Enbridge (NYSE: ENB) made a bold strike last year. The Canadian pipeline and utility company agreed to acquire three natural gas utilities from Dominion for $14 billion. Enbridge’s CEO Greg Ebel stated at the time of the deal, “Adding natural gas utilities of this scale and quality, at a historically attractive multiple, is a once-in-a-generation opportunity.” The deals will increase its cash flow per share, the overall stability of its earnings, and its growth profile.
The company recently closed the second of the three transactions. That put it one step closer to fully seizing this generational opportunity to create North America’s largest gas-utility franchise in a highly accretive deal that should help fuel its growth for several years.
Two down, one to go
Enbridge recently closed the acquisition of Questar Gas company and its related Wexpro companies from Dominion. Questar distributes gas to around 1.2 million customers in Utah, Wyoming, and Idaho. It has a cost-of-service agreement with Wexpro to supply it with reliable natural gas. The acquisition adds “another strong gas utility to Enbridge’s” portfolio, stated Michele Harradence, the president of Enbridge’s gas-distribution and storage platform. Harradence further noted that Questar and Wexpro “enhance the scale and breadth of our existing low-risk utility business model and support our long-term dividend growth profile by providing stable, predictable cash flows.”
The closings of Questar and Wexpro follow the company’s completion of the East Ohio Gas Company (EOG) acquisition in March. EOG is the largest of the three gas utilities Enbridge is acquiring from Dominion. Like Questar and Wexpro, the addition of EOG will further diversify and enhance the stability of Enbridge’s cash flow. These two businesses will contribute about 80% of the annualized earnings of the utilities Enbridge expects to acquire from Dominion.
Enbridge is working to obtain the final regulatory approval needed to close the purchase of the Public Service Company of North Carolina (PSNC) from Dominion. It remains on track to complete that deal this year. That would further diversify and enhance its sources of stable cash flow.
Incremental income and visible earnings growth
Enbridge secured these utility acquisitions at historically attractive valuation multiples. Because of that, it expects the utilities will be accretive to its distributable cash flow per share in the first full year of ownership. With two of the three deals now closed, they’ll supply Enbridge with incremental earnings and cash flow in 2024, with the full benefit expected in 2025.
The other factor that made these utility acquisitions so attractive is their embedded growth profiles. They service regions with growing economies and populations. That helps drive Enbridge’s view that it will be able to invest about 1.7 billion Canadian dollars ($1.2 billion) annually into low-risk, long-term capital projects across those utilities to maintain and expand their infrastructure. These factors drive the company’s view that the utilities should grow their earnings at an 8% compound annual rate in the coming years.
With two deals now closed, Enbridge has secured 80% of the stable and growing cash flow it expects these natural gas utilities to generate over the coming years. They add to the company’s already robust growth drivers, which should expand its cash flow per share by 3% annually through 2026 and by around 5% per year over the medium term. That steady earnings growth should give Enbridge the fuel to continue increasing its high-yielding dividend. Enbridge has raised its payout for nearly 30 straight years.
Nearly 80% of the way there
Enbridge has now closed two of its three gas utility acquisitions from Dominion, which comprise about 80% of the income it expects these businesses to generate. Barring any setbacks, it should close the third transaction later this year. This once-in-a-generation investment opportunity will significantly enhance the stability of Enbridge’s cash flow and long-term growth profile. Because of that, the company should have plenty of fuel to continue increasing its dividend. That makes it a great option for investors seeking a big-time passive-income stream that should steadily rise in the future.
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Matt DiLallo has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
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