Conservative Holdings Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF) and Provident Energy Ltd (TSX: PVE, NYSE: PVX) are merging. The deal will create a CD10 billion Canadian energy midstream giant, with a particular emphasis on serving the burgeoning natural gas liquids (NGLs) market.

Pembina shareholders will enjoy an immediate 3.8 percent boost in the monthly dividend when the deal closes, to a new rate of CAD0.135. The company has targeted annual increases of between 3 and 5 percent, a long-awaited return to dividend growth two years ahead of management’s prior projections.

Pembina shareholders will own one share of the merged company for every pre-merger share they own now. The new company will retain the Pembina name and will also be listed on the New York Stock Exchange (NYSE) for the first time.

Provident shareholders get 0.425 shares of Pembina. That equates to a 27.5 percent increase in shareholders’ monthly dividends. It’s also a premium of a little less than 25 percent based on pre-deal prices of the two companies.

The real benefits to shareholders of both companies from this deal lie in future earnings potential. There’s little if any overlap between the companies’ assets. Instead, it adds Provident’s liquids extraction, storage and transportation services to Pembina’s 4,611-mile pipeline system and related assets.

The result is what management calls a “complete value chain” in the NGLs business, providing everything from transportation and marketing to extraction, fractionation and storage. The company’s reach will include all of Canada’s most prolific shale gas regions, the light oil-rich Bakken and Cardium areas and Athabasca oil sands. Tar sands cornerstone assets include the exclusive transportation franchise for Syncrude, the prolific oil producer operated by ExxonMobil’s (NYSE: SOM) Canadian unit.

In recent years Pembina has systematically increased its scale by adding new cash-generating energy infrastructure, thereby boosting its ability to add assets and raise cash flow further. Provident, meanwhile, has been doing much the same thing since spinning off its oil and gas production as Pace Oil & Gas Ltd (TSX: PCE, OTC: PACEF) in mid-2010, adding NGLs-related assets.

The companies’ combined capital spending budgets total CAD700 million for 2012. As a single entity, however, the new combination have considerably enhanced opportunities to expand as well as improved financial flexibility to fund it. The result figures to be more robust growth in cash flow as well as reliable dividend growth.

The transaction is structured to be tax-free for both US and Canadian shareholders. A majority of Pembina shareholders as well as two-thirds of Provident holders must approve it. It must also clear the Competition Act in Canada and win approval of the Toronto Stock Exchange (TSX). And NYSE approval is necessary before trading of the new company can commence on that exchange.

As with most major mergers, shares of acquirer Pembina slipped initially following the deal’s announcement. Since then, however, the company’s stock has been upgraded by three of the 10 research houses covering it. That should go a long way toward holding the share price steady as the deal works toward consummation. And shareholders may not have to wait long for that; management is planning to hold votes in March, and regulatory approvals should be achieved by late spring.

Based on some years of covering both companies, Pembina-Provident looks like one of the most compelling business combinations I’ve seen in a quite a while, putting together two operationally strong entities into a far more financially powerful whole, with enhanced opportunity to expand in a rapidly growing market. My strong view is shareholders of both companies should vote “yes.”

As for risks, the combined company will be more exposed to the NGLs “frac” spread than Pembina on its own, or roughly about 25 percent initially. This could make earnings more volatile, though it’s likely to be a benefit in the near term. NGLs pricing is expected to remain strong due to surging domestic and global demand and the big gap between oil and gas prices.

Moreover, during a Jan. 16 conference call Pembina CEO Robert Michaleski projected a drop in frac exposure to “something like 10 percent or thereabouts of our cash flow” by 2015, as the company shifts commercial arrangements in favor of “stable” cash flows. This is the same strategy Pembina has used effectively for many years to minimize commodity-price risk from its various assets.

The second key risk is this isn’t a bite-sized or incremental combination for either company. And with so much complementary expertise, there’s always the risk of not managing the combined operations effectively, as well as of losing key personnel. That’s somewhat mitigated by the fact that these are essentially infrastructure-focused businesses. But until we see a few combined operating quarters, there will be some questions about just what the synergies are and how everything works together.

Finally, there’s the danger that shareholders and/or regulators might reject the deal. The former appears highly unlikely, given the generally positive reaction in the market place as well as from analysts. There’s also a CAD100 million break-up fee for both sides, a disincentive for a rival bid as well as sudden cold feet from management. Meanwhile, regulatory risk seems low, given this is an all-Canadian deal, assets are complementary and officials have routinely approved such transactions.

If the deal should fail, shareholders wouldn’t get the promised dividend increases. But both companies would remain sound in their own rights for the long haul, as well as potential takeover targets.