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Court scrutinizes opponents' claims in CPP case; Wyoming clears way for new coal mine

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


Court scrutinizes opponents' claims in CPP case; Wyoming clears way for new coal mine

Top news

The U.S. Court of Appeals for the District of ColumbiaCircuit wrapped up a marathon session of oral arguments on the late Sept. 27by questioning opponents' claims that the carbon-cutting rule isunconstitutional and that the U.S. EPA failed to show its goals are achievable,among other issues.

With government approval in hand, developers of the PacificNorthWest LNG project still face the tough decision of whether to move forwardwith it. A glutted LNG market, a thick list of required environmentalconditions and a price tag last estimated at C$36 billion are all pointsMalaysian state energy company Petroliam Nasional Bhd., or Petronas, must weighin determining how to proceed with its effort to build the liquefaction andexport facility on British Columbia's Lelu Island.

The Wyoming Environmental Quality Council granted consent toRamaco LLC to move forward in the permitting process for a new coal mineoperation in the state, overriding opposition from a neighboring landowner.During a Sept. 28 hearing held in Cheyenne, Wyo., the six members of thecouncil voted unanimously to allow consent in lieu of surface owners to Ramacosuperseding a challenge from neighboring landowner, Lighthouse Resources Inc.

Power

* New Mexico regulators have an approximately , or 10.2%,electric rateincrease for Public ServiceCo. of New Mexico, more than the hearing examiner's recommendedhike of $41.3million. The PNMResources Inc. subsidiary had originally an increase of , or 14.4%. In response,PNM said it was disappointed that the regulators discounted the value of PaloVerde assets and did not approve recovery of the balanced draft technology forthe San Juan plant and that it plans to file an appeal to the New MexicoSupreme Court.

* With its plan to be acquired by still up in the air,SolarCity Corp haslined up more than $650million in financing in just over two weeks. The developer andfinancier on Sept. 28 said Citi is supporting a pair of funds to develop morethan $347 million of solar projects in California. That followed a Sept. 12announcement that a private fund affiliated with Quantum Strategic PartnersLtd. made a $305 million equity investment in a portfolio of residential,commercial and industrial solar projects.

* The city of Boulder, Colo., is asking Colorado regulatorsto approvea proposal that would allow it to create a municipal utility separate from The city nowseeks approval for the transfer of certain Xcel Energy-owned assets within cityboundaries that are needed to serve its customers. Xcel Energy serves the statethrough its Public Service Co. ofColorado subsidiary.

* AvistaCorp. has joined Energy Impact Partners LP, a private equity firmthat funds emerging technologies to improve customer service, reduce costs andincrease revenues. EIP's utility coalition also includes , , Xcel Energy,Ameren Corp.,Great Plains EnergyInc. and FortisInc.

Natural gas/midstream

* CenterPointEnergy Inc.'s CFO said Sept. 28 with the 30-day window to accept anoffer from OGE EnergyCorp. for its ownership stake in Enable Midstream Partners passing, he had .

* KKR &Co. LP and Venado Oil and Gas LLC have formed a partnership toconsolidate proven assets in the Eagle Ford Shale of South Texas. KKR's EnergyIncome and Growth Fund I will largely be providing funding support to thepartnership. Meanwhile, Venado plans to "apply its expertise" toacquire and enhance the assets through operational efficiency, technicalinnovation and community relations, according to a news release.

* ChesapeakeEnergy Corp. launched an $850 million private placement ofconvertible senior notes due 2026, according to a company statement.Net proceeds will be used for general corporate purposes, which may includedebt repurchases and the repayment of the company's credit facility and senior noteswith near-term maturities.

* Canadian Minister of Natural Resources Jim Carr hasrejected assumptions that the federal government will now green-lightKinder Morgan Inc.'splanned Trans Mountain oil pipeline after giving its to the Pacific NorthWestLNG project, Reutersreports. "Kinder Morgan will be decided on its own merits," Carr wasquoted as saying. "There is no linkage between these projects."

* BoardwalkPipeline Partners LP, despite looming contract roll-offs, iscompelling to investorslargely due to its growth potential, project backlog and extensive gas pipelinesystem, according to analysts at U.S. Capital Advisors. The analysts initiatedcoverage of Boardwalk with a price target of $22 per share and a"buy" rating.

* DTE EnergyCo. plansto sell 12 million equity units to help fund its proposed $1.3 billion acquisition of midstream gas assets in the AppalachianBasin from M3 MidstreamLLC and Vega EnergyPartners Ltd., according to a DTE release.

Coal

* In an interview with BloombergNews, Duke EnergyCorp. CEO Lynn Good said the company's planned of "willaccelerate" Duke's transition away from coal-fired generation to naturalgas-fired generation. "I think we'll still be operating coal in2030," Good was quoted as saying. "Whether we will be in 2040 I thinkis a question, or in 2050."

* Two years ago, ahead of a cascade of coal bankruptcies andplummeting U.S. coal demand, Robert Murray stood before a crowd of coal'ssupporters in Florida and shared his goal of being the "last manstanding" in the coal business. Today, with over 50 coal companybankruptcy filings since 2012, hemay not be far off.

Commodities

* The weekly natural gas inventory report to be released bythe U.S. Energy Information Administration at 10:30 a.m. ET on Thursday, Sept.29, is expected toshow natural gas inventories building at a still lackluster pace,trailing historical average injections considerably.

* Taking the lead from the October gas contract that rolledoff the board in the prior session down 4.4 cents at a finish at $2.952/MMBtu,natural gas futures for November were biased higher overnight ahead of the Thursday, Sept. 29,open as traders jockeyed for positions leading up to the midmorning release ofthe weekly storage report that is expected to show another smaller-than-averagebuild that would allow for a further erosion of stock overhangs.

* Day-ahead power values could have a Thursday, Sept. 29, asexpectations for jumbled demand at the close of the workweek conspire with therecent volatility in natural gas futures trading. With the October gas futurescontract rolling off the board Sept. 28, the new front-month November contractwas unchanged early Thursday ahead of the opening bell.

SNL Image

New from RRA

* On Sep. 26, the Maryland Public Service Commissioninitiated aproceeding to review the state's electric distribution systems, thefocus of the which is to ensure that such systems are customer-centered,affordable, reliable and environmentally sustainable.

Quoted

"That 30-day period has lapsed and suffice it to saythat, given that we have not put out a press release and a Form 8-K on amaterial agreement, there is no material agreement to report at thistime," CenterPoint Energy CFO Bill Rogers regarding the company'sconsideration of the sale of its interest in Enable Midstream Partners toinvestment partner OGE Energy.

The day ahead

* The EIA natural gas storage report is due out today.

* Early morning futures indicators pointed to a loweropening for the U.S. equity markets. To view more SNL equity market indexes,click here.To view more SNL Energy commodities prices, click here.


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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