May 7, 2014
Executives
Adam McKnight - Director of Investor Relations Al Monaco - President and CEO Richard Bird - EVP, CFO and Corporate Development Guy Jarvis - President of Liquid Pipeline John Whelen - SVP and Controller Steve Wuori - President of Liquids Pipelines Byron Neiles - SVP of Major Projects
Analysts
David McColl - Morningstar Linda Ezergailis - TD Securities Juan Plessis - Canaccord Genuity Paul Lechem - CIBC Ted Durbin - Goldman Sachs Kyle Kirst - BMO Capital Matthew Akman - Scotiabank Andrew Kuske - Credit Suisse Steven Paget - FirstEnergy Robert Kwan - RBC Capital Markets
Operator
Welcome to the Enbridge, Inc. First Quarter 2014 Financial Results Conference Call.
My name is Christine, and I'll be the operator for today's call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.
I will now turn the call over to Adam McKnight, Director; Investor Relations. Adam, you may begin.
Adam McKnight
Thank you. Good morning, and welcome to Enbridge Inc's first quarter of 2014 earnings call.
With me this morning are Al Monaco, President and CEO; Richard Bird, Executive Vice President, Chief Financial Officer and Corporate Development; Guy Jarvis, President of Liquid Pipeline, John Whelen, Senior Vice President and Controller and Byron Neiles, Senior Vice President, Major Projects. This call is webcast, and I encourage those listening on the phone lines to view the supporting slides, which are available on our website.
A replay and podcast of the call will be available later today, and a transcript will be posted to the website shortly thereafter. The Q&A format will be the same as always.
We'll take questions from the analyst community first, and then we'll invite questions from the media. I'd add that for everyone's benefit you wait until the end of the call to queue up for questions, and the questions are limited to twp per person.
Please reenter the queue if you have additional queries. And I'd also like to remind you that I will be available after the call for any follow-up questions that you might have.
Before we begin, I'd like to point out that we may refer to forward-looking information during the call. By its nature, this information applies certain assumptions and expectations about future outcomes, so we remind you it is subject to the risks and uncertainties affecting every business, including ours.
This slide includes a summary of the more significant factors and risks that might affect future outcomes for Enbridge, which are also discussed more fully in our public disclosure filings on both the SEDAR and EDGAR system. And with that, I will now turn the call over to Al Monaco.
Al Monaco
Okay. Thanks, Adam.
And just before we begin, we understand that we may not be coming across very well. It may seem a bit distant here.
So bear with us, we're trying to project the best we can. I'll begin with a brief recap of our first quarter numbers.
Then as you know we have got a lot of activity going on. So I'll provide an update on recent projects and regulatory developments along with where we sit today on the execution of our 2014 and '15 program.
Richard is going to then take you through our financial results in more detail along with our usual funding position update. I'll wrap up with our outlook and priorities going forward.
Moving on to Slide 5, earlier this morning we announced the first quarter results, adjusted earnings came in at 492 million or $0.60 a share. Earnings were up slightly over last year, even though the first quarter of 2013 was exceptional.
EPS at $0.60 was pretty much where we expected to be in Q1. That means we're on track to be within our full year guidance range of $1.84 to $2.04 per share.
And as I said, Richard will provide more color on Q1 puts and takes in a few minutes. So turning to Slide 6, by far the most important development this past quarter was securing shipper supports for a significant new investment in our liquid Mainline, and that's the Line 3 Replacement program.
Line 3 is very important for us. It represents a major enhancement of our liquids pipeline system and a 7 billion is the largest in our history.
Line 3 is apparently one of six crude lines in our Mainline system right-of-way moving crude out of Western Canada. You can see by inset map what we have included here sits in within the system, basically running through the two Alberta market hubs to Gretna, Manitoba, and then it feeds the rest of our system downstream as Superior.
We've been replacing segments of the pipes. Those are the ones in red on the map, and over time, our plan was to continue replacing those segments.
The reason for that is that even though the line is running in good order today it makes sense in some cases to replace entire segments relative to other alternatives we have. So basically the projects proceeds our previous maintenance plan by replacing all the remaining segments, and of course we'll be using the latest and high-strength steel and pipe coating.
Timing-wise, we expect the line will be fully replaced and serviced at the second half of 2017. The underpinning for Line 3 is very strong.
The return on our capital will be recovered by a 15-year shipper tolls surcharge that will apply to the existing Mainline system. So you can think of this as spreading the cost of the replacement across all the volumes on the Canadian and the U.S.
systems. We're now underway and we've begun landowner consultation.
Slide 7 highlights the key benefits of the project. First, Line 3 delivers significant benefits to our customers.
And just as a remainder, the overall capacity of the systems here is not going to change that's because we are effectively already in balance upstream and downstream in Superior. What the project does though is provide increased reliability and assurance of moving anticipated volumes on the system to the end of the decade.
That's critical because it ensures producers a highly reliable access to the best markets, so they can get full value for the crude and refiners and get access to the reliable feedstock. The second benefit is that investment lines are very well with their own priority of enhancing the overall safety and reliability of our system.
And finally, it comes with a solid investment outlook for Enbridge. First, it saves about a $1 billion in maintenance and capital through 2017, and that number would rise after that, have we not replaced the line.
We're having a very good return on large capital investment with solid commercial underpinning, and it will contribute nicely to longer term EPS growth well past 2017. I'm going to come back to that point later on.
Slide 8 summarizes the status of our regulatory applications for some of our most prominent projects, and as you are all aware the regulatory and permitting environment is certainly challenging these days to say the least, so we're managing this very closely. Beginning with Gateway in December, the Joint Review Panel recommended that the Federal government approved the project.
That was of course subject to over 200 conditions which we're currently reviewing, but recall that a good number of those conditions were actually commitments we made in this regulatory process.
As I've said before, on that project the regulatory process is one step. The focus now is on re-engaging some of the aboriginal groups and stakeholders along the right-of-way to better understand their views on address any remaining concerns.
Next on the Alberta Clipper expansion, as you recall that's designed to bring capacity up to 800,000 barrels per day in two phases, and that's through addition of pumping capacity. So, no new pipe is required.
Several regulatory approvals have been received, that's been noted here in the slide, Phase 1 and 2 have been approved by the NEB in Canada, and Phase 1 have received Minnesota state approval. Public hearings in Minnesota for Phase 2 have now been completed, and we're waiting for the decision there.
On our application for an amended presidential permit, the department of state is working on the supplemental environmental impact statement, and we talked about this last quarter even though we had plan for this process to take longer the contingency we have wasn't enough. In light of that we advanced temporary system optimization measures.
We expect those to largely mitigate any impact of this year's expected throughput related to Phase 1 capacity of 120,000 barrels per day that we had planned to have in service this year. At this point, we believe that the department of state process will be completed in time for us to meet our original schedule to have full capacity with 800,000 barrels per day in place by the third quarter of 2015.
In April we received Federal Cabinet's approval for the Edmonton to Hardisty line, which was recommended by the National Energy Board. In early March we received NEB approval of the Line 9 reversal project.
Recall that Line 9B will connect refineries in Ontario, Quebec with light oil from Western Canada and the Bakken. This isn't our largest project, but it is a critical one as these refiners currently face a major competitive challenge given higher price form feedstock costs.
There were a number of conditions attached to the NEB decision which we're now discussing with our shippers. The approval process here doesn't mean that we're done, we will continue to build on the very expensive consultation process that we undertook with communities on this project.
Back to Line 3 for a moment here, we will file our applications with the NEB and FERC and other regulators later this year. We're now finalizing our detailed cost estimate for the project.
Lastly, in January we received OEB approval for the GTE project in the Toronto area. We anticipate starting construction there this year with an in-service date of late 2015.
So that's the run-through on the regulatory updates as you see there is quite a few here. So, we thought it would be best to keep you up-to-date.
The next three slides, I'm on Slide 9 now, it provides a broader update on the status of our $41 billion capital program. Over the next two years we will bring $19 billion of capital into service.
On this first slide here, $9.4 billion of that we expect to come into service this year, and the green checkmarks indicate the projects that are now in service. On Line 6B we completed the 75 Mile 6B Replacement program, and just a few days ago we placed in the service the section between Griffith and Stockbridge.
So that's a good outcome. Completion of these projects is going to provide much needed incremental capacity downstream in Chicago into the upper Midwest in the Ontario market.
We're pleased that the Norealis project was ready for service on April 1. This project serves the Husky Sunrise Energy project.
Turning to Slide 10, which highlights the status of the Western Gulf Coast Market Access program; the combination of Flanagan South and Seaway Twin project impacts an incremental 600,000 barrels per day of Canadian heavy to the Pad 3 market, which is obviously an important conduit for us and our customers given the constraints on existing capacity. On Flanagan itself, we are in good share here.
We believe as construction on this 590 mile new bill is nearing completion. So we are comfortable with their Q3 in-service projection.
In the twinning and extension of the Seaway line which will more than double the capacity of existing lines to about 860,000 barrels per day is on target for completion in the next couple of months. Both projects will have a positive impact on earnings later this year.
And of course both come with what we refer to as the tilted return profile. Basically that means that the equity returns start out in both the high single-digit area, an increase over time and an increase in return profile really reflects the facing contractual commitments that we have which ramp up over time.
Just to clarify, I think there is some fuzziness on times of both the tilted return profile, but the overall return on this type of profile achieve the full life average double-digit returns that we talk about on these major capital investments. Turning now to Slide 11, I'm not going to go through this slide, but it does provide a good snapshot of the projects that are slated to come into service next year, and all of our businesses.
The point is that we are expecting another nine plus billion in projects in 2015 as all of these projects are progressing well. Now, I'll turn it over to Richard for color on the quarterly results.
Richard Bird
Okay. Good morning everyone.
And I am on Slide 12 now, and as Al mentioned it was a solid quarter consistent with our expectations though I have to look at the comparatives to the first quarter of last year. You might initially wonder about that and what you have to remember was that Q1 last year was an unusually strong quarter on a number of different fronts.
So, we are pleased to have roughly matched last year's strong first quarter. And this year in contrast the last year we will see much stronger quarter-over-quarter uplifts in the subsequent quarters of the year.
Looking at the individual segments, liquids pipeline is essentially flat relative to the strong first quarter that it enjoyed last year. And the Canadian Mainline beating the biggest part of liquids pipelines was likewise flat with volumes up significantly, but that's offset by the lower residual IJT tool.
Complicating the picture a little bit, this year is the fact that line 9B is idle for the early part of the year while it's being reversed and expanded and we will then come back into service in Q4. So the CTS component of the Mainline if you exclude line 9 and just look at CTS component by itself, it's up by about $5 million.
Expectation for the Canadian Mainline for the full year remains in track with our guidance comments which are essentially flat. There is not much to say about the smaller subsegments within liquids pipelines quarter-over-quarter.
They are all pretty much flat, but we are still expecting both the oilsands regional system and the Gulf Coast access projects that AL mentioned a few minutes ago to generate increased earnings for the full year as various components come into service. So we are still expecting liquids pipelines as a whole to be up, but just modestly for the full year on the strength of these two subsegments.
Gas distribution is down quarter-over-quarter, and that reflects the different quarterly pattern of recording gas costs between this year and last and we expect it to balance out over the year. We had lower transactional services revenue due to the cold weather that that should recover over the balance of the year.
And we will recognize revenue at the lower existing delivery rates until new rates are accrued likely in the third quarter at which time we will catch up. So we are still expecting a flat full year result for gas distribution.
Gas pipelines and processing was also flat year-over-year. The other subsegment was up a little bit.
That's the strength of new renewables assets placed into service since the first quarter of last year. On the other hand energy services was down.
That was accepted given the exceptionally -- sorry, that was expected given the exceptionally strong performance last year. And we would expect that to be true of the full year as well down from last year, all consistent with our guidance comments and consistent with the moderately lower expected full year 2014 for the overall gas pipelines and processing segment.
Sponsored investment was the only segment which was up relative to last year with bigger contributions from both Enbridge energy partners and Enbridge income fund. Again, that's as expected and consistent with our full year guidance.
And the corporate segment is flat quarter-over-quarter for all intends and purposes. The corporate bank is making a bigger contribution as its margin on intercompany financing grows on a bigger asset base, and is now coming close to offsetting all of our corporate costs.
The [vehicles] (ph) contribution was down. But that largely reflects the unusually strong Q1 for last year, and again the segment as a whole, the corporate segment is running consistent with expectations and full year guidance of our moderate uplift relative to 2013 on a full year basis.
Moving to the next Slide; so, overall as I've just been through segment-by-segment, the first quarter was pretty much as expected. And at this point we remain on track with our guidance range of $1.84 to $2.04 with no significant headwinds or tailwinds yet apparent that would be pushing toward one side of the range or the other.
Moving ahead with Slide 14, it was pretty much of a routine quarter in terms of the funding actions that we undertook with about 2.5 billion of funding laid on during the quarter, that's become a routine quarter for Enbridge on the funding side. And more noteworthy than the absolute amount of the funding where some of the details such as the 50 year note issued by Enbridge at the parent level and the 1.9% coupon three year note issued by Enbridge gas distribution establishing a new record low for Canadian corporate issue.
Our funding waterfall on Slide 15 reflects the steady progress covered in the prior chart, mostly on the debt side in the first quarter, but all still very manageable in terms of what's left to do over the balance of this plan through 2017. And then finishing up on Slide 16, we continue to optimize our funding sources to provide the lowest cost of capital and to maximize the value capture from our growth investments for current shareholders.
We remain comfortable that we will be able to source the 2.6 billion of additional equity will require for our 5 year funding plan from the lower cost sources, then issuance of public equity. And in particular from a combination of preferred share issuance and asset monetizations including sponsored vehicle drop downs.
We have removed one particular monetization structure from our roaster at this time that's the U.S. infrastructure cofunding concept.
After showing some initial promise, we have concluded that this particular structure will not be able to match the favorable economics of our Canadian structures such as the Enbridge Income Fund and Noverco. So we will shift our focus back to these structures including potentially a more aggressive drop down schedule for Enbridge income front.
We believe there is significant capacity which could be tapped from this source. And with that I'll turn it back to Al.
Al Monaco
Okay. Thanks, Richard.
So we are now on Slide 17. I am just going to wrap up by focusing on bigger picture and specifically how the new growth projects we recently secured in the last few months further strengthens our growth outlook.
And since Enbridge stays, you will recall we've added $10 billion in secured projects and that was volume three and with Buffalo expansion that we are developing for the Fort Hills partners in Suncor, and Norlite, which will draw diluent from our Stonefell Terminal up to the Athabasca region. It's a large number of secured projects in terms of the magnitude, but strategically with Buffalo build on a strong regional oilsand infrastructure and Norlite initiates our diluent presence in northern Alberta.
Now, aside from that, those two projects fit very much in the middle of our value proposition. They are both underpinned with 25 year throughput agreements, so they will generate very solid risk adjusted returns supporting the predictability of our earnings and cash flow well into the future.
So, all in we commercially secured now 36 billion in capital projects that will be placed in the service by 2017, but doesn't include another 5 billion or so in projects and development. The table also breaks down the 36 billion of secured between those with traditional flat return profiles and upward tilted returns that I talked about earlier on.
The almost 15 billion in projects with a flat profile provide very good transparency and EPS grow through 2017. But with line three, we now have almost 22 billion in upward tilted projects.
This is very important because the combination of timing, the size and the return profile of these projects will drive incremental EPS growth beyond 2017. And that growth is going to come with no incremental capital investment and we would all agree that's the best we can have.
It's really been discharged that base our confidence in the future. Turning to Slide 18, given our $41 billion growth capital program, we remain confident in delivering average annual EPS growth on average 10% to 12% through 2017.
The portion of our post 2017 growth already locked down and securing -- secured rather through the tilted return profile with a very solid base to support continued industry leading growth beyond 2017. There is also room to supplement organic growth through substantial dropdowns of matured cash generating assets to our sponsored vehicles as Richard was talking about.
With respect to dividends, the other part of this chart, we would expect to see the growth rate attracts EPS, but has to move their profile. With the amount of capital we are putting in the ground we will see strong cash flow.
This provides the potential to further accelerate the dividend growth above the earnings growth rate depending on the availability and the attractiveness of capital investments that we see later on. Slide 19 reiterates the three priorities that guide us today and into the future.
Number one, of course remains safety and reliability. We made great strives and our team is pleased with progress so far.
There are many examples that couple main the most proactive preventative maintenance program in North America and secondly our operational risk management program focuses us on achieving industry leadership. Second priority is effective execution of the program.
Despite the challenges, overall we are executing well on the ground, and staying also ahead of our funding needs and ensuring we have ample liquidity, another thing that Richard commented on earlier. And finally with growth secured over the medium term as I said third priority is to expend and diversity growth beyond 2017.
We are bringing along new growth platforms as well in a measured and disciplined way. These include electricity generation transmission, energy services and international.
And as a growing inventory of generating -- cash generating assets that offer very good potential for dropdowns. So just to summarize remarks today on Slide 20, the first quarter results were solid and came in as expected.
With that start we are on track to be within the full year adjusted EPS guidance range of $1.84 to $2.04 per share. We are making great progress as well on executing the capital program.
Most recent $10 billion of secured growth projects combined with the embedded tilted return gives us high degree of confidence that we will able to maintain our industry leading growth beyond 2017. Finally, industry leading growth will generate strong dividend growth.
So that wraps up our remarks. And now I'll ask the operator to open up the line for questions.
Operator
Thank you. We will now begin the question-and-answer session.
We will take questions from the analyst communities first and then invite questions from the media. Please limit questions to two per person and re-enter the queue if you have additional queries.
(Operator Instructions) Our first question comes from David McColl from Morningstar. Please go ahead.
David McColl – Morningstar
Yeah. Good morning, everyone, and thanks for taking a couple of questions from me.
With the ongoing delays to the Keystone XL and challenges, shall I say, for more than Gateway, I am wondering if you have an any interest in developing coastal rail offloading terminals for Canadian crude, either perhaps in the Vancouver area or somewhere else where you might need to develop new infrastructure and port facilities? And then second question, should we say [unrelated] (ph), can you provide any update on the plans for the recent land you acquired I believe near the Kitimat area?
Thank you.
Richard Bird
Okay, David. Well, as far as your question around coastal rail, obviously with the pipeline constraints these days we're always thinking about opportunities that will help out our customers.
The one actually that we just brought into service is the Eddystone project in the U.S. East Coast.
That just started operating actually a few days ago. So, we're thinking about those opportunities particularly where pipeline timing issues or otherwise constraints are precluding early development of those opportunities.
So I guess we're thinking about those; Eddystone is probably the most visible right now. On your second question, I think you're referring to the land that we acquired at Grassy Point on the West Coast.
I would put this in the category, David, of our general business development activities that we undertake to obviously secure important lands for potential future development. So, we will probably leave it at that for now, and these things have a tendency to at some point potentially be valuable in developing projects.
So that's where we are at right now, very early stage.
David McColl – Morningstar
Okay. I appreciate the commentary.
Thank you.
Richard Bird
Okay. Thanks, David.
Operator
Thank you. Our next question comes from Linda Ezergailis from TD Securities.
Please go ahead.
Linda Ezergailis - TD Securities
Thank you. Can you provide some context as to what exactly EEP is negotiating with [Capone] (ph) with respect to the Lakehead tools?
And what would the tool be based on kind of the default calculations versus what EEP is desiring, and are you trying to roll in some extra CapEx or is there something else going on?
Richard Bird
Okay. We'll hand that over to Guy for the response.
Guy Jarvis
Yeah. So, Linda, you're familiar we have gotten a number of players in our tooling historically, and the element of the, I guess, the rate base and the toll if you want to call it that it's under renegotiation is the SEP2 element.
So it's really kind of a negotiation of -- just a re-negotiation of the traditional elements in terms of returns and integrity treatment and whatnot. So I don't think there is anything untoward or out of sorts here.
It was a negotiation that in some respects took a backseat to our work with industry on the Line 3 Replacement, which is probably the most significant reason why there is a bit of …
Linda Ezergailis - TD Securities
So the SEP2 expired or …
Guy Jarvis
SEP2 formally expired at the end of the last year.
Linda Ezergailis - TD Securities
Okay. That's helpful.
And with respect to -- I think Richard made a comment with respect to Enbridge gas distribution, now expecting incentive regulation decision. Is it now Q3 versus Q2 prior?
Do you know what's causing the delay?
Guy Jarvis
I'm not sure that we have or expected it by Q2, but if we did then at this point in time it's looking like it will be more likely to be Q3, Linda.
Linda Ezergailis - TD Securities
Okay, thank you.
Operator
Thank you. Our next question comes from Juan Plessis from Canaccord Genuity.
Please go ahead.
Juan Plessis – Canaccord Genuity
Yeah, thank you. Al, you mentioned that beyond 2017 earnings growth could be driven by some new growth platforms.
Can you talk a little bit more about what new growth platforms you would consider?
Al Monaco
Sure, Juan. Well, the primary ones right now and as we mentioned we're bringing this along at a fairly reasonable pace and measure pace now because we have got so many things in front of us in the next several years, which gives us the option to bring these along slowly.
Certainly our power generation business, you know, we developed fairly sizable business already in the realm of 1,800 megawatts of renewable generation. That's the one opportunity.
The next opportunity I would say generally is electricity transmission. We dipped our tool in the water now with the Montana inter tie line.
That provides a good opportunity. We like that business, and frankly the power generation side, because they come with very similar business models and commercial underpinnings to core part of our business today.
Another opportunity which I think is very good potential, perhaps not exactly in the new platform category, but certainly Canadian midstream natural gas with all of what's going on in Northern B.C. today with respect to development for future LNG projects and just generating the amount of drilling for natural gas liquids in particular.
There is a lot of demand for natural gas midstream infrastructure. I think generally people talk about the LNG plants themselves or the Long-Haul pipes, but certainly a lot of requirements are gathering and processing infrastructure, and you think given the magnitude of those projects and the number of them, a company like Enbridge I think will -- can play a very strong role.
And we have had some initial success there as you know with Cabin in the Peace River Arch. I guess maybe finally Juan, on the international; this is another reflection of taking a measured approach, so we have primarily three main countries that we are looking at right now, Australia, Peru and Columbia.
We have true experience on those countries. We like the fundamentals.
And the business environment very much strong business environments relative to all of the areas you look at. So those are the three primary opportunities that we are looking at right now internationally.
Juan Plessis – Canaccord Genuity
Thanks.
Al Monaco
Okay, no problem.
Juan Plessis – Canaccord Genuity
That's excellent, Al. Thanks very much.
And maybe just a more detailed question, probably for Richard. What non-core assets were sold at Enbridge offshore and are there any more assets in that segment that you are looking to sell?
Richard Bird
Well, there are no more assets in that segment that we are looking to sell, but I think generally we are always looking at the enterprise-wide asset based in assessing whether particular assets continue to achieve our financial objectives or whether they might better achieve someone else's financial objectives in, and to the extent to which they are tied into a broader strategy. So in the case of the actuary, it was a small system that we had on the books were relatively low carrying value, but we didn't see any real future in it and it did have a significant eventual banding that liability associated with it.
So it makes sense to get rid of it. Somebody else thought -– they saw a use for it and was prepared to take on that asset.
Juan Plessis – Canaccord Genuity
Okay. Thank you very much.
Operator
Thank you. Our next question comes from Paul Lechem from CIBC.
Please go ahead.
Paul Lechem – CIBC
Thank you, good morning. My questions are on the Mainline and I'm wondering about the residual toll that you received and at a buck 81 for Q1, does it stay at that level for Q2 and it adjusts on July 1st when the new adjustment comes in?
Can give us any sense also then on that adjustment what you expect either the Lakehead system told to go to your residual toll or you directionally at least, can we get a sense of where it might move to?
Richard Bird
Okay. Paul, we are going to hand that to Guy to respond to.
Guy Jarvis
Yeah. So you are correct in terms of the timing of when it's likely to change.
I think we are at a stage right now where we are not in a position to give you prescriptively what we expect to focus on those, but I think directionally we are expecting that IJT component to Canadian Mainline is going to weaken a bit.
Paul Lechem – CIBC
So your residual will go likely go lower post (indiscernible)?
Guy Jarvis
Correct.
Paul Lechem – CIBC
Okay. And what are the elements that go into that?
What will make up the Lakehead system portion of that? Is it negotiations with, that you mentioned with cap or is there anything else we should think about?
Richard Bird
No, I don't think the negotiations with cap would necessarily be a factor to there. It's really the largely the true-ups of the capital expenditures and the volume on the past period.
Lakehead does operate after service. So there is our true-ups mechanisms that end up flowing through in the following years.
Paul Lechem – CIBC
Okay. And then on the volume, you had 1.9 million barrels crossing the border, up over 100,000 barrels year-over-year.
What is your forecast for this year in terms of the volumes and what is the theoretical capacity that you can carry on the Mainline at this point in time? Thanks.
Richard Bird
Yeah. So let me tackle the first part of your question first.
We're expecting to see continued gradual growth of volumes on the systems throughout the balance of the year. We are very happy with when we look around the production community and the pace at which the production is growing.
We had quite a bit of success for this point in the year in terms of some of the initiatives we were undertaking to increase the capacity on our system. We now have Line 6B Phase 1 in service and we got a couple of other projects that are continuing.
So we are pretty happy with our capability to move in higher volumes throughout the balance of the year, and the barrel seemed to be there. So generally the trend would be good.
And I am sure I have forgotten the second part of your question.
Paul Lechem – CIBC
Well, just -- how much theoretical capacity you have there to increase volumes. Can you get much higher at this point in time about the 1.9 without the Clipper expansion?
Richard Bird
Well, we have disclosed previously that we think that we come up with a number of alternatives to mitigate or replace the volume expectation we had from Phase 1 of our Alberta Clipper this fall. So we are looking at -- I think Alberta Clipper, we are looking at a range of an additional 120,000 barrels a day in addition with some of these.
So I think throughout the year we are looking at adding as much as 250,000 barrels a day of additional capability within our nameplate by the end of the year.
Paul Lechem – CIBC
Thanks very much.
Richard Bird
Thanks, Paul.
Operator
Thank you. Our next question comes from Ted Durbin from Goldman Sachs.
Please go ahead.
Ted Durbin – Goldman Sachs
Thanks. Hi, I would like to ask at first about the impact of rail, crude-by-rail on your volumes.
What are the shippers telling you that they are thinking about in terms of Western Canadian crude moving? And then how did the change in specifications on some of the railcars change the impetus to move crude by rail?
Al Monaco
Okay. Well, maybe generally on rail, we'll hand it over to Richard, given title is in his (indiscernible) we have some rail operations there.
I think we have seen particularly in North Dakota given that the differentials have narrowed up, we are seeing volumes flow back on the North Dakota system, pretty good results there last quarter. And I think that's what we have always been saying is pretty much how it will move forward in that as these basis differentials tighten up, we should see volumes come back on the pipes simply because of the better economics from a tooling perspective.
More generally, what we are seeing is that producers want options, and particularly given this constrained environment that we are working with in the next little while, it's not surprising to see rail facilities being dealt, but as I said ultimately the economics should drive volumes back on to two pipes as some of these expansions come on. Richard, do you have anything on the specs themselves on rail.
Richard Bird
Sure. So and maybe just to talk a little bit on to Al's answer on rail impact.
We do carry now an expectation of a permanent rail component within our long-term volumetric forecast. So as Al was indicating we are expecting the fair bit of rail to come back to pipe as we open up access to the attractive markets that are otherwise currently being served by rail.
But we don't expect it's ever going to all be on pipe and we are building that into our long-term volume forecast. With respect to the railcar specifications, with respect to both our own energy services business which does carry railcar leases and more broadly the industry in general.
I don't think that either the requirements to convert to the more robust cars by 2017 or the additional provisions for emergency response requirements for rail shippers are going to significantly impact the goal of rail is going to play that role being the one that Al just described. There is enough time for conversions to occur for the most part, and so that's probably not going to be much of a factor.
Ted Durbin – Goldman Sachs
Okay. I appreciate it.
And then my second question was just your thinking on financing has evolved a little bit, you have dropped the co-funding vehicle. Any thoughts on additional dropdowns to EEP, I know they mentioned at their Analyst Day the amount of book value of assets that's still setup at ENB, or is it staying really with USS that's still does really focus on MEP dropdowns as you previously guided?
Al Monaco
So I think it's almost exactly as you have just said the near term plan with respect to dropdowns on the EEP side of the family is to build the EEPs financial capability through dropdowns to mid coast energy partners. Use that to largely to fund its participation in liquids growth projects, get those in service, get the cash flow going from those which will support both distribution increases and also improved coverage and look out to a point in time where EEP is enjoying the benefits of that.
And that will be reflected in its evaluation. At which time, yes, there is a very significant asset base that would be available to support further dropdowns to EEP and to support further dropdowns to Enbridge income fund and possibly other forms of monetization as well.
Ted Durbin – Goldman Sachs
Okay, thank you.
Al Monaco
Okay.
Operator
Thank you. Our next question comes from Kyle Kirst from BMO Capital.
Please go ahead.
Kyle Kirst - BMO Capital
Thanks. Good morning, everybody, and nice results.
Just a couple of quick questions, the first, can you remind me the timeframe on Alberta Clipper as far as adding the pumping stations for to effectuate Phase 2 kind of have in the back of my head that that would be a six months process, but wanted to reconfirm that?
Al Monaco
Well, maybe the way to think about it Kyle is that initial Phase 1 was mentioned 120,000 barrels a day. As we talked about we think we can mitigate the throughput that was originally designed for that this year.
So that's the first phase. The next phase which would involve some additional stations, we bring on 230,000 barrels per day.
So what we are saying at this point, you remember we are with the department of state and their presidential permit. And then the presidential permit review, we are thinking that by Q3 we should have that permit and pretty much you can think of those stations being ready if the permit is ready by that time.
So that's how we are looking at phasing for Alberta Clipper expansion to 800.
Kyle Kirst - BMO Capital
When you mentioned Q3 we should have that permit and pretty much you can think of those stations being ready if the permit is ready by that time. So that's how we're looking at that phasing of the four Alberta Clipper expansion to 800.
Kyle Kirst - BMO Capital
Sorry, when you mentioned 3 for the permit you're mentioning it -– are you meaning it for next year, meaning we could be basically as soon as we get the permit, for instance, we would be ready to go with the project that this would be kind of being done in parallel?
Al Monaco
Yeah, Q3 next year -– Byron, do you want to go to that last point?
Byron Neiles
Certainly, the Minnesota regulatory (indiscernible) for that additional capacity was held on April 9th. In Minnesota we expect a decision this summer, and that would allow us and enable us to construct the additional facilities.
So that is now indicated when we received the amended presidential permit, we'd be able to put those additional barrels into service.
Kyle Kirst - BMO Capital
Understood. I appreciate the clarification on that.
And then just secondly, in understanding this is perhaps putting the cart in front of the horse, Al, the $5 billion of additional projects that you all are evaluating, is there any additional color as far as -– are these a collection of several projects I guess coming off of Line 3, is there any singularly large project, and I guess I'm trying to get a better sense from a financing standpoint, if these are projects that if they do happen would be sort of potentially coming to service within the current five-year horizon, i.e. they have to be funded here in 2014-2015, are these projects that as they're making or perhaps more than 2017 and beyond timeframe?
Al Monaco
Yeah, okay. So that's a good question, Kyle.
So, the way we manage this inventory I guess is really to probability wait all of the projects that we're working on. So there is no particular single project that is comprising the majority of that.
I'd say it's several or many projects that are in that category. They're anticipated if successful to all be in service by 2017.
However, as to the funding comment, Richard's waterfall, he goes through accounts for that level of projects and development. So we can think of it as us planning for from a financing perspective with success on those projects, but it covers all of our businesses, and there are many in that category.
Kyle Kirst - BMO Capital
Fair enough. Thank you so much guys.
Al Monaco
Carl
Operator
Thank you. Our next question comes from Matthew Akman from Scotiabank.
Please go ahead.
Matthew Akman – Scotiabank
Thank you very much, good morning. Al, you spoke about some of the midstream opportunities down the road, maybe a little bit more clear and present would be for construction of gas processing in Canada, and Enbridge is in that business now, and I'm wondering whether you guys see any opportunities in the next couple of years on construction of new large scale gas processing, is that something you'd participate in, given the experience at Cabin and what you see an outlook there?
Al Monaco
Yeah. It's a good point, Matthew.
As I said earlier, we're pretty excited about the level of opportunity both in Alberta and B.C. and I mentioned this briefly, but some of these projects are very sizable.
We're not talking about $100 million plans for CO2 or NGL processing here. These are quite a bit larger, and given the financing capability we have in the future, even though we're quite full up at the moment, certainly these bigger projects fit quite well.
In addition, we've always thought of our expertise in the gathering of process and business in the states that we use that as something that's effectively exportable to Canada. So that was a major driver actually in our ability to win the Cabin project, and of course Byron's team and execution capability gives us some pretty credibility out there to be a player in this market in the future.
Matthew Akman – Scotiabank
Okay, thanks for that. Is there more questions on commodity exposures and how the weather affected Enbridge in the quarter, but Aux Sable through others reported some profit on the pipeline capacity that they owned in alliance, and I know Enbridge had some of that in the portfolio, is it still in there and did it have any impact on the quarter?
Al Monaco
Yes, it's still is in there and it did have an impact on the quarter, so we had quite a few impacts throughout the business from the cold start to the year, probably the most single significant one was with Enbridge gas distribution which by tradition is normalized out. So you can see that in the detailed results, but there are various other little processes; some positives, some negatives.
I wouldn't say other than energy services piece which is also called out in the MD&A, there probably wasn't any other that was particularly remarkable in magnitude.
Matthew Akman – Scotiabank
And just to clean up on that lower transactional services that you mentioned on EGD, I'm a little bit surprised about that given some of the volatility, out of the top maybe the opposite, is there anything you'd like to add there?
Al Monaco
Well, in fact that is a one way. The weather impact actually goes in the opposite direction, because typically EGD has some capacity storage and pipe beyond that which requires for it's usual regulated business activities, but it uses that to make some margin, but given the cold weather all that capacity was called and used to support the medium, the regulated utility.
So that took away the opportunity in the first quarter, so negative weather impact in the first quarter, but the way that business works there is opportunity over the balance of the year. And the magnitude of the opportunity is capped in any case.
So we are still are confident we will secure within that cap development we have built into our full year guidance even tough we didn't get any of it in the first quarter.
Matthew Akman – Scotiabank
Okay, I'll take that tradeoff on my gas bill. Thanks, guys.
Operator
Thank you. Our next question comes from Andrew Kuske from Credit Suisse.
Please go ahead.
Andrew Kuske – Credit Suisse
Thank you, good morning. I guess it could be directed to Al or Richard, and it's just on the dynamics in the interplay between building new platforms for growth as you mentioned, you mentioned four of them early on versus the dropdowns, so I guess in conjunction with the dropdowns, is this little bit of a chicken and egg dynamic that you're going to face?
Al Monaco
Maybe you see if I understand the question. Maybe if you could just clarify that for us, Andrew.
Andrew Kuske – Credit Suisse
Sure. Yeah, I guess if you look out over the next few years, you're pretty much fully allocated from a pretty impressive, I'm not trying to be patronizing at this, but a pretty impressive capital backlog out until 2017 and thereafter you do have some projects, but they're less visible.
And so I guess just the dynamic we're trying to build new things and new platforms for growth to extend the growth versus the dropdowns to fund things?
Al Monaco
Yeah, I see, so I guess the way we're looking at this balance between all of what we've got going on right now and the need to execute, and when I say execute, not just in the field but something those opportunities we're very cognizant of making sure that we're not overexpending ourselves and financing as you know, we've been ahead of the curve on financing side. So the way we're looking at these new platforms as I implied earlier is that we're going to take a measured approach, the way I look at, at least three of those four is -– there are options in many ways.
We've been lucky to be able to have this growth in the near-term here, but it gives us an opportunity to bring those other platforms along in a measured way that you're saying. As far as the dropdown capability, the way I look at that it's a tremendous opportunity to release capital from the business at the right time.
We've got two very good vehicles in Enbridge income fund and Enbridge energy partners. Enbridge income fund is obviously working quite well right now.
As Richard alluded to earlier, there will be some time to go by and so we can fully recognize the growth in EEP which will allow us to have them absorb these dropdowns more efficiently. So I think that's sort of the balance where we're running at the moment.
I'm not sure if that answers the question entirely, but that's the big picture.
Andrew Kuske – Credit Suisse
That's helpful, and then just a follow-up. When you look at the potential dropdown strategy and the potential that Enbridge has to drop assets, whether it would be ENF or EEP, I guess when you step back and you look at yourselves and really Trans Canada really the last two large really big corporate owners of assets in this space without really significant MLP cash flow is coming into them, do you see yourself morphing into that kind of model where it's really predominantly MLP cash flows coming in, or really retaining your current structure?
Al Monaco
Well, I guess first off, we watched this pretty closely and we can see that there is a certainly disposition to moving assets into MLPs or other vehicles and we'll continue to look at it closely, but I'd say at this point in time we've got a lot of growth in front of us. And we're watching the funding.
We're watching opportunities for roll downs. And at some point we may conclude that there is more capability to do further roll downs, and move more into that space.
So that's kind of how we're thinking of it at the moment.
Andrew Kuske – Credit Suisse
Okay, thank you.
Al Monaco
Okay.
Operator
Thank you. Our next question comes from Steven Paget from FirstEnergy.
Please go ahead.
Steven Paget – FirstEnergy
Good morning, and thank you. With your tilted return projects, which I understand to be tilted earnings return.
Would we be correct in understanding your return on assets or your operating income divided by assets would be flat over the life of the same projects?
Richard Bird
So this just pulls out again -– Steven, I'm not sure I've quite got (indiscernible).
Steven Paget – FirstEnergy
Just your tilted return projects -– the tilted return is really a tilted earnings return. The earnings return increases over time, isn't that right?
Richard Bird
Yes.
Steven Paget – FirstEnergy
But with the return on assets, that is the EBITs over assets would that -– is that more flat over time, because of course its pre-interest etcetera.
Richard Bird
I don't think so. We don't necessarily look at that as our primary financial measure, but I can't think off of hand why EBIT wouldn't follow a similar profile to earnings.
So I'm going to say it would be tilted either way you look at it. The angle of the tilt might be a little it different but it will be tilted either way.
Al Monaco
I think that's right. If you just use ROE as a proxy, and as Richard said, it shouldn't be that much of different on an EBIT basis.
Think of it as moving initially from high single-digits to exceeding double-digits over time to average double-digit project. I don't think there will be any difference between the two, Steven.
Steven Paget – FirstEnergy
Thank you. That's actually very helpful.
So we talked about measures. When measuring the efficiency of your operations or potential acquisitions, what metrics might you use?
Al Monaco
Well, I guess there is a host of things, that certainly when we are moving into decision-making mode for capital investments particularly when we get into these large sized opportunities, you'd agree, I'm sure that this kind of cash flow returns on equity are the key metrics that we use. We monitor that very closely after we proceed.
Certainly we watch values very closely; operating costs and so on and so forth. So those are the major things that we're looking at throughout the piece.
And Richard, do you have anything to add on that one?
Richard Bird
I don't think so. When we're looking at a capital project, Steven, we are generally assuming traditional levels of efficiency on most runs.
We're actually running the business, and these business units have a pretty significant drive to enhance efficiency and manage costs down. So we don't necessarily incorporate any assumed success on that front into our capital investments decision-making process.
Al Monaco
Maybe just continuing about your question a little more, Steven, when we're making a decision the obvious goal is to try and lockdown under our business model as much of the risk as we can. So certainly from a capital cost perspective; that's our goal for lockdown as much of the capital as we can and Byron's team is focused on that.
Richard's team is focused on managing the interest rate exposure and the foreign exchange exposure if there is any. More broadly, Richard mentioned business units, one of the business unit measures that we focus on aside from just volumes and other financial metrics are the safety metrics, and that's equally important for us as the key to managing the business in an effective way.
It was not just about the financials.
Steven Paget – FirstEnergy
So it sounds like fro1m what you're saying and from what Richard said, that you don't look at an asset owned by someone else and think if we buy it we will increase -– we can dramatically increase the efficiency and therefore that's what makes the decision possible.
Al Monaco
Okay. So I think I understand you now.
This focuses back on your reference to acquisition. So, yes, that's always going to be part of the equation when we're looking at an opportunity.
I think if you look back to Seaway, the base Seaway system when we acquired that certainly the synergies if you will, or the opportunities to change to the top line, revenue line were accounted for, but I'll say that we're pretty cautious on that because those numbers are easy to assume. They're always harder to execute on.
So we are pretty conservative as to what we will assume on a potential acquisition, but generally, yes, you may have to pay for some opportunity to have further growth or synergies that you may not have on your own with your existing assets.
Steven Paget – FirstEnergy
Thank you, both. Those are my questions.
Al Monaco
Okay. Thanks, Steven.
Operator
Thank you. Our next question comes from Robert Kwan from RBC Capital Markets.
Please go ahead.
Robert Kwan – RBC Capital Markets
Good morning. Started looking a little bit further out in potential projects and the Mainline set up following your announced initiatives, where do you see the potential bottlenecks in the system, i.e.
bottleneck alleviation projects, whether that's on the Canadian side or for the downstream around Clearbrook and Superior?
Al Monaco
Yeah. Okay, Robert, so I think really the bottleneck for us after Line 3 would be downstream Superior.
Even though we're expanding southern access right now, once we get past the next two to three years we are likely going to be fully powered up on our systems access Superior. So if there is a bottleneck it would be there.
There would be a number of things we could do from there, looping of course or perhaps twinning line that kind of thing. There is no transparency to that opportunity right now.
Of course we'd have to have a pretty strong commercial underpinning to undertake something like that, but that's the primary area that I see. We do have some opportunities to further expand our Flanagan south system once it goes into service and potentially even Seaway.
So there is a little bit of opportunity probably in the couple of 100,000 barrels per day on both systems as well.
Robert Kwan – RBC Capital Markets
Okay. So larger capital initiatives could certainly just be in Alberta to Gulf type full expansion potential?
Al Monaco
Yeah, as I said it will be primarily downstream at Superior with Line 3 as we are talking about, it would effectively restore the entire capacity line to about 760,000 barrels a day there. We're assuming of course as we move forward -– Alberta Clipper in terms of moving that up to 800, I'd say assuming those two -– it's primarily focused downstream in Superior.
Robert Kwan – RBC Capital Markets
Okay. Just small numbers question, on EELP, just wondering if there is anything behind the quarter at 7 million of earnings, that was down about half of what you booked in Q4, citing some of the eastern access smaller projects and it just feels like we're back to the Clipper earnings?
Richard Bird
Just give us a moment on that one, Robert. John, you got …
John Whelen
Yeah, there were some reversal of shipper credits related to that project that causes a little bit of noise quarter-over-quarter, but doesn't really do anything with respect to our long-term outlook, Robert.
Robert Kwan – RBC Capital Markets
Okay. So, just temporary downside in Q1, is that what you're looking?
Okay.
John Whelen
Okay.
Robert Kwan – RBC Capital Markets
[And right next] (ph), just asked one smaller there, nervous question. Just on the Mainline, the O&M was pretty low in the first quarter compared to the year ago, but just on prior quarters, are you capitalizing more costs or is it just timing?
John Whelen
Guy have to split out here, but -– do you want to try that Richard?
Richard Bird
So, there is a number of things, Robert that are affecting the pattern of the O&M within that business unit. I think generally we're trying to going back to Steven's question on efficiency, we're trying to tighten up the cost picture and we're moving through some peak cost events within that system.
So I think generally we're going to see a little lower level of cost in 2014 than what we saw in 2013 on the Mainline, but the first quarter just because of the timing of expenditures would overstake the extent to which we will see that on a sustainable basis. So we're continuing to see better cost moving forward, lower cost moving forward, but not to the same extent as in the first quarter.
Robert Kwan – RBC Capital Markets
Okay, that's great. Thank you very much.
Richard Bird
Okay.
Al Monaco
Thank you.
Operator
Thank you. As there are no further questions, I'd like to turn the call back to Adam McKnight for any closing remarks.
Adam McKnight
Thank you, Christine. We have nothing further to add at this time, but I'd remind you that I'll be available for questions following the call.
Thank you, and have a good day.
Operator
Thank you. Ladies and gentlemen, this concludes today's conference.
Thank you for participating. You may now disconnect.