Financial Markets - Investor Desk

Business Strategy & Outlook

Genesis operates a mix of thermal (coal and gas) and hydro generation, with total annual production of approximately 7,000 GWh. The company’s hydro generation provides it with low-cost generation during times when there is sufficient rainfall and/or snowmelt. Conversely hydro generation can fall sharply when inflow to the firm’s lakes recedes because of insufficient rainfall. During such times, production from its thermal power plants can be ramped up to make up for the shortfall in hydro generation. Spot prices can increase dramatically during periods of low rainfall, reflecting the demand-supply mismatch caused because of lower nationwide energy output. Such times tend to favor Genesis as the excess generation is sold at higher prices. Consequently, Genesis’ profitability and margins can increase during periods of low rainfall and high electricity prices.

Genesis hedges its gas requirements by holding a 46% stake in New Zealand’s Kupe gas field. Under the current contract, Genesis is obligated to purchase the entire natural gas output from Kupe. This provides the firm with a reliable supply of gas to power its thermal plants and also underpins Genesis’ dual-fuel offering to its customer base. Genesis is also entitled to its share of LPG and oil from Kupe. The oil is exported, while LPG is on-sold to its residential and commercial customers. Kupe introduces oil price risk, though hedging helps in the near term. The main concern is that Kupe earnings will end in 10-15 years, depending on the extent to which its life can be extended through new oil and gas discoveries. This is a risk to Genesis’ earnings, cash flow, and dividends over the long term. As transmission lines are upgraded and more renewable energy is developed, Genesis will likely close some of its aging thermal generation units in the medium term.

Financial Strengths

Genesis Energy’s financial leverage increased following recent acquisitions, however, one can be comfortable given expectations for solid earnings growth, long average debt maturity profile and the ongoing dividend reinvestment plan. As of June 2022, gearing (as measured by debt/capital) was 36%, down slightly on last year. Net debt/EBITDA (adjusted for equity credit on subordinated debt and excluding one-off costs) was 2.7 times in fiscal 2022, within management’s target of 2.4-3.0 times. There’s a forecasted unadjusted net debt/EBITDA, which is the better way to judge financial strength, of 2.5 times in the next few years, which is reasonable. Guidance is for capital expenditure of up to NZD 80 million in fiscal 2023. The elevated capital expenditure for a few years before falling back to typical levels of below NZD 70 million per year. Nonetheless, free cash flow should remain strong.

Bulls Say

Persistently high wholesale electricity prices are flowing through to customer tariffs, supporting earnings growth.
A mix of thermal and hydro generation assets allows Genesis Energy to take advantage of high electricity prices during periods of low rainfall and low hydro storage.
The Pole 3 cable, linking the South Island to the North Island, reduces price disparity between the two islands and reduces location cost risk for all generators.

Company Description

Genesis Energy is one of New Zealand’s leading producers of electricity, accounting for more than 15% of the country’s total generation. The firm enjoys a strong retail presence, with the highest retail market share, at over 25%. The company has a mix of renewable and thermal assets, with the latter accounting for about 55%-60% of the firm’s overall production. The company has a 46% interest in the Kupe oil and gas field.

(Source: Morningstar)

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