UNCLASSIFIED 164527 MEMORANDUM TO THE MINISTER ENBRIDGE-SPECTRA MERGER (Information) SUMMARY © On September 6, 2016, Enbridge Inc. and Spectra Energy Corp. (Spectra) announced that they have entered into an agreement to merge the two companies. The combined company would operate under the Enbridge banner and be headquartered in category. © The merger will create the largest energy infrastructure company in North America (ie. pipeline, gas distribution, electricity generation, etc.), with acombined estimated CADS$165 estimate that the merger yn in cost savings and in amore diversified company with almost equal wanting between oil and natural gas projects. * The merger will be reviewed under the Competition Act in Canada and undergo various federal reviews in United States (U.S.) to ensure that there are No significant impacts on competition. ‘© The merger will also be reviewed under foreign investment laws in the U.S. to ensure that the transaction does not present a threat to U.S. national security. * The proposed merger is not expected to trigger a review under the Investment Canada Act, given that it is a Canadian company acquiring control of a non-Canadian business. . ‘* The Department will continue to monitor the transaction and keep your office apprised of any developments. ‘00064TACOS AU MPORWATION | -2- UNCLASSIFIED S 164527 BACKGROUND Enbridge is a Canadian company, based in Calgary. It is involved, either through direct operations or through corporate investments, in four main business segments in Canada and the U.S. These business segments include: — oil pipelines: with its most important asset being the Enbridge M western Canadian crude oil to the U.S. Midwest, Ontario and Quebec; — natural gas: distribution, including Enbridge Gas Distribution that serves residential, commercial and industrial customers in Central and Eastern Ontario as well as northern New York state; = natural gas gathering: processing and pipeline facilities; and renewable and alternative electricity generation projects. ine that brings Spectra is an American company, based in Houston, which is involved in a similar to those of Enbridge. It transports 15% of all natural gas consumed in the U.S. and has a significant presence in Canada, including: — Natural gas storage: transmission and distribution; — Westcoast Pipeline: the main natural gas gathering, processing and pipeline system in British Columbia; and — Express Pipeline: which moves crude oil from Western Canada to the U.S. Midwest. On September 6, 2016, the two companies issued a news release indicating that they were combining through a stock-for-stock merger transaction to form an energy infrastructure company with an estimated CAD$165 billion in enterprise value. The transaction was approved by the boards of directors of both companies and is expected to close in the first quarter of 2017, subject to shareholder and regulatory approvals. ‘The news release identifies several benefits to the transaction, such as: — the merger will bring together the two highly complementary platforms of Enbridge (strength in oil pipelines) and Spectra (strength in gas pipelines); = the combined company will be positioned to provide integrated services and connecti between key supply basins and demand markets; and = the combined company will have the scale, balance sheet strength, financial flexibility, and cash flow to comfortably fund future growth. ‘00085-3- UNCLASSIFIED 164527 In terms of enterprise value, the new company would be the largest in its field in North America and one of the top 10 energy companies worldwide (close to the size of British Petroleum). In terms of market capitalization, it will become the fourth largest corporation in Canada (after the Royal Bank, Toronto Dominion Bank and Scotiabank). CONSIDERATIONS Several media reports are describing the transaction as the acquisition of Spectra by Enbridge for a value of CDN$37 billion. This perception reflects the fact that: — Enbridge is a slightly larger company than Spectra; — the new company will be called Enbridge Inc.; its corporate headquarters will be in Calgary, and the current head of Enbridge, Mr. Al Monaco, will continue to serve as President and Chief Executive Officer of the new company; = current Enbridge shareholders will own 57% of the company and Spectra shareholders, 43%; and = The transaction will provide Spectra shareholders with an 11.5% premium with respect to the closing price of Spectra common stock on September 2, 2016. Companies such as Enbridge and Spectra are appealing for investors looking for reasonably safe investments with predictable returns. Itis likely that the main objective of the merger is to enhance this investors’ appeal. The news release indicates that 96% of the combined company’s cash flow will be underpinned by long-term commercial agreements (cost-of-service, take-or-pay or fixed fee). The combined company will have a more diversified portfolio than its predecessors had individually, with a strong presence in both oil and gas pipelines. As well as, the combined company will have a more diversified presence in Canada and the U.S. than hat predecessors. Both companies have multiple projects at different stages of development aimed at ensuring long-term growth. However, the outlook for some of these projects may be uncertain, given a context where the demand for new oil and gas pipelines has weakened with lower growth in oil and gas production due to weak commodity prices, and where pipeline projects face increased regulatory scrutiny and political uncertainty. ‘The merging of the two companies may be a way to show continued financial growth to shareholders without all projects coming to fruition. The news release suggests that the merger will provide “achievable cost synergies” of CDNS540 million from operations and tax savings of CDN$260 million through utilization of tax losses, which could free up capital for investment. The impact on the companies’ current employment levels is unclear; however, the headquarters of the combined company will be located in Calgary. 000066“4 UNCLASSIFIED =~ 164527 Investment Reviews The merger will likely be subject to various federal reviews and approvals under Canadian and U.S. investment acts: — In Canada, proposed mergers of all sizes and in all sectors of the economy are subject to review by the Competition Bureau under the Competition Act, to determine whether they will likely result in a substantial lessening or prevention of competition; = In Canada, the proposed merger is not expected to trigger a review under the Investment Canada Act, given that it does not entail non-Canadians acquiring control of an existing Canadian business; ~ In the U.S., the merger will be reviewed by the Bureau of Competition of the Federal Trade Commission, whose mandate is to prevent anticompetitive mergers and other anticompetitive business practices in the marketplace. Under the Hart-Scott-Rodino Antitrust Improvements Act, parties must not complete certain mergers until they have made a detailed filing with the Federal Trade Commission and the Department of Justice, and waited for those agencies to determine that the transaction will not adversely affect U.S. commerce under the antitrust laws; and — In the US., the merger will also be reviewed by the Committee on Foreign Investment, which is an inter-agency committee headed by the Secretary of the Treasury and authorized to review transactions that could result in control of a U.S. business by a foreign person, in order to determine the effect of such transactions on the national security of the U.S. CONCLUSION The Department will continue to monitor this merger and provide information as progress is made through shareholders and regulatory approvals. Christyne Tremblay Philip Jennings Deputy Minister Associate Deputy ister Contacts: — John Foran, Director, 343-292-6213 Petroleum Resources Branch, Energy Sector ~ Terry Hubbard, Director General, 343-292-6165 Petroleum Resources Branch, Energy Sector 000067