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Williams CEO angles for Permian gas, sees political opportunity in Amazon growth

Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View


Williams CEO angles for Permian gas, sees political opportunity in Amazon growth

➤ Opposition to gas pipelines in New York could hurt developments such as Amazon.com Inc.'s expansion in New York City, but the politics may be changing.

➤ Williams is more focused on gas supplies in the oil-rich Permian Basin than many peers.

➤ Pipeline companies' financial health is not reflected in market valuations, but continued results should bring back yield-focused investors.

As president and CEO of Williams Cos. Inc., Alan Armstrong has led one of the most prolific natural gas pipeline companies in North America since 2011. Williams had a busy 2018, closing a $10.5 billion deal to roll up its master limited partnership in August and completing a milestone expansion on its flagship Transcontinental Gas Pipe Line Co. LLC system when the Atlantic Sunrise component began service in October. S&P Global Market Intelligence spoke with Armstrong about Williams' outlook for 2019 and the midstream sector's post-MLP future. The following is an edited transcript of that conversation.

SNL Image

Williams Cos. Inc. President and CEO Alan Armstrong called struggling midstream sector valuations a "buying opportunity."

Source: Williams Cos. Inc.

S&P Global Market Intelligence: Now that the company's consolidation is complete, what are top priorities for the year ahead?

Alan Armstrong: Probably our biggest growth area next year is Northeast gathering volumes, and those are really starting to ramp up at the end of this year with the Atlantic Sunrise pipeline now online. ... A lot of activity is going on in the field with the producers right now building out our system to be able to take on their additional volumes.

There are several other projects like the Gulf Connector expansion project, which feeds [Cheniere Energy Inc.'s] Corpus Christi LNG facility ... that has already been partially placed in service, and we're in the process of commissioning the rest of it.

Everyone is talking about the Permian Basin, and production shows no signs of slowing down. Can you explain the strategy behind Williams' partnership with Brazos Midstream Holdings LLC and what it is like to compete for projects down there?

The Permian represents a low-cost supply from the gas side, and we want to make sure that we are keeping the Transco network expanding and able to pick up supplies not only from the Marcellus and Utica [shales] but from the Permian as well. ... Our angle is quite a bit different from most of the typical Permian midstream players out there because we really are trying to integrate on the gas side, and so our focus and our interests are perhaps different from our peers.

Our experience with private-equity-backed companies like Brazos Midstream has been a positive experience because we have got great operating capabilities and our assets are in prime locations, and there are a lot of synergies to be extracted from growing our business. ... Clearly, the private funds today are much lower-cost [sources of capital]. Their yield expectations are lower than the public markets are, and so we've been finding ways to partner with those firms. ... We have so many growth opportunities in our portfolio that need to be funded, and we see them as a good source of that funding.

Williams is no stranger to pipeline permitting challenges, particularly in New York state. With so many projects in process, do you see that regulatory environment changing in 2019?

There's a lot of need for gas supply into the New York City market. There's a lot of development that's trying to occur, and local distribution companies that we serve like [National Grid PLC] and [Consolidated Edison Inc.] don't have any incremental supplies to offer, so if a business like Amazon moves into the area and wants to be assured that they are going to have adequate gas supplies ... [the utilities] are not really in a position to be able to say "yes" to that today. That is becoming more and more evident to state and local politicians.

We're really starting to press on the fact that here we have these great emissions-reduction opportunities in these markets, and yet the extremists are really blocking the public from being able to enjoy the benefits of that. ... There continues to be a small but very noisy voice that's prohibiting these very important economic projects from being developed today. We think that's going to turn around as people really face the facts.

With companies ditching the MLP model and valuations down across the board, the midstream sector saw a lot of changes in 2018. Is this a problem, an opportunity, or both?

Certainly in the short term, it's a problem, but in my history in the space, companies have never been healthier than they are today, both from a dividend-coverage and a balance-sheet perspective and their ability to self-fund themselves. That's a very strong combination compared to the MLP structure that was dependent on the public equity markets being open ... and today, most of the big companies like Williams are not relying on those markets in any shape or form.

It's very surprising to me seeing those stock prices today, but ... it's not compounding the way it was back in 2016, when the major players with big projects had to fund them either by overleveraging themselves with debt or having to issue public equity in the form of MLP units. ... It was a downward spiral.

I think we'll look back on the current situation and say, "Wow, what a buying opportunity across the whole space." I don't recall a time in my years in executive management when the business has been this healthy but the equity markets so poorly reflecting that. I'm looking forward to those investors taking advantage of it being rewarded.

If the traditional MLP model is done, what is the value proposition for investors now? Will energy pipelines still be a field for income investors seeking yield, just without the pass-through tax status?

There's a bit of confusion, I would argue, in the market today between who's exposed to crude oil prices and who is not. It's interesting to see [share prices] like Williams' continually go down with crude oil prices when we have very little exposure to crude, and so it's kind of surprising to see everyone lumped together in that regard. I think it will work its way out. I think the earnings will show who is exposed and who isn't, and I think that'll be proof in the pudding in terms of this commodity exposure. But today ... there doesn't seem to be much distinction.

Our cash flows have never been higher-quality than they are right now, but I look around the industry and I think our peers are pretty healthy, too. My hope is that people stick to doing what they said they're going to do when it comes to earnings, because I think that is going to attract long-term yield investors.

What is the biggest shift you have seen during your time in the industry?

The biggest shift is the United States' ability to extract natural gas out of the ground at a lower cost. ... Out of industrialized areas, we clearly are the lowest-cost when it comes to gas production, and that's come from tremendous efforts in technologies. ... If you think about all the petrochemical businesses we brought back to this country, it really is on the backs of the exploration and production companies.


Listen: Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Mar. 20 2019 — Some fintech companies are making hay with digital platforms that tout their differences with banks, even though they are often offering virtually the same products. In the episode, we discuss with colleagues Rachel Stone and Kiah Haslett the deposit strategies employed by the likes of Chime, Aspiration and other incumbent players such as Ally Financial, Discover and Capital One. Those efforts conjure up memories of a Don Draper pitch in Mad Men and likely will enjoy continued success.

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Technology, Media & Telecom
Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Highlights

The segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

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.

Mar. 20 2019 — The U.S. broadband-only home segment logged its largest net adds on record in 2018, validating Comcast Corp.'s and Charter Communications Inc.'s moves to make broadband, or connectivity, the keystone of their cable communication businesses.

The size and momentum of the segment also put in perspective the recent high-profile online-video video announcements by the top two cable operators as well as AT&T Inc.'s WarnerMedia shake-up and plans to go toe-to-toe with Netflix in the subscription video-on-demand arena in the next 12 months.

We estimate that wireline broadband households not subscribing to traditional multichannel, or broadband-only homes, rose by nearly 4.3 million in 2018, topping the gains from the previous year by roughly 22%. Overall, the segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

For perspective, broadband-only homes stood at an estimated 11.3 million a mere four years ago, accounting for 13% of residential cable and telco broadband subscribers.

The once all-powerful, must-have live linear TV model, which individuals and families essentially treated as a utility upon moving into a new residence, increasingly is viewed as too expensive and unwieldy in the era of affordable, nimble internet-based video alternatives. This has resulted in a sizable drop in penetration of occupied households.

As a result, continued legacy cord cutting is baked in and broadband-only homes are expected to continue to rise at a fast clip, with the segment's momentum in the next few years compounded by Comcast's, Charter's and AT&T's ambitious moves into online-video territory.

Note: we revised historical broadband-only home estimates as part of our fourth-quarter 2018, following restatements of historical telco broadband subscriber figures and residential traditional multichannel subscriber adjustments.

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Q4'18 multichannel video losses propel full-year drop to edge of 4 million

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Q4'18 multiproduct analysis sheds more light on video's fall from grace

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Watch: Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

Mar. 19 2019 — Steve Piper shares the outlook for U.S. power markets, discussing capacity retirements and whether continued development of wind and solar power plants may mitigate the generation shortfall.

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Credit Analysis
2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View

Mar. 15 2019 — On November 20, 2018, a joint event hosted by S&P Global Market Intelligence and S&P Global Ratings took place in London, focusing on credit risk and 2019 perspectives.

Pascal Hartwig, Credit Product Specialist, and I provided a review of the latest trends observed across non-financial corporate firms through the lens of S&P Global Market Intelligence’s statistical models.1 In particular, Pascal focused on the outputs produced by a statistical model that uses market information to estimate credit risk of public companies; if you want to know more, you can visit here.

I focused on an analysis of how different Brexit scenarios may impact the credit risk of European Union (EU) private companies that are included on S&P Capital IQ platform.

Before, this, I looked at the evolution of their credit risk profile from 2013 to 2017, as shown in Figure 1. Scores were generated via Credit Analytics’ PD Model Fundamentals Private, a statistical model that uses company financials and other socio-economic factors to estimate the PD of private companies globally. Credit scores are mapped to PD values, which are based on/derived from S&P Global Ratings Observed Default Rates.

Figure 1: EU private company scores generated by PD Model Fundamentals Private, between 2013 and 2017.

Source: S&P Global Market Intelligence.2 As of October 2018.

For any given year, the distribution of credit scores of EU private companies is concentrated below the ‘a’ level, due to the large number of small revenue and unrated firms on the S&P Capital IQ platform. An overall improvement of the risk profile is visible, with the score distribution moving leftwards between 2013 and 2017. A similar picture is visible when comparing companies by country or industry sector,3 confirming that there were no clear signs of a turning point in the credit cycle of private companies in any EU country or industry sector. However, this view is backward looking and does not take into account the potential effects of an imminent and major political and economic event in the (short) history of the EU: Brexit.

To this purpose, S&P Global Market Intelligence has developed a statistical model: the Credit Analytics Macro-scenario model enables users to study how potential future macroeconomic scenarios may affect the evolution of the credit risk profile of EU private companies. This model was developed by looking at the historical evolution of S&P Global Ratings’ rated companies under different macroeconomic conditions, and can be applied to smaller companies after the PD is mapped to a S&P Global Market Intelligence credit score.

“Soft Brexit” (Figure 2): This scenario is based on the baseline forecast made by economists at S&P Global Ratings and is characterized by a gentle slow-down of economic growth, a progressive monetary policy tightening, and low yet volatile stock-market growth.4

Figure 2: “Soft Brexit” macro scenario.5

Source: S&P Global Ratings Economists. As of October 2018.

Applying the Macro-scenario model, we analyze the evolution of the credit risk profile of EU companies over a three-year period from 2018 to 2020, by industry sector and by country:

  • Sector Analysis (Figure 3):
    • The median credit risk score within specific industry sectors (Aerospace & Defense, Pharmaceuticals, Telecoms, Utilities, and Real Estate) shows a good degree of resilience, rising by less than half a notch by 2020 and remaining comfortably below the ‘b+’ threshold.
    • The median credit score of the Retail and Consumer Products sectors, however, is severely impacted, breaching the high risk threshold (here defined at the ‘b-’ level).
    • The remaining industry sectors show various dynamics, but essentially remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 3: “Soft Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

  • Country Analysis (Figure 4):
    • Although the median credit risk score may not change significantly in certain countries, the associated default rates need to be adjusted for the impact of the credit cycle.6 The “spider-web plot” shows the median PD values for private companies within EU countries, adjusted for the credit cycle. Here we include only countries with a minimum number of private companies within the Credit Analytics pre-scored database, to ensure a robust statistical analysis.
    • Countries are ordered by increasing level of median PD, moving clock-wise from Netherlands to Greece.
    • Under a soft Brexit scenario, the PD of UK private companies increases between 2018 and 2020, but still remains below the yellow threshold (corresponding to a ‘b+’ level).
    • Interestingly, Italian private companies suffer more than their Spanish peers, albeit starting from a slightly lower PD level in 2017.

Figure 4: “Soft Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

“Hard Brexit” (Figure 5): This scenario is extracted from the 2018 Stress-Testing exercise of the European Banking Authority (EBA) and the Bank of England.7 Under this scenario, both the EU and UK may go into a recession similar to the 2008 global crisis. Arguably, this may seem a harsh scenario for the whole of the EU, but a recent report by the Bank of England warned that a disorderly Brexit may trigger a UK crisis worse than 2008.8

Figure 5: “Hard Brexit” macro scenario.9

Sources:”2018 EU-wide stress test – methodological note” (European Banking Authority, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies“ (Bank of England, March 2018).

Also in this case, we apply the Macro-scenario model to analyze the evolution of the credit risk profile of EU companies over the same three-year period, by industry sector and by country:

  • Sector Analysis (Figure 6):
    • Despite all industry sectors being severely impacted, the Pharmaceuticals and Utilities sectors remain below the ‘b+’ level (yellow threshold).
    • Conversely, the Airlines and Energy sectors join Retail and Consumer Products in the “danger zone” above the ‘b-’ level (red threshold).
    • The remaining industry sectors will either move into or remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 6: “Hard Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

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  • Country Analysis (Figure 7):
    • Under a hard Brexit scenario, the PD of UK private companies increases between 2017 and 2020, entering the intermediate risk band and suffering even more than its Irish peers.
    • Notably, by 2020 the French private sector may suffer more than the Italian private sector, reaching the attention threshold (here shown as a red circle, and corresponding to a ‘b-’ level).
    • While it is hard to do an exact like-for-like comparison, it is worth noting that our conclusions are broadly aligned with the findings from the 48 banks participating in the 2018 stress-testing exercise, as recently published by the EBA:10 the major share of 2018-2020 new credit risk losses in the stressed scenario will concentrate among counterparties in the UK, Italy, France, Spain, and Germany (leaving aside the usual suspects, such as Greece, Portugal, etc.).

Figure 7: “Hard Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

In conclusion: In Europe, the private companies’ credit risk landscape does not yet signal a distinct turning point, however Brexit may act as a pivot point and a catalyst for a credit cycle inversion, with an intensity that will be dependent on the Brexit type of landing (i.e., soft versus hard).

1 S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence.
2 Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings.
3 Not shown here.
4 Measured via Gross Domestic Product (GDP) Growth, Long-term / Short-term (L/S) European Central Bank Interest Rate Spread, and FTSE100 or STOXX50 stock market growth, respectively.
5 Macroeconomic forecast for 2018-2020 (end of year) by economists at S&P Global Ratings; the baseline case assumes the UK and the EU will reach a Brexit deal (e.g. a “soft Brexit”).
6 When the credit cycle deteriorates (improves), default rates are expected to increase (decrease).
7 Source: “2018 EU-wide stress test – methodological note” (EBA, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies”. (Bank of England, March 2018).
8 Source: “EU withdrawal scenarios and monetary and financial stability – A response to the House of Commons Treasury Committee”. (Bank of England, November 2018).
9 As a hard Brexit scenario, we adopt the stressed scenario included in the 2018 stress testing exercise and defined by the EBA and the Bank of England.
10 See, for example, Figure 18 in “2018 EU-Wide Stress Test Result” (EBA November 2018), found at:https://eba.europa.eu/documents/10180/2419200/2018-EU-wide-stress-test-Results.pdf

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2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Market-Driven View

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