UPDATE 3-Enbridge insists pipe safety regimen is working

Thu Aug 2, 2012 2:58pm EDT

* Adjusted EPS C$0.36 vs. C$0.34

* Says operational risk management plan worked in Wisconsin

* Investors growing wary of ruptures

* Shares down 1 percent

By Jeffrey Jones

CALGARY, Alberta, Aug 2 (Reuters) - Enbridge Inc insisted on Thursday its quick response to a U.S. oil pipeline leak last week showed that safety improvements implemented after a devastating 2010 spill in Michigan were working, des pite sharp criticism from regulators.

Enbridge, which reported a 7 percent increase in adjusted second-quarter profit, said it was still uncertain when it could reopen the line.

The Canadian pipeline company is under growing pressure from the public, its oil-shipping customers and now investors to show improvements in its safety record following last Friday's leak of its Line 14 in rural Wisconsin.

The U.S. Pipeline and Hazardous Materials Safety Administration issued a corrective action order this week requiring 12 safety measures, tests and analyses Enbridge must undertake before it can restart the 318,000 barrel a day pipeline. It leaked more than 1,000 barrels from a br ea k measuring more than four- feet i n t he latest of several incidents.

The massive Enbridge pipeline system moves most Canadian oil exports to the United States.

On a conference call to discuss the results, executives said heightened attention to pipeline leaks is driven more by the debate over Canadian oil sands development and Enbridge's contentious C$6 billion ($6 billion) Northern Gateway pipeline to Canada's West Coast than by Enbridge's own safety record.

Still, much of the call focused on the Line 14 leak and other incidents, as analysts and investors grow more concerned about the increased regulatory scrutiny and other ways that the issue is clouding Enbridge's business prospects.

INVESTORS WARY

"The focus on maintenance and integrity has been heightened by several fold over the past few quarters and people are starting to notice. Even the analyst community is starting to care about these pipeline ruptures, which is a new thing," UBS Securities analyst Chad Friess said.

"Normally it's environmentalists who focus in on that, but it is potentially starting to have an impact on their actual business and that's why people are starting to take notice on the investing side."

Besides complicating efforts to win approvals for new projects -- the company has also announced a C$3.2 billion expansion of its network to eliminate bottlenecks and get Canadian crude to Quebec -- ruptures force Enbridge to spend more on maintenance and testing. That has an impact on profits if the costs cannot be passed on to customers within a regulated toll structure, Friess said.

President Al Monaco pointed to Enbridge's operational risk management plan, involving pipeline integrity, leak detection, control center operations and corporate safety culture. The plan was developed in response to the Michigan incident, in which 20,500, barrels of oil leaked into the Kalamazoo River system.

"We have had a very good record of safety over the years and frankly we're proud of it," he said. "The reality is when you have major incidents as we did in 2010, you have to look at things and kick things up a notch."

PHMSA questioned the company's safety program in its corrective action order for Line 14.

PHMSA said defects in the pipeline had been discovered when it was built 14 years ago and that it had ruptured in Wisconsin in 2007, spilling 1,500 barrels of oil.

" The history of failures on (Enbridge's) Lakehead Pipeline system, of which the a f fected pi peline is a part, the defects originally discovered during construction, and the 2007 f a ilure indicate that (th e) resp ondent's integrity management program may be inadequate," t he regulator wrote.

Last month, the U.S. National Transportation Safety Board harshly criticized Enbridge for its initial response to the Michigan spill. On Wednesday, Canada's National Energy Board said it would audit Enbridge's pipeline control-room procedures as it studies the NTSB report.

Some of the Line 14 crude has been rerouted to other Enbridge pipelines, but the company said it did not yet know if the outage will force it to ration space for the month.

DERIVATIVES HIT NET INCOME

In the second quarter, Enbridge's net income fell to C$11 million, or 1 Canadian cent a share, from year-earlier C$302 million, or 40 Canadian cents, due to losses on financial derivatives.

On an adjusted basis, profit rose to 36 Canadian cents a share from 34 Canadian cents.

Analysts on average had expected a profit of 38 Canadian cents a share, according to Thomson Reuters I/B/E/S.

The company said it was on track to meet its full-year adjusted profit forecast of C$1.58 to C$1.74 a share.

Shares of Enbridge, which has a market value of C$32.70 billion, were down 44 Canadian cents, or 1 percent, at C$40.07 on the Toronto Stock Exchange. The shares have risen 29 percent over the past 12 months.

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California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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