HOUSTON Jul 31, 2015 (Thomson StreetEvents) -- Edited Transcript of Enbridge Energy Partners LP earnings conference call or presentation Thursday, July 30, 2015 at 9:00:00pm 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 * Steve Neyland Enbridge Energy Partners, L.P. - VP, Finance * Guy Jarvis Enbridge Energy Partners, L.P. - EVP, Liquids Pipelines, Director of the General Partner ================================================================================ Conference Call Participants ================================================================================ * Sunil Sibal Global Hunter Securities - Analyst * Brian Zarahn Barclays Capital - Analyst * John Edwards Credit Suisse - Analyst * Ross Payne Wells Fargo - Analyst * Sharon Lu Wells Fargo - Analyst * Shneur Gershuni UBS - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to Enbridge Energy Partners Second Quarter 2015 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) And as a reminder, this conference call is being recorded. At this time, I would like to hand the conference over to Mr. Sanjay Lad, Director of Investor Relations. Sir, you may begin. -------------------------------------------------------------------------------- Sanjay Lad, Enbridge Energy Partners, L.P. - Director, Investor Relations [2] -------------------------------------------------------------------------------- Thank you, Syed. Good afternoon and welcome to the 2015 second 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 Investor section of our website at enbridgepartners.com. A replay will be available later today, and a transcript will be posted to our website shortly thereafter. As a reminder, the Partnerships' 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 Mr. Mark Maki, President and Mr. Steve Neyland, Vice President, Finance. Available for the Q&A session, we also have Mr. Guy Jarvis, Executive Vice President, Liquids Pipelines; Mr. Greg Harper, Executive Vice President, Gas Pipelines and Processing; Mr. Jonathan Rose, Treasurer; and Ms. Noor Kaissi, Controller. Moving forward to slide two, our legal notice. This presentation will include forward-looking statements. Any statements made or discussed today that do not constitute or are not historical facts, 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 news release and the Partnership's 2014 Annual Report on Form 10-K and subsequently filed quarterly report on Form 10-Q. This presentation also contains certain non-GAAP financial measures. The reconciliation schedules for these non-GAAP measures to comparable GAAP measures can be found in the Investor section of our website. Please turn to slide two. I will now turn the conference over to Mr. Mark Maki, President. -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President [3] -------------------------------------------------------------------------------- Well, thank you, Sanjay. Good afternoon and welcome. We're pleased with the Partnership's solid start to the first half of 2015. Today, we announced a 2.3% increase in our cash distribution over the prior quarter, and together with the Alberta Clipper drop-down increase, our cash distribution level is approximately 5% greater than the second quarter of 2014. On the call today, I'll provide an update on project execution, discuss the Partnership's strategic outlook, and then touch on actions we've announced and our planning for the future to strengthen Midcoast Energy Partners, Midcoast or MEP. I'll then transition the call over to Steve, who'll present our second quarter financial highlights. Please turn to slide number three. Let's start with our Market Access growth projects. We are continuing to make good progress in our liquids pipeline Market Access programs. These programs are designed to enhance pipeline connectivity to premium North American crude oil markets. Demand for crude oil and pipeline capacity from Western Canada and the Bakken remains very strong. In particular, throughout the quarter, our heavy oil pipeline capacity was fully utilized. Steve will provide more information on our volume performance in his section of the call. Our Market Access projects, by themselves, provide us with great momentum to achieve the higher end of our 2% to 5% annual cash distribution growth target later on in our planning horizon. Slide three outlines components of our US Mainline Expansion series of projects and their respective target and service dates. We recently completed two key components of our Mainline Expansions. First, our Line 61 Southern Access expansion to 800,000 barrels per day between Superior, Wisconsin and Flanagan, Illinois entered service in May. Second, in July, we increased the capacity of our Line 67, Alberta Clipper pipeline to 800,000 barrels per day. Looking forward, we are on track to complete our Line 78 Chicago Connectivity project, which will add an incremental 570,000 barrels per day capacity between the pipeline hub at Flanagan, Illinois and the Griffith, Indiana refining market, later this year. 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. Let's move forward to slide number four. During the quarter, the Partnership achieved an important milestone in our $2.6 billion Sandpiper Pipeline Project. In June, the Minnesota Public Utilities Commission approved the project Certificate of Need. The approximately 600-mile pipeline project will transport Bakken crude from the Partnership's Beaver Lodge Station, which is south of Tioga, North Dakota to Clearbrook, Minnesota through a 24-inch diameter pipeline. A 30-inch diameter pipeline will connect Clearbrook to our terminal at Superior, Wisconsin. 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. We continue to work cooperatively with the permitting authorities, state agencies, elected officials, and the public to bring Sandpiper into service. The next key phase of the project is the route approval process. In Minnesota, an Administrative Law Judge, or ALJ is expected to set the schedule for the route approval proceedings in the third quarter of 2015. These proceedings will evaluate the preferred route and its alternatives that connect the Clearbrook, Minnesota terminal and the Superior, Wisconsin pipeline terminal. Subject to regulatory and other approvals, we estimate that the in-service date for the Sandpiper Project will occur during 2017. This project is very attractive to EEP and our partner, Marathon. Sandpiper has a base level return, secured through a long-term take or pay arrangements. Atop that base level of return, incremental return will be generated by spot volumes and market demand pull associated with downstream Market Access projects at Enbridge. A good example of this is the Line 9B project to Montreal and these Southern Access extension that will serve the markets in the Patoka region. Please turn to slide number five. Turning to the drop-down outlook from Enbridge, from a unit price perspective, the valuation perspective in particular, 2015 to-date has been tough on most everyone in the MLP sector. Current market conditions, relative valuations have deteriorated from the time we announced that we were exploring a large scale drop-down strategy with our parent, Enbridge Inc. For the strategy to be effective for both Enbridge and EEP, EEP's cost to capital needs to improve. With EEP's current cost to capital, management believes that a large scale drop-down program from Enbridge will not be initiated this year given the current market conditions. EEP remains very important to Enbridge's overall strategy and Enbridge is continuing to carry forward certain actions to support EEP during this time of significant organic growth. Enbridge has demonstrated strong support of EEP in the past with constructive actions such as the equity restructuring, the initial effort of our drop-down transaction, joint funding of pipeline expansion projects and more recently, the extension of the distribution deferral period of our Series 1 preferred units among other actions and Steve will talk about the Series 1 preferred actions in his comments. Enbridge has a very substantial inventory of assets that fit very well with EEP. When those assets are dropped-down, they want the returns to our EEP unitholders to be attractive. In the current environment, on a large scale, this is not likely practical. In the interim, we're working at ways to lower EEP's cost of capital and position EEP to accept selective drop-downs from Enbridge. Good examples of this selective drop-down strategy include future drop-down call options in the Eastern Access and Mainline Expansion series of projects, whereby EEP may increase its participation in these attractive projects by an incremental 15% at cost. The recent Alberta Clipper drop-down is another good example of the selective drop-down that was beneficial to EEP unitholders holders. Please now proceed to slide number six. We recently announced actions that we expect will continue to strengthen Midcoast, enhance its ability to deliver distribution growth through 2017. Midcoast is strategic to EEP. Reestablishing Midcoast as a drop-down MLP will enhance EEP's future funding sources for our liquids pipelines growth projects. One key action of note is EEP has entered into an amendment of Midcoast Operating or Midcoast Operating Limited Partnership agreement to allow for increased allocations of distributable cash flow to Midcoast through 2017. This amendment affects the distributions related to the quarter ended June 30, 2015 through the quarter ended December 31, 2017. If Midcoast has a DCF result that is less than 1.0 times distribution coverage for any quarter, EEP will forego a portion of its quarterly distribution from Midcoast operating to help MEP achieve a 1.0 times distribution coverage. EEP will also support up to a $0.005 per unit per quarter increase in MEPs distribution. The expected net cash impact to EEP over the period is expected to be nominal and there'll be no requirement for Midcoast to reimburse EEP for any of these adjusted distributions. Any foregone distributions will be an adjustment to EEP's book capital account in Midcoast. There will not be any impact to the tax basis of the Midcoast or EEP unit holders as a result. These actions will enhance both MEP's ability to deliver distribution growth through 2017 and maintain a 1.0 times distribution coverage. Next, in 2016, EEP is planning to resume the drop-down strategy of transferring additional ownership interest in Midcoast operating to MEP. EEP expects to present the next drop-down proposal to the Board of MEP's General Partner in 2016 with economic terms redesigned to provide attractive accretion to the MEP unit holders. To help defray MEPs prospected funding requirements, EEP will consider recede of MEP equity for some or all for the consideration for the next drop-down to MEP. That is strategic to EEP and these initiatives are designed to help MEP navigate through the current environment of weak commodity price fundamentals. The management team at MEP continues to make solid progress to strengthen Midcoast operating by pursuing meaningful cost-reduction measures, divesting of non-core assets, and strengthening the gas segment's cash flow certainty. The measures being enacted and planned will provide value to EEP unitholders through improved performance in the natural gas business and lowering our external financing needs by reestablishing MEP as a drop-down partnership. Please turn to slide seven. I'll turn the call over to Steve to discuss our first quarter financial results. -------------------------------------------------------------------------------- Steve Neyland, Enbridge Energy Partners, L.P. - VP, Finance [4] -------------------------------------------------------------------------------- Thank you, Mark. We are pleased with Partnership's solid start in the first half of 2015. Our second quarter financial performance is attributable to strong cash flow contributions from the completion of portions of our multi-billion dollar organic growth program, as well as continued strong deliveries on Lakehead and North Dakota liquids pipeline systems. Starting with the financial results table on left of the slide; for the second quarter, the Partnership reported adjusted EBITDA of $422.4 million and distributable cash flow of $231.6 million representing a 17% and 19% increase over the second quarter of 2014. Second quarter adjusted net income of $120.5 million was $13.4 million higher than the second quarter 2014. Higher earnings were primarily attributable to additional assets placed into service, the Partnership's drop-down acquisition of the 66.7% interest of the US segment of the Alberta Clipper pipeline from Enbridge and higher revenues attributable to an increase in deliveries on our liquids pipeline systems. Our as declared distribution coverage ratio through the first half of 2015 on a cash basis was 1.14 times and 0.96 times assuming inclusion of paid-in-kind distribution. For the second quarter, cash coverage was 1.07 times and 0.9 times, assuming inclusion of the paid-in-kind distribution. Our debt-to-EBITDA metric at the end of the second quarter was 4.4 times, which considers 50% equity treatment for the hybrid financing instruments we currently have in place. As it relates to our credit facility compliance parameters, which attribute 100% equity treatment for the hybrids, we are comfortable in compliance with those leverage requirements. The main items eliminated from these adjusted results include unrealized non-cash mark-to-market net gains and losses. a non-cash goodwill impairment in our natural gas business and other items noted in our supplemental slides. During the second quarter, an analysis for the impairment of goodwill is performed for our natural gas business, after we learn from customers that reductions in drilling will be prolonged in the producing basins in which we operate due to the continued low commodity price environment. As a result of this analysis, it was concluded that $246.7 million of goodwill was impaired. I would now like to transition to the Partnership's operational highlights. Total liquids system deliveries increased approximately 8% over the second quarter of 2014 to just under 2.8 million barrels per day. Our heavy oil pipelines continue to run at or near capacity with many of the lines being oversubscribed or in apportionment due to continued growth in oil sands production and strong demand for heavy crude in the US Midwest and along the Gulf Coast. The Partnership's Lakehead system facilities expanded pipeline connectivity to these key refining centers and is supported by the demand pull from Enbridge's market extensions pipelines for heavy capacity through the Flanagan South pipeline and Seaway system. Deliveries on our Lakehead system for the second quarter averaged 2.2 million barrels per day. Relative to the first quarter of 2015, Lakehead delivery decreased approximately 122,000 barrels per day, primarily due to light oil upgrader maintenance in Western Canada during the second quarter. Looking forward to Lakehead deliveries during the second half of 2015, the upgrader maintenance activities have concluded and 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 remain strong, complemented by additional mainline system expansions as well as expected startup of Enbridge's Line 9B projects to Montreal and the Southern Access extension to serve markets at Patoka. Deliveries on both our North Dakota and Mid-Continent systems strengthened over the first quarter of 2015 to 365,000 and 221,000 barrels per day respectively, due to continued strong demand for oil pipeline capacity from our customers. In the Bakken, while there has been a reduction in the number of drilling rigs within the basin, we continue to see rig activity in the core regions remaining active and our mainline deliveries remained strong as these light volumes move downstream to the refining centers. Looking ahead to the third quarter, we expect to incur operating costs associated with the conducting a scheduled hydrostatic test on our Line 2 as part of our ongoing integrity initiatives. The expected cost of the hydro test has increased approximately $15 million and is now expected to cost approximately $85 million. We are able to recover 50% of such cost through our tariff and we began collecting a portion of these costs in the second quarter and will continue to collect amounts through 2016 on our tariffs. We intend to normalize the net unrecovered costs associated with hydro test. As noted earlier by Mark, we are pleased with the completion of our Line 61 and 67 mainline expansions during the second quarter and these projects are expected to increase the utilization of our Lakehead system in the second half of the year. The defensive nature of the Partnership's earnings and cash flow foundation position us to successfully navigate through the low crude oil price environment. We have built the liquids pipeline segment of our business using a low risk business model. Our organic growth program is predominantly underpinned by cost of service arrangements and several take or pay commercial frameworks. In addition, we benefit from the demand pull of volumes through our system from the Market Access projects of Enbridge and its subsidiaries. Finally, demand for crude oil and pipeline capacity from Western Canada and Bakken remains strong, as our liquid pipeline systems provide a high level of reliability and connectivity to meet crude oil transportation need of our customers. Shifting our attention to the right portion of slide seven, into key development. Our limited partnership agreement has been amended to restructure the terms of the Series 1 preferred units to strengthen the Partnership's near to medium term distributable cash flow outlook. The amendment extents the payment deferral for distributions accruing for the Series 1 preferred units through June 30, 2018 and alters the repayment schedule of those deferrals to allow repayment of the accumulated deferral amount in equal amounts over a 12-quarter period beginning in early 2019. Thus there are two key changes here. First, our cash payments to Enbridge will not begin until the third quarter of 2018. Previously, this was expected to occur in the third quarter of this year. This is an extended three-year deferral of cash payments, which are expected to be $90 million per year. Second, the payment of the total accumulated deferred distribution amount would now be expected to occur over a 12-quarter period commencing in early 2019. Previously, the total accumulated deferred distribution amount was expected to occur in mid-2018. Additionally, the amendment extends the rate reset of this instrument until June 30, 2020. These adjustments are designed to strengthen the Partnership's distributable cash flow outlook in the interim and align with the target in service period of our Sandpiper pipeline project and the completion of our announced Lakehead system expansions. While these actions are expected to enhance the Partnership's distributable cash flow in 2015 by approximately $45 million, a portion of the benefits is expected to be offset by further refinements to our full year financial outlook. As such, we expect our previously communicated full year 2015 distributable cash flow and coverage outlooks to remain intact at between $900 million to $960 million with 2015 full year coverage to be between 0.9 to 0.96. times. Please turn to slide eight. This slide provides our forecasted 2015 capital expenditures. We expect capital expenditures to be approximately $1.3 billion, which includes $80 million of maintenance capital. These expenditures are represented net of joint funding. Our 2015 capital expenditure forecast was modestly increased due to refinements of our anticipated capital spend profile. The funding needs of our base capital program remain manageable. At the end of the second quarter, we had over $1 billion of available liquidity. We intend to continue to prudently manage our balance sheet and maintain our investment grade credit ratings. Please turn to slide nine. I'll turn the call back over to Mark for his closing remarks. -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President [5] -------------------------------------------------------------------------------- Thank you, Steve. Just a few points of emphasis in closing. We expect the Partnership's solid start to 2015 to provide positive momentum as we progress our way to the second half of 2015. We anticipate the deliveries in our liquids pipeline systems will remain strong, complemented by the recent pipeline expansions that we placed in service, and our systems reliability and connectivity to the premium North American crude oil markets. One key item I'd like to focus on in closing is the transformative low-risk organic growth program that we have underway at the Partnership. As we've seen in 2014 and through the first half of this year, organic growth projects have delivered meaningful growth in earnings and cash flow. These projects are underpinned by long-term, low-risk contracts that are expected to be -- deliver highly certain low risk cash flow growth to our unitholders. The Partnership has over $5 billion of commercially secured organic growth target to enter service by 2018. Additionally, Enbridge and the Partnership are well positioned to pursue incremental liquids pipeline growth opportunities in an environment of low crude oil prices, With the built-in expansion capability in our liquids pipeline systems, we can cost effectively respond to our customers' incremental transportation needs with low cost expansions of our existing pipelines or provide for further development in our existing pipeline corridors. These projects and others being explored by Enbridge will pull more volumes through our mainline system and they require a new infrastructure in our existing corridors. All these projects can be staged in increments to meet our shipper needs. The Partnership's current organic growth projects together with the asset drop-down potential from our General Partner and future low cost system expansion opportunities provide confidence in the Partnership's long-term growth outlook. Now, I'll turn the call over to Syed for Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Sunil Sibal, Global Hunter Securities. -------------------------------------------------------------------------------- Sunil Sibal, Global Hunter Securities - Analyst [2] -------------------------------------------------------------------------------- Hi, good afternoon, guys and congrats on a good solid quarter. Couple of questions from me, starting off with the drop-down of the call options on Eastern Access and Mainline Expansion in Line 3, I think that's probably a total of about $1 billion to $1.2 billion of call options. Should we think about that being broken down over a period of couple of years going forward or could that be done in a single go or -- for those call options. How should we be thinking about that going forward? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President [3] -------------------------------------------------------------------------------- Most likely, Sunil, it will be broken up over a period of time. I won't get any more specific than that. All three together in a one shot would be too much and frankly the timing of all the projects is somewhat staggered. So again, it lends itself to a periodic drop-down over time. -------------------------------------------------------------------------------- Sunil Sibal, Global Hunter Securities - Analyst [4] -------------------------------------------------------------------------------- Okay. And then on the Sandpiper Project with that 2017 start-up date, working from that 2017 start-up date, when does EEP needs clarity on the route to meet that 2017 guideline or timeline? -------------------------------------------------------------------------------- Guy Jarvis, Enbridge Energy Partners, L.P. - EVP, Liquids Pipelines, Director of the General Partner [5] -------------------------------------------------------------------------------- Hi, it's Guy Jarvis. Currently, we're on a timeline where we expect to have the regulatory clarity that we need for that project in the fall and that will get us to the targeted service date that we currently have. -------------------------------------------------------------------------------- Sunil Sibal, Global Hunter Securities - Analyst [6] -------------------------------------------------------------------------------- Okay, that's helpful. And then, lastly on the Series 1 preferred units, just wanted to make sure of that DCF guidance. So previously, you had provided DCF guidance $900 million to $960 million, which was based on a $45 million payment in the second half. So that payment is being deferred while you're maintaining the $900 million to $960 million guidance, is that correct? -------------------------------------------------------------------------------- Steve Neyland, Enbridge Energy Partners, L.P. - VP, Finance [7] -------------------------------------------------------------------------------- That's correct. So the $45 million was expected to be this year, it won't, so that's a benefit. And then, there is other refinements, one of which of course would be on our gas side of the business which we talked about in April, some of the challenges there. So that's -- as well as just other refinements in the plan. -------------------------------------------------------------------------------- Sunil Sibal, Global Hunter Securities - Analyst [8] -------------------------------------------------------------------------------- Okay, that's all I had. Thanks. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Brian Zarahn, Barclays Capital. -------------------------------------------------------------------------------- Brian Zarahn, Barclays Capital - Analyst [10] -------------------------------------------------------------------------------- I guess, it'd be helpful to get a little more commentary on the drop-down delay from Enbridge Inc. Is this off the table for the remainder of the year or is this something that could change if markets improve? And then, I guess secondly, it would seem that even with this market sell-off your weighted average cost of capital could accommodate a drop down and just tell us your thoughts as to where you see strategically that process fit within EEP? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President [11] -------------------------------------------------------------------------------- Sure, generally Brian, the asset review or the drop-down review is something that is ongoing and something that we'll always, I guess, be looking at inside the Company. Certainly the valuation drop in terms of -- [you've seen our] price and say, couple of months back to now is noticeable and that of course impacts accretion to the LP unitholders. So that's probably one of the things that we're focused on here. I mean, no question, Enbridge is very committed to EEP and wants to take actions that are going to help strengthen EEP and certainly, we see across the family that drop-downs to the sponsored vehicles are effective way to generate value at all levels inside the family. So at this time, we look at this and we think, near-term a huge drop-down or big drop-down is probably not the way to go and what we're targeting is more of a selective approach as opposed to a large scale dropped down, and we'd give you some examples of selective in the prepared comments, but certainly the call options that we have, Alberta Clipper was an example of that and so we know that the parent has got a substantial portfolio of assets that could be dropped-down. So as far as what this year might lend itself to, it really depends upon what the capital markets do with respect to unit prices and so forth, but certainly from a growth perspective, our Company is very, very well positioned with or without drop-downs, but certainly the drop-downs add a nice element to our growth story. -------------------------------------------------------------------------------- Brian Zarahn, Barclays Capital - Analyst [12] -------------------------------------------------------------------------------- Would you expect an update during next earnings as to where the process stands or we should just assume, if the commodity markets stay where they are, this is on hold for an indefinite period of time. -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President [13] -------------------------------------------------------------------------------- I would say it's on hold for an indefinite period of time, again, we've got a number of things that are attractive even at the current cost of capital, the call options being good examples of that. So, when it's time to bring those down and financing needs are in order, they certainly - those fit ideal even at current prices. -------------------------------------------------------------------------------- Brian Zarahn, Barclays Capital - Analyst [14] -------------------------------------------------------------------------------- And then, I guess shifting gears to your crude pipeline system. In light of your contract structures, which provide good downside protection, how do you view the likely lower production growth in the US and Canada impacting your system, whether it's spot volumes that you are assuming on some of the projects or volumes on whatever spot capacity would have on your system. How does this impact, I guess the long -- what you would expect long term on your asset base? -------------------------------------------------------------------------------- Guy Jarvis, Enbridge Energy Partners, L.P. - EVP, Liquids Pipelines, Director of the General Partner [15] -------------------------------------------------------------------------------- Brian, it's Guy. I'll take a crack at that. Certainly when we think about our system today and going forward, and how that's going to shape up on the heavy side of things, we continue to be very bullish on the growth that we're seeing in heavy production out of Western Canada. To date, so far this year, everything is right on target with what we had expected to see and we're continuing to hear from those people that have projects under development that are going to kind of ramp up the heavy side of production through 2018 or so, that everything is a go there. So it's evidenced by -- we continue to eke out more and more heavy capacity on our system and every time we eke out to more capacity, it fills. So we feel very confident about that. On the light side of the system, our light lines have never really run at their full capability, but as we have ideally get the Line 9 reversal in place by sometime towards the end of the year and then the Southern Access extension adding more light market onto our system, we're feeling quite comfortable that those volumes are going to actually rise as well. So we're seeing a good level of supply still in North Dakota. We're not really seeing a fall-off in the production that one would maybe attribute, if you just looked at the fall off in rig count. So we continue to be full and seeing strong volumes out of there. So, at this stage of the game, we don't really -- we can't really identify kind of a pocket or an area of supply into our system that really appears to be at that much risk. -------------------------------------------------------------------------------- Brian Zarahn, Barclays Capital - Analyst [16] -------------------------------------------------------------------------------- I appreciate the color, Guy. I guess, I was asking maybe a little more medium-term, not right now as we look ahead for the next year. I mean the US may have its first year of production decline since 2008 and just getting some negative headlines from producers especially some of the bigger ones in terms of their CapEx budgets? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President [17] -------------------------------------------------------------------------------- Well, I think if you think about our system, the only large production basin in the US that we're exposed to is the Bakken, the most recent numbers that I saw is there is well in excess of 600,000 barrels a day of production from the Bakken that's still moving out of there on rail. So it's going to have to go on awful long ways in the negative direction before we would foresee that it would start chewing into the pipeline volumes that we're seeing. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Shneur Gershuni, UBS. -------------------------------------------------------------------------------- Shneur Gershuni, UBS - Analyst [19] -------------------------------------------------------------------------------- Hi, good afternoon, guys. I just want to focus on the decision on the large-scale drop-down. You seem to indicate that there could be drop-downs, cannot be drop-downs. I'm not sure you've been a 100% clear with respect to; are we going to see any drop-downs in 2015 on a much smaller scale? And then, again in 2016, is it just the one-time big transfer of assets is on hold, but smaller drops are not? I was wondering if you can just be a little bit more clear and specific as to kind of what the plan is at least for this next six, if not 12 months. -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President [20] -------------------------------------------------------------------------------- Well, certainly the big mega drop kind of like was done with the Income Fund in Canada. That's really not in the cards unit prices where they are and frankly, I think the markets on the US side will be more amenable to a sequential or targeted or selective drop-down program over time. So that I think is generally what we would be looking at. Is it possible we do a drop-down this year? I cannot say that we will or won't, but -- and certainly when we get into 2016, we have options, call options that we start to look at exercising. So I think you got a relatively -- I won't provide any more certainty than that, but I think if you look ahead, we have those call options in place. They have time-bounds on them. We'd like certainly to exercise those. That gives you some readability to drop-downs from the parent at a very attractive multiple to us. -------------------------------------------------------------------------------- Shneur Gershuni, UBS - Analyst [21] -------------------------------------------------------------------------------- I'm kind of curious about the decision to not sort of just lay it out like say, hey, we're going to do this over three years in a readable format or five years in a readable format. It seems a lot of MLPs that get classified as a drop-down MLPs or have a very solid visibility on drops, tend to see an improved cost of capital in why you wouldn't want to take advantage of that in terms of providing some clarity and just sort of lay it out, rather than sort of hedging, maybe yes, maybe no, this year and will we have options next year and so forth. I'm curious about the decision in terms of trying to achieve the best cost of capital possible. -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President [22] -------------------------------------------------------------------------------- Some of it really also relates to you've got a lot of organic projects that are coming in, there is a little bit of variability as far as timing for some of those projects and being able to kind of work around that. That has a little bit to do with when can you scale something in and the financing that goes along with it. So that's part of it. And then second, as I said in my comments, there is still -- this is work ongoing. This is not something that we've concluded on either at the parent level or at the Partnership level. Still working together as to what is the answer, but one of things that we had certainly promised to do at the parent level in here was provide you updates as it went along. And right now, as we see it, with current unit prices, it is a bit of a challenge to do. And certainly a large scale drop which we get asked for every time we meet with somebody is, is that for sure, is just something we're not entertaining at this time. So where we can provide clarity, we are; and when we can provide more clarity, we will. -------------------------------------------------------------------------------- Shneur Gershuni, UBS - Analyst [23] -------------------------------------------------------------------------------- Okay, great. Thank you very much guys. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Ross Payne, Wells Fargo. -------------------------------------------------------------------------------- Ross Payne, Wells Fargo - Analyst [25] -------------------------------------------------------------------------------- Thanks, my questions have been answered. Thank you. -------------------------------------------------------------------------------- Steve Neyland, Enbridge Energy Partners, L.P. - VP, Finance [26] -------------------------------------------------------------------------------- Operator, do we have another one in the queue? -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Sharon Lu, Wells Fargo. -------------------------------------------------------------------------------- Sharon Lu, Wells Fargo - Analyst [28] -------------------------------------------------------------------------------- Hi, good afternoon. Just, I guess, following up on the discussion of the drop-downs, I guess besides that valuation, were there any other factors that drove management's decision to defer the drops? And is there a certain maybe cost of capital range or valuation range for EEP that would result in management reconsidering? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President [29] -------------------------------------------------------------------------------- Good question, Sharon. I think on both parts of that, there is parts that I can answer, parts of it I can't. With respect to valuation, certainly even at current unit prices, the book value calls work but they would be a lot more attractive at a higher unit price. So we're going to monitor that. I'm not going to give you a definitive number one way or the other. And just, certainly we think that unit prices at the current level is undervalued and we'd like to see a stronger price for the units to begin really the drop-down program. -------------------------------------------------------------------------------- Sharon Lu, Wells Fargo - Analyst [30] -------------------------------------------------------------------------------- Okay. And, I guess, valuation was the primary driver then? There weren't any other factors? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President [31] -------------------------------------------------------------------------------- I really don't think there's any other factors, Sharon, of any note at all other than just valuation. -------------------------------------------------------------------------------- Sharon Lu, Wells Fargo - Analyst [32] -------------------------------------------------------------------------------- Okay. And I guess, based on the identified projects and EEP's base business, how should we think about, I guess, the distribution growth going forward are progressing, Are you still targeting the high-ends of that range, that 2% to 5% range for next year? -------------------------------------------------------------------------------- Steve Neyland, Enbridge Energy Partners, L.P. - VP, Finance [33] -------------------------------------------------------------------------------- I'm not going to guide on 2016 just yet Sharon, a little bit early for us to do that. We haven't completed our planning price process for next year. So that's -- but certainly, we've talked before, as the projects come into service, we expect to be at the higher end of that 2% to 5% and then, you'd supplement that with drop-downs as additional tailwind to that level of growth. -------------------------------------------------------------------------------- Sharon Lu, Wells Fargo - Analyst [34] -------------------------------------------------------------------------------- Okay, great. Thank you. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- (Operator Instructions) John Edwards, Credit Suisse. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [36] -------------------------------------------------------------------------------- Yes, good afternoon everybody. So, a lot of the questions I had on the drop-downs have been asked, but just to clarify then, it sounds like you're just suspending this for now, you do intend to do drop-downs not, say, a mega drop-down, but you're now leaning toward parceling these in overtime, correct? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President [37] -------------------------------------------------------------------------------- I would describe it, John, as a selective basis as opposed to a large scale drop-down. That's really more probably the working model at the moment. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [38] -------------------------------------------------------------------------------- Okay. And the ones that you're targeting at still the pipes that you laid out. I think it was one of your Analyst Days, maybe it was last year, it's still that basic list, it's about $1 billion of EBITDA, more or less? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President [39] -------------------------------------------------------------------------------- Yes, the pipes that make the most sense, John, initially would be -- anything that we have jointly funded with the parent and along our Mainline system and then kind of working off from there. -------------------------------------------------------------------------------- Steve Neyland, Enbridge Energy Partners, L.P. - VP, Finance [40] -------------------------------------------------------------------------------- Hey John, this is Steve. Just to clarify, the slide that you're referencing, it's been out there for a bit. It's really a -- from a book value perspective, we've characterized it as a $10 billion book value that exists and of course there'd be some multiple associated with that. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [41] -------------------------------------------------------------------------------- Okay. What's the rough EBITDA associated with those pipelines? -------------------------------------------------------------------------------- Steve Neyland, Enbridge Energy Partners, L.P. - VP, Finance [42] -------------------------------------------------------------------------------- Not sure I have that handy, John, or that we've provided that necessarily. Some of those lines are, about half of them are -- say about two-thirds of them are in services. There is another third obviously that are coming into service with Line 3 and others. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [43] -------------------------------------------------------------------------------- Okay. So, long term then, you're still targeting, to Sharon's question, this -- the higher end of the 2% to 5% and your hope is that drop-downs would perhaps augment that and push it above, correct? -------------------------------------------------------------------------------- Mark Maki, Enbridge Energy Partners, L.P. - President [44] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [45] -------------------------------------------------------------------------------- Okay, that's helpful. That's all I had. Thank you. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Thank you. I'm showing no further questions at this time. This concludes our question-and-answer session. -------------------------------------------------------------------------------- Sanjay Lad, Enbridge Energy Partners, L.P. - Director, Investor Relations [47] -------------------------------------------------------------------------------- Great. Thank you, Syed. We appreciate your interest in Enbridge Partners and thank you for participating in today's conference call. I would like to remind you that I will be available for any follow-up questions you may have. Thank you and have a great evening. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for participating in today's conference call. This concludes our program. You may all disconnect and have a wonderful day.
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