Nov 4, 2009
Executives
Vern Yu – VP, IR and Enterprise Risk Pat Daniel – President and CEO Richard Bird – EVP, CFO and Corporate Development Colin Gruending – VP and Controller
Analysts
Carl Kirst – BMO Capital Matthew Akman – Macquarie Andrew Kuske – Credit Suisse Robert Kwan – RBC Capital Markets Steven Paget – FirstEnergy Linda Ezergailis – TD Newcrest Sam Kanes – Scotia Capital
Operator
Good morning, ladies and gentlemen, and welcome to the Enbridge Inc. 2009 third quarter financial results conference call.
I would now like to turn the meeting over to Mr. Vern Yu.
Vern Yu
Thank you and good morning. Welcome to Enbridge Inc.’
s Q3 2009 earnings call. With me this morning are Pat Daniel, President and Chief Executive Officer; Richard Bird, Executive Vice President, Chief Financial Officer and Corporate Development; and Colin Gruending, Vice President and Controller.
Before we begin, I would like to point out that we may refer to forward-looking information during this call. By its nature, this information implies certain assumptions and expectations about future outcomes.
So we will remind you our information is subject to risks and uncertainties affecting every business including ours. A more fulsome disclosure of these risks and uncertainties can be found in our public disclosure, filing is available both on SEDAR and EDGAR.
This call is webcast and I encourage those listening by phone to go to our website under the Investor tab and you will be able to find some slides there. A replay and podcast of the call will be available later today.
The Q&A format of the call will be our normal format where the initial Q&A is restricted to the analyst community and once that’s finished, we will be available to take questions from the media. And finally, I would like to remind everyone that Pat Murray and I are available after the call for any detail or follow-up questions.
So with that, I would like to turn the call over to Pat Daniel.
Pat Daniel
Great, thanks very much Vern, and good morning, everyone. Thank you for joining us this morning.
As you know earlier today, we were pleased to announce third quarter adjusted earnings of $152 million, which is an increase of 78% over this quarter last year. To on the year-to-date basis, adjusted earnings have increased 30% to $616 million or $1.70 per common share.
As a result of this strong performance, we are today increasing our full-year guidance from the range of $2.18 to $2.32 per share to a new range of between $2.30 and $2.36 per share. The midpoint of this new guidance range represents a 25% increase over our 2008 adjusted earnings.
Richard, of course, will speak to third quarter results as well as this new guidance range in more detail shortly. But it’s safe to say that we are on track to deliver a record growth year for Enbridge.
Our solid growth comes from the combination of a number of things, firstly, new assets which we placed into service through 2009, also improved results from our existing businesses, and our increased investment in Enbridge Energy Partners, and then finally ADC from assets that are currently under construction. All of our business units are performing very well this year.
As most of you are aware, we recently held our Annual Investor Days in Toronto and New York and we spent lot of time at those meetings focusing on our strategic direction. So as a result of that, I am going to keep my opening remarks quite brief today.
If you didn’t get a chance to attend Enbridge Day in person, I would encourage you to review a replay of the webcast on our website where we do go into a lot of detail on individual projects and strategy. There, you are going to find a detailed review of why we believe Enbridge has substantial evaluation upside as a result of the many opportunities that we have in our liquids, gas and green energy businesses, coupled with a very low risk profile for the company.
So far in 2009, we have placed more than $3 billion worth of new projects into service. These projects provided much needed energy infrastructure for our customers and they are going to grow Enbridge’s earnings in cash flows going forward.
We’ve also made significant progress this year in securing new projects that will allow Enbridge to grow its earnings per share at an average of 10% per year into the middle of the next decade. During 2009, we placed the $300 million Line 4 extension project into service, which extended Line 4 back to Edmonton from Hardisty, Alberta.
Secondly, we increased the capacity of our Spearhead Pipeline by 55% through a US $100 million expansion project. We also completed our light sour crude oil pipeline project in Phase II of the Southern Access project.
In Ontario, we installed the remaining 50 turbines of the Enbridge Ontario Wind project bringing all 190 megawatts on line now. And finally, we placed a total of 7.5 million barrels of crude oil storage into service at Hardisty during 2009, so it’s been a tremendous year from a new project point of view.
Moving on to our new goal projects announced during the past quarter, we have two separate projects in the Gulf of Mexico as you know, the first was the about $0.5 billion Walker Ridge Gas Gathering System which is going to provide service to the Jack, St. Malo and Big Foot ultra deepwater developments.
And this project not only increases our infrastructure footprint in the Gulf, but it does so in a way that reduces our risk in that area. The contracts call for a minimum return backed by long-term take or pay arrangements and as such, Enbridge is protected from both capital cost and volume risk.
The Walker Ridge project highlights type of commercial arrangements that we will pursue as we continue to strength our offshore business. And of course the announcement in early October of the Big Foot oil pipeline further reinforces our commitment to an improved risk return profile for our off shore assets.
This is about $0.3 billion project US which will transport oil from the proposed Big Foot ultra deepwater development and it’s complementary to the Walker Ridge project that I was previously speaking to. As you know, Enbridge currently moves about 40% of off shore gas production to our systems in the Gulf, and we are well positioned for future expansion in both natural gas and oil pipeline infrastructure there.
Turning to our green energy business, we’ve recently announced the 20 megawatt Sarnia Solar project which represents Enbridge’s initial entry in the pretty rapidly growing business of solar energy. This project is right in the sweet spot of Enbridge’s renewable energy strategy with risk and returning characteristics that are fully consistent with Enbridge’s low-risk business model and very similar to our crude oil pipeline business in terms of business model.
The Sarnia Solar project is expected to be completed by the end of 2009 and will be the largest photovoltaic solar energy facility in operation in Canada and one of the largest in North America. Finally as we noted in our news release this morning, we are encouraged by increasing signs of renewed activity in oil sands as commodity prices have recovered to a large extent.
Enbridge of course is the largest operator of regional crude oil pipeline serving the oil sands, and this gives us a very strong competitive advantage in pursuing significant growth opportunities both in regional oil sands pipeline infrastructure and also an extending access to new markets for Canadian crude oil and further improving netbacks for our customers. So to conclude, we are not only bringing projects in on budget and on schedule, but we are also building a very strong portfolio of commercially secured projects across our liquids, our gas and our green energy businesses.
These new projects and potential opportunities are going to help ensure that Enbridge will continue to deliver strong, steady earnings growth well into the next decade. So with that, I will now pass it off to Richard Bird, who is going to review the quarterly financial results in more detail and as well address the adjustment that we have made to our 2009 guidance range.
Richard, over to you.
Richard Bird
Okay, thanks Pat. Good morning, everybody.
I will be starting on slide 6 of the slide deck for you that are following along on that. And as Pat mentioned earlier, this morning, we released our third quarter results, and year-to-date reported net income was $1.255 billion or $3.45 per share, that being a 19% increase over our 2008 earnings.
2009 and 2008 results, both on a reported basis included a one-time gain on sales related to the sale of our investment in OCENSA in the 2009 year-end CLH and the 2008 year. Our 2009 earnings were also increased by large marked-to-market gains on derivatives used to lock in foreign exchange interest rates and commodity prices.
2009 was further increased by stronger performance within each operating segment of the company, which offset the loss of earnings coming from our international segments, and we will get into that stronger operating performance in a moment. Excluding one-time and non-operating factors, our adjusted earnings for the year and the third quarter increased by 30% and 78% respectively, which places us ahead of where we planned to be this time of year and is why we are adjusting our 2009 guidance range, which I will speak to in just a few minutes.
So let’s first walk through each operating segment in a little more detail. Liquids Pipelines adjusted earnings rose $45 million in the third quarter of 2009 alone to $119 million and increased $86 million for the first nine months of 2009 to $313 million, that’s a 38% increase.
So the chart on page 7 of the slide deck, you can see that very significant uplift in the performance year-over-year for both three months and the nine months for Liquids Pipelines. As with the first half of the year, most of this increase is due to the recognition of allowance for equity funds used during construction within the Enbridge system from Alberta Clipper and from our Southern Lights project.
In addition, Southern Lights earnings include contributions from the LSR line, which was placed into service in the first quarter of this year. The Athabasca segment earnings reflect a full three quarter contribution from the Waupisoo Pipeline as it wherein 2008 it became contributing to earnings late in the second quarter.
These positive results were only marginally offset in the full year by increased business development costs. Results within the Gas Pipelines business also improved substantially based on strong performance from our off shore assets, which benefited from contributions from the Shenzi lateral placed into service in April of this year.
Higher throughput from the Thunderhorse platform which is now producing at levels that exceed our original volume expectations also helped earnings in this segment. And finally, all three assets within this Gas Pipeline segment which are US based have benefited from the hedging that was put in place in late 2008, which hedged 80% of Enbridge’s US earnings at an average rate of $1.32 through 2013.
Sponsored Investments had another strong quarter. EEP more than doubled its contribution in the third quarter when compared to the prior year as adjusted earnings increased $15 million in the quarter and $35 million year-to-date.
That strong performance was primarily due to the increased ownership of EEP as a result of our $500 million US capital injection need in the fourth quarter of last year. Other results within EEP were also improved as a result of stronger performance, operating performance within both the liquids and natural gas businesses.
These results were also further enhanced by the stronger locked-in US dollar and by our higher general partner incentive income from this investment. The Enbridge Income Fund’s contribution again increased and that’s on the strength of two distribution increases announced by the Fund in 2008, which we are seeing the full-year benefit of it in 2009.
And in the Sponsored Investments segments, you will see a new line this quarter which is related to Alberta Clipper US and once we have received the final regulatory approvals for this project we began to earn AEDC on this investment during this quarter, and of course more to see in quarters to come. The earnings that you see in the quarter therefore reflects 67% of the after-tax earnings from AEDC booked within the partnership and converted to Canadian dollars.
Moving next to Gas Distribution and Services, results were slightly improved in the third quarter as the quarterly loss decreased by $5 million. Losses are typically incurred during the third quarter of each year due to lower summer month heating demand within the gas distribution assets, most notably Enbridge Gas Distribution.
Year-to-date adjusted earnings are up by $22 million from $130 million last year to $152 million this year. And that year-over-year increase was primarily as a result of stronger performance from our Energy Services business which was able to realize higher margins and volumes from a contango oil market and low risk transportation arbitrage opportunities.
Earnings at Enbridge Gas Distribution were consistent with the prior year, and with further cost savings under our incentive regulation program, we expect earnings in 2009 for the full year will exceed full-year 2008 earnings, and we expect to achieve in excess of a 100 basis points of ROE premium above the benchmark regulated rate, as well as providing significant savings to customers in the form of reduced charges for gas delivery. So both that premium and the savings going back to customers reflect performance under the incentive regulation regime for Enbridge Gas Distribution now in its second year.
To conclude our review of the segmented results, corporate costs for the quarter were in line with the prior year and year-to-date results continue to benefit from lower operating costs due to corporate cost initiatives as well as some favorable foreign exchange realized gains. As a result of these very strong year-to-date results, as Pat mentioned earlier, we are increasing our 2009 earnings guidance range from $2.30 to $2.36 per share and that pretty well reflects the relative strength of each of those segments that I have covered as they have performed in the nine months to date.
On that note, I will turn it back to Pat for his concluding comments.
Pat Daniel
Great, thanks Richard. And so maybe I can just pretty quickly summarize before we take your questions, our very strong year-to-date results led us to increase our guidance range in anticipation of the strongest growth year in the company’s history.
As you know, we have successfully placed a number of major projects into service on time and on budget, and we continue to add to our substantial list of commercially secured projects within all three business areas, liquids, pipes, natural gas pipes and green energy. These commercially secured assets along with improved results within our existing assets will enable the company to grow at an average rate of 10% per year well into the next decade even when using this record year of 2009 as the base year.
Enbridge has the strongest growth profile in our sector, balanced against the lowest risk profile in the sector and we think that offers investors a unique investment opportunity with substantial evaluation upside. So on that note, maybe we can move into the Q&A session.
Vern Yu
Hello.
Pat Daniel
We have a moderator there?
Operator
Yes, sorry. (Operator instructions).
Our first question comes from the line of Carl Kirst with BMO Capital. Please proceed.
Carl Kirst – BMO Capital
Hi. Good morning, everybody, and nice results.
Pat just a quick question on the renewable side. I know in the past – the recent past, you have been talking about your folks are bringing a lot of opportunities to you.
And just trying to get a sense – are these other additional Sarnia type projects or is this for instance more a foundation projects that you have that are looking at expanding? And then most notably here, the Sarnia coming into service at the end of this year, at what point do we think this project could potentially be expanded, is that something that would be evaluated sooner rather than later or is that something that where you have to let it operate for a year and then perhaps in 2011 you think about expanding it?
Pat Daniel
Well to come back to you – and first of all, Carl thanks for the comment on the quarter, we appreciate that, and it’s been a great quarter and a great year. With regard to your general question, it’s a combination of potential expansions of existing facilities and potential acquisitions of new renewable facilities.
And we do hope to continue to expand both the solar and the wind business. I think the key thing is that whatever we do, it will be very much along the line of a very similar business model to what you are seeing in Sarnia.
So we do have good organic growth expansion opportunities within existing facilities, but some acquisition opportunities as well.
Carl Kirst – BMO Capital
And then with respect to the potential timing of the Sarnia expansion, is that something where you have to let it operate for a good amount of time to get comfortable with it or is it something that you think you could do in a cooking cutter fashion fairly – it’s fairly soon?
Pat Daniel
I would say more of the latter. We feel very pretty comfortable with the operation, not that it’s in operation, but with the relatively straightforward nature of the operation in the solar business, so we wouldn’t necessarily have to have that up and going for the long period of time before we stepped out and did another one like it.
Carl Kirst – BMO Capital
Okay, fair enough. And then just last question if I could.
And this is more looking out at 2010 – and the sort of quarter’s passed, I guess the guidance for 2010 has been not only we are going to have 10% growth or we are going to have 10% growth off of 2009, clearly we are getting a much better performance in 2009 at least than we expected. Should we be thinking about this?
I mean though the word you used was on average. Is that still we should be using or is what you are seeing that is creating the benefit in 2009 also rolling forward into 2010?
Richard Bird
Well as we indicated it at our Investor Day conferences Carl, we feel we will be able to produce 10% per year going forward. And you are right this is a very strong year this year, we are in the final stages of our budget preparation for our 2010 and – but we’ve remained comfortable with the 10% per year growth going forward.
Carl Kirst – BMO Capital
Great. Thank you.
Richard Bird
Thank you.
Operator
Our next question comes from the line of Matthew Akman with Macquarie. Please proceed.
Matthew Akman – Macquarie
Thank you. I have a couple of questions on the Gas Distribution business and I am not sure who this is for.
But on page 8 of the MD&A, there is a reference to requesting specific changes to the rate handbook and subject to OEB approval, rate adjustments could be effective Jan 1, 2010. Is that in relation to just the existing incentive regulation program or is there something different or in addition to that?
Pat Daniel
Colin, do you – can you respond to that?
Colin Gruending
Yes, I am not precisely sure what you’re – what’s getting out. But we have filed our application for 2010 rate and have put in a graph into that administers new directive for green opportunities.
So we will get new rates for 2010, effective January 1. Hopefully, it’s very early in the year.
Matthew Akman – Macquarie
But there is no significant change in the framework that you are expecting or in the methodology for setting rates relatively to 2009.
Colin Gruending
That’s correct.
Pat Daniel
Yes, no, there isn’t.
Matthew Akman – Macquarie
Okay. Okay, thanks.
And in Gas Distribution earnings so far this year look relative flat on a normalized basis, is there some kind of catch-up that you booked in the last quarter for incentive regulation normally?
Colin Gruending
Matthew we have been accruing an estimate of the earnings range that Richard had described. So there isn’t any kind of back-end weightedness [ph] to that – you mentioned of the earnings calculation.
I think we just expect the continued positive drivers as mentioned in the MD&A on the (inaudible).
Matthew Akman – Macquarie
Okay. Thanks.
Pat Daniel
We’ve also got the phenomenon there where the new rate structure is generally changing the quarterly pattern of our earnings relative to what it has been historically as low, so that will factor into the way the fourth quarter will play up. But some of those – some of that incentive performances progressive, Matthew, so it will have a more significant effect as we move from quarter-to-quarter as well.
Matthew Akman – Macquarie
Because I would have expected year-over-year full-year earnings to be up.
Pat Daniel
I think that’s a reasonable expectation.
Matthew Akman – Macquarie
Yes, thanks for that. And on the Income Fund, Richard, I just wanted to understand a little bit about the strategic thinking behind leaving it out there, is it just sort of a evaluation kind of decision the corporation relative to the Income Fund, or is there anything more behind that that you would like to get into?
Pat Daniel
Matthew, maybe I can just respond first, and then I will ask Richard to supplement. The main objective we had here was to move unit holders into a corporate, a more sustainable corporate structure for them as (inaudible) going forward with broader access to the markets in general.
And as you probably know from looking at the structure, Enbridge is effectively earning is neutral on this initiative, so it’s very much one that we think provides better longer-term market access for the Income Fund unit holders. And that’s the broad strategic driver behind it.
And Richard, you may want to add to that?
Richard Bird
Yes. Well I think that’s pretty much, Matthew.
The proposed restructuring, although the details are still to be refined and finalized, working with the Independent Committee of the Fund. But the general thrust of it is the best alternative that we think there is available to potentially restore the Income Fund on a sustainable basis to a source of capital for Enbridge for low-risk high cash flow assets as it was originally conceived to be.
So we hope that it will be successful in restoring that capital access, and at the same time, obviously be a good deal with unit holders.
Matthew Akman – Macquarie
Okay, thanks very much. Those were mine questions.
Pat Daniel
Thanks Matthew.
Operator
Our next question comes from the line of Andrew Kuske with Credit Suisse. Please proceed.
Andrew Kuske – Credit Suisse
Thank you, good morning. Just as it relates to your green energy strategy and when you start to think about green power among other things, provincial governments in particular have backstopped a lot of that kind of development by a way of long-term PPAs.
And given the position of lot of the provinces with pretty strained balance sheets, and if you took away the backstops and the longer-term contracts, to what degree would you anticipate being involved in that type of business?
Pat Daniel
Well, certainly not to the degree that we are. There is no doubt Andrew that at this point, almost all forms of green energy are higher cost than traditional sources of energy as in coal fired or hydro or gas fired power generation.
So it does require some level of government subsidization and support. And what we of course are looking for in that is the long-term nature of that support and enhance the 20-year power purchased agreements.
So I think it’s fair to say that we all expect that overtime, green energy as it becomes and hits sort of a critical mass in terms of size and development, we will bring those cost down and hopefully be competitive without subsidization, but in the meantime, we are going to need the long-term deals and are to be able to make the project economics work.
Andrew Kuske – Credit Suisse
And just at this point, are you seeing a little bit less appetite from some of the provinces just in part, because in Ontario, the ministry has been over run with applications for wind power development? And do you see that lessening provinces’ appetite and actually proceeding?
Pat Daniel
Well, we haven’t really noticed that to date in terms of the lessening of appetite. In fact I would say in general, in North America, there seems to be a growing appetite.
And the – so we haven’t seen that. I do understand and know that there have been a huge number of applications come forward which is going to cause provincial government in Ontario to have to high grade those, but we haven’t seen any wavering in terms of the concept of philosophy in the strategy at this point at least Andrew.
Andrew Kuske – Credit Suisse
Okay, that’s helpful. And if I may just ask a question to Richard, and it just relates to the non-cash earnings component in your earnings coming from ADC or AFUDC, and right now in this current quarter, a great quarter, about almost 20% of your earnings came from non-cash sources.
And I just – when you look at over the next 18 to 24 months, where do you think your non-cash earnings will peak, and then when do you think that starts to wane?
Richard Bird
Well, I would guess over that period of time, our non-cash earnings will probably peak in this quarter or possibly in the first quarter of next year, because at that point in time, most of the projects are either complete or verging on complete. So we are pretty much there now.
And as we move into 2010, most of those non-cash earnings convert into cash earnings.
Andrew Kuske – Credit Suisse
Okay, that’s helpful. Thank you.
Pat Daniel
Thanks Andrew.
Operator
(Operator instructions). Our next question comes from the desk of Robert Kwan with RBC Capital Markets.
Please proceed.
Robert Kwan – RBC Capital Markets
Great, thank you. Just on the Enbridge systems, a comment that the earnings were up due to lower financing costs, was this just something outside of the flow-throughs you haven’t placed or is this something that’s going to reverse in the future quarters?
Pat Daniel
Richard?
Richard Bird
Colin – yes, Colin, do you want to take that one?
Colin Gruending
Sure. Robert, so for a specific silos within the liquids Enbridge system, we have made some slight modifications due to some transfer pricing of debt costs, which we are – you will see a I guess a mirrored negative impacting corporate for.
So it’s just we are just trying to price the debt at the right price.
Robert Kwan – RBC Capital Markets
Okay.
Richard Bird
Robert, it’s a phenomenon that you saw in Q2 where corporate expenses were lower than what you expected, because of this transfer pricing issue. And all we have done is move that into the business segment to more accurately reflect the run rate in the actual business units.
Robert Kwan – RBC Capital Markets
Okay. From a business perspective, for a total perspective, there is no change or there is no catch up that’s going to be forthcoming, this is simply just an internal transfer?
Pat Daniel
That’s correct, Robert. But from the perspective of the business unit, it is sustainable that that does now reflect what our views is for long-term cost of financing that should be charged to that business unit.
Robert Kwan – RBC Capital Markets
Okay. And then just my other question relates to the Gretna option that you have proposed as part of the keystone hearings.
Just wondering if you can give any color as to where that stands right now and whether you had any detailed discussions with your customers and what response has been?
Pat Daniel
We had no further detailed discussions. And we’ve put forward our case on that, and had no further discussions on that Robert.
Robert Kwan – RBC Capital Markets
Do you plan to take the sub shortly with shippers or is it you just wanted to float it out and see whether anybody is going to come to you on it or –?
Pat Daniel
Well I think that we have a taken our duct to extent that we can and we are hardly supportive of the option as the best way to optimize investments for the upstream industry and provide them with the best and most timely service. And we just – we – I think have made the case very well and very strongly.
We just now need to leave it to the industry and to a certain extent to the regulators. We know we’ve put forward that in a recent hearing that alternative and to really be with the regulator of the industry as to whether they want to take up on it.
Robert Kwan – RBC Capital Markets
Okay, great. Thanks Pat.
Pat Daniel
Thanks Robert.
Richard Bird
And of course on that one, Robert, you would have seen from the testimony that a number of customers did come forward indicate that they did support option and would wish to see it move ahead. But as Pat said, I think we need to get some indication from the regulator as do they before we can really do anything further with it.
Operator
Our next question comes from the line of Steven Paget with FirstEnergy. Please proceed.
Steven Paget – FirstEnergy
Good morning. Just a question on green energy – electrical power projects and green energy projects earned a relatively fixed amount of revenue per year.
And as the capital depreciates they earn a better ROE every year to the end of the contract. And I am just wondering how that fits in with the Enbridge business model where the ROE is fixed over the term of a contract.
Does it mean that Enbridge accepts a lower ROE at the beginning in return for the better ROE at the end of that renewable project?
Pat Daniel
Richard, can you speak to the return profile for our renewables?
Richard Bird
So you are definitely Steven. And broadly in our overall portfolio investment opportunities, most of them are relatively flat ROE profile i.e.
you are in the same ROE every year. There are some however outside of green power which do have a tilted returned profile.
But from our perspective, a mix of both is a good thing, because it both provides good front-end earnings on an overall portfolio basis, but we do have a few of them that are providing continuing growth in returns as we move forward in time. So a little of both is a good thing, or a lot of both is a good thing.
Steven Paget – FirstEnergy
Thank you. And could I ask your comments on the feeding tariff for wind in Ontario, you have developed a sizeable wind facility in Ontario.
Any plans for a second one, now that it’s – you are pretty much guaranteed to get a contract?
Pat Daniel
Well, we – yes the feeding tariff is a very important part of the business model for our development of wind in Ontario. We are very pleased with the investments we have made to date.
And if we can find more than fit the business model of Enbridge and the return profile, we definitely will go ahead with them Steven. So those opportunities are very much in our radar screen.
Steven Paget – FirstEnergy
Okay. Thank you.
Those are my questions.
Pat Daniel
Thank you.
Operator
Our next question comes from the line of Linda Ezergailis with TD Newcrest. Please proceed.
Linda Ezergailis – TD Newcrest
Good morning. My question is just related to one of the recent decisions by the National Energy Board to discontinuing use of the regulated ROE formula.
Just wondering how that might affect your negotiations on your Liquids Pipelines when shipper is going forward? And I guess the second question will be related to Enbridge Gas Distribution and your views on how this NEB decision might set a precedent to affect change in Ontario?
Pat Daniel
Maybe I can just comment briefly and generally, and again then, Richard if you have something to add. Generally Linda, it doesn’t make much difference to us, because we are largely decoupled from that multi-pipeline generic return as you know and we tend to have over the years negotiated individual settlements and tools.
Often though there are references to a multi-pipeline or generic return and some premium to that in the deals that we have done, and so it’s going to be just a mechanical situation of ensuring that there is a common understanding either we follow a similar calculation techniques, so we have got a reasonable reference point there, but very seldom that we do new projects that are dependent on that return alone. So as a result, it should have very little impact.
We tend to negotiate almost all of our deals. And Richard, you may want to comment on EGD and the –
Richard Bird
Yes. So our expectation Linda is that there will ultimately be an impact at EGD, of course the formula discontinuance was the second chew dropping after the TQM decision which pretty much said the formula was undershooting the mark.
And by implication, the formulas of all the provincial regulators are undershooting the mark as well. So we would expect the OEB would move towards a rate of return which reflects a more appropriate return to investors.
The impact of that won’t be immediate, because we are on incentive regulation for another three years to come. And in fact, we expect to make as much or more under incentive regulation as would like arise as a result of the increase in the underlying rates.
But that will obviously impact the environment in which a further incentive regulation deal would be done two or three years from now and obviously in a positive direction.
Linda Ezergailis – TD Newcrest
Great, thank you.
Pat Daniel
Thanks Linda.
Operator
Our next question comes from the line of Sam Kanes with Scotia Capital. Please proceed.
Sam Kanes – Scotia Capital
Thank you. Back to solar for a minute, I have understand for solar to largest US producer of panels and the lowest cost producer of panels in the States, that’s your partner constructing out your project of course.
Have you made further agreements to use their paneling going forward in the second, third and or fourth sites within Ontario? Is it a limit outcome unless you want to proceed in this area or is it just simply the government giving you the economics to make this work, because there is no green technology here, it’s simply a right return mechanism for some Ontario panels going in from outside of Ontario?
Are you joint ventured with them now or can you even – if they came in at low CapEx, is it all to their account or would be to your account?
Pat Daniel
So a number of questions in there, Sam. First of all, we don’t have any formal agreement with First Solar to work solely with them or exclusively with them.
We – they are a large fine company like you see very – a very much in the frontend of new technology development with regard to solar. So I am not saying that we wouldn’t do something with them going forward, because we have found them to be a very good partner.
I am trying to remember all the subparts to your question. But with regard to capital costs, that is a fixed cost on the basis of the fixed EPC bid on the projects.
So hence we don’t carry any capital cost risk on Sarnia Solar. And we also have an operating and maintenance agreement with First Solar for the maintenance of the panels.
All of that, cost has been worked into our economics. And I think you asked whether we would more obviously if we can find more with this kind of signature, we definitely will do them.
We do expect to continue to grow the renewables business. And as we indicated at our Investor Day conference, when we get out five years or so, we expect we could have up to 2% to 3% of the earnings of the company coming from renewables with such combination of solar, wind, fuel cell application, and our wastage recovery units.
That’s still relatively small, but it is growing at a pretty good rate to get there. So as long as we can find the business model that fits so well as the projects to date have with Enbridge will continue to grow the business.
Sam Kanes – Scotia Capital
Thanks Pat. Just on a broad one in general, is there any kind of activity with oil dollars on Gateway at this stage?
Pat Daniel
Gateway continues to move along and we have got strong support for Gateway. And I think it’s fair to say that both Canadian producers in Southeast Asian refiners still feel that the concept around Gateway makes sense in terms of improving net-backed producing for Western Canadian producers and broadening out access to crude supply for Southeast Asian refiners.
Our intent remains to make application to the NEB either later this year, early next year. We are waiting on a joint review panel in terms of reference which we expect shortly and that that should provide the guidance we need to proceed with an application fairly soon.
Sam Kanes – Scotia Capital
Thanks Pat.
Pat Daniel
Thanks Sam.
Operator
We have a follow-up question from Steven Paget with FirstEnergy. Please proceed.
Steven Paget – FirstEnergy
Good morning. Question – I understand that the inner green which is owned by the Alliance owners is looking at the construction of some base load power assets in Saskatchewan that are 40 to 80 megawatts.
Is this a new move for this inner green which had owned waste heat stations on Alliance, is it moving forward to become a significant power generator in Canada?
Pat Daniel
Richard, do you want to take that?
Richard Bird
Sure. I think, Steven, what you are probably referring to is Fort Chicago’s disclosures in that regard.
And inner green has put a bit into Saskatchewan Power Authority. As you indicated, it is for technology that employs the same kind of waste heat recovery technology that inner green’s existing assets utilize.
And so it’s a little different application and then it is including a primary generation facility as well, but also utilizing waste heat. Of course, we have no idea whether it will be successful with that bid or not, so it’s a pretty small step out relative to inner green’s business model.
But remains to be seen whether it comes to anything or not and it is green.
Steven Paget – FirstEnergy
Okay. Thank you.
Operator
This concludes the question-and-answer session. I will now turn the call back to Mr.
Yu for closing comments.
Vern Yu
Operator, were there any calls from the media – questions from the media?
Operator
No. There were not, sir.
Vern Yu
Okay, great. Well, thank you everyone.
And just like to remind you that Pat Murray and I will be at our desk shortly to take any follow-up – detailed follow-up questions.
Pat Daniel
Thanks everyone.