File OF-Fac-Oil-N304-2010-01 01 8 December 2011 Mr. Kenneth MacDonald VP, Law and Regulatory Affairs Northern Gateway Pipelines Inc. Suite 3000, 425 1st Street SW Calgary, Alberta T2P 3L8 Facsimile 403-718-3525 Ms. Abby Dorval Manager, Regulatory Affairs Northern Gateway Pipelines Inc. Suite 3000, 425 1st Street SW Calgary, Alberta T2P 3L8 Facsimile 403-767-3863 Mr. Richard Neufeld, Q.C. Barrister & Solicitor Fraser Milner Casgrain 15th Floor, 850 2nd Street SW Calgary, Alberta T2P 0R8 Facsimile 403-268-3100 Dear Sirs and Madame: Northern Gateway Pipelines Inc. (Northern Gateway) Enbridge Northern Gateway Project Application of 27 May 2010 Information Request Number 9 to Northern Gateway The Joint Review Panel (Panel) is examining Northern Gateway s application dated 27 May 2010 and has determined that further information is required, as detailed in the attached Information Request No. 9. The Panel s examination of Northern Gateway s application is ongoing and additional requests for information will continue to be provided to Northern Gateway throughout the IR process. Northern Gateway is directed to submit its response with the Panel and send a copy to the OH-4-2011 Parties by noon, Mountain Time, 25 January 2012. Should you have any questions, please contact Mr. Andrew Hudson, Legal Counsel at 403-299-2708. Yours truly, for L. George Acting Secretary to the Joint Review Panel Attachment
Northern Gateway Pipelines Inc. Section 52 of the National Energy Board Act Application for Enbridge Northern Gateway Project NEB File No.: OF-Fac-Oil-N304-2010-01 01 Filed 27 May 2010 Information Request no.9 to Northern Gateway Table of Contents Information Request no.9 to Northern Gateway... 1 Socio-Economics... 1 9.1 Construction Camp Policies... 1 Financing and Tolls... 2 9.2 Equity Investors... 2 9.3 Insurance Coverage for Liabilities Arising from Construction and Operations... 3 9.4 Commercial Steps after Regulatory Approval... 5 9.5 Return on Common Equity... 8
Page 1 of 9 Socio-Economics 9.1 Construction Camp Policies Reference: i) Exhibit B8-2, Application, Volume 6C, Section 4.4 Regional Social and Economic Effects, Table 4.4-38 (A1D5V2) (Adobe page 147 of 273) ii) Exhibit B40-2, Northern Gateway Response to JRP Information Request No. 5 dated 6 October 2011(A2E7Q0), Response to IR No. 5.4 (Adobe page 11 of 33) Preamble: Reference i) states that Northern Gateway will develop policies for construction camps to limit adverse interactions between Project workers and local communities. Reference ii) states that construction camp policies for the Project will be developed during detailed engineering and construction planning and will be finalized six months prior to construction. The Panel requires further information regarding the elements that will be considered in the detailed policy or the elements that will comprise the detailed policies in reference i). Request: Please discuss the elements that will be addressed in the policies to limit adverse interactions between Project workers and local communities, including, the goals and principles of the policies and how they will address the following: a) substance abuse; b) community approved use of local facilities and services, including recreation, social, retail or medical, by Project workers; c) the use of firearms or hunting and fishing by Project workers; d) issues raised by local communities; e) other elements to be considered in the policies to limit adverse interactions between Project workers and local communities; f) proposed monitoring to measure the success of the policies in meeting their intended goals. Where Northern Gateway maintains that any of the above requested information cannot be determined until detailed engineering, please describe why the respective principles or elements addressed in the construction camp policies are dependent on detailed engineering.
Page 2 of 9 Financing and Tolls 9.2 Equity Investors Reference: i) Exhibit B29-3, Application, August 2011 Update to Volume 2 (A2C1L8), Appendix C(1), Pro Forma Precedent Agreement Crude Oil Pipelines, pages 2 to 23 (Adobe pages 5 to 26 of 164) and Appendix D to Precedent Agreement, Transportation Service Agreement, pages 5 to 22 of 88 (Adobe pages 88 to 104 of 164) ii) Exhibit B1-2, Application, Volume 1 (A1S9X5), Section 1, page 1-11, (Adobe page 23 of 44) iii) Exhibit B29-3, Application, August 2011 Update to Volume 2 (A2C1L8), Precedent Agreement, Appendix D, Transportation Service Agreement (TSA), Schedule B to TSA, Oil Pipeline Toll Principles, Section 6, Aboriginal Participation, page 58 (Adobe page 141of 164) iv) Exhibit B31-2, Northern Gateway Response to JRP Information Request No. 2 dated 18 August 2011(A2C2V5), Response to IR 2.8(b), Attachment JRP IR 2.8(b) (Adobe page 15 of 27) v) Exhibit B1-4, Application, Volume 2 (A1S9X7), Section 4.1, page 4-1 (Adobe page 31 of 166) Preamble: Reference i) includes the definitions for the Pro Forma Precedent Agreement and the Transportation Services Agreement for the crude oil pipeline. The definitions refer to Direct Owner, a Founding Shipper/ Funding Participant that is an equity owner, and Aboriginal participation in Northern Gateway s equity offering. Reference ii) states that that Northern Gateway Pipelines Limited Partnership (the Partnership) includes Enbridge Inc. as a limited partner and Northern Gateway Pipelines Inc. as a general partner. The Partnership is offering an equity position to participating Aboriginal groups. Reference iii) states that up to 10% of the Equity capitalization will be available to qualified Aboriginal groups. The qualified Aboriginal groups electing to participate in the equity offering will have the project fund their portion of the Aboriginal Equity. Reference iv) presents a simplified organization chart of the Partnership showing Enbridge Inc. as an investor. Reference v) states that one Funding Participant has reserved the right to negotiate a direct ownership interest in the Project s pipelines. This Funding Participant would also have the right to participate in any future capacity additions and the approval of Aboriginal equity investment made available in the pipelines.
Page 3 of 9 The Panel requires additional information on the types of equity investors in the Project. Request: a) Please identify and provide a brief description of each type of equity investor in the Project. Your description should include, but not be limited to, a description of whether the investor is a shipper or nonshipper, and if the investor will be a limited partner or hold another interest. b) Please describe the rights, obligations, liabilities and potential benefits of each of the various types of equity investors, identifying where they are identical and where they differ by type of investor. The discussion on potential benefits should include but not be limited to cash and dividend distributions and the benefits that flow to a shipper from holding equity in the Project. c) Please describe the potential liability for each type of equity investor, if any, in the event of a pipeline spill, if the general partner s combined resources and insurance coverage are insufficient to pay for all costs associated with clean-up and compensation. d) Regarding reference v), what criteria and approvals do Aboriginal groups interested in becoming equity investors in the Project have to meet? e) If these criteria were met, would the Direct Owners in reference v) make the final determination on the eligibility of an Aboriginal group to purchase equity in the Project? 9.3 Insurance Coverage for Liabilities Arising from Construction and Operations Reference: i) Exhibit B31-2, Northern Gateway Response to JRP IR 2.8(f) and (g), (A2C2V5), pages 15 to 17 of 29 (Adobe page 15 to 17 of 29) ii) Exhibit B3-21, Application, Volume 7B (A1T0H1), Section 9, Examples of Hypothetical Spills along the Pipelines, pages 9-22 to 9-24 (Adobe pages 22 to 24 of 60) iii) Province of British Columbia IR 2.23 dated 3 November 2011 (A2H2F6), page 23 of 41 (Adobe page 23) iv) Exhibit 37-3, Northern Gateway response to C. Brown IR 1.2 (A2E4J0), page 3 of 3 (Adobe page 3) Preamble: In reference i) Northern Gateway provides an overview of planned insurance coverage for its construction and operational phases. Two of the insurance programs identified for the operational phase are the Property and Business Interruption Insurance Program with a coverage limit of
Page 4 of 9 CAD 700 million for any one event and the General Liability Insurance Program with an annual coverage limit of USD 575 million. Coverage for pollution legal liability is included within this latter program. No coverage limits were provided for the insurance programs identified for the construction phase; rather, Northern Gateway stated that Enbridge would assess the potential risk and procure an appropriate level of insurance. Northern Gateway s response to JRP 2.8(f) and (g) makes several references to the insurance maintained by Enbridge. The relationship between Northern Gateway s General Partner and Enbridge and their respective roles regarding insurance coverage is not clear. In reference ii) Northern Gateway presents four hypothetical hydrocarbon spill scenarios along the pipeline route. Reference iii) is an information request from the Province of British Columbia, highlighting other factors that could impact the severity of the hypothetical spill scenarios that are described in reference ii). In reference iv) Northern Gateway states that the environmental and social consequences of a spill and associated clean-up costs will depend on a number of biophysical factors. Because of the complex ways in which these factors interact, Northern Gateway stated that it is not possible to predict the financial cost of a spill. The Panel requires additional information on insurance coverage for the two pipelines and a more substantive response to JRP IR 2.8(g). (A37597) Request: a) Please advise which corporate entity will hold the insurance coverage described in reference i) for the construction and operation phases of the Project. b) How has Northern Gateway determined the appropriate level of insurance to carry for each program described in reference i) for the operations phase of the Project? Please include in your response details of the risk analysis performed, assumptions made and hypothetical events and supporting data considered, in evaluating the coverage limits proposed. c) Please provide details of the considerations and analysis that Enbridge will undertake to determine the appropriate level of insurance for the construction phase of the Project, as described in reference i). d) Do the limits for any of the insurance programs identified in reference i) apply exclusively to claims for Northern Gateway or
Page 5 of 9 would claims for Enbridge and/or its affiliates also be covered under the coverage limits identified? e) What kinds of events, losses and liabilities would be covered under the pollution legal liability component of the General Liability Insurance Program? Please indicate if there is a coverage limit for pollution legal liability, as a component of the General Liability Insurance Program. (A37597) f) Are there any conditions, circumstances or exclusions under which the insurance programs identified by Northern Gateway in reference i) would not cover the losses and liabilities of Northern Gateway and/or third parties? If so, please describe the conditions and circumstances and indicate the deductibles that would apply. g) Please describe the extent to which Northern Gateway intends to selfinsure and provide illustrations of potential events that would be covered in this category. h) In the context of references ii), iii) and iv), how will Northern Gateway financially cover any losses and claims for spills, malfunctions or other potential liabilities, in excess of its insurance coverage during the operational life of the Project? Please include in your response details of any other indemnities, bonds, letters of credit, guarantees or other instruments which will be held to cover these potential liabilities. 9.4 Commercial Steps after Regulatory Approval Reference: i) Exhibit B1-4, Application, Volume 2 (A1S9X7), Section 2.3, page 2-3 (Adobe page 27 of 166) ii) Exhibit B29-3, Application, August 2011 Update to Volume 2 (A2C1L8), Pro Forma Precedent Agreement for the Crude Oil Pipeline, Appendix C(1), pages 1 to 73 (Adobe pages 4 to 76 of 164) and Appendix C to Pro Forma Precedent Agreement (Transportation Services Agreement Export Oil Pipeline), pages 1 to 51 (Adobe pages 84 to 164 of 164) iii) Exhibit B31-2, Northern Gateway Response to JRP Information Request No. 2 dated 18 August 2011(A2C2V5), Response to IR 2.5, page 8 (Adobe page 8 of 29) iv) Exhibit B1-4, Application, Volume 2 (A1S9X7), Appendix A, pages A1-73, (Adobe pages 45 to 73 of 166) and Appendix B, pages B-1 to 40 (Adobe pages 123 to 166 of 166)
Page 6 of 9 Preamble: Reference i) describes steps that Northern Gateway will take after it receives regulatory approval, to finalize firm Transportation Service Agreements with shippers. These steps include developing a more definitive capital cost estimate for the construction of the Project and a finance plan to enable Northern Gateway to construct and place the pipelines in service. Reference ii) refers to a Preparation Plan to be used in developing Technical Studies and a Finance Plan; these documents are required before potential shippers will execute binding Transportation Service Agreements. The Technical Studies include a construction execution management plan for the oil pipeline (CEMP), the Class III Capital Cost Estimate and the Class III Toll Estimate. The Class III Capital Cost Estimate will have an accuracy level within the range of plus 25% and minus 15% after including a risk dependent contingency. Reference ii) also includes a Preparation Plan Procedure that stipulates that Northern Gateway shall deliver the final Preparation Plan to the Term Shippers no later than 30 days after the release of the Panel Decision. Finally, reference ii) identifies various categories of funding participants and shippers; the reference also presents a Management Plan in Appendix C for governance during the development phase of the oil pipeline. These categories are identified, described and used, for example, in the definitions article of the Precedent Agreement, in Appendix C (Management Plan) to the Precedent Agreement, in the definitions article of the Transportation Services Agreement (TSA) (Appendix D to the Precedent Agreement), the Oil Pipeline Toll Principles (Appendix D to the TSA), Article 9 in the Precedent Agreement Allocation of Pipeline Capacity, and Article 24 of TSA Direct Ownership. In reference iii), Northern Gateway advised the Panel that Muse Stancil has been requested to update the net benefit analysis, which will be filed with the Panel as soon as it is available. Reference iv) includes the analyses of the Project s benefits by two consultants (Muse Stancil and Wright Mansell). These analyses were prepared for the May 2010 Application. Based on the above, the Panel understands that Northern Gateway expects to receive Panel approval before Northern Gateway develops accurate capital costs and a final finance plan. The Panel requires further information regarding the economic feasibility of the Project and Northern Gateway s proposed methods of financing, before rendering its Decision. In particular, the Panel requires: reasoned estimates on capital costs and a finance plan to enable a
Page 7 of 9 credible assessment of the economic feasibility of the Project; and the status of funds provided by funding participants and the use of those funds to date in the development phase of the Project. Request: a) Has Northern Gateway prepared an update to the capital cost estimate for the Project since it filed the Application in May 2010? If so, please provide the most recent update of the estimated capital costs, the date of the estimate and an opinion on the class level and accuracy of this estimate compared to a Class III Capital Cost Estimate. b) Using the capital cost estimate provided in a), or if not available, the capital cost estimate in the May 2010 application, please provide a high level sensitivity analysis of the tolls for each pipeline and the resulting Project benefits as estimated in the consultants reports presented in reference iv) and updated per reference iii), assuming the capital costs would be 25% and then 50% greater than the capital cost estimate provided in a). c) What is the approximate impact on tolls (expressed as a percentage), that Northern Gateway would expect from pre-funding for abandonment costs? d) Has Northern Gateway or its consultants and advisors prepared a preliminary finance plan beyond the information filed to date? If so, please provide a copy of the plan indicating the assumptions underlying the plan and the date it was completed. Your response should also include a summary of the key terms and conditions that Northern Gateway expects to be required in any financing obtained. If this information is not available now, when can the Panel expect to receive the information? e) Regarding shippers and funding participants identified in reference ii), please summarize and compare the rights and obligations of a Supporting Term Shipper, a Founding Shipper FP, a Confirmed Funding Participant, a Confirmed Funding Participant that is a Supporting Term Shipper, Confirmed Funding Participant that did not execute a Letter of Support, a Non-Confirmed Funding Participant that is not a Supporting Term Shipper, a Funding Participant DO and any other types shippers and funding participants identified in reference ii) with respect to the following criteria: Funding of Technical Studies; Eligibility to participate and vote in committees and groups identified in the Management Plan;
9.5 Return on Common Equity Page 8 of 9 Access to Pipeline Capacity during allocation process; Entitlement to differentiated toll levels; Sharing in excess revenue; Sharing in pipeline expansion benefits, and Required Equity Participation. (A37597) f) How many Funding Participants have made financial commitments to date and what is the total amount of the funds committed? g) How much of these funds have been spent in development work up to and including 31 October 2011? Reference: i) Exhibit B31-2, Northern Gateway Response to JRP Information Request No. 2 dated 18 August 2011(A2C2V5), Response to IR 2.8(a), page 15 of 29 (Adobe page 15 of 29) ii) Exhibit B29-3, Application, August 2011 Update to Volume 2 (A2C1L8), Precedent Agreement, Appendix D, Transportation Service Agreement (TSA), Schedule B to TSA, Oil Pipeline Toll Principles, Section 6, Aboriginal Participation, page 58 (Adobe page 141 of 164) Preamble: Reference i) states that the updated TSA submitted to the Panel on 11 August 2011 reflected some revisions to the Toll Principles and increased tolls. These revisions included: an increase in the Return on Equity (RoE) from 11% to 12%; and the funding of Aboriginal Participation in the ownership of Project equity. Reference ii) states that up to 10% of the Equity capitalization will be available to qualified Aboriginal groups. The qualified Aboriginal groups electing to participate in the equity offering will have the Project fund their portion of the Aboriginal Equity. The reference describes how participating Aboriginal groups will repay the debt through a First Nation Note Receivable; an annual interest rate will be paid on the First Nation Note Receivable at Northern Gateway s average cost of long-term debt plus 100 basis points. Request: a) Please provide the rationale for the increase in the RoE from 11% to 12%. Your response should include, but not be limited to a discussion of: a.1) The extent to which negotiations with Funding Participants, Direct Owners, potential shippers or other parties providing
Page 9 of 9 a.2) a.3) a.4) equity funds to the Project influenced the decision? The extent to which the increase is based on financial market studies or advice from market advisors? The extent to which the funding of Aboriginal Participation could account for the increase in the RoE. For this question please include an illustration and discussion of the difference between the Project s cost of capital for funding Aboriginal groups and the annual interest income receivable (in dollars), assuming qualified Aboriginal groups exercise the option for 10% Equity funding through the use of First Nation Notes Receivable; and Any other factors or reasons for the increase in the RoE. b) Please explain the impact of the revisions to the Toll Principles on tolls resulting from: b.1) The increase in RoE from 11% to 12%; and b.2) The impact of funding Aboriginal Participation in the ownership of Project equity.