Oil has been fueling the industrial economy for over a century. It's still important today and likely will remain vital for years to come. However, the digital economy runs on a different fuel: data. Companies rely on data centers to process and store data for their cloud computing and artificial intelligence (AI) applications. And those power-hungry facilities require massive amounts of energy.
That's playing right into the hands of Enbridge (NYSE: ENB), a leader in energy infrastructure. The Canadian pipeline and utility operator is capitalizing on new opportunities to help supply lower-carbon energy to data centers. This could give the company even more cash to grow its 7%-yielding dividend in the future.
Already paying dividends
Enbridge recently closed its $4.3 billion acquisition of Questar, the second of three natural gas utilities it's buying from Dominion. The initial draw of buying Questar (now Enbridge Utah) and the other two gas utilities is that they generate very stable cash flow that should grow steadily in the future.
CEO Greg Ebel commented on one driver in its second-quarter conference call: "Utah's projected population growth is 5% annually through at least 2028, which we expect to drive rate-based growth for years to come."
Another new growth driver is starting to emerge in Utah. Enbridge noted in its second-quarter earnings release that "we are in negotiations to connect up to 200 megawatts (MW) of power to serve data center customers and have had numerous inbounds to connect up to an additional 1.5 gigawatts (GW) over the long-term."
Connecting its gas distribution system to support growing power demand by data centers would enhance the already solid growth it sees ahead for this recently acquired gas utility.
Enbridge, which will soon operate the largest gas utility franchise in North America, is seeing similar opportunities elsewhere in its footprint. In the second-quarter call, Ebel said, "Throughout our utility footprint, we are engaged in additional early stage discussions with data centers that we expect to translate into future growth."
Growing demand by data centers will also benefit the company's large-scale gas transmission business (its pipelines deliver 20% of the gas consumed in North America each day). Ebel discussed the opportunity on the call:
In gas transmission, our assets are ideally located and well connected. We are within 50 miles of 45% of all natural-gas power generation in North America ... We've had a range of customers in the U.S. Southeast that expressed interest in securing approximately 700 million cubic feet a day of transmission capacity to serve up to 5,000 megawatts of new gas power demand.
Utilities will need to build more natural gas power plants to support surging power demand by data centers and other catalysts like electric vehicles and the onshoring of manufacturing. With its strategically positioned gas pipeline assets,Enbridge has an excellent chance to supply gas to these new facilities. Growing demand could boost volumes across its existing pipelines and provide expansion opportunities.
Providing clean power to tech companies
Technology companies must balance their need for baseload power (which natural gas provides) to meet basic demand with their sustainability goals. That's also leading them to secure renewable energy directly from producers like Enbridge.
For example, Amazon signed a long-term power purchase agreement to buy 100% of the energy produced by Enbridge's Fox Squirrel Phase 2 solar energy project in Ohio, which should come on line in the third quarter. The company noted that data center operators value Enbridge's reliability, experience, and proven track record.
The company is working on creative ways to provide these companies with renewable energy, which it can't always build near a data center. For example, companies are signing virtual long-term power purchase agreements with Enbridge. These allow them to buy renewable energy directly from the company, which it supplies to the grid, allowing the purchasers to offset the emissions from the power they're using.
It signed a virtual power purchase agreement with AT&T to support its Orange Grove solar farm in Texas. AT&T will buy 100% of the power of the 130 MW facility.
Enbridge has over 2 GW of wind and solar energy projects in development. That gives it a large portfolio of projects to support the new power load from data centers that should come on line in 2026 and beyond.
A data-powered growth accelerator
Enbridge is in the early days of capitalizing on the expected acceleration in power demand, driven in part by data centers. It's already starting to see new growth opportunities emerge to supply more gas and renewable energy to utilities and data center operators. That could help put a charge in its already solid earnings growth rate, potentially giving the company even more fuel to grow its high-yielding dividend.
That growth and income make Enbridge an enticing low-risk way to play the coming surge in power demand as the digital economy shifts into a higher gear.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matt DiLallo has positions in Amazon and Enbridge. The Motley Fool has positions in and recommends Amazon and Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
