Enbridge tax challenge could cost northern Minn. counties millions

Enbridge Energy's massive property tax challenge may end up costing several northern Minnesota counties millions of dollars. In fact, two counties — Clearwater and Red Lake — could end up refunding more money to Enbridge than they raise annually from all of their property tax payers.

Enbridge has appealed five years of taxes, claiming the Minnesota Department of Revenue unfairly valued its vast pipeline network, resulting in significantly higher payments. The company says a November Minnesota Supreme Court decision in a separate pipeline tax case buttresses its own appeals.

"It's scary for us," said Allen Paulson, Clearwater County's auditor. "If Enbridge wins its appeal, the [tab for the county] will be $7.2 million, and our levy is $6.8 million."

Clearwater County faces the biggest hit because it's home not only to pipelines, but an Enbridge tank farm and terminal in the town of Clearbrook. Plus, Clearwater and Red Lake are sparsely populated and have small tax bases — so the company's tax contributions loom particularly large.

Enbridge's pipelines cross 13 Minnesota counties, transporting crude oil from Alberta, Canada, and North Dakota to a terminal in Superior, Wis. If Enbridge wins its tax appeal, "it could frankly have a devastating effect on these counties," said Julie Ring, executive director of the Association of Minnesota Counties.

Local governments and school districts would be hurt, too, since they receive portions of tax collections from counties, she said. Bills introduced in the Minnesota House and Senate would use state general fund money to cover successful tax appeals on property valued by the Revenue Department.

The department and Enbridge are scheduled for mediation talks this week, and county administrators are hoping a settlement might at least lessen any repayment burden. While the Revenue Department determines the tax value of pipelines, utilities and railroads, tax revenue is apportioned to counties hosting the properties.

Enbridge Energy is a subsidiary of Calgary-based Enbridge Inc., North America's largest oil and gas pipeline operator. The firm has appealed the Minnesota property taxes it paid from 2012 through 2016.

"We have always paid our fair share, and we expect tax increases," said Jennifer Smith, an Enbridge spokeswoman in Duluth. "These [appeals] are about the amount of the increase," which ended up being 24 percent in 2012 due to a change in valuation methodology by the state.

Smith said she refers to a change in 2012 on the weighting of key financial inputs into the assessment equation. Until 2012, she said, Enbridge's property taxes in Minnesota were historically in line with comparable states where the company has pipelines, such as Wisconsin, North Dakota and Michigan.

The Department of Revenue, in a statement to the Star Tribune, denied that it changed the valuation methodology in 2012 but declined to give details, citing litigation. The department also cautioned against comparisons to other states.

To get a sense of the gulf between the Revenue Department and Enbridge, the agency's valuation of the pipeline system for 2015 was $7.13 billion; the company's was $4.25 billion, Minnesota Tax Court filings show.

If Enbridge wins its appeals, Smith said the total tax refund due to the company could amount to tens of millions of dollars. The company declined to give a more precise estimate.

The Revenue Department said it couldn't speculate about the amount of any refund, but noted that the state, too, received funds from Enbridge tax collections, so any refund would include that money.

At least two other pipeline operators in Minnesota besides Enbridge have appealed their property taxes in recent years. But the Enbridge cases are likely to have the biggest impact given the company's size. Enbridge runs six pipelines across Minnesota to Superior, where crude oil is transferred to Enbridge pipelines running through Wisconsin and Michigan. Plus, Enbridge pipelines are critical in transporting about 80 percent of crude oil refined in the Twin Cities, the company says.

Enbridge's Minnesota pipeline system carries 2.8 million barrels of oil per day on average. In 2015, it generated $1.89 billion in operating revenue for Enbridge Energy Partners — 36 percent of the company's total revenue, tax court records show. Enbridge Energy Partners' net operating profits in Minnesota rose from $329 million in 2013 to $524 million in 2015.

The company plans to spend $2.6 billion on a replacement for one of its main pipelines — Line 3 — though that project has been mired in the regulatory process. The replacement would veer from Line 3's current route and go through wilderness areas, sparking opposition from environmentalists and Indian tribes.

The new Line 3 — expected to be operating in 2019 if approved — would increase the value of Enbridge's system, significantly upping the company's taxes, Smith said.

Enbridge's appeals were stayed by the Minnesota Tax Court in early 2016, pending final resolution of a tax appeal by Minnesota Energy Resources Corporation (MERC), Minnesota's third-largest natural gas utility.

MERC, a subsidiary of Chicago-based Integrys Energy Group, challenged the Revenue Department's valuation of its pipelines for the years 2008 through 2012. The tax court reduced MERC's valuation in all but one of those years and ordered the Revenue Department to recalculate the company's tax liability. Both parties appealed the ruling.

The Minnesota Supreme Court affirmed the tax court's decision in part — and reversed it in part — remanding the case to Tax Court.

Enbridge has interpreted the Supreme Court's decision in the MERC case as a win. "The Supreme Court has reached conclusions that are consistent with positions we have taken in our appeals," Smith said.

Counties complain they're caught in a taxation process they don't control. "Why should the counties be penalized?" said Bob Schmitz, Red Lake County's auditor. "We didn't make an error."

Red Lake County is Minnesota's third-smallest county, with just over 4,000 residents. Enbridge is its largest taxpayer, and the county had a total levy last year of $2.6 million. Schmitz says that if Enbridge prevails, the county could be on the hook for $3.5 million. "How do we possibly get the money to pay them back?"

More populous counties with bigger tax bases stand to take a hit, too.

Take Polk County, which counts over 32,000 residents and has a commercial tax base that includes two large sugar beet processing plants. Enbridge makes up just over 1 percent of Polk County's total tax valuation, yet its pipeline system is the highest valued property in the county.

Polk County Administrator Charles Whiting expects that if Enbridge wins its appeals, the county will have to pay up to $1.8 million, wiping out the increases in its tax levy over the past two years.

"It's the scale of the payback that has us concerned," he said. "And we are not at the table for the appeals process, which concerns us."

Mike Hughlett • 612-673-7003