Enbridge Inc. Equity Research Earnings Update. Q1 In Line But Reducing '08 Slightly On Project Timing and Financing Needs

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1 Equity Research Earnings Update May 3, 2007 Stock Rating: Sector Performer Sector Weighting: Market Weight mo. Price Target $40.00 ENB-TSX (5/2/07) $37.15 Key Indices: Toronto, S&P/TSX Yr. EPS Gr. Rate (E) 6.0% 52-week Range $31.75-$41.48 Shares Outstanding 355.0M Float 355.0M Shrs Avg. Daily Trading Vol. 585,692 Market Capitalization $13,188.3M Dividend/Div Yield $1.23 / 3.3% Fiscal Year Ends December Book Value $14.50 per Shr 2007 ROE (E) 12.2% LT Debt $9,024.9M Preferred $125.00M Common Equity $5,148.7M Convertible Available No Earnings Per Share Prev Current 2006 $1.74A 2007 $1.75E $1.75E 2008 $1.90E $1.85E P/E x x 21.2x x 20.1x Pipelines, Utilities, & Power Enbridge Inc. Q1 In Line But Reducing '08 Slightly On Project Timing and Financing Needs Enbridge reported Q1'07 EPS of $0.65 vs. our estimate of $0.62 and $0.62 in Q1'06. Management confirmed our thesis that growth will remain slow through 2008 but then begin to accelerate in We are making modest downward reductions to '08E EPS and our price target (to $40 from $41). The Q1 results were slightly higher than we anticipated but only because of a $0.02 per share insurance payment on the offshore pipelines that really relates to a prior year. Otherwise, earnings per share were in line with expectations and essentially flat to last year. Growth will remain modest in 2008 as construction of new projects continues. We are reducing our '08 EPS estimate by $0.05 due to delays in bringing on the Ontario wind project and the likely issuance of more equity sometime during the year (we assume mid-year '08). Despite the slow near-term growth, we concur with management that the 2009 and especially 2010 picture looks very attractive. Our Sector Performer rating balances the premium valuation and relatively slow nearterm EPS growth against the positive future outlook. Stock Price Performance Dividends Per Share 2004 $0.92A 2005 $1.04A 2006 $ E $1.23 Company Description Enbridge Inc. is a North American pipeline, midstream and natural gas distribution company. Matthew Akman 1 (416) Matthew.Akman@cibc.ca Gilbert Chan, CFA (416) Gilbert.Chan@cibc.ca Alda Pavao, CFA 1 (416) Alda.Pavao@cibc.ca Source: Reuters All figures in Canadian dollars, unless otherwise stated CIBC World Markets does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures" section at the end of this report for important required disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, where applicable. Find CIBC research on Bloomberg, Reuters, firstcall.com CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, BCE Place, Toronto, Canada M5J 2S8 (416) and cibcwm.com CIBC World Markets Corp., 300 Madison Avenue, New York, NY (212) (800)

2 Investment Summary Enbridge reported Q1'07 EPS of $0.65 vs. our estimate of $0.62 and $0.62 in Q1'06. Management confirmed our thesis that growth will remain slow through 2008 but then begin to accelerate in We are making modest downward reductions to our '08 EPS estimate and our price target. For a breakdown and analysis of earnings by segment, please see the appendix to this comment. The Q1 results were slightly higher than we anticipated but only because of a $0.02 per share insurance payment on the offshore pipelines that really relates to a prior year. Otherwise, earnings per share were in line with expectations and essentially flat to last year. A lack of growth was apparent across most of the business units. Earnings were up only modestly on a normalized basis for the pipeline businesses. On a per share basis, there was no significant growth in pipeline earnings. Gas Distribution is performing well and will likely earn in excess of the allowed ROE. We see Gas Distribution as the one bright spot among the operating business units at Enbridge in We believe growth will remain modest in 2008 as construction of new projects continues. Management confirmed so much on the conference call. We are reducing our '08 EPS estimate by $0.05 due to delays in bringing on the Ontario wind project and the likely issuance of more equity sometime during the year (we assume $500 mln mid-year 08). Despite the slow near-term growth, we concur with management that the 2009 and especially 2010 picture looks very attractive. In a full report on the company dated September 18, 2006, we quantified the potential growth in earnings contribution from Enbridge Energy Partners (EEP, SP) at about $60 million between 2006 and With the major part of EEP s growth (Southern Access) on track, this analysis still holds. As a result, we think Enbridge can grow EPS at a 10%-12% compound annual rate in the timeframe. The key questions for Enbridge s stock performance now are: 1. How much of the future growth is already reflected in the stock? 2. How much of the remaining growth not in the stock should investors pay for today? The answer to the first question is that some but not all of the growth is in the stock. Some of it must be because Enbridge still trades at a premium to the group despite having a slower than average growth rate right now. The EV/EBITDA multiple of about 10.5x is considerably higher than the group average of about 8.5x and higher than TransCanada (TRP, SO) at about 9.3x. As is well documented, Enbridge also trades at a higher P/E multiple than the group, even now after some recent underperformance. On the other hand, 10.5x EV/EBITDA is not expensive any more when it comes to pipeline stocks. Our analysis suggests that Spectra (SE, SP) trades at about 10.0x EV/EBITDA and that U.S. pipeline master limited partnerships trade at more like 12.0x. Once the superior growth at Enbridge kicks in, the 10.5x EV/EBITDA multiple may look too low. That is why we believe not all of the future growth is factored into the stock price. 2

3 Whether investors will and should pay for that growth today is a challenging question. Achieving the growth is not without risk. We see a few key risks: MLP policy framework The company s master limited partnership growth depends on the continuation of a policy framework in the U.S. that supports the structure. While we believe the FERC is supportive, pipeline shippers have challenged the model in court. In particular, the FERC policy of allowing a tax allowance in rates has been the subject of recent court challenges. Any court-imposed change in tax treatment could impact the economics of MLPs. Capital cost risk Cost escalation has been a common theme for all types of energy infrastructure lately. In the Q1 presentation, Enbridge acknowledged it has partial or full risk on most projects. Returns and ultimate growth are contingent upon bringing projects in on time and on budget. Financing risk Management acknowledged the company will likely have to issue more common equity to complete the construction-spending program in 2008/9. Market conditions at the time equity is required will dictate the cost of any new financing. New financing needs can also overhang valuation in the near-term. These risks are far from insurmountable. Enbridge is a top project manager and has likely built adequate cushion into its budgets. Also, we believe market appetite for Enbridge shares will be strong when financing attractive growth initiatives. Nevertheless, risks cannot be ignored and we do not think the market will totally ignore them. Therefore, until sometime in 2008, we doubt all of the company s new growth will factor into Enbridge s share price. Our view is essentially unchanged following the Q1 report. We recommend the stock as a core holding for the medium and long-term but doubt it will outperform the group this year. Our Sector Performer rating and $40 target price are consistent with this view. 3

4 Appendix: Summary of Q1 07 and Full-Year Estimates by Segment Exhibit 1. Segmented Earnings for Enbridge Inc. (Data in C$ millions, unless otherwise stated) Q1/07A Q1/06A 2006A 2007E 2008E Liquids Pipelines Enbridge System $49.1 $52.0 $202.3 $203.7 $206.7 Athabasca System $13.6 $12.3 $52.8 $56.3 $58.1 Spearhead Pipeline $1.3 $0.2 $6.2 $8.0 $12.0 Olympic Pipeline $3.7 $0.8 $6.7 $10.8 $10.8 NW System $1.6 $1.0 $6.4 $3.0 $5.4 Feeder Pipelines and Other ($0.5) ($0.1) $0.0 ($2.0) ($2.0) Waupisoo $4.0 Midstream Oil (Terminals) $20.0 Total Liquids Pipelines $68.8 $66.2 $274.4 $279.8 $315.0 Gas Pipelines Offshore GoM Pipelines $9.1 $4.6 $18.1 $24.0 $24.0 Alliance Pipeline (U.S.) $7.5 $7.3 $29.7 $28.8 $30.1 Vector Pipeline $3.8 $4.1 $13.4 $14.9 $18.1 Total Gas Pipelines $20.4 $16.0 $61.2 $67.7 $72.2 Sponsored Investments Enbridge Energy Partners $10.2 $8.2 $36.5 $49.2 $62.8 Enbridge Income Fund $9.6 $9.3 $37.8 $37.1 $37.1 Total Sponsored Investments $19.8 $17.5 $74.3 $86.3 $99.9 Gas Distribution and Services Enbridge Gas Distribution $84.8 $79.6 $98.7 $109.6 $115.8 Enbridge Commercial Services $4.0 $6.6 $18.8 $16.0 $9.0 Noverco $17.0 $13.9 $18.7 $20.0 $20.0 Other Gas Distribution Operations $5.3 $4.7 $6.5 $5.8 $5.8 Enbridge Gas New Brunsw ick $2.8 $1.8 $9.8 $10.4 $10.5 Aux Sable $0.5 $1.0 $25.8 $12.0 $10.0 Gas Services and Other $0.7 ($0.3) $3.9 $2.0 $2.0 Total Gas Distribution and Services $115.2 $107.3 $182.2 $175.8 $173.1 International CLH $14.5 $13.3 $54.5 $57.2 $62.7 OCENSA/CITCol $8.3 $8.2 $33.9 $33.0 $33.0 Jose Terminal and Other ($0.8) $0.3 ($5.2) ($6.0) ($5.0) Total International $22.0 $21.8 $83.2 $84.2 $90.7 Corporate ($16.8) ($19.4) ($82.2) ($74.6) ($84.5) Operating Earnings for Common $229.4 $209.4 $593.1 $619.2 $666.5 Unusual Items ($3.8) $2.7 $59.4 ($3.8) $0.0 Weather Impact $1.4 ($21.3) ($36.9) $1.4 $0.0 Gain on Asset Sales $0.0 $0.0 $0.0 $0.0 $0.0 Reported Earnings for Common $227.0 $190.8 $615.6 $616.8 $666.5 Average Shares Outstanding (mln) Operating EPS from Continuing Operations $0.65 $0.62 $1.74 $1.75 $1.85 Reported EPS $0.65 $0.56 $1.81 $1.74 $1.85 Notes: 1. Unusual items in Q1/07 include unrealized losses on derivative instruments at EEP of $2 million, insurance proceeds of $5.3 million on damaged parts at Offshore Pipelines, $2.8 million mtm loss at Aux Sable and $4.3 million Tidal Energy mtm loss. 2. Unusual items in 2006 include $6.5 million of EEP non-cash derivative fair value gains, $48.9 million adjustment from changes to future federal and provincial income tax rates and a $4 million Noverco dilution gain. Source: Company reports and CIBC World Markets Inc. 4

5 Liquids Pipelines Liquids Pipelines reported earnings of $68.9 million for the quarter, an increase of $2.6 million from the same time period in Improved earnings came from the full three months operation of the Olympic Pipeline and Spearhead Pipeline (which commenced operations in February and March 2006, respectively). Higher transportation revenues will likely be offset by increasing operational costs in the industry. We see the Liquids Pipelines segment flat for the remainder of the year and until 2008, when new pipelines come into service. Gas Pipelines Normalized first quarter earnings where $20.4 million compared to $16 million in Q1 06. Enbridge Offshore Pipelines earnings included insurance proceeds of $6 million from business interruption policies (this amount was not deducted as an adjusting item). The Gas Pipelines segment should see slight earnings growth to 2006 as the Neptune Pipeline and Vector expansion come into service near the latter part of However, strength in the C$ could offset this. Sponsored Investments Normalized earnings in the Sponsored Investments segment were $19.8 million, up from the first quarter of Improved results primarily came from Enbridge Energy Partners due to increased ownership interest and gains from gas storage and lower operating costs on the Lakehead System, offset slightly by gas processing margins and higher gas measurement losses. Q1 operational issues at EEP should subside and new pipelines will increase earnings from the subsidiary in the back half of 07. Gas Distribution and Services Excluding unusual weather impacts, Enbridge Gas Distribution and Services reported earnings that were $5.2 million higher than Q1 06 due to customer growth and higher storage and transportation capacity transaction revenues. For Q1 07, Enbridge Gas Distribution realized returns on a 35% common equity ratio and we anticipate an increase in the ratio to around 36% - 38%, upon a regulatory decision. A partial rate increase will also be effective April International Earnings for the International segment in Q1 07 were up from Q1 06 due to higher average transportation tariffs, longer hauls and a stronger Euro. Corporate Adjusted corporate costs were lower in Q1 07 compared to Q1 06 due to decreased interest expense from lower corporate debt levels, which were repaid from the issuance of common equity. 5

6 Price Target Calculation Our $40 price target is derived from our dividend discount valuation analysis, with regard and reference to 2008E relative P/E and EV/EBITDA. Our $40 target price implies a 10.4x 2008E EV/EBITDA multiple and a 21.6x multiple of our 2008E EPS forecast of $1.85. The price target also implies a 3.0% dividend yield. Enbridge s earnings and dividend growth rate have been among the highest of the Canadian pipelines and utilities group, with a relatively low-risk profile. We also believe that Enbridge will have earnings acceleration later in the decade. For these reasons, despite the low growth forecasts we are carrying for the very near-term, we continue to use a target multiple at a premium to the group average for the Canadian pipeline and utility stocks. Key Risks to Price Target Enbridge could fall short of our 2007 and 2008 earnings forecasts (and fail to meet our target price) for various reasons, including (but not limited to) the impact of negative regulatory decisions, and unanticipated weaker commodity prices. Increased competition in oil pipelining introduces risks to returns on existing and new oil pipeline assets. Increased competition for pipeline and utility assets by financial players also raises risks to returns on possible acquisitions. The pipeline and utility sector, as a whole, is sensitive to changes in Canadian long-term bond yields. If broader market risk dissipates and bond yields rise, shares could be negatively impacted. 6

7 Our EPS estimates are shown below: 1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly 2006 Current $0.62A $0.35A $0.27A $0.50A $1.74A 2007 Prior $0.62E $0.36E $0.26E $0.51E $1.75E 2007 Current $0.65A $0.36E $0.25E $0.50E $1.75E 2008 Prior $1.90E 2008 Current $1.85E 7

8 IMPORTANT DISCLOSURES: Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated from revenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment Banking Department within the Corporate and Leveraged Finance Division. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest. Important Disclosure Footnotes for Enbridge Inc. (ENB) 2a Enbridge Inc. is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months. 2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for Enbridge Inc. in the past 12 months. 2e CIBC World Markets Inc. has received compensation for investment banking services from Enbridge Inc. in the past 12 months. 2f CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from Enbridge Inc. in the next 3 months. 2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from Enbridge Inc. in the next 3 months. 7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by Enbridge Inc. 8

9 Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered by CIBC World Markets: Stock Prices as of 05/02/2007: Enbridge Energy Partners, L.P. (EEP-NYSE, US$59.95, Sector Performer) Spectra Energy Corporation (2g) (SE-NYSE, US$26.63, Sector Performer) TransCanada Corp. (2a, 2c, 2e, 7) (TRP-TSX, $39.76, Sector Outperformer) Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key to Important Disclosure Footnotes" section of this report. 9

10 Key to Important Disclosure Footnotes: 1 CIBC World Markets Corp. makes a market in the securities of this company. 2a 2b 2c 2d 2e 2f 2g 3a 3b 3c 4a 4b 4c 5a 5b 6a 6b This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months. CIBC World Markets Corp. has managed or co-managed a public offering of securities for this company in the past 12 months. CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months. CIBC World Markets Corp. has received compensation for investment banking services from this company in the past 12 months. CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months. CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. This company is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12 months. CIBC World Markets Corp. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. This company is a client for which a CIBC World Markets company has performed non-investment banking, non-securities-related services in the past 12 months. CIBC World Markets Corp. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. CIBC World Markets Inc. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common equity securities. A member of the household of a CIBC World Markets Corp. research analyst who covers this company has a long position in the common equity securities of this company. The CIBC World Markets Inc. fundamental analyst(s) who covers this company also has a long position in its common equity securities. A member of the household of a CIBC World Markets Inc. fundamental research analyst who covers this company has a long position in the common equity securities of this company. 7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by this company. 8 A partner, director or officer of CIBC World Markets Inc. or any analyst involved in the preparation of this research report has provided services to this company for remuneration in the past 12 months. 9 A senior executive member or director of Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., or a member of his/her household is an officer, director or advisory board member of this company or one of its subsidiaries. 10 Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., has a significant credit relationship with this company. 11 The equity securities of this company are restricted voting shares. 12 The equity securities of this company are subordinate voting shares. 13 The equity securities of this company are non-voting shares. 14 The equity securities of this company are limited voting shares. 10

11 CIBC World Markets Price Chart HISTORICAL PERFORMANCE OF CIBC WORLD MARKETS' RECOMMENDATIONS FOR ENBRIDGE INC. (ENB) Date Change Type Closing Price Rating Price Target Coverage 10/05/ SP Matthew Akman 11/15/ SP Matthew Akman 11/17/ SP Matthew Akman 12/06/ SP Matthew Akman 01/26/ SP Matthew Akman 04/10/ SP Matthew Akman 07/08/ SP Matthew Akman 08/02/ SP Matthew Akman 10/19/ SP Matthew Akman 01/08/ SP Matthew Akman 01/16/ R - Matthew Akman 02/02/ SP Matthew Akman 11

12 CIBC World Markets' Stock Rating System Abbreviation Rating Description Stock Ratings SO Sector Outperformer Stock is expected to outperform the sector during the next months. SP Sector Performer Stock is expected to perform in line with the sector during the next months. SU Sector Underperformer Stock is expected to underperform the sector during the next months. NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock. R Restricted CIBC World Markets is restricted*** from rating the stock. Sector Weightings** O Overweight Sector is expected to outperform the broader market averages. M Market Weight Sector is expected to equal the performance of the broader market averages. U Underweight Sector is expected to underperform the broader market averages. NA None Sector rating is not applicable. **Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada. "Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues. ***Restricted due to a potential conflict of interest. Ratings Distribution*: CIBC World Markets' Coverage Universe (as of 02 May 2007) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) % Sector Underperformer (Sell) % Restricted % Restricted % Ratings Distribution: Pipelines, Utilities, & Power Coverage Universe (as of 02 May 2007) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) % Sector Underperformer (Sell) 0 0.0% Restricted % Restricted % Pipelines, Utilities, & Power Sector includes the following tickers: ACO.X, CU, EEP, EMA, ENB, FTS, RRI, SE, TA, TRP. *Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World Markets has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, and sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting. Important disclosures required by IDA Policy 11, including potential conflicts of interest information, our system for rating investment opportunities and our dissemination policy can be obtained by visiting CIBC World Markets on the web at or by writing to CIBC World Markets Inc., BCE Place, 161 Bay Street, 4th Floor, Toronto, Ontario M5J 2S8, Attention: Research Disclosures Request. 12

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