Enbridge ENB announced that it has reached an agreement with shippers for a 10-year competitive toll settlement (CTS) on its crude oil mainline system, which it expects to file with the National Energy Board in May along with a letter of support from the Canadian Association of Petroleum Producers. Overall, we view the CTS as a favorable arrangement and feel that our updated model and $66 fair value estimate capture both the near- and long-term implications. We expect that the CTS will allow Enbridge to preserve and enhance throughput over the coming decade, earning similar rates of returns on the mainline with upside potential toward the middle and back-end of the decade. Perhaps the most important theme of the CTS, and the biggest difference relative to prior incentive arrangements over the past 16 years, is toll certainty. First, the 10-year deal provides more visibility for both Enbridge and shippers than did prior five-year deals. Also, a corresponding international joint tariff (IJT) provides a CAD 3.85 per-barrel toll from Hardisty to Chicago, which will be adjusted annually by 75% of the Canadian GDPP inflation index. This toll should ensure that the upper Midwest (PADD II) remains the premium market for Canadian heavy crude, as it avoids a longer route and heftier toll to the Gulf Coast--even if and when TransCanada's TRP Keystone extension comes online. In fact, Canadian shippers signed up on Keystone could even be better off avoiding the variable portion of the toll and sending barrels on the mainline to meet any unsatisfied demand in the upper Midwest first, before sending barrels to the Gulf Coast.

Beyond the theme of toll certainty, management said it has assumed very conservative throughput with the CTS. We also like that the agreement automatically triggers a renegotiation if average nine-month throughput at Gretna, Manitoba (the mainline's border crossing) falls below 1.25 million bpd before 2014, or 1.35 million bpd thereafter. If new terms cannot be agreed upon, Enbridge could file again with the NEB, likely reverting to a more cost-of-service type model, but we consider this a highly unlikely worst-case scenario. We'd add that mainline earnings will likely be a little lower in 2011 than in 2010, which is part of the front-end giveback for long-term upside potential that is consistent with prior arrangements. Management had incorporated this in its CAD 2.75-2.95 guidance, as have we in our model. From Enbridge Energy Partners' EEP perspective, we anticipate business as usual with little or no cash flow impact in the near term and upside potential in the longer term from throughput increases.

Source: thestar.com

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