Last fall, Enbridge (NYSE: ENB) made a bold strike. The Canadian pipeline and utility giant agreed to buy three natural gas utilities from Dominion in a $14 billion deal. The transaction would create the largest natural gas utility franchise in North America.
At the time, Enbridge’s CEO Greg Ebel stated, “Adding natural gas utilities of this scale and quality, at a historically attractive multiple, is a once-in-a-generation opportunity.” While it took a little more than a year, the company has finally closed this generational opportunity to expand its gas utility business. The deal significantly enhances the company’s ability to sustain and grow its 6.5%-yielding dividend.
Enbridge recently announced that it has closed its acquisition of Public Service Company of North Carolina (PSNC) from Dominion. The deal adds over 600,000 service customers in the state, which it serves with over 13,000 miles of gas distribution and transmission pipelines and other related gas infrastructure assets.
The utility should supply Enbridge with stable, low-risk cash flow backed by government-regulated rate structures and steady gas demand. That cash flow should grow in the coming years as Enbridge invests in expanding PSNC’s infrastructure to support rising gas demand in its service region.
Closing the PSNC acquisition was the final phase of this transformational transaction. Enbridge previously closed the purchase of The East Ohio Gas Company in March and completed its deal for Questar Gas Company in June.
The trio of gas utilities significantly expands Enbridge’s gas distribution platform. It will supply 22% of the company’s annual adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), up from 12% before the deal. It further diversified the company’s business while increasing its exposure to lower carbon energy.
The new gas utilities also increased the company’s cash flow from stable regulated assets and enhanced its growth profile. Enbridge expects to invest 5 billion Canadian dollars ($3.7 billion) over the next three years into low-risk, quick-return projects, which will increase its earnings from these utilities.
Enbridge has built one of the lowest-risk businesses in the energy infrastructure sector. The company has a diversified platform focused on four core franchises: liquids pipelines (50% of its EBITDA), gas transmission and midstream (25%), gas distribution and storage (22%), and renewable power (3%).
About 98% of the EBITDA generated from those businesses comes from cost-of-service or contracted assets, which are very predictable and stable. As evidence, Enbridge has achieved its annual financial guidance for 18 straight years, despite two major recessions and two additional periods of oil market turbulence.
The company targets to pay 60% to 70% of its very stable cash flow to investors in dividends. It retains the rest to invest in its large backlog of commercially secured capital projects. The utility acquisitions pushed its backlog to CA$24 billion ($17.8 billion) of projects it should complete through 2028. Those projects give it lots of visibility into its future earnings growth.
The company expects those projects will help grow its EBITDA by about 5% annually. Meanwhile, it has additional investment capacity, thanks to its strong balance sheet, which it can use to sanction additional expansion projects and make accretive acquisitions, further enhancing its growth rate.
With a strong financial profile and visible earnings growth, Enbridge should have plenty of fuel to continue increasing its dividend. It could grow its dividend by as much as 5% per year over the medium term, further extending a streak that is currently at 29 straight years.
Enbridge has closed its once-in-a-generation opportunity to add three high-quality gas utilities to its portfolio. They enhance the stability of its earnings base, increase its diversification, and bolster its growth profile.
Because of that, Enbridge is in an even stronger position to continue growing its dividend. That makes it an excellent dividend stock to buy for the long term.
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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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