SPONSORED INVESTMENTS

Sponsored Investments includes the Company’s 16.6% ownership interest in EEP and a 41.9% equity interest in EIF. Enbridge manages the day-to-day operations of, and develops and assesses opportunities for each, including both organic growth and acquisition opportunities.

Earnings from Sponsored Investments were $86.8 million for the year ended December 31, 2006 compared with $64.8 million in 2005. Earnings increased primarily because of strong results from EEP.

Earnings from Sponsored Investments were $64.8 million for the year ended December 31, 2005 compared with $66.2 million in 2004. EIF earnings increased due to allowance oil sales on the Saskatchewan System and collection of a notional tax in tolls on Alliance Canada. This increase was more than offset by EEP’s non-cash unrealized mark-to-market losses on derivative instruments that are considered ineffective hedges for accounting purposes.

Revenues from Sponsored Investments include only revenues from EIF as the Company equity accounts for its interest in EEP. For the year ended December 31, 2006, revenues were $254.7 million consistent with $249.0 million for the year ended December 31, 2005.

Revenues from Sponsored Investments include only revenues from EIF as the Company equity accounts for its interest in EEP. For the year ended December 31, 2006, revenues were $254.7 million consistent with $249.0 million for the year ended December 31, 2005.

Revenues for the year ended December 31, 2005 were $249.0 million compared with nil for the year ended December 31, 2004. The Company consolidates EIF under the variable interest entity rules, which came into effect on January 1, 2005. In 2004, the investment in EIF was accounted for as an equity investment.

Enbridge Energy Partners
EEP owns and operates crude oil and liquid petroleum transmission pipeline systems, natural gas gathering and related facilities and marketing assets in the United States. Significant assets include the Lakehead System, which is the extension of the Enbridge System in the U.S., natural gas gathering and processing assets in Texas, the mid-continent crude oil system, various interstate and intrastate natural gas pipelines and a crude oil feeder pipeline in North Dakota.

Results of Operations
EEP earnings were $43.0 million for the year ended December 31, 2006 compared with $21.7 million for the year ended December 31, 2005. The results improved significantly, despite the stronger Canadian dollar, and reflected considerably higher liquids throughput on the Lakehead System, higher margins and increased volumes in the natural gas gathering and processing businesses in addition to a higher Enbridge ownership interest. The 2006 results also included $6.5 million (net to Enbridge) of unrealized mark-to-market gains (2005 – $5.0 million of losses) on derivative financial instruments that did not qualify for hedge accounting treatment. While Enbridge believes the hedging strategies are sound economic hedging techniques, they do not qualify for hedge accounting and have been accounted for on a mark-to-market basis through earnings.

Earnings of $21.7 million for the year ended December 31, 2005 were down from 2004 earnings of $28.6 million primarily due to $5.0 million (net to Enbridge) of unrealized mark-to-market losses on derivative financial instruments, which did not qualify for hedge accounting treatment. In addition, EEP earnings were negatively affected by lower Lakehead System volumes, a stronger Canadian dollar and a lower ownership interest offset with higher earnings from the natural gas business.

EEP issued Class A partnership units in 2005 and 2004. Because Enbridge did not fully participate in the 2005 and 2004 offerings, dilution gains resulted. While new Class C units were issued by EEP in the third quarter of 2006, no dilution gains resulted as Enbridge participated in the offering, increasing Enbridge’s ownership interest in EEP from 10.9% to 16.6%.

Distributions
EEP makes quarterly distributions of its available cash to its common unitholders, including Enbridge. Under the Partnership Agreement, Enbridge, as general partner, receives incremental incentive cash distributions, which represent incentive income, on the portion of cash distributions, on a per unit basis, that exceed certain target thresholds as follows.

During 2006, EEP paid quarterly distributions of $0.925 per unit (2005 – $0.925 per unit; 2004 – $0.925 per unit). Of the $43.0 million Enbridge recognized as earnings from EEP during 2006, 37% (2005 – 65%; 2004 – 50%) were incentive earnings while 63% (2005 – 35%; 2004 – 50%) were Enbridge’s share of EEP’s earnings.

Strategy
EEP intends to increase its distributions through the optimization of existing assets including increased throughput, the expansion of the existing liquids and gas midstream businesses, and the acquisition of complementary assets. EEP will focus on assets that generate stable cash flows including crude oil mainline, feeder system and mid-continent terminaling, interstate and intrastate gas pipelines and certain gas gathering and processing assets. EEP is benefiting from strong supply growth in both the liquids transportation and gas midstream businesses. Oil sands volume growth will increase throughput and generate opportunities such as the Southern Access expansion. High gas prices and improved technology are driving new capital investment and volume growth in EEP’s principal gas regions. Tightening gas quality specifications are also increasing demand for EEP’s treating and processing services. EEP’s growing base of gas volumes will allow it to aggregate volumes to improve margins and potentially underpin a new take-away pipeline capacity project. Examples of this aggregation include the recent expansion and extension of the East Texas system in the construction of additional pipeline infrastructure and the Alberta Clipper Project.

East Texas Clarity Project
The East Texas Clarity project, undertaken by EEP, is a US$0.6 billion expansion of EEP's East Texas system and is progressing on-schedule to add 0.7 bcf/d of natural gas transportation capacity to the Texas intrastate market in 2007. The Clarity project will be completed in phases during the year with the first phase scheduled for completion in early 2007. This phase involves the construction of a natural gas treating facility and related mainline expansion.
Additional phases of the project will be complete in mid-2007 and end of year 2007. When complete, the Clarity project will link growing natural gas production in East Texas, and third party storage assets in East Texas, with major third party pipelines and markets in the Beaumont, Texas area.

Business Risks
Supply and Demand
The profitability of EEP depends to a large extent on the volume of products transported on its pipeline systems.

The volume of shipments on EEP’s Lakehead System depends primarily on the supply of Western Canadian crude oil and the demand for crude oil in the Great Lakes and Midwest regions of the United States and Eastern Canada. EEP expects significantly increased crude oil supplies from the oil sands projects in Alberta. In addition, Enbridge’s future plans to provide access to new markets in the Southern United States are expected to increase demand for Western Canadian crude, resulting in increased volumes for EEP.

EEP’s natural gas gathering assets are also subject to changes in supply and demand for natural gas, natural gas liquids and related products. Commodity prices impact the willingness of natural gas producers to invest in additional infrastructure to produce natural gas.

These assets are also subject to competitive pressures from third-party and producer owned gathering systems.

Regulation
In the U.S., the interstate and intrastate gas pipelines owned and operated by EEP are subject to regulation by the FERC or state regulators and their revenues could decrease if tariff rates were protested. While gas gathering pipelines are not currently subject to active regulation, proposals to more actively regulate intrastate gathering pipelines are currently being considered in certain of the states in which EEP operates.

Market Price Risk
EEP’s gas processing business is subject to commodity price risk for natural gas and natural gas liquids. Historically, these risks have been managed by using physical and financial contracts, fixing the prices of natural gas and natural gas liquids. Certain of these financial contracts do not qualify for cash flow hedge accounting and EEP’s earnings are exposed to mark-to-market valuation changes associated with certain of these contracts.

Enbridge Income Fund
EIF’s primary assets include a 50% interest in Alliance Pipeline Canada and the Enbridge Saskatchewan System, both purchased from the Company in 2003. The Alliance Pipeline Canada, is the Canadian portion of the Alliance System, described in the Gas Pipelines segment above. The Enbridge Saskatchewan System owns and operates crude oil and liquids pipelines systems from producing fields in Southern Saskatchewan and Southwestern Manitoba connecting primarily with Enbridge’s mainline pipeline to the United States.

EIF also owns interests in three wind power generation projects purchased from Enbridge in October, 2006 and a business that develops waste-heat power generation projects at Alliance Pipeline Canada compressor stations.

Results of Operations
EIF earnings were $37.8 million for the year ended December 31, 2006, comparable with the prior year, and reflected modest earnings growth at EIF. The increase in earnings reflected lower tax on distributions received from EIF.

EIF earnings were $34.2 million for the year ended December 31, 2005 compared with $30.0 million for the year ended December 31, 2004. The 2005 results include higher preferred unit distributions as well as higher incentive income consistent with EIF’s cash distribution increases in 2004. EIF’s operating results benefited from strong performance at both Alliance Pipeline Canada and the Saskatchewan System.

Tax Fairness Plan
On October 31, 2006, the Canadian Government announced a “Tax Fairness Plan” that would, among other things, create a new tax regime for publicly traded income trusts including EIF. Under the proposed rules, the taxable portion of an income trust’s distributions would be subject to taxation in a manner similar to the treatment of taxable income within a corporation. For existing income trusts, the new rules would not become applicable until 2011 provided they limit their expansion to “normal growth” prior to that year. On December 15, 2006 the Government issued guidelines with respect to what it would consider “normal growth” for existing income trusts that wish to ensure that they do not become subject to the proposed tax rules until 2011. Under these guidelines, the amount of equity units that an income trust can issue to finance growth up to 2011 may not exceed the value of its publicly traded equity units on October 31, 2007 (subject to annual limits). The guidelines do not explicitly limit the amount of debt that an income trust can issue to fund growth although as a practical matter this will be constrained by credit considerations and/or financial covenants.

On December 21, 2006, the Government released draft legislation for comment. Considerable uncertainty still exists as the draft legislation does not fully address all aspects of the tax regime introduced in the Tax Fairness Plan (including the “normal growth” guidelines. Further, the proposed legislation is now subject to review by a Parliamentary committee through an expedited public hearing process. Timing for enactment of the legislation by Parliament remains uncertain.

If enacted in their present form, the proposed tax changes would, all other things equal, likely result in a reduction of cash available for distribution by the Fund commencing in 2011. With respect to the proposed limitations on equity unit issuances, EIF should be able to fund its currently identified growth plans. However, with the current uncertainty in the capital markets resulting from the proposed tax changes, there can be no assurance that sufficient capital will be available to fund further acquisitions or expansion projects. EIF is closely monitoring legislative developments and carefully assessing the impact of the proposed legislation on the business and financial outlook of EIF and its broader effect on the income trust sector as a whole, all with a view to adopting a strategy that will maximize value to unitholders going forward once legislative framework is finalized.

Incentive and Management Fees
Enbridge receives a base annual management fee of $0.1 million for management services provided to EIF plus incentive fees equal to 25% of annual cash distributions over $0.825 per trust unit. In 2006, the Company received incentive fees of $2.4 million (2005 – $2.1 million, 2004 – $0.8 million). The Company is the primary beneficiary of EIF through a combination of the voting units and a non-voting preferred unit investment and as such EIF is consolidated, starting January 1, 2005, under variable interest entity rules.

Strategy
EIF will maximize the efficiency and profitability of its existing assets through representation on the boards and/or management committees of EIF’s assets, pursue organic growth and expansion opportunities, invest in the Saskatchewan System expansion and Alliance Canada receipt facilities and expansions and pursue opportunities to acquire energy infrastructure investments or related assets.

Business Risks
Risks for Alliance Pipeline Canada are similar to those identified for the Alliance Pipeline US in the Gas Pipelines segment.

Saskatchewan System
The majority of the volumes shipped on the Saskatchewan and Westspur common carrier pipeline systems, key components of the Saskatchewan System, have no specific volume commitments. There is no assurance that shippers will continue to utilize these systems in the future or transport volumes on similar terms or at similar tolls. However, there is limited pipeline competition in this area. The main competition to the pipelines is from trucking.

EIF’s liquids and natural gas pipelines are dependent upon the supply of and demand for crude oil and natural gas from Western Canada. Supply, in turn, is dependent upon a number of variables, including the level of exploration, drilling, reserves and production of crude oil and natural gas, the accessibility of Western Canadian crude oil and natural gas, the price and quality of crude oil and natural gas available from alternative Canadian and United States sources. In addition, the regulatory environments in Canada and the United States, including the continued willingness of the governments of both countries to permit the export of crude oil and natural gas from Canada to the United States on a commercially acceptable basis, could impact the supply of crude oil and natural gas.