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4-Traders Homepage  >  Equities  >  Toronto Stock Exchange  >  Enbridge Inc    ENB   CA29250N1050

ENBRIDGE INC (ENB)
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Enbridge Energy Partners L P : Itasca County discusses potential liabilities following Enbridge pipeline overvaluation

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05/26/2018 | 06:56pm CEST

The state of Minnesota has repeatedly overvalued Enbridge Energy's oil pipeline system, a state Tax Court judge ruled earlier this month, potentially leaving several counties, including Itasca County, in jeopardy of paying millions of dollars in tax refunds to the company.

On Tuesday, May 15, tax court Judge Joanne Turner ruled the Minnesota Department of Revenue (DOR) had overvalued Enbridge's pipeline system by $156 million in 2012, $880 million in 2013 and $2.2 billion in 2014, resulting in a total overvaluation of the pipeline system of $3.2 billion throughout that time period.

Enbridge, the largest pipeline operator in North America, argued it was overtaxed by $55 million from 2012 to 2017. The company operates several pipelines that cross 13 northern Minnesota counties (Beltrami, Aitkin, Carlton, Cass, Clearwater, Hubbard, Itasca, Kittson, Marshall, Pennington, Polk, Red Lake and St. Louis), connecting Alberta and the company's terminal in Superior, Wis., and transporting nearly 2.5 million barrels of oil per day.

Although pipelines are assessed by the state, tax proceeds are distributed to the counties. As a result, there is a potential that the latter may have to refund tens of millions of dollars to Enbridge, which has said it was overtaxed by $15-20 million during 2012-2014, the years covered during the current litigation.

According to information provided by Enbridge spokeswoman Jennifer Smith, in 2012, the Minnesota Department of Revenue elected to "apply a new methodology that excessively raised the taxes of utility companies, including Enbridge." As a result, the company is seeking adjustments from the Minnesota Department of Revenue in tax court regarding the department's new methodology used for property tax calculations.

"We anticipated a 16 percent increase [in 2012] based on the traditional valuation methodology, which was acceptable," wrote Trent Wetmore, Director, Operations, Liquids Petroleum, Midwest Region, Enbridge, Superior, Wis., in a submitted letter to the Herald-Review. "However, under its new methodology, the DOR rendered an assessment that raised taxes by 24 percent [beginning in 2012]."

"In Minnesota, the state assesses the tax, the counties collect it, and taxpayers pay it," said Wetmore. "In this instance, Enbridge has been paying an inflated tax while seeking an equitable solution to the higher assessed value."

According to Wetmore, from the beginning, Enbridge attempted to mediate with the DOR to find an "acceptable solution" to the issue.

"Unfortunately, despite those efforts, we had to petition the tax court for review of the department's valuation method," continued Wetmore.

Although the counties were not responsible for the flawed assessments, Smith said under Minnesota law, it is the obligation of the counties to refund the bulk of any overpayments should Enbridge prevail in court.

According to the Minneapolis Star Tribune, at least two counties, Clearwater and Red Lake counties, could end up refunding more money than they raise annually from taxpayers. Red Lake, the third-smallest county in the state, has a total tax levy of $2.6 million and it has been estimated it may have to pay $3.5 million if Enbridge prevails, the Star Tribune reported.

While specific county-level allocations still need to be determined, according to County Auditor/Treasurer Jeff Walker, Itasca County could stand to lose more than $5 million in back-tax payments to Enbridge.

"Preliminary estimates for Itasca County are that we would owe about $5.6 million on those three years alone," said Walker, who added that the county would be liable for nearly half of those payments. The remaining 50 percent of liability would fall equally on individual cities and townships as well as school districts. Interest rates, said Walker, are not included in his preliminary estimates.

Enbridge has also sued the state for the tax years 2015-2017, cases which have yet to be heard. According to Walker, if those cases prevail in court, the numbers could "get pretty wild."

"My best guess is that if those go to court and prevail, for those three years, it will probably be even worse," explained Walker. "In 2014, the state missed the mark by 40 percent, so if it's 40 percent for the next three years, our liability will be much higher than $5.6 million."

Walker said he is "not trying to get everyone overly anxious" about the ruling as it is still early on in the process.

Where counties go from here is going to be directed by the state, said Walker.

"They can appeal that decision just like any other entity, or they could settle with Enbridge and accept an alternative methodology for the prior years and for the years going forward," Walker explained.

Or, the state could allow the decision to stand, holding counties responsible for making the payments.

"[If that happens,] the county will receive a court order directing us to make the payment," continued Walker. "Once I get that, I have to immediately cut a check."

Walker said Itasca County would be affected "dramatically" by such a decision because a tax abatement payment would come from the county's reserves.

"These retrospective tax abatements are much more difficult to handle," explained Walker. "So what we would hope the state would do would be to take responsibility for the errors in the assessments in this particular matter, and hold the counties harmless and provide a funding mechanism for these tax payments."

Walker expressed concerns that this case could possibly "spill over" to all other utilities, which comprise nearly 20 percent of the county's total property tax base.

"They're all standing in the wings, of course, watching this," said Walker. "The ripple effect could be enormous."

According to Smith, "given the unwelcome financial burden the counties may face," Enbridge plans to work with the affected counties "to identify ways to alleviate the financial impact."

Smith said possibilities for addressing the burden could include spreading refund payments over a number of years or treating the refunds as credits against future taxes.

"Throughout this entire process, Enbridge has been focused on trying to find an equitable solution to the tax dispute," added Smith, who said Enbridge does not plan to take any "immediate action" on this ruling as all parties now have 30 days to file an appeal.

"It is important for people in the impacted counties to understand that we are not interested in creating any hardship for them," wrote Wetmore. "Enbridge understands that the counties were not responsible for the flawed assessments and we are committed to working with them to help alleviate the financial impact."

Walker said the county will seek allies in similarly affected entities, and urge state legislators to provide financial support to those affected by the ruling.The Minnesota DOR wrote in a statement that they "disagree with the Minnesota Tax Court's decision."

"We understand the concerns of the affected counties," the DOR continued. "This is not the end of the litigation, and we are exploring our options for appeal."In addition to the tax lawsuits, Enbridge is awaiting approval from the Minnesota Public Utilities Commission to decommission and replace its Line 3 oil pipeline. The project has aroused strong opposition from environmental and tribal groups across the state.

According to Smith, should the tax court ruling stand reducing Enbridge's assessments, the counties "should not see a net decrease in tax revenues moving forward if the Line 3 Replacement Line [were] to be approved.""After the first full year that the Line 3 Replacement Project is in service, Enbridge will pay an estimated additional $19.5 million annually to the state of Minnesota," said Smith.

Minnesota agencies have been reviewing the $2.6 billion project since 2015, and a decision is expected by June 27.

© Copyright © 2018 Grand Rapids Herald-Review, APG Media of Minnesota LLC. All rights reserved., source Newspapers

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Financials ( CAD)
Sales 2018 47 209 M
EBIT 2018 8 271 M
Net income 2018 3 624 M
Debt 2018 67 914 M
Yield 2018 6,61%
P/E ratio 2018 18,35
P/E ratio 2019 15,95
EV / Sales 2018 2,90x
EV / Sales 2019 2,83x
Capitalization 69 088 M
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Mean consensus OUTPERFORM
Number of Analysts 18
Average target price 51,1  CAD
Spread / Average Target 26%
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Managers
NameTitle
Albert Monaco Co-President, CEO & Non-Independent Director
Gregory Lorne Ebel Chairman
Leon Anthony Zupan Chief Operating Officer-Liquids Pipelines
John K. Whelen Chief Financial Officer & Executive Vice President
Charles Wayne Fischer Independent Director
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