Before investing in a capital-intensive business, it’s important to understand the company from both a debt and an equity perspective.

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With that in mind, we asked Colum McKinley, vice-president, Canadian equities at CIBC Asset Management, and Jeffrey Waldman, head of global fixed income at CIBC Asset Management, to explain how they’d each approach a pipeline company. Both managers own Calgary-based Enbridge: McKinley, its stock and Waldman, its bond.

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Equity metrics for pipeline companies

“When we think about investments in a pipeline business,” says McKinley, “what we’re most interested in is earnings and, importantly, free cash flow generation: excess cash that it generates after reinvesting in its business.”

That’s because these metrics “speak to the sustainability of the dividend and the ability to grow that dividend over time. […] Companies that consistently grow their dividend over time are strong free cash flow generators [and] tend to do quite well against the broader market.”

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Enbridge currently pays an above-average yield of 4%, which he calls “very strong.” He adds the firm has historically had strong dividend growth. “Over the last five years, their dividend has grown by mid-teen levels. We think [that] in the future it will grow at a slower rate, but we think it still will be an above-average grower.”

McKinley also looks to macro factors when analyzing a pipeline. “[We think] about how that oil environment is going to evolve over the coming months and quarters, but also over the longer term. [And we think about] what that ultimately means for how we transport oil within [and] outside of Canada—that latter part is a bigger political issue that is gaining attention.”

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His projections for a pipeline company ultimately feed into his picture of its true long-term earnings power.

Fixed-income metrics for pipeline companies

“Energy companies, including pipelines, are really capital-intensive businesses,” points out Waldman. “So it’s important for the company to be able to have funding for [such] projects, and the only way to do that is to have access to debt and equity markets, both during the build-out phase and ongoing when refinancings take place.”

As a result, Waldman looks at a firm’s access to project financing and then the prospective cash flows that would service the resulting debt. “We’ll look at things like its debt to total capital to gauge the amount of debt being used relative to other sources,” he says.

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Further, he reviews “overall debt to earnings before interest, taxes, depreciation, and amortization [EBITDA]. We’ll also look at interest coverage.”

Waldman says Enbridge does well on all fronts. “It has many funding options and uses those options judiciously and selectively, including debt issuance here in Canada and the United States, as well as equity issuance and even preferred share issuance. In the past 12 months, Enbridge has raised over $4 billion of debt and more than $2 billion of equity.”

As a result, the company’s “debt to total capital has improved this year, with their $2-billion equity issuance.”

As for its debt to EBITDA, “that peaked in 2014. It’s been declining ever since as new assets have come online and generated assets for the company. Also, its interest coverage ratio has improved in the last two years.”

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Waldman also analyzes a company’s contracts to determine future cash flows. “The contract’s terms could expose a pipeline company to different types of risks, such as risks in changing prices of the underlying commodity that’s shipping, or risks to the quantity of the product that’s being shipped through the pipelines by its customers.”

Enbridge satisfies here, too. “Its cash flows are relatively stable; 95% of the cash flows are supported by long-term contracts with customers, and only 5% are exposed to changing commodity prices.” He adds that Enbridge has low cash flow variability.

Why talk to another manager

Waldman looks to the equity team for insights on a pipeline’s dividend payout ratio. “For Enbridge, [paying dividends] uses about a billion dollars of cash every year. So it’s helpful to get Colum’s team’s perspective on the direction of this dividend payout ratio expected by the equity market.”

Another reason the teams collaborate is because “we’re always wary of shareholder-friendly activities that could potentially compromise bondholder interests,” says Waldman. “For example, last year we worked with Colum’s team to assess the impact of asset sales and restructuring that was taking place among the Enbridge family of companies.”


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