恩橋 (ENB) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Enbridge, Inc. third quarter 2006 financial results conference call. I would now like to turn the meeting over to Mr. Bob Rahn. Please proceed, sir.

Thank you, Annie. Good morning, and welcome to the Enbridge, Inc. third quarter earnings call. With me this morning are Pat Daniel, President and Chief Executive Officer, Steve Wuori, Executive Vice President, Chief Financial Officer and Corporate Development, Greg Sevick, Senior Vice President, Planning and Customer Services, and Colin Gruending, Vice President and Controller. During this conference call, we may refer to, or speak to certain forward-looking information. Statements made with respect to forward information are subject to a variety of risks and uncertainties pertaining to operating performance, regulatory parameters, weather, economic conditions, and commodity prices. A more fulsome discussion of these risks is included in our securities filings, which are publicly available on both the SEDAR and EDGAR systems. This call is webcast recorded, and I encourage those listening on the phone lines to view the supporting slides, which are available on our website at www.enbridge.com. A replay of the call will be available later today, and a transcript posted to our website shortly thereafter.

When we move to Q and A, please limit your questions to one follow-up and rejoin the queue. I would also remind you that I will be available after the call for any detailed follow-up questions you may have. At this point, I would like to turn the call over to Mr. Pat Daniel.

Thanks Bob. Good morning everyone, and thank you very much for taking the time to join us. I realize this is a very busy day for everyone as a result of the tax changes relating to income trusts announced yesterday, and therefore, our attendance is down. But we very much appreciate your attendance. In what might seem like a repeat, another great quarter for Enbridge, with continuing strong financial results and operating performance right across the board in all divisions of the company as well as further strong progress on our strategic initiatives.

Adjusted operating earnings for the quarter are $92.3 million, which is up 25% over last year quarter-to-quarter. YTD adjusted operating earnings have increased 12% over last year to $420.5 million. So at this point, we fully expect that 2006 adjusted operating earnings will fall within our $1.65 to $1.75 guidance range. Steve Wuori is going to elaborate on the quarterly financial results in a moment, but before he does that, I would like to provide a very brief strategic update on broader issues in the company.

In addition to being on track to deliver another year of very solid financial and operating results, 2006 will stand out as the turning point in moving forward with a number of strategic initiatives, particularly the crude oil segment of our business. As you know, we just completed our annual investor conferences in both Toronto and New York, where we provided a very comprehensive review of our major capital projects and/or growth initiatives. So in light of that, I'm going to focus really just on the high points today, and provide some further updates where needed. For those of you that were not able to join us at the Investor Day meetings, I will remind you that the entire Investor Day presentation, along with the playback and transcript of the proceedings are available on our website at www.enbridge.com., so please refer to that. In our first quarter call this year, I indicated that piece by piece, we are putting in place a very comprehensive pipeline network with the flexibility to supply diverserefining markets through the U.S., Midwest, Mid-continent, and U.S. Gulf Coast. And that really is exactly how this strategic plan has unfolded for us through the year. The real strategic catalyst was the Spearhead pipeline, the first initiative, which commenced operations in March of this year. The almost immediate narrowing of the light/heavy differential was really indicative of the value realized by having access to a new market. So very quickly thereafter, we received CAPP approval for the 400,000 barrel a day southern access expansion into Chicago, and we've recently accelerated the phasing in of that southern access capacity in order to have 120,000 barrels a day of capacity available by the end of 2006. And this is particularly important, in that November nominations on the system have almost put us into apportionment, and the new capacity is very important. The full 400,000 barrels a day of Southern Access capacity will be available in quarter 1 of 2009. Southern Access is capable of providing two additional capacity increments of 400,000 barrels a day each, from Superior into Chicago, with a relatively inexpensive power up of the system. So Southern Access could be viewed, really, as the pre-build for Alberta Clipper, and I'm going to speak more to that in a few moments.

The next piece in this market access puzzle came in the form of the July 17th CAPP approval for the $350 million U.S. Southern Access extension. And that extension will provide an initial capacity to move, once again, up to 400,000 barrels a day from Flanagan, which is near Chicago, into Patoka, Illinois. So with the Southern Access expansion and extension moving into the construction phase, our commercial people are now focused on finalizing agreements relating to our Alberta Clipper project. And you might recall that initial interest in Alberta Clipper suggested the potential for a contract pipeline.

But as commercial discussions progressed, it became evident that integrating Alberta Clipper with the existing main line system would generate significant economies of scale, as well as enhancing overall product quality. So we're now proceeding on a rolled-in basis with Alberta Clipper. And this has resulted in a more optimal design, with Phase 1 capacity from Hardisty to Superior now having been increased to 450,000 barrels a day from the previously reported 400,000 barrels a day. Increasing that capacity will cost us approximately U.S. $140 million, raising the Phase 1 capital cost to U.S. $1.9 billion from U.S. $1.8 billion. And we're now targeting regulatory filings late in 2006, or early 2007, for Alberta Clipper, in order to have the in-service date in late 2009. Accelerating capacity availability for Southern Access and increasing the Phase 1 capacity of Alberta Clipper makes sense particularly in light of recent announcements we have seen from our customers. For example, BP's plan to expand its Whiting refinery, along with the recent ConocoPhilllips EnCana announcement point to a desire on the part of our customers to accelerate the development of eastbound pipeline capacity. I guess what they're saying to us is, "Go east, young man," which is the reverse of the typical expression.

So at our investor conference, we indicated that after Southern Access, we saw a need for either an Alberta Clipper or Gateway project in the 2009 and 2010 time period. At this point, it would appear that Alberta Clipper will precede Gateway, unless there's a shift in current market sentiment. So with that in mind, turning to Gateway. We now have spent approximately $80 million to date on developing this project,and we are going to continue our development efforts, but not at the same accelerated pace as the Alberta Clipper project, of course, due to the push to move that crude east. Western Canadian producers and southeast Asian refiners continue to be very supportive of the Gateway project, in that it provides significant supply and market optionality to them. Gateway will also be a significant value add for the province of Alberta. Having access to markets that are independent of U.S. Midwest pricing dynamics will ensure that we receive full world price for our particular crude oils coming out of Western Canada.

Moving on, commercial discussions with respect to our Southern Lights project are now in the advanced stages as well, and you'll recall that this is our proposal to transport an initial 180,000 barrels a day of diluent from the U.S. Midwest to Edmonton, Alberta. And again, as we've seen with other projects, customers are taking a longer view and have now endorsed an upsizing of the diluent pipe diameter to 20 inch. This is going to increase the project cost by about $1.3 billion U.S. from the previously announced cost of $920 million. This project is under review at CAAP, and we are targeting a 2009 in-service date on that as well.

Early in the year we discussed our contract terminaling opportunities, and in particular, our announcements develop an initial 5 million barrels of capacity at Hardesty, Alberta. We're now planning to add a second phase, which would raise the capacity to 7.5 million barrels and result in a total project cost $375 million. Also, at Enbridge Energy Partners, construction is underway to add over 5 million barrels of commercial storage at a cost of about $119 million U.S. at various locations, including Cushing, Oklahoma. So lots of activity on the tankage and terminal front. In fact, in the liquids business alone, we have approximately $4 billion of projects that are approved and proceeding at this point. However, we have a further $10 billion in projects that are either pending or on the drawing board at various stages of review and approval.

Moving on to the gas side of our business, at Enbridge Energy Partners, the east Texas system expansion and extension, which we refer to as our Clarity Project, is on schedule for completion in 2007. The project will provide about 700 million cubic feet per day of capacity to transport increasing east Texas production to markets in southeastern Texas, as well as interconnects with several interstate pipelines. It's very important in terms of improving netbacks for producers in East Texas. At Enbridge Offshore, we're pleased to report that we didn't see a repeat of the 2005 hurricane season. In fact, 2006 was really a non-event as far as hurricane activity in the Gulf of Mexico is concerned. Repairs required as a result of the damage incurred in 2005 are now complete and we're back to pre-Rita/Katrina volume levels on our Gulf of Mexico system. In terms of new development, our West Cameron lateral is transporting in the range of 40 to 45 million cubic feet per day, and the Neptune and Shenzi projects are on schedule and on budget for further growth and expansion in the [inaudible] corridor.

We mentioned at our investor conference the potential that could be associated with the ultra deep plays in the Gulf of Mexico, and the excellent positioning that our offshore assets have with respect to that potential. As I'm sure you can appreciate, it's going to be some time before we know exactly what that meansfor us, but we are very encouraged by the overall prospects that that deep water Gulf of Mexico provides, and we're very pleased with the positioning of our infrastructure.

In the gas pipeline part of the business, the FERC has approved the 200 million cubic feet per day on the expansion of the Vector pipeline, which increases Vector capacity to 1.2 Bcf a day. On August 18th, Enbridge Gas Distribution filed an application with the OEB related to 2007 rates. Some of the key elements of that application include a $3.8 billion rate base, a requested ROE of 8.74% on a deemed equity thickness of 38%. So with the application is a request to approve a budgeted $460 million capital program for the 2007 test year. So good expansion growth and capital investment opportunities in the distribution business.

So over the period of 2006 to 2010 we have approximately $4 billion of approved and proceeding projects in the gas segment of the business. At this point, let me turn things over to Steve Wuori to discuss in more detail the quarterly financials.

Well, thanks Pat, and good morning everyone. As Pat noted, Enbridge continued to deliver strong performance in the third quarter. Reported earnings increased significantly year over year, primarily due to increased earnings from the Aux Sable Plant, from Enbridge Energy Partners, and also the crude oil mainline system. In addition, the gas pipeline segment also contributed to increased earnings as the prior year's earnings were negatively impacted by the hurricanes that affected the performance of the offshore assets in the Gulf of Mexico.

Third quarter was again very clean from an accounting standpoint, with modest adjustments for non-operating factors. In particular, weather impacts in the third quarter were small in both years 2005 and 2006. After adjusting for non-operating factors, normalized earnings were $92 million, compared to $74 million in the third quarter of 2005, or a gain of $18 million. The strong performance is due to solid contributions from all the business units, partially offset by foreign exchange impact due to the stronger Canadian dollar and higher interest costs in the corporate segment.

I'll now turn to the quarterly highlights from the various business segments. The liquids pipelines segment continued to deliver the strong performance that we've seen, and it's up more than $6 million compared to the third quarter of 2005. The Enbridge mainline system accounted for just over half of that increase. The performance of the mainline continues to be driven by similar factors as in the second quarter, principally oil loss costs that are now lower. Additional earnings from the incentive tolling settlement, and higher toll and surcharge revenues that are related to the terrorist expansion. The remaining increase in the liquids segment was primarily due to a higher contribution from the Athabasca pipeline as a result of new connections, infrastructure additions that we've made there, as well as the fact that we're now including first time earnings in 2006 from both the Olympic and the Spearhead pipelines.

In gas pipelines, earnings at the Enbridge Offshore segment were up $6 million, compared to last year. Last year, of course, was negatively impacted by both hurricanes Katrina and Rita. Although, as Pat noted, throughput volumes have returned to pre-hurricane levels, although increased earnings are partially offset by the impact of a stronger Canadian dollar since last year. The Alliance U.S. and Vector pipeline earnings were also negatively impacted by the stronger Canadian dollar, and also Vector earnings were affected by higher operating costs that are related to non-routine integrity inspections that are required to satisfy regulatory requirements.

The sponsored investment segments were largely driven by Enbridge Energy Partners, which is performing well, as was reported last Monday. Our earnings contribution from the partnership was up due to higher through-put on the Lakehead crude oil system, and also strong margins and increased volumes in the natural gas processing and gathering businesses. The third quarter earnings from the partnership also reflect Enbridge's increased ownership, which is now 16.6% as a result of the $250 million investment in Enbridge Energy Partners equity that Enbridge made during the quarter. This investment was made at the same time as a similar investment made in EEP by the Caisse de depot.

In the gas distribution and services segment, adjusted operating earnings increased $8.7 million over the third quarter of 2005. The main highlight in this segment is Aux Sable, which earned $15 million during the quarter. This represents a $12 million improvement over the comparable quarter in 2005, and is due primarily to the strong fractionation margins experienced by Aux Sable throughout 2006. Earlier this year, Aux Sable entered into an output agreement that provides a fixed annual fee plus an upside sharing on fractionation margins, which is determined on an annual basis. In the third quarter, we have recognized the upside sharing contribution based on the accounting criteria for year to date revenue recognition. Should favorable margins continue through the balance of 2006, we would record these in the fourth quarter.

The quarterly variance for EGD reflects the timing of various costs as compared to the forecast cost of service, and the Noverco earnings were lower as the prior year included a future income tax recovery related to the receipt of a significant cash dividend. And looking quickly at the international portfolio, strong and solid. Earnings were on par with Q3 of last year, as both CLH and Ocensa continued to deliver solid performance.

And finally in the corporate segment, corporate costs were higher than the prior year quarter, but came in as we expected, given the refinancing of a portion of floating rate debt with longer term fixed rate debt at a higher interest cost. Third quarter corporate costs are in line with the second quarter of 2006. I think that completes my review of the quarterly highlights, and I'll now turn it back to you Pat, for concluding remarks.

Great. Thanks, Steve. It's appropriate that I make just a very brief comment on the change in taxation of income trust that was announced yesterday. As you know, Enbridge holds certain of its mature, stable Canadian assets in an income trust, and those contribute just 4 to 5% of the earnings of the company, so a relatively small part of our business. Obviously, over the next four years, tax rate changes will now come into effect for that trust, and we will fully assess the impact of those changes in the upcoming days, and consider any minor changes in our corporate structure that those tax rate changes might dictate, if any at all.

So let me sum up the same way I did at our investor conference. I have never been more optimistic about the future of Enbridge. We have a very solid, well diversified earnings base, and my confidence regarding future earnings growth goes up almost daily as we advance our strategic initiatives in this company. So once again, thank you for your attendance, and I believe at this point we can now throw things open for questions.

[OPERATOR INSTRUCTIONS] And your first question comes from the line of Sam Kanes with Scotia Capital. Please proceed.

Morning, I guess, Steve, a question for you. With respect to Aux Sable, did you in fact book then 100% of the accrued gains you expect to receive in cash later on, as of 9/30? Could you put a little more color in what you just did in Aux Sable?

Yes, that was an assessment, Sam, of the September 30th year to date that we expect to receive with a very high degree of certainty.

Okay. So is that 100%, or is it 80%, or 60% of 9/30's accrued amount that you recorded?

I think it's a slightly conservative estimate. I don't know if I'd put it at 80 or 90, but it's slightly conservative. We want to be sure that we have a high degree of certainty. So it would be slightly conservative.

Okay, let me, one follow-up. Pat, with respect to ConocoPhillips in Canada, which you mentioned, of course, that interconnects with what the case going on right now Trans Canada trying to get Keystone going. I'm sure you're actively watching, if not participating. Is there anything to come out of any consequence yet for us to glean, from your perspective, on that competitive proposal?

Not really, Sam. I think we will leave that for you to assess with regard to their project. We were involved in the hearing from the point of view of our downstream customers, and insuring that if there is any gas pipe taken out of service that they're held harmless. We are not opposed to the project at all, but simply needed to insure from the point of view of the downstream regulator that we not lose any gas pipe service as a result of this, that might be needed in the future, or at least that they were somehow compensated should that happen. But that was the only intervention that we had in the hearing. And I can't really comment on how that's going for them.

Thanks, Pat.

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

Hi. I have a question with respect to the new income tax information at Enbridge Day. Could you-- you talked about Enbridge raising money through its sponsored investments. What portion was expected to come from Enbridge Income Fund?

Well, we had about a 70% interest in that income fund, Dominique, and I think we felt that there was probably about $400 to $500 million dollars worth of equity that we could raise through a further selldown of that income fund.

I'm sorry, my question relates more with respect to your capital program. Steve had a line, hybrid securities [inaudible] looking at it and equity from partners and from sponsored investments. And I'm just wondering to what extent you're relying on raising money from Enbridge Income Fund for some of your growth projects?

Okay. I think I understand, Dominique, it's Steve. I think most of what you're talking about there, we intend to fund through Enbridge Energy Partners. Things like Southern Access and so on. So probably, something like $4 billion out of the $15-ish billion could come from Enbridge Energy Partners doing projects directly in the U.S. And so I think that's where-- that's what I think you're referring to. We hadn't really intended that the income fund would participate in the expansions, other than through the selldown of our preferred interest that Pat mentioned. And so naturally the Fund would be raising common unit equity to retire the preferred units.

I understand. Okay. And just one very small question. NiSource had announced some problems in their Gulf of Mexico gas assets. I'm just wondering if that's a positive impact to your operations down there, or if there's no impact at all?

There is really no impact. We haven't had any issues there at all, Dominique.

Okay. Thank you.

Your next question comes from the line of Karen Taylor, with BMO Capital Markets. Please proceed.

Good morning. Can you just talk about the Gateway LNG proposals? You talked about-- really in a sense, pushing back the liquid portion of that project. Can you talk about the status of the condensate portion of the Gateway? Pembina seems to be advancing reasonably well on their proposal, and you've got the Southern Lights. So is that portion of the Gateway project going to be done in advance, or is it also deferred?

We would tend to synchronize the two, the crude line and the diluent line, Karen, for obvious reasons of synergies between the two, so that'll be our intent at this point. We'll probably have a better idea over the next few months as to whether there is a point in moving the diluent for condensate line along at a little bit more rapid pace than the crude line. But at this point we would tend to pretty much keep them in sync.

And the $80 million that you've accrued in deferred, I guess, for project development costs point of view. You're not planning to expense that at all over the coming-- at what point do you say, deferral, deferral, deferral, and we do have to start expensing?

Well, to answer the first part of your question, no we don't intend to expense that. We are very confident that this project is going to go, and all we're talking about is a timing related issue here. We continue to get very, very strong support for the project, so no, we wouldn't intend to change there, Karen.

And just lastly on the Alberta Clipper project. Is ConocoPhillips still behind Keystone, we've heard rumblings that perhaps BP is behind the Alberta Clipper. Is it a broad industry support at this point? Has it evolved beyond one particular customer? And what's the probability, in your mind, of two pipelines with that capacity going down into the Midwest?

It is very broad industry support, and that's why, as I indicated in my remarks that it's gone from being potentially a contract pipeline for one or two or three parties, to the industry saying that this is a broadly needed facility and capacity. So, definitely broad support for it, and it's under review with CAPP right now. With regard to the need, you may recall at our investor conference, Karen, we laid out our forecast and CAPP's forecast of growth and production out of western Canada, and put, sort of in a stepwise diagram, the capacity adds that we see coming on in about 400,000 barrel a day traunches. And we definitely see more capacity than the 400,000 barrel a day Alberta Clipper being needed. Whether that is an Alberta Clipper expansion, whether it is a direct line to the Gulf of Mexico, whether it is Gateway, whether it is Keystone, the market will decide. But, absolutely, there will be significant additional capacity required in addition to Clipper. As I mentioned, we're very close to being in apportionment in the month of November on our system. We're running right [inaudible] as it is today. 25:34

I'll get back in the queue. I have a follow-up, but I'll let someone else [have it].

Okay. Thanks.

Your next question comes from the line of Matthew Akman with CIBC World Markets. Please proceed.

Thanks. Maybe it's a question for Greg. You guys are having a great year on the Enbridge system from incentives. Could you please just explain whether next year you have to kind of reset the bar at the higher level you're achieving this year, in terms of quality and control, or whether the incentives that you're earning this year do carry over into 2007?

Yes, Matthew. The incentive structure we've got under the incentive tolling agreement does have targets which get progressively-- as the bar gets progressively higher as time goes on. So we will be-- you're right, we're having a good year this year, and next year we'll be working towards more difficult targets, but we're still confident that we're going to be able to achieve those as well.

So, if I understand, the targets were preset when the multi-year negotiation was complete, so [inaudible] set based on what you actually achieved in 2006, but rather what you had agreed on before the multi-year term.

That is correct, and there were a number of new targets set during this year for heavy quality metrics that didn't exist in the first year. so this is our first year working towards those targets.

Okay, thanks. And then, maybe this is a question for Steve Wuori, around the cash flow statement. There's been a pretty big swing, I guess to the negative, on equity earnings in excess of cash distributions, especially for the three month period in the quarter, the swing was, I guess, about $100 million relative to last year. Could you just explain what's driving that swing?

I think probably-- and we'll look further, Matthew-- but I think that would drive primarily from a large Noverco dividend, cash dividend, in 2005, which would have boosted that year, which, of course, didn't recur in 2006. I think that's probably the one granular item there.

Okay. If you guys have other things, just get back to me after the call. Thanks a lot.

Thank you.

And your next question comes from the line of Andrew Kuske with UBS. Please proceed.

Thank you. Good morning. I know it's only been a brief time since the tax changes were announced, and you did address them in the commentary, Pat. But if you could just give us a sense of how you're going to look at the M&A environment on a go-forward basis? Obviously, there's implications for Enbridge Income Fund, and then just kind of consolidation within the infrastructure world. And then also, finally, the multiples that we have seen some of these funds pay for assets over the last few years.

Thanks for asking that, Andrew, because as you know, we have been very quiet on the acquisition front over the last few years, in both the MLP and the U.S. and the income fund in Canada, even though we specifically set up the income fund, seeded it with mature Enbridge assets, and assumed it would be an aggressive and active M&A vehicle. However, multiples have been so high that we have not seen economic opportunities to do significant acquisitions. And therefore, we have sat on the sidelines, which is the typical discipline that you expect from Enbridge, rather than chasing some of the deals that have been out there. So as a result of that, really, the change doesn't, in any way, impact on our plans, because we weren't assuming significant acquisition growth through either the MLP or the income fund, not that the MLP is impacted by these tax changes. So really, this won't impact on our growth plan. As you know, it's very much organic-oriented over the next number of years.

With regard to consolidation, I think I'm going to need a little more time to absorb exactly what's happened here to determine whether this results in any consolidation or change in the market. I think we're just going to need a little bit of time to think about what's-- how this will impact some of the trusts that have done deals with those higher multiples.

And I guess just as a follow-up. With tax neutrality effectively being put in force and effect, and no real valuation advantage existing between a fund and a corporate entity, if the valuations of those funds come down dramatically, do you see an actual acquisition opportunity for Enbridge Inc. And then, how do you actually pay for that, given your capital program?

Well, those are all thoughts that have been running through my mind since late yesterday as well. And I think it's fair to say that this change, quite possibly, could represent an opportunity for us, but I think it's a little too early for us to say anything more than that, Andrew. We will assess it very closely over the upcoming days.

Okay, that's great. Thank you very much.

Thanks.

Your next question comes from the line of Maureen Howe with RBC Capital Markets. Please proceed.

Thanks very much, and good morning. Just following up on the answer to the previous question regarding raising $400 to $500 million potentially through selling down the interest in Enbridge Income Fund. Would that be-- would that range, $400 to $500 million have been to take the interest down to 30%?

I think it was around 20, which was our original target, Maureen.

I think, generally, the higher end of that range, the $500 million, was based on taking us down to the 20% that we've intended to hold, and that would be entirely a common unit holding.

Okay. And just in that regard, still very, very early in the trading today, only the first few minutes, but Enbridge Income Fund did open down about 30%, a little bit over 30%. Would you consider taking it private again?

Again, I think it's a little too early, Maureen. I did toss and turn a little last night thinking about these issues, but wanted to get a little bit of sleep for this call. So I haven't had a chance to think through it. But I'm sure there will be a number of considerations and thoughts like that. I think it's a bit too early to react on it, and we will certainly give it careful consideration.

And then just on a slightly different topic, and this is coming back to Gateway. Pat, can you tell us what happened to the Chinese? I mean, are they gone, are they looking elsewhere, and looking for cheaper oil? What's that situation? How is it evolving?

We talked, as you know, a little bit about this at Enbridge Days at the investor conferences, Maureen, in that the expectation that I think we have all had in the industry was that the Chinese would either make some significant equity investments in oil sands developments, or form joint ventures with oil sands players so that they effectively had an interest in the molecules being produced in the oil sands, and that-- we were looking to that to be the anchor shipment on Gateway. To date, they have not been able to make such investments or form such alliances. We've got no indication at all of a lack of interest on their part, it's simply been buying discipline that has caused them to shy away to date, as I understand it. But absolutely no decline in interest, a very strong push for increased crude oil supply in China. We continue to have very significant discussions with all three of the Chinese companies, and there could be a deal done at any point. But as you know, until there is one, we really don't have an anchor shipper.

Right. Thanks very much.

Thank you.

Your next question comes from the line of Winfred Freuhauf with National Bank Financial. Please proceed.

Thank you. Regarding the potential reduction of your interest in Enbridge Income Fund, have you thought about the $400 million to $500 million you could potentially raise changed since last night?

Well, I think, as Pat said, we had to get some sleep. But I certainly have thought about that, Winfreid, and obviously, we need to see what happens. I mean, I expect that the market will probably overreact today, and then we'll see what happens from there as things normalize. But I think our financing model is always dynamic, it has many different facets, it's always moving, based on projects that are coming into certainty and different financing opportunities. So it's in input now, that we'll have to watch closely. And we certainly will do that.

And I think just to add to that, Win, as you know, the capital program that we're referring to is one that is really spread over a four, five, or six year period of time. And hence, the timing of any selldown would have been based on equity requirements for further growth opportunities. So it's not that this is something that was eminent, or required in the short term by Enbridge.

Thank you. My follow-up question relates to the income tax reductions that you booked in the second quarter of this year. But my question is not about what you booked, but about the impact of this reduction on cash flow in the current quarter. Because as I see it, there's really a mismatch between the recognition of earnings your second quarter stretching out to 2010, and the realization of cash resulting from those reductions. So I'm interested in how much did your income taxes reduce in the second quarter on your cash flow statement, as a result of these income tax rate reductions?

Let Colin Gruending answer that question.

Win, good morning. It's a small impact in the quarter, and will be, probably, on a go-forward basis. The recognized change in future tax liabilities is related mostly to our purchase price excesses on Noverco and EGD, which are revalued. Our taxes on the bigger assets in Canada are on flow-through taxes, so you're not going to see a big impact to go forward on that, I don't think.

Okay. Perhaps we could take this up after the call, I have another question. But thanks very much.

Thank you.

Your next question comes from the line Linda Ezergailis with TD Neucrest. Please proceed.

Thanks. This is perhaps a little bit more pedestrian, but Aux Sable, the profit that you've recognized year to date, how much of that would be related to the first half of 2006 and not the third quarter?

Colin, could you comment on that?

I don't think we're going to [give you] a split, Linda. As you know, it's an annual measure.

You know, I appreciate that. But if we're splitting hairs within Enbridge Energy Partners on non-cash mark-to-market gains, et cetera, et cetera, I just thought maybe, for $14 million you could smooth it a little bit, but all right.

Well, you know, I think it is an important matter, and I think you'll typically see us recognize contingent earnings at Aux Sable when they're no longer contingent at the back end of the year. In this case, Q3, we've started. But practically going forward, it could be Q4. And just like the ITS metrics, which are contingent opportunities, you're going to see us recognize those towards the back end of the year. So we're not, I don't think prepared to give you a quarterization of the year, though.

I think the Q3 recognition, which is the first for the year, was really, as we assessed it, we realized that the degree of certainty around the recognition of these is very high, and so therefore it was appropriate to recognize them rather than wait for the fourth quarter even though technically, it is an annual measure. So I think, as Colin said, you will see us, probably in Q3, Q4 each year, recognizing those as the certainty moves into line.

So, have you received any cash payments at all? Or has Aux Sable received any cash payments yet?

Yes.

What were the cash payments in this? Was it the second quarter and the third quarter that you received a cash payment?

We've received cash payments, I'm not sure-- Aux Sable has the cash, frankly, and is making distributions to its partners. We've received some cash dividends, Linda. I'm not exactly sure, exactly. We've received more or less than we reported in earnings, but probably not far from it.

So about $14 million, that was all in the third quarter?

Well, it's what we're recognizing for the year to date.

But my understanding was there was no cash payment in Q1. My understanding that your partner said they received a cash payment in Q2, and--

And we said cash payments, I think, in Q2 and Q3, Linda.

Okay. All right, thank you.

[OPERATOR INSTRUCTIONS] And your next question is a follow-up from Karen Taylor. Please proceed.

Hi, we're just going to go back to the Alberta Clipper and the need for facilities. ConocoPhillips Keystone seems to be tied directly to a refining strategy. Is the Alberta Clipper interconnecting with the refinery? I've heard that it's anchoring, or will be anchored to the Whiting Refinery owned by BP. So are you suggesting that-- when we talk about market development, it's always contingent upon capacity at the refining levels, to actually receive this product and then do something with it. So, is Alberta Clipper tied to a refining solution that creates market, as does the ConocoPhillips/Keystone proposal?

I would say that it is not tied to a specific refinery solution, and in fact, is designed to address the broad industry needs of refinery expansions like BP, the ConocoPhillips refinery expansion, the new market access into Cushing, the potential for Marathon Ashland doing refinery and capacity ads in eastern PADD II. So it really is a very broad service that will address not only refinery expansions, but expanded markets for Canadian crude.

Oh, I understand that, but the whole essence with excess, or incremental capacity out of the basin is to narrow the light/heavy differential. So, of the refineries that you just mentioned on a broader basis, have those refineries announced plans to increase their heavy oil processing capabilities, in order to actually result in a narrowing of the light/heavy differential, should Alberta Clipper go ahead and should the extra volumes arrive?

Well, as you know, BP at Whiting has announced such plans. To date, Marathon/Ashland has not announced any plans. In fact, I think in total, there's about 800,000 barrels a day of announced plans in PADD II, and that we're talking about providing 400,000 barrels a day of capacity through Clipper, and can add another 400,000 with the Clipper expansion.

Does the 800,000 barrels a day that you just mentioned include the ConocoPhillips?

Greg, can you comment on that?

It does include ConocoPhillips, it includes a number of other expansions at the Koch refinery, at BP and a number of other [inaudible] refiners. Over the last year, there's been about 800,000 barrels a day of announced plans related to increased Canadian crude.

And just lastly, if we could-- thank you for the answer, by the way-- if we could just move to this notion of equity that you said that over the near-term, the $400 to $500 million that would come from selling down the Enbridge Income Fund units is not immediately needed for equity over the short-term. Can you give me an indication, or timing, how that $400 to $500 million in notional equity would be obtained, absent some sort of ability on the Enbridge Income Fund? Is it all going to be hybrid so you're going to need to actually issue now common equity towards the end of the decade, or after that?

I think I'll let Steve comment on that, because there are a variety of sources, from resisting cash flow to other opportunities. Steve?

Yes. Well, we'll be assessing that, Karen, and looking at things like hybrids, which now are receiving more favorable equity credit. so I think that's something that, I think if you recall from Enbridge Day, was on the right hand side of the chart as a possibility for a source of equity. So we'll be looking in that direction, we'll be watching, as I mentioned, to Winfried, the Income Fund, and exactly what the fallout is from yesterday's announcement. So it's going to be a dynamic model as it always is. But I think that we certainly are aware that a number of issuers have gone to the hybrid market, and appear to have done so pretty successfully. So that is a possibility.

Thank you.

Thank you.

Your next question is a follow-up from Sam Kanes. Please proceed.

[Inaudible] Ontario winds, and also [inaudible] connected with the income trust ruling. How does this change your strategy in your new wind farm you're having grief with right now in Ontario? Can you walk from this? Do you want to walk from this? How much have you put down with your partner as a down payment to commit to this particular wind farm here in Ontario?

Again, I'm going to have Steve comment on that, but no, we don't intend to walk from that project, Sam.

And Sam, were you implying that yesterday's announcement would have an impact on that?

Well, an impact in your motivation of following it through precisely what you've done, rolling down, I guess, [tax], used up wind farms into your [sub]. But now, of course, it's shifted on you.

Well, it may have shifted. I think our plan has been that that's a corporate, Enbridge corporate project, in any event. And actually, that's the most efficient, in order to use the accelerated tax benefits available to corporates that aren't available to income trusts, even before yesterday. So, the Ontario Wind Project really has been intended as a corporate project, and we've modeled the economics based on that without relying on a sale to an income fund in the future. And obviously, we're going to assess that as we chew through the early years of the project and use up the accelerated tax benefits, I think there will come a time when we will assess whether movements into the then trust market of the day make sense or not.

Okay, thank you.

Thanks, Sam.

And your last question is a follow-up from Winfried Freuhauf. Please proceed.

Thank you. My question is on the Enbridge offshore system in the Gulf of Mexico. When this system was first discussed by Enbridge, an annual earnings contribution in the vicinity of $30 million was held out. Now, then, we had hurricanes and whatnot. Now we heard, also, that throughput levels have been restored to pre-hurricane levels. What about the restoration of earnings to pre-hurricane promises?

I think, Winfried, one of the things that's moved quite a lot since we bought that, is the Canadian dollar. And so, therefore, the original $30 to $40 million range that we had discussed notionally at the time of the acquisition was based on probably what then was a $0.72 dollar, or something on that order. So there's been an FX drag on that already. So that's a big piece. I think also that when we see large pieces of production like Thunderhorse come on, which has been obviously delayed beyond what anyone expected, that is when we're going to start seeing more of the growth that had been projected. And then this whole lower tertiary zone out in the deep water, which we are really, ideally positioned to capture, looking out three to four years, I think that presents an opportunity that we actually did not model in or project when we made the acquisition. So, I think the deep water generally, in gas, the deep water potentially in oil, and factors like that are what we're looking to, in terms of how we're positioned in the Gulf.

Before we come back to see whether there are any further and final questions, I would like to talk with some further thoughts, Karen, on your question with regard to Alberta Clipper and specific downstream projects in the 800,000 barrels a day that Greg mentioned. Recognize that producers have indicated that they would prefer Clipper not be contracted and tied to specific producers or specific refiners, and that it provide an overall capacity add to the Enbridge system. And therefore, it isn't as tightly linked as some other projects might be to specific individual downstream developments.

And, as you know, we carry multiple grades, about 60 different grades through the Enbridge system. This can be viewed as an expansion of capacity in our system, and the nominations that might fill it up may well be for synthetic, for example, or any other grade of crude that would then-- we would balance our system to be able to accommodate that entire new capacity. And as Canadian crude pushes competing offshore crude further south in the U.S. and with declines in domestic production in the U.S., we're filling that gap with a variety of Canadian crude. So this capacity add needn't be viewed as entirely dependent on downstream, heavy crude capacity add.

And in fact, I think that it can be somewhat the chicken and the egg. As certainty of pipeline capacity is put into place, that can influence the thinking of refiners as they model economics and consider conversion, say, to heavy oil if the certainty of access is there. So I think it is somewhat iterative.

Do we have any further questions?

There are no further questions.

If there are no further questions, we'd just like to thank everyone for their continuing interest in Enbridge. And we'll talk to you on our fourth quarter results in January. Thank you.

Pat Daniel. Thanks everyone.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.