Enbridge: New Mainline Settlement Resolves Uncertainty Over Toll Structure

In what we view as a very good outcome, Enbridge ENB announced an in-principle agreement with its customers on its Mainline tolling structure. The agreement looks to maintain the status quo, in line with prior results and guidance, preserving Enbridge’s overall returns and economics. The settlement covers both U.S. and Canadian portions of the Mainline through 2028, and interim tolls will be implemented as of July 1, 2023. The agreement has strong support from Enbridge’s board as well as the 37-member industry stakeholder group. We expect to maintain our CAD 52/$39 fair value estimate as well as our narrow moat rating.

Enbridge disclosed that its 2023 EBITDA for Mainline will remain at about CAD 5 billion. The initially negative pro forma rate impact is offset by higher volumes and higher foreign-exchange rates. About 70% of the barrels on Mainline will be under the new settlement, while the remaining 30% will be tolled on a full path basis to markets downstream. The new agreement means that Enbridge will no longer have to pursue its cost-of-service filing. We also like that there is a performance collar that provides incentives for Enbridge to optimize throughput and costs, ensuring the pipeline will earn 11.5%-14.5% returns, similar to returns earned previously. Toll escalations for power and other costs are tied to U.S. consumer prices and indexes while allowing Enbridge to pursue solar self-power initiatives to reduce emissions. There is also a continuing volume ratchet feature that will flex rates up or down by $0.035/barrel for every 50,000 barrels/day change in throughout.