恩橋 (ENB) 2004 Q2 法說會逐字稿

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

Thanks, Stephanie. Good afternoon, everyone. Welcome to our call. With me today are Pat Daniel, president and CEO; Steve Wuori, group VP and CFO. Steve has some opening remarks, as usual. And Scott Wilson, SVP and controller is also available to assist in the question period following.

I’d like to 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 these risks include weather, through put volumes, interest rates, regulatory decisions and other items. These risks of course are discussed more fully in our filings, which are available publicly through CDAR and Edgar system.

This call is being webcast recorded, and for those of you listening over the phone I would encourage you to review the accompanying slides. A call replay and transcript will be available later today and early tomorrow respectively. I’ll turn the call over to Pat, now.

Thanks, Colin. Good afternoon, everyone, and thank you very much for joining us. As I am sure you are all aware, earlier today Enbridge announced second quarter results for 2004. Beginning with a very strong first quarter, our six month adjusted operating results are right in line with our expectations and up about 4 percent over 2003 on a comparable basis.

Accordingly, what I would like to do is focus my remarks very much on our strategic outlook, and of course Steve will follow up with comments more specifically on the numbers. As you know, I’ve been highlighting now for some time the fact that the fundamentals for Enbridge are very promising at this point. We are entering another growth phase in our industry, and we expect that 10s of billions of dollars on energy infrastructure is going to be required over the next decade to meet North American energy demands.

This will include not only building new crude oil and export pipelines to access Alberta’s very vast oil sands resource, but it also very surely includes building new frontier infrastructure in various spacings, as well [inaudible] our pipelines to market. Obviously LNG, regasification terminal opportunities, more storage and more shipping capacity.

Because of the focus that this company takes on the fundamental trends in energy production and consumption, we feel that we are very keenly aware of just where that infrastructure is going to be required in North America over the next number of years, and we are targeting involvement in a number of those areas. I feel that the company is really well-positioned at this time, and we are working very hard to execute on a number of opportunities that we’ve got there.

Clearly though, project development, especially when you are talking about green field project development requires long lead times. A significant design assessment is involved and a lot of innovation and some commercial negotiation on every project. I can assure you that our business development teams are working very diligently now with customers and also potential partners on various projects, and we are also requesting a selective [inaudible] of acquisitions as always.

I would like to provide some color on both the organic growth and acquisition fronts, but unfortunately because of commercial sensitivities my updates are going to have to, as usual, be somewhat constrained and general in nature.

Let me try to run through these as succinctly as I can. First of all, starting off with our Athabasca pipeline. As you know, discussions continue on feeder and storage opportunities within Alberta, and there should be a number of opportunities over the next many years. Our Athabasca feeder pipeline remains very well-positioned through that oil sands corridor, and we expect to expand our 10-tank terminal north of Fort McMurray and to add new laterals and main line pumping. Our plans now see another $150m in capital invested to 2007 in that Athabasca project.

Shifting over to [Wapasu], of course new feeder pipelines are going to be required to connect the next wave of oil sands projects to market, and in that regard we continue to work on the [Wapasu] pipeline proposal from Fort McMurray down to Edmonton. The current proposal that we are putting forward may be structured similar to the Athabasca project, and it would include about a 2008 in-service date, accommodating about 200,000 bpd initial capacity via a 24-inch diameter line, and that would be of course expandable with incremental pumping capacity on the line.

We anticipate that the capital associated with this project would be about $300m and it would be spent in the timeframe between 2006 and 2008. A decision from producers on this initiative, and producers of course being the customers that we help to put the commercial deal together with, a decision from them is likely to occur prior to year end and what we really like about our project is that it offers producers flexibility by using the Athabasca pipeline that I’ve already referred to to accommodate sequential start dates and the phase-in of production profiles. So we are going to offer them Athabasca today and then [Wapasu] development going forward.

Also within Alberta we are considering expanding our very successful Hardisty storage [inaudible] operations. We may more than double our capacity from 3-7m barrels of storage, and that is going to require another $50m of capital in the 2005 to 2008 timeframe. We would expect to have a decision on that made within the next six months as well, so more to come on that project.

That kind of covers the local landscape within Alberta. Let me now switch and talk in terms of export and new market initiatives. I am going to start again with Spearhead. As you know, we previously reported we had deferred our smaller Spearhead reversal initiative and this was the smallest of our southern extensions. However, the asset continues to hold very significant geographic importance, and in the coming weeks we are going to be working very creatively with our partner on this project, BP, to assess alternatives for the future of that line.

In the mean time though, we continue to talk with interested area refiners and Canadian producers, and at this point a late 2005 in-service date is still not out of the question for the Spearhead project.

We also see Canadian crude moving to Eastern [Katu] and the Gulf Coast by 2007. In this regard, we are conducting discussions around the appropriate infrastructures. You will see this occur on economic toil and turns, so we are relatively early stage. And I realize this is a little bit vague, but I really can’t tell you more at this point about how those discussions are going. Once again we hope to have something more definitive by the year end with regard to both the Gulf Coast and the Eastern part of [Katu].

Also assuming additional volumes pulled through to these new markets, additional mainline capacity is going to be needed in the 2007 and 2008 timeframe, and of course our southern access is really designed to debottleneck the mainline, the Enbridge mainline south of Superior, Wisconsin, and to provide numerous delivery options to shippers from that line. Our plan would be to have an interconnect with Spearhead, providing northbound service in the Chicago area via Spearhead, and also facilitate southbound service to Cushing and new access, of course, into Wood River, a major refining center on the [Tocawood] River.

So at this point, industry is considering also a more phased debottlenecking program on our existing mainline that would eventually build out very similar to the southern access project that we originally proposed. Both those alternatives are under consideration and we await a decision here late in the year on southern access.

Finally in the old pipeline project inventory at least, let me give you a quick update on Gateway. This project is the biggest, but probably the furthest away with a planned 2009 in-service date. However, it has attracted perhaps the most attention of all of the alternatives given it’s very broad nature. The project driver here currently is in building market demand, or more precisely Asia Californian demand for crude oil. In Asia, due to increased demand in California due to declining supply, so we catalyzed that process with a trip to China.

Our trip, together with others efforts and the growing, absolute demand from Asia has generated some very serious interest, resulting now in a number of Asian delegations making repeated trips to Calgary during the quarter, so we’ve had very good response to our initial enquiries in southeast Asia.

To help build confidence around producer netbacks, we’ve also been refining a number of our project estimates, including the pipeline engineering and construction costs. The resulting tariffs, which of course are critical, we’ve done a lot of work on tankerage costs due to upgrades. We still plan on the 30 inch line to the west coast with an initial capacity of 400,000 bpd, capital cost of $2.5b. So that is unchanged. Our best estimate now is that the Instate Pipeline Tariff on Gateway would approximate or better a competing project to Vancouver, and it would come in at about USD $1.75 per barrel.

What is really striking here is the very significant tankerage advantage that Gateway would have in terms of accessing larger ships, and as the DLCC ships are approximately three times larger than those available to Vancouver Harbor, the unit savings to Asia would be in the order of USD $2 per barrel. So an overwhelming advantage to the Gateway alternative. We expect to gain some industry decisions later in ’04, although on this one I think it may realistically be early ’05 and we will keep you posted with milestones as we work on that.

So that is a run through on oil on our opportunities. Let me switch now to natural gas pipeline proposals. I would like to start out with LNG. During the quarter, our partner and roughly 25 percent owned affiliate, Gas Metropolitan, announced a proposed LNG regasification terminal project on the St. Lawrence River near Quebec City. The project is called Rabasca. Together with GasMet and one of our partners in the vertical, [Gas De France,] we continue to pursue regulatory and site approvals for this very interesting and exciting project. You might want to just visit the project’s website, which is www.rabasca.net for more details if you would like some further background on the project.

This would be a 2008 or 2009 in-service date and it would require between $200m-$300m of capital from Enbridge beginning in 2006. That depends on the final partnership splits which are not yet in place.

Moving to Alaska gas, earlier in the quarter and as I am sure you know, we filed an application with the State of Alaska under the Stranded Gas Act to permit us to commence formal discussions now with the state and the producers towards building the Alaskan and Canadian portions of a very much needed gas pipeline to market. That is a bigger project again, of course, and it is also a number of years away. Our proposal is a fresh and innovative one, and as I said, we are going to work very hard to demonstrate that we’ve got some value to add to this project and we need to demonstrate that both to the producer group and to the State of Alaska, and we are working on that every day.

Currently the risk burden on developing this project lies with the resource owners and the royalty holders. I guess I would feel very strongly that due to the ever-increasing need for the gas, we feel that the market and therefore the end consumer should be sharing in the risk associated with the development. I am sure you will agree that the offsetting benefits in terms of lower prices and lower price volatility will follow, so it will be a significant benefit to consumers in helping to support this development.

We intend to work with both Canadian and U.S. regulators to encourage this market support for the project and be a big asset to the producers in doing that.

In terms of an update on gas distribution utility, we are currently working through our 2005 cost of service rate increase. We were very pleased to settle a good many issues with interveners, in fact we had about 61 issues in number, 48 of those were settled through the EDR process and four of them in addition to that were partially resolved. We did reach settlement on two very big issues, our 2005 capital budget, which is $247m. It is similar to past years, and also our O&M budget of $301m which is up from prior years.

We did take some other issues to hearing, and Enbridge’s final argument of course is scheduled for August 3rd. We expect a final decision in October with regard to that rate case.

Generally speaking, though, we expect 2005 earnings should be roughly similar or increased compared to 2004, due to customer and rate base flow in that utility. As you know, we set a new record last year, over 60,000 new customers added and we’ve already posted 42,000 customers added this year.

Directionally we are exploring a number of alternatives to separate from 2006 and 2007, including the possibility of a multi-year incentive arrangement which we would very much like to do. The OEB has scheduled a technical conference on performance-based rates for October 5th and 6th and we would hope that will provide us with some guidance on future acceptability of DDR parameters, so we are working very hard to get an incentive system in place there.

Finally, I would just like to comment on our financial position. It is currently the strongest it has ever been in the history of this company, and it is getting stronger every quarter. We are generating free cash flow of more than $300m this year and next, and that is net of dividends and capital requirements going forward.

We also have some balance sheet room and we have recently created some additional flexibility in that regard with the partial monetization of that investment in [Alta Gas] which generated net cash proceeds of $217m to Enbridge. So in short, our balance sheet is in excellent shape, we’ve got considerable financial flexibility.

So that’s a very quick strategic update, and I am going to stop there and hand it over to Steve for comment on the numbers and then I will come back wrap up later on.

Thanks very much, Pat. Good afternoon, everyone. Before I discuss the quarterly earnings I will quickly remind you that we relaunched our corporate web site last week and it contains some enhanced disclosures and corporate context. I think it continues to be a popular communication tool with investors and I encourage you to continue visiting the site, it beats web surfing, so you can certainly access it and I hope that we get your feedback on it as well.

Looking at the quarterly performance, recall that the first quarter was very strong, 95 cents normalized versus 79 cents in the prior year, and we caution that performance would likely normalize or partially normalize through the balance of the year.

Reported earnings for the second quarter were in line with those expectations as Enbridge earned $248m or $1.49 per share. The quarter has just two unusual items, colder weather and a dilution gain which I have set out in the earnings release.

Excluding these unusual items, second quarter adjusted operating earnings were $1.34 a share, compared to $1.43 last year on a basis that removes the effect of the unbilled revenue timing change at EGD that we talked about at some length after the first quarter. Essentially earnings are lower due to the Alliance Canada and Enbridge Saskatchewan sale into the income fund, and some higher corporate costs.

Looking at some of the quarterly highlights, asset by asset, we will start with our sponsored investment segment, the Enbridge income fund which was formed on July 1, 2003, contributed an incremental $7.5m in quarterly earnings at Enbridge. At Enbridge Energy Partners the earnings contribution was a similar $7.1m which reflects widespread volume growth and the success of recent acquisitions such as the [Kantara] North Texas acquisition and the Shell Mid Continent assets which were acquired earlier this year.

These are solid contributions from the sponsored investments, that should grow with each of these businesses. Enbridge proudly has a 72 percent economic interest in the Canadian Income Fund and a 12 percent interest in the U.S. partnership.

Liquids pipeline segment is down about $2m over Q2 last year. The crude oil system generated $41m for the quarter, which is consistent with recent quarters, but Athabasca pipeline earnings were down $1m due to higher tax expenses and also a reminder that the Saskatchewan earnings have now moved to sponsored investments give the sale to the income fund last year.

Looking at gas pipelines, it is similarly affected by the creation of the income fund in this particular segment. The sale of Alliance Canada to the income fund creates that, and the segment is now down $9m from the prior year. The Vector Pipeline earnings contribution doubled to $4m, given the additional 15 percent interest that we acquired in the fourth quarter of ’03, and also improved transportation margins from the capacity available for short-term contracting.

We are pleased that Vector has been running full bcf a day and is fully contracted through 2005 so a very good news story at Vector.

The international portfolio continues to post very strong results. The quarterly earnings for the segment are up $3m over last year on the strength of the performance of [CLH in Spain]. It’s throughput is up over 60,000 bpd or 9 percent year to date and we continue to experience favorable euro translation. So exciting things, I think, happening in Spain with regard to refined product demand and the effect that it has on CLH. [Rosenza] in Columbia is right on target at $8m a quarter.

The vast distribution and services segment had a good operating quarter including about $16.5m in benefit from cold weather. Comparing year to year on a weather normalized basis, EGD’s second quarter results are down about $3m from last year at about $115m. In getting to this apples-to-apples comparison, you would subtract $9.4m from the prior year quarter to account for the unbilled revenue accrual practice that we changed this year. The resulting net difference of about $3m is related to higher O&M spending in the second quarter due to some work that was not completed in the first quarter. We have posted a summary of the 2003 pro forma adjustments on the web site, to clarify the historical quarterly impact of the unbilled revenue accounting change.

But a reminder, as we did in the first quarter call, that it is a zero sum effect. It is just movements to more accurately reflect in the proper quarter the revenue recognition through the year.

I also want to remind you again of the potential change to the Enbridge Gas Distribution year end, pending the outcome of our current rate case. We have proposed to move the 2005 fiscal year end of EGD to December 31 from September 30, which would remove the awkward quarter lag and consolidation and reporting. So that is really one of our objectives here, is to simplify reporting going forward. If approved, we would like to adopt the change in 2004 at Enbridge Inc to build a good comparative year for 2005.

Enbridge’s 2004 results would include five quarters of EGD, including the October to December ’04 period, although our ’04 guidance already takes this into account. The ’05 year would begin cleanly on January 1st of 2005 and I think that in spite of any noise that these changes have introduced, we do believe that the year end and the unbilled revenue accrual changes are going to simplify our reporting at EGD over the longer term.

There are a couple of other assets grouped in the distribution and services segment, Oxable and Alta Gas, which probably warrants some discussion. Oxable was cash flow positive again, but mildly unprofitable, losing $1.8m during the quarter. This represents a $3m improvement over the comparable 2003 quarter, due to more favorable liquids prices, together with a continued focus on risk mitigation.

We have locked in some positive margins, and largely removed the volatility from this business for the remainder of 2004, and we are also encouraged by another development at Oxable which relates to a downstream LDC raising its maximum allowable heat content for volumes coming out of the Alliance pipeline. What this does is effectively reduce the floor volumes that currently must be extracted at the Oxable plant, in effect partially reducing its minimum processing requirement, so that’s another positive.

Turning to Alta Gas, we monetized about two-thirds of our holdings, or 11.65m units in the Alta Gas income trust last week, and will continue to monitor the balance of our holding which is at about 13 percent. Alta Gas is included in our reporting line called “other”, and because they have not reported their quarter yet, we can’t get into details, but we should highlight that embedded within the Alta Gas equity pick up we have recorded an after tax dilution gain of about $8m in respect to Alta Gas’ June 3rd treasury offering in which Enbridge did not participate.

There is also an over-allotment option on units that the underwriters can exercise until early September in respect of the offering that we did last week. Before I leave the gas distribution segment, I should also note that we are very pleased with our new partners in [Deverco], CDP Capital, B.C. Investment Management and SMC Lavalin share a long-term investment horizon with Enbridge and their entrance into the [Deverco] structure does not trigger any economic or accounting changes for us. [Deverco] earnings are up during the quarter given Gas Metro performance, and because the prior year included a tax liability revaluation charge of $2.3m.

Corporate costs are higher due to factors such as expensing stock-based compensation, higher BD costs due to the activity that Pat was speaking about earlier, and higher insurance costs, while last year included more income from a loan to Enbridge Partners than we are receiving this year.

Going forward, we see the corporate run rate to be between $20-$25m per quarter. So those are the quarter earnings highlights, and I think it is another clean quarter all in all with some positive underlying operational trends which leave us in good shape for the year as a whole.

In that regard, we remain comfortable with our existing earnings guidance of $3-$3.10 per share, excluding unusual items. We see continued strength from a diversity of businesses including Enbridge Gas Distribution, Vector Pipeline, the Oxable plan, CLH volumes and both of the sponsored investments.

So that’s a look at the quarter Pat, and I will now turn it back to you.

Great, thanks Steve. I would just like to reiterate what I said at the outset and that is we feel that Enbridge is extremely well-positioned within this growth industry and it is very nice to be able to call it a growth industry again, both from an oil and gas delivery perspective, we are well-positioned. We remain very focused on developing the many projects that we have in our pipeline and we are going to keep a very disciplined eye on relevant acquisition opportunities as always.

As we do, we know that the returns on reinvested capital will follow as a result of the discipline and approach that we have taken. We will not forsake long-term economic volume or our low risk profile going forward. So that really concludes our remarks. Colin, I will turn it back over to you.

All right, thanks Pat. I understand today is quite a busy day on the earnings calendar, so maybe respecting other participants time, I might suggest that we limit follow up questions. Okay, operator.

(Operator instructions) The first question is from Dominique Barker; CSFB.

Good afternoon. I wanted to ask about [summer fill up]. I understand that your equity on your balance sheet, that it is merely a contract. I wanted to confirm that that contract is not capitalized either, and I wanted to get an idea of any cash impact you think there might be as a result of – I guess there is a bigger proceeding going on right now?

Colin, can you respond to that, please?

No, we have a legal proceeding that should proceed into September, I believe, and a decision might be this year, perhaps early next year. In terms of cash costs, we are seeking to collect some small receivables and we are also seeking damages for the balance of the contract. So you know, if we are to reset on the latter point, we’d record a one-time income item.

Okay, and just a second question. What sort of acquisition do you estimate you can make right now?

That’s always a difficult one to answer, Dominique. We have got a lot of balance sheet capacity available to us right now, so it would depend an awful lot on the capital structure of the target, but we are in a position where we could probably do a company doubling size transaction if we found the right deal to do. We do have a lot of capacity to move.

Thank you very much.

Thank you. The next question is from Linda Ezergailis; TD Newcrest.

Thank you. Just want some clarification on your guidance. I am wondering if the composition of that has changed. Now historically, I understand there was an unannounced acquisition baked into that number, and if I heard you correct today Steve, that guidance includes five quarters of Enbridge Gas Distribution?

No, Linda, we actually have removed the effect of that fifth quarter.

Oh, it excludes that effect of that fifth quarter.

Yes, so that is for the clean year.

Has the composition of your guidance changed at all?

Not really, I think as we talked, if I remember it was probably on the year end call where we gave the forward guidance we talked about how there is always a component of our earnings that comes from acquisitions that we have not identified specifically at the beginning of the year, and there is still a component of that.

I think it is fair to say, just to add to that Linda, that we’ve been very pleased with the base operations of the company, and therefore any incremental investment which is even smaller in size at the six month mark than it might have been at the beginning of the year based on the base asset performance.

Okay, and I guess we will next discuss this topic on the next quarterly conference call. Is there an investor’s day scheduled prior to third quarter?

It’s in the first week of October I believe, Linda.

Okay, so we will have a richer discussion at that point, I would imagine? If not prior to then if there is something you are going to announce before then?

Absolutely.

Thank you.

Thank you. The next question is from Karen Taylor from BMO Nesbitt Burns. Please go ahead.

Can I just come back to the guidance again and this unbilled revenue adjustment? The 300 to 310, you have growth in here, you also have normalized for the Enbridge Gas Distribution year end changes – is that all correct?

That’s correct, yes.

So when I look at year to date performance by segment as you’ve laid out, how am I going to get to that range on a weather normal basis in the last half of the year? What particular area do you see as being pulling us back into that range?

I think strong performance from a number of areas. I talked about a few, Vector, [OxSable] which has typically been a significant drag and really is no longer. The sponsored investments segment, we have optimism for. You may have notice, Karen, that [Eve] recorded a very good quarter. And so I think also that CLH, as I was talking about, continues with very strong performance, that looks good for the remainder of the year. So we’ve obviously in preparation for the quarterly call have done a pretty thorough scrub of what the businesses are looking like and how the year is looking, and we remain comfortable with it.

Let me ask two quick related questions. The interest costs in other. You know, you are pushing free cash flow, you haven’t bought a lot this year, but yet the other costs seem persistently high. So is the savings associated with higher cash receipts asset divestitures being offset by a lower efficiency on your overall tax planning activities?

Scott, can you –

Well, Karen, I think we addressed on the last call that our taxes for 2004 are going to be above statutory rates. We are anticipating something closer to a [1 percent] rate rather than in the mid-30s. So we are incurring higher taxes, now that is largely due to the tax rate increase in Ontario which is something that we adjusted out.

I think you asked about interest, and we are experiencing, within the corporate segment, slightly lower interest than what we included in our budget, but as Steve noted, that is being offset by higher corporate costs and the fact that relative to last year we are looking at a higher loan to the partnership. That is down significantly less.

Have you finally repatriated the last $200m from the partnership that was outstanding?

That is about USD $130m that is still outstanding, Karen. And I think with that we could call that in, but there isn’t a need to at the moment so that just remains, but of course the balance was much higher a year ago.

The last related question to all of this is this company doubling transaction. How much leeway do you think the rating agencies are going to give you in terms of transactions size before they require that you issue equity in order to save or maintain the A- rating?

Well I can’t quantify that for you, I will ask Scott and Steve to comment on it in a minute, Karen, but let me just give you a general comment that we are very protective of the credit rating of the company, and therefore any transaction that we did that approached that size, we would ensure that we would be in a position where we could maintain a very strong rating going forward. The amount of capacity that the rating agencies would see us have would depend an awful lot on the risk profile on the assets that we were looking at. Steve, you may want to add to that.

Just before you go on, I mean a company doubling transaction has, even if it is in identical businesses, is fraught with risk given the valuation integration and combination and just final management issues. So you know, I hear what you say in terms of the risk profile, but company doubling transactions are very large and very difficult to put together, notwithstanding the similarity or divergence of assets. So how real then is that statement in view of what you just said on the bond side?

Well, first of all let me remind you that I commented on a company doubling transaction in response to a question as to what the maximum capacity of something is that we can do. It is not that we plan a company doubling transaction, Karen. I realize there is transaction risk, there is also tremendous opportunity in properly executed, large transactions. We doubled the size of this company in the early to mid-90’s in going out and acquiring Consumers Gas, a highly successful deal.

We would, in any deal we look at, we would very carefully assess the execution risk around it, the execution risk associated with expected synergies, the personnel risk, the asset risk, the credit rating risk, et cetera. So don’t take that remark as one to suggest that we are going to do a company doubling transaction. It’s just that we do have the capacity, I feel we’ve got the management skills and the capability to do it if we saw the right opportunity and if it wouldn’t endanger that credit position.

I think, Karen, just to add to that, of course, you know our positions can come in the form of cash or shares of a combination thereof. Just in looking at what we have by way of capacity, and as you are aware we actually have gone below our adjusted debt to cap range, so something over $1b of cash acquisition is available to us without having to access the equity markets. I think I wouldn’t want to be more specific than that, but I think that we could do an acquisition of that size.

It kind of gets back to Dominique’s question earlier and that may have around cash capabilities. So we are able to look at significant acquisitions without being tied to the equity markets.

Thanks, I’ll turn it over to someone else.

Thank you. The next question is from Maureen Howe from RBC Capital. Please go ahead.

Thanks very much. I actually just have a couple of quite quick clarification questions. You mentioned the weather effect and that Steve, I think you used $16.5m which is what you have on page 2 of the interim, but later on in the report when you refer to it it is referred to as a $12.7m impact in the second quarter. I just don’t understand the difference.

Maureen, I think there is a $16.5m and then on two pages there there was a $12.7m. The $16.5m is the number to look at.

Okay.

The reason we have a $12.7m is the old method that the regulators are comfortable with –

So the $16.5m incorporates, Colin, the change in the end-bill revenue?

Correct.

Okay. And on that regard, and I am sorry for this question, I am just slow. I don’t understand, it can go back to the $9.4m reversal, if I understand it correctly it was revenue recorded in Q1 and it was reversed in Q2? Is that right?

That’s right, Maureen. Not entirely reversed. We recorded $35m of additional earnings in Q1 and advised and expect that to be reversed through the balance of the year. Indeed we expect that by the end of the next quarter it will entirely reverse. $9m of it reversed in Q2.

Maureen, the $9.4m that I was referring to earlier was how you would make the comparison, if you wanted to compare apple-to-apples and –

That’s what I am trying to do, Steve, exactly that. So if we are comparing apples and apples, should we subtract or I guess add the $9.4m back to Q2? This quarter?

The easier way to do it is to leave ’04 as reported and adjust ’03 back.

Okay, but I don’t see anything here that – okay. So just leave ’04 as reported?

Yes, and then on the left side we posted what 2003 would have looked like pro forma and then, so I think if you are adjusting 2003 the core of the adjustment would be to subtract $9.8 –

Okay, so –

So Maureen, when we talked about the adjusted operating earnings, that is the adjustment that we make to arrive at what we are talking about. Subtract $9.4m from Q2 of ’03, notionally.

Okay, and for us “unbilled revenue challenged”, you’ve done that on your web site?

Yes.

Okay, that’s great. Thanks very much.

Thanks, Maureen. Maybe we are all “unbilled revenue challenged” for a while here, but it is better for the future, we think.

Thank you. The next question is from Matthew Eckman; CIBC.

Thanks. I wanted to just stay with account distribution for a second, and maybe this is a question for Scott, but it looks like volumes are down based on your statistical analysis year-over-year. I am just wondering whether that is because you are starting to see some conservation effect from the pricing of natural gas, or is that sort of weather differences year-over-year? Especially in light of the fact that you’ve added so many customers, what are your thoughts on that?

Maybe before Scott comments on the year-over-year, Matthew, I will just make a general remark. We have noticed over the last four to five years about a 1.2 percent decline in average use per customer, which would imply conservation, probably price related. So there has been a general trend and of course it isn’t – it varies a little bit from year to year, but there has been a slight downward trend in average use per customer.

In terms of degree-day deficiency, Matthew, for the six months ended 2004, and I know you are familiar with that term, there is 3,100 actual degree days recorded in the current year versus 3,206 recorded in the prior year. So I think that is what you are referring to.

Okay, then going bigger picture on distribution, Steve I think you said earnings on an apples-to-apples basis for that segment would be slightly down, is that correct?

Yes, about $3m.

And I am just wondering why that would be the case, given that the [Aria] is kind of similar this year to last year, and I know there are a lot of [rate] positions there.

Well, we’ve got some O&M coming in through the second quarter, I think that was held over from the first quarter, and I think that is probably the bulk of the difference.

Okay, so is that a timing issue or ongoing?

I think largely timing.

Okay, and then this last question on gas distribution, in the distribution disclosure for the quarter there was some discussion of [Bloor Street] incident and possible liability there, I am just wondering whether you have quantified your maximum exposure and whether you have reserved against that at all?

Well I think that we obviously cannot predict what the outcome is going to be or really comment on it. I don’t think it would be appropriate to try to speculate on that. We’ve not provided for it, given that uncertainty, but we obviously are looking very closely at that incident, which is very serious and what may come through.

So I don’t think there is anything more really that we can say about right now.

I might just add, Matthew that to the extent that a lower court does find that there is any amount owing by the distribution utility –

Bloor Street –

I am sorry -- I am sorry. Steve’s right, there is nothing to put in –

Okay, and then this last quick question for Steve. This is a financing question. You’ve paid down a lot of short-term debt, even in the quarter, and I think that you had some preferred that were callable that had a much higher interest rate, and I am just wondering from a financing perspective using all of this free cash you’ve got, why would you use it to pay down all of your short-term debt when you could be calling a more expensive form of financing.

That’s an excellent question, Matthew, and we certainly have looked at those preferred securities, one of which is partly callable, the other of which is callable in October, mid-October. Those coupons are 7.6 and 8 respectively.

So certainly we are aware of those and looking at that as we look at the overall picture, including the [Alta] gas proceeds.

Okay, great. Thanks. Those are all my questions.

Thank you. The next question is from Bob Hastings from Canaccord.

Just a clarification on that extra quarter. In terms of your guidance, it is not in there, but when you report it it will be. Just kind of wondering the magnitude of that?

It’s a quarter of assets, should have something in the range of $50m of earnings associated with it.

Okay. And on the financing issue, I heard close to $1b number, maybe what you could do is say, in order to go to that larger transaction, what would you want out of that size transaction? I guess it’s always [inaudible] environments say they are going to do a big transaction, and then maybe it is very modestly accretive. [A company of your size] if there is a transaction that doesn’t do a lot for earnings, you kind of wonder, why do it? So what would you want out of that position if you are going to spend a billion dollars?

Let me comment generally and then we can ask Steve to comment specifically with regard to the $1b. First of all, Bob, you know the track record of this company and the discipline with which we look at acquisitions and opportunities, and we have been a very strong relative position compared to the North American marketplace over the last two years with a strong, multiple advantage, and particularly over the last year with a strong balance sheet and the capacity that was referred to. We have not done a major deal because we cannot find something that is sufficiently accretive to make it work for our shareholders and we will not go out and do a deal unless we can have a very significant degree of accretion and also strategic value in terms of growth opportunities going forward.

I think your implied question was aimed at that, and I can assure you we would be looking for significant accretion from any deal that we do.

I wouldn’t have much to add other than to say that when you look at assets there is also a strategic component that sometimes can play in, but certainly we look for acquisitions that are going to generate a return north of 10-13 percent, perhaps. Though I wouldn’t want to put hard brackets on that, because of the nature of building an asset business, and what assets might be available or can be obtained.

Generally we are going to be looking for returns of that nature. As Pat said, we will look for significant accretion, unless there is a strategic imperative that sets the stage for something a lot better in the future.

Thanks very much,

Thanks, Bob.

Thank you. The next question is from Andrew Kusky; UBS.

Thanks. Good afternoon. If you could just give us a bit of clarity of the corporate costs, and the corporate costs as they sit right now have ranked up a bit in part due to business development costs. If you could just give us a bit more color as to where you are spending those costs, are you looking more on a North American basis for business development, or you are looking a bit abroad, and then from business development, are we looking at green field or acquisitions?

Andrew, it covers the waterfront but the main focus is in North American and the main focus is green field, organic growth projects. I listed them off earlier with regard to the crude oil system, and from Spearhead to Southern Access to Gateway, significant work that is underway in working on those deals right now.

We also continue to look at international opportunities, some of which we have discussed in prior calls, and feel that we’ve got a little bit of room if we were to find another very attractive international deal, so we do have some business development expense there.

But the majority of it is being focused in North America on green field, extensions of the existing system, and on acquisitions both in the [inaudible] partnership and the income fund level.

If I can add just one follow up related to that question. If you could just give some color and commentary about Spearhead’s potential success versus the Exxon [inaudible] and the potential reversal of that pipeline to the Gulf, a bit of the relative attractiveness of those two markets.

To me, it isn’t an either/or with regard to access to the Gulf Coast via, for example, an Exxon Mobile line reversal or access to [Cushing] through Spearhead. I think that based on the significant growth that we are going to see in production out of Western Canada, and the variety of products from heavy crude to synthetics, that we are going to want to be able to access a variety of markets.

We never really intended that it would be Spearhead or the Gulf Coast or Spearhead or Eastern [Katu]. We think that both are required, relatively minor expense, particularly for Spearhead, to provide an outlet from that Chicago marketplace for Western Canadian producers.

So volumetrically, again, not a huge volume moving into either market, the main thing is to be able to clear Chicago from our point of view, Andrew, and we see both projects as being needed.

That’s great, thank you.

Thank you. The next question is from Sam Anes from Scotia Capital.

Thank you. I guess acquisitions are organic projects, is Australia dead? Is your bid still alive? Can you give us a little update on that and your level of interest continuing? And I guess range land, that went to California and Harding, did you have an opportunity of bidding on that?

let me address Australia first, Sam. We continue to be interested in investment opportunities in Australia, and as I have said in prior calls, normally we don’t comment on individual acquisition opportunities, but because of the way in which this has been portrayed in the business press in Australia we feel it appropriate that we do comment. The assets we were looking at have been put into bankruptcy. We are in the process of talking with the banks to see whether appropriate contracts can be developed with the main customers there in order to solidify the value of the pipeline as such that would allow us to go forward.

If that happens, we will, but you know, they are very difficult to tell at this point, whether that will happen.

Is there another bid? I thought there were several bids that were short listed, I presume the same is happening by your competitive bidders?

I really don’t know what is going on with competitive bidders at all, Sam.

Switching to Rangeland then.

Yes, Rangeland –

Is it possible that you [inaudible] California by a third party?

We did look at that opportunity, and Steve, correct me if I am wrong, but I believe that that was an exercise of the [Rolfer] and therefore there was really no opportunity for other parties to participate.

Yes, they had indirectly a [Rolfer] and we were certainly well-aware of Rangeland and have known it for years, since its Amoco days, and so on. Pacific is also our partner on the Frontier system, so they are good folks. So we certainly looked at Rangeland and ultimately, obviously did not engage in it.

Lastly, and I will hand it over to someone else, the Gateway project. Can you describe its progressive path flow, like an alliance path where you have producers taking pieces of interest or shipping, layaway will be the customers in Asia or California, a bit of both? Did you have any preliminary of how that might evolve?

I would think it would be a bit of both. We are prepared to make opportunities available in the project to both producers and to refiners and customers, and have had discussions with both parties, Sam. I think it is fair to say that those that are committing volume have the write to take an ownership position in the system if they so desire, so we would be pleased to have them along as partners.

Thank you. The next question from Zahir Cott; Baker, Jamar & Assoc. Please go ahead.

Hi, good afternoon, gentlemen. Just part of – I don’t want to belabor this question, but I just want to clarify basically the financial policies going forward. I think Steve mentioned there was $1b of current capacity. Now if any of these acquisitions proceed, would you still be able to maintain your so-called credit protection, and debt to cap of 60-40 and cash flow of about 15 percent, would you still see that going forward, materializing, including the acquisition?

It is a good question, Zahir, and I think as we’ve mentioned before, we look at every acquisition through the prism of the balance sheet, and are very much focused. Coming up a year ago, the negative outlook from S&P removed from the rating, we are very serious about the balance sheet and the credit rating, and always look at acquisitions through that prism. So that is a very important factor to us as we look at a cash acquisition, if one were to arise, what effect that would have.

We also stay in pretty close touch with the agencies.

In terms of your current businesses are 60 percent basically cash flow comes from distribution and pipes and approximately 40 percent from other businesses. Now if you go ahead, would you be increasing any of these companies to the particularly – how do you see that changing going forward? Will everyone still be 50 percent and then your so-called fully [inaudible] business will be down?

You are talking about the splits here between distribution and pipes and other businesses.

Correct.

Well of course it would depend very much on the acquisition opportunity, but we have indicated before that the opportunities we would tend to look at would be crude oil, pipeline, and gas pipeline and gas distribution, those are our main areas of expertise.

For example, when we go out and look at a gas pipeline opportunity, if we were to do a small acquisition there that would at least temporarily increase the size of that segment, and the same with the others.

But those are our three main businesses, we are reasonably comfortable with the splits right now. As I’ve said before though, we probably could stand to strengthen a little bit on the gas pipeline side. We are kind of what I would call a world-leading level with the crude oil pipeline system, we are the largest gas distributor in Canada and therefore have significant market positioning. We would like to have a little bit stronger gas pipeline market position than we have today.

One other area is international, and we have generally said that about 15 percent of our earnings would come from international investments, and when you are sitting at something like 12 or 13 percent today. And that is something that we move very carefully on the if the right acquisition came along, or the right international opportunity that pushed us a little bit above the 15 percent level, that is maybe an adjustment we’d be prepared to make.

Just one last question, are we talking about acquisitions? Did you want to talk about any of your further non-core disposals? I think you did an [inaudible] and any more to come in that respect?

We are very, very happy with our portfolios here. We have very little, if anything, that is not dead center core for us, and as you know, over the last three years now we exited the energy services business, we exited Cornwall Electric and then felt that [Alta Gas] wasn’t dead center core. It was the day that we entered, but the business has changed a little over the years.

So no, we don’t have any significant asset dispositions in mind.

Thank you.

Thank you. The next question is from Wayne Freid-Fruoff; National Bank.

Thank you. What size of implied acquisition would correspond to your net proceeds from the sale of your units in Alta Gas plus supplemented by some cash? What sort of debt to equity ratio would you be looking at?

We’d have to do some quick math, Wayne, to arrive at that. We have about $230m in proceeds, supply, I think our total holdings was worth about $370m or thereabouts, depending on the trading price of the trust units.

So Scott is doing some quick math here, and by the way, what I was talking about the available cash to do an acquisition of about $1b, I had some of those proceeds in my mind as well. Maybe that’s what is interesting, is we do have the flexibility now to look at doing things like debt repayment or deploy those to a cash acquisition. Scott, I think you’ve done some quick math, and we’ve got to also remember that we have only sold two-thirds of our holding in Alta Gas, and we are going to review our continuing position in Alta Gas going forward.

The math isn’t very high level. If you just take the proceeds number that Steve mentioned and divide it by the typical equity ratio that we target of about 40 percent, you come up with a number in the high 500s.

Right.

I think that’s a good guideline.

And are you sort of implying that the acquisition might set up a minimum and maximum level? And if it tends to move towards the maximum you might perhaps look at selling some more of your other gas holdings, or are you happy with sort of an initial acquisition in the $500m to $600m range?

Well we don’t have any particular target in mind at this point, Wayne, and the sell down with regard to Alta Gas was not with any particular redeployment relating to an acquisition. As you know, I have said many times before that the main focus of this company has been and will be on organic growth because of the very strong positioning that we’ve got, and we’ve got a very aggressive list of organic growth projects going forward over the next couple of years, and we feel that is where we are most likely to be able to add shareholder value going forward.

So don’t take the sell down of the Alta Gas position as positioning to do an acquisition of any particular size or nature.

Well I listened to your presentation of the various projects you are looking at and the timing, it seems to me that we are looking in terms of size at the 2006 to 2009 timeframe. Would that be correct?

That’s been the majority of it, yes you are right.

So right now, halfway through 2004 or a little bit more, if you are saying that you don’t have any particular acquisition in mind at the moment, that would suggest to me that you might perhaps repay some debt or preferred securities. So rather than pouring available cash into an acquisition that doesn’t seem to be definitely on your drawing board right now. Would that be correct?

Well as Steve indicated earlier, that is one of the alternatives with regard to the cash. And realize, and I know you do, that dispositions are often a matter of the right time and the right opportunity and the right market, and that is certainly our perspective with regard to Alta Gas. It isn’t a positioning at all, it is taking advantage of the environment in which we find ourselves today.

Well I appreciate that, but on the other hand your company is not known to sit on a pot of gold for any particular length of time, so it seems to me that if your timing is correct on the sale of other gas units, which I don’t doubt for one nanosecond, then you must have something in mind in terms of the use of these funds that is pretty tangible perhaps within the balance of 2004. Would that be wrong?

We have got a lot of opportunities in front of us, but we don’t have anything specific on the acquisition front. So I don’t know how else to respond to it. We are in a very strong position, but that is as much in being opportunistic on the disposition side, as it is because we have anything sitting in the wings that we intend to redeploy tomorrow.

I think, Wayne, there are three business development groups that are very active at the moment, one being the corporate, the other being the Enbridge Income Fund in Canada and the third being [Heath] in Houston. I think that really the income fund and [Heath] are looking obviously at what opportunities there are. Those opportunities would be in the smaller size range, generally. I think that the deal pipeline is not too bad, but we don’t have anything that we are prepared to talk about today in terms of taking the Alta Gas proceeds.

It would seem to me, not that I want to prolong this unnecessarily, but it would seem to me that perhaps your thinking of perhaps letting say [Heath] or the income fund making acquisitions, you might perhaps maintain the same level of interest in these vehicles and still be able to improve your balance sheet and create more firing power in terms of equity to debt ratio. Say a year or two from now, than if you would go out now and make a larger acquisition.

Opportunities, particularly on the acquisition front, are often very difficult to time, Wayne, and that is what makes it so difficult to comment specifically. But with regard to our position, as you know, we hold about a 13 percent position in the MLP in the U.S. We feel that is about right. We don’t have any real intention to significantly vary that.

We’ve indicated at the time that we created the income fund in Canada that we could potentially sell our position down to somewhere in the 20 percent range and you could take that as a long-term target, so there could be some monetization opportunity there over a period of time.

That’s helpful, thanks very much.

Thank you. The last question is from Andrew Fairbanks from Merrill Lynch. Please go ahead.

Thank you. Good afternoon, guys. Not a question on acquisitions, Pat, I was wondering if you could just talk a little bit more about your last gas pipeline proposal, how it differs from some of the alternatives that are out there and some of the specific advantages you see it offering?

Thanks, Andrew. First of all let me just say generally that one of the things that we have to offer is northern gas pipeline operating experience. Not talking experience, but operating experience. We run the Norman Wells pipeline, we built it, constructed it in permafrost and discontinuous permafrost, and therefore have the experience to bring to bear on the project.

With regard to our specific proposal, what we have been working on is a proposal to phase in northern gas development and we are working with producers right now to determine the level of acceptability of this approach to them, and what we are suggesting would be two 36 inch lines phased in. So build a 36 inch line, hence bring that gas on-stream faster because you are able to build a smaller project, it is easier to finance, it is easier to get the project off center and going, and then fully [inaudible] that 36 inch to twin 36’s which would ultimately carry the full 4.5 to 5 bcf a day of gas to come out of Alaska.

This would allow that gas to phase in to market for one thing, and like I say, it would lower the initial hurdle of the capital cost hurdle associated with the project. It also would allow North American sourcing of steel for the project, which would help in terms of the comparative bidding rather than have to go off shore to a very limited number of suppliers.

We feel that it would be a very practical approach, both from a market and capital perspective, and I think one of the reasons why the producers have hesitated in getting this project going is the huge risk associated with a $20b project which would be their total Alaska to Chicago price tag. We could get things started at a much lower capital cost, risk level by starting with the smaller line. So that is the main differentiating feature and that along with our Enbridge experience in the north puts us in a pretty attractive position.

Very good. Thanks, Pat.

Thank you.

Thank you. There are no further questions registered at this time, Mr. Gruending.

Okay, thanks operator, and thanks to all participants for joining us. That concludes our call. Good bye.

Thank you. The conference has now ended.