Analyst Note| Stephen Ellis |
The Canadian Energy Regulator (CER) has rejected Enbridge’s proposed shift to long-term contracts from a monthly nominating system for the Mainline system. While we had expected the CER to accept Enbridge’s proposal, ultimately, we do not believe the shift has a material impact on Enbridge’s fair value estimate, as historically the pipeline utilization has been over 90% and in apportionment at times. Thus, we wouldn’t expect any material differences in the rates achieved over time under any new contracting approach with the strong demand. However, maintaining the monthly nomination system introduces a level of uncertainty that wouldn’t exist with long-term contracts because the barrels could potentially shift between competitors’ pipes as new capacity comes online. The Canadian pipeline export capacity has historically been extremely undersupplied, and we don’t expect that to change going forward, which means Enbridge’s pipes will remain full or nearly full, in our view. With the minimal financial impact, we do think the increased uncertainty over future returns supports our narrow moat to some extent. Still, the bulk of this impact for this decision is that it reflects a black eye for Enbridge’s management team in terms of managing its regulatory and stakeholder relationships over the multiyear timeframe that the application was under consideration by the CER and in preparation to submit the proposal. In response, Enbridge plans to re-engage with stakeholders and customers to pursue a new incentive contract structure or a cost of service contracting structure. Enbridge will submit a cost-of-service application to the CER while these discussions take place and expects a decision in 2023.