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NEWS RELEASE · 8th May 2012
NEI Investments
SUBJECT: Grounds for Supporting Shareholder Proposal
COMPANY: Enbridge Inc.
SYMBOL: ENB (TSX)
AGM DATE: May 9, 2012

This Proxy Alert provides grounds for supporting a shareholder proposal submitted to Enbridge Inc. by NEI Investments (NEI). Despite an ongoing dialogue with Enbridge on the Northern Gateway Pipeline that has spanned over six years, NEI has not been able to determine how the board of directors of Enbridge has assessed the risks facing the project from First Nations’ opposition, and to what degree the board is aware of these potential risks. NEI has been unable to reconcile Enbridge’s claims that First Nations support will be acquired with statements of opposition from key First Nations’ leaders along the pipeline right of way. The following proposal has been filed with the company as a result.

Proposal

The shareholder proposal asks the following of Enbridge:

That the Board of Directors provide a report to shareholders by May 2013 (at reasonable cost and omitting proprietary information) that details how the board has assessed the risks associated with First Nations’ opposition to the Northern Gateway Pipeline (Gateway). The report should discuss how First Nations’ opposition will factor into the final decision to pursue Gateway. If the project will be pursued regardless of opposition, the report should detail how the company will mitigate the operational, reputational, and legal risks of such opposition.

Our Rationale

The company’s proposed Gateway pipeline is a $5 billion project that involves over 80 Aboriginal communities and organizations. Numerous court rulings have reaffirmed that Aboriginal communities must be consulted and accommodated on developments that potentially impact their title and rights, as guaranteed in the Constitution. Gateway faces vocal opposition from several Aboriginal communities who state the project will be detrimental to these rights.

For example:

• The Coastal First Nations have signed a declaration banning crude oil tankers off the coast of Northern BC. (http://wcel.org/sites/default/files/file-downloads/Coastal%20First%20Nations%20Tanker%20Ban%20Declaration.pdf)

• The First Nations Summit, representing the majority of First Nation communities in BC, issued a declaration that Gateway must not proceed without the free, prior and informed consent of the affected First Nations. (http://www.fns.bc.ca/pdf/JointPRreFNS_Enbridge_Resolution10_1_10.pdf)

• The Carrier Sekani Tribal Council, whose territory covers over 30% of the proposed pipeline route, has been clear in its opposition to the pipeline. Tribal Chief David Luggi has stated, “…as far as we are concerned, this project is not going ahead. They (Enbridge) are misleading investors that they are achieving certainty. Carrier Sekani First Nations have unequivocally said no to the project, and it is not allowed in our territories.” (http://www.carriersekani.ca/news/cstc-supports-first-nations-against-the-enbridge-pipeline/)

The potential risks of moving forward if current levels of opposition continue include:

• Lengthy litigation against the National Energy Board (NEB) process and the project. The Mackenzie Gas Project is an example where First Nations’ opposition in Canada has led to extreme delays in project approval.

• Costly delays from protests and blockades during construction. An indefinite halt has been placed on Shell Canada’s coalbed methane project in northern BC due to blockades and opposition from the Tahltan First Nation.

• Long-term damage to relationships with Aboriginal communities in these and other jurisdictions. Enbridge is already seeing heightened opposition to other proposals such as its request to reverse the flow of its Line 9 pipeline in Eastern Canada. A high profile conflict linked to Gateway will likely exacerbate future tensions.

• Overall damage to corporate reputation from a protracted dispute with Aboriginal communities.

Currently, Enbridge has communicated to investors that it hopes to gain the approval of affected First Nations, but it has not explained if this approval is required for moving forward with the project (http://www2.canada.com/topics/news/story.html?id=4769156). Should the NEB approve Gateway despite First Nations’ opposition, the risks facing the project will not diminish. Enbridge has not explained to investors how it will mitigate these risks if the current level of opposition remains.


Enbridge’s Response

Enbridge states in its Management Information Circular that:

1) The company has disclosed substantial information about the Gateway project and the risks it faces.

2) The project enjoys significant support from First Nations along the pipeline corridor.

3) Support from First Nations is not a legal requirement.

4) The National Energy Board (NEB) is ultimately responsible for ensuring that the Crown’s duty to consult is fulfilled.

5) It is premature for the board to discuss plans for the Gateway project until the NEB decision is rendered.

NEI maintains that:

1) We did not ask the company to disclose more information about the project; we specifically asked how the board will factor First Nations’ opposition to the project into the decision to move forward with Gateway – which the company has not addressed.

2) We disagree with the assessment that the project enjoys significant support, given that as of the date of the proxy less than half the First Nations along the pipeline route are supportive and most of the other First Nations have expressed emphatic opposition to the project.

3) Stating that First Nations’ support is not a legal requirement for moving forward downplays the reality that First Nations’ opposition can stop or greatly impede the project.

4) The NEB ruling will have little to no impact on the level of opposition to the project, so to defer to the NEB process is not sound risk mitigation.

5) The company is already incurring significant harm to its corporate reputation as a result of the Gateway project, so it is absolutely within the mandate and responsibility of the board to provide shareholders with the assurance that it has a plan to mitigate these risks. A failure to assess and disclose these risks prompts NEI to ask if the board is abdicating its responsibility.

In sum, NEI is concerned that the level of First Nations’ opposition to the Gateway project brings significant risks to both the project and the company. These risks will likely manifest in several ways, ranging from almost certain legal challenges and delays, to long-term damage to the company’s corporate reputation as a responsible company.

The company has spent years developing a corporate reputation that has strengthened its social license to operate. A protracted battle with First Nations will most certainly impact this reputation negatively. The board has not explained to shareholders how the level of opposition to the project will factor into the final decision to proceed with Gateway, nor how it will mitigate the risks should it proceed in the face of stiff opposition.

Arguments

1. The board has not addressed the key question of the resolution – how will First Nations’ opposition impact the decision to move forward with Gateway?

While Enbridge rightly points out that it has made substantial disclosures on the Northern Gateway process to date, we have not asked the company to provide more detail on its consultation process. We have specifically asked to hear from the board on its risk assessment of First Nations’ opposition to the Gateway process. Neither management nor the board have explained how or if substantial First Nations’ opposition will impact the decision to go forward with the project. Further, investors have not been told how the company plans to mitigate the risks of moving the project forward should substantial opposition to the project remain.

The information provided by Enbridge in the proxy circular is similar to what was presented to the filers of the resolution during withdrawal negotiations. Enbridge made it clear at that time that no members of the board were involved in the crafting of the response. It appears we have not yet received a response from the board itself on this issue, although that was the main tenet of our proposal. One of the fundamental responsibilities of the board is to perform strategic risk assessments; investors need assurance that the board is performing this task adequately. The response to our resolution provides no more insight on the board’s position.

2. The opposition to the project is both significant and widespread.

Enbridge references the signing of equity agreements with the company by 20 First Nations as proof of “significant support” for the Gateway project. We find this characterization to be misleading. Labeling the support of less than half of the First Nations along the pipeline corridor as significant implies that the opposition of most of the remaining First Nations is minor, and in respect to the future of the Gateway project, insignificant. This statement also neglects to address the reality that some of the strongest opposition is coming from the Coastal First Nations, a group not included in Enbridge’s depiction of support along the pipeline route. (1)


Further, the situation is complicated by the fact that the majority of the opposition appears to be coming from First Nations communities in BC. (2) Most of these communities have never signed a treaty with the federal government and as such have unextinguished Aboriginal rights and title in their traditional territories. Several First Nations have used the courts to define the extent of these rights. (3) Frequently, these lawsuits are instigated by large resource and industrial projects. In this context, it is important to understand where the opposition to the Gateway project is coming from in order to understand the risk of the project being subjected to successful litigation.



A sampling of statements by First Nations along the pipeline and tanker route that show the risks facing the project:

“I’m not going to say we’ll be affected, because there is no damn way this is going to happen,” Guujaw, Haida Nation Chief. (4)

“Our decision has been made: Enbridge will never be allowed in our lands,” Chief Jackie Thomas, Saik’uz First Nation. (5)

“If you want to talk about ‘social dysfunction’ let’s talk about the impacts that an oil spill from the Enbridge oil tanker and pipeline project would have on our community…One spill from a supertanker in BC’s coastal waters would wipeout our livelihoods forever – now that’s dysfunctional,” Arnold Clifton, Chief Councillor of the Gitga’at First Nation. (6)

“We’ve told Enbridge many times that this pipeline will not go through our territory, but they seem to have a hard time listening,” Alphonse Gagnon, Wet’suwet’en First Nation hereditary chief. (7)

“We will not allow any project to proceed that infringes the constitutionally protected rights of our people,” Dolores Pollard, Chief Councillor, Haisla First Nation. (8)

“Our territory represents a large portion of the proposed pipeline route and there’s no way we’re going to allow it. The only thing Enbridge investors can bank on with this project is strong opposition,” David Luggi, Chief of the Carrier Sekani Tribal Council. (9)

“We will not allow the proposed Enbridge Northern Gateway Pipelines, or similar Tar Sands projects, to cross our lands, territories and watersheds, or the ocean migration routes of Fraser River salmon,” Save the Fraser Declaration, signed by over 100 First Nations. (10)



3. First Nations’ opposition represents real risks to the success of the project.

Enbridge’s statement that First Nations’ support is not a legal requirement is true, but largely irrelevant. The opposition to the pipeline will almost certainly result in multiple legal challenges should the project be approved by the NEB process. First Nations have made this clear, and many analysts assume that the project will face numerous legal challenges that will delay the project and significantly add to its costs. (11) The Canadian Environmental Assessment Agency has itself stated that not only is the likelihood of a legal challenge to the NEB process high, the likelihood of such a challenge being successful is moderate to high. (12) Regardless of the outcome of this anticipated litigation, the project will likely face delays while these cases are resolved through the courts.


However, this is not the most alarming aspect of the opposition. Based on the statements made by various First Nations, it seems clear that if Enbridge attempts to build the Gateway pipeline in the face of the current opposition, there is a strong likelihood of widespread civil disobedience. (13) The threat of civil disobedience seems a plausible enough risk that investors need to hear from the board on mitigation strategies.

The prospect of the company being caught in a protracted and confrontational dispute with First Nations’ communities should give pause to most reasonable investors. The legality of this opposition will be moot.

4. Deferring to the NEB process is not sound risk mitigation.

Enbridge provides extensive information on the National Energy Board (NEB) process and how consultation is managed through that process. In general, this is welcome information for investors. However, it would be misleading to contend that a successful outcome from the NEB process will mitigate the risks from First Nations’ opposition. As discussed earlier, if the NEB process results in a favourable decision it will almost certainly be contested in the courts. Should those challenges fail, it appears that some First Nations are actively considering civil disobedience.

Enbridge’s proxy response puts forth the premise that the risks of First Nations’ opposition to Gateway are specific to the project and can be isolated through the NEB consultation and approval process. In contrast, the approval process is likely to trigger and compound the risks of a long drawn out campaign of civil disobedience and legal challenges, risks that will spill over into company’s operations as a whole.

The board cannot use the NEB process to defer its responsibilities to assess the risks of the project. The outcome of the hearings will have little bearing on the level of opposition to the project and thus will have little bearing on the level of risk tied to the project. To hope that the NEB process will resolve the risks facing Gateway would be an imprudent course of action.


5. The company is already inflicting damage to its own reputation.

Enbridge states in its proxy that it is premature for the board to provide the information that NEI is requesting while the NEB process is still underway. This assertion ignores the reality that the company is already facing significant risks from the project. In particular, the company risks long-term damage to its corporate reputation as a result of the vocal and widespread opposition to the project.

Enbridge has spent significant resources and effort in building a reputation as one of the leading responsible energy companies in the world. The benefits of this reputation include being an employer of choice, a partner of choice, and being a company of choice when it comes to winning the social license to operate. Enbridge has clearly seen the advantages of being seen as a corporate social responsibility leader. (14)

The current backlash against the project is already having an impact on the company brand, as the company is in the news almost daily in relation to the Gateway opposition. As is usually the case in corporate/community conflicts, the company’s faults, real or imagined, are being very publicly scrutinized. It simply cannot be argued that the current level of heightened debate will have anything but a negative impact on the corporate brand.

The board has not shown investors that it has accounted for this risk or that it has a plan in place to mitigate it. Should the company become engaged in a protracted dispute with the First Nations opposing the project, damage to the corporate brand will only get worse. The fallout from this damage could be far-reaching. We have already seen the current opposition to the Gateway spread to include voices of Aboriginal communities removed from the immediate impacts of the project.15 The spread of this opposition is likely to have impacts on future negotiations with these and other communities, putting at risk Enbridge’s ability to secure a social license to operate for future projects.

The company has $48 billion in future projects in some state of development.16 Gateway represents just $5.5 billion of this total, or just over 10% of future development. The board has a duty to adopt an enterprise-wide perspective. Failure to do so will increase risk across the entire portfolio, and therefore increase the risk to shareholders.

The company’s position, based on various statements by Chief Executive Officer Pat Daniel, is clear: it believes the project will be granted approval by the NEB and that it will be in service by 2017.17 This date is only five years away and well within the strategic planning horizon of the board. It is not unreasonable to assume that the board would have an opinion on both the likelihood of the company meeting the 2017 goal and the risks attached to pursuing this goal. The resolution simply asks for the board to share this deliberation with investors.

If it is the board’s position that the risks facing the Gateway project, including the threat of legal challenges and civil disobedience, do not warrant a detailed risk assessment and mitigation strategy, investors need to hear this in plain language and should be told how the board came to this conclusion. While we may disagree with the board if this is its assessment, the board does not have to agree with us. However, it does bear the responsibility to investors to clearly state its rationale considering the potential materiality of the situation.18

Summary and Recommendation

In conclusion, our proposal asks that the board describe how First Nations’ opposition to the pipeline will be integrated into the decision to go forward with the Northern Gateway pipeline project; and, if the project will proceed regardless of such opposition, how the company will mitigate the risks. We believe the current level of opposition is already bringing significant risk to the company, and thus to investors. We feel it is almost certain that the project will experience significant delay and potentially even cancellation. Regardless of outcome, Enbridge will sustain long-term damage to a hard-earned positive corporate reputation. Should this level of opposition be sustained, the risks to Enbridge will increase significantly. The company has not disclosed to investors how it has assessed these risks or how it plans to mitigate them. Investors have insufficient information to determine if the board has practiced its responsibility to assess enterprise wide risks that could be incurred by opposition to the Gateway project.

We recommend a vote FOR this shareholder proposal.


Footnotes
1 http://www.coastalfirstnations.ca/news-release/march-29-2012-1018am

2 Note that all of the First Nations impacted by the project in Alberta, plus a few in Northeast BC, would be signatories to Treaty 8.

3 For example: Haida Nation v. British Columbia (Minister of Forests), [2004] 3 S.C.R. 511, 2004 SCC 73 (http://scc.lexum.org/en/2004/2004scc73/2004scc73.html); West Moberly First Nations v. British Columbia (Chief Inspector of Mines), 2011 BCCA 247 (http://www.courts.gov.bc.ca/jdb-txt/CA/11/02/2011BCCA0247.htm).

4 http://wildernesscommittee.org/news/haida_nation_says_no_way_oil_tanker_traffic

5 http://www.theglobeandmail.com/news/politics/bc-first-nations-assert-their-right-to-veto-northern-gateway/article2367739/

6 http://andrewfrank.ca/2012/03/21/gitgaat-first-nation-reacts-to-minister-of-natural-resources-insulting-remarks/

7 http://wetsuweten.com/news/article/no-means-no-first-nations-opposition-to-enbridge-pipeline-is-
growing-and-un/

8 Ibid.

9 Ibid.
10http://savethefraser.ca/fraser_declaration.pdf

11 Jeremy van Loon and andrew Mayeda, “Enbridge faces rising costs as Northern Gateway hearings start,” Financial Post, January 9, 2012. http://business.financialpost.com/2012/01/09/enbridge-faces-rising-costs-as-northern-gateway-hearings-start/?lsa=8e00cc7d


12 Mike De Souza, “Unreasonable consultation could overturn pipeline plans,” Calgary Herald, March 10, 2012. http://www.calgaryherald.com/business/Unreasonable+consultation+could+overturn+pipeline+plans/6281990/story.html


13 Kyle Kipp, “Civil disobedience ‘absolute possibility’ if pipeline proceeds, coalition says,” Canada.com, March 13, 2012. http://www.canada.com/business/Civil+disobedience+absolute+possibility+pipeline+proceeds+coalition+says/6296754/story.html


14 http://www.enbridge.com/AboutEnbridge/CorporateSocialResponsibility.aspx

15 For example, 35 Chiefs of the Dene Nation have passed a resolution expressing support for opposition to the pipeline: http://www.reuters.com/article/2011/07/21/idUS150817+21-Jul-2011+MW20110721; the Assembly of First Nations National Chief has stated that Northern Gateway needs the consent of First Nations: http://www.theglobeandmail.com/news/video/video-northern-gateway-needs-first-nation-consent-says-atleo/article2389569/?from=sec434; First Nations in Alberta have signed the Calgary Statement of Solidarity: http://wcel.org/sites/default/files/file-downloads/Calgary%20Statement%20of%20Solidarity%20May%2010%202011_0.pdf

16 http://www.enbridge.com/InvestorRelations/Events.aspx (see January 19, 2012 presentation)

17 Gustavo Vieira, “PM to China: wanna buy some oil?” Macleans.ca, February 10, 2012. http://www2.macleans.ca/2012/02/10/pm-to-china-wanna-buy-some-oil/; and Jeremy van Loon, “Enbridge CEO Daniel Sees Northern Gateway Line Operating by 2017,” Bloomberg, January 19, 2012. http://www.bloomberg.com/news/2012-01-19/enbridge-ceo-daniel-sees-northern-gateway-line-operating-by-2017.html

18 As stated in the Corporate Risk Oversight Guidelines published by the International Corporate Governance Network, “the risk oversight process begins with the board. The…board has an overarching responsibility for deciding the company’s strategy and business model and understanding and agreeing on the level of risk that goes with it.” Further, ICGN also notes that “shareholders, directly or through designated agents, have a responsibility to assess and monitor the effectiveness of boards in overseeing risk at the companies in which they invest.” http://www.icgn.org/files/icgn_main/pdfs/best_practice/icgn_cro_guidelines_(short).pdf


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