1 of 6 Pipelines, Power & Utilities Recommendation: Risk: 12-Month Target Price: HOLD Unchanged LOW C$39.00 Unchanged 12-Month Total Return: 8.3% Market Data (C$) Current Price $37.15 52-Wk Range $31.75-$41.48 Mkt Cap (f.d.)($mm) $13,195.7 Dividend per Share $1.23 Dividend Yield 3.3% Avg. Daily Trading Vol. (3mths) 879819 Financial Data (C$) Fiscal Y-E December Shares O/S (f.d.)(mm) 355.2 Float Shares (mm) 355.2 Net Debt/Tot Cap 61.1% BVPS (basic) $14.84 ROE 13.6% Estimates (C$) Year 2005A 2006A 2007E 2008E EPS (basic) 1.57 1.74 1.77 1.84 EPS (f.d.) 1.55 1.73 1.76 1.82 EPS (f.d.)(old) 1.55 1.73 1.73 1.82 CFPS (basic) 3.86 3.44 3.65 3.56 DI 1.04 1.15 1.23 1.29 DI (old) 1.04 1.15 1.23 1.34 EPS (f.d.) Quarterly Estimates (C$) Year 2005A 2006A 2007E 2008E Q1 0.60 0.61 0.61 -- Q2 0.28 0.35 0.36 -- Q3 0.18 0.27 -- -- Q4 0.48 0.50 -- -- Valuations Year 2005A 2006A 2007E 2008E P/E (f.d.) 24.0x 21.5x 21.1x 20.4x P/CFPS (basic) 9.6x 10.8x 10.2x 10.4x P/DI 35.7x 32.3x 30.2x 28.8x All figures in C$, unless otherwise specified. Linda Ezergailis, P.Eng. Robert Hope (Associate) 416 983 7784 416 983 9717 linda.ezergailis@tdsecurities.com robert.hope@tdsecurities.com Enbridge Inc. (ENB-T, ENB-N) C$37.15 Q1 Earnings Flat Year-Over-Year, But the Focus Remains Long-Term Event Enbridge's Q1/07 normalized EPS of $0.61 was two pennies shy of our estimate and in-line with Q1/06 normalized EPS. Impact Neutral. Details Liquids Pipelines Q1/07 earnings of $68.9 million increased $2.6 million vs. Q1/06 mainly due to the full quarter contributions from the Olympic and Spearhead pipelines, partially offset by slightly lower Enbridge System earnings (Exhibit 1). Enbridge System earnings declined $2.9 million primarily due to the impact of a strong labour market on compensation expenses as well as increased taxes in the Terrace component. Gas Pipelines earnings of $14.4 million declined 10% year-over-year primarily due to lower normalized contribution from Enbridge Offshore Pipelines (EOP). Sponsored Investments earnings of $19.8 million increased $2.3 million mainly due to a higher ownership interest in Enbridge Energy Partners (EEP), gains from gas storage and lower operating costs on the Lakehead System. Gas Distribution and Services earnings of $108.0 million were in-line with Q1/06 levels. Higher earnings at Enbridge Gas Distribution (EGD) and Noverco were offset by unrealized fair value losses on derivative instruments and a transition of EGD customer care services from Customer Works to a third party service provider. International earnings of $22.0 million were in-line year-over-year. Corporate expenses declined $2.6 million to $16.8 million during the quarter primarily due to a decreased interest expense from lower corporate debt. Please see the final pages of this document for important disclosure information. Company Profile Enbridge Inc. (ENB-T, N) owns and operates: 1) the world's longest crude oil and liquids pipeline system; 2) Canada's largest gas distribution network in Ontario; and 3) additional oil & gas transmission, gathering, storage and processing assets. ENB-T: Price 45 40 35 30 25 20 2004 2005 2006 45 40 35 30 25 20
2 of 6 Exhibit 1. Segmented Earnings Analysis ($mm unless otherwise stated) YOY YOY % Q1/07 Q1/06 Change Change Liquids Pipelines $68.9 $66.3 $2.6 4% Gas Pipelines 1 14.4 16.0 (1.6) -10% Sponsored Investments 2 19.8 17.5 2.3 13% Gas Distribution and Services 3 108.0 107.3 0.7 1% International 22.0 21.8 0.2 1% Corporate (16.8) (19.4) 2.6-13% Operating Earnings 216.3 209.5 6.8 3% Weather 1.4 (21.3) 22.7 n.a. Adjustments 9.3 2.7 6.6 244% Reported Earnings 227.0 190.9 36.1 19% Average Shares Outstanding - Diluted (mm) 354.2 342.7 11.5 3% Operating EPS - Weather Normalized $0.61 $0.61 ($0.00) 0% Reported EPS $0.64 $0.56 $0.08 15% Note: Reported earnings have been normalized to reflect the following: 1) $11.3 million of insurance recoveries in Q1/07 at Enbridge Offshore Pipelines 2) Non-cash derivative fair-value losses of $2.0 million in Q1/07 and $2.7 million in Q1/06 at EEP 2) $1.4 million effect of colder than normal weather on EGD in Q1/07 as well as $21.3 million effect of warmer than normal weather in Q1/06 Source: Company reports, TD Newcrest. Outlook Earnings Guidance Reiterated: Management reiterated its 2007 EPS (basic) guidance range of $1.75-1.85, which appears to include $0.02 of business interruption insurance proceeds that are excluded from our estimate. We note that our estimate is towards the bottom of this range. Longer term, management expects Enbridge to achieve an EPS CAGR of 8-10% over a five-year period. The majority of this growth is forecasted to be back-end loaded as the bulk of Enbridge s large capital projects such as Southern Access, Alberta Clipper and Southern Lights are expected to enter service and start contributing to earnings in 2009 and 2010 (Exhibit 2). Dividend Growth Expected to Decelerate: Management indicated it would not increase dividends to the point where the payout ratio is above its targeted range of 60-70%. Given that Enbridge is now near the top end of this range, by our calculations, suggests that dividend growth might decelerate in 2008 in sympathy with muted near-term EPS growth. Equity Offering a Possibility for 2008: The company expects to install permanent financing for its projects shortly before they enter service. Therefore an equity financing in 2008, similar to the approximately $560 million offering in Q1/07, could be expected. Management is also exploring hybrid securities as an alternative or complement to an equity financing. Well Positioned for Next Export Pipeline Tranche: Management believes that additional pipeline capacity, beyond Southern Access, Alberta Clipper and TransCanada s Keystone, will be needed around 2012. Enbridge believes that it could cost effectively expand Clipper to meet this demand possibly followed in a year or two by its Gateway or US Gulf Coast proposals. Large Capital Program Update: Enbridge provided an update and additional disclosure relating to the expected returns as well as capital and volume risks of some its capital projects. Full life or DCF returns on equity are expected to range from 9%, on the Canadian portion of Southern Access, to the mid-teens on Waupisoo and the Spearhead Expansion. The amount of capital cost risk assumed by Enbridge also varies from none, as in fully contracted or regulated pipelines, to full, which is rare and only utilized when the company believes they can control capital costs and the expected returns are substantial. We provide a large capital project overview in Exhibit 2.
3 of 6 Exhibit 2. Summary of Enbridge s Large Capital Projects Name Capacity Potential In- Service Date Estimated Cost Full Life Return Capital Cost Risk Status Firm Shipper Support Exists Southern Access (1) Southern Access (2) Southern Access (3) 124 kbpd 90 kbpd 180 kbpd Q1/09 (Phases 1-3) US$1.6 billion (Phases 1-3) ENB - US$0.3 billion EEP - US$1.3 billion US - 11% + Floating Can - 9% Floating US - None on 88% Can - None Under Construction Southern Access Extension 400 kbpd Q1/09 US$0.4 billion 11% Floating None Under Construction Alberta Clipper 450 kbpd 2010 Enbridge - C$1.5 billion EEP - US$0.8 billion Typical Typical Received Industry Support Proposed Crude Oil Export Pipelines U.S. Gulf Coast Direct 400 kbpd 2010-2011 (US$200mm) Up to US$3.6 billion Gateway Export 525 kbpd 2012-2014 C$2.5 billion Proposal Open season concluded. Shipper support indicated. Southern Access (5) 400 kbpd US$400 million Proposal Non-Export and Condensate Pipelines and Terminalling Waupisoo - Oil 350 kbpd - initial 600 kbpd - potential 2008 C$0.5 billion (initial) Mid Teens Partial Pre-Construction Eastern PADD II Access 250 kbpd 2010-2011 US$280 million Proposal PADD I Pipeline 300 kbpd 2010-2012 US1.4 billion Proposal Spearhead Expansion Expansion I - 65 kbpd Expansion II - 100 kbpd 2009 2011 US$0.1 billion US$215 million Phase I - Mid Teens Phase I - Full Waupisoo - Condensate 150 kbpd - minimum 2008 C$200 million Proposal Successful Open Season Concluded Southern Lights - Condensate 180 kbpd 2010 US$1.3 billion 12% + Kicker Partial Received shipper support Gateway Condensate 193 kbpd 2012-2014 C$1.7 billion Open season concluded. Shipper support indicated. Terminaling Up to 30 million bbls 2007-2009 Source: Company reports, TD Newcrest. Up to - C$2.0 billion; C$0.8 billion Proceeding Low Teens Full Various Stages Valuation Exhibit 3. Peer Group Valuation Curr. Shares Market Ind. Book EPS P/E EPS P/E Symbol Price O/S (mm) Cap (mm) Div. Yield Value P/BV 2005A 2006A 2007E 2008E 2005A 2006A 2007E 2008E For. E Forward ENB $37.15 355.0 $13,188 $1.23 3.3% $14.84 2.5 $1.55 $1.73 $1.76 $1.82 16.4x 21.5x 21.1x 20.4x $1.78 20.9x ACO.X $49.55 58.3 $2,889 $0.88 1.8% $25.65 1.9 $2.36 $3.19 $3.45 $3.35 17.4x 15.5x 14.4x 14.8x $3.42 14.5x CU $46.60 125.4 $5,844 $1.22 2.6% $19.33 2.4 $2.03 $2.55 $2.63 $2.59 21.7x 18.3x 17.7x 18.0x $2.62 17.8x EMA $21.80 111.1 $2,422 $0.89 4.1% $12.78 1.7 $0.99 $1.08 $1.15 $1.25 20.7x 20.1x 19.0x 17.4x $1.18 18.4x FTS $28.02 109.3 $3,063 $0.84 3.0% $12.25 2.3 $1.11 $1.33 $1.42 $1.55 17.4x 21.0x 19.7x 18.1x $1.46 19.1x TA $26.54 202.7 $5,380 $1.00 3.8% $10.80 2.5 $0.88 $1.09 $1.28 $1.50 28.8x 24.4x 20.7x 17.7x $1.35 19.6x TRP $39.76 534.7 $21,260 $1.36 3.4% $17.49 2.3 $1.72 $1.87 $2.03 $2.17 21.1x 21.3x 19.6x 18.3x $2.08 19.1x Avg. 3.4% 2.3x 21.0x 21.1x 19.6x 18.3x 19.2x Note: Averages exclude ATCO due to its holding company nature. Source: Bloomberg, TD Newcrest.
4 of 6 Justification of Target Price Our $39.00 target price is predicated on 2008 financial estimates as follows: 1) 50% relative earnings yield of 114% (vs. historical average of 118%), 2) 25% relative dividend yield of 81% (vs. historical average of 71%), and 3) 25% P/B ratio of 2.4x (vs. historical average of 2.4x). We believe Enbridge will trade at a premium versus the sector due to its leverage to growing volumes in the oil sands, favourable negotiated settlements with its shippers, above average profitability, and operational diversification. Key Risks to Target Price 1) Higher than expected long bond yields; 2) acquisitions that do not create shareholder value; 3) operational disruptions; 4) potential reduction in historical valuation premium to sector; 5) tougher than expected competition for new oil transmission pipeline capacity; 6) regulatory surprises; 7) substantial delays and/or cancellations of oil sands projects; and 8) WCSB risk. Investment Conclusion This quarter's results reaffirm our view that Enbridge will be challenged to grow earnings in 2007 and 2008, as many of its capital projects are not expected to be in-service until later this decade. We believe Enbridge shares have underperformed the sector in April and year-to-date partially due to a growing recognition of earnings growth being muted in the near-term. Longer term however, we believe Enbridge s large portfolio of growth projects, including higher return crude oil storage terminals and diluent import lines, will help Enbridge achieve above average EPS growth. Give the recent pullback, the shares may be interesting for more patient investors with a long-term horizon, but at this time total returns are not sufficient to warrant a buy recommendation. While our bias is increasingly positive as Enbridge continues to make progress on its projects, we continue to recommend investors HOLD Enbridge.
5 of 6 TD Newcrest Disclosures Company Ticker Disclosures Enbridge Inc. ENB-T ENB-N 2, 4, 13, 14 1. TD Securities Inc., TD Securities (USA) LLC or an affiliated company has managed or co-managed a public offering of securities within the last 12 months with respect to the subject company. 2. TD Securities Inc., TD Securities (USA) LLC or an affiliated company has received compensation for investment banking services within the last 12 months with respect to the subject company. 3. TD Securities Inc., TD Securities (USA) LLC or an affiliated company expects to receive compensation for investment banking services within the next three months with respect to the subject company. 4. TD Securities Inc. or TD Securities (USA) LLC has provided investment banking services within the last 12 months with respect to the subject company. 5. TD Securities Inc. or TD Securities (USA) LLC has provided non-investment banking securities-related services within the last 12 months with respect to the subject company. 6. TD Securities Inc. or TD Securities (USA) LLC has provided non-securities-related services within the last 12 months with respect to the subject company. 7. TD Securities Inc. or TD Securities (USA) LLC has received compensation for services other than investment banking within the last 12 months with respect to the subject company. 8. The research analyst knows that an affiliate to TD Securities Inc. or TD Securities (USA) LLC has received compensation for services other than investment banking within the last 12 months with respect to the subject company. 9. A long position in the securities of the subject company is held by the research analyst, by a member of the research analyst s household, or in an account over which the research analyst has discretion or control. 10. A short position in the securities of the subject company is held by the research analyst, by a member of the research analyst s household, or in an account over which the research analyst has discretion or control. 11. A long position in the derivative securities of the subject company is held by the research analyst, by a member of the research analyst s household, or in an account over which the research analyst has discretion or control. 12. A short position in the derivative securities of the subject company is held by the research analyst, by a member of the research analyst s household, or in an account over which the research analyst has discretion or control. 13. TD Securities Inc. and/or an affiliated company is a market maker, or is associated with the specialist that makes a market, in the securities of the subject company. 14. TD Securities Inc. and/or affiliated companies own 1% or more of the equity securities of the subject company. 15. A partner, director or officer of TD Securities Inc. or TD Securities (USA) LLC, or a research analyst involved in the preparation of this report has, during the preceding 12 months, provided services to the subject company for remuneration. 16. Subordinate voting shares. 17. Restricted voting shares. 18. Non-voting shares. 19. Common/variable voting shares. 20. Limited voting shares. 21. The Research Analyst has visited the material operations of the subject company. 22. The subject company provided transportation and accommodation during the visit of the material operations. Distribution of Research Ratings Action List Buy: 8%, Buy: 35 %, Speculative Buy: 4 %, Hold: 46 %, Reduce: 7 %. Of the subject companies, TD Securities Inc. has provided investment banking services within the last 12 months for the following percentages of companies within each of the four categories: Action List Buy: 68% Buy: 60%, Speculative Buy: 55% ; Hold: 50%, Reduce: 63%. Research Dissemination Policy TD Newcrest makes its research products available in electronic and/or printed formats and simultaneously distributes them to its institutional clients who are entitled to receive them. The are distributed by email, and are available in PDF and text form on First Call Notes, First Call Research Direct, Bloomberg and Reuters. Research Reports and Bulletins are distributed by email; they are also printed and distributed by courier to our entitled clients. PDFs of Reports and Bulletins are available on Reuters and First Call Research Direct. Summaries are available on First Call Notes and Bloomberg. All research is available by password to entitled institutional clients at www.tdsecurities.com
6 of 6 Research Ratings ACTION LIST BUY: The stock's total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next 12 months and it is a top pick in the Analyst's sector. BUY: The stock s total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next 12 months. SPECULATIVE BUY: The stock's total return is expected to exceed 30% over the next 12 months; however, there is material event risk associated with the investment that could result in significant loss. HOLD: The stock s total return is expected to be between 0% and 15%, on a risk-adjusted basis, over the next 12 months. REDUCE: The stock s total return is expected to be negative over the next 12 months. Overall Risk Rating in order of increasing risk: Low (12% of coverage universe), Medium (29%), High (54%), Speculative (5%). Directorships and Advisory Relationships Analyst Certification Each analyst of TD Securities Inc. whose name appears on page 1 of this research report hereby certifies that (i) the recommendations and opinions expressed in the research report accurately reflect the research analyst's personal views about any and all of the securities or issuers discussed herein that are within the analyst s coverage universe and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the provision of specific recommendations or views expressed by the research analyst in the research report. Disclaimer TD Newcrest, A Division of TD Securities Inc. "TD Newcrest" is the tradename that TD Securities Inc., TD Securities (USA) LLC and TD Securities Limited use to market their institutional equity services. Although the information contained in this report has been obtained from sources that TD Securities (USA) LLC, TD Securities Inc. and TD Securities Limited (collectively "TD Securities") believe to be reliable, we do not guarantee its accuracy, and as such, the information may be incomplete or condensed. All opinions, estimates and other information included in this report constitute our judgment as of the date hereof and are subject to change without notice. TD Securities will furnish upon request publicly available information on which this report is based. TD Securities Inc. has accepted responsibility for the contents of any TD Securities (USA) LLC research appearing in this document. TD Securities (USA) LLC has accepted responsibility for the contents of any TD Securities Inc. research appearing in this document. TD Securities Limited has accepted responsibility in Europe for the contents of any TD Securities Inc. research appearing in this document. Canadian clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of TD Securities Inc. Canadian retail investors are served by TD Waterhouse Canada Inc., a subsidiary of The Toronto-Dominion Bank. U.S. clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of TD Securities (USA) LLC. European clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of TD Securities Limited. Insofar as the information on this report is issued in the U.K. and Europe, it has been issued with the prior approval of TD Securities Limited and only to persons falling within Articles 19 and 49 of the Financial Services & Markets Act 2000 (Financial Promotion) Order 2001, namely persons sufficiently expert to understand the risks involved. No recipient may pass on the information contained in this report to any other person without the prior written consent of TD Securities. TD Securities Inc., TD Securities (USA) LLC and TD Securities Limited are wholly owned subsidiaries of The Toronto-Dominion Bank. TD Securities Limited is authorized and regulated by the Financial Services Authority. The activities of The Toronto-Dominion Bank under its Financial Services License are regulated by the Australian Securities and Investment Commission in Australia. Copyright 2007 by TD Securities. All rights reserved. Full disclosures for all companies covered by TD Newcrest can be viewed at www.tdsecurities.com/equityresearch/disclosures by TD Newcrest s institutional equity clients.