Certainty Will Be Key To New Canadian Mainline Tolling Framework: Enbridge CEO

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Enbridge Inc. is hearing from customers about the importance of toll certainty and egress as the company negotiates a new tolling framework for its Canadian Mainline.

“The key here is that given that it’s very difficult to build any pipeline capacity, and we know the upstream customers do have a lot of opportunity to grow incrementally,” Al Monaco, president and chief executive officer, told this morning’s Q4 results conference call. “They want to make sure that we bring what we’ve brought before, which is ideas and options to move barrels at very low incremental costs for them.”

Colin Gruending, executive vice-president and president, liquids pipelines, said the feedback from customers has been fairly homogenous — they want to ensure that Enbridge stays aligned and behaves in a manner that creates value for the shipping community.

“We’re hearing consistently about the need for continued fixed tolling, certainty on the toll, and that alignment. And so, while I know the Mainline contracting application was contentious at the end, if we remove the contracting element of it, or substantially do that, then I think there’ll be potential for consistent alignment by the group.”

Late last year, the Canada Energy Regulator (CER) denied Enbridge’s application to implement firm service contracting on its Canadian Mainline system. Since the CER’s decision, Enbridge has initiated a process to negotiate a new tolling framework with customers and other stakeholders.

Currently, Enbridge is working on two possible commercial frameworks for the Mainline, including a new incentive rate-making agreement that may be similar to the competitive toll settlement (CTS) agreement that expired in June 2021, as well as a cost-of-service application. Either framework provide attractive risk-adjusted returns for Mainline operations, management says. Possible financial outcomes should not materially impact the financial outlook.

“The incentive tolling model has worked very well in the past and aligns us with our shippers, and that’s because it provides the toll certainty they want and need to run their businesses,” said Monaco. “It keeps costs in check and it incents us to add capacity. In that framework, we take on operating, capital and FX risk, and of course volumes move up and down. If we manage all of that well, then we can earn a commensurate return above the cost-of-service return.”

He added: “While the value equation has worked well in the past for both parties, we’re equally comfortable under a cost-of-service arrangement going forward, because it minimizes the risks I’ve mentioned, and we’d earn a good risk-adjusted return.”

As per the terms of the CTS, the company is collecting interim tolls that are consistent with the tolls in effect on June 30 of last year, which is when the CTS agreement expired and which are subject to refund. Enbridge has included provisions in its 2021 Mainline results from July 31 to December 31, along with its 2022 and three-year guidance, in recognition of the uncertainty of future tolls.

Enbridge expects industry consultations and negotiations will last through the first half of 2022, with the potential to file a proposed incentive tolling settlement or cost-of-service application with the CER for review later this year.

“We don’t want to presuppose the timing, but we’re looking to land on a path by this summer, hopefully, and then either file a settlement agreement or a cost-of-service after that,” Monaco told the conference call. “Either way, we don’t anticipate a material change in the context of Enbridge’s overall EBITDA.”

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