Enbridge Inc. (ENB) Q4 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Enbridge Inc. Fourth Quarter 2011 Financial Results Conference Call. I would now like to turn the meeting over to Jody Balko.

Thank you, Diana. Good morning, and welcome to Enbridge Inc.'s Fourth Quarter 2011 Earnings Call. With me this morning are Pat Daniel, President and Chief Executive Officer; Richard Bird, Executive Vice President, Chief Financial Officer and Corporate Development; and John Whelen, Senior Vice President and Controller. This call is webcast, and I encourage those listening on the phone lines to view the supporting slides, which are available on our website. A replay and podcast of the call will be available later today, and a transcript will be posted to our website shortly thereafter. The Q&A format will be the same as always. The initial Q&A session is restricted to the analyst community, and once completed, we will invite questions from the media. I will also remind you that Jonathan Gould, and I will be available after the call for any follow-up questions that you may have. Before I begin, I like to point out that we may refer to forward-looking information during the call. And by its nature, this information applies certain assumptions and expectations about future outcomes, so we remind you, it is subject to the risks and uncertainties affecting every business, including ours. This slide includes a summary of the more significant factors and risks that might affect future outcomes for Enbridge, which are also discussed more fully in our public disclosure filings available on both SEDAR and EDGAR systems. And with that, I'd like to turn the call over to Pat Daniel.

Well, thank you, Jody, and good morning, everyone. Thank you for joining us for a review of our fourth quarter and our full year results. Most of you are likely wondering why our 2011 results are being released on an unaudited basis, so I'll just explain that upfront before I move on to the more substantive matters. Those of you who follow Enbridge Energy Partners will know that they announced a few weeks ago that they had identified a misstatement of earnings from their NGL trucking and marketing business accumulating to $17 million over multiple years. That operation, of course, is just a small part of EEP's overall business, which sells and distributes EEP's NGL volumes. It provides less than 2% of EEP's recurring operating income. The misstatement did not affect EEP's cash flow, and it's not expected to have any impact on future earnings, cash flow or distributions to EEP's unitholders and to Enbridge. We've taken a $3 million noncash charge for our share of EEP's estimated prior period adjustment that's expected to book in its fourth quarter. We're comfortable that we've identified the appropriate magnitude in the misstatements and reflected the appropriate correcting entry in Enbridge's consolidated financial statements. Our external auditors are just now finalizing their detailed review. We decided that we should release our results now as originally planned rather than waiting the formal conclusion of the audit, and of course, we will file our complete financial statements and disclosure documents upon receipt of the audit opinion. So let me move on now to the results themselves. And as I'm sure you're aware, earlier today, we were very pleased to announce that our adjusted earnings for the fourth quarter were $275 million or $0.37 per share. So on a full year basis, that puts us at…

Okay, thanks, Pat. Good morning. Picking up the story at Slide 14 of the slide deck, I'll walk through the notable details of the fourth quarter, which unfolded largely as expected. Liquids Pipelines continued to contribute to earnings growth and our Regional Oil Sands System was the primary driver in the fourth quarter and for the full year, with higher volumes and higher tolls kicking in on that system and additional facilities coming online, as well as extended asset depreciation lives. Mainline earnings were off from the level in the prior quarter and last year. Volumes and revenues remained strong under the CTS, but operating and admin expenses bunched up in the fourth quarter with a full-court press on integrity spending programs. We will see some quarterly variability in that O&A expense going forward, but our third quarter would be more indicative of what we'd expect for a running rate. The effective current tax rate booked on mainline earnings was also high in Q4 due to timing of expenditures and year-end true-ups. Again, the Q3 rate would be more indicative of what we'd expect for a full year run rate. All in all, the mainline full year results were better than expected at the time of our original guidance due to stronger volumes under the CTS than we had expected at that time. And that's contributing to Enbridge reaching the top end of our adjusted earnings per share guidance range. And also setting the stage for the strong contribution to 2012 earnings growth, which is reflected in our guidance for this year. For Gas Distribution, in Q4, we gave back a portion of the third quarter year-to-date strength as I indicated we expected to on our third quarter call. Like Liquids Pipelines, this was partially a matter of integrity program…

Great. Thanks, Richard. So maybe I can just very quickly summarize. We're, firstly, very pleased with our results for 2011, an 11% increase over 2010 and right at the top end of our original range. Secondly, we've had the exceptional success in securing new projects across all of our business units in the latter part of 2011. And therefore, we're positioning ourselves for funding capabilities accordingly as Richard has just summarized. At the same time, we continued to attach the highest priority to operational safety and integrity of our existing systems. And lastly, we remain very confident that we can achieve an annual growth rate in EPS, averaging 10% through 2015 based on conservative mainline volume and project development assumptions. So that concludes our prepared remarks for this morning. And now I ask Diana to open the phone lines to take questions.

[Operator Instructions] The first question will come from the line of Paul Lechem, CIBC.

Just a question on the Spearhead Pipeline and the implications of volumes on the mainline. In the Q4, the volumes in Spearhead were, I think, on averaging, 54,000 barrels a day. It's picked up significantly since then. Does that mean -- should we imply from that, that the mainline volume is pulling through, should be up by the same amount, and what's the outlook for the balance of the year?

Richard, obviously, the indication is very positive but in terms of the pull-through, I think that's a very fair assumption that Paul has made?

Yes. There's not necessarily a 1:1 relationship between volumes on any downstream pipe. But generally, directionally, that pull-through effect should pull additional volumes to the mainline, and we have seen pretty strong mainline claims coming into the earlier part of the year.

Okay. Just maybe follow-up, your -- Patrick comments on the Flanagan South. What is the $1.9 billion project? What volume would that or capacity would that imply? And if you're thinking about upsizing, where can an upsize go to?

Well, the $1.9 billion, if I've got the right number that you're looking at, Paul, would relate to expectation that we would build a 30-inch twin of Spearhead South. And what we now will look at as a result of this open seasons, whether we have sufficient commitment to upsize that to 36-inch. And of course, depending on the power associated with the line and the pumping station capacity, we'll determine what the ultimate capacity would be. But it's -- so we're looking at whether we upsize to a 36 from 30.

The next question comes from the line of Linda Ezergailis, TD Securities.

Just wanted to follow-up with Paul's question and ask it maybe in a little bit of a different way. What sort of volumes are you seeing on your mainline ex-Gretna right now? And given that Q1 is half done, what might we look for, for the quarter generally? And are you still assuming a flat volume 2012 versus 2011, given the strong start to the year?

So ex-Gretna volumes, I don't know whether any of us -- Richard, you got that number?

Yes. Well, I don't have that specific number. But in the fourth quarter, when our MD&A is released and we included the detail on the CTS...

We're just looking up some numbers for you here.

You're going to see fourth quarter throughput ex-Gretna of a little higher than the third quarter. And contrary to normal patterns, where we see a significant drop-off as we roll into the first quarter, those volumes have continued on pretty strong through January. So we're not going to get into specific guidance on quarter-by-quarter volumes ahead of time. But suffice it to say that the volume picture exiting the year and into 2012 has been quite strong.

So there'd be an upward bias for the year generally, given the unusual seasonality that you're seeing in Q1 but you don't want to go there yet?

Yes. I think that's a good way of putting it. A little too soon to be thinking about changing anything on our full year picture just yet.

And the next question comes from the line of Juan Plessis with Canaccord Genuity.

With respect to the Canadian Mainline, you mentioned that there is some higher pipeline integrity inspection costs. I just wonder if you can break out the increase in this expense in the quarter? And I know you're continuing the integrity program in 2012. But going forward, beyond 2012, do you see these costs as more of recurring in nature? Or would you expect this cost to decline?

So, Juan, I think I'll probably just come back to the comment that I made earlier, which is the cost that we incurred in the third quarter across-the-board on O&A are more consistent with what we would see on a running rate than the ones in the fourth quarter. So when we break out the detail for you in the MD&A on Q4 versus Q3, you'll see an uptick in overall O&A. But if you look at the difference between fourth quarter and third quarter, that's roughly the magnitude of greater than run rate cost that we experienced in the fourth quarter.

Okay. And beyond 2012, you think that's going to continue?

Generally, as we move into the future, we will see an increasing component of cost associated with integrity in that mega line. Of course, we'll also see increasing revenues as well.

And the next question comes from the line of Ted Durbin, Goldman Sachs.

You talked a little bit about this, but you just did finish your Seaway open season I believe. How likely are you thinking that you'll twin the pipeline? And then what's the timing when you might bring an expansion like that online?

The -- I think the likelihood is very good at this point, Ted, but we will formalize that for you over the next few weeks as we conclude the open season. And then it may take us a few days after the formal close of that open season to go through the commitments that have been made and determine how to best design. But I think it's fair to say that it's quite likely. And the timing, as you know, is to have the reverse Seaway volumes flowing first in about June of this year, ramping up to 400,000-plus by the end of the year, the first part of 2013. But the twin line, I believe we're targeting late 2014.

And then just to follow-up on that. Are you tying your Flanagan South sort of contracting to the Seaway piece as well? Or should we think about that as, this is 2 separate projects and 2 separate sets of commitments?

Well, you -- I think it's fair to say that those that are committing to Flanagan South are looking at being able to move their volumes all the way through to the Gulf. And so therefore, the -- although they've been run as 2 separate open seasons and of course, there are 2 separate ownership structures because we're in a 50-50 joint venture with Enterprise south of Cushing, the effect of the commitments are to move the crude all the way to Gulf.

Got you. And then if I could just ask one more. How are you thinking about the offshore business? Are you expecting to continue to make losses there on kind of the timing of one of the base business might turnaround, realizing that you have Walker Ridge and Big Foot coming down the road. But just thinking about the base business here?

Yes. The base business is, of course, very dependent on increased drilling activity and development drilling in the Gulf and you -- as you know, that had gone through significant delays. We do expect a recovery, it is hard to forecast exactly when that will occur. But we know -- we're not anticipating a really strong year through 2012 but growing volumes going forward.

The next question comes from the line of Carl Kirst, BMO Capital.

I'm not sure if we can kind of bookend but, Pat, you gave some great color as far as -- this is on the Gulf Coast Access, the Flanagan South, starting with the 30-inch twin and maybe going up to as high as 36 inches, adding pumping and the like. Is there any way to sort of bookend what the incremental investment potential could be above the $1.9 billion if you did all of that? Or are you guys not prepared to go there just yet?

Well, we -- we're probably not prepared to go there with any precision yet, Carl. Because I believe the number, for example, in upsizing is around $600 million. But of course that has to be then matched upstream and downstream. There will be mainline capital associated with that. So it will take us a little while to work through what the overall capital plan would be and investment opportunities as a result to the upsizing. It's not just a matter of increased diameter, but it's got to be matched both upstream and downstream. But we will be able to put that in place for you shortly after we get to analysis of the open season.

Great. That's helpful. And one follow-up if I could, and this kind of goes more to opportunities like Cabin Gas that was kind of a sort of a nice mix of both new buying and organic. Given where gas prices are today, do you see any -- either additional or even growing opportunities for more midstream assets like that to shake loose from some of the E&Ps? Or how do you see that in sort of the context of today's commodity market?

Well, we do see more opportunity. And as you -- I think we mentioned in a prior call, we have already looked at and have bid on other assets to further supplement that, we're not successful in that. But as you know, even though the gas, the dry gas business right now is not really strong, the liquids-rich gas business is very strong. And as these LNG projects off the West Coast gain momentum, I think the confidence in the Canadian gas and midstream business will grow. And obviously, the producers in Western Canada wanting to free up capital by turning plants such as Cabin over to companies like us in the midstream business. So we think there's good potential there and that it will continue to grow.

The next question comes from the line of Matthew Akman, Scotia Bank.

Reference on Regional Oil Sands pipeline to increase toll, which pipeline is that in reference to? Would that be Athabasca or Waupisoo?

John, do you -- Waupisoo pipeline?

I was wondering if you could provide some color around that, I guess. I know the volumes are obviously rising there, which takes revenue higher. But what is the reference to increased tolls?

Yes. Well, I have to double check that, Matthew. We think it's the -- just thinking through the various contracts on the various lines, a number of them have provisions in for gradual toll escalation, and we think it's primarily the Waupisoo that, that reference is in relationship to.

It sounds -- my expectation would be that the upside in earnings would be primarily from volume flow rather than tolls. Is that kind of your feeling as well, Richard?

Yes. I think that would be the main driver.

Okay. There's a reference -- a separate question. And I'm not sure if this is for Pat or Richard. But there's a reference to Noverco monetizing shares in Enbridge. Obviously, Enbridge would get money in the door. I mean, the return on Noverco is kind of a fixed-type return, so -- which is kind of a modest-type return. So is your expectation then that this would be an accretive transaction for Enbridge once the funds are redeployed into the business?

Yes. I think that is a good assumption, Matthew, and there will be a significant flow back to Enbridge because, as you know, through Noverco we effectively own a portion of our south through the share -- the Enbridge share of the south within Noverco.

The next question comes from the line of Andrew Kuske, Credit Suisse. Andrew M. Kuske - Crédit Suisse AG, Research Division: Just a question really relates to Noverco and when you think about that asset and how it's held by yourselves and, really, by the partner. Obviously, they're doing a portfolio management activity on a broader basis. But we've seen a lot of pension fund interest in long-dated assets and really going direct -- directly investing in those type of assets whether they'll be pipelines or real estate. So is this really just a one-off portfolio management activity by the Caisse? And if that is yes on that answer, the second part, are you seeing a lot of interest from pension funds approaching you wanting to take direct interest in underlying assets?

So I think the answers are, yes, yes, Andrew. This is really a portfolio trimming exercise by the Caisse. And we have just an excellent relationship with them through Noverco. And we -- as you've heard us speak in many occasions before, is we look at various structures for financing new initiatives going forward. But the concepts around partnering up with the pension funds is something that is certainly not new to us. And it's something that we're counting on, as Richard described earlier in his bag of tools, with regard to equity and financing of the great projects we've got in front of us. So I think it's fair to say, yes, to the second part of your question as well. Andrew M. Kuske - Crédit Suisse AG, Research Division: So then just as a follow-up to that, do you see an opportunity in the current low interest rate environment and with pension fund interest in these type of assets of doing a more radical restructuring of Enbridge into sort of GP/LP structure at a macro level to really accelerate the growth, the size and, really, the returns to Enbridge common shareholders?

Well, I'll let Richard respond to that in a little more detail. That hasn't been a discussion, that's more macro level. And I give Richard a hard enough time, Andrew, about complexity of the corporate structure already that he's probably afraid to think about it. But I'll ask him to comment.

Yes. So I think Pat's pretty well covered it in a way that we're playing that capital market arbitrage that's behind your comment, is really in how we manage our various sponsored vehicles and Noverco and the assets that we look to, dropping those vehicles and potential other sidecars, which could involve pension funds as you're suggesting as opposed to completely changing the structure of the parent itself.

The next question will come from the line of Robert Kwan, RBC Capital Markets.

Just on the mainline and CTS, I'm just wondering if there's an update or some additional color on what ongoing discussions are with shippers on the potential reopener?

Really, there hasn't been any discussions. You're referring to the potential reopener in the event that Keystone XL is not approved by January 2013.

That's right, Pat.

Yes. And no, we haven't had any further discussion. I think the industry continues to be, if not optimistic at least hopeful, that Keystone XL will get approval and it will be a nonissue going forward. But no, we haven't had any significant discussions in that regard.

Okay. Just another question. Coming off of a good year, you had previously guided for the potential to move through the high end of the range. Just wondering, if you can give us some color as to what types of things didn't materialize? And maybe more importantly, are some of these items timing issues that might better set you up for 2012?

Okay. I'll maybe ask Richard to comment on that. We recognize, we provided guidance range and when you hit the top end of it, we don't want to apologize too much for having not gone through the top end of it. And maybe just to take you up on the words, Robert, we're not coming off of a great year. We're going forward to another great year and expect to be up from that. But, Richard, could you maybe comment why we didn't add a couple more pennies over the top end of the guidance range?

Sure. Yes, well of course, there's many small amounts and to be clear, our third quarter guidance was that we expected to be near to the top end of the range or slightly above, so we pretty well hit bang in the middle of that expectations. We thought we might have seen a little more strength in Energy Services in that fourth quarter that we might hung on to the great arbitrage opportunities to a slightly greater extent than we did. I think the slightly higher O&A in both Liquids Pipelines and Gas Distribution, some of that we expected, some of it was a little more than what we expected. So really a variety of small things and no one of which, I think, has got particular predictive value going into the future.

The next question will come from the line of Steven Paget, FirstEnergy.

You mentioned that mainline expansion, so if you could detail that how would the mainline be expanded, and what will the schedule be for proposing this extension? Could the application be in front of the relevant authorities within the next year?

Well, the -- I guess, you're referring to the mainline extensions that I was referring to in order to accommodate the expanded volumes south of Flanagan. And relatively straightforward, Steven, because we do have spare capacity on the system that it will be primarily pumping capacity and minimal regulatory approvals associated with that.

My second question relates to Aux Sable, we're seeing -- your partner in the Seaway Enterprise look at putting together a very large pipeline system that would move ethane down to the Gulf Coast. Could that significantly improve netbacks on Conway, and by extension, your earnings from Aux Sable?

We should have our Al Monaco here to respond to that. But I don't know whether...

I think that's directionally correct, Steven, bearing in mind that BP really manages the commercial side of that business on our behalf and we share in the upside that they generate. But I think directionally, the fundamentals that you're describing if additional capacity was put in to the Gulf Coast, that should tighten up the differentials that are available to that business.

[Operator Instructions] The next question comes from the line of Curt Launer, Deutsche Bank.

But I would like to ask 2 quick questions, if I could. One is to just get some additional information relative to the Bakken expansion program, the status of the mainline relative to it being full. There's been a lot of discussion in and around the bases differentials at Clearbrook recently, if you could comment on that. And anything else that would give us additional information relative to the timing of capacity additions in and around your Bakken expansion program.

Well there's, Curt, a fair bit of detail in that, I don't know -- in that question. I don't know whether we've got -- because you're looking for a comment on both Bakken expansion, the associated mainline you mentioned, the differentials around Clearbrook. Maybe that's something we can get back to you on and provide a little bit of follow-up in detail. As you know, we've got a big capacity expansion underway on both the Canadian and U.S. side of the Bakken, and they're in the process right now through business development of looking at an even further expansion because of the rapid growth out of the Bakken. So it's really in a state of flux, but we could put in front of you what we've got underway right now in a follow-up call if that would work.

Yes. That would certainly work. But if I could just it make one specific question for today. We're looking at capacity that's in and around 162,000 barrels a day now. Is there any kind of a number that you would share in terms of a target or what you would be looking for happening here over the next 12 months?

Well, why don't I take a stab at that. So our capacity out of the Bakken on the existing mainline system is larger than what you just indicated. I think we're running at about 200,000 barrels a day on the mainline. And we do have the front-end of the Bakken expansion program, which I think has got about another 25,000 on top of that. The full Bakken expansion program is 145,000 barrels a day as I recall, and that's targeted to be in schedule in the early part of next year. So we will be running about 350,000 of capacity out of the Bakken at that point in time.

Right. Those are the numbers that I was looking for and you canceled the segregated sour program, which got to the 200,000. I missed that from my notes from before. One follow-up question, if I could. You talked about stronger volumes under the CTS, and is there any incremental information you can give us in that regard to help us model our way through it for 2012 and '13?

Well, I think in our standard IR book, we've got -- you've got both the disclosures on what the starting point is and what our forecasts are for growth out of the basin. So we can certainly spend some more time on you with that, Curt.

The next question comes from the line of Winfried Fruehauf, Fruehauf Consulting Limited.

Regarding northern Gateway Pipeline, does Enbridge currently own or has an option to own to acquire docklands at Prince Rupert? And if so, why did Enbridge not choose Prince Rupert in the first place as a terminal for Northern Gateway?

Win, at this point, I don't believe we have any options at the Prince Rupert. And the reason why we -- and as you probably recall, we went through very extensive routing studies before we chose Kitimat and the main reason why we preferred Kitimat versus Rupert was the requirement to run parallel to the Skeena River for about 50 miles going into Rupert, on what would be a very narrow right-of-way space and hence, we felt from an operational point of view that we would be much better off going into Kitimat. And of course, the harbors, an outstanding harbor in Kitimat. Recently, I've indicated that we will re-examine that to see whether there's another way to get to Prince Rupert. But all of our engineering and environmental studies continue to point in the direction of Kitimat being the best alternative. We want to make sure that we have thoroughly evaluated any and all routing opportunities.

And the next question comes from the line of David Brandt, Moody's.

I wondered if you could maybe comment a little on the Line 9 reversal in terms of timing, expected cost and the volume that it will move?

Okay. Well, Line 9 reversal, we're looking at in a couple of phases, at least a couple of phases, David. And as you know, we're well on the way to planning the first phase of that, which would be reversal to Westover junction in order to be able to access the Nanticoke refinery. And then, we, at the same time, we continue to work with producers in order to get sufficient support to reverse the line all the way to Montréal to be able to move Canadian crude into the Montréal market. And those discussions are underway. It's difficult to know when we will get the level of support that we need to proceed with that. But it's a relatively straightforward program then to turn around and reversed the line in order -- because, of course, it originally operated in a west to east mode. We also have to work through a regulatory process that we are feeling is unduly burdensome with regard to re-reversal. We felt that having operated the line in the west to east mode that, that should be a fairly straightforward process. It sounds like the regulator is looking at a longer process than we had required, but we're working to see what we can do to shorten that. So a little hard to be predictive with regard to dates at this point in time.

If I could add to that, the reversal to Westover is a pretty minimal capital expenditure. It's about $20 billion. So it's really in conjunction with our Line 5 expansion project, and that piece is very small.

And this concludes the question-and-answer portion for today. I would now like to turn the call back to Jody Balko for closing remarks.

Well, thanks, Diana. We've got nothing else to add at this time, but I'll just remind you that Jonathan Gould and myself are available for any follow-up questions. So thanks, everyone, and have a good day.

And ladies and gentlemen, this concludes today's conference. You may now disconnect and have a great day. Thank you.