Enbridge Earnings: More Tuck-In Deals; Progress on Financing the Purchase of Dominion Gas Utilities

Enbridge’s ENB third-quarter results were solid as the company reaffirmed its guidance range for 2023 EBITDA between CAD 15.9 billion and CAD 16.5 billion. Our forecast is also unchanged at CAD 16.4 billion. We don’t expect to change our CAD 52 or $38 fair value estimates or our narrow moat rating. Third-quarter EBITDA increased 3% year over year to CAD 3.9 billion, helped primarily by higher economic interests in the Gray Oak and Cactus II pipelines, as well as higher Mainline pipeline volumes.

We continue to see the purchase of three U.S.-based gas utilities from Dominion Energy as a respectable, but not outstanding use of capital. The deal remains on track to close in 2024. We think investors remain primarily focused on the balance sheet. Enbridge reaffirmed its targeted range of 4.5 times to 5 times debt/EBITDA as it seeks to prefund the deal. Our median debt/EBITDA ratio across the 39 U.S. utilities we cover is about 5.4 times. Post-close, Enbridge’s earnings will be about 25% utilities. If we assign 25% of Enbridge’s earnings a 5.4 times leverage ratio, this implies the rest of the businesses will carry a debt/EBITDA ratio between 4.2 and 4.9 times to meet Enbridge’s targeted range. The current debt/EBITDA ratio of 4.1 times is low as Enbridge is prefunding the purchase and it will increase once the deal is completed.

We expect investors would be happier with a lower consolidated leverage ratio between 4 times and 4.5 times as that would imply leverage levels more in line with midstream peers, considering the overall enterprise business mix. This would imply that Enbridge needs to find more capital-light growth levers and potentially consider asset sales. With 75% of the deal funding in place, Enbridge is considering its options, including asset sales and equity issuances, which would help.