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Morningstar | Enbridge boosts exchange ratio, giving Spectra unitholders more value.

Spectra Energy Partners unitholders will probably become Enbridge shareholders by the end of 2018, substantially changing the fundamentals and risk in their investment. In May, Enbridge announced plans to acquire Spectra common unitholders' 17% stake in a unit-for-shares exchange.Spectra unitholders soon will own about 5% of Enbridge, a Canadian energy conglomerate primarily leveraged to oil markets. We expect there is little common unitholders can do to stop the deal given Enbridge's 83% ownership, but common unitholders did get a lift in August when Enbridge increased the share exchange ratio 10%.We considered Spectra's pipelines among the most valuable energy infrastructure in the U.S. The pipelines connected some of the largest gas demand regions with the most prolific, lowest-cost gas supply in the country. Its Texas Eastern pipeline running from the Gulf Coast to New York is capable of supplying 10% of U.S. gas consumption.Spectra was positioned as a growth vehicle for Enbridge when Enbridge acquired it in February 2017. The increasing demand for gas in the U.S. gives Spectra plenty of long-term growth potential, but finding the best projects is important. Before Enbridge's acquisition offer, we thought Enbridge would use Spectra to drop down some of its completed projects and fund gas midstream investment. But that strategy changed when Spectra's unit price fell more than 20% between January and May 2018.Spectra's other key assets are the Algonquin and the Maritimes & Northeast pipelines in New England and its 50% stake in Gulfstream going into Florida. Both of these areas have tight gas supplies and growing demand, making Spectra's pipelines critical assets. Spectra's other pipelines all support its eastern U.S. system, providing high-return expansion opportunities.Utilization on Spectra's pipes is high, and all pipelines generate fixed-fee cash flow from long-term contracts, making Spectra an exceptionally stable cash generator. Its one oil pipeline from the Canadian oil sands through the Midwest U.S. These volume-sensitive earnings are contracted with good regulatory support and will shrink to 10% of consolidated earnings as the gas business grows.