Post by
CanSiamCyp on Sep 08, 2023 1:11pm
Offering closed ... BMO now able to comment ...
Resuming Coverage at Market Perform Following Gas Utility Acq'n; Target to $52
Bottom Line:
The US$14B (C$19B) acquisition of three high-growth U.S. gas utilities from Dominion Energy comes with several positive strategic benefits (notably the big pivot to perpetual utility assets), but the accretion is not expected to be meaningful (at least initially), and funding and regulatory uncertainty could persist through most of 2024 (as in past U.S. utility acquisitions we have observed). Resuming coverage with Market Perform rating and lowering our target price to $52 (vs. $54).
Key Points
Slightly accretive. Based on the acquisition valuation of 1.3x rate base and 16.7x P/E (2024E) with an 8% rate base CAGR expected, we estimate low single-digit accretion in 2025E (first year of operation), with improvement over time as $1.7B is invested annually in rate base (pro forma, secured backlog to $24B vs. $19B). Following the $4.6B equity offering, there remains a funding gap of ~$8.5B, where we model $3.5B hybrids, $1B corporate debt, and sub-$4B ATM (DRIP and asset sales could fill the gap). On asset sales, we do not believe there are any sacred cows; examples of recycling candidates could include a minority interest of the Mainline and its net 2.2GW renewable power portfolio including a transmission line in Ontario.
Lots to like on the strategic front. While we are lukewarm on the anticipated financial benefits, we see several positive strategic merits: 1) enhanced scale and diversification; 2) de-risks growth guidance and offsets our concerns on the Mainline; 3) a more balanced business mix (oil to 50% vs. 57% and utilities to 22% vs. 12%); and 4) adds perpetual assets, supporting long-term dividend sustainability.
Regulatory approvals should be manageable. We anticipate the regulatory approval process to be non-controversial with a straight fairway to close before the end of 2024, with the quickest turnover likely in Ohio. The gas utilities ENB is acquiring are allowed a regulated return of ~10% on average on deemed equity of ~51%.