Ellis Gives a "Defensive" Thumbs UPEnbridge: Adds Three U.S. Gas Distribution Utilities in Defensive Move Analyst Note Stephen Ellis, Sector Strategist, 6 Sep 2023
Enbridge is acquiring East Ohio Gas Company, Public Service Company of North Carolina, and Questar Gas natural gas distribution utilities for CAD 19 billion (USD 14 billion), including USD 4.6 billion in debt from Dominion Energy. Separately, Enbridge announced it plans to issue CAD 4 billion in shares to help fund the deal.
The transaction implies a 16.6 times 2024 earnings multiple and 1.5 times rate base, which is in line with natural gas distribution utility market valuations, and we think it implies a fair deal for Enbridge. We do not expect to change our CAD 52 per share (USD 39) fair value estimate or narrow moat rating.
We see the addition of three U.S. gas distribution utilities as primarily a defensive move. Despite the size of the transaction, Enbridge is leaving its 5% annual EBITDA growth expectation over the medium term, which suggests to us that the earnings contribution is replacing weaker results on the liquids side of the business. It also indicates Enbridge management sees more challenges and risks in the liquids portion of the business and prefers fairly strongly to allocate incremental capital elsewhere.
Enbridge was viewed by investors as utility-like beforehand, and this tends to reinforce that view by materially increasing the earnings contribution from actual utilities. The deal will take the gas distribution business to a bit less than a fourth of Enbridge’s overall business mix.
The new utilities add about CAD 1.7 billion in annual capital spending opportunities that are typically low-risk,