Biden Revokes Keystone XL Permit
by Joe Gemino, CPA | Morningstar Research Services LLC | 01-21-21

In a highly anticipated move, newly inducted President Joe Biden revoked the Keystone XL's presidential permit on his first day in office. The president cited climate change issues as the underlying reason for revoking the project's permit. The move comes as no surprise to us, as we expected Biden to oppose the project.

The cancelation of the Keystone XL comes as good news to wide-moat Enbridge. It appears that investors are mistakenly worried about underutilization of the Mainline pipeline system due to the construction of competing pipeline expansions. Even if the Trans Mountain Expansion is placed into service in 2023 (our base case), we expect only minor underutilization of the Mainline until Canadian crude supply ramps to fill all available pipelines. With the stock trading near $35 (CAD 44), we see almost 30% upside in the stock coupled with a 7.5% yield.

Procter & Gamble's Heft Proves Unwavering in Q2, but Pace of Gains Stands to Temper
by Erin Lash, CFA | Morningstar Research Services LLC | 01-20-21

Leading up to wide-moat Procter & Gamble's second-quarter earnings release the overarching question remained anchored in whether it would be able to continue the string of mid- to high-single-digit organic sales marks that have come to characterize the results over the past two and a half years. And in that regard, the firm did not disappoint, posting an 8% underlying sales gain (driven by 5% higher volumes and a 3% benefit from increased prices and favorable mix), a far cry from the low-single-digit levels the business was chalking up just a few short years ago. But we don't surmise P&G's top-line momentum is the product of a shift in focus away from driving profitability improvement. P&G also boasted gross and operating margin expansion, up 150 and 250 basis points, respectively, to 53.1% and 27.2%, reflecting the benefit of sales leverage and productivity gains that offset a 7% increase in advertising for its leading brands.

When taken together, management again bumped up its fiscal 2021 outlook, now calling for 5%-6% organic sales growth (from 3%-4% most recently) and core EPS growth of 8%-10% (from 5%-8%), which outpace our 4% and 7% respective pre-print marks. While we intend to amend our near-term forecast in light of its year-to-date performance (which will likely boost our $113 fair value estimate by $1-$2 per share), we don't expect competitive angst will lay dormant over an extended horizon (as it has since the pandemic took hold). As such, we intend to hold the line on our long-term expectations for 4% annual sales growth and operating margins in the mid-20s (up from the low-20s average the past three years).

And despite this stellar performance, it's clear expectations have been raised, as shares slumped at a low-single-digit clip on the news. However, given the stock still sits at a mid-teens premium to our assessment of intrinsic value, we'd suggest investors remain on the sidelines until a more favorable risk/reward opportunity arises.

Williams' ESG Efforts Could Attract New Investors, but No Immediate Valuation Impact
by Travis Miller | Morningstar Research Services LLC | 01-20-21

We are reaffirming our $27 fair value estimate and narrow moat and stable moat trend ratings after Williams Companies detailed its environmental, social, and governance road map. The stock trades at a 17% discount to our fair value estimate and a 7% dividend yield as of Jan. 19, making it one of our top picks, especially for income investors.

In August, Williams became the first midstream company to commit to net-zero carbon emissions by 2050. We think this is achievable, since large customers like utilities with similar commitments will force Williams toward that goal.

In the near term, we think Williams will meet its commitment to a 56% reduction in greenhouse gases from 2005 levels by 2030. Williams has already reduced its GHG emissions by 44% and plans $3 billion of investment during the next five years to reduce GHG on its system. We think this will help Williams sustain more than $1 billion of growth investment annually while maintaining an investment-grade balance sheet and growing dividend.

The primary challenge for Williams is getting approval from customers and regulators to raise rates for its pipeline efficiency investments, which could make up 40% of its $3 billion of emissions-reduction investments. We believe Williams' efficient scale competitive advantage, especially at Transco, will allow it to earn a fair return on those investments.

Solar and renewable natural gas could represent another 30% of emissions-reduction investments. We expect Williams to keep these investments within its existing footprint, helping mitigate large execution risk. We think it's unlikely Williams will take on any large solar, renewable natural gas, or hydrogen investments outside its footprint before 2025.

We continue to forecast mostly flat 2020 earnings, in line with management's guidance range. Earnings growth in the gathering and processing business has been offset by weakness at the transmission and Gulf of Mexico segment.

Biden's Green Agenda Offers Growth Potential for Utilities
by Charles Fishman, CFA| Morningstar Research Services LLC | 01-22-21

We are reaffirming our fair value estimates, moat ratings, and moat trend ratings for U.S. utilities after President Joe Biden kicked off his environmental policymaking efforts. We consider the sector fairly valued.

We believe tighter environmental regulations are a net positive for most utilities. Growth investments in renewable energy, grid modernization, and electric vehicles should outweigh higher regulatory, operational, and financial risk. We forecast that the U.S. utilities we cover will invest $656 billion over the next five years, more than consensus expects and up from the $541 billion spent in the past five years. This supports our 5.5% average annual industry earnings growth outlook through 2024.

Biden's recommitment to the 2015 Paris Agreement won't have a material near-term impact on utilities. Most utilities' investment plans already reflect similar climate goals with support from state regulators and policymakers.

Investors should watch Biden's approach as the third president this decade to propose power plant emissions regulations. Courts have set a narrow path between Barack Obama's Clean Power Plan, which the Supreme Court stayed in 2016, and Donald Trump's Affordable Clean Energy rule, which was vacated by appeal on Jan. 19. We think it will be even tougher to get emissions legislation through Congress.

We expect emissions-reduction investments will remain a key growth driver for utilities because of state policies and demand from customers and investors. As the federal government has dithered, power plant carbon emissions have fallen 25% during the last decade due to economics and state policymaking. We forecast that natural gas generation will continue stealing market share from coal and renewable energy will double its market share by 2030.

We agree with consensus that Biden's interim goal of net-zero carbon emissions for the power industry by 2035 is unachievable with current technology and potential cost. A 2050 goal is more reasonable.

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