HOUSTON Nov 2, 2015 (Thomson StreetEvents) -- Edited Transcript of Enbridge Energy Partners LP earnings conference call or presentation Monday, November 2, 2015 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Sanjay Lad Enbridge Energy Partners, L.P. - Director, Investor Relations * Mark Maki Enbridge Energy Partners, L.P. - President and Principal Executive Officer * Steve Neyland Enbridge Energy Partners, L.P. - VP, Finance * Guy Jarvis Enbridge Energy Partners, L.P. - President, Liquids Pipelines, Director of the General Partner ================================================================================ Conference Call Participants ================================================================================ * T.J. Schultz RBC Capital Markets - Analyst * Shneur Gershuni UBS - Analyst * John Edwards Credit Suisse - Analyst * Brian Zarahn Barclays Capital - Analyst * Sunil Sibal Seaport Global Securities - Analyst * Faisal Khan Citigroup - Analyst * Sharon Lui Wells Fargo Securities, LLC - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the Enbridge Energy Partners, LP quarter-three 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference: Mr. Sanjay Lad, Director of Investor Relations. Mr. Lad, you may begin. -------------------------------------------------------------------------------- Sanjay Lad, Enbridge Energy Partners, L.P. - Director, Investor Relations [2] -------------------------------------------------------------------------------- Thank you, Andrea. Good morning and welcome to the 2015 third-quarter earnings conference call for Enbridge Energy Partners. This call is being webcast and a copy of the presentation slides, supplemental slides, condensed unaudited financial statements, and news release associated with it can be downloaded from the investors section of our website at enbridgepartners.com. A replay will be available today and a transcript will be posted to our website shortly thereafter. As a reminder, the Partnership's results are also relevant to Enbridge Energy Management, or EEQ. I will be available after the call for any follow-up questions you may have. Our speakers today are Mark Maki, President, and Steve Neyland, Vice President Finance. Available for the Q&A session, we also have Guy Jarvis, Executive Vice President Liquids Pipelines; Jonathan Rose, Treasurer; and Nora Casey, Controller. Moving forward to our legal notice, this presentation will include forward-looking statements. Any statements made or discussed today that do not constitute or are not historical fact, particularly comments regarding the Company's future plans and expected performance, are forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. The risks associated with forward-looking statements have been outlined in the press release and the Partnership's 2014 annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q. This presentation also contains a certain non-GAAP financial measures. The reconciliation schedules for these non-GAAP measures to comparable GAAP measures can be found in the investors section of our website. Please turn to slide 2. I will now turn the conference over to Mark Maki, President. -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [3] -------------------------------------------------------------------------------- Thank you, Sanjay. Good morning and welcome. Our agenda this morning will have Steve start with a review of our third-quarter financial results and the Partnership's funding outlook. I will then follow Steve with an update on our project execution, discuss the Partnership's strategic outlook, and close with a few brief comments on our distribution growth outlook. Before we move forward, I want to highlight the Partnership's solid financial and volumetric performance, which demonstrates the benefits of our low-risk business model. We expect continued strong utilization of our pipeline systems and growing deliveries to the markets that we serve as a result of our very strong competitive position in our supply basins and the tremendous demand pull in refineries that are connected to our system. This market position will grow stronger as our pipeline expansions enter service, delivering highly stable earnings and cash flow growth to our unitholders. Please turn to slide 3. And Steve, take us through the third-quarter financial results. -------------------------------------------------------------------------------- Steve Neyland, Enbridge Energy Partners, L.P. - VP, Finance [4] -------------------------------------------------------------------------------- Thank you, Mark. The Partnership delivered another quarter of solid financial and volumetric performance. Our third-quarter financial performance is attributable to strong cash flow contributions from the completion of portions of our multibillion-dollar organic growth program as well as continued strong deliveries on our Lakehead and North Dakota liquid pipelines systems. Starting with the financial results table on the top left of the slide, for the third quarter, the Partnership reported adjusted EBITDA of $460.7 million and distributable cash flow of $248.8 million, which represent a 13% and 18% increase over the third quarter of 2014, respectively. Our as-declared distribution coverage ratio for the third quarter was 0.96 times, assuming inclusion of the paid-in-kind distribution to cash coverage of 1.15 times. Our debt to EBITDA leverage metric at the end of the third quarter was 4.3 times, which considers 50% equity treatment for the hybrid financing instruments we currently have in place. The leverage compliance metric within our credit facility attributes 100% equity treatment for the hybrid instruments. Hence, we are comfortably in compliance with those leverage metric requirements. The main items eliminated from these adjusted results include unrealized non-cash mark-to-market net gains and losses; expenses attributable to the Line 2 hydrostatic test, net of recoveries; and other items noted in our supplemental slides. On October 30, the Board of Directors declared a quarterly cash distribution for the Partnership's unitholders of $0.583 or $2.33 per unit on an annualized basis, representing a 5% increase when compared with the third quarter of 2013. Please refer to the upper right-hand side of the slide. Here, we show that the total liquids system deliveries have increased 6.5% over third quarter of 2014 to 2.89 million barrels per day. The strong volumetric performance demonstrates the benefits of our low-risk business model and our liquids pipelines system's premier supply access and market demand pull. Deliveries on our Lakehead System for the third quarter averaged 2.34 million barrels per day. When compared to the second quarter of 2015, Lakehead deliveries increased approximately 130,000 barrels per day, primarily due to the completion of our Line 67 Mainline Expansion to 800,000 barrels a day in July. Looking forward to the balance of the year, we expect heavy oil production to remain strong from Western Canada as oil sands expansion projects continue to ramp up. We expect Lakehead deliveries to increase as refineries emerge from seasonal maintenance, complemented by additional mainline system expansions as well as the expected startup of Enbridge's Line 9B reversal project at Montreal. Deliveries on our North Dakota and Mid-Continent Systems remained solid during the third quarter, averaging 330,000 and 216,000 barrels per day, respectively. In the North Dakota Bakken region, while there has been a reduction in the number of drilling rigs within the basin this year, we continue to see rig activity in the core regions remain active and our mainline deliveries remain at capacity as these light volumes move downstream to the refining centers. The Partnership's solid financial and operational performance year to date is largely attributable to the execution of our market access program and the meaningful growth and cash flows from these pipeline expansion (technical difficulty) guidance ranges for adjusted EBITDA of $1.68 billion to $1.78 billion and distributable cash flow of $900 million to $960 million. Please turn to slide 4. This slide provides our forecasted 2015 capital expenditures. We expect capital expenditures to be approximately $1.1 billion, which includes $80 million of maintenance capital. These expenditures are presented net of joint funding. Our 2015 capital expenditures forecast shows a modest decrease from the prior-year quarter capital spend forecast, primarily due to refinements of project spend profiles. Turning your attention to the available liquidity chart on the right-hand side of the slide, our recent $1.6 billion senior unsecured notes offering highlights the importance of maintaining an investment-grade credit rating and the benefits of being part of the Enbridge family of companies. With the recent closing of our debt offering, we have enhanced the Partnership's available liquidity to approximately $2.1 billion. Our notes offering provides the Partnership with substantial liquidity as we continue to progress through the construction of our highly attractive organic growth program. Finally, there has been no change in our cost estimate related to Line 6B incident and our remaining costs relate primarily to monitoring the status of the river. Please turn to slide 5. We have made significant progress to secure our organic growth program currently underway. First, we have been successful in raising approximately $1.9 billion in 2015 by accessing both public equity and debt capital markets. As noted in our earlier discussion, the Partnership has strong available liquidity resulting from these actions. Next, the joint funding arrangements with Enbridge enhance the Partnership's financing flexibility. The Partnership's participation in the highly attractive access project, specifically the Eastern Access, Mainline Expansion series, and the Line 3 replacement project, are commensurate with EEP's funding capabilities. A key consideration for the Partnership's funding outlook will be the funding level associated with the Line 3 replacement project. We expect the project will be funded jointly with Enbridge and the project's funding level is under consideration by the Enbridge Energy Management special committee. Collectively, the funding secured by the Partnership, in addition to the joint funding arrangements with our sponsor, facilitate manageable equity needs at EEP over the near to medium term. In summary, we are well positioned to execute on our funding plan to support the buildout of our liquids growth projects. As well, I would also like to emphasize that maintaining our investment grade credit rating remains a top priority at the Partnership. Please turn to slide 6. We want to take a moment to reinforce again the low risk and stable nature of our business model as presented by the chart. In 2015, our liquids pipeline business is expected to provide approximately 90% of the Partnership's earnings and distributable cash flow, which is predominantly underpinned by long-term, low-risk contract structures, such as cost of service and indexed toll. The result is a stable and defensive utility-like contract risk profile. We are often asked about how the current low commodity price environment affects our business. We do not anticipate the current environment of low crude oil prices to materially affect the underlying earnings and cash flows from our liquids pipelines business. More than half of the Partnership's cash flows are underpinned by long-term cost of service arrangements, which have no volume sensitivity. The blue wedge representing our fee-based component of our cash flows is predominantly generated by the indexed toll component of our Lakehead System. These indexed volumes are benefited by the fact that the primary basins we serve are short on pipeline capacity. We expect continued high utilization rates on our Lakehead and North Dakota systems, which source their volumes from Western Canada and the Bakken areas, respectively. Our $6 billion of commercially secured growth projects coming into service through 2019 are primarily underpinned by long-term cost-of-service and take-or-pay contract structures and are expected to provide highly certain cash flow growth, transitioning the Partnership to an even lower risk business model. Please turn to slide 7. While we are seeing that certain producers have been adversely affected by the low commodity price environment, it is important to highlight the quality of the Partnership's customer base. Approximately 90% of EEP's shipper customers are investment-grade. The remaining noninvestment grade customers are closely monitored and appropriate measures are taken to mitigate the credit risk. It is also noteworthy that the mainline shippers' [nominate] volumes on a month-to-month basis and our pipeline systems provide a high level of reliability and connectivity to premium markets for these shippers, matching producer supply to the respective crude oil market centers. Our risk management program, the Partnership, actively manages and seeks to mitigate counterparty credit risk. Please turn to slide 8. I will now turn the call back over to Mark to discuss project execution and the Partnership's growth outlook. -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [5] -------------------------------------------------------------------------------- Thank you, Steve, for the quarterly financial review. We are continuing to make good progress in our liquids pipeline market access programs. These projects are designed to enhance pipeline connectivity to the premium North American crude oil markets. Demand for crude oil from Western Canada and the Bakken remains very strong. This means our pipeline systems, with their unmatched market access and low transportation rates, are very much in demand and are often oversubscribed, despite the current crude oil price environment. At times, it seems we cannot expand our pipeline systems quickly enough. A phase of our US Mainline Expansion completed in July 2015 increased our pipeline capacity by an incremental 230,000 barrels per day into Superior, Wisconsin, through the addition of new pump stations along the lines. Next, additional capacity was added to our Line 61 Southern Access line and this was placed into service in October, bringing capacity or capability of Line 61 to 950,000 barrels per day from Superior into Flanagan, Illinois. The final phase of this commercially secured expansion project will ultimately increase capacity to 1.2 million barrels per day and will be aligned with the anticipated in-service date of the Sandpiper project. Looking forward, we are on track to complete our Line 78 Chicago connectivity project later in the fourth quarter of this year, which will add an incremental 570,000 barrels per day of capacity between the pipeline hub at Flanagan, Illinois, and the Griffith, Indiana, refining market. Each of these expansion projects is underpinned by long-term, low-risk cost of service structures that will deliver highly certain earnings and cash flow growth to the Partnership. I would also like to provide a quick update on the Sandpiper project. The regulatory process for our Sandpiper project is proceeding. Earlier this year, the Minnesota Public Utilities Commission, or PUC, unanimously approved the project and granted a certificate of need. Since that time, the Minnesota Court of Appeals reversed the PUC's certificate of need order, stating that an environmental impact statement must be prepared prior to reaching a final decision on the need for the pipeline. The need for this project is very clear. Sandpiper is an important project for Bakken shippers and will add much-needed pipeline capacity out of the region, enabling lower-cost access to key markets in the US Mid-Continent and Eastern Canada. The Company continues to work very cooperatively with permitting authorities, state agencies, elected officials, labor leaders, and the public to bring Sandpiper into service. The expected service date of the project is around the end of year 2017. Let's move forward to slide number 9. Demand for pipeline takeaway from Western Canada and the Bakken regions remain strong. The Canadian Association of Petroleum Producers, or CAPP, continues to forecast increasing crude oil supply from Western Canada, despite the current low crude oil price environment. Oil sands projects typically have a very long-lived and steady production profile. In addition, existing projects are not expected to curtail production, as this is costly and could potentially impact the lifecycle returns of the projects. With regard to North Dakota supply, approximately 75% of the Bakken resource base is located in the 4 core counties, which are served by our pipeline systems. Producer drilling economics in those core counties remains attractive in the current price environment. Hence, demand for pipeline takeaway from the region continues to be robust. There is currently approximately 600,000 barrels per day of crude oil production from the Bakken moving by rail. As a low-cost transportation provider, our pipeline systems are running near capacity and we expect any near-term reductions in Bakken crude oil production to first impact volumes moving on rail. Currently, we are seeing [North Dakota] pipelines running at very high utilization rates. Turning to demand. Volumes in our mainline system continue to increase as additional market access projects enter service. Our pipeline systems are uniquely positioned to offer shippers from Western Canada and the Bakken unparalleled optionality to access markets in Eastern Canada, the Midwest Pad 2, and the Gulf Coast refining centers. With direct or indirect access through third-party pipelines to over 8.6 million barrels per day of refining capacity, the demand pull-through our pipeline systems is tremendous. The enhanced market access created by Enbridge's US Gulf Coast market extension, the Line 9B reversal project to Montreal, and the Southern Access extension to certain markets at Patoka will all facilitate further long-term demand pull for light and heavy crude oil. With high-quality markets connected to our system, shippers have enhanced flexibility to reroute their monthly volume nominations to alternate delivery points should market disruptions recur, like a refinery outage. It is also important to note that the long-term take-or-pay contract structures that underpin Enbridge Inc.'s supply basin takeaway pipeline systems and the downstream systems, such as Line 9B, Flanagan South, and Seaway, serve to pull more volume through our system. Shippers are highly incentivized to utilize this capacity, which serves to push and pull volumes through the pipeline system. And we are sitting squarely in the middle. Please turn to slide number 10. At its recent investor day, Enbridge Inc. noted that it is evaluating a plan to propose systematic selective dropdowns to EEP over the next several years. Our existing organic growth program and the 15% book value call options on jointly funded projects provide momentum to deliver to the high end of our 2% to 5% annual distribution growth target once Sandpiper and the Line 3 replacement projects enter service. Enbridge continues to evaluate these selective drop-down opportunities to EEP and illustrated approximately $500 million of annual dropdowns from 2016 through 2019 at the recent Enbridge analyst days. The selective drop-down opportunities for Enbridge could enable the Partnership to deliver distribution growth above its current 2% to 5% annual growth target. EEP remains an important part of Enbridge's overall strategy, and Enbridge has a substantial inventory of assets that fit very well with EEP. Please proceed to slide 11. Looking ahead, the Partnership's low-risk liquids pipeline business delivers reliable and stable cash flows to our unitholders. Our solid year-to-date financial performance provides us with positive momentum as we progress through the fourth quarter and into 2016. We expect continued high utilization of our liquids pipeline systems, complemented by components of our pipeline expansion programs entering service and those that will begin service here in the near future. We expect to exercise our 15% upsize option on the eastern access project at book at some point during 2016. The support from and alignment with our sponsor Enbridge remains one of the key advantages and helps distinguish EEP from other MLPs. Enbridge continually evaluates opportunities to create value and enhance the growth outlook for EEP. Turning to our gathering and processing business held at Midcoast, significant progress has been made to establish a more sustainable cost platform that enhances the business's competitiveness. Gregg Harper and his team have done a great job reducing the business's annual administrative cost by over $50 million per year. Midcoast is very well positioned to grow and be successful both in this turbulent period and when commodity fundamentals improve. Please turn to slide number 12. In closing, just a few key takeaways. The Partnership's solid year-to-date financial performance gives us confidence that we are on track to deliver the high end of our full-year 2015 EBITDA and distributable cash flow guidance. As we execute our transformative organic growth program, we continue to transition the Partnership to an even lower-risk profile with growing sustainable long-term cash flows to our unitholders. The Partnership has over $6 billion of commercially secured organic growth targeted to enter service by 2019. These projects and others being explored by Enbridge will pull more volumes through our mainline system and may require new infrastructure in our existing pipeline corridors. Finally, the Partnership's current organic growth projects, including Sandpiper and the Line 3 replacement project, the existing upsize options together with selective drop-down potential from Enbridge, provide momentum for the Partnership to deliver distribution growth above its current 2% to 5% annual growth target, a little bit later on in our plan. Therefore, the long-term outlook for the Partnership remains strong. And we appreciate your interest in Enbridge Energy Partners. Andrea, if you could please open the lines for Q&A? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) T.J. Schultz, RBC Capital Markets. -------------------------------------------------------------------------------- T.J. Schultz, RBC Capital Markets - Analyst [2] -------------------------------------------------------------------------------- Hi, good quarter. If we just consider the $500 million per year of potential drop-downs, can you just give us some idea of the assets that are being considered for 2016? Would additional interest in the eastern access be on the call option percentage be the most obvious candidate? And with that continue to be at cost or are you considering other assets sooner? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [3] -------------------------------------------------------------------------------- T.J., really the various assets would certainly have very substantial portfolio at Enbridge that could potentially be dropped down. But the most logical candidates to start with, frankly, are Eastern Access and the Mainline Expansion because it's existing assets on our existing system. You had a later point in time that you could look at other assets, like Flanagan South and Seaway and Toledo, Spearhead, to name a few of the other pipeline systems. But logically, you start with anything on our existing mainline, so EA and ME would make the most sense. As far as what multiple, no real comment on that at this point. A little early to do that. Enbridge has always been very supportive of EEP, but I leave it at that. Book value calls, to start with. We do plan, as noted on the call, to execute that in 2016. And then if we were to add onto that with some additional increment, that would be maybe what would be ideal. But certainly EA or ME would make the most sense. -------------------------------------------------------------------------------- T.J. Schultz, RBC Capital Markets - Analyst [4] -------------------------------------------------------------------------------- Okay. So just to clarify on the distribution, if you are able to execute on the dropdowns above the call options on a consistent basis, is the messaging that you can do better than 5% annual distribution growth? So maybe you deliver higher single digits, but if markets don't cooperate and it only makes economic sense to do the call options and then what you have going on organically, then you stay at that 2% to 5% range? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [5] -------------------------------------------------------------------------------- 2% to 5% with our existing portfolio of assets, including the book value call options. The $500 million dropdowns allow us to advance to the higher end or beyond that range. We also are very specific in our comments here to say that that would be -- higher end of the range is achievable after really Sandpiper and Line 3 enter service. -------------------------------------------------------------------------------- T.J. Schultz, RBC Capital Markets - Analyst [6] -------------------------------------------------------------------------------- Okay, that makes sense. Just lastly: at the investor day, there was some discussion about developing a new business plan for growth along the Gulf Coast. I just wanted to see if you could expand on that from your perspective, how you view the opportunity there. It's obviously pretty competitive. But if you think M&A needs to happen to make a bigger presence quicker or if it will be smaller, more measured. -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [7] -------------------------------------------------------------------------------- Sure. That's going to fall in Guy Jarvis's area of responsibility. Guy, you want to field that question? -------------------------------------------------------------------------------- Guy Jarvis, Enbridge Energy Partners, L.P. - President, Liquids Pipelines, Director of the General Partner [8] -------------------------------------------------------------------------------- Yes. So I think the first thing I would clarify with is the intent is that that new business opportunity is going to be pursued through Enbridge Inc. So it's not a Enbridge Energy Partners venture. To get a bit to your question, I think we are looking at a little bit of everything. We are starting with more of a blank page than a true script as to how we get into that. We do believe that acquisitions of some sort will form the basis of creating the foundation there. But at this point in the game, we don't really have anything right in our sights. -------------------------------------------------------------------------------- T.J. Schultz, RBC Capital Markets - Analyst [9] -------------------------------------------------------------------------------- Okay, fair enough. Thank you. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Shneur Gershuni, UBS. -------------------------------------------------------------------------------- Shneur Gershuni, UBS - Analyst [11] -------------------------------------------------------------------------------- Just a couple quick questions here, more about the growth rate in dropdowns. Starting off, you basically mentioned interest in accelerating your distribution growth rate. Can you balance that decision against your coverage expectations, X the PIK units? Is there a target in mind? Do you wait for coverage to exceed 1.0 times? If you can just walk us through that thought process, given that the market seems to be more preferring coverage these days versus growth? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [12] -------------------------------------------------------------------------------- Sure. Certainly, we look to balance those two things together. When we analyze our distribution growth outlook and our plans for distribution, we are very focused on what the long term tells us. And this means projects as they come into service, what our expectations are as far as cash flow growth, what we expect from our base system performance, cost of financing, and all that goes into the equation. And so we look at what we can sustain over the long run, and that is the basic premise over the top. From a coverage perspective, we've gone through periods of this in our past, where you are sub 1 times for a period of time and you work your way back into coverage. Certainly, our target would be like a 1.05 to 1.10 for EEP over the long run. If it takes us a couple years to get there, that's fine. So what I think you would see is likely to be quicker a little bit this year. We had some balancing off of coverage improvement year over year along with paying out to the investors. So probably in the near term, as I alluded to in the previous question, we will be in the 2% to 5% range. Maybe it's on the closer end, the lower end of that, to start with. And then transition to higher end, again, as Line 3 and Sandpiper come into service. Those are very important projects to us. They are obviously big capital projects and they are attractive and accretive. And once those are -- we are clear of those, together then with dropdowns, I think it becomes much easier for us to go beyond the 5%. -------------------------------------------------------------------------------- Shneur Gershuni, UBS - Analyst [13] -------------------------------------------------------------------------------- Okay. And then as a follow-up, your comments on selling at book value, when I think about the math of depreciation against net PP&E, it does suggest that it could be a fairly low drop value. Am I thinking about this correctly? Could we see some fairly favorable multiples when it comes to drops on an EBITDA basis? Any sense on what it would be like versus historical ranges or what it would be versus, let's say, what an organic project would do for you and so forth? Would be more accretive to that; less accretive? Just a little bit of color on how that will play out? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [14] -------------------------------------------------------------------------------- Sure. Well, again, our projects, the type of projects that we are dropping, are very long-lived cash flow. So the profile associated with them typically is 30-year type of recovery of capital. So your EBITDA multiple by definition there will be a little bit 8-ish, 9-ish kind of range. And those are book value type numbers. So that's what you would expect to see really, probably, on the book value drops would be 8 or 9. And with respect to long run, again, those are very sustainable long-term rectangles of cash flow that come with those projects. -------------------------------------------------------------------------------- Shneur Gershuni, UBS - Analyst [15] -------------------------------------------------------------------------------- Okay. And one last question. When I was looking at slide number 10, where you talked about your selective dropdowns and hence distribution growth outlook, you have a grey bar and a blue bar number, the base plan, and then with dropdowns. The 5%-plus CAGR -- am I reading that correctly that that's basically the base plan and the dropdowns would be incremental to that? Or does the 5%-plus include both? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [16] -------------------------------------------------------------------------------- The 5%-plus would include both. -------------------------------------------------------------------------------- Shneur Gershuni, UBS - Analyst [17] -------------------------------------------------------------------------------- Would include both? Great. Thank you very much, guys. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- John Edwards, Credit Suisse. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [19] -------------------------------------------------------------------------------- Congrats on a nice quarter. Just coming back to the dropdown trajectory question and specifically going back to your slide 10, so you show selective dropdowns, $500 million a year starting in 2016. But from your commentary, you are pretty emphatic on Line 3 replacement and Sandpiper expansion. So is it correct to assume that the $500 million a year would be really after Sandpiper and Line 3 replacement? Or are there going to be some options to drop some of this stuff in beforehand, like your slide 10 illustrates? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [20] -------------------------------------------------------------------------------- The illustration on slide 10 is the base plan, John. If something was said that lead you to think otherwise, that wasn't the intent. So that's bad word selection, probably, on my part. But the idea here is that you would see, as laid out on the slide, a book value call on EA and then the selective dropdown from the parent of circa $500 million. The only thing I was trying to allude to with the migration beyond 5% is we really don't see that happening until after Sandpiper is in service and Line 3 is in service. It really goes to the point, which I think others have raised, which is you've got to balance off coverage and growth. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [21] -------------------------------------------------------------------------------- Okay. So what you are really getting at is you are in the base 2% to 5% until after Sandpiper and Line 3 replacement. And the above 5% would really be from these additional selective dropdowns, 2018 and beyond -- or 2017 and beyond, I guess? Is that correct? -------------------------------------------------------------------------------- Steve Neyland, Enbridge Energy Partners, L.P. - VP, Finance [22] -------------------------------------------------------------------------------- Yes. Got it, John. Correct. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [23] -------------------------------------------------------------------------------- Okay. And then with the permitting on Sandpiper, you are still expecting that expansion to come on toward the end of 2017? Is that correct? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [24] -------------------------------------------------------------------------------- Around the end of 2017 -- year-end 2017. Around year-end 2017. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [25] -------------------------------------------------------------------------------- Okay. And then just on a housekeeping item, just so we can confirm our math. So net of joint funding, what have you spent at EEP so far this year, the CapEx? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [26] -------------------------------------------------------------------------------- Steve is going to dig for that, so maybe we will come back to that question in a little bit, John. Any other ones? We got to scratch around to find the net number. (inaudible) the financial, which is growing. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [27] -------------------------------------------------------------------------------- Just the only other one would be -- we talked a little bit about this on the Midcoast call. Just in terms of managing your stake in Midcoast, there's obviously been discussion at the Midcoast level about planning to say -- have a dropdown of a share from EEP this year. So the issue is, if capital markets don't cooperate, how are you thinking about contingencies there? And would you consider -- from our calculations, it looks like you can support the distribution trajectory at MEP without dropping down anything in 2016 if capital markets require that. Would that be more or less the way to go? Or how should we be thinking about that? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [28] -------------------------------------------------------------------------------- I think our base plan, John, is going to be -- as laid out before, we announced the support actions from Midcoast. First off, of course, we intend to invest alongside Midcoast on projects that they undertake. Gregg Harper has done a superb job of bringing cost out of the business and positioning it for the future. So you have seen that business performance perform very well in the last 3-4 quarters under his leadership. So I think you're going to start to see the business be rewarded for that. I'd expect equity cost to come down. EEP has indicated it's going to be supportive of what Midcoast is doing. And if a dropdown makes sense, EEP has prepared to take equity back as part of the way to make that happen. We also said we would make it attractive to the LP unitholder in Midcoast. The base plan is we still want to do a dropdown. If for some reason capital markets are a mess, then maybe you wait. But our base plan is, assuming that Gregg continues to progress in the business, he sees opportunities out there that he can execute on. And EEP has said it's going to be supportive. So that's our base plan. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [29] -------------------------------------------------------------------------------- Okay, fair enough. That's all I have. If we need to come back off-line on the other housekeeping item, we can do that. -------------------------------------------------------------------------------- Steve Neyland, Enbridge Energy Partners, L.P. - VP, Finance [30] -------------------------------------------------------------------------------- Yes. Really quick, John, the year-to-date net spend is in and around about $600 million for the year, which is comparable to the $1.1 billion that's on slide 4. So on a run rate basis, a little bit more spend coming at the fourth quarter. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [31] -------------------------------------------------------------------------------- Okay, great. Thank you very much. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Brian Zarahn, Barclays. -------------------------------------------------------------------------------- Brian Zarahn, Barclays Capital - Analyst [33] -------------------------------------------------------------------------------- Can you provide some additional color on the reduction in 2015 expansion CapEx, especially in the other liquids projects? Have any projects been canceled? Or how do they change in scope? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [34] -------------------------------------------------------------------------------- Steve, want to field that? And I think a lot of it, Brian, is just going to be timing. And keep in mind that some things have been delayed because of regulatory process or so forth. These are -- and we tend to probably err a little bit on the side of some money gets spent as opposed to not. And so some conservatism is there for financing plan reasons and others. But nothing of any consequence, Steve, has been canceled, has it? -------------------------------------------------------------------------------- Steve Neyland, Enbridge Energy Partners, L.P. - VP, Finance [35] -------------------------------------------------------------------------------- Yes, I think -- no, nothing has really been canceled. If you go to slide 4 and if you were to lay out last quarter's forecast -- which I'm sure you are probably doing, Brian -- there's $170 million change this quarter to last quarter. And over half of that actually has been what we call liquids other growth enhancements, which is a number of different smaller projects that we have. Those could -- tankage work that we have, API-653 work, and valve replacements and other aspects. So really just a function of timing. And as Mark notes, probably a little bit of conservatism that comes out about this time of year. So that's the predominant driver. And everything else is really smaller amounts on be it Sandpiper, natural gas growth and Line 3; each for about $20 million to $25 million apiece and change. So I'd call it refinement at this point. -------------------------------------------------------------------------------- Brian Zarahn, Barclays Capital - Analyst [36] -------------------------------------------------------------------------------- And then staying on Sandpiper for moment, and appreciate the update. Given the unfortunate tendency for permitting to be taking longer than expected for a variety of projects in the infrastructure sector, how comfortable are you with year-end 2017? And at what point does the cost of the project get impacted by the delay? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [37] -------------------------------------------------------------------------------- Well, certainly, the cost of the project is to a degree going to be affected by timing, of course, and when you can fit the construction windows in and so forth. But I would say this: the need for the project is still absolutely clear. You look at how much volume is moving on rail today. The market that this pipeline is intended to serve in the Pad 2 region, in particular, the customer support is very strong and understanding of the regulatory process in the state of Minnesota. So we expect, Brian -- we said around end of year 2017. And that's still our expectation. -------------------------------------------------------------------------------- Brian Zarahn, Barclays Capital - Analyst [38] -------------------------------------------------------------------------------- Thanks, Mark. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Sunil Sibal, Seaport Global. -------------------------------------------------------------------------------- Sunil Sibal, Seaport Global Securities - Analyst [40] -------------------------------------------------------------------------------- Congrats on a solid quarter. A couple of questions from me. First, looking at the Bakken volume, seems like there was a bit of a sequential downtick there. I was wondering is that just a function of what all we are seeing in Bakken or anything else that we should figure into that? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [41] -------------------------------------------------------------------------------- Let's go to Guy Jarvis for that one, if that's all right. Guy, can you field that? -------------------------------------------------------------------------------- Guy Jarvis, Enbridge Energy Partners, L.P. - President, Liquids Pipelines, Director of the General Partner [42] -------------------------------------------------------------------------------- Yes. So a couple things to make clear. First off is our legacy North Dakota System has continued to be full throughout this period. So we're not seeing any reductions on the legacy system at all. We have been experiencing, not just recently but over the last year or so, that volumes we have under contract out of the Bakken that come north back into Canada into our mainline at Cromer, Manitoba, and then move down on the mainline have been less consistent in terms of their throughputs. And I think that's really what you are seeing is that our customers are making month-by-month decisions in terms of which direction they want to take that crude. So you are right; on the surface, it would appear there's a bit of erosion. But I think it's important to note that we do have demand charge coverage on those assets that are -- where we are experiencing this bit of variability. So it's not having much of a bottom-line impact. -------------------------------------------------------------------------------- Sunil Sibal, Seaport Global Securities - Analyst [43] -------------------------------------------------------------------------------- Okay, got it. And then on your storage demand, seems like a lot more volumes have been directed at Cushing and some of the regions. So I think you've talked about some storage projects. I was just kind of curious how do you look at your storage position in Cushing and anything that you need to update there in terms of capacity, etc. -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [44] -------------------------------------------------------------------------------- Guy, you want to take that one as well? -------------------------------------------------------------------------------- Guy Jarvis, Enbridge Energy Partners, L.P. - President, Liquids Pipelines, Director of the General Partner [45] -------------------------------------------------------------------------------- Sure. Well, two comments. We are seeing a lot of activity through Cushing; obviously a lot more of what we would characterize as operating type use of the storage facility as opposed to the pure trading around the storage facility. So we are always looking at our situation there in terms of how much we've got, when we have new capacity coming available for contracting, and whether in fact we should be adding -- I think as we talk here today, we don't have a plan to be expanding our position. But it's something we're always looking at. -------------------------------------------------------------------------------- Sunil Sibal, Seaport Global Securities - Analyst [46] -------------------------------------------------------------------------------- Okay. That's helpful. And then lastly on the financing, a question for Steve Neyland. How should we be thinking about your financing for organic growth as well as potential dropdowns at EEP, especially if the capital markets on the MLP side remain constrained? Any thoughts on ENB taking back equity in order to facilitate those? -------------------------------------------------------------------------------- Steve Neyland, Enbridge Energy Partners, L.P. - VP, Finance [47] -------------------------------------------------------------------------------- Yes. No real thoughts around the Enbridge taking back equity. But one of the things I would point you to is one of the key aspects we are using to manage our financing requirements is the Line 3 joint funding. So that's something to keep a careful eye on here over the next little while as the special committee looks to complete their work. And so that's a variable that we can move within EEP to ensure that our financing requirements are manageable. And certainly this year, I would classify what we've done this year as being manageable. And then as it relates to the equity markets, which certainly have a life of their own right now, we keep a careful eye on that. But given the vast amount of liquidity that we have in place, we are able to pick our points associated with that. So a lot of flexibility as it relates to that. So I think we're well positioned. And so more information to come, certainly on the financing front once we complete and conclude upon the Line 3 special committee work. -------------------------------------------------------------------------------- Sunil Sibal, Seaport Global Securities - Analyst [48] -------------------------------------------------------------------------------- All right. That's [a lot]. Thanks, guys, and congrats again on a solid quarter. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- Faisel Khan, Citigroup. -------------------------------------------------------------------------------- Faisal Khan, Citigroup - Analyst [50] -------------------------------------------------------------------------------- Just a few questions. When you guys closed on the debt offering that you had last month, the 30-year paper was I think around 7.3% or [not under the water] 7.5%, which was higher than when you've raised debt before in the past. So I was just wondering how does that -- does that get passed through in your cost of service contracts, the higher cost of debt in the current environment as credit spreads have widened out? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [51] -------------------------------------------------------------------------------- What we do is typically the deals that we have in place, the commercial structures around the various expansion projects are generally reliant on EEP's overall weighted average cost of debt, its WACD. So it would get picked up to a degree in that. Sometimes you win; sometimes you lose against that equation. So the blended offering is probably in the general time zone of the average, maybe a little higher. But that's how we would handle that. Typically, as you issue bonds, it goes into your WACD and that's what you apply against the rate base. There's I think one exception to the role -- I believe it's Alberta Clipper, that there is a specific series of debt that is tied to that particular project. But generally speaking, it's a WACD. -------------------------------------------------------------------------------- Faisal Khan, Citigroup - Analyst [52] -------------------------------------------------------------------------------- Okay. So then we definitely will see some -- assuming that this financing is being used for most expansion capital that that should be passed -- most of the higher cost of financing should be passed through on the cost of certain contracts? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [53] -------------------------------------------------------------------------------- Yes. In a perfect world, it would work that way. I think the ideal would be always tie the debt issuance to a particular project. But that's hard to do as a general corporate purposes and others. So we just use the WACD. -------------------------------------------------------------------------------- Faisal Khan, Citigroup - Analyst [54] -------------------------------------------------------------------------------- Okay, okay. On the volumes in the quarter, which were fairly strong, I'm just wondering didn't seem like there was any sort of impact to the quarter from the BP Whiting downtime. I'm just wondering if you were able to reroute volumes or something. What happened in the quarter so that you were able to avoid that sort of outage? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [55] -------------------------------------------------------------------------------- Sure. Just generally speaking, one of the nice things about our system -- and we touched on this in our commentary and this is an example of that -- were, without speaking to any particular refinery, you see volume reroute on the system. Keep in mind: we are attached to 8.4 million barrels a day of refining capacity through different systems and we got a lot of flexibility to move volumes elsewhere. So that's one of the key things about moving on Enbridge versus a lot of other people is you've got other markets to go to, if there's an issue. -------------------------------------------------------------------------------- Faisal Khan, Citigroup - Analyst [56] -------------------------------------------------------------------------------- Okay. Any impacts from the cancellation of Carmen Creek for you guys? It was a shale project that was recently canceled. -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [57] -------------------------------------------------------------------------------- Guy, you want to field that one? -------------------------------------------------------------------------------- Guy Jarvis, Enbridge Energy Partners, L.P. - President, Liquids Pipelines, Director of the General Partner [58] -------------------------------------------------------------------------------- Yes. We had -- in our forecast, we had Carmen Creek Phase 1 in our forecast. But it didn't show up until 2022, so nothing of any consequence prior to that. -------------------------------------------------------------------------------- Faisal Khan, Citigroup - Analyst [59] -------------------------------------------------------------------------------- Okay, fair enough. And then last question from me. The commentary from some of the Canadian rail companies on reducing their tariffs and trying to attract more business back to their lines. Can you just comment on what kind of impact that could have to you guys or what you are seeing from that competitive force? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [60] -------------------------------------------------------------------------------- Well, I think generally -- yes, go ahead, Guy, please. Take that. -------------------------------------------------------------------------------- Guy Jarvis, Enbridge Energy Partners, L.P. - President, Liquids Pipelines, Director of the General Partner [61] -------------------------------------------------------------------------------- I was just going to say I think the best way to look at that from our perspective is that any barrel of heavy oil that we can move, we are getting it. We are full on our heavy side. We are continuing to be apportioned from time to time. If you look at a Canadian barrel of heavy getting railed to the Gulf Coast versus going on pipeline, there's upwards of a $10 per barrel advantage on the pipeline. So I don't know just how deeply the railroads think they can go, but there's a long ways to go before they can be more competitive than the pipelines. -------------------------------------------------------------------------------- Faisal Khan, Citigroup - Analyst [62] -------------------------------------------------------------------------------- Okay. Thanks for the time. Appreciate it. -------------------------------------------------------------------------------- Operator [63] -------------------------------------------------------------------------------- Sharon Lui, Wells Fargo. -------------------------------------------------------------------------------- Sharon Lui, Wells Fargo Securities, LLC - Analyst [64] -------------------------------------------------------------------------------- Based on your full-year guidance and year-to-date results, this kind of implies sort of flattish Q4 EBITDA. What are maybe some of the factors that could offset, I guess, the expected increase in maybe liquids volumes? -------------------------------------------------------------------------------- Steve Neyland, Enbridge Energy Partners, L.P. - VP, Finance [65] -------------------------------------------------------------------------------- Yes, this time of year, we have some seasonal maintenance that occurs on the liquids side of things. So we expect basically our repairs and maintenance cost to be a little bit higher. As well, some integrity spending that we have on the go that we have scheduled will also increase our run rate on expenses. And then finally, the recent debt offering that we did will increase interest expense from what we saw prior in the year. -------------------------------------------------------------------------------- Sharon Lui, Wells Fargo Securities, LLC - Analyst [66] -------------------------------------------------------------------------------- Okay, that's helpful. And Steve, maybe if you could just comment on how you are treating the Line 2 hydro test expenses as a nonrecurring item versus maybe like a maintenance CapEx spending? -------------------------------------------------------------------------------- Steve Neyland, Enbridge Energy Partners, L.P. - VP, Finance [67] -------------------------------------------------------------------------------- Sure. So the Line 2 hydro is a very unusual and unique circumstance for us as it relates to the magnitude of this hydro. And so based upon that, we have taken into account of normalizing those amounts as not being typical of our run rate. So what we have in the quarter is we have a couple things. We have the cost that we've incurred as it relates to the Line 2 hydro. And there will be some more of that cost that will show up in next quarter. But the predominant amount of about $50 million this quarter is in there. And then offsetting that is we get a 50% recovery on that cost from our shippers. So we have about -- and the revenue is taken over a longer period of time. So we have $8.5 million of revenue. So you are roughly about, I think, a $42 million net number in there. And so there's a couple of components. And then in future periods, we will have this revenue collection that will occur and we will also normalize that out when we get into future periods. -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President and Principal Executive Officer [68] -------------------------------------------------------------------------------- Our preferred method of testing pipeline integrity is through internal inspection tools. And those are charged to expense as we run those tools. So the higher testing is not, again, like our preferred method. In this instance, we did it on Line 2. And it's unusual in terms of dollars being spent on this particular test. So that's one of the reasons. It's not really a run rate item. That's why we normalized it out. -------------------------------------------------------------------------------- Sharon Lui, Wells Fargo Securities, LLC - Analyst [69] -------------------------------------------------------------------------------- Okay. That makes sense. And then just housekeeping -- if you could repeat what the year-to-date total CapEx expenditures have been net to EEP? -------------------------------------------------------------------------------- Steve Neyland, Enbridge Energy Partners, L.P. - VP, Finance [70] -------------------------------------------------------------------------------- Yes. We are running our numbers a little tighter, so we will take this as an approximate. I think we probably had -- and John Ed -- I'm glad you brought up the question. The number we gave to John Edwards was a little bit light. So we are about $800 million year-to-date net spend. And that compares to the when you go to slide 4, which is $1.13 billion. So I think -- and again, we've had a few refinements in our full-year forecast, again, just refinement of process as we get towards the last quarter of the year. -------------------------------------------------------------------------------- Sharon Lui, Wells Fargo Securities, LLC - Analyst [71] -------------------------------------------------------------------------------- Okay, great. Thank you. -------------------------------------------------------------------------------- Operator [72] -------------------------------------------------------------------------------- This concludes our Q&A session for today. I would now like to turn the call back over to Mr. Lad for any further remarks. -------------------------------------------------------------------------------- Sanjay Lad, Enbridge Energy Partners, L.P. - Director, Investor Relations [73] -------------------------------------------------------------------------------- Okay. Thank you, Andrea. We appreciate your interest in Enbridge Energy Partners and thank you for participating on today's conference call. I would like to remind you that my team and I will be available for any follow-up questions you may have. Thank you and have a great day. -------------------------------------------------------------------------------- Operator [74] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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