恩橋 (ENB) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Enbridge Inc. third-quarter 2007 financial results conference call. I would now like to turn the meeting over to Mr. Vern Yu. Please proceed.

Thank you. Good morning and welcome to the Enbridge Inc. third-quarter 2007 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; Richard Bird, Executive Vice President, Liquid Pipeline and Colin Gruending, Vice President and Controller.

During this call, we may refer to or speak to certain forward-looking information. Statements made with respect to forward-looking information are subject to a variety of risks and uncertainties pertaining to operating performance, regulatory parameters, weather, economic conditions and commodity pricing. A more fulsome discussion of these risks are included in our securities filings, which are publicly available on both SEDAR and EDGAR.

I would also note that our supplementary financial information package for the period of 2002 to 2006 is now complete and is available on our website under Financial Information Additional Resources. This call is webcast and I encourage those listening on the phone lines to view the supporting slides, which are available on our website at www.Enbridge.com\investor. A replay of the call will be available later today and a transcript will be posted on our website shortly thereafter.

The Q&A format will be the same as the Q2 call. The initial Q&A session is restricted to the analyst community. When we have concluded Q&A for the analyst community, we would invite the media on the call for further Q&A. For both Q&A sessions, we ask you to limit your questions to one follow-up and rejoin the queue. I would also remind you that Colin, Anu and I will be available after the call for any detailed follow-up questions you may have. At this point, I would like to turn over the call to Pat.

Great. Thanks, Vern. Good morning, everyone and thank you all for taking the time to join us. As you know, earlier today, we reported year-to-date adjusted earnings of C$438 million, which is a 4% increase over last year. The third-quarter adjusted earnings were 14% lower than last year's third quarter and this is primarily because we have employed more conservative risk management practices at Aux Sable this year, which has decreased the earnings contribution in 2007. And of course, the rapid increase in the value of the Canadian dollar has negatively impacted the earnings contribution from our US operations.

Despite these factors, we are still on track to meet our C$1.75 to C$1.85 EPS guidance range, albeit at the lower end of that range. Steve Wuori will provide a full review of the financial results after my remarks, so what I would like to do now is just move on to a strategic update and of course, we recently completed our annual investor conferences in Toronto and New York where we provided you with a very comprehensive review of our growth initiatives and the financing plans associated with those. For anyone who was not able to attend the sessions, they are available on our website under the Investor Relations tab.

So what I would like to do now is just take a few moments to update you on the developments since investor days and to provide the current status of the growth initiatives we have underway. The biggest news of course since Enbridge Day is the Fort Hills Pipeline project. At a forecast cost of about C$2 billion for the first phase of the project and a 2011 in-service date, this project represents the first in that second wave of growth opportunities that we identified at Enbridge Day. Most of the capital was provided for in the risk component of the first wave of development, but part of it represents the first commercially secured portion of the second wave, so we are very pleased with that.

It will contribute to continued growth in earnings in the next decade and the details, of course, of the agreement are confidential and remain so for competitive reasons. However, I think it is fair to say that on the strength of our operating and construction capabilities, we are able to achieve an attractive risk return package similar to that of other large projects that we have discussed with you in the past. Similar returns, basically low teens returns, a flat return profile, no throughput risk and a carefully structured capital cost risk management and sharing agreement.

The Fort Hills system will be our third regional system serving the Athabasca oil sands and will further reinforce the scale and efficiency of our regional asset base and for those that were with us and following us at the time that we embarked on the Athabasca Pipeline, I think you can see the wisdom of that investment and the risks we took at the time.

Turning to other projects. We remain on schedule to complete all of our secured liquids projects for their planned in-service dates. Let's start, first of all, with the regional pipeline developments. Enhancements to the Athabasca Pipeline have been completed along with the associated pipeline laterals that serve the Long Lake and Surmont oil sands projects. The Surmont facilities are in service and we expect Long Lake to be in service later this year.

Construction continues on the Waupisoo Pipeline and that project remains on track to be completed by the end of the second quarter of 2008. Our mainline capacity expansions also remain on schedule. Phases one and two of Southern Access are both expected to meet their respective service dates of early 2008 and early 2009.

As you are aware, commercial terms related to Alberta Clipper have been finalized for some time and an application for the Canadian portion has been filed with the NEB. Enbridge Energy Partners, our US affiliate, will file its application with FERC in 2008. And Alberta Clipper is still scheduled to be in service in mid 2010.

On the regulatory front, a revised tolling agreement for the Southern Access extension into Patoka was filed with FERC on October 18 of 2007 and it is still our expectation that we will have regulatory approval in time to commence construction in 2008 and to be in service in 2009 with that extension.

Staying on schedule continues to be a challenge and it is coming at a cost. A hard reality is that it is costing us more than we would have liked to meet our expected in-service dates. The increased capital costs have stemmed primarily from higher than anticipated contractor and labor costs. That has been the prime driver. And as you will have noticed in our MD&A, three of our projects -- Southern Access, Southern Lights and Waupisoo -- have experienced significant cost increases.

While these cost increases are disappointing, I should note that we are still happy with the returns of the overall portfolio and recognize the overruns will actually increase the aggregate earnings that we derive from these projects.

The estimated capital cost for the US portion of Southern Access has increased from C$1.8 billion to C$2.1 billion. The vast majority of the overrun will be recovered in the higher toll and will not have an appreciable impact on the return on that particular project.

Our Southern Lights project, we now expect the total capital cost to be in the order of US$2.2 billion and that is up from US$1.5 billion. The project is tolled on a cost of service basis and we will recover all of our capital costs. This cost overrun does lower the project's equity return to the lower end of that 10% to 12% range that we discussed at Enbridge Day. Now, we have the ability to increase our return depending on the extent to which throughput on the line exceeds 90% of capacity, which could increase our returns by about 2% to roughly 12%.

Finally, we now expect the capital cost of the Waupisoo project to increase by roughly C$100 million to C$0.6 billion and this is inclusive of IDC by the way. Our contract with the Waupisoo shippers allows for a portion of these cost overruns to be shared with the shippers. These cost overruns will not materially impact our return on the project and that return will remain in the mid teens.

As we discussed at Enbridge Day, Enbridge's overall portfolio of risk to cost overruns has been largely mitigated on a contractual basis and a portfolio-wide cost overrun of 50% would still only result in a portfolio return reduction of roughly 2% in terms of return on equity.

Enbridge Energy Partners announced, as I am sure most of you are aware, an annualized C$0.10 per unit distribution increase last week. This distribution increase signals that each base business has improved and that it is on track with its growth projects. On an annualized basis, the distribution increase will add roughly C$2 million in incentive earnings to Enbridge Inc. and sitting at C$3.80 per unit, that brings it closer to the high, general partner distribution splits of C$3.96 known as the high splits. So we are moving in the right direction.

Turning to the gas side of the business. We are very encouraged with the recent developments at our gas distribution business. We have reviewed many of those with you at Enbridge Day. Some increased equity thickness in going from 35% to 36%. Along with the implementation of incentive regulation is good news when taken in the context of already strong organic growth in the core business augmented by a growing, nonregulated slate of business opportunities that Al Monaco reviewed with you. So we look for good things coming out of gas distribution over the next five years.

Staying in Ontario, we have received final regulatory clearance to construct our 182 megawatt wind project in Bruce County. Construction has begun on that project and we expect the facilities to be in service in the latter half of 2008.

Our Rabaska LNG project received Quebec Cabinet approval on October 26, which represented the last regulatory hurdle in the province for that project. We also expect final federal regulatory approval in the near future. And as you know, we continue to work on securing long-term supply contracts for the project.

In Texas, Enbridge Energy Partners continues to move forward with its $635 million US project Clarity, to transport growing production out of East Texas. Stage two facilities are now complete and the third stage is scheduled for completion in early 2008. Current throughput is approximately 200 million cubic feet per day, building towards 700 million per day when fully complete in 2008. So the system is partially operational already.

So that is a quick run-through on major projects and concludes my remarks. I am going to now turn it over to Steve and I will come back and do a very quick wrap-up, but Steve, could you go ahead with the financial and operating highlights?

Okay. Thanks very much, Pat and good morning, everyone. I thought what I would do is start with the financing strategy first, particularly in light of the Fort Hills Pipeline project announcement last week and the capital cost revisions that Pat referred to earlier.

We continue to follow the financing plan I laid out at Enbridge Day and we remain confident that we will be able to finance our projects on attractive terms. I would like to briefly walk you through an update of the financing flowchart that I have presented at Enbridge Day for the base case or first wave of projects and update it to where we are today.

In addition to the cost revisions that Pat described earlier, we have now included the Fort Hills project and we have also adjusted our Canadian to US dollar exchange rate assumption from C$1.15 to US$1.00 to C$1.05 to US$1.00. And we have had to start talking here as to which is the big dollar and which is the small dollar as we do these exchange rates, but we are talking about adjusting it for a C$0.95 Canadian dollar versus the US$1.00 -- I guess it hit US$1.10 this morning.

Given that the Canadian dollar is trading at around that, the total capital costs actually are going down the higher the Canadian dollar goes because a lot of these are US dollar costs. And so the estimate that I'm giving here is probably a little bit conservative from a capital perspective, especially at a C$0.95 dollar.

As a result of the updates, our total cost estimates have increased by about C$1.7 billion to just under C$14 billion and that is the C$13.9 billion you see at the top of the chart. You should note that a portion of the Fort Hills capital costs were in the first wave capital figures presented at Enbridge Day and they were in on a probability weighted basis. Removing that probability weighting for Fort Hills or making it 100%, the additional funding requirement for this project is now on the order of C$0.7 billion higher than what was presented at Enbridge Day. So it is important to note that a large portion of this was notionally in the figures already. This still leaves about C$1 billion of probability weighted liquids pipelines projects that are in the development stage still included in the first wave.

Turning to the financing chart then and starting with a revised C$13.9 billion, deducting free cash flow of about C$5.7 billion over the period of 2007 to 2011 leaves a net funding requirement of C$8.3 billion. Separating that into the average capital structure of debt and equity results in a total requirement of C$5.8 billion of debt and C$2.5 billion of equity.

Looking first at the left-hand debt column, we have already raised C$1.2 billion in 2007. This leaves C$4.6 billion of debt yet to be funded over the next four years. That is a change from C$3.6 billion previously. And also a reminder that project financing will be used for the Southern Lights project.

Moving over to the equity column, after deducting new equity from our dividend reinvestment and stock option plans and the C$600 million raised in early 2007, the net equity requirement to be funded over the next several years is C$1.6 billion. That was C$0.9 billion on the chart at Enbridge Day.

As I indicated before, this can be met with any or a combination of asset monetizations, common equity or hybrid securities. Our equity requirement could decline if the Canadian dollar remains strong and if some of the projects in development do not come to fruition.

I think it is worth noting that the C$2 billion in capital costs for Fort Hills is concentrated in the 2010, 2011 period. So it is a really good fit for the rest of the Wave One capital, which has a larger period of spend in 2008 and 2009. And as such, Enbridge's equity requirements in the near term will not be impacted meaningfully by the Fort Hills project.

It is also worth reiterating here that all of the projects are underpinned by strong commercial arrangements and are very credit supportive. So while we are talking fairly large numbers, when you break the financing plan down into its components, it remains very much manageable.

We also continue to be well-positioned from a liquidity perspective. We currently have about C$4.4 billion of standby credit facilities, of which about C$2.4 billion is available and undrawn net of the amounts that are backstopping our commercial paper programs.

We intend to further increase our credit lines by year-end or very shortly thereafter to ensure that there is sufficient available liquidity to fund Enbridge's capital program and to manage through adverse market conditions or for unanticipated expenditures.

I will now move to the quarterly financial results. Reported net income in the third quarter was C$78 million or C$0.22 a share compared to C$95 million or C$0.28 a share in 2006. The results are relatively clean from an accounting standpoint with only modest adjustments for non-operating factors given that weather impacts were minimal in both 2006 and 2007.

Adjusting for non-operating items, third-quarter earnings were C$79 million or C$0.22 per share, down from third-quarter '06 earnings of C$92 million or C$0.27 per share. On a year-to-date basis, adjusted operating earnings of C$1.23 per share are generally in line with the prior year period.

I will now walk you through our key challenges in the quarter and then I am going to finish with the description of the strongest areas of the business this quarter. First of all, foreign exchange. Virtually every Canadian company is going to be talking about this and we may as well. Our earnings were adversely impacted by the dramatic appreciation of the Canadian dollar against the US dollar over the last quarter.

Overall, there was a negative foreign exchange impact on earnings of about C$5 million in the quarter. This will be a challenge for us in the remainder of 2007 and beyond from an earnings perspective and just a reminder of the sensitivity that a C$0.01 change in the US Canadian dollar exchange rate results in an after-tax earnings impact of about C$1.8 million.

I should also note that we have cash hedges in place to protect foreign currency-denominated investments and their associated cash flows. Over the first nine months of the year, we have received C$12.5 million in after-tax cash flows from these hedges. The payments that we received under these have been booked to the balance sheet and are included in the cash flow statement, but they do not flow to the income statement and that makes me mad.

If the dollar remains about where it is and who can tell where it is right now, but about a C$0.03 drag on EPS for the full year can be expected if things remain through the rest of the fourth quarter as they stand today.

Turning to Aux Sable, the adjusted earnings from Aux Sable are down C$9 million compared to last year mainly due to realized hedge losses. Given our large capital expenditure program in other areas of the business, our goal is to preserve cash flows from the assets that tend to exhibit more volatility of earnings and cash flow than the comfort level that we have and therefore, Enbridge entered into transactions earlier this year to hedge in approximately C$10 million in upside earnings for the full year, while 2006, of course, was unhedged, it being the first year of that agreement.

Looking forward, we have taken advantage of the record high forward fractionation curve and we have locked in Aux Sable earnings in the order of about C$20 million for 2008.

I will now talk about the Enbridge offshore system. Earnings were down modestly compared to the third quarter last year mainly due to lower deliveries on the offshore system pipeline. Lower offshore volumes were expected given the continued natural production declines in the area and the startup of gas production from new deepwater development projects continues to be delayed from the after effects of the hurricanes in 2005.

Earnings were also affected by higher operating costs and continuing 2005 hurricane inspections costs as we do the final inspections of the systems. So while this quarter's offshore performance is weak, mostly due to factors beyond our control, we do expect that it is going to steadily get better from here.

We have several new projects that will start to generate earnings as they come on stream and they include the Neptune oil and gas project by early 2008 and I should note that we are already booking standby fees on the Neptune system in the fourth quarter of 2007. Atlantis we expect in late '07, Thunderhorse in late 2008 and Shenzi in mid 2009 as a rough timeline of when these new developments will come on.

Turning to liquids pipelines. Earnings from the Enbridge mainline system and Athabasca are down compared to the third quarter of 2006 primarily due to increased operating costs, which continues the trend from the first two quarters of this year. As well, Enbridge system earnings were impacted by higher taxes in the Terrace segment of liquids pipelines.

Earnings from CustomerWorks were also down over the prior year quarter. As you know, CustomerWorks has been an excellent investment, but pursuant to an OEB recommendation, it did lose its major client, Enbridge Gas Distribution, CustomerWorks will retain its other clients and will look to add new customers.

Although we have encountered the challenges that I have just described, we are fortunate to have a diversified asset portfolio and there were several assets that frankly rocked in the quarter. It is hard not to be excited, first of all, about EEP's outlook. EEP's increased earnings were driven primarily by Enbridge's higher ownership interest and improved financial performance at Enbridge Energy Partners from both the liquids and gas businesses of the partnership.

As Pat mentioned earlier, we believe that the partnership's recent increase in its distribution is a strong signal of its continued growth profile and we expect further growth in its earnings and distributions as it completes its slate of expansion projects.

Enbridge Gas Distribution experienced its usual seasonality in the quarter, but it is having a very good year primarily as a result of continued customer growth and higher average usage by utility customers.

The international segment just continues to deliver strong performance. Third-quarter earnings were up slightly over 2006 mostly due to higher earnings from CLH, which were positively impacted by a 2.6% increase in volumes, higher average transportation tariffs and also the impact of a stronger euro.

And finally, in the corporate segment, our third-quarter costs were lower by about C$4 million compared to 2006 primarily due to lower interest expense as we used the proceeds of the February equity issuance to pay down debt.

So those are my remarks on the financing plan in the quarter, Pat, and I will turn it back over to you.

Great, Steve, thanks. Just a little reminder that CFOs are supposed to be emotionless. You are not allowed to get mad about the accounting rules. Thanks, Steve. So we continue to execute on our existing crude oil expansion projects and now have been able to secure this first project in the second wave of growth opportunity with the agreement on Fort Hills.

While these projects will contribute modestly to near-term earnings and cash flow, our earnings and cash flow will ramp up steeply in 2009 and thereafter as a result of the significant series of projects coming on stream. Supporting this, of course, is a very diversified business platform that continues to deliver strong operating and financial results.

So in closing, as we build and grow our business for the long term, we will continue to employ best construction practices. We will consult closely with stakeholders and work very closely with the regulators to complete this significant expansion program. So on that note, I think we can now move to the Q&A, Vern.

Okay. We would be happy to take all questions at this point.

(OPERATOR INSTRUCTIONS). Bob Hastings, Canaccord.

Hi. Yes, I share Steve's concern on the hedging. Just to clarify that, Steve, the impact of the Canadian dollar you said was C$5 million. It's about 6.4% of the earnings. What would that have been had that been booked the way it used to be booked?

C$12.5 million would have flowed to the income.

In the quarter?

That's full nine months.

So we would've had C$12.5 million book to income under the old Canadian hedge accounting rules for the nine months ended September 30.

Do you have the third quarter?

Third quarter was approximately C$3.5 million.

C$3.5 million? By the way, it would be nice in the MD&A if the explanations of changes could relate more to the third quarter because that is what we are focused in on because we have seen the previous part of the year.

The other question I had really stemmed around Aux Sable and Aux Sable is -- I heard you say, Steve, that there was C$10 million sort of hedged into the earnings. Does that mean that that is what you'd expect to earn for the year and it's all locked in at this point or you have done that portion of the earnings and again this year, would expect to see a big fourth-quarter contribution coming through?

I think about C$10 million is what we will expect from the asset for the year the way it looks right now, yes. That is what we have hedged in and that is pretty much where it is going to land barring anything unforeseen.

And as you know, Bob, we did that intentionally in order to lock in what we thought was a very favorable position on Aux Sable. As it turns out, crude oil prices continue to rise. Gas price softened, so playing the market would have turned out to be better, but that is not what Enbridge is about. We lock in what we thought was a very solid operation there.

The oil/gas fractionation ratios are about six to one. They are about 12 to 1 today, so it is a very strange time that we are in quite frankly and as I said, we have taken advantage of that for 2008 because our objective really is to stabilize what comes out of Aux Sable.

Do you feel that your hedging program has effectively locked in no matter what happens sort of C$20 million of earnings next year, a step up of C$10 million bucks?

It is a little bit more than that, but we have locked that in thus far. We have not locked in the full year, but there is a little bit of upside left there.

Okay. Does that have any impact sort of as we see the year progress? Is it coming in in one particular quarter the way the hedging works?

Well, I guess an ideal scenario would, of course, in this situation be that the frac ratio would collapse, we would wind up the hedges and reload, but that is not what we are -- that is not what we are planning for. We've locked in the earnings and I think we are comfortable with that level of performance for sure.

Thank you very much.

Bob, it's Colin here. Just to maybe give you a little bit more quarterly color on maybe how to expect '08 to come in. And as you know, this is a hedge of our upside sharing agreement, so it is contingent upside. So we are still following generally the contingent kind of gain accounting where you will see the income likely fall into the final quarters of the year.

You will also see some mark-to-market hedge gains or losses relative to our hedge position on the market value of those spreads. So there will be some mark-to-market noise along the way here, which we are a little (inaudible). We do not get hedge accounting on this.

Okay. So again, the noise along the way, but by the end of the year, you should be up to about that C$10 million that you have locked in?

For '07, yes.

So C$10 million for this year; C$20 million for next year. Okay, thank you very much.

Karen Taylor, BMO Capital Markets.

Just I guess a question for Steve. Steve, at Enbridge Day, you said that you were going to work hard to eliminate the equity requirement for 2008. And so given that the capital expenditure profile for Fort Hills is skewed towards the 2010 period, is that still one of Enbridge's goals to avoid issuing equity in 2008 and doing instead asset divestitures or monetizations?

I think what I said at Enbridge Day, Karen, is that the base case assumption should still assume an equity issuance roughly the size range that we did in 2007, but we did introduce the willingness to consider asset monetizations and quite honestly, we do continue to pursue that and so I think I do not want to flip over and make the base case into an asset monetization because then we start running down the trail of what asset when, how and so on. But I think that I would just reiterate that we are very much looking at that as a way of frankly avoiding issuing the common equity. But we are willing to do that and the calculus will be what is the more dilutive or accretive move to make at the time.

So that strategy as laid out at Enbridge Day is very much in tact, Karen.

Okay. And I don't know if this is a question for Richard, but perhaps you could just talk about the cost escalation on the Enbridge system itself on the liquids portion, of course, in Canada and just talk about where that is coming from? Is it under control now going into the fourth quarter and how does it look I guess for next year as well?

Karen, are you referring to the existing mainline operating cost -- cost escalation?

Yes.

Okay. Richard?

Sure. I can tackle that. If you are looking at the mean -- if you are looking at the Enbridge system and about a C$9 million year-over-year unfavorable variance, the three big components there are tax effects from Terrace. There is a double taxation effect that we mentioned in the past that's starting to catch us. That would be the biggest component of that. Higher O&A related to higher compensation costs would be the next biggest component and that is not really driven by increasing headcount, although our headcount increases have been significant as we move into execution of these projects. For the most part that is all being capitalized. Most of it is frankly just due to the environment in Alberta and in the Northern US and the fact that we are offering significantly higher compensation benefits and have to do so to attract and retain people.

And then the final component of that would be on the integrity side where we have had some integrity incidents this year and as a result, we have had to ramp up our integrity programs and so under the incentive tolling settlement, we are still picking up some incentive gains on that integrity program, but not as big as in the prior year.

I think we are going to continue to see that cost impact on staff costs roll on into the future. That is not going to go away. I think we're likely going to see the integrity thing go back to a more normal level as we move into the future. And of course, that Terrace tax effect thing, as we've talked about, is something that we won't have to reckon with in the future.

Can you -- of the C$9 million year-over-year variance, can you attribute it to the three different categories being that taxation, higher O&A for comp and integrity and then do so for the quarter as well?

I can do it for you in rough terms. Say a little over half is Terrace tax effects and the balance is roughly evenly split between the higher compensation and the integrity.

So if I would assume 60% for the -- I'm sorry. Repeat those.

A little over half of it is the tax effects on Terrace and the other two factors would be roughly equal.

Applied to taxes to do comp and integrity.

And is that the same in the quarter?

The quarter would be a little higher skewed on the tax effect side starting to hit us more significantly in the third quarter and I don't have specifics in front of me on that, but that is the direction.

Okay. Thank you.

Matthew Akman, CIBC World Markets.

Thanks very much. I wanted to explore the impact of the cost increase, especially around Southern Access. It's pretty large from C$1.3 billion I guess to C$2.2 billion. How do you guys look at that because on the one hand, the ROE is lower I guess from base case 12% down to 10%, but on the other hand, it is a bigger investment opportunity. So I guess it is 10% base case on C$660 million of equity now versus before 12% base case on C$390 million of equity and still at a 10% ROE, that is an accretive investment. So is this really -- how do you look at that? Is this a good thing or a bad thing?

Well, I think you have -- yes, first of all, you said Southern Access, but you meant Southern Lights, Matthew, right?

Correct.

I think you have analyzed it correctly. It does have a negative impact on ROE. It can have a positive impact on EPS growth.

So on a net basis, this isn't necessarily a negative development for the Company?

Well, we consider it a negative development because we want to bring these projects in at as high a return as we can and we want to be able to offer as low a toll as we possibly can to our customers. So we are not happy at all, Matthew, and we would trade the EPS accretion for higher return and lower toll.

Okay. Maybe I can move onto another project that seems to be a little bit delayed, which is around Athabasca. The earnings were a little bit lower. Is Long Lake going to contribute earnings to the Athabasca Pipeline in the next year as the pumping comes into service even though Long Lake might not be producing until -- what is it -- 2009?

Richard, can you comment on the timing on --?

Yes, we should begin to see bitumen flows on both the laterals and the Athabasca line in 2008, so it will begin to ramp up and make a contribution in 2008.

But do they pay you only when the production starts to come on or do they pay you when the capital comes online?

There is a standby fee on the laterals whether they are flowing or not. It is not as remunerative as when they are actually flowing and of course, we don't get any revenue on the Athabasca Pipeline on the mainline until they start flowing.

Okay. Thanks for that clarification.

Linda Ezergailis, TD Newcrest.

Thank you. When we look at your long list of pipeline projects, I guess notionally I have been assuming that the further out the project, the less accurate or firm the cost estimate, but can you give us a sense maybe of -- a refined sense of confidence levels in your various cost estimates and which ones might be subject to further revision?

Sure. And I will maybe ask Richard to do that using our methodology of a certain class of estimate, which implies a level of accuracy recognizing that in the rapidly escalating environment that we are in, it has been difficult to forecast that, Linda. But Richard, could you maybe just run through on the cost estimates that we have on the projects underway?

Yes, sure. So maybe just for context, we have been through a very extensive re-examination of the costs on all these projects and that is why you see new numbers or will see them in the MD&A and Pat has just referred to the major adjustments. That reflects the fact that, on a number of these projects, we are now well along in construction and so we can see what costs actually are and for other projects, we -- which aren't in construction, we now have proposals from contractors, so we have got I think a much better handle on costs at this point in time. Unfortunately, as a result of that, we have increased our forecast.

All of the projects at this point would be operating off of a forecast, which is either at a Class III level, which typically carries a plus or minus 20% level of accuracy in this world or better than that in cases where we have actually moved into construction.

I think our latest cost estimates reflect an element of conservatism in them having been once off the mark. The organization has generally been focused on trying to make sure we have got it right this time. But in the current environment, there still does remain an element of uncertainty associated with those costs.

So the Fort Hills would be a Class III as well?

No, sorry. Fort Hills is -- the Fort Hills cost estimate will go through a pretty extensive process over the next two years really of finalization of scope and refinement of cost estimates. So it is a conceptual estimate. It is a placekeeper for the time being until the customers finalize slope and then we go through a very detailed engineering process and we won't put the pin on the costs for that until we've basically completed the engineering and bid the project out.

So is that a Class IV plus or minus 50% or there's no class --?

It is not really a classified estimate.

Okay. All right.

You can't do a classified estimate with a scope as open-ended as it remains at the moment.

Good point. Okay. Just as a follow-up question. How much interest and how much other in terms of operating expenses has been capitalized in the quarter and year-to-date?

Yes, Linda, it's Colin here. For the year-to-date, I'll speak to interest primarily. As Richard alluded to, we are capitalizing costs for construction, but for interest, we have -- there are a number of projects here, almost a dozen. Capitalized for C$39 million of interest. I think this is pretax. And for the quarter, about C$17 million. That compares with about C$14 million and C$6 million for the corresponding periods in 2006, so you are seeing about a threefold increase in that area. And that is as expected in a standard GAAP and we're in construction mode.

Does that answer your question, Linda?

On the interest side, but can we get any more clarity on the operating expense side?

No, it's very comprehensive. We don't have that with us.

Okay, thanks, Colin.

Andrew Kuske, Credit Suisse.

Thank you, good morning. Now labor productivity has been a big issue in Alberta and you are feeling a bit of the brunt of that. I am just curious, when you look at the trade-off and you mentioned a little bit of this earlier on staying on schedule on some of these projects versus cost increases to keep the project on schedule. How do you deal with that trade-off? And then really as a follow-up to that question, how are you compensated at the end of the day because if you wind up throwing more bodies at a project to get it done on time and you suffer cost escalation, how do you actually get compensated from a shipper? And I know it has going to vary from pipeline to pipeline, but if you could give some color around that that would be greatly appreciated.

Sure. Well, I will let Richard respond to that, Andrew, but you have put your finger on a very important issue and that is the one of productivity because we have seen a very significant escalation in costs. We have seen a significant reduction in productivity and the two in combination has resulted in the challenges that are described in the MD&A. But Richard, could you try to provide a little more of a quantification around that?

Sure. Well, it is the combination of labor cost escalation and labor cost productivity that is by far and away the single largest factor accounting for the variances here in fact. The reality is our steel costs have been locked in on all these projects, so you are seeing significant cost increases expressed as a percentage of the entire project, but really they are occurring on about two-thirds of the cost base of the project and on that two-thirds, they are even more significant on a percentage basis.

So it is those two factors in combination with the fact that the contracting environment is really such that you can't get contractors to accept any of that risk. You can't get fixed price contracts or if you do, you find yourself renegotiating those part way through or running the risk that you won't have people to complete the job if you don't. So that is the environment.

How are we compensated for it? Well, a number of the projects, as we have indicated, are basically costs passed through. So where our customers are telling us we have got to have that project and we have got to have it on time, which for the most part is what they are telling us, they are absorbing the risk associated with that in the form of a cost pass-through and that is generally I guess how we are compensated for it is our risk -- our capital cost risk management structures on these various projects are designed to absorb us or absolve us of a significant portion of the costs associated with meeting the schedule through passing that through to tolls.

So most of the pass-throughs that occur, effectively it is going to wind up in sort of a notional type rate base and you are going to receive that sort of cost overrun or higher cost over a period of time as opposed to being compensated in a more immediate or direct fashion?

We would be compensated in the form of higher earnings post-completion, yes.

Okay. And then if I may ask just a slightly different question or quite a different question just on FX hedging. With the dollar where it is right now, how do you look at your FX hedging program on a go-forward basis?

That's a good question. It would be tempting to unwind it and take a several hundred million dollar gain from the hedge portfolio, but we have a policy of being 50% to 70% hedged on our foreign dollar-denominated cash flows and investments. We are at the lower end of that range right now and I think we are comfortable there.

I think we are going to continue to evaluate now as we and everybody else try to see where the Canadian dollar is going to go, but I think the stability is what we really look for and predictability and I don't see us abandoning that strategy just because of a move in the Canadian dollar, particularly a one or two-month move.

And offsetting that exposure where we were long Canadian dollars -- long US dollars, we are also short US dollars as we construct things and a lot of our purchasing is done in US dollars, so that is going to help us hopefully lower overall aggregate capital costs in the projects, so there is an offsetting here.

Right. Thank you.

(OPERATOR INSTRUCTIONS). Robert Kwan, RBC Capital Markets.

Thank you. If I can just revisit the equity funding gap and what you have there. So Steve, you mentioned -- so you are at C$1.6 billion now, but there is a couple of things that could move that number around whether it is the Canadian dollar sticking in where we are or even strengthening. In addition, I guess projects not coming through. Is there any way you can kind of quantify those two impacts and what that could do to the C$1.6 billion?

Well, I think that, as I said, the C$1.6 billion is predicated on a $0.95 Canadian dollar, so it is already conservative based on where the dollar is today. Capital costs will go down if the Canadian dollar remains as high as it is as we have talked about before.

I think per what Richard said with the thorough scrub that has been done on capital costs that we have now brought forward for today, we don't see that moving around a lot from here, but certainly if there are any upward adjustments, that could drive the numbers slightly the other way. Although, I think that the impact is quite muted from the top line to the bottom equity line through that. So there is not a lot that is moving that -- that is apt to move that number around at this point. We have done it for all of the year, so that goes right up to the end of 2011 and it includes all of Fort Hills. So that is quite a span of time and I guess what we are trying to convey is that the top-line number, when broken down, becomes very manageable.

All right, Steve. I guess I was thinking a little bit more about your comment about that you have risk-adjusted certain projects that have not been announced yet.

Oh, sure. Yes, thanks. I mentioned that about C$1 billion of this C$13.9 billion is projects that are in development that we have assigned a probability weighting to. If they don't come -- let's say that none of them came to fruition, you could take C$1 billion off the top line if that is where you were headed.

We always have a risk probability or a probability weighting on the projects that we have in development so that we can keep a good grip on that from a financing perspective. So about C$1 billion of that is in development. I think we would say fairly likely to proceed, but we do have our internal risk or probability weighting assigned to them.

So just kind of to get a sense if in the unlikely case that you got none of the C$1 billion just based on the equity component that you might reduce your equity funding by about C$400 million or so?

Pretty close, yes.

Okay. And then just the last thing on that, do you have some thoughts as to the timing of your equity funding gap? I know you have given some color around what you think you might need to do in '08. Any kind of thoughts through the remainder of the year as how the remaining kind of -- how the C$1 billion breaks down?

I think it is going to be a continual iterative process of looking at the actual funding needs, liquidity needs and also our FFO credit metrics and other metrics that the rating agencies watch. So that is what we will be watching pretty closely. I think we have tried to be pretty clear about what we think in 2008 and we are going to assess from '09 and beyond. But certainly one of the fulcrums around which this turns is our credit concerns as well.

Okay. Thanks, Steve.

Daniel Shteyn, Desjardins Securities.

Yes, good morning, everyone. I have -- my first question is with regards to Alberta Clipper. Now, there has been some headlines I guess over the last couple of days about the fact that First Nations Community is asking for compensation from the Alberta Clipper project. I am just wondering if this particular announcement was already factored into your timeline and cost estimates.

Yes, I think it is fair to say that it is, Daniel, and we worked very closely with First Nations' people along all the right of ways, including Clipper, but very much so we have been very much aware of the issue and it has been factored in.

Okay. Now, to borrow the famous words of someone, are there any other known unknowns with regards to First Nations' claim on your suite of pipeline projects and by that what I mean is are you anticipating any other challenges or demands for compensation with any one of the projects that you have that could be material?

Well, you maybe caught me up with your last word on material, but we definitely anticipate that in this day and age of growing stakeholder challenges around gaining right-of-way and access to land that there will be challenges with regard to specific issues that we are aware of, no. But we have factored into all of our projects the expectations that landowner negotiations, right-of-way costs and First Nations' challenges. Often as a result of land claim issues with the federal government are part of doing business today. So we certainly have factored the expectation of those challenges in.

Very good. And going back to the revised funding requirement slide, the C$13.9 billion I should say, are there any other probability weighted projects from the second wave in the funding requirement much like Fort Hills?

I don't think so. Fort Hills was about the only one. We had regional pipeline development projects probability weighted of which Fort Hills is a large part of that.

Okay. And the C$1 billion that you mentioned that was the probability adjusted first wave projects that were in there. Do you mind specifying which ones those are again?

Yes, I actually do mind, Daniel, and I don't mean to be glib, but I think it is probably not -- I think that what I would say is that when you think of the presentations Richard has made with regard to extensions to the US Gulf Coast, the Eastern PADD 2, other regional development projects between the oil sands and Edmonton or Hardisty, I think those are the key areas that we would consider and then, of course, also in Wave Two could be Gateway Pipeline and so that is probably as close as we can come just because there is a number of project discussions underway and possibilities and I don't think it would be too helpful right now to try to get more specific.

Okay. That's fine. I understand. What about the expansion of Alberta Clipper? Would that be considered more as a first wave or a second wave project?

It's a second wave.

Second wave. Got it. Okay. Thanks very much.

[Ross Payne], Wachovia Capital Markets.

How are you doing, guys? You mentioned monetization as one form of generating cash for some of these CapEx programs. What are your thoughts there in terms of drop-down -- potential drop-downs to EEP for some of your US assets? And secondarily, does the change in currencies impact that decision making? Thanks.

I think that is always a possibility just structurally between corporate assets and EEP. I think the way we look at it right now though is that EEP has such a strong growth profile and list of projects ahead of it that there really isn't an imperative to try to do drop-downs at this point. There are candidates among our US assets that would probably be logical fits in the MLP, but we are not really focused on that in the near term. We will always look at that as a possibility, but I don't think we are really focused on that right now.

No, I think Steve's point is bang-on with regard to the near term. I think that as we work our way through the capital programs, that certainly is one of the potentials when you take a look at the long-term financing needs that is a potential monetization for Enbridge in the longer term. But certainly not in the near term for the reasons he has indicated.

Thank you.

Bob Hastings, Canaccord.

Just to get a clarification on EGD's rate case. You mentioned they have one, it is retroactive to the beginning of the year. Just wondered how you've booked it, whether you have booked it already and if so, how much was it and what was applicable to previous quarters?

Colin?

We don't have that for you today, Bob.

Can we get back to you on that?

Sure, but is it in the numbers?

Colin is hesitating here.

Yes, there's not much in the quarter. The quarter is pretty weak, as you know, seasonally.

Okay, you can get back to me when you --.

Yes, we are going to have to get back to you on that, Bob.

Thanks a lot.

Linda Ezergailis, TD Newcrest.

Thanks. Just going back to your C$13.9 billion number. The C$1 billion risk-adjusted number, assuming all of those projects were to go ahead, what would that C$1 billion number grow to?

You might have to give us a minute to look through that, Linda. We might have to get back to you. I don't know that we can just -- there is quite a list of different projects with probabilities and so it would take us a little time to force those all to 100% and assess whether we believe that is the right approach or not. So I think we should get back to you on that one.

And the numbers we have used in there, Linda, are quite conceptual because the projects have not been fully scoped out. So it is difficult to know what the capital would look like on each of them. But we can maybe work up a ballpark number and get back to you.

Okay. And just to get a better understanding of your probability risk adjusting, that is just a simple linear 50% probability or 75...?

Right.

Yes. It is a probability of proceeding and then a forecast percentage of ownership. In most cases, it is 100%, but there are some projects where we may have equity partners and so I guess notionally, notionally, when Richard talked about the Wave Two potential at Enbridge Day, you could kind of look to that as being one way of saying if you put at 100% the risk weighting or probability weighting of all the projects, you start moving toward Wave Two capital.

Yes, I think that's right and also for clarification, I am not sure whether this was the impression that we gave, but not all -- we don't apply a 50% probability weighting to all projects. Some of them are less than that, some of them, like Fort Hills, would have been embedded in the prior numbers at a significantly higher probability than that because at the time that plan was put together, which was back last spring, we were already beginning to get relatively confident that Fort Hills would fall into place.

Okay. So then all of your Wave Two projects in some form of risk adjustment are in that C$1 billion number?

No, the Wave Two projects were the C$14 billion potential over and above Wave One.

Okay. So other than Fort Hills, there was no Wave Two in there?

I think there were small amounts, as Steve indicated, all the way from maybe a portion of the Gulf Coast to some regional infrastructure to some tankage that was included in that as well.

Okay. Thank you.

Karen Taylor, BMO Capital Markets.

Thanks. If you could get back to me as well with Linda's number on the reverse risk weighting for the C$1 billion, please. And also on the Enbridge Gas Distribution, how much of the rate case reflected in this quarter if any? And also is the rate case available -- the one that was filed on October 18 for Enbridge Gas? If someone could e-mail me a link, I would appreciate it.

To the filing?

Yes.

Okay.

Those are my questions.

We will do that. Thanks, Karen.

Thank you.

There are no other questions in the queue at this time. I would like to turn the call over to Mr. Vern Yu for closing remarks.

Well, thank you. I would like to thank everyone for their interest in Enbridge this morning and we would like to remind everybody that Anu, Colin and I are available after this call for the rest of the morning to take any more detailed questions and with that, I would like to thank everyone and wish you a good day.

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