25. COMMITMENTS AND CONTINGENCIES

Environmental Liabilities

We are subject to federal and state laws and regulations relating to the protection of the environment. Environmental risk is inherent to liquid hydrocarbon and natural gas pipeline operations, and we are, at times, subject to environmental cleanup and enforcement actions. We manage this environmental risk through appropriate environmental policies and practices to minimize any impact our operations may have on the environment. To the extent that we are unable to recover payment for environmental liabilities from insurance or other potentially responsible parties, we will be responsible for payment of liabilities arising from environmental incidents associated with the operating activities of our liquids and natural gas businesses. Our General Partner has agreed to indemnify us from and against any costs relating to environmental liabilities associated with the Lakehead system assets prior to the transfer of these assets to us in 1991. This excludes any liabilities resulting from a change in laws after such transfer. We continue to voluntarily investigate past leak sites on our systems for the purpose of assessing whether any remediation is required in light of current regulations.

As of December 31, 2016 and 2015, our consolidated statements of financial position included $99.9 million and $95.8 million, respectively, in “Environmental liabilities,” and $50.8 million and $64.0 million, respectively, and in “Other long-term liabilities,” that we have accrued for costs we have recognized primarily to address remediation of contaminated sites, asbestos containing materials, management of hazardous waste material disposal, outstanding air quality measures for certain of our liquids and natural gas assets and penalties we have been or expect to be assessed.

Lakehead Lines 6A & 6B Crude Oil Releases

Line 6A Crude Oil Release

A release of crude oil from Line 6A of our Lakehead system was reported in an industrial area of Romeoville, Illinois on September 9, 2010. We estimate that approximately 9,000 barrels of crude oil were released, of which approximately 1,400 barrels were removed from the pipeline as part of the repair. Some of the released crude oil went onto a roadway, into a storm sewer, a waste water treatment facility and then into a nearby retention pond. All but a small amount of the crude oil was recovered. We completed excavation and replacement of the pipeline segment and returned it to service on September 17, 2010.

We have completed the cleanup, remediation and restoration of the areas affected by the release. On October 21, 2013, the National Transportation Safety Board, or NTSB, publicly posted their final report related to the Line 6A crude oil release that occurred in Romeoville, Illinois on September 9, 2010, which states that the probable cause of the crude oil release was erosion caused by a leaking water pipe resulting from an improperly installed third-party water service line below our oil pipeline.

The total cost estimate for this crude oil release was approximately $53.0 million, before insurance recoveries and including fines and penalties. These costs included the emergency response, environmental remediation and cleanup activities associated with the crude oil release. For the year ended December 31, 2015, we paid $0.6 million related to the costs on the Line 6A release, with no such costs paid in 2016 and 2014. We have no remaining estimated liability as of December 31, 2016.

Line 6B Crude Oil Release

On July 26, 2010, a release of crude oil on Line 6B of our Lakehead system was reported near Marshall, Michigan. We estimate that approximately 20,000 barrels of crude oil were leaked at the site, a portion of which reached the Kalamazoo River via Talmadge Creek, a waterway that feeds the Kalamazoo River. The released crude oil affected approximately 38 miles of shoreline along the Talmadge Creek and Kalamazoo River waterways, including residential areas, businesses, farmland and marshland between Marshall and downstream of Battle Creek, Michigan.

We continue to evaluate the need for additional remediation activities and are performing the necessary restoration and monitoring of the areas affected by the Line 6B crude oil release. All the initiatives we are undertaking in the monitoring and restoration phase are intended to restore the crude oil release area to the satisfaction of the appropriate regulatory authorities.

On March 14, 2013, we received an order from the EPA, which we refer to as the Order, that required additional containment and active recovery of submerged oil relating to the Line 6B crude oil release. In February 2015, the EPA acknowledged our completion of the Order.

In November 2014, regulatory authority was transferred from the EPA to the Michigan Department of Environmental Quality, or MDEQ. The MDEQ has oversight over submerged oil reassessment, sheen management and sediment trap monitoring and maintenance activities, through a Kalamazoo River Residual Oil Monitoring and Maintenance Work Plan.

In May 2015, Enbridge reached a settlement with the MDEQ and the Michigan Attorney General’s offices regarding the Line 6B crude oil release. As stipulated in the settlement, Enbridge agrees to: (1) provide at least 300 acres of wetland through restoration, creation, or banked wetland credits, to remain as wetland in perpetuity, (2) pay $5.0 million as mitigation for impacts to the banks, bottomlands, and flow of Talmadge Creek and the Kalamazoo River for the purpose of enhancing the Kalamazoo River watershed and restoring stream flows in the River, (3) continue to reimburse the State of Michigan for costs arising from oversight of Enbridge activities since the release, and (4) continue monitoring, restoration and invasive species control within state-regulated wetlands affected by the release and associated response activities. The timing of these activities is based upon the work plans approved by the State of Michigan.

As of December 31, 2016, our cumulative cost estimate for the Line 6B crude oil release remains at $1.2 billion. This includes a $15.0 million increase in cost accruals for estimated fees and civil penalties, under the Clean Water Act of the United States, as described below under Fines and Penalties, offset by a reduction of estimated remediation efforts. In addition, in the fourth quarter of 2016, the cost accruals were reduced by $8.0 million mainly due to optimization of our remedial investigation reporting and savings related to our residual oil monitoring and maintenance.

For purposes of estimating our expected losses associated with the Line 6B crude oil release, we have included those costs that we considered probable and that could be reasonably estimated at December 31, 2016. Our estimates exclude: (1) amounts we have capitalized, (2) any claims associated with the release that may later become evident, (3) amounts recoverable under insurance, and (4) fines and penalties from other governmental agencies except as described in the Fines and Penalties section below. Our assumptions include, where applicable, estimates of the expected number of days the associated services will be required and rates that we have obtained from contracts negotiated for the respective service and equipment providers. As we receive invoices for the actual personnel, equipment and services, our estimates will continue to be further refined. Our estimates also consider currently available facts, existing technology and presently enacted laws and regulations. These amounts also consider our and other companies’ prior experience remediating contaminated sites and data released by government organizations. Despite the efforts we have made to ensure the reasonableness of our estimates, changes to the recorded amounts associated with this release are possible as more reliable information becomes available. We continue to have the potential of incurring additional costs in connection with this crude oil release due to variations in any or all of the categories described above, including modified or revised requirements from regulatory agencies, in addition to fines and penalties as well as expenditures associated with litigation and settlement of claims.

The components underlying our cumulative estimated loss for the cleanup, remediation and restoration associated with the Line 6B crude oil release, the majority of which have been paid, include the following:

	(in millions)
Response personnel and equipment	$	547.3
Environmental consultants		224.3
Professional, regulatory, fines and penalties and other		443.4
Total	$	1,215.0

For the years ended December 31, 2016, 2015 and 2014, we made payments of $20.8 million, $37.2 million and $141.4 million, respectively, for costs associated with the Line 6B crude oil release. For the years ended December 31, 2016 and 2015, we had a remaining estimated liability of $138.8 million and $149.8 million, respectively. We did not recognize any insurance recoveries for the years ended December 31, 2016, 2015 and 2014.

Fines and Penalties

At December 31, 2016, our total estimated costs related to the Line 6B crude oil release include $68.5 million in fines and penalties. Of this amount, $61.0 million relates to civil penalties under the Clean Water Act of the United States, which we have fully reserved in our contingency accrual but have not yet paid, pending approval of the Consent Decree, as described below.

In June 2015, Enbridge reached a separate agreement with the United States of America (Federal Natural Resources Damages Trustees), State of Michigan (State Natural Resources Damages Trustees), Match-E-Be-Nash-She-Wish Band of the Potawatomi Indians, and the Nottawaseppi Huron Band of the Potawatomi Indians, and we paid approximately $3.9 million that we had accrued to cover a variety of projects, including the restoration of 175 acres of oak savanna in Fort Custer State Recreation Area and wild rice beds along the Kalamazoo River.

Consent Decree

On July 20, 2016, a Consent Decree was filed with the United States District Court for the Western District of Michigan, Southern Division, or the Court. The Consent Decree is our signed settlement agreement with the U.S. Environmental Protection Agency and the U.S. Department of Justice regarding Lines 6A and 6B crude oil releases. Pursuant to the Consent Decree, we will pay $62.0 million in civil penalties: $61.0 million in respect of Line 6B and $1.0 million in respect of Line 6A. The Consent Decree will take effect upon approval by the Court.

In addition to the monetary fines and penalties, the Consent Decree calls for replacement of Line 3, which we initiated in 2014 and is currently under regulatory review in the State of Minnesota; refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Line 3 Replacement Program for further details. The Consent Decree contains a variety of injunctive measures, including, but not limited to, enhancements to our comprehensive in-line inspection (ILI)-based spill prevention program; enhanced measures to protect the Straits of Mackinac; improved leak detection requirements; installation of new valves to control product loss in the event of an incident; continued enhancement of control room operations; and improved spill response capabilities. Collectively, these measures build on continuous improvements we have implemented since 2010 to our leak detection program, control center operations, and emergency response program. We estimate the total cost of these measures to be approximately $110.0 million, most of which is already incorporated into existing long-term capital investment and operational expense planning and guidance. Compliance with the terms of the Consent Decree is not expected to materially impact our overall financial performance.

Insurance

We are included in the comprehensive insurance program that is maintained by Enbridge for its subsidiaries and affiliates. On May 1 of each year, our insurance program is renewed and includes commercial liability insurance coverage that is consistent with coverage considered customary for our industry and includes coverage for environmental incidents such as those we have incurred for the crude oil releases from Lines 6A and 6B, excluding costs for fines and penalties.

Enbridge, together with us and its other affiliates, renewed its comprehensive property and liability insurance programs, under which we are insured through April 30, 2017, with a liability program aggregate limit of $900.0 million, which includes sudden and accidental pollution liability. In the unlikely event that multiple insurable incidents which in aggregate exceed coverage limits occur within the same insurance period, the total insurance coverage will be allocated among the Enbridge entities on an equitable basis based on an insurance allocation agreement we have entered into with Enbridge, MEP, and other Enbridge subsidiaries.

A majority of the costs incurred for the crude oil release for Line 6B are covered by the insurance policy that expired on April 30, 2011, which had an aggregate limit of $650.0 million for pollution liability for Enbridge and its affiliates. Including our remediation spending through December 31, 2016, costs related to Line 6B exceeded the limits of the coverage available under this insurance policy. Through December 31, 2016, we have received total insurance recoveries of $547.0 million for the Line 6B crude oil release, out of the $650.0 million aggregate limit. We will record receivables for additional amounts we claim for recovery pursuant to our insurance policies during the period that we deem realization of the claim for recovery to be probable.

In March 2013, we and Enbridge filed a lawsuit against the insurers of $145.0 million of coverage, as one particular insurer is disputing our recovery eligibility for costs related to our claim on the Line 6B crude oil release and the other remaining insurers assert that their payment is predicated on the outcome of our recovery with that insurer. We received a partial recovery payment of $42.0 million from the other remaining insurers and amended our lawsuit such that it included only one insurer.

Of the remaining $103.0 million coverage limit, $85.0 million is the subject matter of a lawsuit Enbridge filed against one particular insurer described above. In March 2015, Enbridge reached agreement with that insurer to submit the $85.0 million claim to binding arbitration. The recovery of the remaining $18.0 million is awaiting resolution of that arbitration, which began in the fourth quarter of 2016. While we believe that those costs are eligible for recovery, there can be no assurance that we will prevail.

In addition, and separate from the Line 6B claim, during the year ended December 31, 2016, we recorded an insurance recovery of $10.0 million associated with the Line 6A crude oil release. We received the payment in October 2016. This is the total insurance recovery available for that incident.

Griffith Terminal Crude Oil Release

On February 25, 2014, a release of approximately 975 barrels of crude oil occurred within the Griffith Terminal in Griffith, Indiana. Subsequently, a repair plan was reviewed with PHMSA, repair work was completed in 2014 and final closure was received in early 2015. The released oil was fully contained within our facility and substantially all of the free product was recovered. The released oil did not affect the local community, wildlife or water supply. As of and for the years ended December 31, 2016 and 2015, we had no remaining estimated liability and made no payments. For the year ended December 31, 2014, we made payments of $6.3 million.

Legal and Regulatory Proceedings

We are a participant in various legal and regulatory proceedings arising in the ordinary course of business. Some of these proceedings are covered, in whole or in part, by insurance. We are also directly, or indirectly, subject to challenges by special interest groups to regulatory approvals and permits for certain of our expansion projects.

A number of governmental agencies and regulators have initiated investigations into the Line 6B crude oil release. Two actions or claims are pending against us and our affiliates, in state courts in connection with the Line 6B crude oil release. Based on the current status of these cases, we do not expect the outcome of these actions to be material to our results of operations or financial condition.

Governmental agencies and regulators have also initiated investigations into the Line 6A crude oil release. One claim was filed against us and our affiliates by the State of Illinois in the Illinois state court in connection with this crude oil release. The costs associated with this order are included in the estimated environmental costs accrued for the Line 6A crude oil release. On February 20, 2015, we agreed to a consent order releasing us from any claims, liability, or penalties. We are also pursuing recovery of the costs associated with the Line 6A crude oil release from third parties; however, there can be no assurance that any such recovery will be obtained.

We have accrued a provision for future legal costs and probable losses associated with the Line 6B crude oil release as described above.

Oil and Gas in Custody

Our Liquids assets transport crude oil and NGLs owned by our customers for a fee. The volume of liquid hydrocarbons in our pipeline systems at any one time varies from approximately 30.0 million to 66.1 million barrels, virtually all of which is owned by our customers. Under the terms of our tariffs, losses of crude oil from identifiable incidents not resulting from our direct negligence may be apportioned among our customers. In addition, we maintain adequate property insurance coverage with respect to crude oil and NGLs in our custody.

Approximately 40% of the natural gas volumes on our Natural Gas assets are transported for customers on a contractual basis. We purchase the remaining volumes and sell to third parties downstream of the purchase point. At any point in time, the value of our customers’ natural gas in the custody of our Natural Gas systems is not significant to our operating results, cash flows, or financial position.

Rights-of-Way

As part of our pipeline construction process, we must obtain certain rights-of-way from landowners whose property the pipeline will cross. Rights-of-way that we buy are capitalized as part of “Property, plant and equipment, net” in our consolidated statements of financial position. Rights-of-way that we lease are expensed. We have recorded expenses of $2.6 million, $2.7 million and $3.6 million for the leased right-of-way agreements for the years ended December 31, 2016, 2015 and 2014, respectively.

Future Minimum Commitments

As of December 31, 2016, our future minimum commitments that have remaining non-cancelable terms in excess of one year are as follows:

	2017		2018		2019		2020		2021		Thereafter		Total
							(in millions)
Scheduled maturities of debt obligations⁽¹⁾	$	—	$	920.0	$	575.0	$	2,657.6	$	775.0	$	3,000.0	$	7,927.6
Estimated cash payments for interest⁽²⁾		363.2		318.0		273.4		233.0		198.1		2,537.9		3,923.6
Purchase commitments⁽³⁾		352.5		—		—		—		—		—		352.5
Power commitments⁽⁴⁾		20.5		20.5		20.0		18.5		5.2		129.5		214.2
Operating leases		21.2		16.3		14.8		14.5		14.2		45.5		126.5
Right-of-way		2.0		1.9		1.8		2.1		1.6		33.3		42.7
Product purchase obligations⁽⁵⁾		155.5		99.6		86.2		87.6		79.2		201.6		709.7
Transportation/Service contract obligations⁽⁶⁾		115.3		125.7		129.6		125.3		124.7		213.4		834.0
Fractionation agreement obligations⁽⁷⁾		74.8		74.8		74.8		75.0		74.8		81.3		455.5
Other long-term liabilities⁽⁸⁾		0.6		0.6		0.6		0.6		0.7		4.2		7.3
Total	$	1,105.6	$	1,577.4	$	1,176.2	$	3,214.2	$	1,273.5	$	6,246.7	$	14,593.6

⁽¹⁾

Represents scheduled future maturities of our consolidated debt principal obligations. For information regarding our consolidated debt obligations, see Item 8. Financial Statements and Supplementary Data, under Note 17. Debt.

⁽²⁾

Estimated cash payments for interest exclude adjustments for derivative agreements and cash payments for interest on variable-rate debt. We borrow and repay at varying amounts and interest rates. For more information on our debt obligations, see Item 8. Financial Statements and Supplementary Data, under Note 17. Debt.

⁽³⁾

Represents commitments to purchase materials, primarily pipe from third-party suppliers in connection with our growth projects.

⁽⁴⁾

Represents commitments to purchase power in connection with our Liquids segment. We included certain power commitments with obligations that are dependent on variable components. For these commitments, we only included the determinable portion of our commitment based on the contracted usage requirement and the current applicable contract rate.

⁽⁵⁾

Represents long-term product purchase obligations with several third-party suppliers to acquire natural gas and NGLs at the approximate market value at the time of delivery. Also represents commitments to purchase drag reducing agents.

⁽⁶⁾

Represents the minimum payment amounts for contracts for firm transportation and storage capacity we have reserved on third-party pipelines and storage facilities.

⁽⁷⁾

Represents the minimum payment amounts from contracts for firm fractionation of our NGL supply that we reserve at third party fractionation facilities.

⁽⁸⁾

Includes noncurrent portion of capital leases and deferred credits. We are unable to estimate deferred income taxes (see Note 22. Income Taxes) since cash payments for income taxes are determined primarily by taxable income for each discrete fiscal year. We are also unable to estimate asset retirement obligations (see Note 18. Asset Retirement Obligations), environmental liabilities (see Note 25. Commitments and Contingencies) and hedges payable (see Note 21. Derivative Financial Instruments and Hedging Activities) due to the uncertainty as to the amount and, or, timing of when cash payments will be required.

The purchases made under purchase commitments, power commitments, product purchase obligations, transportation/service contract obligations and fractionation agreement obligations for the years ended December 31, 2016, 2015 and 2014 totaled $1.8 billion, $399.5 million and $1.9 billion, respectively.

Our consolidated operating expenses include lease and rental expense amounts of $13.0 million, $14.9 million and $18.2 million during the years ended December 31, 2016, 2015 and 2014, respectively.