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FirstEnergy CEO highlights gas challenges; DTE Energy buys in

Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

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

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

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


FirstEnergy CEO highlights gas challenges; DTE Energy buys in

As DTE EnergyCo. unveiled its latest plans to tap into the booming gasmarket, FirstEnergy Corp.'stop executive said the shale revolution has provided more obstacles thanopportunities for the company's competitive generation business.

"We live in a very geographically challengedarea," FirstEnergy President and CEO Charles Jones Jr. said Sept. 27 at theWolfe Research Power and Gas Leaders Conference in New York.

"Clearly, our competitive business is in a difficultlocation. We sit right on top of the Utica and Marcellus shale," Jonessaid. "Gas prices in our region are at very low prices [and] have loweredthe overall electric price significantly. Good for customers, in the shortterm, but obviously a strain on this business."

Jones, appearing on a panel with Chairman and CEO LeoDenault, explained how the power business has changed since 2008, when hesupervised FirstEnergy's commodities operations.

The CEO noted that the combined fleets of FirstEnergy andAllegheny Energy Inc.— which FirstEnergy later acquired — could generate 110 million MWh of electricityand power prices were $65/MWh or higher "around the clock … pretty muchthat entire year." In addition, gas prices ranged from $9.50/Mcf to$14.50/Mcf that year, he said.

"Two things happened. We had a recession that affectedthe economy particularly hard in the region that we serve and there was atechnological breakthrough with shale, and we happen to sit right on top ofit," Jones said. "Today, with the fleet that we have left, we canmake about 80 million MWh [of electricity] and the price is generally below$30. It's not hard math to figure out what that did to the competitivebusiness."

FirstEnergy currently operates more than 9,400 MW of coalgeneration primarily in Ohio, Pennsylvania and West Virginia, which sit atopthe Marcellus and Utica shale in the Appalachian Basin. The company, however,only operates slightly more than 1,400 MW of gas-fired generation in Ohio andPennsylvania, according to SNL Energy data.

DTE Energy, meanwhile, on Sept. 26 announced it plans tobuy multiplemidstream gas assets in the Appalachian Basin from and forapproximately $1.3 billion, further diversifying a business that includesmidstream assets and the utilities DTE Gas Co. and DTEElectric Co.

"These transactions will significantly increase ourmidstream presence in the Appalachian basin," DTE Energy Chairman and CEOGerard Anderson said in a news release announcing the deal. "The acquiredassets are in a productive area of the Southwest Marcellus/Utica region andhave expansion potential."

The systems move natural gas from the Marcellus and Uticashale regions to multiple markets.

DTE followed the midstream acquisition deal with a Sept. 29announcement that it plans to build 1,000 MW of natural gas capacity inMichigan to replace planned coal plant retirements through 2023.

FirstEnergy Corp. is seeking regulatory help to keep baseload generation, such as its massive W.H. Sammis coal plant in Ohio, operating.

Source: FirstEnergy Corp.

Regulatory help

FirstEnergy, which has not invested as heavily in gasgeneration, is seeking regulatory help for baseload coal and nuclear generationin Ohio.

The company has modified its electric security plan and generationrider, approved bythe Public Utilities Commission of Ohio in March, following to intervene.

Jones said the "very complicated case," initiallyfiled in August 2014, has been through three different PUCO chairmen, but heexpects a final decision in the next four to six weeks.

The CEO said after the case is resolved, FirstEnergy plansto have discussions with policymakers, both regulators and legislators, in allthe states it operates in to find out what their long-term vision is forgeneration.

"I think the data clearly shows that deregulatedstates' customers are paying more today and have paid more consistently sincethey deregulated than regulated state customers pay. The data also shows thatderegulated states, for the most part, have become more and more net importersof generation than what they were when they deregulated," Jones said."I think the data, particularly in some of the states that we serve — Ohioand Pennsylvania, in particular — shows that it's had a negative impact on theindustrial economy of those states."

Jones said the integrated model is not the right way to dobusiness for FirstEnergy's customers, so if regulators continue to stick withthis plan "then our strategy is going to be to find a way to get out ofcompetitive generation."

"How do you do that? Some of that is you're just goingto close units that don't make economic sense. You're probably going to sellsome units that have value and then ultimately we'll see where that takesus," he said.

Jones, however, reiterated that discussions withpolicymakers around some sort of nuclear subsidy plan, reregulation or assettransfers must take precedence over any decision with FirstEnergy's competitivebusiness.

"There's a lot of discussion that needs to happenbefore I see us just jettisoning that part of the company. I don't think that'sthe right thing to do for customers either," he said.

Separation plan

Both Jones and Denault discussed the challenges associatedwith their respective merchant businesses.

Jones said in July that the company will look at"allalternatives" for its competitive business, including the saleor deactivation of units, in response to challenging conditions in the market.

"We own a competitive generation fleet that I think,long-term, doesn't fit in the mix of the type of company that we want tobe," Jones said at the Wolfe Research conference. "We are movingtowards being more of a regulated company."

More than 80% of the company's annual earnings comes fromits regulated businesses "and we're positioning each of those to grow aswe move into the future," he added.

UBS Securities LLC contendsFirstEnergy "will need to consider spinning off, shutting or selling[FirstEnergy SolutionsCorp.] assets to improve credit metrics."

"We're improving. We clearly have some issues with ourbalance sheet that we're continuing to work on," Jones said. "Therate cases in Pennsylvania and Ohio, we hope, will position us [so] that we canbe talking about … more of the types of investments we're going to be makingand where we're going to make them."

Denault noted that Entergy's focus of separating itsregulated and merchant businesses is "one that we've had for quite sometime."

"The volatility associated with the merchant businessand the vagaries of the market there are so much different than what we see aswe look at what's going on in the regulated utility business that we've neverreally viewed those as businesses that should be together," Denault said."That's why we tried to spin them, sell them and that sort of thing.

"Our objective there is exactly the same. What we'vehad to do is adapt to the marketplace."


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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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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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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