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Over half of US coal delivered in 2017 on contracts with under a year remaining

Judge OKs AT&T/Time Warner, Opening A Potential Bidding War For FOX Assets

Technology, Media & Telecom

Kagan MediaTalk - Episode 2: TV’s Summer Soccer Fever

50 Years Of Altman Z-score, And PD Model Fundamentals – Case Study General Motors

Energy

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


Over half of US coal delivered in 2017 on contracts with under a year remaining

As coal producers continue to report increased volatility in demand, just over half of the coal sold to U.S. utilities in 2017 was delivered on spot deals or through contracts with less than a year remaining.

Persistently low and competitive prices for natural gas have led many utilities to run coal plants at varied rates to match demand, and industry observers have reported the days of long-term contracts to feed baseload coal-fired power plants are gone. Just 21.3% of the coal sold to electricity generators in 2017 was delivered on contracts with more than three years remaining at the time of delivery, according to an S&P Global Market Intelligence analysis of U.S. Energy Information Administration data.

"The reality is the industry has changed massively from where it was five or six years ago when utilities used to know what they were going to burn through their coal plants and would buy accordingly," Cloud Peak Energy Inc. President and CEO Colin Marshall said on a call with analysts in April. "There is a lot more variability, which is what we're coming to terms with."

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Thermal coal producers like Cloud Peak are hoping the rapid rate of coal-fired power plant closures will slow and give some opportunity for supply and demand to come back into balance. The problem for the coal sector is natural gas remains cheap and plentiful and the existing coal fleet, most of which is not designed for ramping generation up and down, is getting older with few signs of any new coal construction in sight.

An executive with a company now part of Evergy Inc. recently said the company has adapted its baseload power operations to "flex and cycle with market opportunities." Vistra Energy Corp. has plans to upgrade a legacy coal fleet it acquired to be better able to ramp up and down to "create more flexibility and value." Other companies including Duke Energy Corp. and Ameren Corp. have said power plants being run as baseload sources of energy will be increasingly less likely as utilities seize on cheaper sources of power when they are available.

"The level of volatility you will see in the system has never been seen before. It's getting ready to happen," Duke Energy Corp.'s managing director of fuel procurement, Brett Phipps, said at a recent coal conference when talking about supply and demand factors in today's coal market. "The way that we have constructed things in the past is not going to work."

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Between 4.4% and 10.7% of the coal delivered to U.S. utilities on a monthly basis was sold on short-term, spot contracts from 2008 to 2012. That started trending upward in 2013 and by December 2017, spot coal deals made up 16% of coal sales, according to federal data.

During a recent peak in August 2012, coal delivered on contracts with two years or more remaining constituted 45.7% of the coal sold to U.S. utilities. That then trended downward before hitting a low of 25.2% of coal delivered in April 2017. Since then, the trend has reversed slightly and more coal has been delivered through contracts with more than two years remaining before expiration.

Long-term contracts provide certainty to producers who must decide when and where to deploy capital. With coal readily available and cheap, utilities have hesitated to sign contracts for coal they are not sure they will be able to use.

Pricing has been so weak in some cases that Marshall recently said Cloud Peak was "very close" to the point where the company does not want to sell at prices utilities are willing to pay.

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Daniel Scott, executive director of MKM Partners, wrote in a June 12 note that while normal U.S. utility coal inventory levels were about 140 million tons a decade ago, today that number, on an equivalent days of burn basis, needs to be closer to 100 million tons before coal companies can wield pricing power with domestic utility customers. Currently, he noted, nationwide utility coal inventory levels are around 126 million tons.

The Powder River Basin, where Cloud Peak operates, is particularly sensitive to utilities turning to natural gas power plants, Moody's recently noted.

"Surface mines with significant scale help keep costs down, which is important considering the freight considerations, but the basin is vulnerable to fuel switching by utilities, particularly since low sulfur content means that PRB coal can be used in older and unscrubbed power plants," a May 31 note said. "New gas-fired generation will continue to replace these plants."

Meanwhile, Central Appalachia's significance in thermal coal markets has been sharply reduced due to a steep decline in demand for the region's costlier coal. While producers in the basin have seen a resurgence in demand for metallurgical coal used to make steel, utilities now buy significantly less coal from the region to make electricity. According to EIA data, nearly three-quarters of the coal delivered from Central Appalachia producers in 2017 was to fulfill spot deals or through contracts with less than a year remaining on their term.

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Technology, Media & Telecommunication
Judge OKs AT&T/Time Warner, Opening A Potential Bidding War For FOX Assets

Highlights

A federal judge approved the AT&T – Time Warner Merger, setting the stage for a frenzy of media consolidation. First up: a bidding war over 21st Century Fox.

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.

Jun. 14 2018 — A U.S. district judge on June 12 approved AT&T Inc.'s acquisition of Time Warner Inc. with no restrictions, which should open up the media M&A floodgates in a world that is increasingly moving toward digital consumption of content. First up to bat: competitive bidding for most of 21st Century Fox Inc.

Comcast Corp., emboldened by the decision that the merger did not violate antitrust laws, offered on June 13 to purchase most of 21st Century Fox for $79.17 billion in cash, a 19.7% premium to Walt Disney Co.'s stock offer of $66.14 billion, worth $68.36 billion based on the close of Disney's stock June 13.

On a cash flow basis, the deal would be expensive, at 14.1x 2018 cash flow, although this drops to less than 10x when $2 billion in synergies are factored in.

Although the offer from Comcast is attractive, we think a competing offer that allowed shareholders to choose cash or stock may have been more attractive to some shareholders that have a low basis in their shares. Since this deal was widely expected to be announced, Disney has had plenty of time to consider whether it will bid higher, and if so, if it will do so with a mix of stock and cash. Should the board decide Comcast has the better deal, Disney would have five days to come up with a counter offer.

As the table below shows, the regional sports networks are the most expensive piece of the company, valued at an estimated $19.14 billion in the Comcast offer.

Disney-Fox deal: What will the Department of Justice think?

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Listen: Kagan MediaTalk - Episode 2: TV’s Summer Soccer Fever

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.

In this second episode of Kagan MediaTalk, senior research analysts Justin Nielson and Tony Lenoir discuss the upcoming FIFA World Cup, to be held in Russia June 14-July 15, and what soccer's biggest international stage means for the U.S. TV ecosystem.

In addition to being hosted on Soundcloud this podcast is also available on iTunes, Stitcher, and TuneIn.

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P).


Credit Analysis
50 Years Of Altman Z-score, And PD Model Fundamentals – Case Study General Motors

Jun. 11 2018 — The year 2018 marks the 50th anniversary of the Altman Z-score, which was designed to gauge credit strength of publicly traded manufacturing corporates. Until this day, the model has been used by financial practitioners to obtain a condensed picture of the financial strength of a company, and serves as a benchmark for credit risk assessment models.

As a part of providing data and tools for a comprehensive analysis of credit risk, S&P Global Market Intelligence has developed a family of PD Model Fundamentals (PDFN). The PDFN is a statistical model that produces probability of default (PD) values over a one- to more than thirty-year horizon for public and private banks and corporations of any size. The model maps the PD values to credit scores1 (i.e. ‘bbb’), based on historical observed default rates (ODRs) extracted from S&P Global Ratings’ database (available on CreditPro® ) PDFN also offers a global coverage of over 250 countries and more than 20 segments, regions, and industries.

PDFN incorporates both financial risk and business risk to generate the overall PD value. This innovative approach captures, in a statistical PD model, important credit risk drivers as identified by S&P Global Ratings’ extensive experience in corporate credit assessments, and provides users with a well-rounded measure of credit risk, where different sources can be easily identified.

We apply the credit assessment metrics to analyze one of the most publicized bankruptcy events in the last decade, the case of General Motors (General Motors Company, formerly General Motors Corporation). In Figure 1 we present the historical evolution of credit risk for General Motors (GM) from January 2005 to May 2018, accompanied by bankruptcy related Key Developments. We compare assessed credit score by PDFN, Altman Z-score, and corresponding S&P Global Ratings Issuer Credit Rating.

At the beginning of 2005, PDFN indicates a credit risk score of ‘bbb-‘, while the S&P Global Ratings Issuer Credit Rating is ‘BBB-‘. The credit risk score indicates that General Motors had adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments. Likewise, the Z-score indicates a rather problematic financial situation, placing General Motors in distressed zone category.

In the following months, the credit quality of General Motors rapidly deteriorated. PDFN signals highly increased probability of financial distress already at the beginning of 2007, more than two years in advance. The implied ‘ccc’ credit score suggests high vulnerability to adverse business, financial, or economic conditions with at least a one-in-two likelihood of default. A few months before default, PDFN indicates a credit score of ‘cc’, thus expecting default to be highly likely. Similarly, the S&P Global Ratings Issuer Credit Ratings shows decaying credit quality, albeit the credit rating changes are more sporadic and have larger increments. The Z-score starts to show a significant deterioration of credit quality one year prior to default, but with a notable lag in comparison with PDFN.

After completion of the post-bankruptcy reorganization, creditworthiness of General Motors improved, and PDFN indicates a fairly stable credit risk profile with an implied score of ‘bbb’. In comparison, S&P Global Ratings Issuer Credit Rating initially shows a greater conservatism in light of the reorganization processes. Since then, the credit rating has improved steadily, converging with PDFN estimate. Z-score shows a somewhat steady estimate of credit risk, with a slight deterioration in the recent years.

Figure 1: Historical evolution of credit risk for General Motors (GM)

The shaded area denotes the period of reorganization between the bankruptcy announcement and reemergence of General Motors (GM) as a public company on the New York Stock Exchange (NYSE). Dashed vertical lines denote bankruptcy related Key Development (see corresponding numbers for details). The Z-score scale has been selected to match the credit score level at the beginning of the period.

Source: S&P Global Market Intelligence (as of May 30th, 2018). For illustrative purposes only.

General Motors (GM) – Key Developments:
(1) Nov 8, 2008: GM heads towards bankruptcy
(2) Dec 31, 2008: GM expects to receive $13.40 billion in funding from U.S. Department of The Treasury.
(3) Feb 14, 2009: GM contemplates bankruptcy
(4) Jun 1, 2009: GM filed for bankruptcy
(5) Nov 17, 2010: GM has completed an IPO and starts trading on NYSE

PDFN incorporates both financial and business risk dimensions to generate an overall PD value as well as an assessment of each individual dimension (financial and business risk). It also comes equipped with a useful analytic tool, the contribution analysis, which allows users to identify drivers of risk, in absolute or relative terms, to define potential paths to creditworthiness improvement or deterioration.

Figure 2 presents the current credit risk profile of General Motors as provided by the PDFN based on last twelve months of data. The contribution analysis indicates that overall business risk is strong, but the company’s financial position is aggressive and is currently the main driver of overall PD estimate. A deep dive analysis shows a weak total equity position which in addition to profitability (EBIT/Total Assets) and efficiency (EBIT/Revenues), resulting in limited financial flexibility (Retained Earnings/Total Assets), represent the risk factors with the largest driver for the assigned credit risk score for General Motors.

Figure 2: Credit risk profile of General Motors (GM)

Source: S&P Global Market Intelligence (as of May 30th, 2018). For illustrative purposes only.

This case study exemplifies the value of PD Model Fundamentals, in providing predictive insights into companies’ creditworthiness and dynamic estimates of PD value and mapped credit score. Our model was trained and calibrated on default flags and is able to signal deterioration of credit quality well in advance of the actual bankruptcy event. The combination of both financial risk and business risk enables a comprehensive overview of a company's creditworthiness, while also providing an in-depth review of a company's credit risk profile to identify and distinguish the main sources of risk. S&P Global Market Intelligence leverages leading experience in developing PD models to achieve a high level of accuracy and a robust out-of-sample model performance. The integration of PDFN into the S&P Capital IQ platform allows users to access a global pre-scored database with more than 45,000 public companies and almost 700,000 private companies, obtain PD values for single or multiple companies, and perform a scenario analysis.

1 S&P Global Ratings does not participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the uppercase credit ratings issued by S&P Global Ratings.

Companies And Sectors Most Impacted By U.S.-Chinese Tariffs

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Credit Market Pulse March 2018 Issue

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Webinar Replay: Outlook On Credit Markets And The Implications For Systemic Risk

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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.