United Parcel Service UPS declared a quarterly dividend that was unchanged from its previous quarterly payout. Enbridge ENB also declared a quarterly payout that was unchanged in CAD, but U.S. investors generally see modest variations each quarter, based on current exchange rates.

Please see new analyst notes below from Morningstar Research Services for Compass Minerals CMP, Duke Energy DUK, Enbridge, ExxonMobil XOM, FirstEnergy FE, and Plains GP Holdings PAGP.

Best wishes,

David Harrell
Editor, Morningstar DividendInvestor

Compass Hits Rough Patch in Goderich Restoration, but Long-Term Outlook Intact
by Seth Goldstein, CFA | Morningstar Research Services LLC | 11-06-19

Compass Minerals reported decent third-quarter results. Companywide adjusted EBITDA remained flat at $67 million as higher salt and plant nutrition North America profits were offset by lower plant nutrition South America results and higher corporate costs. Management lowered its 2019 adjusted EBITDA guidance to a midpoint of $315 million from a midpoint of $330 million due to higher salt costs and lower plant nutrition volumes. After updating our model to incorporate lower near-term results, we trim our Compass Minerals fair value estimate to $80 per share from $81.

Our long-term outlook remains intact that Compass will be able to fully restore its flagship Goderich mine, driving higher salt profits. Our wide moat rating based on Compass' cost-advantaged salt production is also unchanged. The market reacted negatively to the guidance cut, sending shares down more than 6% at the time of writing. At current share prices, we view Compass as materially undervalued.

In the salt business, Compass noted that Goderich production continues to improve, as unit costs are falling versus 2018 levels. However, one of Compass' continuous miners hit a patch of lower-quality salt rock, which will result in a reconfiguration of the mine. This will temporarily increase unit costs due to lower production volumes as the miner is physically relocated. However, to minimize the risk that this kind of incident occurs again, Compass has installed radar and will use more in-seam drilling when exploring new patches of the mine. As a result, we continue to forecast that Compass will be able to fully restore salt production and profitability, albeit slightly delayed versus our original timeline.

In plant nutrition, we expect the North America business to see a full rebound in profits in 2020 as U.S. planted acres recover from the lowest planting levels in over a decade. As a result, we forecast 2020 plant nutrition North America profits to be in line with 2018 results.

Duke Energy to Raise $2.5 Billion in Equity to Fund Atlantic Coast Pipeline; Reports Strong Earnings
by Andrew Bischof, CFA, CPA | Morningstar Research Services LLC | 11-08-19

We are reaffirming our $88 fair value estimate and stable, narrow moat ratings after Duke Energy reported third-quarter operating earnings per share of $1.79 compared with $1.65 in the same year-ago period. Management narrowed its 2019 EPS guidance to $4.95-$5.15, from $4.80-$5.20. We plan to increase our full-year EPS estimate, but the changes will not have a material effect on our fair value estimate.

The Atlantic Coast Pipeline, in which Duke is a 48% owner, received positive news with the announcement in the quarter that the U.S. Supreme Court will hear the appeal of the Appalachian Trail decision. Given prior precedence, we expect a high probability for a positive decision in spring 2020. We think parties to ACP will be able to resolve the issues with the Fish and Wildlife Service biological opinion. Duke is no longer seeking a phased-in approach for ACP; it expects completion in the first half of 2022.

To fund Duke's portion of the $7.3 billion to $7.8 billion project, Duke will issue $2.5 billion in equity in 2020. Duke is currently trading near our fair value estimate, resulting in likely no impact to our fair value estimate. However, we think it will be difficult to offset dilution from share issuances from additional cost savings and growth capital.

Duke filed for new rates at Duke Energy Carolinas and Duke Energy Progress seeking 10.3% allowed return on equity and $755 million in rate increases in North Carolina. We think investor concerns about the negative trend in regulatory constructiveness in South Carolina impacting North Carolina outcomes are unwarranted. We expect a decision with an allowed return on equity of 9.8%.

Legislation enacted in North Carolina earlier in the month allows a path for storm cost securitization, but it kept out key rate mechanisms that would have increased regulatory constructiveness. In Florida, regulators are adopting a final rule to enact recent legislation supporting storm resiliency.

Enbridge Exceeds All Expectations
by Joe Gemino, CPA | Morningstar Research Services LLC | 11-08-19

Wide-moat Enbridge reported another strong quarter that exceeded our and CapIQ consensus expectations. The company reported third-quarter adjusted EBITDA of CAD 3.1 billion, which was up from CAD 2.96 billion in the year-ago quarter. Consensus expected adjusted EBITDA of CAD 2.99 billion, which was slightly above our expectations. Enbridge also reported distributable cash flow of CAD 2.1 billion compared with CAD 1.6 billion in the third quarter of 2018. Consensus expected distributable cash flow of CAD 1.9 million, also slightly above our expectations. The outperformance was attributed to higher throughput and tolls on the Mainline system, higher volumes on the Flanagan South and Seaway pipelines, increased throughput on the Bakken pipeline system, and a stronger-than-expected contribution from new gas transmission projects. The increased performance was partially offset by the divestiture of the company's midstream assets coupled with increased. After the strong quarter, the company reaffirmed that distributable cash flow per share would exceed the mid-point of its CAD 4.30/share to CAD 4.60/share guidance, which is consistent with our forecasts.

There were no major updates on the company's major growth projects and initiatives. Enbridge expects Minnesota to complete the revised environmental impact by December of this year. At that point, the project should be clear of all regulatory and legal hurdles. The company is also continuing to advance its mainline priority access contract initiative and is awaiting the outcome of the Canada's Energy Regulator review regarding the fairness of the proposed open season.

Despite the strong quarter, we don't see any changes to our long-term thesis. As such, we are maintaining our $47 (CAD 62) fair value estimate and wide moat rating.

Exxon's Third-Quarter Earnings Fall As Macroeconomic Headwinds Offset Solid Operational Performance
by Allen Good, CFA | Morningstar Research Services LLC | 11-04-19

Exxon reported third-quarter earnings that continue to reflect the macroeconomic headwinds the company is facing across all parts of its business, which are weighing on earnings and cash flow. Our narrow moat and fair value estimate are unchanged. Third-quarter earnings fell to $3.2 billion from $6.2 billion last year as each of its three segments reported lower results. Upstream earnings slid to $2.2 billion from $4.2 billion last year as lower oil and natural gas prices, along with higher growth-related expenses and the absence of one-time items, more than offset a 3% growth in volumes. Downstream earnings fell to $1.2 billion from $1.6 billion last year on narrower margins and continued downtime chemical earnings fell to $241 million from $713 million last year, primarily on weaker margins as overcapacity and economic softness continue to weigh on the sector.

Cash flow excluding working capital and asset sales proceeds of $8.1 billion failed to cover capital spending and dividends. Year to date, operating cash flow, excluding asset sales proceeds and working capital, of $20.8 is running at about two thirds of management's target introduced March. The cause is largely a result of the difficult macroeconomic environment because not only are oil and gas prices weaker than expected, but so are refining and chemical margins, removing any countercyclical benefits of the integrated model, which typically works well in a variety of environments.

The company continues to target $15 billion in asset sale proceeds through 2021 however, which should buffer operating cash flow and keep the dividend safe until commodity prices improve to midcycle levels and new projects come online. It just announced a sale of its Norway assets, which should result in $3.5 billion of proceeds.

Otherwise there is no meaningful deviation from the company's long-term growth plans including its 2025 targets or change to our expectations around midcycle pricing. As a result, we plan to include the latest market conditions into our model but do not anticipate a material change to our fair value estimate or narrow moat rating

FirstEnergy Ups Distribution System Spending; Increasing Fair Value Estimate
by Charles Fishman, CFA | Morningstar Research Services LLC | 11-04-19

We are increasing our fair value estimate to $43 per share from $42 after FirstEnergy reported 2019 third-quarter operating EPS of $0.76 versus $0.80 in the same period last year. Management also initiated 2020 guidance in line with our estimate and increased projected 2019-21 annual regulated distribution investment to $1.7 billion, the upper end of previous guidance range.

Earnings per share were lower in the third quarter versus last year due to milder weather and the sunsetting of the Ohio Distribution Modernization Rider.

We were not concerned that FirstEnergy didn't roll its 6%-8% EPS growth target beyond 2021. CEO Chuck Jones stated during the conference call that their internal financial planning was not complete and he was not yet prepared to provide an earnings-growth rate beyond 2021. However, he stated that this shouldn't be taken as an indication that the growth will be disappointing when they do initiate the guidance.

Based on accelerated distribution investment and Jones' comments, we now think EPS growth from 2020-2023 following the expiration of the Ohio DMR will average 5.4%, 60 basis points higher than our previous estimate. This was the primary driver for the increase in our fair value estimate. Time-value appreciation since our last update also contributed.

Our five-year distribution capital spending increased by $310 million, to $8.51 billion and our estimate of capital expenditures for three-year period of 2019-2021 is in line with FirstEnergy's higher guidance. Our estimate for 2023 EPS contribution from the distribution segment increased by $0.13, to $2.45.

Partially offsetting stronger distribution earnings were lower regulated transmission earnings, contributing $0.87 per share in 2020 versus our previous estimate of $0.93. However, the slowdown due to higher O&M and interest appears to be temporary and we assume compound annual growth from 2021-2023 returns to 7.3%, equal to our previous estimate.

Plains Reports Good Third Quarter, but 2020 Outlook Disappoints
by Stephen Ellis | Morningstar Research Services LLC | 11-06-19

Plains reported a good third quarter, but its 2020 outlook was disappointing, reflecting lower Permian volume growth, higher levels of Permian pipe-on-pipe competition, and weaker marketing differentials. After updating our model, we're lowering our fair value estimate to $26 per unit from $29.50 while maintaining our wide moat rating. To some extent, Plains is seeing a large reversal of its supply and logistics profits, which it expects to contribute only $50 million-$100 million in 2020 EBITDA versus close to $700 million this year. However, more takeaway capacity being added to the Permian, and lower overall volume growth from the basin after two strong years of growth are expected to trim fee-based growth in 2020 too. The firm estimates roughly an $85 million negative EBITDA impact to lost spot volumes on its pipelines due to weaker Permian differentials. Overall, we expect 2020 EBITDA to decline to $2.6 billion from $3.1 billion in 2019.

From a capital perspective, Plains is taking care not to repeat the mistakes of its past and become overleveraged. Plains' initial 2020 growth budget of $1.35 billion is fairly close to 2019's expected $1.4 billion, as it is prioritizing excess cash flow generation to ensure that it will not need to issue equity. From a distribution perspective, we estimate 2019's coverage ratio will be over 2 times compared with 1.3 times if we exclude supply and logistics contributions. Similarly, in 2020, we estimate a coverage ratio of 1.6 times compared with 1.3 times excluding S&L contributions. Overall, despite the collapse in S&L margins in 2020, debt/EBITDA is expected to tick up to perhaps 3.3 times from the current 2.8 times. Factoring in how the rating agencies consider preferred debt, Plains' overall leverage would be about 4 times, which we consider reasonable.

Buying back stock remains a possibility if EBITDA performance is better than expected, but considering Plains' capital position and its current forecast, we consider it unlikely, despite the stock's current undervaluation.

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