Reg­u­la­tory process could add US$1.2 bil­lion to Line 3

Min­nesota may or­der old pipe be dug up, re­placed

National Post (Latest Edition) - - FINANCIAL POST - Geoffrey Mor­gan Inc.’s En­bridge Fi­nan­cial Post gmor­gan@na­tion­al­post.com

CAL­GARY •

costs to build its Line 3 re­place­ment pro­ject through Min­nesota could rise by US$1.2 bil­lion, or 16 per cent, an­a­lysts said Thursday, ahead of a crit­i­cal reg­u­la­tory de­ci­sion in Min­nesota.

The Min­nesota Pub­lic Util­i­ties Com­mis­sion is set to rule on the Line 3 pipe­line dur­ing the two-day-hear­ings on July 26 and 27.

BMO Cap­i­tal Mar­kets an­a­lyst Ben Pham out­lined four pos­si­ble out­comes from the Min­nesota PUC de­ci­sion: the reg­u­la­tor could ei­ther deny the pro­ject en­tirely, ap­prove it en­tirely, ap­prove the pro­ject along an al­ter­nate route, or ap­prove the com­pany’s pre­ferred route but also re­quire En­bridge to dig up and re­place the old pipe.

That last op­tion is the most likely, Pham predicts, not­ing that it could add US$1.2 bil­lion in costs to the Line 3 re­place­ment pro­ject. En­bridge has ear­marked $7.4 bil­lion to build the pipe­line.

Pham also re­duced his price tar­get on the com­pany as a re­sult to $59 per share on the Toronto Stock Ex­change, from $61 per share.

The re­duced price tar­get still im­plies a large pre­mium on the com­pany’s shares, which were trad­ing at $42.72 per share on the TSX mid­day Thursday.

The com­pany did not re­spond to a re­quest for com­ment Thursday on whether it an­tic­i­pated ad­di­tional costs.

The Line 3 re­place­ment is con­sid­ered a crit­i­cal pro­ject in the Cana­dian oil­patch as it would roughly dou­ble the ca­pac­ity of the line to 760,000 bar­rels of oil per day, boost­ing de­liv­er­ies of crude oil to the U.S. Midwest, cur­rently the largest mar­ket for Cana­dian oil.

Line 3 is part of En­bridge’s main­line sys­tem that con­nects oil stor­age hubs in Ed­mon­ton and Hardisty, Alta., with re­finer­ies in Wis­con­sin, Min­nesota and other parts of the Midwest.

En­bridge has been forced to ap­por­tion space on its pipe­lines for months, as Cana­dian oil pro­duc­tion out­strips pipe­line ex­port ca­pac­ity and as no new ex­port pipe­lines have been built to han­dle the ris­ing pro­duc­tion.

The most re­cent crude oil fore­casts from the Cana­dian As­so­ci­a­tion of Pe­tro­leum Pro­duc­ers projects oil­sands pro­duc­tion will rise by 1.55 mil­lion bpd be­tween now and 2035, un­der­scor­ing the need for new pipe­lines.

Cana­dian oil pro­duc­ers have had to ac­cept steep dis­counts for their bar­rels rel­a­tive to oil pro­duced in the U.S. due to the lack of ca­pac­ity. Ac­cord­ing to GMP FirstEn­ergy data, the dif­fer­en­tial be­tween Western Canada Se­lect and West Texas In­ter­me­di­ate oil prices rose to $24.35 on Wednesday.

Given the stakes, the Min­nesota PUC’s de­ci­sion will be closely watched in Cal­gary’s oil­patch.

Canac­cord Ge­nu­ity an­a­lyst David Gal­i­son said in a note Thursday that the most likely out­come from the state reg­u­la­tors is an ap­proval of the pro­ject adding that “a pos­i­tive ap­proval is needed to help with cur­rent egress bot­tle­necks for Cana­dian crude.”

A neg­a­tive de­ci­sion on the pro­ject is the least likely out­come, but would deal a blow to En­bridge and Cana­dian oil pro­duc­ers, he said.

“A re­jec­tion of the (Line 3 re­place­ment) would be very neg­a­tive for both En­bridge as well as Cana­dian heavy oil dif­fer­en­tials,” Gal­i­son said. He noted that the pro­ject, when the U.S./Cana­dian dol­lar ex­change rate is fac­tored in, is ex­pected to cost $9.08 bil­lion, which rep­re­sents 40 per cent of En­bridge’s $22-bil­lion growth pro­gram.

Gal­i­son ex­pects the Line 3 re­place­ment would gen­er­ate over $1 bil­lion in earn­ings be­fore in­ter­est, taxes and de­pre­ci­a­tion for En­bridge.

“Re­mov­ing this much earn­ings con­tri­bu­tion could jeop­ar­dize the com­pany’s div­i­dend growth out­look as well as im­pact the com­pany’s ac­cel­er­ated de-lever­ag­ing process,” Gal­i­son said.

DAVID BLOOM FILES

Stock­piled pipe­line pipe near the oil hub of Hardisty, Alta. The Min­nesota Pub­lic Util­i­ties Com­mis­sion is set to rule on the En­bridge Inc.’s Line 3 pipe­line pro­ject in July, and the de­ci­sion may add more than $1-bil­lion to the cost.

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