Last November, Enbridge (NYSE: ENB) outlined its three-year strategic and financial plan. One of the key components of the Canadian pipeline giant's strategy was selling 3 billion Canadian dollars' ($2.3 billion as of May 9, 2018) worth of non-core assets in 2018, which would give it some of the cash needed to finance its CA$22 billion ($17 billion) expansion plan. That would enable the company to reduce debt while still growing cash flow and the dividend at a 10% compound annual rate through 2020.
It didn't take Enbridge long to achieve its asset sale goal as it announced two separate transactions this week to monetize non-core assets. By quickly hitting this goal, Enbridge is well on its way to achieving the aims of its three-year plan.
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Cutting ties with Midcoast
In the first deal, Enbridge announced that it agreed to sell its Midcoast Operating business for $1.12 billion in cash (about CA$1.44 billion) to a private equity fund. Midcoast operates natural gas and natural gas liquids (NLGs) gathering, processing, and transportation services in the U.S., mainly in Texas, Oklahoma, and Louisiana. It's different from most other assets that Enbridge owns due to its high exposure to commodity price volatility, which has been an issue in recent years.
Enbridge initially housed these assets in its MLP Enbridge Energy Partners (NYSE: EEP), which subsequently created another MLP, Midcoast Energy Partners, to hold a stake in these assets. However, slumping oil and gas prices caused Midcoast's earnings to plummet. Because of that, Enbridge took Midcoast Energy Partners private last year for $170 million and then bought the remaining stake in Midcoast's assets from Enbridge Energy Partners for $1.31 billion plus the assumption of $840 million in debt.
While the company is now selling this business well below what it paid for the assets last year, the sale is "an important step in our shift toward a pure regulated pipeline and utility model," said CEO Al Monaco.
Finding a partner for renewables
Enbridge's second transaction involves the sale of a 49% stake in some of its North American onshore renewable power assets as well a 49% interest in its offshore wind projects in Germany to the Canada Pension Plan Investment Board (CPPIB). The company will receive CA$1.75 billion in cash from this transaction and offload CA$500 million of future capital expenditures. In addition to that, Enbridge and CPPIB formed a 50-50 joint venture to pursue future offshore wind projects in Europe.
Enbridge just bought its stake in the German offshore wind farm projects last year, initially agreeing to invest about $1.25 billion for a 50% stake. However, with concerns growing about its balance sheet and ability to finance growth projects, the company has chosen to monetize part of this asset. It's also monetizing its onshore renewable facilities in Canada and two in the U.S. to bring in some much-needed cash. This decision to cash in on a portion of its renewable portfolio follows a similar plan by fellow Canadian pipeline giant TransCanada (NYSE: TRP), which sold its solar assets in Ontario last year. The driving factor in that decision was TransCanada's desire to improve its financial flexibility so that it could "continue to build on our vision of being North America's leading energy infrastructure company," said CEO Russ Girling. What's clear from these deals is that neither TransCanada nor Enbridge sees renewables playing a key role in building the companies they envision themselves being.
What these sales mean for Enbridge investors
Overall, Enbridge will pull in CA$3.2 billion in cash from these deals, exceeding its 2018 asset sale target and keeping it on pace to hits its leverage target of 5.0 times by year-end. Further, the company offloaded some future spending commitments while jettisoning a business that has been a trouble spot for the past several years. These factors should help lift some of the weight that has been holding down the company's valuation over the past year.
These deals will enhance Enbridge's ability to achieve its growth plans, which would see the company increase its 6.5%-yielding payout at a double-digit pace for the next couple of years. While Enbridge still needs to complete its expansion projects on time and on budget, Wednesday's moves show that the company is heading in the right direction.
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