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Low storage, cold forecast may disrupt US coal, gas markets this winter

Studios, Exhibitors Set To Spar Over Streaming

Power Forecast Briefing Discusses Improved Spark Spreads and Profitability Projections for ERCOT and PJM


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

Nexstar Buys WGN For A Song; Divestiture Of WGN, Stakes In Food Channels Likely

Low storage, cold forecast may disrupt US coal, gas markets this winter

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Workers remove a fallen tree from a road and repair power lines during a March 2018 winter storm, in Norwell, Mass. The potential for another cold winter could continue to push up the price of coal and natural gas in the coming weeks.
Source: Associated Press

U.S. natural gas storage and utility stockpiles of coal are at near-term record lows as at least one weather outlook expects power generators to be hit with the coldest winter in five years.

Natural gas stocks ended refill season at the lowest level in more than a decade and a hot summer whittled down utilities' stockpiles of coal to four-year lows. Concerns over the low level of natural gas in storage has already spooked the futures market with traders sending the contract for December delivery up to a four-year high near $5/MMBtu on Nov. 14, only to retreat below $4/MMBtu the next day.

Both commodities could get a boost in demand from what may be the coldest winter since 2013-2014, according to Todd Crawford, a senior meteorological scientist at IBM Business' The Weather Company.

"The winter is expected to have the coldest weather, relative-to-normal, across the more populous areas of the U.S., which has clear implications for increased heating demand," Crawford told S&P Global Market Intelligence. "This is the first winter since 2009-10 that has all of the ingredients for a very cold and snowy winter in the eastern U.S., and we feel that the cold and storminess will be especially notable later in the winter."

He expects a warmer-than-normal winter across the northern and western U.S. and a colder-than-normal winter across parts of the southern and eastern U.S. A weaker-than-normal polar vortex and other factors are also expected to increase the chances of a colder winter across the eastern and central U.S., Crawford added.

Coal miners sense utilities needing coal

Sensing that utility buyers may be getting nervous about their coal supply, producers are likely to be bullish with their coal offers in the coming months, according to Matt Preston, research director for North American coal markets at energy consultant Wood Mackenzie.

"I think the chance of something spiking both coal and gas prices is probably higher than it's been in the past couple winters," Preston said.

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The potential for increased coal buying generated optimism on coal company earning calls where executives have reported success in securing new and longer-term supply contracts. Consol Energy Inc. executives, for example, reported utilities are showing more willingness to enter into multiyear contracts for coal from the company's Pennsylvania mining complex. Limited investments in mines and a strong pull from export markets has pressured supply.

Illinois Basin coal producer Foresight Energy LP President and CEO Robert Moore recently warned that a hard, long winter could catch some electric utility customers unprepared.

"When I take a look at the inventory positions of certain of our utility customers, I'll tell you, we've been scrambling to keep people in coal," Moore said on the partnership's third quarter earnings call. "We've got some folks out there with less than 10 days of coal on the ground, and I'll tell you phones constantly ringing about getting coal over to the plants. It's a serious situation."

With most utility coal stockpiles still generally offering over 70 days of supply cover, the lights aren't about to go out, said Joe Aldina, director of U.S. coal research for S&P Global Platts. But October coal burns were already trending higher and a colder winter could definitely be a boon to U.S. coal producers.

"I think you could add several million more tons of demand in both what is remaining of the fourth quarter this year and in Q1'2019," Aldina said. "I do think it will spur more buying of coal. The question is, will producers be able to step in and provide coal to buyers at these levels of extra demand."

Much of the additional tonnage, Aldina said, would likely come from the lower-cost Powder River Basin coal region. There could be some potential for Illinois Basin coal producers to sell additional tons into the market as well.

Utilities, accustomed to a ready supply of coal in the U.S, do not seem to be panicking. WEC Energy Group Inc., for example, has not changed inventory targets for individual plants dramatically, said spokeswoman Amy Jahns.

"There is a lot of supply available and we don't anticipate any issues meeting load demands this winter," Jahns said in an email.

Natural gas demand reshaped by exports

The gas utility industry is confident that U.S. producers can flow enough supply to meet winter demand without a major price disruption. But several market analysts are warning their clients to brace for a gas price shock when winter rolls in. The 3.2 Tcf of gas in storage, the lowest winter start in 13 years, may not prove to be sufficient to meet peak demand, they say.

In their outlooks for winter 2019, trade groups for U.S. gas marketers and gas utilities agreed that expanding shale gas production from Appalachia and Texas' Permian Basin will allow utilities to rely less on stored gas — which is at low levels not seen since 2005 — and more on new gas from pipelines to meet their fuel needs.

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But some equities analysts and consultants, including B. Riley FBR Inc. oil and gas analyst Rehan Rashid, said LNG exports and Mexican gas demand have reshaped the gas market in poorly understood ways. Rashid told his clients in October that exports create demand for gas that is hard to shut off, even if gas is needed for homes and businesses.

"We believe the demand side has/is becoming stickier," Rashid said. "As a result, duration and magnitude of price signal needed … will have to be stronger than what the market currently believes."

Switching to coal will become less and less an option for power producers, Rashid said. There are far fewer coal power plants with less coal in storage this winter to be expected to step in to serve as a relief for power producers as gas prices climb. "Gas-to-coal switching is not scalable enough to truly cap movement in gas prices over a reasonable time frame," Rashid said.

Rashid's "sticky" demand model prompted him to raise his 2019 gas price forecast from $2.88/Mcf to $3.50/Mcf and he is not alone in predicting higher prices.

"With SE/TX storage limited in its ability to meet sustained, elevated demand given current low stockpiles, and with elasticities in the power sector reduced by structural shifts in the generation stack away from coal to gas, the destruction of LNG exports and exports to Mexico could be the final market balancing mechanism in the event more supply needs to be retained domestically," the market analysts at PIRA Energy Group said in a Nov. 13 note. "Shutting off either demand source won't come cheap."

PIRA, a unit of S&P Global Platts, believes Henry Hub prices could peak at $10/MMBtu on peak winter days.

Any market skittishness is overdone, Barclay's commodities analyst Samuel Phillips said Nov. 7. Production will again exceed demand and, outside of a few peak days, expanding shale gas production from both Appalachia and "free" gas from the Permian Basin's shale oil wells will cap 2019's prices, Phillips said. Further, gas-to-coal switching is still an option, according to Barclays.

"Beware the weather-driven risk premium in natural gas markets, as the price support it yields can disappear just as quickly as it emerged," according to Phillips.

PIRA Energy Group, S&P Global Platts and S&P Global Market Intelligence are all owned by S&P Global Inc.

Technology, Media & Telecom
Studios, Exhibitors Set To Spar Over Streaming

Dec. 14 2018 — According to an article published in Variety in November, Warner Bros. and Universal Pictures are expected to reopen conversations with exhibitors about earlier VOD releases for their films. The studios argue that an earlier on-demand release helps minimize piracy and allows them to better leverage the multimillion-dollar ad campaigns launched for their films' theatrical debuts.

Exhibitors, on the other hand, worry that a shorter theatrical window will reduce ticket sales as potential patrons opt to wait and watch films at home. Fewer ticket sales also lead to lower concession revenues -- the most profitable aspect of the exhibition business.

The article also notes that studios have an extra incentive to negotiate earlier release windows, as WarnerMedia is launching its own streaming service in 2019 while Comcast, home of Universal, is looking to expand its streaming offerings. Having their major films released on their respective services shortly after theatrical release could help drive subscriber growth.

Pushing for a film's possible VOD release just weeks after its big-screen debut could be seen as an aggressive move, but studios have been slowly shrinking their theatrical release windows over the past 20 years. In 1999, the average theatrical window was 169 days; this was just as the DVD market was beginning to explode and the VHS cassette was still a market factor. Soon, DVD became a massive source of revenue for studios and they began to release their films on home video at a quicker pace. In 2017, the average theatrical window dropped to 105 days before dipping to 99 days in 2018.

The major studios all trimmed their theatrical windows by a fair amount between 2000 and 2018, from an average of 172 days down to 94 days, a difference of more than two and a half months. Twentieth Century Fox and Universal Studios had the shortest average theatrical window at 89 days, while Walt Disney had the longest theatrical window at 107 days.

We tracked eight blockbuster films in 2018 that were released on home video less than 90 days after premiering in theaters. The shortest window belonged to "Venom" ($212.3 million domestic gross), which was released in theaters on Oct. 5 and will debut on DVD and Blu-ray just 74 days later on Dec. 18.

The motion-picture business has always been able to capitalize on new technology, from the TV to the VCR to the DVD player, to drive growth. Streaming video has become the primary source for home entertainment — just ask Netflix and its 137.1 million subscribers worldwide. If studios are launching their own services, they naturally want their own premiere content on those services. Studios may not get the rapid release window they are hoping for, but they will likely keep bringing it down slowly, as they have for the past two decades.

If you are a client then learn more about Economics of TV & Film below:

Movies make their way to your home in less than 100 days in 2018

State of Home Entertainment 2018

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Watch: Power Forecast Briefing Discusses Improved Spark Spreads and Profitability Projections for ERCOT and PJM

Dec. 13 2018 — In our latest Power Forecast Briefing, Steve Piper discusses recent power market activity and a forecast that points to profitability for merchant generation regions of ERCOT and PJM. Both saw improved spark spreads in 2018, but ERCOT's upside appears more limited than PJM going forward. More data and market tracking tools can be found on the Market Intelligence platform’s Power Forecast subscription.

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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.

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Technology, Media & Telecom
Nexstar Buys WGN For A Song; Divestiture Of WGN, Stakes In Food Channels Likely

Dec. 10 2018 — Walt Disney Co.'s pending acquisition of much of 21st Century Fox Inc. certainly raised the bar for cable network valuations — at 15.4x cash flow — and the divestiture of the regional sports networks may see another double-digit-multiple transaction with Inc. in the mix of buyers. Another deal, Nexstar Media Group Inc.'s pending acquisition of Tribune Media Co., sees stakes in three cable nets going to the buyer for single-digit multiples (6.9x).

The deal follows the collapse of Sinclair Broadcast Group Inc.'s deal to buy the company, which is now being litigated. We think that Nexstar is getting quite a deal on the cable network assets and will likely flip them for a quick profit.

When Discovery Inc. agreed to buy Scripps Networks Interactive Inc. in July 2017, the domestic cable networks were valued at $10.14 billion, or 10.5x cash flow, with Food Network (US) valued at $4.5 billion (Scripps owned 68.7%) and Cooking Channel (US) (also at 68.7%) valued at $525 million.

In the current transaction, the valuations come to $3.47 billion and $323 million, respectively. Thus, if Nexstar can get Discovery Communications to pay at least what it paid in the Scripps transaction, Nexstar may make a quick profit. Granted, minority interests typically trade at a discount. Scripps Networks Interactive, however, has tried for years to cut a deal to buy out the minority stake and it may be willing to strike a deal at a higher price to put this issue behind it.

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