GNE - Genesis Energy

[bull....]

GNE does not have the same ability to access the 'thin air capital' that comes from the appreciation of sufficient long lived renewable generation assets in the market that other power market players; like Mercury Energy, Meridian and Contact Energy have. GNE need their free cashflow for reinvestment far more than the others. If the company is not to shrink to oblivion, it is going to have to access some of that 'apparently free cashflow' soon IMO, for reinvestment purposes. That means lower dividends for shareholders.

SNOOPY

Genesis Energy says its 400 MW gas-fired E3p plant could cease year-round operations within five years as part of the company’s initiatives to reduce emissions from its generation activities.

if they build new plant they can borrow the capital and pay it back from there very good cash flows, there assets will last plenty long enough to support this

from there initial share offer

Castle Hill Wind Farm, where GenesisEnergy holds resource consents to establish a wind farm inthe northern Wairarapa. The potential site covers more than20,000 hectares and the consents allow up to 286 windturbines with a potential generation capacity of up to 860MW. Should this proceed, its scale is yet to be determined.The terms of the consents give Genesis Energy until 2023 to proceed.

pretty big

[Beagle]

WOW that could be quite a site / sight, 20,000 hectares of wind turbines making 860 MW !...could be a bit of a tourist attraction too !
Maybe they intersperse mega solar panels between the wind turbines as well ? Maybe I don't need to worry about declining earnings in the 2030's after all

[bull....]

WOW that could be quite a site / sight, 20,000 hectares of wind turbines making 860 MW !...could be a bit of a tourist attraction too !
Maybe they intersperse mega solar panels between the wind turbines as well ? Maybe I don't need to worry about declining earnings in the 2030's after all

exactly borrow the capital at these low rates makes perfect sense to build this project . the returns from these wind farms are huge that what ift are doing with long reach

i dont think they would need to reduce divs to cover the new debt from there div payout to free cash flow ratio , plenty of headroom

[Snoopy]

if they build new plant they can borrow the capital and pay it back from there very good cash flows, there assets will last plenty long enough to support this

from there iniGenesis Energy says its 400 MW gas-fired E3p plant could cease year-round operations within five years as part of the compatial share offer

Castle Hill Wind Farm, where GenesisEnergy holds resource consents to establish a wind farm inthe northern Wairarapa. The potential site covers more than20,000 hectares and the consents allow up to 286 windturbines with a potential generation capacity of up to 860MW. Should this proceed, its scale is yet to be determined.The terms of the consents give Genesis Energy until 2023 to proceed.

pretty big

OK Bull, let's see how such a construction project would stack up in cashflow terms. 860MW is a lot of power, and I would doubt the whole thing would go ahead in one hit. So let's say they go for 430MW to start with. Conveniently, when fully operational, that could compensate for the loss of Unit 5 at Huntly ( 403MW) , should management choose to shut it down. (In practice it would not compensate because it would only generate up to 430MW with optimum wind inputs - but I digress).

There is a bit of information on wind farm construction costs here:

http://www.windenergy.org.nz/the-cost-of-wind-energy

"The Ministry of Business Innovation and Employment in its latest Electricity Demand and Generation Scenarios Summary (August 2016) has estimated the long run marginal cost (LRMC) of wind energy at between $90 and $105 MWh. They also have a 10% lower cost model which has wind from $80+ MWh. Many in the industry now consider, with improvements in technology and the benefit of economies of scale from increased world-wide demand, wind farms can be built in New Zealand with a LRMC of $70 to $80 MWh."

That paragraph I have written above is encouraging in the sense that it suggests unlike other construction costs, the cost of building a wind farm may actually be coming down. However the wording is poor. A Long Run Marginal Cost must surely be expressed as 'per MWh' not 'MWh'. And in order to determine that cost, there must be an underlying assumption of what percentage of time the wind turbines are able to deliver their generating power. This would vary from site to site and the underlying figure is not given.

I am going to make a few crude ball park assumptions to drive this analysis further. I shall assume that the effective utilization rate of the wind resource is 20%. This means that over a year a 430MW wind power station will produce:

0.2 x 430MW x 365 x 24 = 753,000 MWh = 753GWh

of energy.

If the initial cost is set to cover 20 years of service without a major capital upgrade, then we are budgeting on total energy production of:

20 x 753GWh = 15,060GWh

$75/MWh construction costs (because the station would not get built unless construction costs were under the long run marginal cost) indicates a total construction budget of:

$75/MWh x 15,060,000MWh = $1,130m

Using a funding cost of 5%, the annual interest bill to service such a debt would be:

0.05 x $1,130m = $56.5m

The number of shares on issue are 1,000m

So the cashflow per share needed to service this loan is:

$56.5m / 1000m = 5.7c

Most recent twelve months of dividends amount to: 8.6cps + 8.45c = 17.05c

This means Genesis Energy shareholders can look forward to a dividend cut of:

5.7c / 17.05c = 33%

once the first half of this wind farm goes ahead.

Any Questions?

SNOOPY

[Snoopy]

Genesis Energy says its 400 MW gas-fired E3p plant could cease year-round operations within five years as part of the company’s initiatives to reduce emissions from its generation activities.

e3p is the new core of generation at Huntly. So I am quite surprised to hear that closure is a consideration for Genesis. If e3p is shut, along with the remaining Rankine units, that would mean 'Unit 5', a peaker supply unit, is the only generation at Huntly left. I am not sure that Genesis would keep Huntly open just for that.

More likely is that e3p would be re-purposed as a peaker station (this is how I would more likely interpret 'cease year round operations'), to be run in conjunction with a new Castle Hill Wind Farm.

Carbon charges significantly increasing are another specific headwind for Genesis that the other big four gentailers do not have.

From p14 AR2018 "Our carbon hedging strategy has saved us over $20 million this financial year and will provide an ongoing buffer against carbon price volatility in the coming years."

From p16 AR2018, the 'Carbon Dioxide Emissions' graph shows an emission profile of 1600kt CO2 (FY2017) to 2200kt CO2 (FY2018).

During 2016, New Zealand's Emission Trading Scheme changed to a domestic only model. A financial history of the NZ emissions trading scheme may be found here:

http://motu-www.motu.org.nz/wpapers/16_06.pdf

With the study period ending at the start of 2016, Emission Prices in the NZ ETS were trending upwards. As of April 2016, prices were more than $NZ13 per unit. Each unit corresponds to one tonne of CO2 emissions.

Current carbon prices can be tracked here:

http://www.carbonnews.co.nz/default.asp

On 29th April 2019, the last traded unit price was $25.65, up from a spot price of around $17 a year earlier.

If Genesis were to pay for the FY2018 emissions at an April 2018 spot price, the annual bill would be:

2,200,000 t x $17/ t = $37.4m

If Genesis were to pay for the FY2018 emissions at an April 2019 spot price, the annual bill would be:

2,200,000 t x $25.65/ t = $56.4m

This means, from a carbon trading scheme position, Genesis are looking at an underlying increase in Carbon Unit cost of $20m per year. (The actual price paid will be influenced by how well Genesis have managed to hedge their future payments, relative to their hedging last year). Putting this in 'cashflow per share' terms we are looking at a reduction in cashflow going forwards of:

$20m / 1,000m = 2cps

This would be an indicator of the kind of cashflow headwind a shareholder might expect, based on the 2018 carbon generation footprint going. forwards. This would likely flow through as a reduction in dividend if Huntly was being used for base load generation. With peak load generation the situation would be different because these higher carbon costs would likely be offset by higher wholesale electricity prices received.

SNOOPY

[bull....]

OK Bull, let's see how such a construction project would stack up in cashflow terms. 860MW is a lot of power, and I would doubt the whole thing would go ahead in one hit. So let's say they go for 430MW to start with. Conveniently, when fully operational, that could compensate for the loss of Unit 5 at Huntly ( 403MW) , should management choose to shut it down. (In practice it would not compensate because it would only generate up to 430MW with optimum wind inputs - but I digress).

There is a bit of information on wind farm construction costs here:

http://www.windenergy.org.nz/the-cost-of-wind-energy

"The Ministry of Business Innovation and Employment in its latest Electricity Demand and Generation Scenarios Summary (August 2016) has estimated the long run marginal cost (LRMC) of wind energy at between $90 and $105 MWh. They also have a 10% lower cost model which has wind from $80+ MWh. Many in the industry now consider, with improvements in technology and the benefit of economies of scale from increased world-wide demand, wind farms can be built in New Zealand with a LRMC of $70 to $80 MWh."

That paragraph I have written above is encouraging in the sense that it suggests unlike other construction costs, the cost of building a wind farm may actually be coming down. However the wording is poor. A Long Run Marginal Cost must surely be expressed as 'per MWh' not 'MWh'. And in order to determine that cost, there must be an underlying assumption of what percentage of time the wind turbines are able to deliver their generating power. This would vary from site to site and the underlying figure is not given.

I am going to make a few crude ball park assumptions to drive this analysis further. I shall assume that the effective utilization rate of the wind resource is 20%. This means that over a year a 430MW wind power station will produce:

0.2 x 430MW x 365 x 24 = 753,000 MWh = 753GWh

of energy.

If the initial cost is set to cover 20 years of service without a major capital upgrade, then we are budgeting on total energy production of:

20 x 753GWh = 15,060GWh

$75/MWh construction costs (because the station would not get built unless construction costs were under the long run marginal cost) indicates a total construction budget of:

$75/MWh x 15,060,000MWh = $1,130m

Using a funding cost of 5%, the annual interest bill to service such a debt would be:

0.05 x $1,130m = $56.5m

The number of shares on issue are 1,000m

So the cashflow per share needed to service this loan is:

$56.5m / 1000m = 5.7c

Most recent twelve months of dividends amount to: 8.6cps + 8.45c = 17.05c

This means Genesis Energy shareholders can look forward to a dividend cut of:

5.7c / 17.05c = 33%

once the first half of this wind farm goes ahead.

Any Questions?

SNOOPY

snoopy cost of debt is less than 5% by issuing bonds.

cost of building wind farms is declining each yr therefore costs today will be lower next yr and lower the next yr after that .... cost to build will be a lot lower than your assumption. also returns from wind are improving all the time.

56m or i would say less is easily covered by existing cash flows as they pay no where near 100% unlike cen who do , you could argue will need to reduce there div to pay for there new plant 1 day

model it on lower costs and higher returns and the proposition looks very attractive as a replacement to exisiting plant ...

[Jaa]

Genesis Energy says its 400 MW gas-fired E3p plant could cease year-round operations within five years as part of the company’s initiatives to reduce emissions from its generation activities.

Any thoughts on why the combined cycle gas powered stations lasted such short times in NZ? Sparky (15yr life) and Southdown (18yrs) are closed and Stratford (might get to 24yrs) and E3P (might get to 19yrs) are projected to close soon.

Yet, the Rankine units look like they will make it to 40 years? They are a lot more environmentally polluting while coal powered and still more polluting while gas powered (not combined cycle).

[Snoopy]

Snoopy cost of debt is less than 5% by issuing bonds.

Interest on Capital Bonds: $25.8m (AR2018, Note 8).
Capital Bonds on Issue over Year: ($426m +$424.4m) / 2 = $425.2m (AR2018 Note 24)

Indicative Bond Interest Rate = $25.8m / $425,2m = 6.1%

cost of building wind farms is declining each yr therefore costs today will be lower next yr and lower the next yr after that .... cost to build will be a lot lower than your assumption.

Cost of turbines coming down? The 'windenergy' website that I quoted would certainly suggest so. And the average of their lower suggested price range is what I did use in my calculation. Of course turbines require foundations and service roads. I doubt if the cost of that bit of the construction will be coming down. On the contrary, I expect it will rise.

Apparently the annual numbers of wind turbines being built worldwide has increased by eight times between 2007 and 2018. That should help production economies of scale.

also returns from wind are improving all the time.

From

https://newscenter.lbl.gov/2017/08/0...energy-prices/

"Increased rotor diameters, in particular, have begun to dramatically increase wind project capacity factors. For example, the average 2016 capacity factor among projects built in 2014 and 2015 was 42.6%, compared to an average of 32.1% among projects built from 2004 to 2011 and 25.4% among projects built from 1998 to 2001."

The 'capacity factor' is the average power generated, divided by the rated peak power. Naturally this is very 'site dependent' as well as 'turbine design dependent'.

56m or i would say less is easily covered by existing cash flows as they pay no where near 100% unlike cen who do , you could argue will need to reduce there div to pay for their new plant 1 day

model it on lower costs and higher returns and the proposition looks very attractive as a replacement to exisiting plant ...

Did you consider the reason that Genesis does not return all of their free cashflow to customers is that they need to retain some of it for reasons not related to building a new power station?

A problem is, even a huge windfarm development proposal like 'Castle Hill' wouldn't replace any of Genesis's existing plant. In times of low wind, e3p would still be required. to fill the gap. So Genesis will permanently have a higher cost structure if their 'Castle Hill' wind farm comes on stream.

SNOOPY

[Snoopy]

Any thoughts on why the combined cycle gas powered stations lasted such short times in NZ? Sparky (15yr life) and Southdown (18yrs) are closed and Stratford (might get to 24yrs) and E3P (might get to 19yrs) are projected to close soon.

I think it all comes down to external market factors. I don't think there is anything technically that would stop all these gas turbines being run for more than 20 years (with a suitable maintenance regime of course). But bringing in a new carbon trading regime could make a perfectly functional gas turbine 'market obsolete'.

Furthermore, if thermal power production was to be retained, there is probably enough design refinement over twenty years that would favour buying a new one for efficiency reasons. I don't think the Boeing 737 jet airliners built today run the same engines as the Boeing 737 jet airliners of twenty years ago, for example. Aircraft engines are just gas turbines when it comes down to it. And rebuilding an old gas turbine power station with a new gas turbine is probably still the cheapest way to produce power, if all other considerations are removed. Compared to the alternatives, gas turbines are cheap.

Yet, the Rankine units look like they will make it to 40 years? They are a lot more environmentally polluting while coal powered and still more polluting while gas powered (not combined cycle).

'Sparky' I see is Contact's Otahuhu Gas Fired power station in South Auckland that has now closed (for those like me who didn't know). The Rankine units may make 40 years. But they haven't been running continuously for 40 years! As an aside, I didn't know that the Rankine units when operating on gas were not combined cycle.

SNOOPY

[bull....]

Now, the Interim Climate Change Committee's report to the Government on the country transitioning to renewable electricity by 2035 has been delayed another two weeks after it was found that the policy would substantially increase electricity prices

https://www.tvnz.co.nz/one-news/new-...le-electricity


bigger dividends on the way