Enbridge's $14 Billion US Gas Utility Buy Raises Eyebrows

Analysts and investors are wary of Enbridge's plans to acquire three major US gas distribution companies from Dominion Energy, a US$14 billion deal that would increase the Calgary-based company's debt load while raising questions about its cash flow potential.

“Enbridge has a significant amount of floating rate debt which has become quite expensive, so I would have preferred to see Enbridge sell assets and reduce its leverage,” Infrastructure Capital Management analyst Andrew Meleney told Energy Intelligence. “Regulated utilities require a significant amount of capex, and the free cash flow yield at Enbridge will be reduced. Both factors will ultimately reduce or delay Enbridge returning capital to shareholders."

On the upside, however, "those assets are highly regulated and will reduce the earnings volatility at Enbridge,” he said.

Enbridge's acquisition — creating North America’s largest gas utility holding company — involves East Ohio Gas, Questar and Public Service Co. of North Carolina. It would double the size of its gas distribution business to deliver a combined 9.3 billion cubic feet of gas per day to 7 million retail customers after the deal's expected 2024 close.

The transaction, which includes US$4.6 billion in Dominion debt, will add utility operations in Ohio, North Carolina, Utah, Idaho and Wyoming to Enbridge’s portfolio. It comprises about 78,000 miles of gas distribution, transmission, gathering and storage pipelines, and more than 62 Bcf of working underground and LNG storage capacity.

"Enbridge is currently the only major pipeline and midstream company that owns a regulated gas utility, and we've further strengthened that position today by doubling the size of our [gas distribution] business," said Patrick Murray, Enbridge's executive vice president and chief financial officer.

For Dominion, the sale highlights the Richmond, Virginia-based company’s focus on its vast state-regulated electric utility holdings and “represents another significant step in our business review, which is focused on repositioning the company to create maximum long-term value for shareholders, employees, customers and other stakeholders,” President and CEO Robert Blue said.

Funding Concerns

Weighed down by questions surrounding the deal’s funding, Enbridge shares trading on the New York Stock Exchange opened about $2, or 5.6%, lower on Wednesday, the morning after the deal was announced, and had regained little ground by Friday.

While reiterating Enbridge’s ‘BBB+’ rating, S&P Ratings downgraded Enbridge’s credit outlook to negative. “Although we believe Enbridge has superior market access, funding plan execution risk remains in the short- to medium-term,” S&P said. Enbridge is funding a portion of the deal with a C$4 billion underwritten equity offering, leaving about US$6.5 billion to be raised.

To come up with that money, Enbridge executives told investors that the company could rely on a mix of asset divestitures, at-the-money equity offerings, and debt.

“We could lower our rating on Enbridge if the company is unable to successfully raise additional funds through asset sales or other means such that adjusted debt to EBITDA is at or above 5x for a prolonged period,” S&P said.

CFRA analyst Stewart Glickman kept a "buy" opinion on Enbridge’s shares, citing the deal’s relatively attractive valuation to both Enbridge’s current business and pure-play gas utility Atmos Energy. But he warned that the businesses being bought could fall short of Enbridge’s growth targets.

"Moving into gas utilities is unlikely to be a major growth driver for Enbridge, but it does allow them to play defense to some degree if there are unfavorable regulatory developments on liquids," Glickman told Energy Intelligence. He estimated the acquired utilities would grow about 3% per year, which is below Enbridge's overall company guidance of 5% for 2023. Enbridge currently gets 57% of EBITDA from liquids pipelines, he noted, and some of those assets face regulatory challenges.

"The company will still be more exposed to liquids pipelines, but less so. So as a means of diversifying, but still staying within businesses that they already know, I think this move is fine," Glickman said. "Financially, it was attractively priced as well."

Taking Another Path

The deal, which has Enbridge expanding downstream, is a departure from those recently announced by other big midstream players that have sought out complementary assets that give them a stronger foothold in growing gas supply basins.

Enbridge’s deal “will result in a meaningful shift in our post-acquisition business mix,” said Enbridge CEO Greg Ebel. “We are the only major pipeline and midstream company with regulated utility cash flow.”

By contrast, Energy Transfer’s US$7.1 billion bid to buy Crestwood Equity Partners includes Crestwood’s gas system in the Delaware sub-basin, which analysts say gives Energy Transfer an opportunity to flow natural gas liquids production to downstream markets.

And with its $885 million acquisition of Meritage Midstream, Western Midstream is banking on the expectation of growing output in the Powder River Basin as operators further develop the play.

Enbridge currently attributes about 57% of its 2023 estimated EBITDA to its liquids pipeline business, 28% to gas transmission, 12% to gas distribution and 3% to renewable power. Once the Dominion deal closes, Enbridge expects about 50% of its EBITDA to come from liquids pipelines, 25% from gas transmission, 22% from gas distribution, and 3% from renewables power.