ThE GENESIS ENERGy ShARE OffER initial pUBlic oFFeRinG oF oRdinaRy sHaRes in Genesis eneRGy limited inVestment statement dated 13 maRcH 2014 we’re in it for you IMPORTANT INfORMATION (THE INFORMATION IN THIS SECTION IS REQUIRED UNDER THE SECURITIES ACT 1978.) Investment decisions are very important. They often have long-term consequences. Read all documents carefully. Ask questions. Seek advice before committing yourself. In addition to the information in this document, important information can be found in the current registered prospectus for the investment. You are entitled to a copy of that prospectus on request. ThE fINANCIAl MARkETS AUThORITy REGUlATES CONdUCT IN fINANCIAl MARkETS The Financial Markets Authority regulates conduct in New Zealand’s financial markets. The Financial Markets Authority’s main objective is to promote and facilitate the development of fair, efficient, and transparent financial markets. For more information about investing, go to http://www.fma.govt.nz fINANCIAl AdvISERS CAN hElP yOU MAkE INvESTMENT dECISIONS Using a financial adviser cannot prevent you from losing money, but it should be able to help you make better investment decisions. Financial advisers are regulated by the Financial Markets Authority to varying levels, depending on the type of adviser and the nature of the services they provide. Some financial advisers are only allowed to provide advice on a limited range of products. Securities Act and Securities Regulations, as modified by the Securities Act (Genesis Energy Limited Crown share offer) Exemption Notice 2014. There is a registered prospectus containing an offer of securities to which this Investment Statement relates. This Investment Statement is an important document and should be read carefully before deciding whether or not to invest in Genesis Energy. No one is authorised by the directors of Genesis Energy or the Crown to give any information or make any representation in connection with this Offer which is not contained in this Investment Statement, the Prospectus or in other communications from the directors and the Crown. Any information or representation not so contained may not be relied upon as having been authorised by the Company, the directors or the Crown. If you are in any doubt as to any aspect of the Offer, you should consult your financial or legal adviser or an NZX Firm. Should you have any questions about this Offer, you can call 0800 90 30 90 (New Zealand only) during the Offer period. You should seek your own taxation advice on the implications of an investment in the Shares. NO GUARANTEE No person guarantees the Shares offered under this Investment Statement. No person warrants or guarantees the performance of the Shares or any return on any investments made pursuant to this Investment Statement. SEllING RESTRICTIONS When seeking or receiving financial advice, you should check– — the type of adviser you are dealing with: — the services the adviser can provide you with: — the products the adviser can advise you on. The Offer is being made only to persons who would be New Zealand Applicants if they elected to apply for Shares, to Participating Iwi in New Zealand and to Institutional Investors in New Zealand, Australia and certain other jurisdictions. A financial adviser who provides you with personalised financial adviser services may be required to give you a disclosure statement covering these and other matters. You should ask your adviser about how he or she is paid and any conflicts of interest he or she may have. No person may offer, sell (including resell) or deliver or invite any other person to so offer, sell (including resell) or deliver any Shares or distribute any documents (including this Investment Statement) in relation to the Shares to any person outside New Zealand except in accordance with all of the legal requirements of the relevant jurisdiction. Financial advisers must have a complaints process in place and they, or the financial services provider they work for, must belong to a dispute resolution scheme if they provide services to retail clients. So if there is a dispute over an investment, you can ask someone independent to resolve it. Most financial advisers, or the financial services provider they work for, must also be registered on the financial service providers register. You can search for information about registered financial service providers at http://www.fspr.govt.nz You can also complain to the Financial Markets Authority if you have concerns about the behaviour of a financial adviser. IMPORTANT NOTICE This document (“Investment Statement”) relates to the Offer by the Crown of ordinary shares in Genesis Energy Limited. Genesis Energy is the issuer of the Shares and the Crown is the issuer and promoter for the purposes of the Securities Act and Securities Regulations. This document is an investment statement for the purposes of the Securities Act and the Securities Regulations and is prepared as at, and dated, 13 March 2014. It has been prepared in compliance with the Unless otherwise agreed with the Crown and Genesis Energy, any person or entity subscribing for Shares in the Offer shall, by virtue of such subscription, be deemed to represent that he, she or it is not in a jurisdiction which does not permit the making to him, her or it of an offer or invitation of the kind described in this Investment Statement, and is not acting for the account or benefit of a person within such jurisdiction. None of the Crown, Genesis Energy, the Joint Lead Managers, the Registrar or any of their respective directors, officers, employees, consultants, agents, partners or advisers accepts any liability or responsibility to determine whether a person is able to participate in the Offer. fORWARd lOOkING STATEMENTS This Investment Statement contains certain statements that relate to the future. Such forward looking statements are not a guarantee of future performance and involve known and unknown risks, uncertainties, assumptions and other factors, many of which are beyond the control of the Crown and Genesis Energy and which may cause the actual results, performance or achievements of Genesis Energy to differ materially from those expressed or implied by such statements. Given these uncertainties, you are cautioned not to place undue reliance on any forward looking statements contained in this Investment Statement. Under no circumstances should you regard the inclusion of forward looking statements as a representation or warranty by the Crown, Genesis Energy, their respective officers, the directors of Genesis Energy or any other person referred to in this Investment Statement with respect to the achievement of the results set out in any such statement, or that the underlying assumptions used will in fact be realised. SUPPlEMENTARy dISClOSURE ANd WIThdRAWAl RIGhT See Section 7 Terms of the Offer under the heading “Supplementary Disclosure and Withdrawal Right” for a description of the process should a significant adverse development occur prior to the Allotment Date. table of CONTENTS section ONE 2 Letters from the Crown and chairman section FOUR 4 Offer at a Glance 12 ABOUT Genesis Energy section SEVEN section TWO section FIVE section EIGHT Terms of the Offer 27 section SIX 44 section NINE About the Shares Glossary 48 7 Investment highlights Overview of Financial Information 40 section THREE 36 What are my risks? 46 DEFINITIONS Appendix / Prospective Financial Information 51 Directory How do I apply? Terms used in this Investment Statement have the specific meanings given to them in the Glossary (including certain industry-specific terms with which you may not be familiar). Unless otherwise indicated, any references to dates and times are to dates and times in New Zealand and any references to dollars ($) are to New Zealand dollars. IMPORTANT NOTICE This document is an investment statement. The purpose of an investment statement is to: —— provide certain key information that is likely to assist a prudent but non-expert person to decide whether or not to subscribe for securities; and —— bring to the attention of such a person the fact that other important information about the securities is available to that person in other documents. For more information to assist you in deciding whether or not to purchase the Shares offered to you, you are recommended to read the Prospectus which has been prepared in respect of this Offer. The Prospectus, which includes the most recent financial statements of Genesis Energy, can be obtained, free of charge: —— by downloading it from www.genesisenergyshares.govt.nz; or —— by calling 0800 90 30 90 and requesting a copy be sent to you; or —— from the Companies Office website at www.business.govt.nz/companies. In certain limited circumstances, Applicants may have the right to withdraw their Applications. Further details of this withdrawal right are set out under the heading “Supplementary Disclosure and Withdrawal Right” in Section 7 Terms of the Offer. Genesis Energy Share Offer investment statement 1 Section One Letters from the Crown and chairman Letter from the CROWN Dear Investor Thank you for considering the Genesis Energy Share Offer. Genesis Energy commenced operations in 1999 and since that time has grown to become New Zealand’s largest retailer of electricity and gas. With more customers than any other energy company, Genesis Energy truly is ‘everywhere’. Genesis Energy has grown and maintained its customer base by being focused on delivering quality customer services and products to its New Zealand customers. Now, by participating in the Genesis Energy Share Offer, there’s another way for Kiwis to be part of the Genesis Energy story. As has been our commitment throughout the share offer programme, the Crown will retain majority ownership of Genesis Energy after the Share Offer is complete. Also, in keeping with our share offer programme commitments, New Zealanders will be at the front of the queue for shares during this Share Offer. For New Zealand retail investors, the price of Genesis Energy Shares will be set at a fixed price per Share prior to the Retail Offer opening, so you will know the price before you decide to apply. In addition to a fixed price, New Zealand retail investors will also receive one Loyalty Bonus Share for every 15 Shares purchased during the Share Offer, up to a maximum of 2,000 Loyalty Bonus Shares. These Loyalty Bonus Shares will be available to eligible New Zealand Applicants who hold their Shares in the same registered name for 12 months. This is the final Share Offer in the Government’s share offer programme. Sale proceeds from the Government’s share offer programme currently stand at almost $4 billion. The proceeds from the Genesis Energy Share Offer will be added to New Zealand’s Future Investment Fund and will be reinvested into New Zealand so we can build new assets such as schools, hospitals and ultra-fast broadband, without the need for our country to borrow from overseas lenders. We look forward to you joining the Crown as a Shareholder in Genesis Energy, the energy company more Kiwis choose to be with. Yours sincerely Hon Bill English MINISTER OF FINANCE 2 Hon Tony Ryall MINISTER FOR STATE OWNED ENTERPRISES section ONE Letters from the Crown and chairman Letter from The Chairman Dear Investor On behalf of the Genesis Energy board, it is my pleasure to invite you to become an investor in our Company. By investing in the country’s largest energy retailer you will have the opportunity to share in our delivery of electricity, gas and LPG solutions to more New Zealanders than any other electricity or gas retailer. At the foundation of providing energy to our customers, Genesis Energy owns and operates a diverse and flexible portfolio of generation assets located in both the North and South Islands. Producing approximately 17% of New Zealand’s electricity in 2013, the Company generates from 10 power stations using water and wind, as well as gas and coal. We have New Zealand’s largest electricity power station at Huntly. These diverse assets allow us to generate electricity in varying weather and hydro lake level conditions. As an investor, you will also share in Genesis Energy’s 31% interest in the Kupe Joint Venture, which owns and operates the Kupe oil and gas field. The field is an integral part of our business. As well as the Company’s 31% share of the Kupe oil revenues, Kupe gas is used to fuel electricity generation at our Huntly Power Station, and to supply our natural gas and growing LPG retail activities. Our large base of retail customers, our diverse and flexible generation portfolio, and our interest in Kupe enable us to manage the impact of volatility in the New Zealand electricity market, and this, together with our disciplined capital expenditure, underpins our intention to deliver consistent, reliable and attractive dividends to Shareholders, even in periods of business cycle downturn. We do not believe significant new electricity generation capacity will be required in New Zealand over the next three to five years and, although we hold consented development prospects, we are not expecting to invest in any major new generation projects in that period. We will continue to apply a disciplined approach to the use of capital funds. The board is proud of the achievements of Genesis Energy through the hard work of our Chief Executive Albert Brantley and his experienced executive team. Across the Company, we value our relationships with communities, environmental partners and iwi in all parts of the country, and this is reflected in how we carry out all of our business activities. We are pleased to provide this opportunity for you to be part of what we believe to be a great New Zealand-focused company that delivers for its customers and its Shareholders. This Investment Statement contains important information about Genesis Energy and the Offer. We encourage you to read the Prospectus carefully and consider the What are my Risks? section before making your investment decision. The board looks forward to Genesis Energy becoming a publicly listed company and welcomes your participation in this Offer. Rt Hon Dame Jenny Shipley DNZM CHAIRMAN Genesis Energy Share Offer investment statement 3 Section TWO offer at a glance OFFER AT A GLANCE What is this? This is an initial public offering of ordinary shares in Genesis Energy Limited by the Crown. generation assets and an investment in the Kupe oil and gas field. You can find out more about Genesis Energy in Section 4 About Genesis Energy. Genesis Energy is a New Zealand focused energy company and is New Zealand’s largest retailer of electricity and gas.1 This market position is supported by a diverse and flexible portfolio of The Offer comprises the Retail Offer (which in turn comprises a General Offer and a Broker Firm Offer), the Participating Iwi Offer and the Institutional Offer. Key Dates 28 March 2014 29 11 General Offer and Broker Firm Offer opens APRIL 2014 14 Final Price announced March 2014 General Offer closes (5.00pm) Broker Firm Offer closes (5.00pm) 16 17 17 Allotment Date Expected despatch of holding statements and any refund payments if required (no later than 28 April 2014) October 2014 Expected commencement of trading on the NZX Main Board and the ASX APRIL 2014 APRIL 2014 APRIL 2014 APRIL 2014 Expected date of payment of first dividend following the Offer These dates are indicative only and may be amended. If the Crown amends any of the above dates this will be announced through NZX. The Offer may also be withdrawn at any time before the allotment of Shares in the absolute discretion of the Crown. Key Offer Statistics Indicative Price Range $1.35 to $1.65 per Share (the Final Price will be announced prior to the Retail Offer opening and may be above, within or below the Indicative Price Range) Number of Shares being offered2 300,000,000 to 490,000,000 (being between 30% and 49% of the total number of Shares expected to be on issue on the Allotment Date) Crown shareholding following the Offer3 At least 510,000,000 (being at least 51% of the total number of Shares expected to be on issue on the Allotment Date) Indicative market capitalisation $1,350 million to $1,650 million Prospective Net Debt4 Indicative enterprise value (EV) $994.3 million $2,344 million to $2,644 million 1 4 Based on Customer Connections for electricity and natural gas as at 31 December 2013. 2 Including the Loyalty Bonus Shares. 3 Excluding the Loyalty Bonus Shares and any Shares acquired by entities associated with the Crown under the Offer. 4 Forecast as at 30 June 2014. See Section 5 Overview of Financial Information for a discussion of non-GAAP financial information. section TWO OFFER AT A GLANCE FY2014 Prospective Implied gross dividend yield5 9.7% to 11.9% 10.8% to 13.2% Implied cash dividend yield5 6.5x to 7.3x 7.8% to 9.5% EV/EBITDAF multiple 14.2x to 17.3x 7.7x to 8.7x Price/earnings ratio FY2015 Prospective 32.3x to 39.5x Key Investment Metrics 13.5% to 16.5% These metrics are provided to help you assess the value of the Company. Indicative market capitalisation, indicative EV, prospective price/ earnings ratio, prospective EV/EBITDAF multiple and prospective implied dividend yields are shown based on the lower and upper values of the Indicative Price Range. The calculations are explained in the table set out at the end of the Glossary. Selected Financial Information $million FY2012 Historical FY2013 Historical FY2014 Prospective FY2015 Prospective Operating Revenue $2,264.8 $2,070.2 $2,040.6 $2,165.9 EBITDAF $387.3 $336.4 $305.2 $363.4 Net Profit $86.4 $104.5 $41.8 $95.4 $1,796.6 $1,949.7 $1,871.2 $1,824.5 $363.3 $298.3 $293.3 $344.9 Net Assets6 Net cash inflows from operating activities Wherever prospective financial information appears in this Investment Statement (including in the selected financial information and key investment metrics presented in this section) you should read that financial information together with the assumptions set out in the Appendix Prospective Financial Information and also the risk factors set out in Section 6 What are my Risks? There is no guarantee that the results set out in the prospective financial information will be achieved. The non-GAAP financial information used in this Investment Statement has the following meaning: EBITDAF Earnings before net finance expense, income tax, depreciation, depletion, amortisation, impairment, revaluations (when they occur), changes in fair value of financial instruments and other gains and losses. Free Cash Flow EBITDAF less finance expense less income tax expense less stay-in business capital expenditure.7 Free Cash Flow is presented only to enable potential investors to consider Genesis Energy’s prospective dividends declared pay-out ratio. The dividends declared as a ratio of Free Cash Flow highlights how much of Free Cash Flow has been, or is expected to be, converted into dividends. Net Debt The value of current and non-current borrowings less cash and cash equivalents. You can find an explanation of trends in financial information and of EBITDAF, and why Genesis Energy uses this non-GAAP measure of financial performance, in Section 5 Overview of Financial Information. A reconciliation of Net Profit to EBITDAF and to Free Cash Flow is also included in Section 5 Overview of Financial Information. 5 Based on the Indicative Price Range. The prospective dividend for FY2014 is inclusive of the dividend expected to be paid to the Crown in April 2014. There is no assurance that prospective dividends will be paid. 6 Net Assets is calculated as total assets less total liabilities. The amount of total assets and total liabilities for each of FY2012 and FY2013 has been taken from the audited consolidated statement of financial position (consolidated balance sheet) of Genesis Energy and its subsidiaries as at 30 June 2013 (including comparatives) and has been calculated as at that date and Net Assets has been calculated for FY2012 and FY2013 based on these numbers. Refer to Section 6.4.5 Audited Financial Statements for the Year Ended 30 June 2013 of the Prospectus. Genesis Energy Share Offer investment statement 7 “Stay-in business capital expenditure”, which relates to on-going asset management and lifecycle maintenance and re-investment programme expenditure and includes capital expenditure on maintaining options for future development but excludes oil and gas rehabilitation and Tekapo canal remediation project capital expenditure. 5 section TWO Your OfFer Incentives Incentives for New Zealand Applicants The Crown is providing incentives to New Zealand Applicants under the Retail Offer as follows: 1 Guaranteed allocation (General Offer only) —— Available only to eligible New Zealand Applicants. —— Applications under the General Offer up to $1,000 will not be scaled. —— Applications in excess of $1,000 under the General Offer will not receive less than $1,000 worth of Shares. 2 Loyalty Bonus Shares —— Available only to eligible New Zealand Applicants. —— Applicants will be entitled to 1 Loyalty Bonus Share for every 15 Shares purchased through the Share Offer. —— Applicants are required to hold their Shares in the same registered name for 12 months. —— Up to a maximum of 2,000 Loyalty Bonus Shares for each eligible New Zealand Applicant. You can find further information about the eligibility criteria and incentives for New Zealand Applicants, including how these incentives will apply for those New Zealand Applicants applying through Custodians, in Section 7 Terms of the Offer and Section 9 How do I apply? 6 section TWO OFFER AT A GLANCE INVESTMENT Section THREE INVESTMENT HIGHLIGHTS delivering attractive dividends Three key features enable us to manage the impact of volatility in New Zealand’s electricity market on our earnings , and to pay attractive dividends. 8 1 nz’s largest retailer of electricity and gas Prospective fy2015 implied Gross 9 dividend yield Based on the Indicative Price Range Prospective fy2015 implied CASH 9 dividend yield Based on the Indicative Price Range 2 3 Diverse and flexible electricity generation oil and gas diversification 13.5% to 16.5% 9.7% to 11.9% By managing its exposure to volatility and with disciplined capital expenditure, Genesis Energy intends to pay Shareholders a consistent, reliable and attractive dividend even in periods of business-cycle downturn. The Company intends to at least maintain, year on year in real terms, the dollar amount of ordinary dividend payments. The amount of dividend declared will be subject to the Company’s capital and risk requirements at the time. Dividends are intended to be paid twice a year with an equal split between interim and final dividends. The table below shows prospective dividends for FY2014 and FY2015 including what this implies as a proportion of Free Cash Flow10. Dividends in the Prospective Period are expected to be fully imputed. Prospective Dividend Schedule There is no assurance that these dividends will be paid Year ending 30 June 2014 Prospective Interim Paid to Crown only Final Dividends declared ($million)11 Dividend per Share (cps) Date of payment 6.4 6.4 Apr 2014 Oct 2014 Final 12.8 Total 160.0 8.0 8.0 Apr 2015 16.0 Oct 2015 152.8 8 Earnings means EBITDAF, a non-GAAP measure defined in Section 2 Offer at a Glance. 11 9 See the Glossary for a definition of this term. 12 Inclusive 193.8 83.8% Dividends declared as a proportion of Free Cash Flow 8 Interim 128.0 Free Cash Flow ($million)10 10 Free Total12 Year ending 30 June 2015 Prospective 82.6% See Section 8 About the Shares for the Genesis Energy dividend policy. of the dividend to be paid to the Crown in April 2014. Cash Flow is a non-GAAP measure defined in Section 2 Offer at a Glance. section THREE INVESTMENT HIGHLIGHTS New Zealand’s Largest Retailer of Electricity and Gas More Kiwis choose Genesis Energy than any other electricity company. We have New Zealand’s largest electricity and gas customer base13 and we take pride in attracting and keeping our customers. This provides scale for developing new products and services and opportunities to lower customer service costs. It also gives us information that helps us to adapt to our customers’ needs and to run our generation more efficiently. Our large customer base provides stable revenues that help protect overall earnings from the impact of volatile wholesale electricity prices. 13 Based on Customer Connections for electricity and natural gas as at 31 December 2013. Genesis Energy Share Offer investment statement 9 Section THREE INVESTMENT HIGHLIGHTS Diverse and Flexible Electricity Generation Hydro Tongariro/ Waikaremoana/Tekapo — Lower operating cost — Geographic diversity across New Zealand — Flexible generation and storage Ability to use low cost, geographically diverse and flexible hydro generation and the highly efficient Unit 5 natural gas generation at Huntly to cover our customer demand. Natural gas Huntly Unit 5 — Highly efficient — Huntly’s newest and largest unit — Operated as Base-load generation with a flexible operating range Ability to increase Unit 5 generation and use Huntly’s coal and natural gas generation to take advantage of higher wholesale prices (for example, in dry periods). Coal and natural gas Huntly’s other Units — Higher cost — Used as Peaking and Hydro-firming plant to realise wholesale opportunities Ability to increase Huntly’s coal and natural gas generation to meet peak market demand and to sell excess Thermal Generation capacity to other electricity companies as insurance against high wholesale prices. 10 section THREE INVESTMENT HIGHLIGHTS oil and gas diversification Genesis Energy’s 31% interest in the Kupe oil and gas field joint venture is an integral part of the business. kupe oil and gas field Kupe provides a diversified source of revenue largely unaffected by electricity market dynamics. Genesis Energy receives a 31% share of all Kupe’s oil, natural gas and LPG production. It has secured 100% of Kupe’s natural gas to make electricity at Huntly and to sell to retail and wholesale gas customers. Oil — Sold internationally There is also the opportunity to influence and share in any future development of the Kupe field. Natural gas — Used to make electricity — Sold to retail and wholesale customers Kupe contributed $109.2m of total Genesis Energy EBITDAF in FY2013 LPG — Sold to customers Millions of Barrels of Oil Equivalent Kupe Estimated Proved Reserves and Probable Reserves as at 31  December 2013 45 40 35 30 25 20 15 10 5 0 Oil Natural Gas LPG Source Gaffney, Cline & Associates Genesis Energy Share Offer investment statement 11 section FOUR ABOUT GENESIS ENERGY Genesis Energy is a diversified energy company. It sells electricity, natural gas and LPG through its Customer Experience business. It generates electricity, and trades electricity and natural gas, through its Energy Management business. The Company has a 31% interest in the Kupe Joint Venture which owns the Kupe oil and gas field. 12 THE ELECTRICITY SECTOR As an energy company that generates, trades and sells electricity, Genesis Energy operates in the New Zealand electricity industry, which comprises the following key components: NEW ZEAlANd ElECTRICITy INdUSTRy dIRECT CONSUMERS $ $ WhOlESAlE ElECTRICITy MARkET $ COMMERCIAl USERS GENERATION 5 Major generators produced about 93% of NZ’s electricity in 2013 TRANSMISSION 1 State-owned national transmission grid operator dISTRIbUTION 29 Payments in relation to the wholesale electricity market Generators – generate electricity at power stations throughout the country and sell that electricity to the wholesale market. RESIdENTIAl USERS The National Grid – Transpower is the owner and operator of the national grid which comprises the towers, wires and cables that transport electricity at high voltages from power stations to distribution networks and directly to large industrial users throughout the country.  Distribution businesses with 150,000km of network lines RETAIlERS 20 Electricity retail brands serving 1.7 million residential customers, 0.3 million commercial customers Electricity flows Distribution Businesses – own the distribution networks that carry electricity from the national grid to residential, commercial and some industrial users. There are currently 29 separately owned distribution networks. Retailers – buy electricity from the wholesale market and sell it to end-consumers, at market prices determined by each electricity retailer. The five largest retailers had a combined 94% market share by Customer Connections as at 31 December 2013. Regulators – The Electricity Authority oversees the electricity market.  A number of other regulatory authorities also have roles. Most New Zealand electricity generation and retailing is undertaken by five large generator/retailers: Genesis Energy, Meridian, Contact Energy, Mighty River Power and Trustpower. Genesis Energy Share Offer investment statement 13 Section FOUR About Genesis Energy Generation Retailers New Zealand’s electricity is generated mainly from hydro, geothermal and wind resources (called Renewable Generation) and natural gas, coal and diesel (called Thermal Generation). Most New Zealand consumers buy their power from electricity retailers that have purchased electricity from the wholesale market. The retailers generally arrange installation of appropriate metering, meter reading, billing and payment collection, and pay distribution charges to distribution businesses in relation to electricity sold to consumers. Retail electricity prices are determined by competition among the nation’s electricity retailers and, aside from a requirement to provide an optional low-user tariff, are generally not directly regulated. The amount of electricity produced from each power station depends on a wide range of factors that continuously change, including demand for electricity, climate conditions, transmission constraints, fuel cost and availability, and competitor behaviour. Due to the large proportion of hydro generation (56% of total generation in 2013) and because New Zealand’s hydro systems can store only limited amounts of water for future use, higher or lower-thanaverage rainfall or snowmelt can have a significant impact on which power stations run to meet the demand for electricity. This, in turn, affects wholesale electricity prices. Electricity Generation Market Share Electricity Customer Market Share 35% 35% 30% 31.4% 31.4% 30% 30% 25% 25.8% 25.8% 25% 25% 20% 20% 26.8% 22.4% 19.4% 20% 16.8% 16.8% 15.5% 15.5% 14.0% 15% 15% 15% 11.0% 10% 10% 10% 5% 5% 0% 0% Genesis Genesis Energy Energy Contact Contact Energy Energy Mighty Mighty River Power River Power Meridian Meridian Trustpower Trustpower 5% Other Other Source Electricity Authority, 2013 Source Electricity Authority, 2013 14 6.4% 6.9% 6.9% 3.5% 3.5% 0% Genesis Energy Contact Energy Mighty River Power Meridian Trustpower Other Source Electricity Authority, Customer Connections as at 31 December 2013 section FOUR ABOUT GENESIS ENERGY Consumers There are approximately two million individual electricity Customer Connections in New Zealand.14 The North Island accounted for 63% of total electricity consumption in 2012. The remaining 37% was consumed in the South Island. While the majority of Customer Connections are residential, electricity consumption is split between residential, commercial and industrial users. This is illustrated in the graph below. New Zealand Electricity Consumption 35,000 GWh per annum 30,000 25,000 20,000 15,000 10,000 5,000 0 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Commercial Industrial Source MBIE Energy Data Historically, over the long-term, residential household demand has moved broadly in line with population growth, and overall electricity demand has tended to move in line with economic growth. National demand has been relatively flat or has declined in each of the years since 2007 until 2012 (being the most recent year for which data is available). This is due to a combination of factors including Key Industry Issues As described in Section 6 What are my Risks? and more fully in the Prospectus, there are a number of potential changes facing the electricity industry in New Zealand which may have an impact on the industry as a whole and on Genesis Energy in the future, the most notable of which are: Tiwai Point Aluminium Smelter – The Tiwai Point aluminium smelter is the largest consumer of electricity in New Zealand. If the smelter were to significantly reduce its electricity consumption, or to cease consumption altogether, the resultant drop in demand could lead to a sustained reduction in wholesale electricity prices (at the location specified in the Tiwai contract) and in electricity prices generally. Potential industry restructuring – On 18 April 2013 the New Zealand Labour Party and the Green Party of Aotearoa New Zealand announced separate proposals for electricity sector 14 Electricity consumption also follows daily and seasonal patterns. Demand is typically lower in warm months and can increase by more than 30% during winter. Electricity market mechanics The wholesale electricity market determines the wholesale price on a half hourly basis (also called the ‘spot price’) by matching the supply of electricity from generators with demand from users (electricity retailers and some large industrial customers). 40,000 Residential poor economic conditions in New Zealand, reduced demand from the Tiwai Point aluminium smelter, reduced demand following the Canterbury earthquakes and relatively flat demand from large industrial manufacturing. Electricity companies that are both generators and retailers do not supply their customers with the electricity they generate. Instead, they sell their generation into the wholesale market at the connection nearest their power station, and buy electricity to supply their customers at the connection nearest the location of their customers. Being on both sides of the wholesale market (as sellers and buyers) allows the generator/retailer companies to better manage the risk of wholesale price variability. For example, if wholesale electricity prices rise, these companies can at least partially offset the increased cost for their retail businesses with the higher wholesale prices they receive from their generation businesses – and vice versa if wholesale prices fall. This is a benefit of vertical integration (that is, being a generator and a retailer). regulatory reform which would involve significant structural changes. These changes could adversely affect electricity generators and retailers. Electricity Transmission Pricing – The allocation of the costs of electricity transmission is under review. This review may change the cost allocated to each electricity generator, although the timing and nature of the changes, including the ability for increased costs to be passed on to consumers, is currently uncertain. Water Rights – The use and allocation of New Zealand’s freshwater resources is under review, including as a result of claims under the Treaty of Waitangi. The outcomes of this review may have an impact on the availability and/or cost of water available to electricity generators. Again, the timing and potential impact on the electricity generation industry is currently uncertain. Based on Electricity Authority Customer Connections as at 31 December 2013. Genesis Energy Share Offer investment statement 15 Section FOUR About Genesis Energy CUSTOMER EXPERIENCE In this part of the business, Genesis Energy sells electricity, natural gas and LPG. Genesis Energy is focused on attracting and keeping valuable customers. It aims to achieve this by delivering practical energy solutions, competitive pricing and quality customer service. Retail Brands Genesis Energy sells electricity, natural gas and LPG to more than 650,00015 Customer Connections through its two retail brands, Genesis Energy and Energy Online. Market Electricity Customers Natural Gas Customers LPG Customers Nationwide brand Brand 473,000 114,000 10,700 26.8% 17 Electricity Market Share 43.7% 18 Selected regions. “No frills” brand, for customers looking for service at competitive prices 67,300 1,500 - Gas Market Share Dual Fuel Customers The Company’s dual fuel offering delivers benefits for both customers and the Company. For customers, it provides the convenience of accessing both electricity and gas from one energy provider, while reducing customer switching and costs for the Company. As at 31 December 2013: —— 70% of Genesis Energy’s natural gas customers also purchased electricity from the Company; and —— 15% of the Company’s electricity customers also purchased natural gas from the Company.16 5% West Coast Nationwide Coverage Genesis Energy seeks to maintain a customer base that broadly complements its generation portfolio in terms of both size and location. The map opposite shows the largest customer centres. The percentage figures in the map reflect the percentage of customers in each region who are Genesis Energy customers (circle size relative to approximate numbers of customers). 15% Otago 6% Southland 15 Based on Electricity Authority Customer Connections for electricity and Gas Industry Company Customer Connections for natural gas and customer accounts for LPG as at 31 December 2013. 16 Note 16 that only 13% of New Zealand electricity customers are able to access natural gas. section FOUR ABOUT GENESIS ENERGY 21% Electricity Market Share and Growth Genesis Energy is the largest electricity retailer in New Zealand with a 26.8% market share.17 The Company successfully grew its South Island customer base following its acquisition of the Tekapo Power Scheme in the South Island in 2011. The Company aims to grow the value of its customer base throughout New Zealand. Northland 19% Advanced Metering Auckland 46% Waikato 16% Bay of Plenty 13% Gisborne 43% 39% Taranaki Hawke’s Bay 42% Manawatu/ Wanganui 2% Attracting Customers Genesis Energy offers a range of products, services and pricing plans to suit the needs of its residential, commercial and industrial customers. Genesis Energy believes that high levels of customer service, ‘keeping it simple’ and putting customers in control of their accounts and the way they use energy, are key drivers of customer attraction and retention. Keeping Customers for Longer Tasman 5% As at 31 December 2013, approximately 355,000 (66%) of Genesis Energy’s electricity customers were using advanced meters. These meters are owned by a subsidiary of Vector Limited, with Genesis Energy receiving the data from the meters. This enables Genesis Energy to provide accurate and up to date monthly billing and to roll out pricing and service plans that appeal to customers interested in monitoring and controlling their electricity usage. Advanced metering services also assist Genesis Energy with its objective of reducing the cost of serving its customers. 8% Marlborough 48% Wellington Nelson Although varying from month to month, Genesis Energy had an average electricity customer switching rate of 18% for the year to 31 December 2013 compared to an industry average of 20%.19 Genesis Energy believes that its focus on delivering competitive prices, practical solutions and good customer service, together with its dual fuel offering helped keep its switching rate below the industry average. Keeping this rate down helps to reduce costs and improve margins for the Company. Benefits of Large Customer Base Genesis Energy’s large customer base provides stable revenues that help protect its overall earnings from the impact of volatile wholesale electricity prices, since retail prices are largely independent of shortterm wholesale electricity prices. This customer base also provides the Company with opportunities to lower its customer service costs and the potential to develop products and services in a cost-effective manner. 22% Canterbury The Company has low financial exposure to any individual customer with no single customer representing more than 0.9% of the Group’s revenue per annum.20 Gas and LPG Customers Genesis Energy is the largest natural gas retailer in New Zealand with a 43.7% market share.18 Since 2010, Genesis Energy has grown its natural gas and LPG customer numbers and sales volumes in both the retail and wholesale markets. 17 Based on Electricity Authority Customer Connections as at 31 December 2013. 18 Based on Gas Industry Company Customer Connections as at 31 December 2013. 19 Based on Electricity Authority switching history reports. 20 As at 31 December 2013 and based on FY2013 revenue. LPG sales volumes have grown from 210 tonnes in FY2010 to 2,445 tonnes in FY2013. Natural gas volumes have increased from 9.5 PJ in FY2010 to 17.6 PJ in FY2013. As with its electricity business, the Company’s natural gas customer switching rate is lower than the industry average. Although varying from month to month, Genesis Energy had an average natural gas customer switching rate of 12% in 2013 compared to an industry average of 17%. Genesis Energy Share Offer investment statement 17 Section FOUR About Genesis Energy ENERGY MANAGEMENT In this part of the business, Genesis Energy generates electricity and trades electricity and gas with wholesale customers. Generation 10 Genesis Energy owns and operates a portfolio of Thermal Generation and Renewable Generation assets located in different parts of New Zealand. The spread of locations and fuel types in the portfolio gives Genesis Energy significant operating flexibility because: —— at Huntly Power Station, the Rankine Units can be run on gas or coal, Unit 5 runs on gas and Unit 6 can be run on gas or diesel; and —— the spread of the Company’s hydro assets minimises its reliance on one water catchment area. The hydro stations provide flexibility for two further reasons. Firstly, they can start generating relatively quickly, and secondly, some water inflows into the Company’s hydro catchment areas can be stored (for varying periods of time), which allows generation to be made available when desired as long as seasonal inflows are sufficient. Power stations 31% Kupe Oil and GAS Field interest Tekapo Site Capacity Commissioned Key Resource Consents Expire A Hydro 25 MW 1951 2025 B 18 Fuel Source Hydro 154 MW 1977 2025 section FOUR ABOUT GENESIS ENERGY Huntly Key Resource Consents Expire Site Fuel Source Capacity Commissioned Rankine Units Gas or Coal 250 MW each Between 1982 and 1985 2037 Unit 5 Gas 403 MW 2007 2037 Unit 6 Gas or Diesel 50.8 MW 2004 2037 Approximately 17% of New Zealand’s electricity output in 2013 32% of electricity production in 2013 from renewable sources Hau Nui Site Fuel Source Capacity Commissioned Key Resource Consents Expire Stage 1 Wind 2.5 MW 1996 2030 Stage 2 Wind 4.8 MW 2004 2037 Site Fuel Source Capacity Commissioned Key Resource Consents Expire Mangaio Hydro 1.8 MW 2008 2039 Rangipo Hydro 120 MW 1983 2039 Tokaanu Hydro 240 MW 1973 2039 tongariro waikaremoana Site Fuel Source Capacity Commissioned Key Resource Consents Expire Tuai Hydro 60 MW 1929 2032 Piripaua Hydro 42 MW 1943 2032 Kaitawa Hydro 36 MW 1948 2032 Genesis Energy Share Offer investment statement 19 Section FOUR About Genesis Energy of readiness that could see it return to service, if required, within 90 days. However, the Company expects a return to three Rankine Units in active service would be considered only under exceptional circumstances. The operation of a fourth Rankine Unit has ceased permanently and the Company has commenced the decommissioning process. Unit 6 – 50.8 MW (Gas/Diesel) Unit 6 is a 50.8 MW open cycle gas turbine, which was commissioned in 2004. This unit can burn 100% gas or diesel to generate electricity. Unit 6 is operated as a Peaking unit when wholesale electricity prices reach high levels or when it is economic to operate it over short periods. Fuel Supply HUNTLY POWER STATION New Zealand’s Largest The 1,203.8 MW Huntly Power Station is New Zealand’s largest power station by capacity and is capable of providing over 20% of New Zealand’s current electricity needs. This station is located close to major population centres, has reliable access to cooling water, coal and gas resources, and benefits from limited transmission constraints. This, together with long-term resource consents, means that the Huntly Power Station is expected to continue to provide Genesis Energy with both a valuable asset and a range of future development options. The Huntly Power Station has the ability to provide Base-load generation while also being able to take advantage of higher prices in the short or medium term. The mix of generating units described below is likely to change over time as older gas/ coal-fired generation units are placed into long-term storage, retired or replaced. In addition, the Huntly Power Station plays an important role in supporting financial contracts offered by the Company to other retailers and large customers as dry period ‘insurance’, and in providing ancillary services such as frequency and voltage support. Currently, Huntly comprises the following units: Unit 5 – 403 MW (Gas) Unit 5 is a high-efficiency combined-cycle gas turbine, which was commissioned in 2007. Unit 5 is operated as Base-load generation with a flexible operating range. The total generation from Unit 5 and the Company’s hydro stations broadly matches the Company’s customer demand for electricity. Rankine Units - Two 250 MW units (Gas/Coal) with an additional 250 MW unit in storage The Rankine Units utilise boiler and steam turbine technology and are capable of using coal and gas to generate electricity. The two Rankine Units currently in service were commissioned between 1982 and 1985 and can each generate 250 MW. These units have the capacity to operate in a range of roles, including Base-load, Hydro-firming and Peaking. Genesis Energy has fuel supply security at Huntly through a range of gas and coal contracts. Generally its gas supply contracts require a set volume to be purchased per year (known as a take or pay contract). The majority of wholesale gas market contracts are long-term take or pay contracts. This means that Genesis Energy is required to pay for the majority of the gas volumes it has contracted to purchase, whether or not it takes the gas. A feature of the natural gas supply contracts is that they provide Genesis Energy with flexibility to increase its electricity generation levels in times of increased demand and high wholesale prices and to supply other natural gas users through short or longer term gas contracts. A key disadvantage is that, when customer demand for electricity is low due to seasonal, operational or electricity market conditions, or when water inflows are high, it may be more economical for Genesis Energy to reduce gas-fired generation and generate electricity from its own hydro or coal fired plant or to increase the amount of electricity purchased from the electricity market relative to the amount generated by Genesis Energy but the take or pay provisions instead may result in Genesis Energy using gas as fuel. Currently, Genesis Energy has contracted to purchase more natural gas than it requires for the operation of its existing Thermal Generation plant and its retail customers’ usage (this is called having a “Long gas position” or being “Long on gas”). Genesis Energy applies a range of measures to manage its Long gas position, however, despite these, the Company’s Long gas position had an adverse impact on the Company’s financial performance during the period from mid FY2010 to FY2013. It is also forecast to have an adverse impact in the Prospective Period. These impacts have been incorporated into the historical and prospective financial information set out in Section 5 Overview of Financial Information of this Investment Statement and Section 6.0 Financial Information of the Prospectus. The financial impact on Genesis Energy of having a Long gas position from 1 July 2015 is unknown as it will depend on a range of factors including the extent of its Long gas position and market conditions at the time. A Rankine Unit was placed into long-term storage at the end of 2013, with the intention of lowering the overall overhead and maintenance costs of the three units and improving the utilisation of the two remaining Rankine Units in service. This unit is stored at a level 20 section FOUR ABOUT GENESIS ENERGY Genesis Energy expects that the extent of its Long gas position will reduce between 2015 and 2020, and be eliminated by 2021.21 The Huntly Power Station is capable of storing up to four years of coal supply.22 Coal storage is important as it enables the Company to quickly increase generation output to mitigate gas supply interruptions, cover generation reductions from other sources and to take advantage of high wholesale electricity prices. As at 31 December 2013 Genesis Energy had a coal stockpile of 994 kT fully covering the amount of coal expected to be used in the Prospective Period. Rights of and Obligations Owed to Waikato-Tainui Genesis Energy leases the land on which the Huntly Power Station is located from Tainui Corporation Limited, a subsidiary of Tainui Group Holdings Limited, the commercial arm of Waikato-Tainui. Under the Waikato-Tainui Raupatu Claims (Waikato River) Settlement Act 2010, Genesis Energy must engage with WaikatoTainui prior to the creation or disposition of any property right or interest in the Waikato River relating to an asset held by Genesis Energy (such as the Huntly Power Station). In addition under that Act, Waikato-Tainui has a right of first refusal in respect of Genesis Energy’s lease of the Huntly Power Station (including fixtures and improvements at Huntly), if Genesis Energy proposes to transfer the Huntly Power Station or any part of it to a third party. This first right of refusal is not triggered by the Offer. Resource Consents to 2037 In May 2012, 25 year resource consents were granted for the generation capacity at Huntly which secure the site’s future as a long-term generation site of national significance. This reflects its critical role in supplying electricity and important ancillary services such as frequency and voltage support. See Section 4.4 Independent Engineer’s Summary Report on Generation Assets and Kupe Facilities of the Prospectus for an independent engineer’s findings on Genesis Energy’s generation assets. Generation Development Prospects It is not expected that significant additional electricity generation capacity will be required in New Zealand over the next three to five years. In the short term, Genesis Energy’s focus is to maximise the efficiency of the Company’s existing generation assets and fuel supplies, and to purchase from the wholesale market effectively, rather than to build new generation assets. However, the Company has a diverse portfolio of longer term generation growth prospects to increase capacity or to displace higher-cost generation in the future. These prospects include greenfield generation investments and opportunities for enhancing existing thermal, hydro and wind assets. Consistent with the Company’s disciplined approach to the use of capital, these development prospects would proceed only if a project becomes economically viable. An example is the Castle Hill Wind Farm, where Genesis Energy holds resource consents to establish a wind farm in the northern Wairarapa. The potential site covers more than 20,000 hectares and the consents allow up to 286 wind turbines with a potential generation capacity of up to 860 MW. Should this proceed, its scale is yet to be determined. The terms of the consents give Genesis Energy until 2023 to begin construction. Arrangements for transmission have not been established. 21 The year in which the Long gas position peaks, and the profile for its reduction over the period 2015 to 2020, will depend on a range of factors, including the actual volumes of gas used for electricity generation and retail sales, whether Genesis Energy varies the quantity of contracted gas purchases and whether contingent reserves become firm at one of the gas fields from which the Company purchases gas. 22 Based on forecasted coal use and stockpile capacity as at 31 December 2013. Genesis Energy Share Offer investment statement 21 Section FOUR About Genesis Energy Generation vs Customer Demand The chart below illustrates how Huntly Unit 5 and the Company’s hydro stations broadly meet Genesis Energy’s customer demand, while enabling the other Huntly units to be used to take advantage of higher-priced opportunities in the market. Generation vs Customer Demand 1,000 900 800 700 GWh 600 500 400 300 200 100 Huntly Unit 5 + Hydro Huntly Rankine Units + Unit 6 Trading Genesis Energy aims to generate and contract electricity at the lowest cost to the Company to meet its customer demand. The Company also aims to maximise the value of its excess Thermal Generation capacity during periods of higher wholesale electricity prices. Genesis Energy’s mixture of Thermal Generation and Renewable Generation gives it the ability to take advantage of a range of wholesale electricity prices and market conditions. Genesis Energy can use coal and gas to fuel its Thermal Generation units to take advantage of periods of higher wholesale electricity prices. Alternatively, it can use Renewable Generation to generate electricity at a lower cost when water is abundant. Nov-13 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Mar-12 Jan-12 Nov-11 Sep-11 Jul-11 May-11 Mar-11 Jan-11 Nov-10 0 Customer Demand In addition, Genesis Energy can earn revenue from its generation capacity outside of a dry period by offering other retailers and large customers financial contracts that allow them to manage the risk of high wholesale electricity prices during such periods (effectively providing dry period ‘insurance’) in return for a fee. Genesis Energy entered into a range of significant electricity Derivative contracts as a result of the electricity market reforms undertaken in 2010. The Company also enters into electricity Derivative contracts to minimise the risk of changes in wholesale market prices or electricity market conditions affecting its financial performance. You can find out more about these contracts in Section 4.0 About Genesis Energy of the Prospectus. Genesis Energy actively participates in both the New Zealand wholesale electricity market and the New Zealand Electricity Futures and Options market run by the ASX. The Company monitors movements in wholesale electricity pricing to take advantage of opportunities to buy and sell electricity positions and to support a number of risk-management products that the Company both offers into and buys from the market. 22 section FOUR ABOUT GENESIS ENERGY KUPE Oil and Gas Genesis Energy, through three wholly owned subsidiaries, has a 31% interest in the Kupe Joint Venture which owns the Kupe oil and gas field that lies in the offshore Taranaki basin. Kupe is an integral part of the Company’s business and provides a diversified source of revenue for the Company. Genesis Energy is an active participant in the Kupe Joint Venture which gives it an opportunity to influence and share in any development of the Kupe oil and gas field. In FY2013, this interest contributed approximately 32% of Genesis Energy’s EBITDAF. Since starting commercial production in 2010, earnings from the Kupe Joint Venture have been consistent, in line with the stable production levels from Kupe. Gas Reflecting its 31% interest in the Kupe Joint Venture, Genesis Energy receives 31% of the natural gas produced. In addition, it has entered into long-term contracts with the other joint venture partners to purchase the remainder of the current natural gas produced and has rights in respect of all future production of natural gas from the Kupe oil and gas field. Genesis Energy sells natural gas to its retail customers in the North Island or uses it for electricity generation at the Huntly Power Station. The Company also sells surplus natural gas on the wholesale natural gas market. Oil The other Kupe Joint Venture participants are Origin Energy Limited (which, through its subsidiaries, has a 50% interest and is the operator of the Kupe oil and gas field), New Zealand Oil & Gas Limited (which, through its subsidiaries, has a 15% interest) and Mitsui E&P Australia Pty Limited (which has a 4% interest). Genesis Energy receives revenue from the sale of its 31% share of oil from Kupe. In 2012, Kupe produced approximately 11% of New Zealand’s total production of oil and condensate. Approximately 95% of the oil and condensate produced in New Zealand in 2012 was exported. Kupe’s assets comprise three wellheads, an unmanned offshore platform, a 30 km pipeline and subsea utilities umbilical cable to an onshore production station near Hawera, oil storage facilities at New Plymouth and an onshore gas pipeline. Kupe commenced commercial production in March 2010 and is an important part of New Zealand’s energy infrastructure. It is expected to meet approximately 11% of New Zealand’s annual gas demand and approximately 50% of New Zealand’s anticipated LPG demand until 2025. Kupe oil, natural gas and LPG production is driven by long-term natural gas contracts which provide for fixed annual production levels, however, volumes may vary from year to year due to natural decline, actual production rates and the timing of shipments. LPG See Section 4.4 Independent Engineer’s Summary Report on Generation Assets and Kupe Facilities of the Prospectus for an independent engineer’s findings on the Kupe assets. 23 Gaffney, Cline & Associates (Consultants) Pte Limited (“GCA”) is an independent international energy advisory group of more than 50 years’ standing whose expertise includes petroleum reservoir evaluation and economic analysis (a detailed discussion of GCA’s qualifications is included in Section 4.5 Independent Expert’s Summary LPG is a secondary product of oil and gas production. Genesis Energy receives 31% of the LPG produced by Kupe which it sells to its customers. Reserves The initial Kupe reserves estimates were reviewed for the Kupe Joint Venture in July 2010 and June 2012. These reviews resulted in increases to the initial reserves estimates and an extension of the anticipated life of the field into the late 2020s. The Kupe Joint Venture’s reserves estimates as at 30 June 2012 were reviewed by an independent expert23, who found them to be reasonable. The independent expert provided updated reserves estimates as at 31 December 2013. See Section 4.5 Independent Expert’s Summary Report on Kupe Reserves and Resources of the Prospectus for an independent expert’s findings on Kupe reserves. Report on Kupe Reserves and Resources of the Prospectus). GCA is not, nor does it intend to be, a director, officer or employee of either Genesis Energy or the Crown. However, GCA has provided, and may in the future provide, professional advisory services to Genesis Energy. Genesis Energy Share Offer investment statement 23 Section FOUR About Genesis Energy PEOPLE, COMMUNITY AND THE ENVIRONMENT The quality of Genesis Energy’s operational, safety and financial performance relies strongly on the well-being, capabilities and performance of its more than 900 employees. The health, safety and well-being of its employees, contractors and others are of paramount importance to Genesis Energy. The Company continues to target world-class performance in health and safety and has recently implemented a number of initiatives to drive improvement in health and safety across all the Company’s activities. The Company continually works to build enduring relationships with local communities, iwi and other stakeholders. The Company seeks to have proactive and constructive relationships with iwi in relation to matters of mutual interest within their respective rohe. The types of relationships that Genesis Energy has with iwi are many and varied, from being a tenant on Māori-owned land, to agreements on how the two parties will work together to address effects of the Company’s activities on iwi, to proactive initiatives that support hapū/iwi development, while also creating wider environmental and community benefits. BOARD OF DIRECTORS John Dell 24 Rt Hon Dame Jenny Shipley Chairman Joanna Perry Deputy Chairman Rukumoana Schaafhausen Andrew Clements John Leuchars Graeme Milne section FOUR ABOUT GENESIS ENERGY Genesis Energy understands that the way in which it operates leaves an environmental footprint, whether as a result of emissions from fuel used at Huntly Power Station, emissions from vehicles used for staff travel or the impact on the natural habitats around the Company’s generation sites. The Company’s environmental performance measures and targets include zero abatement, infringement and enforcement notices under the Resource Management Act 1991. In 2013, Genesis Energy received no such notices. You can find more information on Genesis Energy’s board and executive management team and corporate governance practices in the Prospectus. EXECUTIVE MANAGEMENT Dean Schmidt General Manager Strategy and Corporate Affairs Andrew Donaldson Chief Financial Officer Maureen Shaddick General Counsel and Company Secretary Albert Brantley Chief Executive Andrew Steele General Manager People and Safety Michael Fuge Chief Operating Officer Genesis Energy Share Offer investment statement 25 Section FOUR About Genesis Energy RELATIONSHIP BETWEEN GENESIS ENERGY AND THE CROWN After completion of the Offer, the Crown, acting by and through the Shareholding Ministers, will continue to be Genesis Energy’s majority shareholder with a holding of at least 51% of the Shares in the Company.24 The Crown does not guarantee the Shares or any returns in respect of them or the Company or any obligations of the Company. As the majority owner, the Crown generally will be able to control the outcome of all resolutions put to Shareholders, including the election and removal of directors. The Chairman nominated by the board must be approved by the Minister of Finance. Due to the ownership restrictions in the Public Finance Act and the Constitution, any future equity capital raising that involves issuing any shares or other voting securities of Genesis Energy will be able to proceed only if the Crown agrees to participate to the extent required to maintain an interest of at least 51%. Any decision by the Crown on whether to make equity capital available to Genesis Energy will be made by the Government at the time and will take into account all relevant factors, including competing capital requirements. The Crown’s decisions regarding capital allocation may be critical to any equity capital raising Genesis Energy wishes to undertake in the future. Transactions between the Crown and its associates and Genesis Energy that exceed certain materiality thresholds, as set out in the NZX Listing Rules or the ASX Listing Rules, will require the approval of Genesis Energy’s Shareholders. The Crown and its associates will not be entitled to exercise its voting rights in favour of any resolution to approve such a transaction unless a waiver is granted by NZX and/or ASX (as the case may be). NZX and ASX have each granted a waiver to permit the Company to enter into certain agreements with Transpower without obtaining Shareholder approval where those agreements exceed the relevant materiality thresholds. The waivers are described in Section 7.2 Statutory Information of the Prospectus. Under the Public Finance Act, Genesis Energy is required to provide The Treasury certain limited information that is not publicly available to enable The Treasury to prepare the Government’s consolidated financial statements. This information comprises monthly financial statements, and five-year forecasts which are submitted twice a year. The Company and the Crown have entered into a confidentiality agreement in respect of such information. The Crown is a party to the Treaty of Waitangi with Māori. Treaty obligations lie only with the Crown and not with companies or individuals. However, the way the Crown responds to Treaty claims and the Crown’s relationship with Māori may have implications for Genesis Energy. A claim has been lodged in the Waitangi Tribunal alleging that Ngāti Ruapani has proprietary interests in Lake Waikaremoana, and that such interests are compromised by the use of the lake by Genesis Energy for hydro-generation. The Waitangi Tribunal issued a decision on 28 February 2014 agreeing to hold an urgent hearing on whether the applicant’s ability to seek redress for Treaty of Waitangi breaches is impaired by the sale of Shares in Genesis Energy. The Crown has made a number of commitments to Ngāti Ruapani in connection with that claim, which may have implications for Genesis Energy’s water permits. The Crown considers that these commitments address the issues raised by the claimant in relation to the Genesis Energy Share sale. See Section 4.3 Relationship Between Genesis Energy and the Crown of the Prospectus under the heading “Waitangi Tribunal Claims” for more information. The Public Finance Act provides that nothing in Part 5A of that Act (mixed ownership model companies) permits the Crown to act inconsistently with the principles of the Treaty. 24 In addition, Shares may be acquired by other entities who are associated with part of the Crown such as the managers of the New Zealand Superannuation Fund. 26 section FOUR ABOUT GENESIS ENERGY OVERVIEW OF Section FIVE OVERVIEW OF FINANCIAL INFORMATION OVERVIEW OF FINANCIAL INFORMATION This section provides an overview of financial information. Audited Group financial statements for FY2013 and for H1 2014 along with summary financial statements for the Group for FY2009 to FY2013 and H1 2013 and H1 2014 are set out in the Prospectus. The historical financial information included in this section has been extracted from Genesis Energy’s audited consolidated financial statements and unqualified audit opinions were received for each of those financial statements other than the financial statements for H1 2013 which have not been audited. Genesis Energy has prepared PFI for FY2014 and FY2015 in accordance with Financial Reporting Standard No. 42 “Prospective Financial Statements” for inclusion in the Prospectus and the Appendix - Prospective Financial Information. The PFI provided in this section has been extracted from this information. The PFI includes historical trading results for the six month period to 31 December 2013, based on audited interim financial statements. The PFI is forward looking and based on certain assumptions, and therefore involves risks and uncertainties. Actual results could differ from those expressed or implied by such forward looking statements, with factors that could cause such differences including, but not limited to, those discussed in the section What are my Risks? in this Investment Statement and in the Prospectus. You should read the basis of preparation, assumptions and sensitivities relating to the prospective financial information (as detailed in the Appendix - Prospective Financial Information) so that you fully understand the prospective financial information. Certain information included in this section (including EBITDAF) is non-GAAP financial information. You can find an explanation of why Genesis Energy uses this measure of financial performance later in this section. A reconciliation of Net Profit to EBITDAF and to Free Cash Flow is also included later in this section. A summary of how Genesis Energy makes money The following provides a simplified overview of how Genesis Energy makes money as an introduction to assist in reading the detail in the rest of this section. Genesis Energy’s financial information reflects the performance of its integrated energy portfolio, through which Genesis Energy seeks to: —— sell electricity, natural gas and LPG to its retail customers (residential, small to medium enterprises and commercial and industrial) and wholesale customers at competitive prices; —— minimise the costs associated with providing strong customer service and product innovation; —— buy and trade electricity and natural gas for its customers; —— efficiently generate electricity from its renewable and thermal power stations which is sold into the national wholesale electricity market; —— optimally source coal, natural gas and LPG used to generate electricity or to on-sell to its wholesale and retail customers; —— maximise the benefit from its share of the outputs produced by the Kupe oil and gas field; and —— operate head office corporate services efficiently and with greater cost control. 28 Main factors driving financial performance and cash flows Genesis Energy is a relatively complex business with a number of important drivers of financial performance. The following factors can have a significant impact on annual financial performance and net cash flows, but are not an exhaustive list of all relevant factors. This should be read in conjunction with “Explanation of Trends in Financial Performance” later in this section as well as the section What are my Risks? in this Investment Statement and in the Prospectus. Retail Market Conditions Customer retail sales prices and sales volumes determine the revenue earned by Genesis Energy from selling electricity and gas to end customers. A change in retail competition, national demand and average temperatures can lead to material changes in sales volumes, prices and operating costs, and can have an impact on profit margins. A relatively small change in volumes and prices can substantially affect margins. Refer to the assumptions “Customer electricity and gas revenue” and the related sensitivity analysis in the Appendix - Prospective Financial Information for further information. Wholesale Price of Electricity Volatility in the wholesale price of electricity over a period of months or longer affects generation volumes Genesis Energy offers to the market, and electricity revenues, Derivatives and fuels consumed. Lower wholesale electricity prices tends to drive lower Thermal Generation as well as lowering the cost of purchasing electricity by Genesis Energy to supply customers. The opposite tends to happen when wholesale electricity prices increase. The most important factors driving variability in wholesale electricity prices are supply and demand of electricity, with supply being particularly affected by the availability of water for hydro generation (which has a relatively lower operating cost of generation), discussed further below. The wholesale price over time can have a significant impact on both generation volumes and revenues and the cost of purchasing electricity to supply Genesis Energy’s customers. Generation Output The volume of Genesis Energy’s generation output affects the revenue it earns from selling electricity into the wholesale market. For Genesis Energy this is primarily driven by: —— variable wholesale electricity prices (referred to above) which affect the economics of Thermal Generation (which is a relatively more expensive form of generation); —— variable hydrological conditions at the hydro power stations of Genesis Energy and its competitors; and —— availability and utilisation of generation assets (that is, planned and unplanned outages). Coal and gas fired generation at the Huntly Power Station costs more to run, relative to other forms of generation such as hydro, and is influenced by wholesale electricity prices and the availability and cost of coal and gas (see Section 4 About Genesis Energy for further information on the Huntly Power Station). Genesis Energy section FIVE OVERVIEW OF FINANCIAL INFORMATION will typically increase Thermal Generation from all units when wholesale prices are higher, as the higher price compensates for the higher cost of fuel. Genesis Energy’s hydro generation is affected by water inflows and lake storage levels. The level of water in the storage lakes above Genesis Energy’s hydro power stations depends on the amount of rain and/or snow melt in the catchment area for each lake. The impact of hydrological conditions on Genesis Energy’s hydro power stations typically varies between Genesis Energy’s hydro schemes, due to their geographic dispersion and locations in distinct hydrological catchments. Genesis Energy’s generation production can also change due to outages in its power stations. Most outages are planned well in advance to carry out scheduled maintenance or mid-life upgrades, however, unplanned outages can also occur, for example due to equipment failures. Kupe Production Volumes and Prices Kupe provides Genesis Energy with a diversified source of revenue, which is not affected by changing hydrological conditions. Genesis Energy shares in the outputs from, and the cost of operations of, the Kupe oil and gas field. Kupe contributed 32% of total Genesis Energy EBITDAF in FY2013, and is forecast to contribute approximately one third of total Genesis Energy EBITDAF in FY2014 reducing to approximately one quarter in FY2015. Kupe oil, natural gas and LPG production is driven by long-term natural gas contracts which provide for fixed annual production levels, although, volumes can vary (by 10 to 15%) due to a range of factors including natural decline in reserves, actual production rates and shipping schedules. Reflecting its 31% interest in the Kupe Joint Venture, Genesis Energy receives 31% of the natural gas, oil and LPG produced. Genesis Energy has also entered into long-term contracts with the other Kupe Joint Venture parties to purchase the remainder of the natural gas currently produced. 23 December 2013. Genesis Energy’s BBB+ long-term credit rating is one notch higher than its stand alone credit profile rating (BBB) to reflect S&P’s view of the benefit of the Company’s status as a Government-owned entity. S&P has noted that the one notch higher rating is likely to be maintained while the Crown owns more than 50% of Genesis Energy. On the S&P long-term rating scale, the stand alone ‘BBB’ rating indicates that the entity has adequate capacity to meet its financial commitments, but adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to meet its financial commitments than a higher rated entity. Seasonality Electricity consumption follows daily and seasonal patterns. Demand is typically lower in warm months and can increase by more than 30% during winter months. Fluctuations in seasonal weather patterns have a significant impact on supply of, and demand for, electricity and therefore on financial performance. Capital Expenditure In addition to ongoing and relatively consistent capital expenditure to maintain its assets, Genesis Energy has periodically made large investments in new capital assets. Given that demand for additional electricity generation capacity in New Zealand is not expected to grow significantly in New Zealand over the next three to five years, the Company does not expect to invest in any major new generation projects in the Prospective Period. Genesis Energy therefore expects to have more cash available to be reinvested in the Company or to pay down debt or to be returned to Shareholders. Genesis Energy on-sells some of the natural gas (except for the natural gas used in the generation of electricity) and the oil and the LPG. The revenue derived by Genesis Energy from the sale of oil, natural gas and LPG produced at Kupe is linked to external market prices (including, in the case of gas, the international price for methanol and the Producers Price Index). Therefore changes in the Producers Price Index and market prices affect the revenue derived by Genesis Energy and its profit margin. In addition, the revenue derived from the sale of oil and some of the revenue derived from the sale of LPG is denominated in foreign currencies and therefore movements in the exchange rate between those currencies and the New Zealand dollar also influences profit margins. Genesis Energy hedges a proportion of its oil revenues to reduce the impact of spot price fluctuations on oil revenue. Credit Rating Genesis Energy targets a long-term credit rating25 of BBB+ from Standard & Poor’s (Australia) Pty Ltd (“S&P”). Genesis Energy’s BBB+ rating (with a stable outlook) was re-affirmed by S&P on 25 A long-term credit rating is an expression of the general creditworthiness and credit quality of an entity based on an analysis of quantitative and qualitative metrics and refers to an entity’s ability and willingness to honour its existing debt responsibilities. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by an assigning rating agency. Genesis Energy Share Offer investment statement 29 Section FIVE OVERVIEW OF FINANCIAL INFORMATION Overview of financial performance You can find a full description of assumptions and sensitivities relating to the prospective financial information for FY2014 and FY2015 in the Appendix – Prospective Financial Information. FY2012 FY2013 FY2014 FY2015 H1 2013 H1 2014 Historical Historical Prospective Prospective Historical Historical 1,923.2 1,743.9 1,691.3 1,844.1 877.0 809.2 235.8 212.5 261.0 244.0 108.4 117.7 Petroleum revenue 85.8 80.5 81.3 68.3 34.2 42.6 Other revenue 20.0 33.4 7.0 9.4 11.7 3.6 Total operating revenue 2,264.8 2,070.2 2,040.6 2,165.9 1,031.3 973.1 Electricity purchases, transmission and distribution (1,004.9) (920.0) (912.8) (1,025.3) (449.5) (422.8) (249.4) (217.2) (257.2) (235.4) (109.7) (113.9) (35.0) (31.5) (30.1) (28.5) (14.5) (14.5) (288.4) (259.9) (203.1) (212.4) (112.6) (95.3) Employee benefits (80.8) (83.6) (87.0) (85.2) (41.5) (45.6) Other operating expenses (219.0) (221.7) (245.2) (215.6) (107.6) (130.4) Total operating expenses (1,877.5) (1,733.8) (1,735.4) (1,802.4) (835.4) (822.5) EBITDAF 387.3 336.4 305.2 363.4 195.9 150.6 Depreciation, depletion and amortisation (152.1) (135.0) (157.8) (150.2) (67.0) (81.2) Impairment of non-current assets (12.4) (6.6) (9.5) (13.5) (0.7) (3.6) Change in fair value of financial instruments (11.3) 30.5 (3.9) 4.1 10.1 (2.6) (0.3) - $ million Electricity revenue Gas revenue Gas purchases and transmission Petroleum production, marketing and distribution Fuels consumed 26 (3.1) Other expenses (0.6) (1.7) (0.3) 203.8 136.7 62.8 Profit before net finance expense and income tax 208.4 224.8 Net finance expense27 (88.6) (78.5) (71.1) (70.5) (38.0) (34.1) Profit before income tax 119.8 146.3 62.6 133.3 98.7 28.7 Income tax expense (33.4) (41.8) (20.8) (37.9) (27.9) (9.0) Net Profit 86.4 104.5 41.8 95.4 70.8 19.7 8.6 10.5 4.2 9.5 7.1 2.0 - 11.4 12.8 16.0 5.7 6.4 28 Earnings per share (cents) Dividend declared per share28, 29 (cents) Overview of trends in Net Profit Trends in Net Profit are influenced by a range of non-cash items and interest and tax costs. For example: —— FY2013 Net Profit of $104.5 million was a 21% increase on FY2012 despite a lower EBITDAF, driven by items below EBITDAF including reduced depreciation, depletion and amortisation expenses, a $42 million positive increase in the change in fair value of financial instruments, with lower interest costs offset by higher tax expenses; —— FY2014 Net Profit is forecast to be approximately 60% lower than FY2013 due to an adverse swing in the change in fair value of financial instruments, higher depreciation, depletion and 26 “Other expenses” consists of revaluation of generation assets (when they occur) and other gains and losses relating to foreign exchange and disposals of assets. 27 Finance 30 revenue less finance expense. 133.7 amortisation and lower EBITDAF partially offset by lower interest and tax expenses; and —— FY2015 Net Profit is forecast to improve significantly compared to FY2014, reflecting improved EBITDAF offset by higher tax expense. 28 Based on the number of Shares expected to be on issue on the Allotment Date being 1 billion shares. 29 There is no assurance that prospective dividends will be paid. section FIVE OVERVIEW OF FINANCIAL INFORMATION Key operating metrics (unaudited)30 FY2012 FY2013 FY2014 FY2015 H1 2013 H1 2014 Historical Historical Prospective Prospective Historical Historical Electricity sales - retail (GWh) 5,429 5,354 5,497 5,694 2,797 2,875 Electricity purchases (GWh) 5,781 5,693 5,814 6,018 2,960 3,018 96.44 76.88 68.57 79.10 66.53 53.98 5.4 5.0 6.3 6.9 2.9 3.1 Thermal Generation (GWh) 5,654 4,991 4,097 4,114 2,273 1,875 Renewable Generation (GWh) 2,813 2,221 2,570 2,845 1,513 1,468 Total generation (GWh) 8,467 7,212 6,667 6,959 3,786 3,343 91.10 75.59 71.95 82.18 64.77 54.55 85.77 73.40 58.20 to 68.20 65.50 to 75.50 63.52 53.30 Avg retail electricity purchase price ($/MWh) LWAP Retail gas sales31 (PJ) Avg price received for generation ($/MWh) GWAP Time weighted average wholesale electricity price at the Huntly node ($/MWh) Explanations of the Non-GAAP Financial Information EBITDAF Genesis Energy’s financial statements have been prepared in accordance with NZ GAAP. As such, they comply with NZ IFRS, as well as IFRS. EBITDAF is earnings before net finance expense, income tax, depreciation, depletion, amortisation, impairment, revaluations (when they occur), changes in fair value of financial instruments and other gains and losses. In order to assist readers of Genesis Energy’s financial statements to better understand Genesis Energy’s financial performance, Genesis Energy uses three non-GAAP financial measures being EBITDAF, Free Cash Flow and Net Debt. Because they are not defined by NZ GAAP, IFRS, or any other body of accounting standards, Genesis Energy’s calculation of these measures may differ from similarly titled measures presented by other companies. These measures are intended to supplement the NZ GAAP measures presented in Genesis Energy’s financial information and not as a substitute for those measures. EBITDAF is a non-GAAP profit measure that has been reported in historical financial statements and therefore is shown in the financial information presented in the PFI. Genesis Energy’s management uses EBITDAF to evaluate operating performance of Genesis Energy without the impact of a range of non-cash items (depreciation, depletion, amortisation, impairment, revaluations (when they occur), fair value movements of financial instruments and other gains or losses) or the effects of Genesis Energy’s capital structure and tax position. Genesis Energy considers EBITDAF allows better comparison of operating performance with other electricity industry companies than do NZ GAAP measures that include these items, although caution should be exercised as other companies may calculate EBITDAF differently. EBITDAF should not be considered in isolation or as a substitute for NZ GAAP measures, such as Net Profit and cash flow measures. 30 Operating metrics have not been audited and may differ from those reported in Genesis Energy’s annual reports due to different sources (see specific footnotes) or due to changes in measurement. 31 Excludes gas sold to wholesale customers (comprising large industrial and petrochemical customers). Genesis Energy Share Offer investment statement 31 Section FIVE OVERVIEW OF FINANCIAL INFORMATION Reconciliation of Net Profit to EBITDAF and to Free Cash Flow FY2012 Historical $million FY2013 Historical FY2014 Prospective FY2015 Prospective Net Profit32 86.4 104.5 41.8 95.4 Income tax expense 33.4 41.8 20.8 37.9 Net finance expense 88.6 78.5 71.1 70.5 Impairment of non-current assets 12.4 6.6 9.5 13.5 Change in fair value of financial instruments 11.3 (30.5) 3.9 (4.1) 3.1 0.6 0.3 - 152.1 135.0 157.8 150.2 387.3 336.4 305.2 363.4 Other expenses33 Depreciation, depletion and amortisation EBITDAF Less finance expense (91.4) (79.3) (71.5) (70.5) Less income tax expense (33.4) (41.8) (20.8) (37.9) Less stay-in business capital expenditure34 (51.7) (59.8) (60.1) (61.2) Free Cash Flow 210.8 152.8 193.8 114.0 36 160.036 n/a Dividends declared 155.5 35 73.3% 83.8% 82.6% nil Dividends declared as a % of Free Cash Flow 128.0 Free Cash Flow Free Cash Flow is calculated as EBITDAF less finance expense less income tax expense less stay-in business capital expenditure.34 Free Cash Flow is a non-GAAP financial measure presented only to enable potential investors to consider Genesis Energy’s prospective dividends declared pay-out ratio. The dividends declared as a ratio of Free Cash Flow highlights how much of Free Cash Flow has been, or is expected to be, converted into dividends. Net Debt As at 30 June 2012 Historical As at 30 June 2013 Historical As at 30 June 2014 Prospective As at 30 June 2015 Prospective 16.5 412.9 11.3 114.7 Term borrowings 1,003.0 612.0 1,007.5 834.2 Total borrowings 1,019.5 1,024.9 1,018.8 948.9 Less cash and cash equivalents (24.8) (22.7) (24.5) (24.5) Net Debt 994.7 1,002.2 994.3 924.4 $million Current borrowings Net Debt is defined as the value of current and non-current borrowings less cash and cash equivalents. Net Debt is a metric commonly used by investors as a measure of Genesis Energy’s indebtedness that takes account of liquid financial assets. The table above sets out the calculation of Net Debt. The Net Debt position is forecast to improve in FY2015 post the Tekapo canal remediation project capital expenditure completing in FY2014. 32 NZ GAAP financial measure. 33 “Other expenses” consists of revaluation of generation assets (when they occur) and other gains and (losses). 35 $nil in FY2012 to assist the Company with the funding of the purchase of the Tekapo Power Scheme (which was acquired in June 2011). 36 There is no assurance that prospective dividends for FY2014 and FY2015 will be paid. 34 “Stay-in business capital expenditure”, which relates to on-going asset management and lifecycle maintenance and re-investment programme expenditure and includes capital expenditure on maintaining options for future development but excludes oil and gas rehabilitation and Tekapo canal remediation project capital expenditure. 32 section FIVE OVERVIEW OF FINANCIAL INFORMATION Explanation of trends in financial performance The chart below summarises the movement in EBITDAF over the last five years, H1 2014 and the PFI. This chart allows for comparison of historical EBITDAF to that forecast in the Prospective Period. Historical financial performance is further discussed in Section 6.4 Historical Operational and Financial Information of the Prospectus. Genesis Energy EBITDAF Trends $450 $387.3m $400 $m $305.2m $292.7m $300 $250 $363.4m $336.4m $350 $248.8m $202.4m $200 $150 $100 $50 0 FY2009 FY2010 FY2011 FY2012 FY2013 Historical H1 H2 FY2014 FY2015 Prospective Prospective Summary financial information for the full five year historical period (FY2009 to FY2013) is included in Section 6.4.3 Historical Consolidated Summary Financial Information of the Prospectus. FY2012 onwards is considered most useful for potential investors as there were notable changes in the business with the June 2011 purchase of the Tekapo Power Scheme and the successful development of the Kupe oil and gas field, which had its first full year of production in 2011.37 The chart shows higher EBITDAF in FY2012 with annual average wholesale electricity prices above $75/ MWh with drier than average conditions driving higher electricity revenues. Below is an overview of the primary drivers of Genesis Energy’s year on year EBITDAF performance for FY2012 to FY2015. Overview of Historical EBITDAF for FY2012 FY2012 was a record year for Genesis Energy, with EBITDAF increasing from $292.7 million to $387.3 million, reflecting: —— High annual average wholesale electricity prices which were 58% higher than in FY2011, due to dry weather in the South Island combined with plentiful water and cooler than average temperatures in the North Island. This enabled Genesis Energy to increase utilisation of both North Island hydro stations and its Thermal Generation assets. —— An increase in total generation of 30% due to the full year contribution from the Tekapo Power Scheme (+805 GWh), acquired in June 2011, and increased Thermal Generation as a result of high wholesale electricity prices. 37 Genesis Overview of Historical EBITDAF for FY2013 FY2013 EBITDAF decreased from $387.3 million to $336.4 million, reflecting: —— A reduction in generation volumes and wholesale electricity prices both of which were approximately 15% lower than in FY2012, primarily as a result of a return to more average hydrology (neither particularly wet nor dry) in the South Island. —— Notably for Genesis Energy, wholesale prices were 31% higher in the second half of the year compared to H1 2013 due to a drought primarily centred in the North Island. Genesis Energy had limited ability to adjust its generation profile to benefit from this as a result of a planned outage at the Tekapo Power Scheme. Management estimates this constraint had a negative impact on EBITDAF of $20 million to $25 million (you can find out more about this constraint and the impact on Genesis Energy in Section 6.0 Financial Information of the Prospectus). —— EBITDAF was also affected by an abnormal under-recovery of some lines charges from retail customers (approximately $8 million) due to significantly higher than expected increases in lines charges being incurred by Genesis Energy that were not passed on to customers. This was offset by Genesis Energy’s share of insurance proceeds of $18.6 million which recovered costs incurred in relation to the Kupe subsea utilities umbilical cable. Overview of Forecast EBITDAF for FY2014 FY2014 EBITDAF is forecast to decrease from $336.4 million to $305.2 million, reflecting: —— Suppressed generation output volumes (7.6% lower than FY2013) consistent with lower annual average wholesale electricity prices reflecting flat national demand and relatively high hydro inflows and storage and above average temperatures. —— One-off operating expenses of $26.2 million representing costs of this Offer of approximately $10.0 million and a termination fee and related onerous contract provisions of $16.2 million associated with the exit of a coal import contract. —— As in FY2013, Genesis Energy will be adversely affected by the planned outage at the Tekapo Power Scheme. This outage is expected to be shorter than the outage in FY2013, and is estimated to have a lesser negative impact on EBITDAF than in FY2013, at between $8 million and $12 million. —— Improved EBITDAF from electricity and natural gas sales which is expected to offset some of the above costs. Overview of Forecast EBITDAF for FY2015 FY2015 EBITDAF is forecast to increase from $305.2 million to $363.4 million, reflecting: —— An uplift in generation volumes of 4.4% from those forecast in FY2014 assuming average hydro inflows and corresponding higher annual average wholesale electricity prices. —— Average electricity sales volumes per customer increasing with a return towards average temperatures. —— No one-off operating expenses, no significant planned outages and operating cost savings from the exit of the coal import and related supply chain contracts in late 2013. Energy has a 31% interest in the Kupe Joint Venture. Genesis Energy Share Offer investment statement 33 Section FIVE OVERVIEW OF FINANCIAL INFORMATION Significant or Unusual Events In FY2012, FY2013 and forecast for FY2014 there are one-off or infrequently occurring costs and benefits that should be considered by a potential investor. These are explained below and presented in tabular format. $million Note EBITDAF FY2012 Historical FY2013 Historical FY2014 Prospective FY2015 Prospective H1 2013 Historical H1 2014 Historical 387.3 336.4 305.2 363.4 195.9 150.6 Significant or unusual events: The outage of the Tekapo Power Scheme 1 - 20 to 25 8 to 12 - - - Offer costs 2 1.0 0.6 10.0 - 0.1 2.4 Contract termination fee and related onerous contracts 2 - - 16.2 - - 19.1 Abnormal under-recovery of lines charges 3 - 7.7 - - 7.7 - Insurance compensation and related costs 3 4.0 (18.5) - - - - 34.2 to 38.2 - 7.8 21.6 (6.8) to (7.9) - (2.2) (5.3) 27.4 to 30.3 - 5.6 16.3 Total impact on EBITDAF of removing the significant or unusual events Tax effect of the above Total impact on Net Profit 5.0 4 9.8 to 14.8 (1.4) (2.6) to (4.0) 3.6 7.2 to 10.8 Notes to the above table: 1. The outage of the Tekapo Power Scheme for the remediation of the Tekapo canal in Q3 and Q4 of FY2013 and Q3 of FY2014 reduced the Company’s total hydro generation, and therefore revenue, with a significant negative impact on EBITDAF estimated to be in the range of $20 million to $25 million in FY2013 and forecast in the range of $8 million to $12 million in FY2014. 2. The PFI for FY2014 also includes non-recurring items for the costs related to this Offer of approximately $10 million (a further $1.6 million was incurred prior to FY2014) and a contract termination fee and related onerous contract provisions of $16.2 million for the exit of the coal import contract (net of estimated sub-lease revenue). 34 3. EBITDAF in FY2013 was also affected by an abnormal underrecovery of some lines charges of $7.7 million due to significantly higher than expected lines charges being incurred that were not passed on to customers and by Genesis Energy’s share of insurance proceeds of $18.6 million which recovered costs incurred in relation to the Kupe subsea utilities umbilical cable in FY2013 and earlier years. 4. The tax effect is calculated based on an income tax rate of 28% on taxable items. section FIVE OVERVIEW OF FINANCIAL INFORMATION Overview of Consolidated Balance Sheet As at 30 June 2012 Historical As at 30 June 2013 Historical As at 30 June 2014 Prospective As at 30 June 2015 Prospective As at 31 December 2013 Historical Total assets 3,630.2 3,751.2 3,685.1 3,547.2 3,667.5 Total liabilities 1,833.6 1,801.5 1,813.9 1,722.8 1,757.9 1,796.6 1,949.7 1,871.2 1,824.5 1,909.6 994.7 1,002.2 994.3 924.4 958.3 $million Net Assets38 Including: Net Debt Non-current property, plant and equipment and oil and gas assets are the most significant asset items meaning depreciation and depletion and capital expenditure (together with revaluations, when they occur) have the most significant effect on Net Asset movements in the Balance Sheet. In the Prospective Period Net Assets reduce primarily with depreciation, depletion and amortisation exceeding forecast capital expenditure. In FY2013 there was a revaluation increase in generation assets of $155.6 million. The Net Debt position is forecast to improve in FY2015 following the completion of the Tekapo canal remediation project capital expenditure in FY2014. Overview of Consolidated Operating Cash Flow FY2012 Historical FY2013 Historical FY2014 Prospective FY2015 Prospective H1 2013 Historical H1 2014 Historical Net cash inflows from operating activities 363.3 298.3 293.3 344.9 217.9 164.6 Net cash outflows from investing activities (69.5) (172.6) (97.6) (64.1) (93.2) (32.5) Net cash outflows from financing activities (290.1) (127.9) (193.9) (280.8) (110.6) (106.4) 14.2 25.7 $million Net movement in cash and cash equivalents 3.7 (2.2) 1.8 - Net cash inflows from operating activities approximates EBITDAF with movements over the historical years and the Prospective Period reflecting movements in EBITDAF and working capital. Net cash outflows from investing activities primarily relates to spend on capital expenditure with cash outflows from financing primarily relating to repayment of borrowings and dividends. 38 Net Assets is calculated as total assets less total liabilities. The amount of total assets and total liabilities for each of FY2012 and FY2013 has been taken from the audited consolidated statement of financial position (consolidated balance sheet) of Genesis Energy and its subsidiaries as at 30 June 2013 (including comparatives) and has been calculated as at that date. Refer to the Prospectus at Section 6.4.5 Audited Financial Statements for the Year Ended 30 June 2013. Net Assets as at 30 June 2012 and 2013 has been calculated based on these numbers. The amount of total assets and total liabilities as at 31 December 2013 has been taken from the audited interim balance sheet of Genesis Energy and its subsidiaries as at 31 December 2013 and has been calculated as at that date. Refer to the Prospectus at Section 6.4.4 Audited Interim Financial Statements for the Six Months Ended 31 December 2013. Net Assets as at 31 December 2013 has been calculated based on these numbers. Total assets, total liabilities, Net Assets and Net Debt for the six months ended 31 December 2012 are not included in this Investment Statement as they were not required to be included in the audited interim balance sheet of Genesis Energy and its subsidiaries for the six months ended 31 December 2013. This information is contained within the Prospectus. Genesis Energy Share Offer investment statement 35 WHAT ARE What are my risks? Your Shares will be fully paid and you will not have liability to make any further payments for them. However, you may not be able to get back any or all of your investment and you may not receive the returns you expect. This could be because you are unable to sell your Shares for the price you paid for them (or at all) or because the dividends are less than you expect. The principal risks that may have an impact on Genesis Energy’s business or financial results, and which could reduce or eliminate the value of your Shares or the returns on them, are set out below. A full description of the risks that may have an impact on your investment is set out in Section 5.0 What are my Risks? in the Prospectus. Adverse Prices and Volumes Retail electricity sales – the volume and price at which Genesis Energy is able to sell electricity to customers can materially influence Genesis Energy’s financial performance. Volume and price may be adversely affected by competitor behaviour (such as discounted pricing) and customer behaviour (such as reduced demand due to increased energy efficiency). They can also be adversely affected by factors that affect longer-term wholesale electricity prices, which are referred to below. These include generation capacity being increased before it is required in the market, a significant gas discovery, a reduction in demand in the industrial sector, adverse conditions in the New Zealand economy, adverse regulatory changes or overall warming of the climate. Wholesale electricity prices – the wholesale price at which Genesis Energy sells electricity it generates, or buys electricity it sells to customers, may be unfavourable in the short, medium or longer term. The following factors (alone or in combination with others) could have a significant or material adverse effect on Genesis Energy’s financial performance: —— Medium-term wholesale price drivers: Adverse changes sustained over a period of months in hydrological and climatic conditions, and power station availability; —— Longer-term wholesale price drivers: The wholesale price over time can have a significant impact on both generation volumes and revenues and the cost of purchasing electricity to supply Genesis Energy’s customers. The level of customer demand relative to supply from generators is a key determinant of electricity prices over the longer term. A fall in demand, or excess generation supply, may adversely affect wholesale and retail prices, potentially for a sustained period. These may arise from a range of factors including adverse changes in the level of activity in the industrial sector, competitor behaviour, regulatory changes, a significant gas discovery, population growth, economic conditions, technological advances in the more efficient use and generation of electricity (including by customers, potentially as a consequence of regulatory subsidisation of competing technologies) and weather. In a competitive market, such longer term changes in wholesale prices influence retail prices. Tiwai Point aluminium smelter – the Tiwai Point aluminium smelter accounted for approximately 13% of New Zealand electricity demand in 2012. If New Zealand Aluminium Smelters closes its Tiwai Point aluminium smelter or significantly reduces its electricity consumption, Genesis Energy may be adversely affected. This is because a closure or significant reduction in electricity consumption could result in a reduction in wholesale electricity prices, and in electricity prices generally. The size of these price reductions, both in the short term and ongoing, and any consequential adverse effects on Genesis Energy’s financial performance, would depend on many variables, which are referred to in Section 3.1 The Electricity Sector and Section 5 What are my Risks? of the Prospectus. Genesis Energy understands that the earliest date at which any such reduction could take effect would be 1 January 2015, but there is no certainty as to whether, or when, or the level at which, any such reduction could occur and, therefore, the nature and extent of any impact on Genesis Energy is not known. Regulatory Changes Labour-Green proposed market reform – on 18 April 2013 the New Zealand Labour Party and the Green Party of Aotearoa New Zealand announced separate proposals for electricity sector regulatory reform which would, if implemented, involve significant changes to the electricity industry. It is uncertain whether either party will have the political opportunity to implement its respective proposals. While the implementation, timing and final details of these proposals are uncertain, their implementation, as currently proposed, would have a material adverse effect on Genesis Energy. Transmission pricing methodology – Genesis Energy uses the national grid to transmit electricity. The Electricity Authority is currently reviewing the transmission pricing methodology, which determines the basis for setting transmission charges related to the operation and development of the national grid and how these costs will be allocated to users of the grid. The changes proposed by the Electricity Authority, if implemented, may materially increase Genesis Energy’s costs and also adversely affect the income expected from existing arrangements. It is unclear what proportion of this additional cost would be able to be passed through to consumers. The Electricity Authority is currently consulting on its proposal. However, the outcome of this consultation process remains uncertain and it is unclear what, if any, changes will be made to the transmission pricing methodology and what the timing of any changes will be. The Electricity Authority does not expect to release its second issues paper on this subject prior to the second half of 2014. Genesis Energy anticipates that any changes to the transmission pricing methodology arising from this review would be unlikely to be implemented before 2016. Regulatory change to the electricity market (excluding LabourGreen proposed market reform) – there is a risk, separate from the reforms proposed by the Labour Party and the Green Party, that the Government or regulators (including the Electricity Authority) may seek to regulate or influence the structure or operation of the wholesale and retail markets or introduce measures that may increase Genesis Energy’s costs or restrict the type or extent of Genesis Energy Share Offer investment statement 37 Section SIX What are my risks? its operating activities. This could include a moratorium or other significant set of restrictions on building or operating Thermal Generation plant, which could have an adverse impact on the future use or development of the Huntly site and other Thermal Generation prospects. Operational failure – an operational failure, which includes operator error, made in the operation of one or more of Genesis Energy’s power stations or related infrastructure could have a significant adverse effect on the Company, the electricity market and/or the environment or cause harm to Genesis Energy’s people. Charge on use of water – the Government is in the process of developing reforms for freshwater and resource management systems (although it is not clear if or when such reforms will take effect). Genesis Energy could be adversely affected by these reforms if they impose restrictions or conditions on its generation activities (both hydro and thermal) or if they impose a pricing regime on water or additional costs on its generation activities that the Company is not able to pass on to customers. Electricity transmission infrastructure (hardware) failure – Genesis Energy is reliant on third parties for the transmission and distribution of electricity. This exposes the Company to the risk of planned or unexpected transmission or distribution failures (such as a transmission failure in the national grid operated by Transpower or a failure at a line operated by a distribution company). The electricity transmission and distribution systems in New Zealand are susceptible also to a range of unpredictable natural hazards such as floods, heavy snowfalls, earthquakes, cyclones and solar flares. Infrastructure Failure or Operating Limitations Catastrophic events – a single (or multiple) catastrophic event(s) (such as a significant earthquake, volcanic eruption, landslide, fire, flood, explosion, act of terrorism or other disaster) could result in losses considerably greater than Genesis Energy’s material damage and business interruption insurance limit, which is currently $880 million, in respect of Genesis Energy’s assets, other than its Kupe interests. Genesis Energy has separate insurance arrangements in place in respect of its interests in the assets associated with the Kupe oil and gas field, which is currently covered for losses up to $617 million. Maui pipeline outages – Genesis Energy relies on third-party service providers to deliver gas to its large industrial customers, and to the Huntly Power Station for use as fuel in its Thermal Generation units. Prolonged outages in the Maui pipeline could significantly affect Genesis Energy’s ability to generate electricity and also affect delivery of gas to customers. Kupe infrastructure failure – Kupe’s infrastructure could be affected by a single (or multiple) catastrophic event(s) (such as a significant earthquake, volcanic eruption, landslide, fire, flood, explosion, act of terrorism or other disaster or adverse weather conditions (including serious storms)), or suffer from prolonged failure of structures or systems, which could in turn adversely affect Genesis Energy’s earnings. Also, a catastrophic plant failure could result in an oil spill or other uncontrolled discharge of oil or gas (or other substances) into the environment. Significant costs and liabilities could be incurred by Genesis Energy, as a participant in the Kupe Joint Venture, in remediating any environmental damage resulting from such a spill and any such event could have adverse effects on Genesis Energy’s reputation. Failure of key plant – Genesis Energy relies upon key equipment and technology at each of its power stations. If material items of equipment or technology suffer failures requiring unplanned power station outage and replacement or repair, the Company’s generation production may be reduced and significant capital expenditure may be required to replace or repair such assets. Genesis Energy holds spare parts for many important components, however, the Company does not hold spares for all of its equipment. In particular, a failure in Unit 5 at the Huntly Power Station (including the transformer) could have a significant adverse effect on Genesis Energy’s generation output and on the revenue that Genesis Energy would otherwise have derived. 38 Financial Losses from Contracts Adverse changes in respect of Kupe revenue – revenue derived by Genesis Energy from the sale of oil, gas and LPG produced from the Kupe oil and gas field is linked to external market prices. Changes in these prices, as well as in the international price of oil and methanol and movements in foreign exchange rates, could affect Genesis Energy’s revenue and its profit margin. Thermal fuel risks – Genesis Energy has gas purchase contracts in place with various suppliers (including for natural gas produced from Kupe). As a result of the volume and long-term take or pay nature of such contracts, a significant quantity of this contracted gas is in excess of the Company’s requirements for generation and gas retailing. The Company’s Long gas position had an adverse impact on Genesis Energy’s financial performance from mid FY2010 to FY2013. It is also forecast to have an adverse impact during the Prospective Period. These impacts have been incorporated into the historical and prospective financial information set out in Section 5 Overview of Financial Information of this Investment Statement and Section 6.0 Financial Information of the Prospectus. The financial impact on Genesis Energy of having a Long gas position from 1 July 2015 is unknown as it will depend on a range of factors including the extent of its Long gas position and market conditions at the time. Genesis Energy expects that the extent of its Long gas position will reduce between 2015 and 2020, and be eliminated by 2021.39 39 The year in which the Long gas position peaks, and the profile for its reduction over the period 2015 to the end of 2020, will depend on a range of factors, including the actual volumes of gas used for electricity generation and retail sales, whether the Company varies the quantity of contracted gas purchases, and whether contingent reserves become firm at one of the gas fields from which the Company purchases gas. section SIX What are my risk? Other Principal Risks Treaty of Waitangi – national freshwater and geothermal resources claim – a second hearing of the Waitangi Tribunal will consider whether Māori rights and interests in relation to water and geothermal resources are adequately recognised and provided for and whether Crown policies are in breach of the Treaty of Waitangi. The Government will need to consider whether any recommendations of the Waitangi Tribunal should result in a change of Government policy in relation to the management of freshwater in New Zealand or an acceleration of its current proposed reforms. These reforms are likely to include greater consideration being given to iwi interests before council decisions on freshwater planning are made. Such reforms or changes in Government policy may impose restrictions, conditions or additional costs on Genesis Energy’s access to freshwater and those additional costs may not able to be passed on to customers. In addition, other claims by Māori to interests in land or other resources may, if successful, adversely affect Genesis Energy. Treaty of Waitangi – land claims and memorials – land of which Genesis Energy is either the legal or equitable owner may be subject to claims from Māori. The titles (where titles have been issued) to some of the properties on which Genesis Energy’s power stations are located are subject to memorials under the StateOwned Enterprises Act 1986. These memorials mean that, in certain circumstances, the Waitangi Tribunal has the power to order the return of the land to Māori ownership. In relation to the land in the Waikaremoana Power Scheme and the Tongariro Power Scheme to which Genesis Energy is yet to receive legal title, it is intended that memorials will be registered upon the transfer of legal title to Genesis Energy. Pending such transfer, the Waitangi Tribunal powers of resumption also apply in respect of such land. There is a risk that, if land used by the Company were to be resumed and returned to Māori ownership, the compensation paid to the Company under the relevant legislation may not be sufficient to cover the full extent of the losses incurred by the Company. Reputation – Genesis Energy’s business is large, complex and highly specialised which presents a number of reputational risks. The Company could be adversely affected should it, or the industry generally, suffer from adverse publicity. The effect on Genesis Energy could be a reduction in sales or increase in costs, which may affect financial performance. These and other risks are more fully described in the Prospectus. You should carefully consider these risks before making your investment decision. Consequences of Insolvency You will not be liable to pay any money to any person if Genesis Energy becomes insolvent. If Genesis Energy is liquidated then all claims by its creditors will rank ahead of any entitlement of Shareholders to any distribution. Each Share confers an equal right to participate in any such distribution. However, any distribution made on liquidation of Genesis Energy may be less than the amount of your investment or you may not receive any amount. Genesis Energy Share Offer investment statement 39 TERMS OF Terms of the Offer The Crown is offering to sell 300,000,000 to 490,000,000 Shares in the Company, representing between 30% and 49% of the Shares on issue. This includes the Loyalty Bonus Shares to which New Zealand Applicants may become entitled under the terms of the Offer. The Offer comprises the Retail Offer (which in turn comprises a General Offer and a Broker Firm Offer), the Institutional Offer and the Participating Iwi Offer. How Much Do I Pay? You will pay the Final Price per Share, determined following the ‘bookbuild’ process discussed below. The Final Price is expected to be announced and posted on the Offer website www.genesisenergyshares.govt.nz and under Genesis Energy’s stockcode ‘GNE’ on www.nzx.com on or about 28 March 2014. As the Final Price will be known when you make your Application for Shares, you will be asked to apply for a number of Shares multiplied by the Final Price which will give a total Application amount. The minimum Application amount under the Retail Offer is $1,000. The Crown reserves the right to accept Applications for less than $1,000, including where $1,000 is not a multiple of the Final Price. Refunds and Scaling If the Offer or any part of it is withdrawn, then the relevant Application amounts will be refunded without interest no later than five Business Days after the decision to withdraw the Offer is announced. If the total dollar amount of Shares you apply for and the value (based on the Final Price) of the Shares you receive differs by more than the Final Price due to scaling of your Application, this difference will be refunded to you no later than five Business Days after the Allotment Date without interest. If this difference is less than the Final Price, it will be retained by the Crown. If you apply for a total Application amount that is not a multiple of the Final Price, your Application will be rounded down to the nearest multiple of the Final Price and any difference will be retained by the Crown. Refunds will be paid in the manner you elect any future dividend payments to be paid. How is Pricing of the Shares Fixed? The Final Price for the Shares will be determined on or about 28 March 2014 following a ‘bookbuild’ managed by the Joint Lead Managers. The bookbuild is a process through which information is collated about the demand for Shares by selected Institutional Investors including NZX Firms submitting bids for the number of Shares they wish to purchase or be allocated at a range of prices. That information is then used to assist with the determination of the pricing and allocation of Shares. The bookbuild will take place on 27 and 28 March 2014.40 The Final Price will be determined by the Crown and may be within, above or below the Indicative Price Range of $1.35 to $1.65 per Share. Summary of the Retail Offer Who can apply for Shares in the Retail Offer? How many Shares can you apply for? General Offer: New Zealand Applicants The minimum Application amount is $1,000. Applications up to $1,000 will not be scaled. Applications in excess of $1,000 will not receive less than $1,000 worth of Shares. The minimum Application amount is $1,000. Your broker will inform you of your firm allocation. It will be a matter for the NZX Firm or selected trading bank to decide how they make allocations amongst their eligible retail clients and whether your Application will be scaled back. Broker Firm Offer: New Zealand Applicants who are offered a firm allocation by an NZX Firm or a selected trading bank 40 These Will you be allocated all the Shares that you apply for? Are you eligible for Loyalty Bonus Shares? How do you apply? ü Apply online at: www.genesisenergyshares.govt.nz or by completing the Application Form included with this Investment Statement. ü Contact your NZX Firm or selected trading bank that notified you of your allocation and they will provide you with Application instructions. If the Offer is over-subscribed, your Application may be scaled back. If the Crown exercises its right to scale back Broker Firm Offer allocations following the close of the General Offer, retail client Applications under the Broker Firm Offer will be scaled back at the Crown’s discretion. There is no minimum guaranteed allocation under the Broker Firm Offer. Accordingly, final individual allocations under the Broker Firm Offer may be lower than the minimum Application amount of $1,000. dates are subject to change as noted in Section 2 Offer at a Glance. Genesis Energy Share Offer investment statement 41 Section SEVEN TERMS OF THE OFFER Loyalty Bonus Shares You may be entitled to receive Loyalty Bonus Shares from the Crown if you: —— are a New Zealand Applicant who receives an allocation in the Retail Offer (whether you apply under the General Offer or the Broker Firm Offer); and —— hold your allocated Shares continuously in the same registered name until 12 months from the Allotment Date (subject to very limited exceptions set out in Section 7.1 Details of the Offer in the Prospectus). Loyalty Bonus Shares will be fully paid ordinary shares in the Company. The number of Loyalty Bonus Shares that you are entitled to receive will be calculated on the basis of one Loyalty Bonus Share for every 15 Shares allocated to you under the Retail Offer and held continuously in the same registered name until 12 months from the Allotment Date, up to a maximum of 2,000 Loyalty Bonus Shares. The number of Loyalty Bonus Shares you will be eligible to receive will be calculated based on the lowest number of Shares held continuously by you between the Allotment Date and 12 months following that date. Fractional entitlements to Loyalty Bonus Shares will be rounded down to the nearest whole number. The number of Loyalty Bonus Shares you are entitled to receive will be adjusted as appropriate to take account of any share consolidation, share split or bonus share issue. The conditions which must be met in order for the Loyalty Bonus Shares to be allotted to you are set out in Section 7.1 Details of the Offer in the Prospectus. Applications under the Institutional Offer and the Participating Iwi Offer have no entitlement to Loyalty Bonus Shares. New Zealand Applicants applying through Custodians will be entitled to Loyalty Bonus Shares on the same basis as if they were applying directly in the Offer, provided that the eligibility criteria are satisfied. The value of any Loyalty Bonus Shares at the date on which they are transferred to you should reflect the market price of the Shares in the Company at that date. The Crown intends to allot Loyalty Bonus Shares within five Business Days of the date which is 12 months from the Allotment Date. If, for any reason, the Crown cannot legally deliver you your Loyalty Bonus Shares, or it is unduly onerous for legality to be determined, your Loyalty Bonus Shares will be issued to a nominee who will sell those Shares on your behalf and pay you the proceeds of the sale after any costs have been deducted. You will not have any entitlement to any dividends paid on Loyalty Bonus Shares prior to any Loyalty Bonus Shares being transferred to you. Institutional Offer The Institutional Offer is made to Institutional Investors in New Zealand, Australia and certain other jurisdictions, who will participate through the bookbuild. Participating Iwi Offer A pool of up to $94 million worth of Shares (the “Iwi Pool”) representing approximately 6.3% of the Shares41 on issue has been reserved by the Crown for allocation to iwi, with a Crown-recognised deed of mandate, that currently have unsettled historical claims against the Crown under the Treaty of Waitangi. lwi that elect to 41 Calculated 42 participate in the Offer through the lwi Pool will receive a payment from the Crown, in the form of Shares, on account of their potential settlement amount and will not be required to make a cash payment for their Shares. Participating lwi that apply for Shares in the Participating Iwi Offer will not be scaled and will receive a guaranteed allocation of Shares. Any Shares allocated under the Participating Iwi Offer will not form part of the Crown's shareholding of at least 51% of Genesis Energy's Shares following the Offer. Supplementary Disclosure and Withdrawal Right If any significant adverse developments occur prior to the Allotment Date, the Crown and Genesis Energy may advise investors of those developments by publishing advertisements in newspapers with additional information on the Offer website www.genesisenergyshares.govt.nz and available by calling 0800 90 30 90, pursuant to an exemption granted by the Financial Markets Authority under the Securities Act. The Final Price may be altered by the Crown due to the occurrence of a significant adverse development. If that occurs, the revised Final Price will be set out in advertisements published in newspapers. If the Crown and Genesis Energy advise that a significant adverse development has occurred prior to the Allotment Date, by publishing advertisements in newspapers, then an Applicant may withdraw their Application if it is dated on or before the date of publication of the advertisements and the Applicant’s notice of withdrawal is received by or on behalf of the Crown or Genesis Energy within seven days after the date of the initial publication of the advertisements. Notice of withdrawal must be given: —— by calling 0800 90 30 90; or —— by completing the withdrawal form that will be made available on the Offer website www.genesisenergyshares.govt.nz. Withdrawals made by any other method may not be accepted by the Crown. If an Applicant does not take any action to effect withdrawal within the relevant time period, the Crown will be entitled to accept the Applicant’s Application. The Crown and Genesis Energy must refund any Applicant who has validly withdrawn their Application (without interest) within five working days after the expiry of the seven day withdrawal period described above. Allocations and Allotments The Crown will determine Share allocations, in consultation with its advisers and Genesis Energy. If the General Offer is over-subscribed, your Application for Shares may be scaled. This means that the dollar amount of Shares you receive may be less than the dollar amount of Shares for which you apply, subject to your guaranteed minimum allocation. The Crown will determine scaling of the General Offer, in consultation with its advisers and Genesis Energy. Scaling may not be pro rata. at the mid point of the Indicative Price Range. section SEVEN TERMS OF THE OFFER The trustee of the Genesis Energy Executive LTI Plan will receive an allocation priority in respect of any Shares for which it applies on behalf of participating executives up to a maximum dollar amount of $850,000 of Shares (representing approximately 0.06% of the Shares on issue in the Company41). You can find out further information about the Executive LTI Plan, and information about the Employee Share Ownership Plan which is proposed to be introduced during FY2015, in Section 4.2 Board, Management and Corporate Governance of the Prospectus. Allocations by NZX Firms and selected trading banks under the Broker Firm Offer to their New Zealand Applicant clients will be determined by those NZX Firms and selected trading banks. It will be a matter for the NZX Firms and selected trading banks to ensure that New Zealand Applicant clients who have received an allocation from them receive the relevant Shares. If the Crown exercises its right to scale back Broker Firm Offer allocations following the close of the General Offer, Applications from New Zealand Applicant clients under the Broker Firm Offer will be scaled back at the Crown’s discretion. There is no minimum guaranteed allocation under the Broker Firm Offer. Accordingly, final individual allocations under the Broker Firm Offer may be lower than the minimum Application amount of $1,000. No brokerage, commission or stamp duty is payable by Applicants under the Offer. Successful Applicants in the General Offer who applied online will be able to confirm their allocation at www.genesisenergyshares.govt.nz from 17 April 2014 using the reference number they receive when their Application is made. Successful Applicants in the General Offer who did not apply online will be able to confirm their allocations by calling 0800 90 30 90 from 17 April 2014. Broker Firm Applicants should contact their NZX Firm or trading bank from whom they received their allocation to find out if their Application was successful. Cancellation of Sale of Shares If you apply for Shares and misrepresent your status as a New Zealand Applicant, the Crown may cancel the sale of Shares to you and in such case: —— the Company must sell the Shares you hold, up to the number of Shares sold to you under this Offer, irrespective of whether your Shares were acquired under this Offer (unless you had previously sold, transferred or disposed of all of your Shares to a person who was not associated with you); and —— you will receive the lesser of: • the sale price for your Shares less the costs incurred by the Crown and Genesis Energy; and • the aggregate price paid for your Shares less those costs, with any excess amount being payable to the Crown. If you have misrepresented your entitlement to Shares and have sold, transferred or otherwise disposed of Shares to an associated person, then the power of sale will extend to Shares held by that associated person, up to the number of Shares you transferred, sold or otherwise disposed of to the associated person. Listing and Quotation of Shares The Company has applied to NZX to list Genesis Energy, and to quote the Shares, on the NZX Main Board. All of NZX’s requirements relating to the application for listing and quotation that can be complied with on or before the date of this Investment Statement Genesis Energy Share Offer investment statement have been complied with. However, NZX accepts no responsibility for any statement in this Investment Statement. The NZX Main Board is a registered market operated by NZX, which is a registered exchange regulated under the Securities Markets Act 1988. The Company’s NZX and, if listed, ASX stockcode is ‘GNE’. An application will be made to ASX for the Company to be admitted to the official list of the ASX and for quotation of the Shares on the ASX after this Investment Statement and the Prospectus (which includes the disclosure relevant to Australian Institutional Investors and to comply with requirements for a recognised offer under Chapter 8 of the Australian Corporations Act 2001 (Cth) and the Australian Corporations Regulations 2001 (Cth)) have been lodged with the Australian Securities and Investment Commission. ASX takes no responsibility for the contents of this Investment Statement or for the merits of the investment to which this Investment Statement relates. The fact that ASX may admit the Company to the official list and quote the Shares on the ASX is not to be taken as an indication of the merits, or as an endorsement by ASX, of the Company or the Shares. The ASX is not a registered market under the Securities Markets Act 1988. What you need to do to sell your Shares If you wish to sell your Shares on the NZX Main Board after confirming your allocation you must contact an NZX Firm and have a CSN and an Authorisation Code (“FIN”). Opening a new broker account can take a number of days depending on the NZX Firm’s new client procedures. If you do not have a CSN, you will: —— be assigned one when you set up an account with an NZX Firm; or —— receive one from the Registrar when you receive your allotment notice for the Offer (which is expected to be sent on the Allotment Date, after trading has commenced). If you applied online you can also obtain your CSN at www.genesisenergyshares.govt.nz from 17 April 2014 or, if you did not apply online, by calling 0800 90 30 90 from the same date. If you do not have an Authorisation Code (“FIN”), it is expected that you will be sent one as a separate communication by the Registrar on 16 April 2014 . If you have a broker and have not received an Authorisation Code (“FIN”) by the date you want to trade your Shares, your broker can obtain one, but may pass the $20 cost for doing so on to you. None of the Crown, Genesis Energy, the Joint Lead Managers, the Registrar or any of their respective directors, officers or employees accepts any liability or responsibility should any person attempt to sell or otherwise deal with the Shares before a statement confirming allotment of Shares is received. Failure to Achieve Listing If admission to list on the NZX Main Board is denied or the Offer does not proceed for any other reason, all Application amounts will be refunded in full without interest no later than five Business Days after announcement of the decision not to proceed. Failure to achieve admission to list on the ASX will not, of itself, prevent the Offer from proceeding. 43 section EIGHT About the shares section NINE how do I Apply? glossary, Appendix & Directory 44 About the shares Each Share confers an equal right to share in dividends and other distributions authorised by the board of Genesis Energy, and to cast a vote at meetings of Shareholders, in accordance with the Constitution. After completion of the Offer, the Crown, acting by and through the Shareholding Ministers, will continue to be Genesis Energy’s majority shareholder with a holding of at least 51% of the Shares in the Company. For further information in relation to the consequences of this, see Section 4 About Genesis Energy under the heading “Relationship between Genesis Energy and the Crown” and Section 4.3 Relationship between Genesis Energy and the Crown of the Prospectus. Once the Shares are trading, further information about Genesis Energy will be able to be obtained at www.nzx.com. What Returns Will I Get? Your returns on Shares may be: —— dividends paid and other distributions which may be made in respect of your Shares; and —— any gains you make if you sell or dispose of your Shares for a net price that is greater than the price you paid for them (although the market price of your Shares may also decline, making them worth less than you paid for them). No amount of returns is promised in respect of the Shares. The key factors that will determine your returns (if any) are the market price for Shares and the board’s decisions in relation to dividends or other distributions. If you sell your Shares, you may be required to pay brokerage or other sale expenses. Tax will also affect your returns from the Shares. You should seek your own tax advice in relation to your Shares. Genesis Energy is legally liable to pay you any dividends or other distributions declared on your Shares. If you sell any of your Shares, the purchaser of those Shares will be legally liable to pay you the sale price. You may cash in your investment by selling your Shares. Any sale of Shares must be made in accordance with the requirements of the Constitution, the NZX Listing Rules and ASX Listing Rules and any applicable laws. Dividend Policy Dividends and other distributions with respect to the Shares are only made at the discretion of the board of Genesis Energy. The payment of dividends is not guaranteed and Genesis Energy’s dividend policy may change. The board’s decisions in relation to the level of reserves and retentions may affect any dividends or distributions you receive from the Shares. In determining dividends payable to Shareholders, Genesis Energy will comply with the solvency test specified in the Companies Act 1993. Under ordinary business circumstances, the dividend to be declared is determined by reference to Genesis Energy’s: —— working capital requirements; —— medium term fixed asset expenditure programme; —— investment in new business opportunities; and —— risk profile, taking into account the sustainable financial structure for the business and considering predictions of short and medium term economic and market conditions. Subject to the above circumstances that from year to year may affect the quantum of dividend paid, it is Genesis Energy’s intention to pay a dividend that provides Shareholders with a consistent, reliable and attractive dividend even in periods of business cycle downturn. It is intended that, year on year, the dollar amount of ordinary dividend payments will at least be maintained in real terms. Genesis Energy intends to pay dividends semi-annually, typically in April and October of each year. Shareholding Restrictions Under the Public Finance Act the Crown must hold at least 51% of the Shares on issue and no person (other than the Crown) may have a Relevant Interest in more than 10% of the Shares on issue (“10% Limit”). Genesis Energy must not issue, acquire or redeem any Shares if such issue, acquisition or redemption would result in the Crown falling below this 51% holding or a person (other than the Crown) exceeding the 10% Limit. These restrictions would also apply to any other classes of shares or securities which confer voting rights should Genesis Energy issue them. A holder of Shares who breaches the 10% Limit or knows or believes that a person may have breached the 10% Limit must notify Genesis Energy of the breach or potential breach. If a Relevant Interest is held in any Shares in breach of the 10% Limit and this was inadvertent then, for so long as that breach continues: —— no votes may be cast in respect of any of the Shares in which a Relevant Interest is held in excess of the 10% Limit; and —— the registered holder(s) will not be entitled to receive any dividend or other distribution authorised by the board in respect of the Shares in which a Relevant Interest is held in excess of the 10% Limit. However, if the board determines that a breach of the 10% Limit was not inadvertent, or that it does not have sufficient information to determine that the breach was not inadvertent, then in that case the restrictions on voting and entitlement to receive any dividends or other distributions described in the preceding paragraphs will apply in respect of all of the Shares held by the relevant Shareholder. The board may refuse to register a transfer of Shares if it knows or believes that the transfer will result in a breach of the 10% Limit or where the transferee has failed to lodge a statutory declaration requested from it by the board. Trustee corporations and nominee companies (that hold securities on behalf of a large number of separate underlying beneficial holders) are exempt from the 10% Limit provided they satisfy certain conditions set out in the Public Finance Act. The Constitution contains provisions to give effect to the above restrictions, and NZX and ASX have granted certain waivers from their respective listing rules to permit the Constitution to contain these provisions. As a condition, Genesis Energy will bear a ‘nonstandard’ designation on the NZX Main Board. Can My Investment be Altered? Genesis Energy may only amend its Constitution (which sets out the rights attached to Shares) with approval by a special resolution of Shareholders. Genesis Energy cannot take any action that affects the rights of any interest group of Shareholders without approval by a special resolution of that affected interest group. A special resolution must be approved by at least 75% of the votes of those Shareholders entitled to vote and who actually vote on that resolution. Under certain circumstances, if your rights are affected by an action approved by a special resolution, you may require Genesis Energy to purchase your Shares. Genesis Energy Share Offer investment statement 45 Section NINE HOW DO I APPLY? HOW DO I APPLY? Apply Online at www.genesisenergyshares.govt.nz Apply on the Paper Application Form in this Investment Statement Complete the Application Form online following the on screen instructions. You will be required to download a copy of this Investment Statement as part of the online Application process. You must confirm that the download was completed before submitting your online Application. Complete the blank Application Form at the back of this Investment Statement in accordance with the instructions on the Application Form. You can either submit your Application payment online by authorising a one-time direct debit from your bank account, or post a remittance receipt and cheque to the Registrar using the freepost number provided in time to be received by 5.00pm on 11 April 2014. See below under the heading “Application Payment”. Application Instructions Broker Firm Offer Applications To apply in the Broker Firm Offer, contact your broker and they will provide you with Application instructions. Broker Firm Offer Applications must be made directly through your broker. Applications made through the www.genesisenergyshares.govt.nz website, or made on paper forms submitted directly to the Registrar, will be processed as General Offer Applications and will be in addition to any Application made in the Broker Firm Offer. There is no restriction on Applicants applying in both the Broker Firm Offer and the General Offer, although the Crown reserves the right to treat duplicate Applications on a differential basis for the purposes of scaling Applications in the General Offer. 46 You can either complete the Application Form to authorise a one-time direct debit from your bank account or attach a cheque to your Application Form as payment for your Shares. You should complete the Application Form in accordance with the instructions on the Application Form. Your Application Form should be posted to the Registrar at Private Bag 92119, Auckland Mail Centre, Auckland 1142, using the freepost number provided (119873) in time to be received by 5.00pm on 11 April 2014. Alternatively, Applications can be lodged with any NZX Firm, the Joint Lead Managers or any other channel approved by NZX so as to be received in time to enable forwarding to the Registrar by 5.00pm on 11 April 2014. Applying through a Broker, Custodian or Nominee Account To apply using a broker, Custodian or nominee account, contact your broker and they will provide you with Application instructions. If you are applying using a Custodian, you must provide your Custodian with all the information necessary to establish the validity of your Application as a New Zealand Applicant as if you were applying directly for Shares in the Offer. If your Custodian provides this information with its Application in accordance with the instructions it has been given, you will be entitled to the same incentives for New Zealand Applicants and your Application will be scaled (in the event of over-subscriptions) on the same basis as if you had applied directly for Shares in the Offer. section NINE HOW DO I APPLY? Participating Iwi Offer Applications Submitting Your Application Participating Iwi will be provided with their Application instructions by the Office of Treaty Settlements. Participating Iwi that apply for Shares in the Participating Iwi Offer will not be required to make a cash payment for the Shares for which they apply. You will not be able to reverse or change your Application after it has been submitted, except in the case of a supplementary disclosure document being produced. By submitting an Application you agree to purchase and subscribe for the dollar amount of Shares you specify in your Application Form on the terms and conditions set out in this Investment Statement (including the Application Form) and the Prospectus. Treatment of Application If your Application is incomplete or otherwise invalid, for example if the Application Form is not completed correctly or the accompanying payment is for the wrong amount, the Crown may still treat it as valid. The Crown reserves the right to refuse any Application or to accept an Application in part only, without providing a reason. The decision of the Crown as to whether to treat your Application as valid, and any changes made by the Crown to complete your Application, will be final. The decision on the number of Shares to be allocated to you will also be final. You will not be allocated more Shares than can be purchased with the payment you have made. If your Application is not accepted, or is accepted in part, you will receive a refund of the balance payment without interest within five Business Days after the Allotment Date. Refunds will be paid in the manner you elect any future dividend payments to be paid. Application Payment Applications must be accompanied by payment in full for the dollar amount of Shares applied for. Payment may be made to the Crown by direct debit or cheque and will be held by the Crown in trust until Shares are allotted to successful Applicants or Application monies are refunded. Option 1: One-time Direct Debit If you choose to make a one-time payment out of your bank account, the direct debit will be processed on the first Business Day after your Application Form is received by the Registrar or, if received on the day the Offer closes, the same Business Day. One-time direct debits will only be processed from New Zealand registered banks. You must ensure that: —— the bank account details supplied are correct; —— there are sufficient funds in the specified bank account; —— you have the authority to operate the account solely/jointly; and —— the bank account you nominated is one which will allow the one-time direct debit to be made. For example, certain savings accounts may not allow money to be withdrawn in this manner. If you are uncertain you should contact your bank. If the direct debit from your bank account is unsuccessful, your Application will be rejected. The terms and conditions for one-time direct debit can be obtained by calling 0800 90 30 90 during the Offer period. Option 2: Cheque If you choose to pay by cheque your cheque should be made payable to “Genesis Energy Offer”, be crossed “Not Transferable” and not be post dated. Your cheque will be banked on the Business Day it is received. If your cheque is post dated or dishonoured, your Application may be rejected. Privacy Policy If you apply for Shares, you will be asked to provide personal information to The Treasury, Genesis Energy, the Registrar and their respective agents who will collect and hold the personal information provided by you in connection with your Application. Your personal information will be used: (a) for considering, processing and corresponding with you about your Application; (b) in connection with your holding of Shares, including sending you information concerning Genesis Energy, your Shares and other matters Genesis Energy considers may be of interest to you by virtue of your holding of Shares; (c) for conducting an audit or review of the activities contemplated in (a) or (b); and (d) for sending you information about special offers for Shareholders in relation to Genesis Energy’s products and services. To do these things, The Treasury, Genesis Energy or the Registrar may disclose your personal information to: (a) each other; (b) their respective related companies; and (c) agents, contractors or third party service providers to whom they outsource services such as mailing and registry functions, including the Joint Lead Managers, Solution Dynamics Limited and Reach Investor Solutions Pty Ltd. However, all of these parties will be bound by the same privacy policies as The Treasury, Genesis Energy and the Registrar. In addition, if you elect to pay by one-time direct debit, the Registrar will communicate with your nominated bank (including providing your personal information) for the purposes of processing your payment. If you identify in your Application Form that you have a relationship with a broker, financial adviser or private banker (including by submitting an Application Form that has a broker, financial adviser or private banker’s stamp or code in the top righthand corner), The Treasury, Genesis Energy or the Registrar may provide the details of your Application to your nominated broker, financial adviser or private banker. Failure to provide the required personal information may mean that your Application Form is not able to be processed efficiently, if at all. Where The Treasury, Genesis Energy and the Registrar hold personal information about you in such a way that it can be readily retrieved, you have a right to obtain from The Treasury, Genesis Energy and the Registrar confirmation of whether or not they hold such personal information, and to access and seek correction of that personal information under the Privacy Act 1993 by contacting the privacy officers of The Treasury, Genesis Energy and the Registrar at their respective addresses shown in the Directory. You can also access your information on the Registrar’s website: www.investorcentre.com/nz (you will be required to enter your CSN and Authorisation Code (“FIN”)). Questions? If you have questions about how to apply under the Offer, you can call 0800 90 30 90 during the Offer period between 8.00am to 8.00pm (Monday to Friday) and 9.00am to 5.00pm (weekends) or visit www.genesisenergyshares.govt.nz. Genesis Energy Share Offer investment statement 47 GLOSSARY GLOSSARY Allotment Date The date on which Shares are allotted to successful Applicants, which is expected to be 16 April 2014, unless varied by the Crown Applicant Any person named as an applicant on an Application Form Constitution DPS The constitution of the Company, as amended from time to time Dividend per Share declared shown in cents per share Contact Energy EBITDAF Contact Energy Limited Earnings before net finance expense, income tax, depreciation, depletion, amortisation, impairment, revaluations (when they occur), changes in fair value of financial instruments and other gains and losses Crown Her Majesty the Queen in Right of New Zealand CSN Application Common Shareholder Number An application to subscribe for Shares offered pursuant to this Investment Statement and the Prospectus made on the Application Form and accompanied by the application amount Custodian The component of the electricity system load which is continuously present over a stated period. A Base-load power station serves mainly to meet expected Base-load, usually producing electricity at a constant rate and running continuously An Applicant for Shares that satisfies the Registrar that it: —— is a trustee corporation or a nominee company; —— will hold Shares by reason only of acting for another person in the ordinary course of business of that trustee corporation or nominee company; —— holds a range of other securities which are quoted on a market operated by NZX on the same basis for defined beneficial owners; and —— provides regular reporting and corporate actions services to the underlying beneficial owners; and • is owned by or affiliated to an NZX Firm, or routinely and in the ordinary course of business provides these services to NZX Firms or clients of NZX Firms; or • has a demonstrable history of applying for shares in public offers on behalf of underlying beneficial owners bbl Customer Connection Barrel Business Day In respect of electricity, an installation control point being an active point of connection on a local network or an embedded network that the distributor nominates as the point at which a retailer is deemed to supply electricity to a consumer; in respect of natural gas, an installation control point being the point at which a consumer installation is deemed to have gas supplied A day on which the NZX Main Board is open for trading Derivative Application Form An application form attached to, or accompanying, this Investment Statement ASX ASX Limited, or the financial market operated by ASX Limited, as the context requires, also known as the Australian Securities Exchange ASX Listing Rules The official listing rules of ASX Base-load Broker Firm Offer The portion of the Offer that is open to New Zealand Applicant clients of NZX Firms and selected trading banks, who have received an allocation from their NZX Firm or selected trading bank Capital Bonds The unsecured debt securities issued by the Company pursuant to an investment statement and a prospectus dated on or about 7 April 2011 Company Genesis Energy Limited 42 “Stay-in A financial instrument, the price of which is derived from the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments or any agreed pricing index or arrangement. It can be either a private agreement negotiated between two parties or a standardised agreement traded on an exchange business capital expenditure” relates to on-going asset management and life-cycle maintenance and reinvestment programme expenditure and includes capital expenditure on maintaining options for future development but excludes oil and gas rehabilitation and Tekapo canal remediation project capital expenditure. 48 Executive LTI Plan The long-term incentive share plans offered to senior executives of the Company, as described in Section 4.2 Board, Management and Corporate Governance of the Prospectus Final Price The price per Share at which the Shares will be allotted, expected to be determined on or about 28 March 2014 FPVV Fixed price variable volume Free Cash Flow EBITDAF less finance expense less income tax expense less stay-in business capital expenditure.42 Free Cash Flow is presented only to enable potential investors to consider Genesis Energy’s prospective dividend declared pay-out ratio. The dividends declared as a ratio of Free Cash Flow highlights how much of Free Cash Flow has been, or is expected to be, converted into dividends FY Financial year ended, or ending, 30 June Gas Industry Company Gas Industry Company Limited General Offer The portion of the Offer that is open to any New Zealand Applicant Genesis Energy The Company or the Group, as the context requires Group Genesis Energy Limited and each of its subsidiaries GWAP The generation weighted average price calculated as the average price received for electricity generated expressed in $/MWh GWh Gigawatt hour. One gigawatt hour is equal to 1,000 MWh or 1,000,000 kWh (being kilowatt hours) GLOSSARY H1 Kupe oil and gas field or Kupe When preceding a year refers to half year financial results for the first six months of that financial year The oil and gas interest in Petroleum Mining Lease (PML) 38146, known as the Kupe oil and gas field located in Taranaki, New Zealand Huntly Power Station or Huntly Genesis Energy’s power station located in Huntly Hydro-firming The operation of Thermal Generation units so as to allow water to be stored for use during times of more optimal electricity generation or when water is not available IFRS International Financial Reporting Standards Indicative Price Range $1.35 to $1.65 per Share Institutional Investor An investor outside the United States to whom offers or invitations in respect of securities can be made without the need for a lodged prospectus (or other formality, other than a formality which Genesis Energy and the Crown are willing to comply with), including in New Zealand persons to whom offers or invitations can be made without the need for a registered prospectus under the Securities Act Institutional Offer The invitation to Institutional Investors as described in the Prospectus Investment Statement This document IRD New Zealand Inland Revenue Department iwi Māori term for a set of people bound together often by descent from common ancestors or waka (canoe) that migrated to New Zealand. Modern meaning: tribe or tribes Joint Lead Managers First NZ Capital Securities Limited and Credit Suisse (Australia) Limited and UBS New Zealand Limited kbbl Kilobarrel kT Kilotonne Kupe Joint Venture The joint venture between the owners of the Kupe oil and gas field relating to the ownership and operation of the field Loyalty Bonus Shares Fully paid ordinary shares in the Company to be transferred by the Crown to successful Applicants under the Retail Offer subject to the terms and conditions set out in this Investment Statement and the Prospectus including as to eligibility LPG or permanent residents; or • in the case of any other legal entity, it is incorporated or established in New Zealand and the majority of its ultimate beneficial owners, beneficiaries or members consists of persons who are New Zealand citizens or permanent residents NZ GAAP or GAAP New Zealand Generally Accepted Accounting Practice NZ IFRS Liquefied petroleum gas New Zealand equivalents to International Financial Reporting Standards Meridian NZX Meridian Energy Limited NZX Limited, also known as the New Zealand Stock Exchange Mighty River Power Mighty River Power Limited MW A megawatt (MW) is a unit of power and equal to 1,000,000 watts (W) or 1,000 kilowatts (kW) MWh A megawatt hour (MWh) is the amount of electricity equivalent to a steady power of one MW running for one hour; a megawatt hour is the metering standard unit for the wholesale market Net Debt The value of current and non-current borrowings less cash and cash equivalents Net Profit Net profit for the period after tax New Zealand Applicant An Applicant for Shares who provides the following information with their Application Form: —— a valid New Zealand IRD number; —— a valid New Zealand bank account number; —— a New Zealand address; and —— a declaration that: • in the case of an individual, the individual is a New Zealand citizen or permanent resident; or • in the case of a New Zealand incorporated company, it is incorporated in New Zealand and the majority of its ultimate beneficial owners consists of persons who are New Zealand citizens or permanent residents; or • in the case of a trust, it is established in New Zealand and the majority of its ultimate beneficiaries consists of persons who are New Zealand citizens NZX Firm An entity designated as an NZX Firm under the Participant Rules of NZX NZX Listing Rules The listing rules applying to the NZX Main Board as amended from time to time NZX Main Board The main board equity security market, operated by NZX Offer The offer of Shares pursuant to this Investment Statement and the Prospectus Participating Iwi Iwi, with a Crown-recognised deed of mandate that currently have unsettled historical claims against the Crown under the Treaty of Waitangi and that elect to participate in the Offer and receive a payment from the Crown, in the form of Shares, on account of their potential settlement amount Participating Iwi Offer The Offer of Shares to Participating lwi Peak-load or Peaking Peak-load refers to the component of the electricity system load caused by peaks or spikes due to demand Peak-load or Peaking power stations meet peaks or spikes in electricity demand (known as peak demand). Peak-load power stations need to be responsive to quickly achieve the levels of electricity generation required to meet peak demand or take advantage of high wholesale electricity prices. Some power stations may be operating at certain times as Peak-load power stations and at other times serve as Base-load or Hydro-firming Genesis Energy Share Offer investment statement 49 GLOSSARY PFI Q Securities Act Prospective Financial Information A quarter of a financial year Securities Act 1978 PJ Rankine Units Securities Regulations A petajoule is a unit of energy, which is commonly used to measure gas, LPG and oil The two 250 MW gas and coal fired units in service at Huntly and the 250 MW unit currently in storage at Huntly, being units 1, 2 and 4 Securities Regulations 2009 Possible Reserves Those additional reserves which analysis of geoscience and engineering data indicate are less likely to be recoverable than Probable Reserves Probable Reserves Those additional reserves which analysis of geoscience and engineering data indicate are less likely to be recovered than Proved Reserves but more certain to be recovered than Possible Reserves Prospective Period The financial years ending 30 June 2014 and 30 June 2015 Prospectus The prospectus in respect of the Offer Proved Reserves Registrar Computershare Investor Services Limited Relevant Interest A relevant interest has the meaning given to it by sections 5 to 6 of the Securities Markets Act 1988. In broad terms, a person has a “relevant interest” in a Share if the person (a) is the registered holder or beneficial owner of the Share; or (b) has the power to exercise, or control the exercise of, a right to vote attached to the Share or has the power to acquire or dispose of, or to control the acquisition or disposition of, that Share. A person may also have a relevant interest in a Share in which another person has a relevant interest depending on the nature of the relationship between them Those quantities of petroleum, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods and Government relations Renewable Generation Public Finance Act Electricity generated using renewable resources such as water, geothermal and wind Share A fully paid ordinary share in Genesis Energy Shareholder A holder of one or more Shares in the Company Shareholding Ministers The Minister of Finance and Minister for State Owned Enterprises Tekapo Power Scheme The Tekapo power scheme located at the head of the Waitaki Valley in the Mackenzie District of the South Island Thermal Generation Electricity generated using gas, coal or diesel TOU Time of use that is, the prices a customer pays depends on the time they consume electricity or gas Transpower Retail Offer Transpower New Zealand Limited The General Offer and the Broker Firm Offer Trustpower rohe Trustpower Limited The territory or boundaries of tribal groups Unit 5 Public Finance Act 1989 The 403 MW combined cycle gas turbine unit at Huntly Additional Definitions for the Key Offer Statistics and Key Investment Metrics EV/EBITDAF multiple Implied gross dividend yield Indicative market capitalisation EV divided by EBITDAF for the respective forecast financial year. This is a valuation metric that enables comparison with industry competitors and stock market peers. DPS for the respective prospective financial year, grossed up for imputation credits expected to be attached to the dividend (calculated at a tax rate of 28%),43 divided by the Indicative Price Range. This metric is used to approximate the return to the average investor on a pre-tax basis. The number of Shares on issue following the Offer multiplied by the Indicative Price Range. Implied cash dividend yield DPS for the respective prospective financial year divided by the Indicative Price Range. Based on the cash cost to the Company, not necessarily the cash received by investors which will depend on individual investor tax rates and the assumption that the investor holds Shares over the full year. Indicative enterprise value (EV) The indicative market capitalisation plus prospective Net Debt as at 30 June 2014. Price/earnings ratio Indicative market capitalisation divided by Net Profit for the respective forecast financial year. This is a valuation metric that enables comparison with industry competitors and stock market peers. 43 Refer to assumption 36 under the heading “Specific assumptions in respect of the prospective financial information” in the Appendix - Prospective Financial Information. 50 GLOSSARY APPENDIX Prospective Financial Information This appendix contains: —— the basis of preparation for the consolidated PFI for Genesis Energy, including the significant accounting policies applied; —— a description of the board’s best estimate of general and specific assumptions that underpin the PFI contained in this Investment Statement; —— the consolidated PFI for Genesis Energy, as required by clause 11(1)(c) of Schedule 1 of the Securities Regulations to be included in the Prospectus, which includes prospective consolidated comprehensive income statement, balance sheet, statement of changes in equity and cash flow statement; and —— an analysis of the sensitivity of PFI to changes in specific key assumptions. Basis of Preparation The consolidated PFI, for the year ending 30 June 2014 (“FY2014”) and for the year ending 30 June 2015 (“FY2015”) has been prepared in accordance with the requirements of FRS-42 Prospective Financial Statements, as required by the Securities Regulations, specifically for the purpose of the Offer and may not be suitable for any other purpose. The consolidated PFI, including the assumptions underlying it, has been prepared by management and approved by the board. They are based on the board’s assessment of events and conditions existing at the date of this Investment Statement and the accounting policies and best estimate assumptions set out under the heading “General and Specific Assumptions” below. The Crown has not been involved in the preparation of the consolidated PFI. PFI by its nature involves risks and uncertainties, many of which are beyond the control of Genesis Energy. The board believes that the consolidated PFI has been prepared with due care and attention, and consider the best estimate assumptions, when taken as a whole, to be reasonable at the time of preparing this Investment Statement. Actual results are likely to vary from the information presented as anticipated events and results may not occur as expected, and the variations may be material. Accordingly, neither the Directors nor any other person can provide any assurance that the consolidated PFI will be achieved and investors are cautioned not to place undue reliance on the PFI. The consolidated PFI includes historical trading results for the six month period to 31 December 2013, based on audited interim financial statements (as set out in Section 6.4.4 Audited Interim Financial Statements for the Six Months Ended 31 December 2013 of the Prospectus). There is no present intention to update the consolidated PFI or to publish PFI in the future, other than as required by accounting standards. Genesis Energy will present a comparison of the consolidated PFI with actual financial results when reported in accordance with NZ GAAP and Regulation 44 of the Securities Regulations. The PFI is presented in New Zealand dollars and is rounded to the nearest million (to one decimal place), which may result in some discrepancies between the sum of components and totals within tables, and also in certain percentage calculations. The PFI includes items considered non-GAAP financial information, including one profit measure other than Net Profit, being EBITDAF as has been used in historical financial statements and explained in Section 5 Overview of Financial Information. Other non-GAAP financial information used includes Free Cash Flow and Net Debt. Where non-GAAP financial information is reported there is a reference to further information to help you interpret those terms. The directors are responsible for and have authorised for issue the consolidated PFI on 13 March 2014 for use in this Investment Statement. Accounting Policies The significant accounting policies applied to the preparation of the consolidated PFI are set out in Section 6.4.4 Audited Interim Financial Statements for the Six Months Ended 31 December 2013 and in Section 6.4.5 Audited Financial Statements for the Year Ended 30 June 2013 of the Prospectus. One new accounting policy was adopted in H1 2014 relating to share based payments along with the application of new and revised NZ IFRS (see Section 6.4.4 Audited Interim Financial Statements for the Six Months Ended 31 December 2013 of the Prospectus). Currently there are no anticipated changes to accounting standards under NZ GAAP that are expected to materially affect Genesis Energy during the Prospective Period. However, any further changes to NZ GAAP could necessitate changes in the accounting policies currently adopted and any new or amended accounting standards, or interpretation, may affect the actual financial results or financial position. General and Specific Assumptions A description of the board’s best estimate general and specific assumptions upon which the consolidated PFI is based are summarised below, and should be read in conjunction with the information set out in the section What are my Risks? in this Investment Statement and in the Prospectus. General Assumptions in Respect of the Prospective Financial Information 1. Competitive, legislative and regulatory environment There will be no material change in Genesis Energy’s competitive, legislative or regulatory environment, specifically: —— no change over access to land and water resources from Treaty of Waitangi or other claims; and —— no material regulatory changes or electricity market reform including no changes to retail or wholesale electricity pricing regulation. 2. Economic environment There will be no material change in the general economic environment or conditions in which Genesis Energy operates (including the level of activity in the industrial sector) or population growth which would materially affect national electricity demand. 3. Key customers and suppliers There will be no material change in existing contractual, business or operational relationships with Genesis Energy’s key customers or suppliers throughout the Prospective Period, other than the Meridian swaption which runs till October 2014, (discussed in Genesis Energy Share Offer investment statement 51 APPENDIX Section 4.1 Business Description of the Prospectus). Relationships with other key customers or suppliers, should they cease, will be replaced by arrangements with other parties on similar levels of activity and contractual terms. 4. Joint ventures Existing contractual, business and operational relationships and Genesis Energy’s participation in the Kupe Joint Venture will continue throughout the Prospective Period. 5. New Zealand taxation There will be no material change to the New Zealand corporate tax rate of 28%. There will be no material changes to corporate tax laws that would affect Genesis Energy. 6. Accounting standards Accounting standards and interpretations will remain consistent throughout the Prospective Period. The prospective financial information assumes that there will be no material change in NZ GAAP during the Prospective Period. 7. Inflation Consumers Price Index Inflation to be at a constant rate of 2.2% across the Prospective Period. Fuel cost inflation, based on the Producers Price Index, will be 2.3% in FY2014 and 2.8% in FY2015. Specific Assumptions in Respect of the Prospective Financial Information 8. Customer electricity and gas revenue Customer electricity and gas revenue represents: —— sales of electricity, natural gas and LPG to retail customers (that is individual residential households, small to medium enterprises (“SME”) and some large commercial organisations), also referred to as fixed price variable volume (“FPVV”) customers, under the Genesis Energy and Energy Online brands; and —— Time of use (“TOU”) volumes sold to commercial and industrial (“C&I”) customers (some of whom also purchase on a fixed price variable volume basis). Customer electricity and gas revenue is dependent on the volumes, mix and prices at which Genesis Energy sells electricity and/or gas to its customers. For electricity and gas price and volume assumptions, overarching assumptions are: —— no material change in competitive behaviour in either the wholesale or the retail electricity and gas markets; —— any new entrants or gas discoveries will not materially change the competitive environment; and —— no material change in the national wholesale electricity market or the way Genesis Energy buys electricity from the market for its customers. 52 Volumes and mix The retail customer electricity sales volumes and mix are subject to the following underlying assumptions: —— retail electricity sales volumes will increase by 2.7% in FY2014 driven by increased TOU volumes due to C&I contract wins in late FY2013 which are accumulating in FY2014, outweighing reduced volumes to retail customers; —— retail electricity sales volumes increase by 3.6% in FY2015, with the full year impact of contracted TOU volumes and with growth in volumes to retail customers back towards levels achieved in FY2013; —— new retail electricity customers are forecast to be offset by customers switching to other electricity retailers with a net 0.3% decline in electricity customers in FY2014 and no change in FY2015; and —— the average volume per customer is based on the average of the last three financial years usage by type of retail customer and by location (North or South Island), adjusted for above average year weather conditions, including air temperature, which affects customer demand and the customer mix profile as at 31 December 2013. See Sensitivity Analysis later in this Appendix for sensitivity analysis on Electricity Customer Sales Volumes. Electricity sales to wholesale customers represent derivative volumes sold, normally via financial contracts such as CFDs and Options, but excludes futures on the New Zealand Electricity Futures and Options Market operated by the ASX. These volumes fluctuate as a result of both the management of the integrated portfolio and the diverse nature of Genesis Energy’s generation portfolio. The volumes sold to wholesale customers mainly depends on strategic positions taken and the opportunities available to maximise the value of Genesis Energy’s excess Thermal Generation capacity (normally related to periods of higher, or potentially higher, wholesale electricity prices or demand peaks). The net outcome for FY2013 was that Genesis Energy ran a “short” position (ie retail and wholesale sales higher than generation volumes) taking advantage of relatively low wholesale electricity prices to purchase electricity for its retail customers. This position is expected to continue in FY2014 with a lesser “short” position in FY2015 as the result of some of the current derivatives ending, in particular Meridian swaptions (see assumption 24), and this additional capacity not expecting to be sold at this point in time. Value is improved when Genesis Energy can sell electricity to the wholesale market during periods of high wholesale electricity prices and purchase wholesale electricity at lower prices to supply its retail customers. APPENDIX PROSPECTIVE FINANCIAL INFORMATION Customer Data FY2012 Historical FY2013 Historical FY2014 Prospective % change FY2015 Prospective % change 529,342 543,774 541,920 (0.3)% 541,920 0.0% 4,909 4,902 4,754 (3.0)% 4,873 2.5% 520 452 743 64.4% 821 10.5% Electricity sales – Retail (GWh) 5,429 5,354 5,497 2.7% 5,694 3.6% Electricity sales – Wholesale (GWh) 3,020 2,705 2,036 (24.7)% 1,428 (29.9)% Gas Customers (#)44, 45 111,578 115,003 118,949 3.5% 120,140 1.0% 5.4 5.0 6.3 26.0% 6.9 9.5% 640,920 658,777 660,869 0.3% 662,061 0.2% 7.610 9,708 12,708 30.9% 13,848 9.0% 2.0 2.4 3.0 25.0% 3.6 20.0% 648,530 668,485 673,577 0.8% 675,908 0.3% Electricity customers (#)44, 45 Electricity sales – FPVV (GWh) Electricity sales – TOU (GWh) Retail Gas Sales (PJ) Total Customers (excluding LPG)44, 45 LPG Customers (#) LPG Sales (kT) Total Customers (#)44, 45 Genesis Energy experienced an average customer switching rate46 of its retail electricity customers of approximately 18.4% (for the year to 31 December 2013) based on average switching rates. Whilst the average customer switching rate is not an explicit underlying assumption it is a key performance indicator. Recent national market trends have been trending towards higher switching rates and this trend has been considered in the development of electricity customers number assumptions outlined above. Gas customers are forecast to increase in FY2014 and FY2015 with growth in the TOU market and increases in the number of dual fuel customers that receive a discount when they purchase both electricity and gas from Genesis Energy. These higher customer numbers drive higher volumes and therefore revenue, with average usage per customer forecast to remain similar to usage witnessed in FY2013. Prices Average total retail electricity prices received are a function of prices for the energy and service costs component (which includes the price to purchase electricity, levy and metering costs and the cost to serve customers) and lines component (charges for transmission and distribution). The customer electricity sales prices are subject to the following underlying assumptions: —— changes in the lines component that Genesis Energy incurs will be largely passed on to customers; —— the energy and service costs component of the electricity retail price increases on average approximately 2.2% in each year; —— retail price changes are to take effect from early April in each year for the largest 15 regions in New Zealand by retail customer revenue (these regions represent approximately 90% of Genesis Energy’s total retail customer revenue). The remaining retail price changes to take effect on a staggered basis through April and May each year, to move Genesis Energy towards the industry average in terms of the period over which price increases are implemented; —— aggregate retail price increase (including both the lines and the energy and service costs components) equates to approximately 3.6% for April 2014 for the largest 15 regions; 44 Customer numbers based on Customer Connections and excludes vacants and TOU customers, and is sourced from Genesis Energy records. This data may differ from Customer Connections data sourced from the Electricity Authority that appears elsewhere in this Investment Statement due to differences in the way Customer Connections are measured. —— prompt-payment discounts, and current level of discount uptake, continues as per recent trading; and —— TOU pricing changes in line with contracted prices. See Sensitivity Analysis later in this Appendix for sensitivity analysis on the energy and service costs component of the electricity retail price increases. The customer gas sales price comprises a fixed daily rate and a variable price based on volume used. The average selling price in the Prospective Period reflects current pricing and planned price changes, along with promotional pricing programmes. 9. Wholesale electricity prices Consistent with other industry participants, Genesis Energy utilises a demand and supply simulation model of the New Zealand electricity system to estimate market wholesale electricity prices. The model reflects underlying assumptions for supply and demand. Specific assumptions include: —— the average outcome based on the modelled impact of 79 historical years of national hydrological or climatic conditions; —— national demand remains largely flat in FY2014 and FY2015, including assumptions that: • the level of demand from New Zealand Aluminium Smelters Limited at the Tiwai Point aluminium smelter does not change from average levels in FY2013; and • no material technological advances in the more efficient use and generation of electricity; —— gas and coal fuel costs and availability based on specific fuel assumptions (see assumptions 13, 14, 15 and 16); and —— no material infrastructure change or operating limitations other than known power station availability including: • known new generation build and decommissioning announced to the New Zealand electricity market, including that Contact Energy’s TCC power station will not operate during winter 2014; • known New Zealand electricity generator planned outages; and • known transmission constraints for the high voltage direct current link. 45 Customer numbers are per product. Note that some customers purchase more than one product and therefore could fit into more than one category. 46 Based on Electricity Authority switching history reports. Genesis Energy Share Offer investment statement 53 APPENDIX assumption 12); and —— ‘Fuels consumed’ (see assumption 15). The above modelling affects the following line items in the consolidated prospective comprehensive income statement: —— ‘Electricity revenue’;47 —— ‘Electricity purchases, transmission and distribution’ (including electricity purchases, Derivatives and spot costs – see The modelling also forecasts generation volumes (see assumption 10). Refer to Sensitivity Analysis later in this Appendix for sensitivity analysis on wholesale electricity prices and generation volumes. Wholesale Electricity Prices FY2012 Historical Time weighted48 average annual wholesale electricity price 10. Generation volumes and output FY2013 Historical FY2014 Prospective FY2015 Prospective 85.77 ($/MWh) 73.40 58.20 to 68.20 65.50 to 75.50 canal and power stations in FY2013) the generation output of the Tekapo Power Scheme was approximately 200 GWh; —— a second of the four 250 MW coal/gas fired Rankine Units at the Huntly Power Station was placed into long-term storage in late December 2013 and the decommissioning process for the first unit in storage commenced. Therefore in the Prospective Period Genesis Energy will have one of the Rankine Units in storage and one decommissioned, and two units available to the market; —— FY2014 includes an outage for Unit 6 at Huntly Power Station for the first nine months; and —— there will be no material power station failures or interruptions to Genesis Energy’s activities during the Prospective Period, including as a consequence of technical issues, operational error, catastrophic events or normal hazards associated with operating the Company’s business. Based on Genesis Energy’s demand and supply simulation model, generation volumes have been forecast for FY2014 at 6,667 GWh and for FY2015 at 6,959 GWh. These are both below recent historical generation volumes of 7,212 GWh and 8,467 GWh in FY2013 and FY2012 respectively, primarily due to the reduced wholesale electricity prices. Hydro generation is forecast to increase in FY2014 due to the increased hydro inflows and levels of storage experienced in the first half of the year in particular, returning to more normal levels by the end of the year. A further increase in hydro generation in FY2015 reflects a full year of generation from the Tekapo Power Scheme. Underlying assumptions are: —— an outage for 50 days in Q3 FY2014 for the Tekapo canal remediation process (with specified dates for return to service of Tekapo generators in March and May 2014). In the equivalent period in FY2012 (noting there was also an outage at the Tekapo See Sensitivity Analysis later in this Appendix for sensitivity analysis on generation volumes. Summary of Generation Volumes FY2012 Historical FY2013 Historical FY2014 Prospective FY2015 Prospective GWh % of total GWh % of total GWh % of total GWh % of total Gas 3,041 36% 2,732 38% 2,780 41% 3,008 43% Coal 2,613 31% 2,259 31% 1,317 19% 1,106 16% Thermal 5,654 67% 4,991 69% 4,097 61% 4,114 59% Hydro 2,788 33% 2,200 31% 2,543 38% 2,815 40% 25 0% 21 0% 27 0% 30 0% Renewable 2,813 33% 2,221 31% 2,570 39% 2,845 41% Total 8,467   Wind 7,212 6,667 6,959 Generation volumes are sold or traded on the national wholesale electricity market at the time of generation which contributes to Electricity revenue. Total generation volumes in FY2014 and FY2015 are forecast to be significantly below installed generation capacity. temperatures in H1 2014) and therefore the generation of electricity, which in turn can have a positive or negative impact on financial performance. Demand is typically lower in warm months and can increase by more than 30% during winter. 11. Seasonality A significant amount of Genesis Energy’s FY2014 EBITDAF is forecast in the winter months of May and June. This is due to the seasonal uplift in customer demand and the historical pattern of more Thermal Generation in periods of higher wholesale electricity prices. Fluctuations in seasonal weather patterns have a significant impact on supply and demand (for example the above average 47 Including contracted, spot and Derivative wholesale electricity sales revenue from sales to other generator/retailers, retail customers and to the New Zealand Futures and Options market. 48 A simple average of all prices published in the market at half hour intervals for a specific time period (at the Huntly Node). 54 Seasonality for FY2014 (last six months only) and FY2015 has been forecast consistent with previous periods. APPENDIX PROSPECTIVE FINANCIAL INFORMATION 12. Electricity purchases, transmission and distribution operating expenses Electricity purchase costs relate to costs of buying electricity for our customers (retail, TOU, spot and Derivatives) at the price the market charges at the time of the purchase. The lines/distribution companies’ current published pricing applies for the period to 31 March 2014 and pricing provided to Genesis Energy by the lines/distribution companies applies from 1 April 2014. There is no material change to the current transmission pricing methodology and distribution network charges. Increases in the lines component that Genesis Energy incurs will be largely passed on to customers (see “prices” in assumption 8 “Customer electricity and gas revenue”). 13. Gas revenue, purchases and transmission All contracted gas supplies are either consumed as fuel for generation of electricity or on sold to retail customers or wholesale (being commercial and industrial or large industrial and petrochemical customers). Wholesale Gas Revenue arises from: —— sales of committed gas volumes at contracted gas sales prices; and —— sales of uncommitted gas volumes which will be contracted at current market prices. Any unsold gas volumes will be consumed in Thermal Generation. Gas supply contracts peak in volumes in FY2014 reducing in FY2015. Gas purchase prices have been negotiated over the course of the historical financial period in relation to take or pay contracts the Company has with third parties and the gas it purchases from the other Kupe Joint Venture parties. There will be no material gas supply disruption nor change to the current gas transmission pricing methodology and gas distribution network charges. 14. Petroleum revenue, production, marketing and distribution costs and crude oil price assumptions Assumptions relating to Kupe production volumes are based on the fixed long-term natural gas contracts (mostly on a take or pay basis) with the Kupe Joint Venture partners updated for the latest contracted production volumes, prices and natural gas to oil and LPG ratios. The total field production volumes forecast for natural gas are 22.3 PJ for FY2014 and 21.1 PJ for FY2015. Genesis Energy’s share of the corresponding production volumes forecast for oil are 515.1 kbbl and 434.8 kbbl, and for LPG are 29.6 kT and 27.8 kT in FY2014 and FY2015 respectively. Assumptions relating to marketing and distribution costs are based on the fixed long-term contracts agreed with the joint venture partners and recent actual costs. The underlying assumptions for oil price (all in United States Dollars) are: —— hedged oil price will be $102.60/bbl in FY2014 and $99.60/bbl in FY2015; —— 68% will be hedged (including actuals to December 2013) for FY2014 at an average price of $102.90 and 56% will be hedged for FY2015 at an average price of $99.50; and —— Spot oil price will be $103.30/bbl for the second half of FY2014 and $99.60/bbl in FY2015. 15. Fuels consumed Fuels consumed is based on Genesis Energy’s demand and supply simulation model for estimating the wholesale electricity path (see assumption 10 “Generation volumes and output”). The volume of generation is the key driver in changes in fuels consumed expenses, as forecast average cost of fuel per unit consumed is in-line with FY2013 (after reflecting purchase Producers Price Index increases) based on agreed supply contracts. All suppliers will deliver to the coal and gas supply arrangements agreed to between the parties. Obligations under a contract for the supply of imported coal have been terminated which has also triggered various contracts related to the transport, handling and storage of the imported coal to be provided for as onerous with a total adverse impact to EBITDAF of $19.1 million in H1 2014. The total cost is expected to reduce in the second half of FY2014 as sub-lease contracts are completed. The benefit of this contract termination is reduced operating expenses for coal handling, transportation and storage with effect from 1 January 2014 benefiting Genesis Energy by approximately $3.5 million per annum along with cash savings from reduced coal commitments. 16. Coal stockpile With the above noted coal supply arrangements, the coal stockpile is forecast to remain fairly steady being 877 kT ($93.4 million) as at 30 June 2013, 910 kT ($96.1 million) as at 30 June 2014, and 883 kT ($94.4 million) as at 30 June 2015, all based on the weighted average cost base at respective year ends. 17. Other revenue Other revenue in the Prospective Period is forecast in line with FY2013, adjusted for: —— an insurance compensation benefit received in FY2013 of $18.6 million (Genesis Energy’s share of insurance proceeds for recovered costs incurred in relation to the Kupe subsea utilities umbilical cable); —— no forecast coal sales (which reduces other operating revenue); and —— known lease expiries reducing lease income. 18. Emission Units on hand and carbon charges The Emissions Trading Scheme (“ETS”) affects Genesis Energy as a large user of coal and gas. Genesis Energy purchases Emission Units (units issued under the ETS) from within New Zealand or from the global market. Prices of Emission Units will increase in line with the estimated market wholesale electricity prices. $million Emission Unit net additions FY2012 Historical FY2013 Historical FY2014 Prospective FY2015 Prospective 18.5 22.2 – – There will be no material changes to the ETS, emission obligations or global Emission Unit prices. Costs in the prospective financial information, as per the historical financial information, reflects net obligations after taking into consideration forward purchased Emission Unit contracts. Genesis Energy has entered into forward purchase contracts to acquire significant Emission Units to offset its FY2014 and FY2015 obligations. The hedged position is 100% of forecast obligations for both FY2014 and FY2015. Genesis Energy Share Offer investment statement 55 APPENDIX 19. Employee benefits Employee benefits are based on benefits in the most recent actual period adjusted for estimated headcount and known salary and other remuneration changes. FY2014 increases on FY2013 by 4.1% with average employee benefits increasing by approximately 3.4% p.a. and a net cost of redundancy payments. FY2015 reduces from FY2014 by 2.0% due to the benefit from a reduction in headcount outweighing the average employee benefits increase of 3.0%. Administrative and set up costs will be incurred in FY2014 and FY2015 for the Executive LTI Plan and the proposed Employee Share Ownership Plan as discussed in Section 4.2 Board, Management and Corporate Governance of the Prospectus. Genesis Energy will provide an interest free loan to a related party trust to acquire shares for the Executive LTI Plan, and the proposed Employee Share Ownership Plan is envisaged to include share grants. There are also potential release costs. None of these items affect the Group PFI (except the administrative and set up costs) as any Shares offered under these plans are assumed to be offered at their market price. 20. Other operating expenses Other operating expenses include meter reading and maintenance costs, contractors and material costs, consultants and professional service costs, advertising, marketing and promotion costs, property costs, bad and doubtful debts, plant, equipment and vehicle running costs and other operating costs. compared to FY2013; however they decrease by $2.7 million after excluding one-off items. One-off items include costs related to this Offer of $10.0 million and a termination fee and related provision for onerous contracts of approximately $16.2 million (net of estimated sub-lease revenue) associated with the Company’s contracts for procurement of imported coal (see assumption 15 “Fuels consumed”). Other operating expenses decrease by $29.5 million in FY2015, compared to FY2014 with no one-off items and a full year of benefits to operating costs from savings from the exit of coal import contracts in late 2013. Other operating costs decrease as cost savings outweigh inflation increases. 21. Depreciation, depletion and amortisation Historical rates of depreciation will apply to the asset base adjusted for forecast capital expenditure. Oil and Gas depreciation and depletion has increased in FY2014 due to the higher charge in the first 6 months of the year and higher production volumes (see assumption 14 “Petroleum revenue, production, marketing and distribution costs and crude oil price assumptions”). Whilst depletion is based on depleting the cost of oil and gas assets recognised, the percentage reduction in reserves is used to determine depletion rates. See Section 4.5 Independent Expert’s Summary Report on Kupe Reserves and Resources of the Prospectus for the independent expert’s summary of its assessment of Kupe reserves. The finance lease receivable expired in FY2013. Other operating expenses increase by $23.5 million in FY2014, Depreciation, Depletion and Amortisation Summary FY2012 Historical FY2013 Historical FY2014 Prospective FY2015 Prospective Depreciation of property, plant and equipment 80.4 80.6 91.2 94.1 Depreciation and depletion of oil and gas assets 56.3 40.4 54.8 47.3 Amortisation of intangibles 12.5 12.8 11.8 8.8 Amortisation of finance lease receivable 2.9 1.3 - - Total depreciation, depletion and amortisation 152.1 135.0 157.8 150.2 22. Impairment 24. Derivatives and Change in Fair Value of Financial Instruments $million The impairment charge totals $9.5 million in FY2014 and $13.5 million in FY2015. Non-current assets will incur impairment equivalent to forecast capital expenditure on the Rankine Units and Unit 6 as these assets’ fair value is forecast to remain at $nil. Excepting the above items, no further asset impairments have been forecast in FY2014 and FY2015. 23. Revaluation Generation assets carried at fair value were last revalued as at 30 June 2013. No change in fair value of generation assets in the Prospective Period is expected. 56 These assumptions affect contract revenue within Electricity revenue and change in fair value of financial instruments, both within the prospective comprehensive income statement along with Derivatives held in the balance sheet. Changes in fair value of financial instruments have been modelled. There are a series of underlying assumptions in the modelling regarding financial instruments held, hedging effectiveness, forward curves, and realisation. The key specific underlying assumptions for material financial instruments are: APPENDIX PROSPECTIVE FINANCIAL INFORMATION —— interest rate swaps and foreign exchange forward rate contracts are valued against forward curves; —— all interest rate swaps, oil options, oil swaps and foreign exchange forward rate contracts are held to maturity and there are no new interest rate swaps and foreign exchange forward rate contracts; —— electricity contracts for differences assumptions are consistent with financial reporting standards with the valuation based on an effective/ineffective assessment. The key assumptions in the model are: the volumes and the strike price outlined in the agreement with the counterparty, the forecasted internally generated electricity price path, emission credits and the discount rate. The lead-in and long-term hedges fall within this category; —— all new electricity contracts for differences are at fair value at inception and through the Prospective Period; —— the valuation of electricity options is based on a discounted cash flow model over the life of the agreement. The key assumptions in the model are: the callable volumes, strike price and option fees outlined in the agreement with the counterparty, the forecasted internally generated electricity price path, day one gains and losses, emission credits and the discount rate. The options are deemed to be called when the internally generated price path is higher than the strike prices after taking into account obligations relating to the specific terms of each contract; —— the Meridian swaption49 is available to Meridian between April and October 2014 and the additional canal remediation swaption is available when Tekapo canal remediation work is planned (that is, between January 2014 and March 2014 in the Prospective Period), earning Genesis Energy a fixed premium fee for every month the swaption is available; —— Total FY2014 option fees (contract revenue) earned will be less than in FY2013 and FY2015 approximates half the fees of FY2013 due to the above noted swaptions; and —— All other existing electricity Derivatives are held to maturity. 26. Income tax expense 25. Net finance expense 28. Non-current assets Finance (Interest) expense will be at an average rate of 6.4% applicable for FY2014 and 6.6% for FY2015 on borrowings. This reflects the average of interest rates for the different debt instruments that the Company utilises including retail bonds, Capital Bonds, bank debt and wholesale debt. Interest will be paid when it falls due subject to accruals. Non-current assets will reduce as total depreciation, depletion and amortisation (see assumption 21) exceeds total capital expenditure (see assumption 29) and no revaluations are forecast. There will be no change in credit rating in the Prospective Period. The income tax rate will be 28% on taxable profit based on the current corporate tax rate in New Zealand. Deferred Tax Liability will remain in line with the liability at 30 June 2013 and the treatment of powerhouse assets and Tekapo canal remediation project costs is consistent with the financial statements as set out in Section 6.4.5 Audited Financial Statements for the Year Ended 30 June 2013 (Note 16) of the Prospectus. There are no significant items being revisited by the IRD as a result of change in tax policy or retrospective regulation changes. Tax will be paid when it falls due subject to accruals. 27. Borrowings and cash Appropriate debt funding is in place (i.e. wholesale and retail bonds and Capital Bonds and bank funding facilities) and will remain in place for the Prospective Period. See Section 6.4.2 Discussion of Historical Operational and Financial Information of the Prospectus for further discussion of Liquidity and Capital resources in FY2011 to FY2013 including debt funding available as at 31 December 2013 and Genesis Energy’s debt maturity profile as at 31 December 2013. From a cash flow perspective, proceeds from borrowings in FY2014 will be a $197.1 million drawdown on bank funding facilities and $nil in FY2015. Repayment of borrowings in FY2014 includes $75 million being the principal amount of Capital Bonds as part of the modification process50 and $120 million of retail bonds. In FY2015 it is forecast that $68.1 million of borrowings will be repaid. Cash and cash equivalents will be consistent in the Prospective Period at $24.5 million which is in line with cash and cash equivalents at 30 June 2013 of $22.7 million. Therefore in FY2015 cash flows from operating activities, investing activities and financing activities net to $nil, with any balance of operating activities in excess of investing activities applied against borrowings. There will be no changes to existing resource consents and/or their conditions which relate to the generation assets. There will be no catastrophic events (refer to Section 6 What are my Risks?) that affect Genesis Energy’s assets or operations or the national electricity and gas market. 29. Capital expenditure FY2012 Historical FY2013 Historical FY2014 Prospective FY2015 Prospective 7.8 104.8 32.4 - Oil and gas rehabilitation 20.1 2.6 - - Stay-in business capital expenditure 51.7 59.8 60.1 61.2 79.6 167.2 92.5 61.2 $million Tekapo canal remediation project Total Capital Expenditure 49 See Section 4.1 Business Description of the Prospectus for further information about the Meridian swaption. 50 Refer Section 6.4.5 Audited Financial Statements for the Year Ended 30 June 2013 (Note 30) of the Prospectus for further details on the modification process. Total capital expenditure relates to additions spread across property, plant and equipment, oil and gas assets and intangible assets (excluding emission units see assumption 18). Ordinary asset replacement and maintenance, in the normal course of business, is forecast in respect of the existing asset base at an Genesis Energy Share Offer investment statement 57 APPENDIX annual capital cost of circa $60 million. This is also referred to as “stay-in business capital expenditure”, which relates to on-going asset management and lifecycle maintenance and re-investment programme expenditure and includes capital expenditure on maintaining options for future development but excludes oil and gas rehabilitation and the Tekapo canal remediation project capital expenditure. hedged at an average rate of ¥62; —— For FY2015 Japanese Yen maintenance costs are assumed to be ¥578 million of which 90% has been hedged at an average rate of ¥74; and —— The average assumed exchange rates for unhedged transactions are USD0.79 in the second half of FY2014 and USD0.77 in FY2015 and ¥80.7 in the second half of FY2014 and ¥78.5 in FY2015. In addition, specific capital expenditure on the Tekapo canal remediation project of $32.4 million is forecast in FY2014. While Genesis Energy continues to develop its portfolio of new electricity generation options no development or growth capital expenditure is forecast in the Prospective Period. 32. Business acquisitions and disposals The Tekapo canal remediation project is consistent with the capital expenditure previously announced and relates to the second stage of a two stage project which commenced in January 2014. The first of the two stages was successfully completed in January through March 2013 with a capital expenditure of $105 million (with $8 million incurred in FY2012). The total project was budgeted to include spend of $145 million to $155 million. Based on latest information the Company assumes total capital expenditure for this project to be at the lower end of this range at $145 million. Investing cash flows for the purchase of property, plant and equipment, oil and gas assets and intangible assets will be broadly in line with the capital expenditure forecast, differing for capital expenditure accruals. 30. Working capital items Trade Receivables and accrued income assumes normal receipt terms. Payables and accruals will be on standard payment terms (that is, one month in arrears) for operating expenses. Inventories (current and non-current) relate to fuel and petroleum products, consumables and spare parts. Fuel and petroleum products vary with Thermal Generation and timing of production at Kupe. Other inventories will be consistent with the balance at 30 June 2013. Provisions will be materially unchanged on 31 December 2013 balances. No wholesale electricity market counterparties are forecast to materially default on market payments. Receipts and payments are assumed to follow the seasonal pattern of FY2013 (see assumption 11 “Seasonality”) and most other payments and receipts being paid or collected either as incurred or recognised, or in the month following. Finance lease liabilities relate to the normal course of business and reduce due to the exit from import coal contracts (see assumption 20 “Other operating expenses”). 31. Foreign currency Genesis Energy operates predominately in New Zealand dollars but has exposure to United States dollar foreign exchange through sales of oil and gas and Japanese Yen for maintenance costs. For the PFI, the underlying assumptions are: —— For the second half of FY2014 total sales denominated in USD are assumed to be $48 million of which 56% has been hedged at an average rate of USD0.78; —— For FY2015 total sales denominated in USD are assumed to be $83 million of which 30% has been hedged at an average rate of USD0.78; —— For the second half of FY2014 total Japanese Yen maintenance costs are assumed to be ¥284 million of which 98% has been 58 The PFI does not include the acquisition or disposal of any significant assets in the Prospective Period. 33. Litigation As at the date of this Investment Statement, no litigation during the Prospective Period which would adversely affect the financial performance of Genesis Energy or its financial condition during the Prospective Period is known to exist. 34. Related party transactions Except as disclosed in Section 7.0 Terms of the Offer of the Prospectus and in respect of interest free loans for the purposes of the Executive LTI Plan (see Section 4.2 Board, Management and Corporate Governance of the Prospectus), all transactions with the Crown, Crown owned entities and state-owned enterprises, subsidiaries and associates, joint operations and key management personnel will continue to be conducted on an arm’s length basis and at normal market prices and on commercial terms. 35. Equity There will be no new equity issued post the Allotment Date with 1 billion ordinary shares on issue and fully paid on the Allotment Date (540,565,002 as at 30 June 2013). In March 2014 the Company made a bonus issue of 459,434,998 ordinary shares to existing Shareholders. 36. Dividends Dividends will be declared and paid based on the current dividend policy. Total dividends paid to the Crown in FY2014 of $121.0 million, includes the final dividend for FY2013 of $57.0 million, paid in October 2013, and $64.0 million to be paid in April 2014. Total dividends paid to Shareholders in FY2015 are forecast to be $144.0 million, which includes the final FY2014 dividend of $64.0 million to be paid in October 2014 and the interim FY2015 dividend of $80.0 million to be paid in April 2015. Total dividends declared for FY2015 are forecast to be $160.0 million (16.0c per Share) comprising a 50% interim dividend payable in April 2015 and a 50% final dividend to be paid in October 2015. Total dividends declared for FY2014 are forecast to be $128.0 million (12.8c per Share). The dividends declared approximate 84% in FY2014 and 83% in FY2015 of Free Cash Flow. Free Cash Flow is a non-GAAP measure. Refer to “Explanation of Non-GAAP Financial Information” in Section 5 Overview of Financial Information for further details, and the calculation of Free Cash Flow and dividends declared as a percentage of Free Cash Flow. Dividends in the Prospective Period are expected to be fully imputed. At a tax rate of 28% (see assumption 26 “Income tax expense”) the dividends declared grossed up for imputation credits are forecast to be $177.8 million (17.8c per Share) for FY2014 and $222.2 million (22.2c per Share) for FY2015. APPENDIX PROSPECTIVE FINANCIAL INFORMATION Consolidated Prospective Financial Information Genesis Energy Limited and Subsidiaries Consolidated Prospective Comprehensive Income Statement Assumptions For Year Ending 30 June 2014 Prospective For Year Ending 30 June 2015 Prospective 3, 8, 9, 10, 11, 18, 24 1,691.3 1,844.1 3, 8, 11, 13 261.0 244.0 3, 14 81.3 68.3 17 7.0 9.4 2,040.6 2,165.9 3, 8, 9, 11, 12, 18, 24 (912.8) (1,025.3) Gas purchases and transmission 3, 13 (257.2) (235.4) Petroleum production, marketing and distribution 3, 14 (30.1) (28.5) 10, 15, 16 (203.1) (212.4) $million Operating revenue Electricity revenue Gas revenue Petroleum revenue Other revenue Operating expenses Electricity purchases, transmission and distribution Fuels consumed Employee benefits 19 (87.0) (85.2) Other operating expenses 20 (245.2) (215.6) (1,735.4) (1,802.4) 305.2 363.4 Earnings before net finance expense, income tax, impairment, depreciation, depletion, amortisation, fair value changes and other gains and losses Depreciation, depletion and amortisation 21 (157.8) (150.2) Impairment of non-current assets 22 (9.5) (13.5) 24, 31 (3.9) 4.1 Other (losses) gains (0.3) - Profit before net finance expense and income tax 133.7 203.8 Change in fair value of financial instruments Finance revenue Finance expense 0.4 Income tax expense 5, 26 Net profit for the year (70.5) 133.3 (20.8) (37.9) 41.8 Profit before income tax - (71.5) 62.6 25 95.4 Other comprehensive income Items that may be reclassified subsequently to profit or loss: Change in cash flow hedge reserve 24 1.0 2.6 Income tax (expense) relating to items that may be reclassified 26 (0.3) (0.7) Total items that may be reclassified subsequently to profit or loss 0.7 1.9 Total other comprehensive income for the year 0.7 1.9 42.5 97.3 4.2 9.5 Total comprehensive income for the year Earnings per Share attributable to equity holders: Basic and diluted earnings per Share (cents) 35 Genesis Energy Share Offer investment statement 59 APPENDIX Genesis Energy Limited and Subsidiaries Consolidated Prospective Statement of Changes in Equity For Year Ending 30 June 2014 $million Share capital Asset revaluation reserve Cash flow hedge reserve Retained earnings 35 23, 28, 32 24 36 Balance at 1 July 2013 540.6 806.4 (8.7) 611.5 1,949.7 Net Profit for the year – – – 41.8 41.8 Change in cash flow hedge reserve – – 1.0 – 1.0 Income tax credit (expense) relating to other comprehensive income – – (0.3) – (0.3) Total comprehensive income for the year – – 0.7 41.8 42.5 Revaluation reserve reclassified to retained earnings on disposal of assets – (0.6) – 0.6 – Dividends paid – – – (121.0) (121.0) 540.6 805.8 (8.0) 532.8 1,871.2 Assumptions Total Other comprehensive income Balance at 30 June 2014 For Year Ending 30 June 2015 $million Share capital Asset revaluation reserve Cash flow hedge reserve Retained earnings 35 23, 28, 32 24 36 Balance at 1 July 2014 540.6 805.8 (8.0) 532.8 1,871.2 Net Profit for the year – – – 95.4 95.4 Change in cash flow hedge reserve – – 2.6 – 2.6 Income tax credit (expense) relating to other comprehensive income – – (0.7) – (0.7) Total comprehensive income for the year – – 1.9 95.4 97.3 Dividends paid – – – (144.0) (144.0) 540.6 805.8 (6.1) 484.2 1,824.5 Assumptions Total Other comprehensive income Balance at 30 June 2015 60 APPENDIX PROSPECTIVE FINANCIAL INFORMATION Genesis Energy Limited and Subsidiaries Consolidated Prospective Balance sheet $million Assumptions As at 30 June 2014 Prospective As at 30 June 2015 Prospective 27 24.5 24.5 30 281.1 259.2 16, 30 69.9 63.5 Current assets Cash and cash equivalents Receivables and prepayments Inventories Emission Units on hand 18 2.3 2.3 Derivatives 24 13.3 4.0 391.1 353.6 Total current assets Non-current assets Property, plant and equipment 21, 23, 28, 29 2,782.0 2,733.8 Oil and gas assets 21, 28, 29 341.1 295.4 Intangible assets 21, 28, 29 118.2 109.6 Inventories 16 48.2 52.3 Receivables and prepayments 30 1.0 1.0 Derivatives 24 3.4 1.5 3,294.0 3,193.7 3,685.1 3,547.2 235.4 228.5 Total non-current assets Total assets Current liabilities Payables and accruals 30 Tax payable 26 1.6 8.0 Borrowings 27 11.3 114.7 Provisions 30 11.8 11.6 Derivatives 24 21.9 4.6 282.0 367.4 Total current liabilities Non-current liabilities Payables and accruals 30 0.6 0.6 Borrowings 27 1,007.5 834.2 Provisions 30 130.2 129.0 Deferred tax liability 26 380.9 381.5 Derivatives 24 Total liabilities 12.7 10.0 1,531.9 Total non-current liabilities 1,355.4 1,813.9 1,722.8 Shareholder’s equity Share capital 35 540.6 540.6 23, 24, 32, 36 1,330.6 1,283.9 Total equity 1,871.2 1,824.5 Total equity and liabilities 3,685.1 3,547.2 Reserves Genesis Energy Share Offer investment statement 61 APPENDIX Genesis Energy Limited and Subsidiaries Consolidated Prospective Cash Flow Statement For Year Ending 30 June 2015 Prospective 2,020.7 2,188.3 0.4 – 2,021.1 $million For Year Ending 30 June 2014 Prospective 2,188.3 3, 8, 9, 11, 12, 14, 15, 16, 18, 20, 24, 30 1,625.1 1,726.6 19, 30 87.2 85.2 Assumptions Cash inflows from operating activities Cash was provided from: Receipts from customers 3, 8, 9, 10, 11, 13, 14, 17, 18, 24, 30 Interest received Cash was applied to: Payments to suppliers and related parties Payments to employees Tax paid 5, 26 31.6 1,843.4 293.3 344.9 0.1 – 0.1 Net cash inflows from operating activities 15.5 1,727.8 – Cash flows from investing activities Cash was provided from: Proceeds from disposal of property, plant and equipment Cash was applied to: Purchase of property, plant and equipment 29 85.1 61.1 Purchase of oil and gas assets 29 4.0 1.6 Purchase of intangible assets 29 1.4 64.1 (97.6) Net cash (outflows) from investing activities 8.5 97.6 (64.1) Cash flows from financing activities Cash was provided from: Proceeds from borrowings 27 197.1 – 197.1 – 195.0 68.1 Cash was applied to: Repayment of borrowings 27 Interest paid and other finance charges 25 71.1 67.1 Repayment of principal on finance lease liabilities 30 4.0 1.6 Dividend paid 36 121.0 144.0 391.1 280.8 (193.9) (280.8) Net cash (outflows) from financing activities Net increase (decrease) in cash & cash equivalents 27 Opening cash and cash equivalents 27 Short term deposits Closing cash and cash equivalents 62 – 27 22.7 24.5 24.5 Closing cash and cash equivalents Cash on hand and at bank 1.8 24.5 24.5 24.5 – 24.5 – 24.5 APPENDIX PROSPECTIVE FINANCIAL INFORMATION Sensitivity Analysis Introduction to sensitivities PFI is inherently subject to uncertainty and accordingly actual results are likely to vary from PFI and this variation could be material. You can find a full description of assumptions relating to the prospective financial information for FY2014 and FY2015 above, along with a description of risks in Section 6 What are my Risks? of this Investment Statement and Section 5.0 What are my Risks? of the Prospectus. The sensitivity analysis below is provided to assist you with assessing the potential effects of variations in certain key assumptions (defined as those most likely to materially affect results). The sensitivity for each assumption is not intended to be indicative or predictive of the possible range of outcomes. Each movement in an assumption is calculated and presented in isolation from possible movements in other assumptions (i.e. when the assumption is sensitised, all other things remain equal). In reality, it is more likely that more than one assumption may move giving rise to compounding or offsetting effects. Furthermore the sensitivity modelled does not take into account that management action will be taken which may potentially mitigate effects. Therefore care should be taken in interpreting the sensitivity analysis. Sensitivities have been modelled to show the effect on forecast EBITDAF and Net Profit for the following key specific assumptions: Assumption 8 Customer electricity sales volumes and prices —— Retail customer electricity sales volumes are forecast to increase in FY2014, by approximately 2.7% on FY2013, and a further 3.6% in FY2015. This growth is a combination of increased TOU and retail volumes. These increases are dependent on competitive behaviour and economic activity. A sensitivity of an increase or a decrease in retail customer FPVV electricity sales volumes of 5% for each year has been analysed. —— The energy and service cost component of retail customer prices is affected by market conditions and competitive behaviour amongst other things. The sensitivity range provided for the PFI period is based on no increase through to a 5% increase, based on indicative historical price rises and assumes no changes in retail electricity volumes as prices vary. Assumption 9 Wholesale electricity prices —— Wholesale electricity prices are dependent on a wide range of factors, not least including hydrological inflows, and are inherently volatile (as discussed in Section 5.0 What are my Risks? of the Prospectus). A change in wholesale electricity prices will affect electricity revenue and purchases and settlements of financial instruments. The sensitivity applied to forecast wholesale electricity prices is to increase or decrease the time weighted annual average price within a relatively wide range of annual average wholesale prices of $40/MWh to $90/ MWh to illustrate the potential EBITDAF and Net Profit impact. For the purpose of the sensitivity analysis the sensitivity on wholesale electricity price change is applied to generation volumes and retail purchases. Note that hydrological inflows affect generation volumes as well as wholesale electricity prices. No change to generation volumes has been modelled for the purposes of the sensitivity presented. See Section 4.1 Business Description of the Prospectus for further discussion of the impact of hydrological inflows on Genesis Energy’s performance. Assumption 10 Generation volumes —— Generation volumes forecast for the Prospective Period are based on recent historical actual volumes aligned with the reduced wholesale electricity prices. Genesis Energy has the ability to use, or not use, Huntly’s coal or natural gas fired generation in periods of higher, or lower, wholesale electricity prices. The plus or minus 10% sensitivity range provides an illustration of the impact of higher, or lower, generation volumes, on EBITDAF and Net Profit assuming all other things remain equal, in particular no change in the price for generation or coal burn, or the mix, as the volumes vary. This range is reflective of the range in the historical period excluding FY2012 which was a dry weather year where production was 20% to 25% above forecast production volumes. In addition to the key sensitivities chosen, further sensitivities which show the impact of Wholesale Electricity Price on electricity Derivatives, reduced natural gas production volumes at Kupe and movements in the USD:NZD exchange rate, oil prices and market forecasts for interest rates are set out below. Genesis Energy Share Offer investment statement 63 APPENDIX FY2014 Forecast Sensitivities: PFI Sensitivity range Impact on EBITDAF Impact on Net Profit 4,754 GWh Plus/minus 5% $4m to $(4)m $3m to $(3)m Increase by an average of 2.2% No increase/increase by 5% $(4)m to $5m $(3)m to $4m $58.2/MWh to $68.2/MWh $40/MWh to $90/MWh $(23)m to $8m $(17)m to $6m 6,667 GWh Plus/minus 10% $42m to $(42)m $30m to $(30)m $58.2/MWh to $68.2/MWh $40/MWh to $90/MWh N/A $13m to $(4)m USD0.79 USD0.75 to USD0.83 $2m to $(2)m $1m to $(1)m 6.4% +/- 100 bps N/A $(1)m to $1m 103.3 Plus/minus USD5/bbl $1m to $(1)m $1m to $(1)m PFI Sensitivity range Impact on EBITDAF Impact on Net Profit 4,873 GWh Plus/minus 5% $11m to $(11)m $8m to $(8)m Increase by an average of 2.2% No increase/increase by 5% $(20)m to $25m $(15)m to $18m $65.5/MWh to $75.5/MWh $40/MWh to $90/MWh $(26)m to $17m $(19)m to $12m 6,959 GWh Plus/minus 10% $49m to $(49)m $35m to $(35)m $65.5/MWh to $75.5/MWh $40/MWh to $90/MWh N/A $9m to $(5)m USD0.77 USD0.73 to USD0.81 $5m to $(4)m $4m to $(3)m Forward interest rates 6.6% +/- 100 bps N/A $(2)m to $2m Oil prices 99.6 Plus/minus USD5/bbl $2m to $(2)m $1m to $(1)m Key Assumptions Retail customer FPVV electricity sales volumes51 Average increase in electricity retail price (energy and service costs component only) from April 2014 Changes in time weighted average annual wholesale electricity prices51 Generation volumes at average weighted price51 Forward electricity price curve for Derivatives51 Foreign exchange movements impact on unhedged oil and gas sales in USD51 Forward interest rates51 51 Oil prices FY2015 Forecast Sensitivities: Key Assumptions Retail customer FPVV electricity sales volumes Average increase in electricity retail price (energy and service costs component only) from April52 Changes in time weighted average annual wholesale electricity prices Generation volumes at average weighted price Forward electricity price curve for Derivatives Foreign exchange movements impact on unhedged oil and gas sales in USD Further sensitivity information for the Prospective Period —— If Kupe natural gas production volumes were disrupted, without alternate volumes or compensating price changes then the impact on EBITDAF is estimated at $2.0 million/PJ. —— A prolonged unplanned outage of one of the Company’s generating stations could, without a management response incorporating the remaining asset portfolio, negatively impact EBITDAF. As an example, it is estimated that an unplanned outage of Huntly Unit 5 for one week would reduce EBITDAF by $1 million. —— There is sensitivity around identified, and unidentified, capital expenditure projects with respect to timing and level of capital expenditure that will need to be incurred. The current estimate of $60 million underlying “stay in business capital expenditure” is based on the average underlying sustaining spend of recent periods. The actual capital expenditure has often varied from this average capital expenditure. The sensitivity range is estimated as $20 million p.a. 51 These sensitivities for FY2014 have been modelled on the basis of change in the assumption affecting the last 6 months of FY2014 only (given FY2014 has been prepared using 6 months of actual results to 31 December 2013). 64 —— The fair value of property, plant and equipment assets carried at valuation is sensitive to changes in assumptions including forecast wholesale electricity prices. A sensitivity analysis is provided in the audited financial statements set out in Section 6.4.4 Audited Interim Financial Statements for the Six Months Ended 31 December 2013 and Section 6.4.5 Audited Financial Statements for the Year Ended 30 June 2013 of the Prospectus. —— Cash flows from operating activities are affected by most EBITDAF movements except to the extent of changes in balances for receivables and payables, movements in provisions and tax paid. 52 The sensitivity modelled represents the total impact of the range being applied to both the April 2014 and April 2015 assumed price rises. APPENDIX PROSPECTIVE FINANCIAL INFORMATION diRectoRy dIRECTORy ThE COMPANy AUdITOR Genesis Energy Limited Andrew Dick of Deloitte The Genesis Energy Building 660 Great South Road Greenlane Auckland 1051 (on behalf of the New Zealand Controller and Auditor-General) Deloitte Centre 80 Queen Street Auckland 1010 ANZ Bank New Zealand Limited INvESTIGATING ACCOUNTANT ASB North Wharf ThE CROWN C/- The Treasury 1 The Terrace Wellington 6011 REGISTRAR Computershare Investor Services Limited Level 2, 159 Hurstmere Road Ernst & Young Transaction Advisory Services Limited Ernst & Young Building 2 Takutai Square Britomart Auckland 1010 Takapuna JOINT lEAd MANAGERS Auckland 0622 First NZ Capital Securities Limited and Credit Suisse (Australia) Limited lEGAl AdvISERS TO ThE COMPANy First NZ Capital Securities Limited Level 39, ANZ Centre Russell McVeagh 23-29 Albert Street Level 30, Vero Centre Auckland 1010 48 Shortland Street Auckland 1010 King & Wood Mallesons Credit Suisse (Australia) Limited Level 31, Gateway Building 1 Macquarie Place Level 61, Governor Phillip Tower 1 Farrer Place Sydney NSW 2000 Australia Sydney NSW 2000 lEGAl AdvISERS TO ThE CROWN 188 Quay Street Chapman Tripp Level 35, ANZ Centre 23-29 Albert Street Auckland 1010 Australia UBS New Zealand Limited Level 17, PWC Tower Auckland 1010 NEW ZEAlANd RETAIl OffER MANAGERS Ground Floor, ANZ Centre 23-29 Albert Street Auckland 1010 ASB Bank Limited 12 Jellicoe Street Auckland 1010 0 ..la a