Defiant Enbridge sticks with Line 3 plan
Ignores ruling from judge on alternative route
CALGARY • will push ahead with plans to build its $7.5-billion Line 3 pipeline replacement through Minnesota along its preferred route, ignoring the recommendations of an administrative law judge who proposed an alternative route connecting Hardisty, Alta. to Superior, WI.
“We disagree with the (administrative law judge’s) recommended route, which, in our view, introduces safety, environmental and economic risk,” Enbridge president and CEO Al Monaco said on an earnings call Thursday.
Last month, Minnesota Administrative Law Judge Ann O’Reilly recommended the state’s Public Utilities Commission only approve the construction of Line 3 if Enbridge builds it along an alternative route.
Enbridge, the largest pipeline company in North America, filed its response to the judge’s recommendation on Wednesday outlining the reasons why O’Reilly may have erred.
“We can’t understand how our route was not recommended by the ALJ,” Monaco said. He took time to point out on the call Thursday that the judge’s recommendation is non-binding on the Public Utilities Commission (PUC), which is set to make a decision on the project in June.
It would be unusual but not unprecedented for the PUC to go against the recommendation of the administrative law judge, said Edward Jones senior analyst Jennifer Rowland.
“I think Enbridge’s arguments make a lot of sense when you think about their preferred route and especially when you think about how much their preferred route has already been evaluated,” she said.
She said Enbridge’s plan to build its preferred route away from Native American reservation land is one factor strengthening its case, especially as the tribes in the state do not want the pipeline to cross their land. “It does seem like the judge has ignored that,” Rowland said.
If, however, the PUC sides with the judge’s recommendation and approves construction along the alternative route, Enbridge could face a delayed timeline for its project and also a loss of revenues.
Canaccord Genuity analyst David Galison said in a research note that proceeding with the alternative route would require Enbridge shutting down oil shipments on its existing Line 3 pipeline for up to a year, and could reduce its earnings between $240 million and $325 million.
Peters & Co. analysts have called Line 3 “a key project for Enbridge’s corporate growth in 2020 onward — and should be a positive for the stock if it were to go ahead.” The Calgary-based investment broker thinks there is a 67 per cent chance the project will be completed by mid-2020.
It would also be a positive for Canadian heavy oil prices, which has seen deep discounts relative to U.S. and global benchmarks.
Royal Bank of Canada senior economist Nathan Janzen released a report Wednesday that showed if all Canadian heavy oil production sold at a larger-thannormal discount, which is currently the case given a lack of pipeline capacity, would lead to annual revenue losses of $4 billion to $5 billion.
“In context, that’s just 0.2 per cent of Canadian GDP. But it’s also still foregone revenue that could be plowed back into the Canadian economy every year,” Janzen said. “Over time, that cost can still add up.”
Enbridge reported earnings on Thursday morning above analysts’ estimates. The company posted earnings of $510 million in the first quarter, which is down 46 per cent from $945 million from the same quarter a year ago.
The company said the lower earnings were a result of “unusual” writedowns, including on assets held for sale.
To that end, Enbridge announced this week it had sold off $3.2 billion in assets, including parts of its renewable power portfolio to the Canada Pension Plan Investment Board, and the sales put it ahead of its target for the year.
Monaco said the company was still in talks to sell off yet more assets and could eventually divest a total of $10 billion ahead of schedule to pay down debt.
The $61 billion in long term debt has weighed on Enbridge, and analysts said the divestitures this week, as well as the quarterly earnings, helped improve investor sentiment.
Edward Jones’ Rowland said she hoped to see more sales this year.
“The more they do this year, the more it takes that balance sheet criticism off the table,” she said. “This is the stock where you need to be patient because they need to execute and they need to restore investor confidence.”
Enbridge shares rose over 2 per cent on Thursday to $42.51 each in mid-day trading.
THIS IS THE STOCK WHERE YOU NEED TO BE PATIENT.