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Zenith Energy Limited (ASX: ZEN) is a company from the Utilities sector and is specialized in personalized off-grid power generation and service models. On 5 June 2019, Zenith Energy Limited provided an update to the market related to its Purchase Agreement with Gascoyne Resources.
Background:
Under the Power Purchase Agreement (âPPAâ) between Zenith Energy Limited and Gascoyne Resources Limited (ASX: GCY), the company provides energy to GCY at its Dalgaranga mine site. The company acknowledged the formal advice to the market as well as the creditors that the Administrators (FTI Consulting) have specified their intention to continue to operate Gascoyne on a BAU basis (business as usual) while they look for recapitalization options. The administrators indicated that the company would be paid for providing energy during the review period as per the terms and conditions of the Power Purchase Agreement (PPA). The company will continue to look for options under the Gascoyne PPA and will update the market in case any information is available.
Impact:
The assessment of the company of its exposure to the possible outcomes of the Gascoyne Administration can have four potential outcomes as per the requirements of its PPA:
- In case the Administrator continues to operate Gascoyne as a going concern and confirms its obligation under the Power Purchase Agreement, then the company expects that there would be no or immaterial impact to its earnings. The company at present expects that it will not have any impact for FY2019 as the Administrator works through the review. However, the company might experience financial impact based on the duration taken by the Administrator to complete the review and its outcome.
- In case Gascoyne or the financiers of Gascoyne exercise their rights under the PPA to buyout the power plant assets, then the company will be receiving the cash payment that is sufficient to repay the debts which are secured against the project at the buyout date along with its margin on the remaining contract term.
- If Gascoyne wishes to terminate for convenience, the company would have a claim for a termination payment. The debt which is secured against the project would need to be refunded from the termination payment.
- On the other hand, if Zenith wishes to terminate the contract for breach or insolvency, in that case, Zenith would have a claim for breach of contract. The debt which is secured against the project would need to be repaid from the proceeds claim.
In the 1H FY2019, the total revenue of the company declined from A$33.649 million in 1H FY2018 to A$22.658 million in 1H FY2019. The companyâs profit declined by 65% to A$2.566 million.
Review of Operations:
- The company reported an increase in the BOO (Build, Own and Operate) MW under control by 61% as compared to its previous corresponding period.
- There was an increase in the BOO revenue by 53% and BOO EBITDA by 123% over pcp.
- The Group NPAT declined by $4.8 million on pcp due to the refocus on growing BOO operations.
The balance sheet of Zenith witnessed an increase in the net asset as a result of a rise in the total assets. The total shareholdersâ equity for 1H FY2019 was $46.798 million.
During the period, there was a significant cash outflow of $ 48.62 million through the investing activities of the company. The primary driver of the cash outflow was the payments of property, plant and equipment.
Further, the company reported a fall in the cash inflow from the operating activities as compared to the previous corresponding period. The receipt from the customers declined from $33.368 million to $25.286 million.
The company raised $44.624 million from borrowing and repaid borrowing of $2.185 million as well.
By the end of 1H FY2019, Zenith Energy Limited had net cash and cash equivalent worth $0.814 million.
FY2020 Outlook:
The company had highlighted earlier that in FY2020, it is expecting revenue to be in the range of $63 million and $65 million and EBITDA to be in the range of $26.5 million and $28.5 million. However, now the company expects its revenue to be in between $59 million and $62 million and EBITDA in the range of $24.5 million and $26.5 million, discarding any effect of options available to Zenith under the PPA as well as removing the Gascoyne contract as a whole.
On 3 June 2019, the shares of ZEN were under trading halt pending an announcement related to the PPA update. The shares resumed trading on ASX after the release of the announcement on 5 June 2019. By the end of the trading session on 5 June 2019, the shares of ZEN closed at A$0.535, down by 5.31% as compared to its previous closing price.
On 6 June 2019, the shares are trading at A$0.550, up 2.804% (As at 2:46 PM AEST) with a market cap of A$60.29 million and approximately 112.7 million outstanding shares.
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