Enbridge Inc. (ENB) (Enbridge) announced that it has reached an agreement in principle on a negotiated settlement (the settlement) with shippers for incentive tolls on its Mainline liquids system, which moves over 3 million barrels a day of crude oil and liquids from Western Canada to demand markets in multiple provinces and states.
The settlement covers both the Canadian and U.S. portions of the Mainline and will provide customers with a stable, competitive toll relative to competing alternatives. In addition, the settlement will preserve high utilization of the Mainline, and incentivize Enbridge to maximize capacity, benefiting industry egress and customer netbacks. The settlement term is 7.5 years through 2028.
"This settlement continues with Enbridge's track record of working cooperatively with shippers, and industry groups, and builds on a 27-year history of similar incentive deals on the Mainline itself," said Colin Gruending, Enbridge's Executive Vice President and President of Liquids Pipelines. "This settlement is a win-win-win – customers will continue to receive competitive and responsive service; Enbridge will earn attractive risk-adjusted returns; and the Mainline will continue to feed North America and global markets with a long-term source of safe, secure, and affordable energy."
The settlement has been approved by the Enbridge Board of Directors and received overwhelming support from a 37-member industry stakeholder group that includes producers, refiners, integrated companies, industry agencies, and governments.
As part of the settlement, Enbridge will be filing new interim tolls for local Canadian crude movements and cross-border international joint toll deliveries to take effect on July 1, 2023. The settlement also eliminates the need to complete its previously filed Lakehead cost of service application, currently before the United States' Federal Energy Regulatory Commission.
Enbridge expects to jointly finalize the settlement with industry and submit an application for its approval to the Canada Energy Regulator in Q3 2023, with the expectation that the new tolling settlement could be approved and implemented later this year.
Some highlights of the settlement include:
- Establishment of a competitive and stable toll that preserves ongoing high utilization of the Mainline, as well as the profitability of crude oil production in Western Canada
- An International Joint Toll (IJT), for heavy crude oil movements from Hardisty to Chicago, comprised of a C$1.65 per barrel toll plus a US$2.57 per barrel toll, plus the applicable Line 3 Replacement surcharge. Tolls will continue to be distance and commodity adjusted, and will utilize a dual currency IJT that will reduce Enbridge's exposure to foreign exchange fluctuations in respect to the Canadian portion of the toll
- During the term, Mainline IJT tolls will be governed by the terms of the settlement, and for the purpose of calculating tolls, all other previous surcharges are superseded by the settlement
- A financial performance collar providing incentives for Enbridge to optimize throughput and cost, but also providing downside protection in the event of extreme supply or demand disruptions or unforeseen operating cost exposure. This performance collar is intended to ensure the Mainline will earn 11% to 14.5% returns, on a deemed 50% equity capitalization, throughout the term of the agreement, which is similar to the returns earned on average during the previous tolling agreement
- Toll escalation for operation, administration, and power costs tied to U.S. consumer price and power indices
- Certain future expenditures associated with Line 5, including the Wisconsin relocation project and construction of a tunnel under the Straits of Mackinac will be included in rate base. Half the capital will be included in rate base as incurred and collect a new surcharge, while the other half will be backstopped and placed into rate base, for collection via a surcharge, upon project completion
- A structure to manage power costs that allows Enbridge to continue its solar self-power initiatives to reduce emissions
- For additional details, please refer to the Mainline tolling supplemental deck
Approximately 70% of Mainline deliveries are tolled under this settlement, while approximately 30% of deliveries are tolled on a full path basis to markets downstream of the Mainline. The other continuing feature is that the Mainline toll will flex up or down US$0.035 per barrel for 50,000 barrel per day changes in throughput.
The expected financial outcome from this settlement is in line with previously reported financial results and guidance provided, subject to filing and regulatory approval of the definitive agreement and associated rates.
Enbridge is pleased with the customer cooperation and alignment this framework furthers with industry.
"We'd like to thank our customers and stakeholders who worked with us to realize this settlement," said Gruending. "We look forward to continuing that collaboration in the coming months to advance and implement this tolling settlement."