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FERC members see no grid emergency from coal, nuclear retirements

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


FERC members see no grid emergency from coal, nuclear retirements

During a hearing before the U.S. Senate, Federal Energy Regulatory Commission members did not affirm the U.S. Department of Energy's view that the nation faces a grid emergency from the loss of coal-fired and nuclear generation.

The June 12 hearing held by the U.S. Senate Energy and Natural Resources Committee frequently focused on the DOE's efforts to secure subsidies and other support for coal and nuclear plants at risk of closure amid competition from natural gas-fired and renewable energy.

Most recently, the DOE created a draft plan that would require grid operators to buy power or capacity for the next two years from "fuel-secure" plants and spur the formation of a strategic generation reserve. The department would compel the action using provisions of the Federal Power Act and the Defense Production Act.

The DOE said such action is necessary to guarantee grid resilience, protect national security and harden the bulk power system against growing cyberattacks. But FERC commissioners did not demonstrate the same sense of urgency at the June 12 hearing.

"Do any of you believe that in the wholesale power markets, we're facing an actual national security emergency," asked Sen. Martin Heinrich, D-N.M.

FERC Commissioner Cheryl LaFleur said she did not, prompting Heinrich to ask if "anyone can answer that with a yes?" The question was met with silence from the four other FERC members.

FERC launched a grid resilience review in January but has so far spurned DOE attempts to prop up uneconomic coal and nuclear plants in competitive markets. The commission instead opted to gather feedback from regional grid operators on what action, if any, the commission should take to ensure grid resilience.

"I'm a little concerned about the narrative that’s being put out there," said FERC Commissioner Robert Powelson, a Trump administration appointee who has said federal market interventions to help coal and nuclear would disrupt organized markets. "We're going to need all these resources, but I don't think it's appropriate to put the FERC in the arena of creating moral hazards in these markets. These markets are working hyper efficiently right now."

Powelson added that a "hard and fast mandate on these markets could really evaporate all the goodwill that consumers have seen, that the environment has seen. To erode that would be a real step back for our U.S. bulk power system."

The DOE's draft plan could also be costly. FERC member Richard Glick said one analysis of the plan estimated electricity costs could rise nationwide by as much as $65 billion.

But several lawmakers voiced frustration with FERC for not doing more to address changes in U.S. power markets, where natural gas is generating a growing share of electricity and new technologies such as energy storage and distributed generation are taking root.

"I have my concerns with the steps that the Department of Energy is reported to be considering, but I also recognize that they are trying to fill a perceived vacuum," Committee Chairman Lisa Murkowski, R-Alaska, said. "I find it unfortunate that prior commissions did not lead more effectively."

Lawmakers from coal states were displeased with FERC’s lack of alarm about the loss of coal-based generation. Sen. Joe Manchin, D-W.Va., noted that residents of his state, which has an 18% poverty level, have seen their average monthly power bills rise from $88.16 in 2009 to $126.10 in 2017.

"I don’t know how y’all think that you’ve kept these prices down," Manchin said. He added that the DOE’s draft plan "is only for 24 months" but "you're acting like it's going to be forever."

The leaked DOE draft plan, dated May 29, was an addendum to an undisclosed order and is not final. The lack of details made FERC commissioners hesitant to provide their views of the proposal. FERC commissioner Neil Chatterjee said he was unsure what the Trump administration intends to do with the memo but that the plan raised important issues, including with respect to fuel supply risks related to natural gas pipeline constraints.

If the DOE ultimately enforces the plan and grid operators disagree with electric generators on rates to support those plants, Chatterjee said that dispute "would obviously fall within our wheelhouse."

Powelson told reporters he was unsure how power plants would be compensated under the DOE draft plan. If the Trump administration invoked the Defense Production Act to keep units online, "wouldn't the Defense Department have to pay for that?" Powelson said. "If it's under the umbrella of national security, then wouldn't we do an emergency defense appropriations bill to address this 24-month window? I don’t know."

He went on to say that FERC is already taking steps to ensure resilience, including issuing a notice of proposed rulemaking on fast-start resources and orders to support energy storage and frequency regulation. "Unfortunately, we're not getting credit for the work that we do," Powelson said.

FERC Chairman Kevin McIntyre said although he sees "no immediate calamity or threat" for the grid, the commission's resilience proceeding will nevertheless take a "longer-term lens" to the future fuel mix and any associated reliability concerns.


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.

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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.