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Enbridge Adds 3 U.S. Gas Distribution Utilities in Defensive Move

Enbridge moves to boost earnings from utilities businesses; we are leaving the stock’s fair value estimate unchanged.

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Key Morningstar Metrics for Enbridge

Enbridge Stock Update

Enbridge ENB is acquiring natural gas distribution utilities East Ohio Gas Company, Public Service Company of North Carolina, and Questar Gas for CAD 19 billion (USD 14 billion), including USD 4.6 billion in debt from Dominion Energy D. Separately, Enbridge announced that 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 utilities 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 Morningstar Economic Moat Rating of narrow.

We see the addition of three U.S. gas distribution utilities as primarily a defensive move. Despite the size of the transaction, Enbridge is maintaining 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 that Enbridge management sees more challenges and risks in the liquids portion of the business and prefers fairly strongly to allocate incremental capital elsewhere.

Enbridge Boosting Utilities Earnings Contribution

Enbridge was viewed by investors as being like a utility 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, with rider mechanisms enabling a quick recovery of the investment. Longer term, there are hydrogen blending opportunities and potential storage opportunities as the Public Service Company of North Carolina is already piloting a hydrogen blending program. Enbridge is targeting a 2024 close.

Enbridge Stock Price

Source: Morningstar Direct.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Stephen Ellis

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Stephen Ellis is an energy and utilities strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc., covering midstream companies. Ellis is a former member of Morningstar’s China Economic Committee, which provides research on the long-term outlook for the Chinese economy.

Before assuming his current role in 2017, he was director of equity research for financial services and a senior equity analyst. He is also a former editor of the Morningstar Opportunistic Investor newsletter and a former member of the Economic Moat Committee, a group of senior members of the equity research team responsible for reviewing all Economic MoatTM and Moat TrendTM ratings issued by Morningstar.

Prior to joining Morningstar in 2007, he worked as a freelance analyst for The Motley Fool and spent three years working in project and financial analysis for Environmental Systems Research Institute (ESRI), a supplier of geographic information system software and geodatabase management applications.

He holds a bachelor’s degree in business administration and a master’s degree in business administration from the University of Redlands.

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