$28B Energy Deal Creates North American Powerhouse

Energy Dow Jones Newswires

Canadian pipeline company Enbridge Inc. on Tuesday agreed to buy Houston's Spectra Energy Corp. in an all-stock deal valued at about $28 billion, creating a major North American energy-infrastructure company at a time when energy-industry operators continue to deal with the fallout from low oil prices.

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Under the deal, announced jointly by the companies, Spectra Energy shareholders will receive shares of Enbridge valued at around $40.33 each, or a premium of about 11.5%, based on the closing price of Enbridge shares on Friday.

The deal links up crude-hauling heavyweight Enbridge with Spectra's natural gas focused network, which will create a more diverse and stable company, the companies said Tuesday.

The companies' pipeline assets "are irreplaceable; you could not build those assets today," Spectra Chief Executive Greg Ebel said on an analyst conference call held to discuss the deal.

Diversifying is more important as pipeline operators face the fallout of a prolonged rout in energy prices. Even though many pipeline companies have take-or-pay contracts that protect their revenue when commodity prices fall, the slump has dimmed the once bright growth outlook for pipeline companies.

The deal also highlights how tie-ups are increasingly becoming the investment of choice for pipeline operators in a world where new growth projects are challenged by low commodity prices and mounting regulatory hurdles.

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Enbridge CEO Al Monaco said the deal for Spectra an "extension of the runway" for the combined company. "We all know it's pretty difficult to execute [new] projects these days," he said on the conference call.

Spectra and Enbridge, like many other pipeline operators, have both struggled to build new lines during the downturn, in part because of low prices and regulatory obstacles.

Spectra has been trying to expand its existing network across New England, but last month the Massachusetts Supreme Court ruled that the power utilities that would be Spectra's customers cannot pass along additional costs to homeowners and businesses, putting those plans in jeopardy. This summer a Canadian high court overturned an earlier approval of Enbridge's proposed Northern Gateway oil pipeline connecting Alberta with the Pacific West Coast.

Spectra, which has pipelines in the Marcellus basin in the eastern U.S., controls one of the biggest natural gas pipelines that feeds New York City. Enbridge has expanded existing pipelines that carry oil across the border, helping Canada set new export records to the U.S.

Enbridge has also identified more expansions it can do on its old pipelines which will eventually carry another 800,000 barrels a day of oil across the border. The added capacity would be equivalent of building Keystone XL, but Enbridge won't need the same kind of U.S. State Department approvals to proceed that stymied rival TransCanada Corp.

Enbridge controls the most oil storage tanks in Cushing, Okla., the pricing hub for West Texas Intermediate crude.

The deal, which has the full support of the boards of both Enbridge and Spectra, is expected to close in the first quarter of 2017, the companies said in a release.

On closing, Enbridge shareholders are expected to own about 57% of the combined company, to be called Enbridge Inc., and Spectra Energy shareholders will own the remaining 43%. The merged company will have assets spanning crude oil, liquids and natural gas pipelines, terminal and midstream operations, a regulated utility portfolio and renewable power generation operations.

"Bringing Enbridge and Spectra Energy together makes strong strategic and financial sense, and the all-stock nature of the transaction provides shareholders of both companies with the opportunity to participate in the significant upside potential of the combined company, " Mr. Monaco said.

When production from shale formations first began to take off it sparked an energy infrastructure building spree to connect all the new supplies to market. But that pipeline-building boom has started to ebb.

Enbridge had been working with refiner Marathon Petroleum Corp. to build Sandpiper -- a major pipeline out of the Bakken Shale formation. But last month the companies announced that they would buy a stake in a competing pipeline being built in the region, and Enbridge announced last week that its Sandpiper pipeline project is being deferred.

Many pipeline companies are structured as partnerships that pay out most of their available cash in dividend like payments and are under pressure to keep those payouts growing.

The price bust has made some deals more difficult to get done. Earlier this year, Energy Transfer Equity terminated its merger agreement with rival Williams Cos., in a deal that was worth $33 billion when it was first struck. Oil prices continued to slide after that deal was announced last year, raising concerns for Energy Transfer about raising the $6 billion in cash it needed for the deal.

--Lynn Cook, Alison Sider, Ben Dummett and contributed to this article.

Write to Judy McKinnon at judy.mckinnon@wsj.com