GAS PIPELINES

Gas Pipelines activities consist of investments in Alliance Pipeline US, Vector Pipeline and Enbridge Offshore Pipelines. Enbridge has joint control over these investments with one or more other owners. Enbridge owns a 50% interest in the U.S. portion of the Alliance System, a 60% interest in Vector Pipeline and interests ranging from 22% to 100% in the pipelines comprising the Enbridge Offshore Pipelines.

Earnings from Gas Pipelines were $61.2 million for the year ended December 31, 2006 compared with $59.8 million for the year ended December 31, 2005. The increase was due to improved results at Enbridge Offshore Pipelines in 2006, following two severe hurricanes in 2005. The increase was partially offset by the effects of the stronger Canadian dollar. Earnings from Gas Pipelines were $59.8 million for the year ended December 31, 2005, an increase of $6.0 million from 2004. The increase in 2005 is due to incremental earnings from Enbridge Offshore Pipelines, acquired on December 31, 2004.

Revenues for the year ended December 31, 2006 were $345.9 million consistent with $364.3 million for the year ended December 31, 2005. Revenues for the year ended December 31, 2005 were $364.3 million compared with $271.7 million for the year ended December 31, 2004. The increase in revenues was due to the acquisition of Enbridge Offshore Pipelines on December 31, 2004.

Alliance Pipeline US
The Alliance System (Alliance), which includes both the Canadian and U.S. portions of the pipeline system, consists of an approximately 3000-kilometre (1,875-mile) integrated, high-pressure natural gas transmission pipeline system and an approximately 730-kilometre (455-mile) lateral pipeline system and related infrastructure. Alliance transports liquids-rich natural gas from northeast British Columbia and northwest Alberta to Channahon, Illinois. The pipeline has firm service shipping contract capacity to deliver 1.325 billion cubic feet per day (bcf/d). Enbridge Income Fund, described under Sponsored Investments, owns 50% of the Canadian portion of the Alliance System.

The natural gas may then be transported to two local natural gas distribution systems in the Chicago area and five interstate natural gas pipelines, providing shippers with access to natural gas markets in the Midwestern and Northeastern United States and Eastern Canada. Enbridge owns 42.7% of Aux Sable and its results are included under Gas Distribution and Services.

Results of Operations
Alliance Pipeline earnings were $29.7 million for the year ended December 31, 2006 compared with $32.1 million for the year ended December 31, 2005. The decrease was primarily due to the stronger Canadian dollar.

Alliance Pipeline US earnings are $32.1 million for the year ended December 31, 2005 compared with $37.4 million for the year ended December 31, 2004. The moderate decrease is due to the stronger Canadian dollar in 2005.

Transportation Contracts
Alliance has long-term take-or-pay contracts through 2015 to transport 1.305 bcf/d of natural gas or 98.5% of the total contracted capacity. Alliance has 20 mmcf/d of natural gas contracted on a short-term basis. These contracts permit Alliance to recover the cost of service, which includes operating and maintenance costs, cost of financing, an allowance for income tax, an annual allowance for depreciation, and an allowed return on equity. Each long-term contract may be renewed upon five years notice for successive one-year terms beyond the original 15-year primary term. Alliance Pipeline US operations are regulated by the FERC.

Depreciation expense included in the cost of service is based on negotiated depreciation rates contained in the transportation contracts while the depreciation expense in the financial statements is recorded on a straight-line basis of 4% per annum. The negotiated depreciated rates are generally less than the straight-line rates in the earlier years and higher than straight-line depreciation in later years of the shipper transportation agreements. This results in recognition of a long-term receivable, referred to as deferred transportation revenue, expected to be recovered from shippers in subsequent rates.

As at December 31, 2006 $159.8 million (2005 – $145.8 million) was recorded as deferred transportation revenue.

Vector Pipeline
The Company provides operating services to, and holds a 60% joint venture interest in, Vector Pipeline, which transports natural gas from Chicago to Dawn, Ontario. Vector Pipeline has the capacity to deliver a nominal 1.0 bcf/d and is operating at or near capacity. Vector Pipeline’s primary sources of supply are through interconnections with the Alliance System and the Northern Border Pipeline in Joliet, Illinois. Approximately 70% of the long haul capacity of Vector Pipeline is committed to long-term, 15-year firm transportation contracts at rates negotiated with the shippers and approved by the FERC. The remaining capacity is sold at market rates and various term lengths. Transportation service is provided through a number of different forms of service agreements such as Firm Transportation Service and Interruptible Transportation Service.

Results of Operations
Vector Pipeline earnings were $13.4 million for the year ended December 31, 2006 compared with $15.9 million for the year ended December 31, 2005. The decrease reflected the stronger Canadian dollar and higher operating costs in the second and third quarters of 2006 due to scheduled integrity inspections required by the regulator within the first six years of operation.

Vector Pipeline earnings were $0.5 million lower for the year ended December 31, 2005 compared with the year ended December 31, 2004 resulting from the stronger Canadian dollar in 2005.

Business Risks
The risks identified below are specific to Alliance Pipeline US and Vector Pipeline. General risks that affect the entire Company are described under Risk Management.

Supply and Demand
Currently, pipeline capacity out of the WCSB exceeds supply. Alliance Pipeline US and Vector Pipeline have been unaffected by this excess capacity environment mainly because of long-term capacity contracts extending to 2015. Vector Pipeline’s interruptible capacity could be negatively impacted by the basis (location) differential in the price of natural gas between Chicago and Dawn, Ontario relative to the transportation toll.

Exposure to Shippers
The failure of shippers to perform their contractual obligations could have an adverse effect on the cash flows and financial condition of Alliance Pipeline US and Vector Pipeline. To reduce this risk, Alliance Pipeline US and Vector Pipeline monitor the creditworthiness of each shipper and receive collateral for future shipping tolls should a shipper’s credit position not meet tariff requirements. These pipelines also have diverse groups of long-term transportation shippers, which include various gas and energy distribution companies, producers and marketing companies, further reducing the exposure.

Competition
Alliance Pipeline US faces competition for pipeline transportation services to the Chicago area from both existing and proposed pipeline projects. Competing pipelines, with a combined transportation capacity of approximately 3.8 bcf/d provide natural gas transportation services from the WCSB to distribution systems in the Midwestern United States. In addition, there are several proposals to upgrade existing pipelines serving these markets. Any new or upgraded pipelines could either allow shippers greater access to natural gas markets or offer natural gas transportation services that are more desirable than those provided by the Alliance System. Shippers on Alliance Pipeline US have access to additional high compression delivery capacity at no additional cost, other than fuel requirements, serving to enhance Alliance Pipeline US’s competitive position.

Vector Pipeline faces competition for pipeline transportation services to its delivery points from new or upgraded pipelines, which could offer transportation that is more desirable to shippers because of cost, supply location, facilities or other factors. Vector Pipeline has mitigated this risk by entering into long-term firm transportation contracts for approximately 70% of its capacity and medium-term contracts for the remaining capacity. These long-term firm contracts provide for additional compensation to Vector Pipeline if shippers do not extend their contracts beyond the initial term. The effectiveness of these mitigating factors is evidenced by the increased utilization of the pipeline since its construction, despite the presence of transportation alternatives.

Regulation
Both Vector Pipeline and Alliance Pipeline US operations are regulated by the FERC. On a yearly basis, Alliance Pipeline US files its annual rates with the FERC following consultation with shippers.

Enbridge Offshore Pipelines
Enbridge Offshore Pipelines (EOP) is comprised of 11 natural gas gathering and FERC-regulated transmission pipelines in five major corridors in the Gulf of Mexico, extending to deepwater frontiers. The operations were purchased December 31, 2004. These pipelines include almost 2400 kilometres (1,500 miles) of underwater pipe and onshore facilities and transport more than half of all current deepwater Gulf of Mexico natural gas production. These pipelines currently transport approximately 2.0 bcf/d.

Results of Operations
Earnings for the year ended December 31, 2006 in Enbridge Offshore Pipelines were $18.1 million compared with $11.8 million for the year ended December 31, 2005. In 2006, volumes returned to 2005 pre-hurricane levels, resulting in increased earnings compared with 2005. The 2006 results were negatively impacted by the stronger Canadian dollar.

The Company continues to pursue the settlement of claims under its insurance policies for volume losses and additional costs the Company has incurred to restore the service capacity of these assets following hurricanes Rita and Katrina. A settlement of the insurance claim is anticipated in 2007.

Transportation Contracts
The primary shippers on the EOP systems are producers who execute life-of-lease commitments in connection with transmission and gathering service contracts. In exchange, EOP provides firm capacity for the contract term at an agreed upon rate. The throughput volume generally reflects the lease’s maximum sustainable production.

The transportation contracts allow the shippers to define a maximum daily quantity (MDQ), which corresponds with the expected production life. The contracts typically have minimum throughput volumes which are subject to take-or-pay criteria but also provide the shippers with flexibility given advance notice criteria to modify the projected MDQ schedule to match current deliverability expectations.

The long-term transport rates established in the gathering and transmission service agreements are generally market-based but are established utilizing a cost-of-service methodology, which includes operating cost, projected revenue generation directly tied to production deliverability and the appropriate cost of capital.

Weather
Adverse weather, such as hurricanes, may impact EOP financial performance directly or indirectly. Direct impacts may include damage to EOP facilities resulting in lower throughput and inspection and repair costs. Indirect impacts include damage to third party production platforms, onshore processing plants and refineries that may decrease throughput on EOP systems.

The Company continues to maintain an active risk management program that includes comprehensive insurance coverage, notwithstanding a constrained insurance market. However costs have increased in the form of higher insurance premiums and deductibles as well as longer waiting periods for business interruption claims. It is expected that the incidence and severity of windstorm occurrences, and the Company’s direct experience in the Gulf of Mexico, will dictate future costs and coverage levels in this region.

Competition
There is significant competition for new and existing business in the Gulf of Mexico. EOP has been able to capture key opportunities, extending its footprint, positioning it to more fully utilize existing capacity. EOP serves a majority of the strategically located deepwater host platforms and its extensive presence in the deepwater Gulf of Mexico has EOP well positioned to generate incremental revenues, with modest capital investment, by transporting production from sub-sea development of smaller fields tied back to existing host platforms. However, given rates of decline, Offshore pipelines typically have available capacity resulting in significant and aggressive competition for new developments in the Gulf of Mexico.

Regulation
The transportation rates on many of EOP’s transmission pipelines are generally based on a regulated cost-of-service methodology and are subject to regulation by the FERC. These rates may be subject to challenge.

Other Risks
Other risks directly impacting financial performance include underperformance relative to expected reservoir production rates, delays in project start-up timing and capital expenditures in excess of those estimated. Capital risk is mitigated in some circumstances by having area producers as joint venture partners and through cost of service tolling arrangements.

Strategy
The Company plans to continue to grow the Gas Pipelines segment to capitalize on regional supply and demand imbalances and infrastructure requirements through a combination of organic and acquisition opportunities. The Gas Pipelines strategy is based on the Company’s forecast supply and demand for natural gas.

Supply and Demand for Natural Gas
North American natural gas demand is expected to grow at a modest rate for the next three to five years primarily driven by growth in power generation, which more than offsets declines in industrial demand. The re-emergence of coal as a generation source, due to advances in clean-coal technology, as well as the re-emergence of nuclear power as a source of electricity generation may reduce growth in the power related natural gas demand in the longer term. The development of oil sands projects in Alberta also increases the demand for natural gas, as various extraction and upgrading processes require the use of natural gas, however growth in this sector may also be tempered by alternative energy sources. Over time, the entry of new supplies from North Texas, the U.S. Rockies and the Alaska North Slope/Mackenzie Delta as well as Liquefied Natural Gas are expected to adequately supply the market and provide opportunities for Enbridge to deliver this natural gas to markets.

Specific strategies will be executed within two key geographic regions: Western Canadian/U.S. Midwest and Offshore Gulf Coast.

1. Western Canadian/U.S. Midwest Region
The Alliance and Vector Pipelines provide low cost expansion options to the Chicago/Dawn market and the Company plans to expand these systems and position Enbridge to participate in the Alaska gas pipeline. The Company also plans to develop takeaway capacity from Chicago to address the anticipated bottleneck from incremental Rockies and Arctic gas volumes. This could be accomplished through expansion of Vector Pipeline and potentially by developing a new route from Chicago to the U.S. Northeast.

Vector Pipeline Expansion
In 2005, Vector Pipeline announced plans to construct two additional compressor stations, which would expand Vector Pipeline’s capacity from 1 bcf/d to 1.2 bcf/d. This expansion has been approved by the FERC and is scheduled to be in service in the fourth quarter of 2007

2. Offshore Gulf Coast
EOP intends to grow through leveraging its existing asset position to attract new prospects including producer tie-backs as well as those requiring new laterals to be constructed by EOP. A significant number of new discoveries exist on the shelf, in deepwater and the ultra-deep areas of the Gulf of Mexico in the corridors where EOP has existing pipeline facilities. EOP is continually monitoring and pursuing these many prospects. Two such projects under construction are described below.

Neptune Pipeline Project
The Company plans to construct and operate both a natural gas lateral and a crude oil lateral to connect the deepwater Neptune oil and gas field in the Green Canyon Corridor to existing Gulf of Mexico pipelines, extending Enbridge’s existing Gulf of Mexico infrastructure. The laterals are expected to cost a total of approximately US$0.1 billion and will have the capacity to deliver in excess of 200 million cubic feet per day (mmcf/d) of gas and approximately 50,000 bpd of oil. Construction of the natural gas and crude oil laterals is underway with sub-sea tie-ins scheduled for the second quarter of 2007 and throughput is expected to commence in the last half of 2007.

Shenzi Project
Enbridge also plans to construct a natural gas lateral to connect the new deepwater Shenzi field to existing Gulf of Mexico pipelines. The 11-mile lateral is expected to cost approximately US$45 million and to have a capacity of 100 mmcf/d. The Shenzi lateral will deliver natural gas through the Company’s 22%-owned Cleopatra Pipeline, the 50%-owned Manta Ray Pipeline and the 50%-owned Nautilus Pipeline and is expected to be completed by the end of 2007, with the first gas expected by mid-year 2009. Construction scheduling has been accelerated to the second half of 2007 to secure a lay vessel, which are in high demand, and avoid interference with the producers’ development construction in 2008.

Capital Expenditures
The Company expects to spend approximately $210 million in 2007 in the Gas Pipelines segment for ongoing capital improvements, core maintenance capital projects and expansion, including the projects described above. In 2006, the Company spent $110 million on capital expenditures in the Gas Pipelines segment. Discussion of the Company’s access to financing is included under Liquidity and Capital Resources