Genesis Energy (ASX:GNE)

Marc England
CEO
Market Cap (AUD): 3.12B
Sector: Utilities
Last Trade (AUD): 3.05 +0.06 (+2.01%)
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1. About

Genesis has a Retail business, a Generation business and an interest in the Kupe oil and gas field.

Genesis is a diversified energy company. The Company sells electricity, natural gas and LPG through its retail brands. The Company generates electricity, and trade electricity and natural gas, through its Generation business. The Company also has a 46% interest in the Kupe Joint Venture which owns the Kupe oil and gas field.

The Company is New Zealand's largest electricity and gas retailer, supplying energy through its two retail brands – Genesis and Energy Online – to more than 650,000 customer connections across New Zealand. The Company also own and operate a portfolio of thermal generation and renewable generation assets located in different parts of New Zealand.

Genesis' portfolio of generation assets comprises:

  • Thermal Generation: At 953 MW, the Huntly Power Station is the largest electricity generation facility in New Zealand by capacity. It is made up of two modern gas fired and two gas/coal fired generating units.
  • Renewable Generation: Genesis has three hydro schemes Tongariro (361.8 MW), Waikaremoana (138.0 MW) and Tekapo(179.0 MW). These schemes comprise eight power stations. Six are located in the North Island and two in the South Island. The Company also have a 7.3 MW wind farm at Hau Nui in the North Island. This geographical spread of generation helps reduce the impact of localised dry periods on Genesis' earnings.

2. Business model

 

The Company operates the following divisions:[1]

 

Division

Revenue ($M)

% of Revenue

% of Profit (before Int & Tax)

Profit drivers[2]

Customer

$1,453.6

63.1%

30.5%

  • Sustainable growth in FY18 as its integrated portfolio, acquisitions and strategy execution delivered EBITDAF of $361 M, 8% higher than the prior financial year. Net profit fell to $20 M due to non-cash fair value adjustments, however free cash flow and dividends increased
  • EBITDAF guidance for the full year ended 30 June 2019 is in a range of between $350 M to $370 M. This assumes average hydrological conditions, and includes the forecast impact from the planned Huntly Unit 5 mid-life outage estimated at a 50 day duration. Capital expenditure guidance for FY19 is up to $85 M

Wholesale

$1,358.7

59.0%

49.4%

Kupe

$158.6

6.9%

32.0%

Corporate

$0.8

0.0%

(11.8%)

Inter-Segment Items

($667.2)

(29.0%)

N/A

3. Strategy

 

Key strategies include:[3]

 

Emissions

  • Committed to not use any coal after 2025 in normal market conditions. Intention to phase out coal use completely by 2030
  • Reduce and offset non-generation carbon emissions
  • Supported by: transition 100% of light vehicles to EV/hybrid by 2020 and 50% of trucks by 2025
  • Provide transparency of emissions information for its customers through energy monitoring tools, so they can see the impact of their energy choices on their carbon footprint.

 

Water and wildlife

  • Work in partnership with iwi on at least one project each year, with a focus on improving the quality and mauri of water
  • Increase its focus on predator control using digital innovation to deliver improved outcomes for New Zealand’s native bird population.

 

Its Communities

  • School-gen website used in more than half of New Zealand schools by 2020

 

Its People

  • To become an Accredited Living Wage employer by 2020
  • Ambition to have 40:40:20 gender split at leadership level (40% male, 40% female, 20% either) and improve ethnic diversity at all levels to better reflect its communities and customers

 

Putting control in its customers’ hands

  • 40% of customers using information and insight via its digital tools to make active choices about their day-to-day energy use by 2025
  • 200,000 customers actively providing more information about their homes to access advanced energy services by 2021.

 

Delivering New Zealand’s energy future

  • Create at least two new products that help customers make sustainable choices by 2020
  • Ensuring those material suppliers that help us to innovate are also committed to operating in a sustainable way

4. Markets

 

The Company operates in markets including:[4]

 

Industry (Australia)

Industry Revenue

Annual Growth (13-18)

Electricity Retailing

    $50 billion (2017)

5.3%

Electricity Distribution

  $17 billion (2018

(3.3%)

 Gas Supply

   $11 billion (2018)

2..3%

Hydro-Electricity Generation

      $1 billion (2017)

10.2%

5. Competition

 

Major competitors include[5]

 

  • Contact Energy Limited (NZE: CEN)
  • Meridian Energy Ltd (NZE: MEL)
  • Trustpower Ltd (NZE: TPW)

6. History

 

1998[6]  

Genesis Energy founded

 

2010  

Genesis Energy acquired South Island wind farm development project

 

2013  

Genesis Energy announced a change of name from Genesis Power Limited to Genesis Energy Limited

 

2014  

Genesis Energy announced the gas sale to Contact Energy

 

2015  

Genesis Energy Limited (GNE): Support for Meridian Tiwai contract

Genesis Energy today noted that Solid Energy has announced it has been placed into voluntary administration. Solid Energy is a supplier of fuel to the Huntly Power Station

Genesis Energy announced that it has exercised its right under the terms of its Coal Supply Agreement with Solid Energy to terminate that agreement

 

2016  

Genesis Energy Limited (GNE) – Acquisition of New Zealand Oil & Gas’ 15% Share of the Kupe Joint Venture   

Signed swaption contract with Meridian Energy Limited

 

2017  

Genesis Energy drives customer-centric growth strategy with purchase of Nova Energy retail LPG business

 

2018  

Genesis Energy Limited ("Genesis") confirmed today that NZ$200 million of subordinated unsecured capital bonds (“Capital Bonds”) have been allocated to market participants in the General Offer

7. Team

 

Board of Directors[7]

 

Barbara Chapman – Chairman

Catherine Drayton

Joanna Perry

Paul Zealand

Tim Miles

Maury Leyland

Doug McKay

 

Management Team

 

Marc England – Chief Executive

Chris Jewell – Chief Financial Officer

 

Executive General Manager, Corporate Affairs and Transformation (Vacant Position)

 

Tracey Hickman – Executive General Manager, Generation, and Wholesale

Jennifer Cherrington-Mowat – Executive General Manager, Technology and Digital[8]

Nigel Clark – Executive General Manager Customer Operations

James Magill – Executive General Manager, Product Marketing

Nicola Richardson – Executive General Manager, People, and Culture

Matthew Osborne – General Counsel and Company Secretary[9]


read more

8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2017/18 (ended 30 June):[10]

 

Division

Revenue ($M)

% Change

Profit (before Int & Tax) ($M)

 % Change

Customer

$1,453.6

5.2%

$109.8

0.2%

Wholesale

$1,358.6

28.3%

$178.0

1.1%

Kupe

$158.6

30.2%

$115.3

36.6%

Corporate

$0.8

(20.0%)

($42.6)

(13.3%)

Inter-Segment Items

($667.2)

(8.9%)

N/A

N/A

Total

$2,304.5

18.1%

$360.5

8.4%

9. Risk

 

Major risks include:[11]

 

Price Risk

The Group is exposed to movements in the spot price of electricity arising through the sale and purchase of electricity to and from the market. The Group is also exposed to movements in the spot price of light crude oil arising from sales of its share of oil from the Kupe production facility. The Group has limited exposure to changes in the sale price for gas and LPG, as most of the volume is forward sold

 

  • Electricity Sales and Purchases

The Group manages price risk in relation to electricity sales and purchases by entering into electricity swaps and options. Electricity swaps and options are either traded on the ASX or negotiated bilaterally with other energy companies and major customers. Electricity options are entered into as needs are identified and as counterparties seek to hedge their electricity purchase exposure. At balance date the Group had electricity option contracts giving counterparties the right to exercise call options and electricity cap contracts. The aggregate notional face value of the outstanding electricity swaps and options at balance date was $1,073.8 million (2017: $1,213.2 million).

 

  • Light Crude Oil Sales

The Group manages price risk in respect of oil sales by entering into price swap contracts that provide a fixed price for future oil sales. The Group’s Treasury policy sets minimum and maximum control limits ranging from between 50 per cent and 90 per cent for the first 12 months to between 25 per cent and 75 per cent for months 13 to 24. The aggregate notional value of the outstanding oil swaps at balance date was 37.8 million United States dollars (2017: 39.5 million United States dollars). The value of electricity and oil swaps are sensitive to changes in forward prices, and oil swaps are also sensitive to movements in foreign exchange rates. The following table summarises the impact an increase/decrease in these forward-pricing assumptions would have on the Group’s post-tax profit or loss for the year and on the Group’s cash flow hedge reserve using year-end exposures. The sensitivity analysis is based on the assumption that the relevant market prices (future electricity and oil price paths) had increased/ decreased by 10 per cent with all other variables held constant. A positive number represents an increase in profit or the cash flow hedge reserve

 

Foreign Currency Risk

The Group is exposed to foreign currency risk as a result of capital and operational transactions and borrowings denominated in a currency other than the Group’s functional currency (including the purchase and maintenance of capital equipment and the sale of gas and petroleum). The currencies giving rise to this risk are primarily the United States dollar and Japanese yen. The Group uses foreign exchange swaps to manage foreign exchange risk on capital and operational transactions. All significant capital project commitments and all capital purchase orders where exposure and currency levels are confirmed are hedged. All sales, operational commitments and purchase orders denominated in foreign currency over the equivalent of $500,000 New Zealand dollars are also hedged, in accordance with the Group’s Treasury policy. For ongoing operating commitments the equivalent of at least the next 12 months’ exposure must be hedged. For the currency exposure arising from the sale of oil and gas, the policy sets minimum and maximum control limits ranging between 50 per cent and 90 per cent for the first 12 months to between 25 per cent and 75 per cent for months 13 to 24 and zero per cent to 50 per cent for months 25 to 36. The Group uses CCIRS to manage foreign exchange risk on overseas borrowings. All interest and principal repayments are hedged.

The combination of the foreign-denominated debt and CCIRS results in a net exposure to New Zealand floating interest rates and a fixed New Zealand-denominated principal repayment.

 

Interest Rate Risk

The Group is exposed to interest rate risk because the Parent borrows funds at both fixed and floating interest rates. The Group uses interest rate swaps to manage interest rate risk. The Group’s policy sets maximum and minimum control limits for fixed interest rate exposure. These range from between 50 per cent and 100 per cent of projected debt with an age profile of less than one year to a maximum of 50 per cent for projected debt with an age profile of greater than five years and a maximum of 20 per cent for projected debt with an age profile of greater than 10 years.

 

Credit Risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations, resulting in financial loss to the Group. The Group is exposed to credit risk in the normal course of business arising from trade receivables and with banks and financial institutions where short-term deposits are held. The Group is also exposed to credit risk arising from derivative counterparties defaulting on their contractual obligations. The Group is a producer and seller of electricity, gas, LPG and oil. In terms of wholesale sales to the national grid, credit risk is significantly reduced, as the Group purchases from the grid for its retail customer base with credit risk being limited to the net position on settlement. In addition, market security requirements in place ensure there is no significant credit risk for any one participant. Market participants are required to provide letters of credit to the market-clearing agent (NZX Limited), which would be called upon should any market participant default. Credit risk exposure arising from the supply of electricity, gas, LPG and oil to the market is mitigated owing to the Group’s large customer base and, in respect of its larger customers, the diverse range of industries they represent throughout New Zealand. The Group has adopted a policy of only dealing with creditworthy trade counterparties and obtaining collateral, where appropriate, as a means of mitigating the risk of financial loss from defaults. The Group also minimises its exposure to credit risk in this area through the adoption of counterparty credit limits and active credit-management practices, such as monitoring the size and nature of exposures and mitigating the risk deemed to be above acceptable levels. A bond is held as collateral from any post-paid electricity customer whose credit profile does not meet the standard set by the Group. The bond is managed in accordance with the terms and conditions outlined in the supply agreement with individual customers. The bond is returned to the customer at cessation of supply. The value of collateral held at balance date was $0.1 million (2017: $0.2 million). The carrying value of the bond is considered to approximate its fair value. Derivative counterparties and cash transactions are limited to high-credit-quality financial institutions and other organisations. The Group’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. The Group has no significant concentration of credit risk with any one financial institution. The carrying amounts of financial assets recognised in the balance sheet best represent the Group’s maximum exposure to credit risk at the reporting date.

 

Liquidity Risk

The Group’s ability to attract cost-effective funding is largely driven by its credit standing (Standard & Poor’s = BBB+). Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the spreading of debt maturities. Liquidity risk is monitored by continuously forecasting cash flows and matching the maturity profiles of financial assets and liabilities. The following table details the Group’s liquidity analysis for its financial liabilities and derivatives. The table has been drawn up based on the undiscounted cash inflows (outflows) for all financial liabilities and derivatives. Where the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the internally generated forward price curves existing at balance date. As the amounts included in the table are contractual undiscounted cash flows, these amounts will not reconcile to the amounts disclosed in the balance sheet.

References

  1. ^ Annual Report 2018, P. 34-35 https://www.listcorp.com/asx/gne/genesis-energy/news/genesis-energy-fy18-annual-report-1961665.html
  2. ^ https://www.listcorp.com/asx/gne/genesis-energy/news/preliminary-final-report-1961662.html
  3. ^ Annual Report 2018, P 18-19
    https://www.listcorp.com/asx/gne/genesis-energy/news/genesis-energy-fy18-annual-report-1961665.html
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=2147
    http://www.ibisworld.com.au/industry/default.aspx?indid=1826
    http://www.ibisworld.com.au/industry/default.aspx?indid=301
    http://www.ibisworld.com.au/industry/default.aspx?indid=2143
  5. ^ https://quotes.wsj.com/NZ/GNE
  6. ^ https://treasury.govt.nz/information-and-services/commercial-portfolio-and-advice/commercial-portfolio/genesis-energy-limited
    https://treasury.govt.nz/publications/soe-disclosure/genesis-power-limited-genesis-energy-acquires-south-island-wind-farm-development-project
    https://iknow.cch.co.nz/document/zntxtnewsUio2279258sl448588434/change-of-name-for-genesis-power-ltd
    Page 04
    http://member.afraccess.com/media?id=CMN://2A868904&filename=20150727/GNE_01644023.pdf
    https://www.listcorp.com/asx/gne/genesis-energy/news/genesis-energy-confirms-support-of-tiwia-contract-698923.html
    https://www.listcorp.com/asx/gne/genesis-energy/news/genesis-energy-response-to-solid-energy-701331.html
    https://www.listcorp.com/asx/gne/genesis-energy/news/genesis-energy-exits-coal-contract-702808.html
    https://www.nzx.com/announcements/252528
    https://www.listcorp.com/asx/gne/genesis-energy/news/genesis-energy-kupe-acquisition-1465550.html
    https://www.listcorp.com/asx/gne/genesis-energy/news/genesis-energy-acquisition-of-nova-energy-lpg-business-1584096.html
    https://www.listcorp.com/asx/gne/genesis-energy/news/genesis-energy-capital-bond-interest-rate-confirmed-1914711.html
  7. ^ https://www.genesisenergy.co.nz/board-of-directors
    https://www.genesisenergy.co.nz/investors/governance/executive-team
  8. ^ https://www.listcorp.com/asx/gne/genesis-energy/news/genesis-energy-change-in-officer-1954468.html
  9. ^ https://www.listcorp.com/asx/gne/genesis-energy/news/genesis-energy-general-counsel-appointment-1866992.html
  10. ^ Annual Report 2018, P. 34-35 https://www.listcorp.com/asx/gne/genesis-energy/news/genesis-energy-fy18-annual-report-1961665.html
  11. ^ Annual Report 2018, P. 56-59 https://www.listcorp.com/asx/gne/genesis-energy/news/genesis-energy-fy18-annual-report-1961665.html