Enbridge's logos on display at the company's annual meeting in Calgary, Thursday, May 12, 2016.Jeff McIntosh/The Canadian Press
Enbridge Inc.’s ENB-T decision to double-down in the United States with another blockbuster acquisition pits newly minted chief executive Greg Ebel’s diversification strategy against the potential for more debt drama.
After announcing plans Tuesday to purchase three U.S. natural gas utilities from Dominion Energy Inc. for US$9.4-billion in cash, plus US$4.6-billion of assumed debt, Mr. Ebel preached the benefits of having multiple revenue streams.
Consumers want to be able to access energy from different sources, whether it’s oil, gas or renewables, he told media Wednesday. Enbridge will cater to this by creating an organization that is akin to a “three-legged stool,” he said, with one leg for each stream so it can quickly react to energy market changes.
A decade ago, Enbridge generated 75 per cent of its revenue from its oil pipeline division, and it was widely seen as a Canadian business. After a string of deals, including the one this week, the Calgary-based company’s earnings before interest, taxes, depreciation and amortization (EBITDA) will be split 50-50 between its U.S. and Canadian operations, and oil has dropped to half of its total profit.
“I just think it’s a more balanced approach to energy infrastructure, which is really in response to what industry and consumers are looking for in terms of an all-of-the-above approach,” Mr. Ebel said on the call with reporters.
While diversifying, Enbridge must also consider what the new deal will mean for its balance sheet – and some early feedback has been more negative than positive.
Credit rating agencies Moody’s Investors Service and Standard & Poor’s both reaffirmed Enbridge’s investment grade rating after the latest acquisition was announced, but they also put the energy giant on a negative watch, meaning the company has a better chance of being downgraded than upgraded at this point in time.
Although Enbridge sold $4-billion of new shares to cover some of the deal’s US$9.4-billion price tag, “the negative outlook reflects uncertainty about the nature and timing of the remainder of the financing plan and credit metrics, which leave limited cushion to the company’s downgrade trigger of at-or-above 5 times debt to earnings before interest, taxes, depreciation and amortization,” S&P wrote in its ratings update on Wednesday.
Before the acquisition, Enbridge projected that it will keep its debt-to-EBITDA multiple within a range of 4.5 to 5 times for the near future, and even suggested the multiple will be closer to the lower end. After the acquisition, S&P is now projecting debt-to-EBITDA of 4.9 times in 2024.
In its own ratings update, Moody’s directly addressed the added diversification, with earnings from local gas distribution jumping to 22 per cent of Enbridge’s total, up from 12 per cent currently. While the rating agency welcomes this increase, it is more focused on the growing debt concerns.
“Although Enbridge’s business risk profile improves modestly with the transaction, it is not enough to offset ongoing pressure on the company’s financial profile,” vice-president Gavin MacFarlane wrote.
There are many reasons to worry about debt. For one, Enbridge got itself into balance-sheet trouble not so long ago, resulting in a debt downgrade by Moody’s in 2017. After purchasing Houston-based Spectra Energy Corp. in 2016 for $37-billion, Enbridge’s total debt burden had swelled to more than six times its EBITDA. (Enbridge’s current CEO, Mr. Ebel, used to run Spectra.)
To win back investors and restore confidence from rating agencies, Enbridge ultimately sold $5.7-billion worth of assets in 2018, and another $2.1-billion in 2019.
More recently, some rival pipeline companies and utilities have faced the wrath of investors who are worried about debt loads. In July, Canadian rival TC Energy sold 40 per cent of Columbia Pipeline Group, a major division that focuses on natural gas transmission in the U.S. Northeast, to a private equity firm at a much lower multiple than what TC paid to buy it in 2016.
And in a somewhat ironic twist, the reason Enbridge was able to buy the new batch of U.S. assets is because the seller, Dominion Energy, is facing its own debt troubles and had to sell assets. Dominion has been struggling because of a costly offshore wind production project and regulatory changes in Virginia, where it makes the bulk of its money, that will affect the rates it charges. Dominion’s shares are down 44 per cent over the past year.
While Enbridge’s balance-sheet composition is not triggering a ratings downgrade, equity investors are particularly focused on debt loads now that interest costs on new borrowings and refinancings are much more expensive.
Historically, Enbridge could override some of these concerns by enticing retail investors with a large dividend yield. That isn’t always enough any more, and before the acquisition was announced, Enbridge’s shares were down 9 per cent this year despite yielding more than 7 per cent.
Asked about the trade-off between debt and diversification Wednesday, Mr. Ebel said the opportunity to buy the assets was simply too good to pass up. When he took the reins of Enbridge on Jan. 1, he never even considered that such a deal would be available.
A package of gas assets of this nature hadn’t come to market for more than a decade, he said, and Enbridge is “one of the few players that can make a move of this size and magnitude in one fell swoop.” He also repeatedly stressed that the deal will strengthen and stabilize the company’s balance sheet over the long-term.
In terms of how Enbridge will now market itself to investors – as a pipeline operator with utilities? Or a utility operator with pipelines? – Mr. Ebel said he doesn’t think it has to be one or the other.
“I would say you should look at us as an energy infrastructure player that actually has a balanced approach to transporting, delivering for customers and industry on all of the above energy opportunities,” he said.