Corporate merger and acquisition acquisition (M&A) activity in en- ergy has been far from robust this year—at least in the
U.S. midstream sector—making a merger to form a $100 billion-plus enterprise value entity spanning North America all the more remarkable. As one brokerage noted, the combination of En- bridge Inc. and Spectra Energy Corp., the prospective merger due to close early next year, would give birth to a “midstream monster.”

The all-stock agreement, announced before markets reopened after Labor Day, called for holders of Spectra Energy to receive 0.984 share of Enbridge for each share of Spectra Energy. This translated into an 11.5% premium over the prior closing price for Spectra Energy shareholders. The merger was received warmly, with both parties’ stocks moving successively higher on each of the three next trading days.

The combination brings together— and adds balance to—two already premier infrastructure players.

Enbridge’s infrastructure is weighted more heavily to liquids, with its assets comprising just over 90% of the merged company’s liquids pipeline network. By contrast, Spectra Energy’s assets are more oriented to natural gas, with its pipeline assets making up 85% of the combined company’s natural gas network. Pro forma, combined EBITDA is split 49% liquids, 47% natural gas and 4% power.

The management team of the combined company will be led by Enbridge CEO Al Monaco, who will be CEO of the new company. Spectra Energy’s current president and CEO, Greg Ebel, will believe will be the best, most diversified energy infrastructure company in North America, if not the world.”

In terms of visibility of growth, management estimated the combined project backlog would include a“secured growth capital program” of $20 billion, comprised of publicly announced proj- ects entering into service in 2017-2019. Additionally, on a proba- bility-weighted basis, there is an inventory of another $37 billion of diverse development projects.

Why merge now?

For the next three or four years, growth on a standalone basis “looks very, very strong, just because of the execution of projects,” said Monaco on the conference call announcing the merger. “But now is the time to be really thinking about how to position for the future—when you are strong rather than in a position of weakness.

“What this really does for us is to have an extension of the run- way,” he continued.“To extend and to diversify growth was a major priority for us, and this transaction really does it.”

For shareholders, the extended runway to execute further growth projects will literally pay dividends.

Management highlighted an anticipated 15% increase in the dividend payable for 2017. Thereafter, the inventory of organic growth projects is expected to deliver 10% to 12% annual divi- dend growth “through at least 2024.” Payout is projected to be a conservative 50% to 60% of available cash flow from operations.

Moreover, direct exposure to commodity price risk is limited, providing for greater cash flow visibility.

As much as 96% of pro forma free cash flow is underpinned by long-term commercial agreements, such as cost-of-service, take-or- pay or fixed-fee contracts, said management. In addition, combined revenues are such that 93% of the revenue base comes from investment-grade or equivalent customers.

Annual cost synergies are expected to be captured to the tune of $415 million, with an estimated 90% realized by the end of 2018. Management guided to a minimum of $2 billion in asset monetizations over 12 months and possibly as much as an incre- mental $5 billion to $6 billion. Pro forma debt-to-EBITDA is projected to approximate 5.5x in 2017 and to drop below a long-term goal of 5.0x by 2019.

The merger leapfrogs the Enbridge-Spectra combination over such premier names as Duke Energy and Kinder Morgan Inc. to
become the largest North American infrastructure company.

How advantaged is the new infrastructure giant?

Management cited the “two highly complementary platforms” coming together to “enhance customer optionality” and provide “integrated services and first and last mile connectivity to key sup- ply basins and demand markets.”

This consolidates a strong foundation, emphasized Ebel.

“These assets, both on the Enbridge and Spectra side, are irreplaceable. You cannot build those assets today, and that’s a great opportunity to build upon.”