haven't specifically addressed that on LNG but that wouldn't be a bad assumption to assume that we would look for a regulated type rate of return initially with the potential to accelerate that as additional volumes come on. We would have to look at the fact that there would be some additional risks around getting into an all new business.

And as long as we were able to offset the construction risk around the regasifiction facilities in the terminal, and any cost risk associated with siting challenges, then I think we could go on that basis.

I think, too, the basis of projects like that are that utilization is going to increase once a project is successfully sited. So we would build that into our thinking as well.

That's great. Thanks.

With that Pat has now departed so we will carry on.

The following question is from Maureen Howe of RBC Capital Markets.

Thanks very much. Maybe Colin can help us with this but when I did the normalizing adjustments for Enbridge gas distribution for the things that are set out I end up with a number for this year of $61.6 million. And a comparable number and correct me if I'm wrong for last year using your adjustments of $37.1 million?

That's right, Maureen. I think you also want to add into 2003 a number to represent 2003 final rate settlement which of course wasn't achieved until May of '03.

I was wondering if you could give me that number?

I knew you were going to ask me that. I have $6.1 million here for that.

Let's say it's 6.1 because I trust you, and so basically we have a 50% increase, near enough, year over year, near enough $20 million, in gas distribution on a normalized basis. That's huge.

Yeah, it is huge and I think it's fair to say that another factor you should probably look at in both years is O and M. and in short I think a lot of it is timing. If you look back at Q1 '03 if you recall then we had significant O and M. over spend for a variety of reasons including a pretty cold winter. And this quarter we're a bit favorable to budget. So the delta there is a big chunk of this is, quarter over quarter, is Delta. So that will of course reverse itself over the course of 2004.

Can you give any guidance on a year over year basis that we normalize for O. and M. and if we normalize the rate adjustment what sort of improvement you saw in Q1 versus last year?

I don't have an exact number but it's probably around, I think it's probably $5 million to $10 million. I'm trying to think back to last quarter. I think it was about a $10 million overspend in Q1 '03 that we made up later in the year. If you look at the $10 million that's probably a good reference point.

Okay. That's great. Thanks and I will get back into queue.

Thank you.

The following question is from Linda Ezergailis of TD Securities. Please go ahead.

This is a quick question with respect to the Athabasca tax loss carry forward in 2003. Can you give us a sense of what the magnitude of that was? I'm assuming that that will no longer appear in future quarters this year.

Linda, I think it was in the range of $1 million a quarter.

A million a quarter?

Right.

So we should expect to see that Delta then continue for the rest of the year? Yes. The run rate we are seeing in Q1 '04 of just around $11 million for Athabasca is something we think is right through the year.

The following question is from Karen Taylor. Please go ahead.

Can you just comment on L to gas? You indicated there weren't many changes in the contribution of the asset given the conversion to the unit but you also did terminate your strategic agreement with [some on mid stream] developments in Alberta as part of that trust. Can you talk about the long-term role that that asset plays within your portfolio group of companies, whether it remains core and strategic to you?

Yes, Karen. Just thinking back as to our original investment in Al at a gas and more the focus at that particular time on the midstream business proposition that they had which of course shifted to some degree with shifting business conditions over the years. A lot of the properties, and I don't propose to speak for AltaGas here but a lot of the properties that could have been available for acquisition from majors and near majors didn't materialize as many of those ENT companies became more flush with cash.

AltaGas is also now involved in the power sector in a fairly significant way. And so I think although a business proposition and overall direction has shifted to some degree at AltaGas, we are not at all unhappy with it and really don't see anything that changes our view at this point.

So what's the significant then if any and what was the purpose of terminating the agreement, the joint mid stream development agreement with them?

I can't speak specifically to that, Karen. I'm not familiar myself with the terms of that agreement and I don't have it at the tip of my fingers why that would have occurred.

I will follow up with you separately if you don't mind.

That would be fine .

Thank you. Follow up from Dominique Barker. Please go ahead.

I'm just wondering, in the cash flow statement there's tax assets of $49 million, does that include the $45.4 million from the Enbridge distribution? The change in taxes in Ontario?

That should be a non-cash item.

The cash-flow statement?

Yes.

That's exactly what that is adding back a non-cash debit.

Okay. Thanks.

The following question is from Maureen Howe of RBC Capital Markets.

Thanks very much. Steve, you can probably answer this question. It has to do with the strategy of increasing the market for Canadian crude, and basically the view that Chicago could possibly get saturated. Is it saturated with Canadian crude or is it saturated with synthetic crude that really is the concern of producers?

You are talking specifically about the Chicago market?

Yes.

Well currently the Chicago market feeds on about 45% of its needs on Canadian crude and the remainder comes, there's a small percentage of indigenous U.S. production that ends up there and then there's a fair bit of foreign crudes coming in most prominently up the [Cap] line which is the high volume system up from the Gulf. So when we talk about market saturation I think there's two points to that.

One is true market saturation, that is that total supply has over taken demand but also the issue of market share is very important. So I think that one of the objectives of the overall Canadian crude industry is not only to supply the demand in the Chicago regions but literally to displace other volumes and foreign volumes that are now coming in to that and there's been a lot of progress made in that area.

So I would say that one of the objectives in Chicago specifically is to insure that the maximum amount of Canadian crude and there is a good appetite for synthetic but also Chicago in its own right is a pretty good heavy oil market especially at certain times of the year, like right now when the asphalt season is on.

So there will always be a seasonal variance in the market for heavy oil but it's a strong heavy oil market. And there is always a place for synthetic particularly when synthetic is not a homogenous term. Synthetic can be tailored in a lot of different ways. Already up in the oil sands.

So I think tailoring, if we call synthetic crude generically crude that you can manufacture to a certain specification, I think that the key is making sure that it's optimal for the refiners. I would hesitate to say that there's a saturation of synthetic because synthetic can mean a lot of things including, I think as Will Gobert mentioned, a Synbit type of a blend which tends to be heavier. So a long answer to a short question but I think that Chicago offers opportunity for market share improvement and then of course the objectives to get beyond Chicago have more to do with pricing than anything at this point and being able to move the marginal barrel that sets the price past the Chicago pricing point.

What I'm struggling with Steve, and maybe you can help is if the Canadian producers are going head to head with foreign product in Chicago and battling it out, how does it makes sense to move oil to Prince Rupert and tank it across to Asia and go head to head with them in another foreign market?

Well, I think that right now the occasional cargo does move to Asia of Canadian crude and that's I think done more to set a tone in the Chicago pricing environment more than anything although I think there may be a reason why people move an occasional cargo over there. One of the issues is that there is pricing power in the Chicago refining market.

And therefore, one thing that can help that is being able to move crude to a market other than Chicago or past Chicago and in that sense, that tends to set a different tone in the pricing environment as opposed to a tone where it appears that the volumes must move through a single point.

So I think that that is being done today on occasion to Asia, and I think our thought has always been that the reason to think about a project like Gateway, is that the producibility in the oil sands and the number of projects likely to come on are a function of, I'm sorry there was an echo there, but are a function of total crude supply which could practically saturate the tattoo market but that supply can also be influenced by how many outlets there are. It's a little bit of chicken and egg.

So gateway, the proposal with Gateway is to offer another market through the Canadian producer which in turn could influence their thinking in regard to other expansion projects in the oil sand.

Okay. Thanks, Steve.

There are no further questions that have registered at this time. Mr. Gruending I would like to turn the meeting back over to you.

Thanks for joining us. That concludes our call. We are in Toronto this afternoon and will stand by to take any calls that you have so you may register them with one of our home phone numbers. Thank you and good bye.

Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation and have a nice day.