Midcoast Deal Expands Enbridge's U.S. Pipeline System

In its bid to grow its pipeline network in the central United States and along the Gulf Coast, Enbridge Inc., Canada's second largest pipeline operator, agreed to buy up-and-comer Midcoast Energy Resources Inc. of Houston, which last year more than doubled its revenue and saw profits soar 51%. Enbridge owns 21.4% of the $3 billion Alliance pipeline, which delivers gas from Alberta to the Midwest.

Calgary-based Enbridge agreed to pay Midcoast US$27 a share, or about US$350 million, and assume about US$250 million in debt. The price is a 7.1% premium to Midcoast's stock price on Thursday of US$25.20. Enbridge estimates the purchase will add C$30 million (US$19.2 million), or C$.05 a share to its earnings in 2002. They expect to complete the transaction in the second quarter.

When the acquisition is completed, Enbridge said it might transfer all or part of Midcoast's assets to Lakehead Pipe Line Co. Lakehead Pipe Line Partners LP operates the U.S. portion of Enbridge's petroleum pipeline, and Enbridge said Lakehead likely would be the vehicle chosen for the company's U.S. growth.

Lakehead and Enbridge had already announced that they would use their partnership as a vehicle for growth through the acquisition of mature energy transportation assets, including purchasing assets from other Enbridge affiliates.

Enbridge CEO Patrick D. Daniel said that the acquisition would enhance his company's "strong growth profile," and said the deal "represents a significant step in increasing our North American footprint. It furthers several strategic objectives, including obtaining a significant presence in the U.S. Gulf Coast and mid-continent regions, increasing our exposure to natural gas assets and adding to the scale of our U.S. operations." He said Midcoast's risk profile was similar to Enbridge, "with limited exposure to natural gas or natural gas liquids commodity prices."

Daniel said Enbridge planned to keep Midcoast's employees, including its executive staff, noting that Midcoast CEO Dan Tutcher and his team had been "very effective" in developing the company. "Going forward, this team will play a key role in our U.S. development and growth strategy."

Midcoast, with offices in Texas, Alabama, Kansas, Louisiana, Mississippi and Alberta, transports, gathers, processes and markets natural gas and other petroleum products through more than 80 company-owned pipelines. Its pipelines cover almost 4,100 miles in 10 states, Canada and the Gulf Coast.

"The union of Midcoast with Enbridge represents the culmination of our efforts over the past year to position ourselves in the most favorable manner to continue the dramatic growth we have achieved since our initial public offering in 1996," said Tutcher. "This transaction provides a foundation of assets, personnel and financial strength to further accelerate this growth." The Midcoast CEO said that the board had unanimously approved the deal and would vote in favor of the merger in the second quarter.

Enbridge, which saw its profits rise 10% in 2000, despite a fourth quarter loss related to the startup of Alliance, operates one of the longest crude oil and liquids pipeline systems in Canada and the United States. Along with its involvement in liquids marketing and international energy projects, it has a growing involvement in natural gas transmission and midstream businesses. Alliance, its largest asset, was running at nearly full capacity in February, carrying about 1.3 Bcf/d. Enbridge also provides natural gas service to 1.5 million customers in Ontario, Quebec and upstate New York.

Carolyn Davis, Houston

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