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NERC sees no immediate problems with the grid

SNL Banker

Credit Analytics Case Study: Carillion Plc

Live Linear OTT Streaming Bumps Up The Multiscreen Transcoder Market

FOX Could Reap Substantial Rewards For 2026 World Cup


NERC sees no immediate problems with the grid

Despite concerns raised by the Trump administration, officials with the North American Electric Reliability Corp. said nothing in their new report indicates that retirements of coal-fired and nuclear power plants posed a reliability threat to the power grid in 2017.

"Every adequate level of reliability was met," James Merlo, vice president and director of reliability risk management at NERC, said at the June 21 release of the electric reliability organization's "State of Reliability 2018" report. The assessment recapped and analyzed reliability risk trends of the bulk power system in 2017.

"We found nothing in our backwards review that would make us concerned about any one fuel more than another," said Merlo. "It's just more about what is the performance of the grid."

NERC is also assessing the potential impacts that generation retirements could have on the bulk power system. That assessment is slated to be released in November. Concerned about the potential grid resilience impacts of recent and future coal-fired and nuclear power plants, President Donald Trump on June 1 directed the U.S. Department of Energy to take "immediate steps" to prevent the loss of "fuel-secure power facilities," including coal and nuclear plants.

But the only "forward-looking" risks NERC identified in the "fuel-agnostic" study were some resource challenges in Texas that already had been addressed in a recent summer report, Merlo said. NERC's territory encompasses the continental United States; most of Canada; and Baja California, Mexico.

SNL Image

NERC's latest report said the bulk power system experienced no major events other than the two NERC "Category 5" events that occurred when hurricanes Harvey and that battered Texas and Florida in August and September of 2017, respectively. Even though power was lost to a record number of Florida customers, NERC said storm-impacted areas recovered in half the time it took to bounce back following Hurricane Wilma in 2015.

Merlo attributed the faster recovery efforts to money well-spent on "hardening the grid" since Wilma and on "human capital" and ingenuity that helped get the lights back on in hurricane-damaged areas, including the use of drones for assessing damaged power lines. "These are great measures of the resiliency [of] the most complicated machine in the world, [which] resides largely outside," he said.

The report also said North America's power grid suffered no loss-of-load from cyber or physical attacks in 2017, despite near-constant cyberattacks and "continually evolving" threats. Even though the report's current metrics do not address the number of successful cyberattacks or how many were thwarted or aborted, Merlo said NERC is looking at ways to collect, assess and include that data in future reports.

In addition, the report said 2017 saw the number of transmission outages caused by failures of protection system or alternating-current substation equipment or by human error continued to decline for the fifth year in a row. But, Merlo said, human error is a growing concern as equipment becomes more complex to operate.

NERC said frequency response performance rates varied in 2017 by interconnection but nonetheless remained acceptable. Protection systems misoperation rates also remained significant although they declined for the fifth consecutive year to an overall rate of 7.1% in 2017 from 8.3% in 2016. NERC said the three largest causes of misoperations in 2017 were the same as in 2016: incorrect settings, logic and design errors, relay failure or malfunctions, and communication failures.

SNL Image

The year 2017 also saw NERC identify a previously unknown reliability risk of inverter-based resource controls tripping and disconnecting from the bulk power system during transmission disturbances. Merlo attributed the problem to the growing proliferation of solar generation.

The issue first came to NERC's attention during an August 2016 wildfire in San Luis Obispo County, Calif., when a 500-kV line fault resulted in a reduction of 1,000 MW grid-connected solar photovoltaic resources in California ISO's market. Then, a similar situation occurred during the Canyon 2 Fire east of Los Angeles in October 2017 when a 220-kV and a 500-kV line each suffered phase-to-phase faults with normal clearing that led to a reduction of over 900 MW of solar photovoltaic across the service territory of Edison International subsidiary Southern California Edison Co.

NERC found that the majority of such inverter-based resources tripped and disconnected thanks to subcycle transient overvoltages and instantaneous protective action at the inverters. A significant number of the inverters "also entered momentary cessation during and following the fault events," NERC said.

The power grid reliability organization has issued two alerts to resolve the issues and is working with stakeholders on a reliability guideline that Merlo said will look at how such "small events" could impose reliability risks going forward.


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Credit Analysis
Credit Analytics Case Study: Carillion Plc

Highlights

Co-written by Elijah Harden, Risk Services.

Jul. 05 2018 —

Bankruptcy Summary
Carillion Plc (Carillion), a construction services firm, had “declining profit margins” and “high adjusted debt [due to] reverse factoring and its unfunded pension deficit” according to S&P Global Ratings1 . When Carillion filed for liquidation on January 15, 2018, the company had debt and liabilities in excess of £1.5 billion. Trading in the shares was suspended that same day. S&P Global Market Intelligence’s Fundamental Probability of Default (Fundamental PD) rose to 18.27% in the first quarter of 2017 from 1.32% the previous quarter – the equivalent of the implied credit score falling to ‘ccc’ from ‘bb’2 . An additional 30% increase from Q1 to Q2 2017 brought the Fundamental PD to 24%, six months ahead of Carillion’s liquidation. In the quarter leading up to its compulsory liquidation filing, the median Market Signal Probability of Default (Market Signal PD) was 18%, and reached as high as 29%. The Market Signal PD increased nearly sixfold, from 2.17% to 12.69% (equivalent to a credit score decrease from ‘bb-‘ to ‘ccc+’) during July 2017 in response to a share price decline of nearly 70% during the month. Carillion’s share price fell by 39% on July 10 alone, triggered by a profit warning (the first of three) and the announcement of a strategic review.

Exhibit 1: Market Signal and Fundamental PD Escalation

Source: S&P Global Market Intelligence as of June 11, 2018. For illustrative purposes only.

Business Description
Carillion provides maintenance, facilities management, and energy services to buildings and large property estates, in public and private sectors; infrastructure services for roads, railways, and utility networks. It serves aviation, corporate, financial services, oil and gas, central and local government, defense, healthcare, transport, education, commercial and retail, and residential and leisure sectors. Carillion was incorporated in 1999 and is headquartered in Wolverhampton, in the United Kingdom.

Fundamental Probability of Default Analysis
Upon closer inspection of the Fundamental PD in the third quarter of 2017, business and financial risks were significant problems for the company, with vulnerable and highly leveraged scores, respectively. In the first quarter of 2017, Carillion’s Fundamental PD of 1.32% was better than the UK Construction & Engineering industry median of 4.43%. The Fundamental PD later increased to place Carillion in the worst 25% of the industry by the second quarter of 2017. The most significant factor contributing to the increase in Fundamental PD is Carillion’s EBIT interest coverage, a measurement of the company’s ability to pay interest on debt, which fell to -0.32 in the first quarter of 2017 from 2.75 in the fourth quarter of 2016 (semiannual data was multiplied by 0.5). The elevated Fundamental PD was also due to total equity and cash interest coverage which stood at -£405MM and 0.09, respectively, in the first quarter of 2017 down from £730MM and 2.7 in Q4 2016. Between Q4 2016 and Q1 2017 EBIT decreased by £132MM to a net loss of £100MM and equity decreased by an astonishing £1,135MM. The Fundamental PD illustrates Carillion’s sizable net losses left the company debt ridden and unable to operate.

Exhibit 2: Fundamental Probability of Default Contribution Analysis

Source: S&P Global Market Intelligence as of June 11, 2018. For illustrative purposes only.

Exhibit 3: Key Developments

Source: S&P Global Market Intelligence as of June 11, 2018. For illustrative purposes only.

Copyright © 2018 by S&P Global Market Intelligence, a division of S&P Global Inc.
These materials have been prepared solely for information purposes based upon information generally available to the public and from sources believed to be reliable. S&P Global Market Intelligence, its affiliates, and third party providers (together, “S&P Global”) do not guarantee the accuracy, completeness or timeliness of any content provided, including model, software or application, and are not responsible for errors or omissions, or for results obtained in connection with use of content. S&P Global disclaims all express or implied warranties, including (but not limited to) any warranties of merchantability or fitness for a particular purpose or use.

S&P Global Market Intelligence’s opinions, quotes and credit-related and other analyses are statements of opinion as of the date they are expressed and not statements of fact or recommendation to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security.

S&P Global keeps certain activities of its divisions separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain divisions of S&P Global may have information that is not available to other S&P Global divisions.

S&P Global Ratings does not contribute to or 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 credit ratings issued by S&P Global Ratings.

S&P Global provides a wide range of services to, or relating to, many organizations. It may receive fees or other economic benefits from organizations whose securities or services it may recommend, analyze, rate, include in model portfolios, evaluate, price or otherwise address.

[1] Source: S&P Global Ratings, Carillion’s Demise: What’s At Stake? https://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=38529831&From=SNP_CRS as published on March 23, 2018.
[2] Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD scores from the credit ratings used by S&P Global Ratings. S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence.

Credit Analytics Case Study: Carillion Plc

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Credit Market Pulse March 2018 Issue

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Technology, Media & Telecommunications
Live Linear OTT Streaming Bumps Up The Multiscreen Transcoder Market

Highlights

Multiscreen transcoding is widely used today to prepare and distribute video content in over-the-top and TV Everywhere services.

Jul. 05 2018 — Multiscreen transcoding is widely used today to prepare and distribute video content in over-the-top and TV Everywhere services. Multiscreen transcoding revenue is forecast to grow to $628.2 million in 2022, up from $415.1 million in 2017. However, revenue is not rising as quickly as the amount of video being delivered. There are a large number of competitors, so price pressure and the move from hardware appliances to software licenses and cloud services is affecting worldwide multiscreen transcoder revenue.

The amount of video streamed via the internet continues to grow. However, not all of the video is transcoded using a broadcast-quality multiscreen transcoding solution from the vendors discussed in detail in Kagan's latest transcoder report. Some of the largest video streamers in the world, including Netflix Inc. and Alphabet Inc.'s YouTube, use an internal solution. Additionally, those who do not need the same level of density or quality may use solutions such as the free FFmpeg or x264 software, particularly for file transcoding. In some cases, a content producer will use the transcoder that is part of its media asset management system rather than a separate transcoding solution.

Growth in live transcoding revenue is being helped by the expansion of TV Everywhere, or TVE, services. Many multichannel video programming distributors continue to expand the number of linear channels and the amount of VOD content available on their TVE systems in order to offer the same ability to view content on other devices as is available via the set-top box, or STB, in the home. For example, Sky Deutschland GmbH is expanding to offer more than 100 linear channels on Sky Go rather than just the Sky Sport channels. OTT provider ivi.ru of Russia added streamed channels to its service in 2018. Nc+ GO of Poland added 22 channels in April 2018.

FFmpeg and open source solutions have more of an impact on the file transcoding market since multiple passes can be done to produce the quality desired. Therefore, file transcoding vendor revenue is not growing as quickly as the live transcoding vendor revenue. However, some content producers and OTT VOD providers do choose to buy products and services for file-based multiscreen transcoding rather than using an internal or open source solution. The amount of content and the number of versions required to monetize that content continues to grow, causing our expectations of revenue in the file transcoding segment to increase by single-digit percentages each year.

Many transcoder vendors offer cloud transcoding services, oftentimes with multiple cloud providers. The cloud providers tend to be agnostic to the transcoder vendors. A primary example of this is Amazon Web Services, or AWS. Even though AWS owns AWS Elemental, many others also run on AWS, including Beamr Ltd., Bitmovin Inc, Encoding.com Inc., Harmonic Inc., Telestream Inc. and Zencoder Inc.

Revenue from cloud transcoding is expected to increase each year as both the overall multiscreen transcoder revenue grows, as well as the percentage of transcoder revenue that comes from transcoder services that run in the public cloud. The advantages of using cloud transcoding simply outweigh any disadvantages for most use cases.

This article provides some of the highlights contained in Kagan's latest in-depth report titled "Worldwide Transcoding: Live linear OTT streaming bumps up the multiscreen transcoder market," which updates vendor activity and provides global forecasts for live and file transcoding revenue by region, as well as cloud transcoding revenues as a percent of total revenues through 2022.

Video CDN Revenue To Reach $2.2 Billion In 2022

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Technology, Media & Telecommunications
FOX Could Reap Substantial Rewards For 2026 World Cup

Jul. 05 2018 — The 2018 FIFA Men's World Cup has struggled with U.S. viewership due in part to the timing of matches aired from Russia. But the June 14 announcement that the quadrennial cup competition will head back to North America in 2026 was likely music to the ears of TV rights owners Telemundo and 21st Century Fox Inc.'s FOX Sports. The choice of a three-country combination — the U.S., Canada, and Mexico — does not come cheap for the U.S. networks, however. The two will pay a combined $887 million for the 2026 games, including an additional approximately $300 million bonus paid to FIFA because North America was chosen as the location.

The upside is that the World Cup will take place in more ideal airing times, offering stronger ad pricing and bigger audiences. In addition, the number of teams in 2026 will increase to 48, compared to 32 today.

The current tournament is the first in which Telemundo and FOX Sports took away rights from Univision Communications Inc. and Walt Disney Co.'s ESPN/ABC. The announcement may make up for some of the troubles surrounding this year's competition after the U.S. Men's National Team failed to make the cut. In addition, the tournament is in Russia, meaning many of the games have aired during lower viewing times in the U.S.

Despite the challenges, Telemundo and FOX Sports could deliver higher ad revenues compared to 2014, according to some estimates. Telemundo recently announced that it had reached its goal of $225 million in ad sales for this year's tournament. The networks may be benefiting from unused funds tied to the NBA Finals, which ended after just four games

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