GNE - Genesis Energy

[bull....]

Its been very dry in the North Island and they are towards the lower end of guidance range.
Won't affect the dividend and doesn't change the medium term value of the company.

dry weather one off which can just as quickly be re couped this yr with a upgrade once we get rain. div still very nice in the mean time

[bull....]

i see moaningstar upgraded there price , must have realised it was and still is looking silly lol

[Snoopy]

It is now 'normalised result' reconciliation time. I am basing this calculation for the normalised profit of the whole of Genesis Energy on the published "Consolidated Statement of Income", on p31 of AR2016

EBITDAF	$335.3m
less Emission Unit Trading Net Gain {$21.0m-$15.5m}	($5.5m)
less One off Gain on value of Turbine Parts	($6.9m)
Total: Normalised EBITDAF	$322.9
less Net Finance Expense ($2.0m - $65.2m)	($63.2m)
less Depreciation, Depletion & Amortisation	($127.5m)
Total: NPBT (normalised)	$132.2
less Income Tax @ 28%	($37.0m)
Total: NPAT (normalised)	$95.2

Note that the declared after tax profit for Genesis Energy over FY2016 was $184.2m. Yet the 'normalised profit' (repeatable profit, pulling out one off events), is only a little more than half this figure (52%)!

I got a big shock when I carried out this calculation in 2016. Big enough to push me to sell out of Genesis Energy. But was I too hasty to react to a one off atypical year? With the continuing enthusiasm shown for Genesis Energy on this forum, maybe it is time to look again?

It is now 'normalised result' reconciliation time. I am basing this calculation for the normalised profit of the whole of Genesis Energy on the published "Consolidated Statement of Income", on p33 of AR2017

EBITDAF	$332.5m
less Emission Unit Trading Net Gain {$16.9m-$16.3m}	($0.6m)
add back Business Acquisition Costs	$6.9m
Total: Normalised EBITDAF	$338.8m
less Net Finance Expense ($1.6m - $62.1m)	($60.5m)
less Depreciation, Depletion & Amortisation	($174.6m)
Total: NPBT (normalised)	$103.7m
less Income Tax @ 28%	($29.0m)
Total: NPAT (normalised)	$74.7m

Note that the declared after tax profit for Genesis Energy over FY2017 was $118.7m. Yet the 'normalised profit' (repeatable profit, pulling out one off events), is only 63% this figure!

SNOOPY

[Snoopy]

I got a big shock when I carried out this calculation in 2016. Big enough to push me to sell out of Genesis Energy. But was I too hasty to react to a one off atypical year? With the continuing enthusiasm shown for Genesis Energy on this forum, maybe it is time to look again?

It is now 'normalised result' reconciliation time. I am basing this calculation for the normalised profit of the whole of Genesis Energy on the published "Consolidated Statement of Income", on p33 of AR2017

EBITDAF	$332.5m
less Emission Unit Trading Net Gain {$16.9m-$16.3m}	($0.6m)
add back Business Acquisition Costs	$6.9m
Total: Normalised EBITDAF	$338.8m
less Net Finance Expense ($1.6m - $62.1m)	($60.5m)
less Depreciation, Depletion & Amortisation	($174.6m)
Total: NPBT (normalised)	$103.7m
less Income Tax @ 28%	($29.0m)
Total: NPAT (normalised)	$74.7m

Note that the declared after tax profit for Genesis Energy over FY2017 was $118.7m. Yet the 'normalised profit' (repeatable profit, pulling out one off events), is only 63% this figure!

It is now 'normalised result' reconciliation time for FY2018 I am basing this calculation for the normalised profit of the whole of Genesis Energy on the published "Consolidated Statement of Income", on p25 of AR2018

EBITDAF	$360.5m
less Emission Unit Trading Net Gain {$42.0m-$43.7m}	($1.7m)
Total: Normalised EBITDAF	$358.8m
less Net Finance Expense ($1.0m - $75.3m)	($74.3m)
less Depreciation, Depletion & Amortisation	($205.7m)
Total: NPBT (normalised)	$78.8m
less Income Tax @ 28%	($22.1m)
Total: NPAT (normalised)	$56.7m

Note that the declared after tax profit for Genesis Energy over FY2018 was $19.8m. Yet the 'normalised profit' (repeatable profit, pulling out one off events), is 286% this figure. This is quite a contrast to the previous two years where 'declared profit after tax' was significantly greater than 'underlying profit after tax'. So what is it that has caused this turnaround?

Two items in the income statement have substantially reduced the reported NPAT. There has been a one off ($48.8m) revaluation downwards in the value of generation assets. There has been a substantial increase in income tax expense (to $50.5m), relating to 'items that will not be reclassified'. These items are not reflective of current year cashflows. So the $164m paid out in dividends over the year is reflective of neither the 'underlying net profit' nor the 'declared net profit'. The dividend payment is nevertheless 208% of the underlying net profit.

Some would say that dividend availability from the gentailers should be based on free cashflow, not net profit. This view is legitimate. But it conveniently ignores the fact that paying out a dividend in excess of NPAT is in effect giving shareholders their own capital back with a tax bill. It is not a tax efficient way to reward shareholders.

I am not motivated to re-enter Genesis Energy on the basis of updating by analysis. That is because the underlying ability for Genesis to pay imputed dividends is only roughly half what they have been paying. Halve the dividend yield you see posted on the websites and the yield on Genesis shares quoted today looks extremely unattractive. Shareholders (and potential shareholders) beware!

SNOOPY

[bull....]

snoopy there npat results have been all over the place last 10yrs ( history there) up some yrs down other yrs.

yet in the last 10yrs operating cash flow has increased markedly as well as dividends increasing. hence my view that sustainable dividends should be viewed from cash flow not npat

gne has the most room to increase divs of all the gentailers based on div payout to free cash flow which by the way i believe is how most of the gentailers measure

[Beagle]

Cashflow is King and how all the other gentailiers base their dividends.
These are a bond proxy Snoopy and all that matters is cash flow and their ability to pay dividends.

[Snoopy]

Cashflow is King and how all the other gentailers base their dividends.
These are a bond proxy Snoopy and all that matters is cash flow and their ability to pay dividends.

That sounds like rear vision mirror analysis to me Beagle. Yes I think Genesis have done extraordinarily well, given the rag tag of assets they were created from. And yes cashflow has been good.

But the cashflow has come from a depleting gas field and running down the existing power generating assets. Genesis have the most retail customers but do not have a matching power generating ability. Genesis have been particularly agile with the wholesale market participation to get around this. But for how long can they continue to out-think the other market players? The Rankine units are on their last legs and Mercury Energy has put their hand up to build the next major North Island based generation, not Genesis. Genesis had a trial program of installing solar panels on school roofs that could have been a pointed to the future. But where has this initiative gone under new CEO Mark England?

My impression is that Genesis is being asset stripped for cashflow. Surely a massive increase in Capex will be required soon or Genesis could become involved in the kind of price squeeze that has caused the likes of 'Flick' and other retailers short of generation so much recent pain.

Look through the front screen Beagle, and you will see the much touted free cashflow is anything but 'free'. If the free cashflow becomes 'not so free' then you fall back on relying on earnings for dividends. And if Genesis use normalised earnings as a basis for that, then dividends could halve. Guess which way the share price will go in sympathy?

SNOOPY

[Snoopy]

gne has the most room to increase divs of all the gentailers based on div payout to free cash flow which by the way i believe is how most of the gentailers measure.

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. Mercury needs no new capital to build their new wind farm. It is all funded by the increase in balance sheet value of those Waikato River dams. Genesis can't pull the same trick.

If the company is not to shrink to oblivion, Genesis is going to have to access some of that 'apparently free cashflow' soon IMO, for reinvestment purposes. That means lower dividends for shareholders.

SNOOPY

[blackcap]

Cashflow is King and how all the other gentailiers base their dividends.
These are a bond proxy Snoopy and all that matters is cash flow and their ability to pay dividends.

I would disagree with that statement Beagle if I may. Cashflow is king yes, but in the end you have no capital (it has depreciated) and your cashflow is zero. So you need to take that into account when valuing this company.
What is the DCF valuation of 16c, 16c, 17c, 17c, 18c, 18c, 19c, 19, ...... for 20 years and then a terminal value of zero when you do a NPV with a WACC of say 5%. Would be an interesting exercise. Over 20 years comes out to $3.21 (thanks Excel). But make the WACC 8%% and your valuation is only $2.00.

I know all very simple back of envelope stuff but I would worry about cash flows being sustainable ad infinitum.

[Beagle]

All good points so here's my rebuttal.

We are already in a very tight supply situation and that's not going to materially ease in the foreseeable future in my opinion.
GNE paid out just 79% of FCF in its last dividend leaving 21% headroom.
About a quarter of GNE's earnings come from Kupe which will gradually decline over a long period of time...I think conventional thinking is this gradually declines over 15 years but I suspect with new technologies for getting the most out of oil and gas fields this will be more like 20 years, (acknowledge this is speculative on my part).
I think their current substantial yield premium to other sector participants and FCF above that are more than sufficient mitigating factors / safety margin to offset against the slow tailing off of Kupe earnings over a very, very long period of time.
Rankine units, who knows their lifespan for sure ? GNE have said they'll stop operating them from 2030.

GNE have a road map to over $400m in EBITDAF by FY21 as clearly articulated at their most recent investor day which is a considerable uptick from the current years estimated ~ $365m.

For me GNE represents the "bird in the hand" aspect to these power companies and as only part of my portfolio in this sector my approach is simply that I'll worry about declining earnings in the 2030's and in the meantime bank over a decade's worth of significantly higher dividends than I get from the other gentailiers.

I have plenty of other companies that will grow dividends over time so have no qualms about owning a stake in one that may experience some decline in the 2030's.