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EPA sees no new coal plants from its CO2 rule, but it could still help industry

Global Multichannel Market Up 3.1% In 2018 As IPTV Subscriptions Overtook Direct-To-Home Platform

Flying Into The Danger Zone; Norwegian Air Shuttle

Banking

Street Talk Episode 39 - A New Era For Blockbuster Bank M&A

A New Era For Blockbuster Bank M&A


EPA sees no new coal plants from its CO2 rule, but it could still help industry

SNL Image

Scherer, a coal-fired power plant and one of the nation's top carbon dioxide emitters, stands in the distance in Juliette, Ga.
Source: Associated Press

Looser carbon dioxide limits for new coal-fired power plants unveiled by the Trump administration are unlikely to spur construction of any new coal-fired power generation on their own but could be a crucial piece of a broader strategy in the president's bid to revive coal.

The U.S. Environmental Protection Agency's proposed rule aims to "ensure any new coal plants built in the United States use the most advanced, clean coal technologies that have been adequately demonstrated." While the industry said the Obama-era limit essentially outlawed the construction of coal plants without cost-prohibitive carbon capture technology, the Trump administration's proposal moves the bar to a level already achieved by several coal plants running today.

Although the EPA's modeling does not account for other pending actions from the administration to support coal, the agency acknowledges that new coal plants are likely to remain an uneconomical prospect under current market conditions.

"The modeling demonstrates that coal-fired steam generation capacity is not projected to be built in the absence of any CO2 emissions standards," the EPA wrote. "Prevailing economics favor the construction of other types of capacity that are able to meet future demand at a lower overall cost."

The Obama-era rule set a limit of 1,400 pounds of CO2 per MWh for new and reconstructed coal-fired power plants. The new proposal would raise the limit to 1,900 pounds of CO2 per MWh for large coal-fired generating units and to 2,000 pounds of CO2 per MWh for smaller units.

The vast majority of the nation's existing coal fleet, at least 378 generating units, emit more CO2 than would be allowed by new plants under Trump's proposal. However, there are at least 67 power-generating units in the U.S. using coal as the primary fuel source and totaling roughly 39.2 GW of capacity that already emit carbon dioxide at a rate that would fall between the Obama-era standard and the new Trump proposal, according to an S&P Global Market Intelligence analysis of units for which unit level emissions and gross generation data is available. Some of the plants emitting less CO2 than allowed by the new Trump standard were built as early as 1957.

Longview Power LLC's advanced supercritical coal-fired power plant in West Virginia is capable of meeting the standard and has been in operation since 2011. While the plant cost around $2.0 billion and fell into bankruptcy shortly after it was built due to market changes and construction defects, President and CEO Jeffery Keffer said it now boasts the lowest dispatch cost of any fossil fuel plant in the PJM Interconnection and could be built today without as many problems.

Keffer said the company has advocated for a proposal like the one just released by the Trump administration, but over the past two years other factors have lined up against coal, including pressure from investors and financial institutions to move away from the fuel.

"A lot of effort has been put into trying to save existing, much older coal plants and the problem with that is those plants are becoming more and more uneconomic, more expensive to run, and not competing," Keffer said in an interview. "The older coal plants are not going to last. They're not economic. They're highly inefficient and regardless of what efforts are made to try to subsidize them, you can't subsidize them forever unless you're willing to pay a significant amount."

Even under high-demand growth projections, the EPA's estimate suggests, renewables and natural gas capacity additions are expected to pick up the slack instead of new conventional coal plants.

However, its modeling does not incorporate potential federal policy intervention that could come from the administration. The EPA specifically references "mechanisms to incorporate value for onsite fuel storage" — an allusion to so-far-unsuccessful efforts to incentivize coal plants in the name of national security and reliability in the caveats surrounding the accuracy of its model. It also does not account for the potential successes of a U.S. Department of Energy program seeking proposals to support research and engineering designs for smaller, flexible coal plants that could compete with and more closely mimic the operation of natural gas generation capacity.

Michelle Bloodworth, president and CEO of the American Coalition for Clean Coal Electricity, said proposed legislation aimed at providing tax credits for operating and maintenance expenses at existing coal-fired power plants could also spur coal development. Another important bill for the sector, she said, would expand a federal loan guarantee program for carbon capture and storage projects to also apply to high-efficiency, low-emissions coal plants.

"I don't think there's one silver bullet," Bloodworth said in an interview. "We're just hoping that it sends a signal — as there are more discussions around fuel security, resilience and reliability — of the importance of the coal fleet that would incentivize people to want to build and invest in new technology for the coal plants of the future."

The problem for the companies mining and selling coal is that the industry's primary customers, domestic utilities, are also facing social and economic pressure to move away from coal.

"Our customers need to feel confident in the generation investments that we're making," Duke Energy Corp. spokeswoman Kim Crawford said in recent comments about the company shutting down multiple coal units as it adds natural gas and renewable generation to its portfolio. American Electric Power Co. Inc. has factored future carbon regulations into the company's evaluation of generation resource options for many years and will continue to do so, spokeswoman Melissa McHenry said in a recent statement made before the Trump administration announcement.

While acknowledging the proposal is unlikely to result in a coal-fired power plant, the EPA points to the "option value" of a regulatory framework that gives power generators leeway to build a coal plant if they want to. People concerned about the climate implications of burning coal should not assume the administration's proposal is meaningless just because it projects zero new coal plant capacity, said Jack Lienke, regulatory policy director for the Institute for Policy Integrity at the New York University School of Law. While few expect the underlying market dynamic to change as much as would be needed to make coal plants preferable to natural gas generation, pricing and other energy trends are notoriously difficult to predict.

"I think the original rule was best viewed as a kind of risk management strategy, hedging against the risk that gas prices would be higher than expected, and that as a result conventional coal plants would be built without carbon capture technology," Lienke said. "The effect of repealing that rule is that it reopens the risk that if market conditions change unexpectedly, high-polluting coal plants will be built instead of low-emitting natural gas plants."



Global Multichannel Market Up 3.1% In 2018 As IPTV Subscriptions Overtook Direct-To-Home Platform

Highlights

With year-over-year growth of 14.3%, IPTV was the fastest-growing of the three major pay TV platforms in 2018

Number of multichannel subscribers worldwide is modelled to grow at a 2.4% CAGR over the next five years from 1.07 billion in 2018 to 1.21 billion in 2023.

Global multichannel economy generated $230.06 billion in video service revenues in 2018, which are projected to increase to $245.41 by 2023.

Feb. 18 2019 — In 2018, IPTV overtook direct-to-home as the second-largest multichannel platform in the world by subscribers after cable, accounting for 23.4% of the total market of 1.07 billion. With year-over-year growth of 14.3%, IPTV was the fastest-growing platform in 2018, driven by large subscriber additions in Asia-Pacific and, to a lesser extent, Western Europe. Over the next five years, IPTV is projected to post a 7% subscriber CAGR, second only to pay digital terrestrial television with a projected 8.5% five-year CAGR.

While cable remains the dominant multichannel platform globally, cable subs are modeled to continue declining over the next five years at a 0.3% CAGR, largely due to migration to IPTV in Asia and Western Europe.

China, India and the USA remain, by far, the largest multichannel markets, collectively claiming 57% of the global subscriber total in 2018. China and India alone are expected to account for half of the global market by 2023.

The global multichannel economy generated $230.06 billion in video service revenues in 2018, a 1.1% year-over-year increase, while multichannel penetration breached 60% by year-end. North America remains the most lucrative multichannel region accounting for over half of global revenue.

The effects of cord cutting are only observed in North America where multichannel subscribers, revenue and penetration are projected to decline in the foreseeable future, as well as in a handful of oversaturated markets, including Singapore and Hong Kong. In Europe, the biggest threat to traditional multichannel services is posed by free-to-air DTT and lies in the integration of over-the-top and catch-up TV services into DTT platforms as well as the ability to stream channel packages via hybrid boxes.

Global multichannel market overview

Kagan estimates that in 2018, the global multichannel market grew by 3.1% year over year, down from 3.9% in 2017, as rapid subscriber growth is slowing down in China. After the global multichannel market breached 1 billion subscribers in 2017, 32.3 million new homes adopted pay TV services in 2018 to reach 1.07 billion multichannel homes by year-end. We project that the global multichannel household growth will continue to decelerate in the foreseeable future with most markets across Europe, North America and advanced multichannel markets of the Asia-Pacific reaching saturation. The global market is forecast to post 2.7% year-over-year gains in 2019 with a 2.4% 2018-2023 CAGR.

Global multichannel video subscriptions are forecast to increase to 1.21 billion by 2023, adding 136.3 million net subs over a five-year period, while multichannel penetration is forecast to increase to 61.2% in the next five years, up from 60.1% in 2018.

Global multichannel subscribers by platform

While cable TV is expected to remain the largest platform on a global scale in the next five years, its share is forecast to decline from 52.3% in 2018 to 45.8% by 2023, largely due to analog subscriber churn and market share gains by IPTV operators. IPTV, the fastest-growing of the three major pay TV platforms, is modeled to capture a 23.2% market share by 2023.

Global multichannel revenue

The global multichannel economy generated $230.06 billion in video service revenues in 2018, a 1.1% year-over-year increase, with more than half earned by North American pay TV providers. The region's pay TV operators, however, lost 2.4% revenue year over year due to steep subscriber declines, despite growing average revenues per user. Western Europe remained the second-largest multichannel economy, accounting for only 17.7% of the global total in 2018. Latin American multichannel revenues expressed in U.S. dollars declined in 2018, mainly due to exchange rate fluctuations in most of the region's markets.

Given its comparatively high video service ARPUs, North America is expected to remain the most lucrative multichannel economy in the coming five years, despite being only the third-largest by subscribers and experiencing subscriber declines. The region is modeled to account for 43.2% of global video service revenues by 2023. Despite having the lowest multichannel ARPUs among the six regions analyzed, Asia is projected to overtake Western Europe as the second-largest multichannel economy by 2023, due to the sheer size of its market accounting for 18.8% of global multichannel revenue.

IPTV remains the fastest-growing multichannel platform, except in North America and the Middle East and Africa, where increasing pay DTT rollouts are driving revenue growth. Pay DTT is the only platform in Western Europe that is losing revenues, largely due to falling ARPUs. Although cable experienced overall subscriber declines in Western Europe and Asia in 2018, revenues increased on the back of digital subscriber and ARPU gains.

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Global Multichannel Market Up 3.1% in 2018 as IPTV Subscriptions Overtook Direct-To-Home Platform

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Global multichannel market up 3.1% in 2018 as IPTV subscriptions overtake DTH

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Credit Analysis
Flying Into The Danger Zone; Norwegian Air Shuttle

Highlights

This analysis was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global. This is not investment advice or a stock suggestion.

Feb. 13 2019 — The headwinds are picking up for Norwegian Air Shuttle ASA (“Norwegian”), the eighth largest airline in Europe. The carrier has been battling with rising fuels costs, increased competition from legacy carriers, and persistent aircraft operational issues. Norwegian’s problems are a continuation of what have been turbulent months for budget airlines in Europe resulting in a collapse of Primera Air, based in Denmark, near-default of WOW air, Iceland’s budget carrier, and most recently bankruptcy of Germania.

When we pull back the curtain and review the creditworthiness of European airlines to explore further some of the causes for Norwegian’s turbulent period, we see Norwegian’s business strategy and financial structure have made the carrier highly exposed. Coupled with the traditionally slow winter season, the airline may have to navigate through the storm clouds forming on the horizon.

A View From Above

S&P Global Market Intelligence has developed CreditModelTM Corporates 2.6 (CM2.6), a statistical model trained on credit ratings from our sister division, S&P Global Ratings. The model combines multiple financial ratios to generate a quantitative credit score and offers an automated solution to efficiently assess the credit risk of both public and private companies globally.1 Within CreditModel, the airline industry is treated as a separate global sub-model to better encompass the unique characteristics of this industry.

Figure 1 shows the overview of S&P Global Market Intelligence credit scores obtained using CreditModel for European airlines. Norwegian’s weak position translate into the weakest credit score among its competitors. The implied ‘ccc+’ credit score suggests that Norwegian is vulnerable to adverse business, financial, or economic conditions, and its financial commitments appear to be unsustainable in the long term. In addition to Norwegian, Flybe and Croatian Airlines rank among the riskiest carriers in Europe and share a similar credit risk assessment. The airlines with the best credit scores are also Europe’s biggest airlines (Lufthansa, Ryanair, International Airlines Group (IAG), and easyJet). The exception among the top five European airlines is Air France-KLM, which is crippled by labour disputes and its inability to reshape operations and improve performance.

Figure 1: Credit Risk Radar of European Airspace
Overview of credit scores for European airlines

Source: S&P Global Market Intelligence. For illustrative purposes only.
Note: IAG operates under the British Airways, Iberia, Vueling, LEVEL, IAG Cargo, Avios, and Aer Lingus brands. (January 3, 2019)

S&P Global Market Intelligence’s sister division, S&P Global Ratings, issued an industry outlook for airlines in 2019 noting that the industry is poised for stability.2 It stated the global air traffic remains strong and is growing above its average rate at more than 6% annually. The report also cited rising interest rates dampening market liquidity while increasing the cost of debt refinancing and aircraft leases. Oil prices are expected to settle, and any further gradual increases in oil prices are expected to be compensated by rising airfares and fees. The most significant risks for airlines are geopolitical. Potential downside scenarios include a crisis in the Middle East or other disruptions in oil, causing oil prices to spike. The possibility of trade wars and uncertainty surrounding the Brexit withdrawal agreement represent additional sources of potential disruption or weakening in travel demand.

Flying into the danger zone

Although Norwegian has so far dismissed any notion of financial distress as speculation, it has simultaneously implemented a series of changes to prevent further turbulence.3 The airline announced a $230mm cost-saving program that included discontinuing selected routes, refinancing new aircraft deliveries, divesting a portion of the existing fleet, and offering promotional fares to passengers to shore up liquidity.

In Figure 2, we rank Norwegian’s financial ratios within the global airline industry and benchmark them against a selected set of competitor European budget carriers (Ryanair, easyJet, and Wizz Air). Through this chart, we can conclude that Norwegian’s underlying problems are persistent and the company’s financial results are weak. Norwegian’s business model of rapid growth and a debt-heavy capital structure have resulted in severe stress for its financials. Norwegian ranks among the bottom 10% of the worst airlines in the industry on debt coverage ratios, margins, and profitability. This is in sharp contrast to other European budget carriers, which are often ranked among the best in the industry. On the flip side, Norwegian’s high level of owned assets represents its strong suit and gives the carrier some flexibility to adjust its operations and improve performance in the future.

Figure 2: Flying at Low Altitude
Norwegian’s financial ratios are among the worst in the industry

Source: S&P Global Market Intelligence. For illustrative purposes only. (January 3, 2019)
Note: Presented financial ratios are used in CreditModelTM Corporates 2.6 (Airlines) to generate quantitative credit score in Figure 1.

Faster, Higher, Farther

Norwegian has undergone a rapid expansion in recent years, introducing new routes and flying over longer distances. Between 2008 and 2018, the carrier quadrupled its fleet from 40 to 164 planes.4 This enabled it to fly more passengers and become the third largest budget airline in Europe, behind Ryanair and easyJet. However, unlike its low-cost rivals, Norwegian ventured into budget long-haul flights. After establishing its new base at London Gatwick, it started operating services to the U.S., South-East Asia, and South America.

As a result of this expansion, Norwegian’s capacity as measured by available seat kilometres (ASK) and traffic as measured by revenue passenger kilometres (RPK) grew nine-fold between 2008 and 2018, as depicted in Figure 3. By offering deeply discounted fares, the carrier was able to attract more passengers and significantly grow its revenues, which were expected to reach $5bn in 2018. However, to be able to support this rapid growth, Norwegian accumulated a significant amount of debt and highly increased its financial leverage. This rising debt is putting Norwegian under pressure to secure enough liquidity to repay maturing debt obligations.

Figure 3: Shooting for the Stars
Norwegian’s rapid growth propelled by debt

Source: S&P Global Market Intelligence. All figures are converted into U.S. dollars using historic exchange rates. Figures for 2018 are estimated based on annualized YTD 2018 figures. For illustrative purposes only. (January 3, 2019)

Norwegian’s strategy to outpace growing debt obligations by driving revenue growth is coming under pressure. The data tells us that expansion to the long-haul market and the undercutting of competitors to gain market share proved to be costly and negatively impacted Norwegian’s bottom line. Operational performance, measured as unit revenue (passenger revenue per ASK) and yield (passenger revenue per RPK), have been slipping continuously since 2008, as depicted in Figure 4. Negative free operating cash flow required Norwegian to continuously find new sources of capital to finance its operations, and profitability suffered. The carrier was able to ride a tailwind of low oil prices and cheap financing for a while, however, the winds seem to be turning.

Figure 4: Gravitational Pull
Slipping operational and financial performance

Source: S&P Global Market Intelligence, Norwegian Air Shuttle ASA: “Annual Report 2017”, Norwegian Air Shuttle ASA: “Interim report - Third quarter 2018”. Figures for 2018 are estimated based on annualized YTD 2018 figures. For illustrative purposes only. (January 3, 2019)

Norwegian’s plan to outrun a looming mountain of debt obligations is resulting in a turbulent flight. While growing its top line, the carrier has been unable to convert increased capacity and traffic into consistent profit. With a stable industry outlook and cost-cutting measures in place, Norwegian lives to fly another day. However, any additional operational issues or adverse macroeconomic developments could send Norwegian deep into the danger zone.

Learn more about S&P Global Market Intelligence’s Credit Analytics models.
Learn more about S&P Global Market Intelligence’s RatingsDirect®.

S&P Global Market Intelligence leverages leading experience in developing credit risk models to achieve a high level of accuracy and robust out-of-sample model performance. The integration of Credit Analytics’ models into the S&P Capital IQ platform enables users to access a global pre-scored database with more than 45,000 public companies and almost 700,000 private companies, obtain credit scores for single or multiple companies, and perform scenario analysis.

S&P Global Market Intelligence’s RatingsDirect® product is the official desktop source for S&P Global Ratings’ credit ratings and research. S&P Global Ratings’ research cited in this blog is available on RatingsDirect®.

1 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.
2 S&P Global Ratings: “Industry Top Trends 2019: Transportation”, November 14, 2018. https://www.capitaliq.com/CIQDotNet/CreditResearch/viewPDF.aspx?pdfId=36541&from=Research.
3 Norwegian Air Shuttle ASA, “Update from Norwegian Air Shuttle ASA”, press release, December 24, 2018 (accessed January 3, 2019), https://media.uk.norwegian.com/pressreleases/update-from-norwegian-air-shuttle-asa-2817995.
4 Norwegian Air Shuttle ASA: “Investor Presentation Norwegian Air Shuttle”, September 2018.

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Listen: Street Talk Episode 39 - A New Era For Blockbuster Bank M&A

Feb. 08 2019 — The days of large bank buyers pursuing deals to plant a flag in a new market might be gone with acquirers now seeing deals as a way to support investments in technology. BB&T touted that prospect when discussing its landmark merger of equals with SunTrust. In the episode, we spoke with S&P Global Market Intelligence colleagues Zach Fox and Joe Mantone about the drivers of BB&T/SunTrust merger, how much i-banks advising on the deal stand to earn and the prospect of other similarly sized transactions emerging in the future.

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A New Era For Blockbuster Bank M&A

Feb. 08 2019 — The days of large bank acquirers pursuing deals to plant a flag in a new market might be receding as more buyers see transactions as a way to support much needed investments in technology.

In the latest Street Talk podcast, we discuss how BB&T Corp. touted that prospect when announcing its merger with SunTrust Banks Inc. and talk about the implications for future big-ticket transactions.

BB&T said the deal, one of the largest in U.S. banking history, will create a premier financial institution fueled by increased capacity to invest in innovation and talent. That stands in stark contrast to other blockbuster deals announced before the financial crisis, when buyers sought to create financial supermarkets or extend their footprints to new markets.

The size of BB&T's landmark transaction might have caught some members of the investment community off guard since Chairman and CEO Kelly King suggested the company was focused on organic growth and internal initiatives to drive costs lower. Still, while the merger of equals, the largest in BB&T's history, might have come as a surprise, it is part of a small group of large deals that received applause from the Street. The projected tangible book value accretion certainly played a role, but King also emphasized that the expansion would allow BB&T to achieve its previously stated goal of investing in technology to meet growing client demands.

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"We'll transform platforms to drive out cost, that's important, supporting a more technologically enabled business. And we will gain incremental efficiencies through automation by enabling faster, smarter and more secure way of doing business," King said on a call to discuss the deal.

Investment bankers have suggested others could follow BB&T's move and use cost savings from transactions to upgrade technological offerings. Some advisers even predicted an increase in larger deals before the BB&T/SunTrust transaction surfaced, arguing that regional banks needed to play catch up with the nation's largest institutions and upgrade technology and digital channels to keep their clients happy.

For his part, King emphasized that the world has changed considerably, even in just the last 12 months. King echoed comments made during BB&T's investor day in November 2018, when the company rolled out a new initiative, dubbed "Disrupt or Die," focused on improving efficiency while investing in delivery platforms.

"We talked about disrupt to thrive. And this is it, this is kind of the ultimate disrupt to thrive," King said on the SunTrust call.

That theme has recently become more common in larger bank deals. Chemical Financial Corp. and TCF Financial Corp., for instance, highlighted the opportunity to invest in technology as a combined franchise when discussing their $3.55 billion MOE announced a few weeks ago. The companies said the deal would allow them to invest and innovate more efficiently, enhance customer-facing digital service offerings and streamline internal systems and processes.

WSFS Financial Corp. offered a similar assessment when announcing plans to buy Beneficial Bancorp Inc. for $1.5 billion in August 2018. While WSFS took heat for the price paid on the deal, the buyer outlined plans to use some expected cost savings to invest in digital channels and shrink its branch network considerably.

"This combination allows us to economically address the question in every bank's boardroom," WSFS Chairman Mark Turner said on the call. "That is, how and when are we going to adjust to the new realities of banking delivery to meet the changing customer behavior and their needs."

The Street seems to think it makes sense to spend on technology to play offense. Jeff Davis, managing director at Mercer Capital and a S&P Global Market Intelligence contributor, said in a recent blog post that scale might be required to protect existing returns in the face of improving technology. He said the Amazon effect could apply to deposit pricing as "informed depositors with mobile technology" could force increased competition. Davis said the same thing occurred in the asset management business, where cost-conscious investors utilized widely available information and easy-to-use technology to upend the industry's pricing model.

BB&T seems to recognize the threat of fintech and other technology providers creeping into its space. As King noted on the conference call to discuss the SunTrust merger, he wants to get ahead of that sea change and lead rather than follow.

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