Pipeline Giant Forms in $28B Deal


The announced merger of two major pipeline companies promises to create the largest energy infrastructure company in North America, with an estimated market value of $127 billion.

Enbridge Inc. (Calgary, Alberta) and Spectra Energy (Houston) revealed the definitive merger agreement in a joint announcement Tuesday (Sept. 6).

Under terms of the agreement, Enbridge will buy Spectra Energy in a stock-for-stock merger transaction, which values Spectra Energy common stock at $28 billion.

The deal was unanimously approved by the Boards of Directors of both companies and is expected to close in the first quarter of 2017, subject to shareholder and certain regulatory approvals and other customary conditions.

Upon completion of the transaction, Enbridge shareholders will own approximately 57 percent of the combined company, and Spectra Energy shareholders will own approximately 43 percent.

The combined company will be called Enbridge Inc.

Complementary Platforms, Assets

Enbridge reportedly operates the world's longest crude oil and liquids transportation system across Canada and the U.S., while Spectra Energy’s North American operations are said to include 21,000 miles of natural gas and crude oil pipelines, approximately 300 billion cubic feet of natural gas storage, and 4.8 million barrels of crude oil storage, as well as natural gas gathering, processing and local distribution operations.

The Wall Street Journal characterized the merger as a “shift away from reliance on crude oil and ... a bullish bet on natural gas by crude-hauling heavyweight Enbridge.”

Falling oil prices and regulatory challenges have reduced the demand for new pipelines or cancelled projects altogether, prompting operators to view acquisitions as a tool for growth and to reassure investors, it said.

Spectra was likely attractive to Enbridge, the paper suggested, because of its focus on natural gas, its role in the growing Marcellus basin serving the Gulf and East Coasts, and the fact that it has one of the biggest natural gas pipelines feeding New York City.

“For both companies, the deal offers a way of adding to their networks at a time when once-heady growth in building expensive new pipelines has stalled,” it added.

Spectra natural gas processing
Spectra Energy

Sources speculated that Spectra Energy's emphasis on natural gas likely made it a more attractive acquisition for crude-oil-focused Enbridge.

Described as the most significant energy deal since oil and natural gas prices slumped in 2014, Reuters said the merger puts Enbridge in a leading position alongside Kinder Morgan Inc. and Plains All American Pipeline LP.

Enhanced Customer Offerings

According to the companies, the deal combines their complementary platforms and diversified assets in a way that increases offerings and investment opportunities for customers.

With assets spanning crude oil, liquids and natural gas pipelines, terminal and midstream operations, a regulated utility portfolio and renewable power generation, the combined company will be able to provide integrated services and first and last mile connectivity to key supply basins and demand markets, they said.

Enbridge has been looking for opportunities to diversify its asset base beyond 2019, according to Al Monaco, Enbridge president and chief executive officer; combining with the natural gas infrastructure company will help it reach that goal, he said.

“This transaction is transformational for both companies and results in unmatched scale, diversity and financial flexibility with multiple platforms for organic growth,” Monaco noted.

Monaco will retain his role as president and CEO of the combined company. Spectra Energy President and Chief Executive Officer Greg Ebel will become non-executive chairman of Enbridge’s Board of Directors upon the deal’s close.

combined infrastructure map
Enbridge Inc. / Spectra Energy

This map shows the combined infrastructure asset base spanning key supply basins and demand markets for the new entity.

"This is an incredible opportunity for both companies, and we at Spectra Energy could not be more excited about what it means going forward,” Ebel said. “Together, the merged company will have what we believe is the finest platform for serving customers in every region of North America and providing investors with the opportunity for superior shareholder returns."

Monaco added: “We believe our combination of best-in-class assets, superior growth and strong commercial underpinning of our business will be unrivaled in our sector.”

Finances, Operations

In addition to the strategic benefits, the merger makes good financial sense, the executives noted.

On a combined basis for the 12 months ended June 30, 2016, the company would have generated combined revenues in excess of $31 billion and combined Earnings before Interest and Taxes (EBIT) of $4.4 billion, the companies said in their statement.

The merger will also give the combined company the scale, balance sheet strength, financial flexibility and free cash flow to comfortably fund future growth.

"The strength of the combined company will support a large capital program to fund the continued development of Spectra Energy's existing, preeminent project inventory in addition to allowing the combined company to compete for and win the most attractive new growth projects—all while maintaining expected strong dividend growth with exceptional coverage,” Ebel said.

The combined company is expected to achieve annual run-rate synergies of $415 million, the majority of which should be achieved in the latter part of 2018. The company also expects to realize approximately $200 million in tax savings through the utilization of tax losses commencing in 2019.

Enbridge Inc. will base its headquarters in Calgary, while Houston will serve as the combined company's gas pipelines business unit center.

Edmonton, Alberta, will remain the business unit center for liquids pipelines, with gas distribution continuing to be based in Ontario.


Tagged categories: Business matters; Infrastructure; Mergers; North America; Oil and Gas; Pipelines; Program/Project Management

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