Restructuring of a Public Exchangeable Share Structure
March 7, 2007
Doug S. Ewens
In an unprecedented transaction for Canada, Duke Energy Corporation has spun off its interests in its wholly-owned subsidiary, Spectra Energy Corp., to the shareholders of Duke and, indirectly, to the holders of exchangeable shares of a Canadian subsidiary of Duke.
Duke Energy Canada Exchangeco Inc. was incorporated in 2002 when Duke acquired Westcoast Energy Inc. Canadian shareholders of Westcoast who elected to do so received exchangeable shares in the capital of Exchangeco, a Canadian company and a then-subsidiary of Duke. The exchangeable shares were exchangeable at any time at the option of the holder for shares of common stock of Duke. This exchangeable share structure entitled Canadian shareholders to defer recognition of a taxable disposition and to receive the Canadian dividend tax credit on the dividends received on the exchangeable shares.
Holders of the exchangeable shares in the capital of Exchangeco could participate on an ‘equivalent basis’ in the spin-off of Spectra Energy. However, to ensure that these holders did not face an undesired tax burden by participating directly in the spin-off, the share capital of Exchangeco had to be reorganized.
For each existing exchangeable share, a holder received one new Duke Energy Exchangeable Share, which is exchangeable on a one-for-one basis for shares of common stock of Duke and one-half of one new Spectra Energy Exchangeable Share, which is exchangeable on a one-for-one basis for shares of common stock of Spectra Energy.
Exchangeco’s share capital reorganization entitled holders of exchangeable shares to participate indirectly in the spin-off on a basis that was equivalent to the basis on which they would have directly participated if they had owned the number of shares of common stock of Duke for which their exchangeable shares were exchangeable. The reorganization preserved the entitlement of holders of exchangeable shares to defer recognition of a taxable disposition and to receive the Canadian dividend tax credit on dividends received on the new Duke Energy Exchangeable Shares and the new Spectra Energy Exchangeable Shares.
The spin-off created a new public entity with approximately $21 billion in assets. Spectra Energy is now a pure-play, natural gas mid-stream company operating in both the United States and Canada. Spectra Energy’s Canadian operations include gathering, processing and pipeline transmission facilities in western Canada, storage and distribution facilities in Ontario, and pipeline transmission facilities in the Maritimes. The spin-off was undertaken in order to increase the value of the two former businesses of Duke Energy — the power business and the energy business.
McCarthy Tétrault acted as Canadian counsel to Duke, advising on the various Canadian tax and securities regulatory aspects related to the spin-off transaction, the share capital reorganization, and the distribution of shares of common stock of Spectra Energy to the Canadian public shareholders of Duke Energy.