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Texas summer power prices could drive arguments for resilience, new investment


Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

S&P Global Market Intelligence: Who We Serve

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Technology, Media & Telecommunications

Spotify’s Direct Listing Gamble Pays Off

Texas summer power prices could drive arguments for resilience, new investment

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The sun sets behind transmission lines operating outside Sweetwater, Texas.
Source: Associated Press

With summer approaching, all eyes are on Texas and the performance of its power market.

Industry stakeholders at the S&P Global Platts Global Power Markets conference in Las Vegas observed April 11 that the prospect of elevated pricing in the Electric Reliability Council of Texas market is likely to significantly impact the strategies of two key, and potentially competing, segments of the market: those advocating existing baseload assets be compensated for resiliency attributes, and those with a keen eye on developing new capacity, with access to large pools of untapped capital.

For a market most recently associated with bankruptcies, ERCOT appears to be cycling back into the good graces of wholesale generators and project sponsors, at a time when forward price curves indicate the potential for scarcity pricing in the near-term. The absence of capacity pricing in ERCOT may never give investors the same low-risk cash flows offered in PJM Interconnection, but with slimming reserve margins and a price cap of $9,000/MWh, the returns on offer in the Lone Star State may be hard to ignore. Conversely, should prices rise precipitously, industry proponents of compensation for large baseload assets, namely coal-fired and nuclear plants, may frame such volatility as evidence for the benefits of preserving existing assets on the basis of fuel diversity and reliability.

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Resilience rationale

Increasing forward curves in Texas are likely to draw additional players into the market, thereby driving liquidity and the probability of wide intra-day price swings. Such volatility may help uncover pressure points across the system, a phenomenon that has yet to be play out in earnest across competitive markets, outside of extreme weather events.

"If you have volatility, you get more players in the market, more hedge funds, traders, banks, so more liquidity," PSEG Energy Resources & Trade LLC President Shahid Malik said, noting a broad absence of pricing volatility recently in Texas and PJM markets. "When you start seeing volatility, that's when you start to see the market takeover, and you'll see more depth in the market."

"ERCOT and the [Public Utility Commission of Texas] seem more willing to take on volatility, and with that comes higher prices and lower prices," Competitive Power Ventures President and Chief Commercial Officer Sherman Knight added, noting the lack of a capacity pricing construct in Texas.

With upside seen on power prices, stemming largely from recent retirements of large baseload coal-fired generating units earlier in 2018 by Vistra Energy Corp., scarcity pricing, should it occur, could provide additional rationale for resiliency payment constructs at the state or federal level, like those lobbied for by Exelon Corp., FirstEnergy Solutions Corp. and Public Service Enterprise Group Inc.

"Either scarcity pricing will print, or it won't, but either result is pretty staggering," S&P Global Market Intelligence Director of Energy Research Steve Piper said, speaking on ERCOT. "If we see a lot of scarcity print, it might just be a market pricing outcome, or it might tell us something about the value of these resources from a resiliency standpoint and whether they're being compensated adequately."

Development signal

Even without capacity pricing in Texas, an improvement of the forward curve is likely to draw developers' attention. If summer 2018 is tamer than expected, and tighter reserve margins transition into 2019, the persistence of market conditions with the potential for dramatic swings in summer pricing could be too hard for developers to ignore.

"There seems to be pretty good interest from the institutional market now in ERCOT, and I think you'll see deals before long in Texas, but with slightly different terms than in a more established Northeast market," Michael Proskin, Credit Suisse Securities (USA) LLC managing director for power and renewables, said. "I wouldn't be surprised to see a very under-built market with low barriers to entry."

"I do think it's catching people's attention," Proskin added. "I don't know if it's this year or not, but anecdotally, developers are taking a hard look again."

So what will it take to drive the first thermal project? Beyond capacity prices, the answer may depend on who is once again willing to shoulder the risk of uncertainty in long-term pricing.

"ERCOT is an interesting place to invest, but it's so highly volatile that you would have to look at a higher rate of return, and that does drive the supply margin lower," Knight said, noting the improvements in forward pricing. "With those types of prices, it feels like the football has been hiked, and it's sitting there, and someone wants to kick it, but everyone's asking 'Who's holding the football?'"

Watch: Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Steve Piper shares Power Forecast insights and a recap of recent events in the US power markets in Q4 of 2017. Watch our video for power generation trends and forecasts for utilities in 2018.

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Technology, Media & Telecommunications
Spotify’s Direct Listing Gamble Pays Off


Spotify Technology SA shares rose 13% above its $132.00 reference price to close at $149.01 the day of the company’s IPO April 3, resulting in a public market valuation of 4.0x estimated 2018 revenue of €5.22 billion and 16.5x gross profit of €1.28 billion.

Apr. 06 2018 — The following post comes from Kagan, a research group within S&P Global Market Intelligence. To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Spotify Technology SA shares rose 13% above its $132.00 reference price to close at $149.01 the day of the company’s IPO April 3, resulting in a public market valuation of 4.0x estimated 2018 revenue of €5.22 billion and 16.5x gross profit of €1.28 billion. That compares to a trading multiple of just 1.0x revenue for Pandora as of the same date, but Spotify’s higher trading multiple is justified by its higher proportion of paying subscribers among its listeners and its growth outside the U.S.

Spotify Technology is the parent of Spotify AB, the Swedish operator of the popular Spotify streaming service.

Company guidance for full year 2018, provided in Spotify's March 26 8-K filing, is revenue of €4.9 billion to €5.3 billion, up 20% to 30% year over year, and a gross profit margin of 23% to 25%, with an operating loss of €230 million to €330 million including an estimated total cost for the direct listing of roughly €35 million to €40 million in the second quarter.

Spotify Technology S.A. share price and market capitalization

The 8-K also shows Spotify has ambitious monthly active user, or MAU, and premium subscriber growth targets for 2018, with MAUs projected to increase by 26% to 32% year-over-year to 198 million to 208 million and total premium subs growing 30% to 36% to a range of 92 million to 96 million.

At the end of 2017, Spotify had reported 157 million MAUs and 71 million premium subs. Apple Music came in second place with a reported 36 million subs as of February 2018; based on reports from the Wall Street Journal, the company is growing at a monthly rate of 5% compared to 2% at Spotify. According to a Forbes article on April 4, Apple Music just reached 40 million paid subscribers. Inc. has indicated it is the third-largest on-demand streaming music company behind Spotify and Apple Inc.'s Apple Music with a reported 16 million subscribers between Prime Music and Amazon Music Unlimited. That leaves Pandora Media Inc. in fourth place with 5.5 million paid subscribers, although it has a larger ad-supported user base with 74.1 million MAUs reported at the end of 2017.

Based on reports by Music Business Worldwide on April 4, Sony Corp.'s Sony Music, which had owned 5.71% of Spotify shares prior to the first day of trading, sold 17.2% of its stake in the company, representing a little less than a 1% total share, for over $250 million based on the April 3 closing price of $149.01.

In Spotify's prospectus filed April 3, Sony Music, before the April 3 shares sale in the first day of Spotify trading, was the fifth-largest shareholder behind Spotify co-founders Daniel Ek (27.1%) and Martin Lorentzon (13.1%), followed by Tencent Holdings Ltd. (9.1%) and Tiger Global (7.2%).

As reported by Music Business Worldwide, according to a memo released by Sony, the company projects that the unrealized valuation gain and the proceeds from the sale of Spotify shares will amount to roughly 105 billion Japanese yen, approximately US$1 billion, for the first quarter of the fiscal year ending March 31, 2019.