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Morningstar | Minnesota Public Utilities Commission Reaffirms Enbridge's Line 3, Again

As expected, the Minnesota Public Utilities Commission ruled in favor of Enbridge’s Line 3 replacement project. On March 26, the MPUC unanimously rejected the Minnesota Commerce Department’s petitions for reconsideration of the commission's June 2018 certificate of need of approval on the Line 3 replacement project. This decision represents third time that the MPUC ruled in favor of the project. Opponents now have a 30-day period to notify the Minnesota Court of Appeals of any intent to appeal the certificate of need. Accordingly, we expect the state Commerce Department to join tribal groups and environmentalists in the appeals process. Timing on a decision from the Court of Appeals is uncertain, but we expect the process to last through the remainder of 2019.

Any additional appeals on the MPUC’s ruling won’t prohibit Enbridge from advancing the permitting process. Earlier this month, Minnesota announced that its permitting process won’t be completed until November of this year. After the state permits are received, Enbridge expects to receive the federal permits 30-60 days later. Accordingly, we expect Line 3 to be placed into service during the fourth quarter of 2020.

We are maintaining our $47 (CAD 62) fair value estimate and wide moat rating for Enbridge. This decision reaffirms our expectation that the Line 3 replacement will be built. As such, we see over 25% upside in the stock paired with a 6% (and growing) dividend yield. Enbridge remains one of our top picks in the energy sector. We think that investors are mistakenly worried about underutilization of the Mainline while competing pipelines are placed into service. Even if the KXL and TMX are placed into service (as we forecast), we expect only minor underutilization of the Mainline until Canadian crude supply ramps up to our forecast levels. We expect all the major pipeline expansions to be operating near full capacity within the next decade.

Investors are also overlooking Enbridge’s big picture and are too narrowly focused on the company as a dividend stock. Because of this, we think they are not focused enough on cash flows from the growth portfolio. Enbridge sports CAD 18 billion of near-term commercially secured capital projects in its growth portfolio, highlighted by the Line 3 replacement project. Once placed into service, we expect the Line 3 replacement project coupled with various natural gas growth projects to generate almost CAD 3 billion of incremental EBITDA, supporting dividend growth.

Enbridge's Line 3 replacement project would restore Line 3 to its initial capacity of 760 thousand barrels per day, adding 370 mb/d of new pipeline capacity. Similar to other mainline routes, the Line 3 replacement will be a common-carrier pipeline. The pipeline is expected to originate in Hardisty, Alberta, and connect to the United States in Minnesota, where it will connect to other U.S. pipelines. It will provide additional access to refineries in eastern Canada, Cushing, Oklahoma, the U.S. Midwest, and the U.S. Gulf Coast at an expected cost of $7.5 billion. Shipments on the expanded Line 3 can displace feedstock in eastern Canada, but most important, capitalize on the heavy oil refining capacity in the U.S. Gulf Coast while ensuring stability of crude receipts for Minnesota refineries. Construction has already begun on the Canadian portion of the pipeline expansion, while construction on the Minnesota portion is not expected to begin until early 2020 after the announcement of the revised timeline.

Please refer to our January 2018 report, "Best Idea Enbridge Is a Triple Threat," for a deeper dive into the stock's upside.

For a detailed look into Canadian crude market and pipeline trends, please refer to our January 2019 Energy Observer, "Pipeline Expansions Are Canada's Lifelines."