Genex Power Ltd

ASX:GNX

Earnings Call Transcript

[Craig Sansbury]

Genex Power's Q3 Investor Update. I'm Craig Sansbury, who helps Genex with their Investor Relations.

Today, we've got Simon Kidston, who is a Director of Genex; James Harding, who is the CEO; and Craig Francis, who is CFO, to talk you through their Q3 results. So with that, and before I hand over to Simon, please use the Q&A facility or the chat facility at the bottom of the screen to ask your questions. There will be a Q&A session at the end of the presentation.

So Simon, with that, I'll hand over to you.

[Simon Kidston, executive]

Thank you very much, Craig, and good morning, everyone. It's a pleasure here to present what I think has been a really strong quarterly result. And in a moment, James Harding will step through the operational details, and Craig Francis will talk through the numbers. Of course, people familiar with Genex will know our flagship project up in North Queensland. This is what I consider to be a beautiful image of the project, but it's now rapidly being transformed into a renewable energy hub.

Just summarizing the portfolio very quickly, we've got $1 billion of capital invested into renewable assets. Of course, the investments centered in North Queensland at the former Kidston Gold Mine, comprising the operating solar farm, the pumped hydro actually under construction. A wind farm, which we're very excited about, we'll give an update on that in a moment.

And of course, we've just financed our Bouldercombe Battery Project in Rockhampton, which really provides an exciting step up in our earnings for next year. And finally, the Jemalong asset, which as we'll discuss in a moment, has performed really strongly in the last quarter.

Of course, everything we do has got a clean green lens. Of course, the contribution of this portfolio into emissions reduction is truly significant, some 2 million tonnes of CO2 abatement by 2025. And these assets are fully operational, equivalent to 350,000 households. So significant on a national scale and may I dare say, even on an international context.

I hand over to James Harding, CEO, for some operational updates.

[James Harding, executive]

Yes. Thanks very much, Simon, and good morning, everybody. Yes delighted to be here joining this results presentation today. As Simon said, it's been a really strong quarter for Genex. And our 2 operating solar farms, in particular, have been performing very well. Really pleased to note that we've had positive cash flow from operations this quarter. Craig's going to provide you some details in a moment.

But this is due to the excellent technical performance, both at the Kidston Solar and the Jemalong Solar farms in Queensland and New South Wales, respectively. They're both amongst the top 5 performing solar farms on the NEM. And we're also seeing very strong pricing on the market, particularly in New South Wales. The LGC prices, we've seen reaching almost $50. It's well above forecast. And black prices have been, again, extremely strong in the last quarter.

And there's reasons for that. In particular, it's the problems associated together with coal-fired power plant. There's been some failures of coal-fired power plant on the NEM. The availability of those power stations is down, and we expect that sort of to continue over time as these assets age. And the future curves are also showing very strong increasing prices across, particularly it's up those but other parts of the NEM. And that's due to the forecast closures of coal-fired power plants, particularly there and recently launched [Technical Difficulty] on pricing and provide a basis for more renewables to enter the NEM.

So Craig will provide sort of details of the figures of those strong cash flows from the 2 solar farms. I'll just finish this slide with just a short discussion on the Kidston hydro project. I was up there this week. Delighted to see the progress on construction. We're very much on schedule to complete construction and commission the project by the end of 2024. Lots of works going on above ground and below ground, and I'll provide some more detail in the following slides.

And finally, the Bouldercombe Battery Projects, which we reached financial close beginning of this year, that's now kicked off. We secured the supply slots from Tesla. They're now completing the design, and the balance of plant contractor, CPP, is also completing civil and electrical design and preparing to mobilize on site in July this year. So we're expecting to have first generation of power from that battery in the middle of 2023.

I'll hand over to Craig to talk about the numbers on the next slide.

[Craig Francis, executive]

Thanks, James, and good morning, everybody. So the total generation figures for the quarter was 66,000 megawatt hours. And year-to-date, that's 180,000 megawatt hours. That is down on the P50 expectations, but we're really pleased with the outcome, given the weather events that have been facing the East Coast of Australia this summer. It's been a very wet summer, and that has affected generation.

Pleasingly though, the revenue figures are certainly ahead of our expectation, $6.4 million for the quarter. That's comprised of $2.8 million for KS1 and $3.5 million for Jemalong. Jemalong asset, an average bundled price of $105 a megawatt hour. As James said, we're really actually quite pleased to see the LGC pricing remaining strong. And we have seen that trending upwards of rates, and we're selling LGCs at the moment sort of around [ $50 ] which we never thought we'd be, we're saying 12 months ago, that's fantastic to see.

Year-to-date revenue is $16.4 million, and we're expecting that to get to the $21 million mark for the year. Cash receipts, as we've sort of explained in past presentations, these lag the revenue results due to the 1-month settlement period, $7.8 million for the quarter and $18.5 million year-to-date.

And a strong net cash position as at 31 March of $62.4 million, reflecting the proceeds of the recent capital raising, the SPP and the Placement, $47 million in total. And then the contributions we've made to the construction programs for Bouldercombe as well as the cash inflows we received in the solar farms.

A very key metric that James mentioned is we are operating cash flow positive this quarter of $1.7 million. And year-to-date, yes, we're still operating cash flow positive between $500,000. We're expecting that we shall finish the financial year operating cash flow positive for the first time in the company's history. And that's really reflective of the full year contribution of Jemalong. Those 2 solar farms now really generating enough cash to cover the sort of running cost of the business and farms themselves.

So a really strong quarter, and we're really pleased with how the plants have performed. What we're seeing with Jemalong and the pricing as well? Generation has been down, the pricing is providing a natural hedge when there's weather affecting solar output in New South Wales that does lift the prices. And by having an exposure to the merchant pricing, we are seeing a natural hedge across the portfolio, and that's where the revenue figures are surpassing our expectations.

Finally, just to finish on this slide, a very important metric for us is -- for the quarter and for the year, there's been 0 lost time injuries and environmental incidents. Particular focus of ours given the activity that's going on at Kidston with the [ $100 ] million construction projects up there with the hydro.

I'll just move on to talk a little bit about the battery project and just recapping because we've discussed this quite a lot in recent months. But Bouldercombe Battery Project. It's our first battery project. It's 50 megawatts, 100-megawatt hours, and it's located near Rockhampton in Central Queensland. We reached financial close on the project in February, so a very clear milestone this quarter.

And that's a $59 million CapEx project, which will be funded $35 million with a fixed interest loan with Infradebt and $24 million of equity, which was provided by way of that capital raising. So it's fully funded. Importantly, the loan with Infradebt, fixed interest rates for 13.5 years. And we're very pleased to have done that at the time we did, given what's been happening in the global and local interest markets. We're certainly seeing a lot of upward pressure on yield curves. But fortunately, we're very insulated from that with the fixed interest loan with Infradebt.

Just recapping, the battery itself will be sourced from Tesla via a supply agreement, which we locked in, in September last year, again, prior to the commodity price increases that we're seeing in the market presently. So very pleased to have secured that. And Tesla is also providing a 20-year O&M arrangement and warranty for the battery cells, and an 8-year offtake, which I'll talk to briefly on the next slide. Construction is underway, and we're expecting this plant to start generating in the second half of calendar year '23.

Just recapping on the offtake structure and it is an 8-year offtake with Tesla. It gives us a guaranteed revenue floor. And Tesla will operate the battery to maximize revenue across the energy market arbitrage and FCAS markets with a guarantee of floor, and then we share in the upside beyond that floor in accordance with the fixed profit share ratio.

This project, as we said, it's scheduled to be delivering what we expected, $15 million of revenue per annum in the second half of calendar year '23. So we should start to see that contribution in FY '24.

I'll turn it back to James to talk to you around the hydro project, which we recently returned from.

[James Harding, executive]

Yes. Thanks, Craig. Yes, I was very, very pleased to be up at site this week at Kidston, and we're now a year into the 3.5-year build of the project. And it's really exciting to see what's happening at site. So the pictures you see there are of the main access tunnel. We announced start of construction of that main access tunnel back in January this year.

And just for those who are not aware on the schematic picture there, it's the purple sparing tunnel that goes down 1.5 kilometers from the surface down to the underground powerhouse, which is the gray building underground. And you can see the 2 water intake vertical shafts in white from the upper reservoir. Water will drop down 250 meters into the powerhouse through the turbines, generating power and out through those yellow more or less horizontal tailrace tunnels into the lower reservoir. And the process is reversed as water is pumped back through the pumps, the reversible-pump turbines, and back up into the upper reservoir to store.

So it's very exciting to see the progress. I was down in the tunnel yesterday. We're well over 300 meters in, over 15% of the access tunnels complete. You can see on the right-hand picture there the portal opening of the access tunnel. And the middle picture shows the face of the tunnel as it's being drilled, it's a drill and blast operation and between 4 and 4.5 meters is blasted each shift, and progress is continuous.

The other exciting news this month is that we've kicked off construction of the Wises Dam. That is a 6-kilometer circumference, 20-meter high elevated dam that's being constructed from the existing rock waste from the mine to create that upper reservoir across the Wises Dam. And there's lots of activity there moving -- going on on-site to construct that dam.

Later this year, we'll see the start of equipment from ANDRITZ Hydro of Austria arriving on site. The embedded parts will arrive by the end of this year, and we'll see obviously the main turbine generator equipment arriving during the course of next year. And then in 2024, we will see completion of the power line, start of commissioning and commercial operations by the end of that year.

So just on the next slide, just to sort of give a bit of a reminder of the scale of the project. The Kidston Hydro Project is our flagship. It's a $777 million investment. First 85% of that cost is funded by federal government agencies, the NAIF with the $610 million long-term concessional fixed rate loan. Importantly, it's a concessional loan that's fixed for the term, and a $47 million grant from ARENA. And there's a significant contribution also from Queensland government for the long transmission line that will link Kidston to the NEM.

We are operating under a fixed price full wrap, lump sum EPC contract with 2 of the leading contractors, McConnell Dowell and John Holland. And there, as I said, they will progress and well underway with construction.

When it's built, it will be 250 megawatts, 2,000 megawatt hour storage device. It will be the third largest electricity storage device in Australia. And it is the first pumped hydro project that to be built in 40 years. And I was happy to be escorting 2 Queensland ministers. We can move to the next slide, actually, Simon. Because we were able to obviously show the Minister for Energy and the Minister for Resources, the progress of repurposing the old gold mine to a pumped hydro projects.

And -- so they could see for themselves the state of construction, but we're also able to talk about our Kidston Wind project, which is our next pipeline development, where we've identified a very strong wind resource just to the south of Kidston. And that will be developed over the next couple of years. So we'll connect into the new transmission line that's being constructed for primarily the hydro. So we see very, very strong engagement again for Queensland government for completion of what is going to be the Kidston Clean Energy Hub, which will comprise solar, pumped hydro and wind when it's complete.

That project we're developing together with J-Power, our strategic partners, on a 50-50 basis. They're providing most of the development funding for the project. And we are now well progressed in our final feasibility, and we're engaging with our suppliers and -- wind turbine suppliers and contractors and with offtake partners this quarter. And we expect to progress those during the course of this year. And looking to close the financing in the second half of 2023, which will allow the project to construct and connect into that new transmission line in 2025.

I'll hand over back to Simon just to wrap up.

[Simon Kidston, executive]

Thanks, James. One thing I think that's becoming increasingly apparent is that this business has scale and is diversified. But one thing I think we need to articulate better to the market is the fact that we've got embedded locked in earnings growth. And of course, as Craig described earlier, we've got a very strong platform now with 2 operating solar farms. We'll do record revenue this financial year. I think we'll exceed $20 million based on the performance we've seen recently, which really sets the company up well to go to the next level.

And in terms of that next level, having now financed the Bouldercombe project, we'll see a step up substantially in revenues commencing mid-2023. So I think this business has got scale. It's got embedded earnings growth. And of course, that's all before we get the substantial contribution from our pumped hydro project. It's strategic, it's significant, and it's going to really [Technical Difficulty] hard the company's revenues and earnings, which I think is something which will [ drawn ] in the market as we get closer to reaching that milestone of commissioning the pumped hydro project during the course of calendar year 2024.

The wind project is looking really good, as James described. And that, of course, is the next leg of the company's growth as we grow out this portfolio.

So look, I guess in summary, we've always had a laser-like focus on delivering projects on time and on budget. We did that successfully for the first 2 operating solar farms. So far, we're delivering that in terms of the time lines and delivery of the pumped hydro project. And we'll absolutely apply those same principles for the delivery of the battery project.

All of that will mean that the company is on its way to delivering long-term, highly contracted revenues approaching $90 million by -- once the pumped hydro has been in operation. And of course, all being done under very, very, very strong EBITDA margins, some 76% of the revenue falls to the bottom line, due to those highly contracted nature of those cash flows. So it's a $1 billion business. It's diversified. It has scale, and we've got locked in earnings as we deliver these projects.

Look, one concluding comment I will make. The market, of course, is very, very focused on the impact of inflation and potential interest rates. One thing we've been meticulous about is locking in our interest rates at each time we finance a project. And this is important because we've got high levels of certainty as to our funding costs and the blended average of our interest obligations are around 3%. Given where interest rates are at the moment, I think that's a significant feature, which will no doubt become very, very important as interest rates move into this increasing interest rate cycle.

So the company is hedged, we're protected in many ways. There's a strong asset of the company having locked in that funding at very, very low concessional rates. So with that concluding comment, Craig Sansbury, I'll hand back to you.

[Craig Sansbury]

All right, Simon, James and Craig. [Operator Instructions]

First one for you. When are the operator agreements with both Kidston and Jemalong up for renewal? And if so, when would that be up for renewal?

[James Harding, executive]

So we have long-term O&M agreements in place for both those projects. We actually appointed Solarig as the O&M contractor for Kidston last year. So that will be up for renewal in 4 years' time. And Jemalong, similarly, that is a long-term 5-year agreement with Beon who is the EPC contractor that constructed it, and that has another 4 years to run.

[Craig Sansbury]

You mentioned that there was some very strong pricing coming through over the last couple of months, particularly in New South Wales. The question here is the cash flow from Jemalong expected to continue to rise in the short to medium term with those higher wholesale electricity prices in particular underlines some of the coal price increases and unit retirements at Bouldercombe power plant.

[Craig Francis, executive]

I'm happy to take this one. So our view is that certainly in the last 12 months, the wholesale price curve for New South Wales and including LGCs, has risen significantly. And that is a result of these earlier coal retirements and the lower reliability of coal plant. In the fact that this plant being taken out of action now every summer. Continuously is really impacting on the coal generation coming in during the day, which then, in turn, increases the price at which we're receiving for general. So absolutely, we do think the pricing is going to remain strong, and we think there's going to be more coal closure announcements coming over the short to medium term.

In terms of the next quarter, Jemalong the radiance is seasonal, as to be expected. And it's much more seasonal than KS1. So we think the generation will be lower just due to entering the winter months and the shorter days. However, we are buoyed by the strong pricing and particularly the strong LGC pricing that we're seeing. So we think it's going to be another solid quarter next quarter.

[Craig Sansbury]

Probably a follow-up question there. Move for operational cash flow positive this quarter, which is positive. Some really good projects coming through in the solar. What's the opportunity to expand either Jemalong or Kidston Solar like a brownfield expansion opportunities for those solar farms?

[James Harding, executive]

Yes. Look, I'll take that. So there are opportunities. We're looking -- we've got plentiful opportunity. In fact, we have a project over Kidston that is in feasibility phase for a potentially quite large additional solar capability up at Kidston, and that's -- we're progressing that at the moment, noting that it is cyclical.

And as Craig said, there are months of the year that we do see still some negative pricing in Queensland. That's underpinned the business case for our storage strategy in Queensland. So we're certainly looking at that carefully. At Jemalong, that is on also on the distribution network. So there are limitations as to how much capacity we can put at that location. But we're certainly looking at other opportunities in New South Wales, we see strong pricing for renewables solar and wind in New South Wales.

[Craig Sansbury]

A question then on solar versus wind. You guys mentioned opportunities for solar up in Queensland. You've got the K3-Wind project, you've been building out a diversified renewable energy business. What are the, I guess, return differentials between solar and wind and allocation of capital? Or would you be setting that to wind versus solar? So just a bit of a thought process through that.

[James Harding, executive]

Yes. Look, I'll tackle that. And Craig, you can jump in if you have something to add. But yes, they obviously have different profiles, clearly. And we've seen such a prevalence in Queensland of solar, both rooftop residential solar and also utility solar. And obviously, [Technical Difficulty] farms generate during the day when the sun is shining. So they're all coming on at the same time.

Wind obviously has a different attribute. It depends where it's located as to when -- what time of the day the strong is -- the wind blowing stronger. So if you have wind located across the NEM from North Queensland down to South Australia, you'll get a pretty good spread of wind blowing at different times of the day. So certainly, at times when prices are high and the evening peak, for example, you see some pretty strong performances from wind in particular. And we see that at Kidston.

The Kidston Wind profile matches very closely to the demand profile in Queensland. So that's been quite attractive to offtakers in the discussions that we have. So this all factors into what we see as a portfolio approach for Genex. We're going to have a combination of wind and solar and balancing storage in our portfolio, which allows us to take benefit from high pricing, either by generating wind in the evening peak or being able to move solar into those peak periods.

[Craig Sansbury]

A few questions around the storage, in particular, the battery strategy. Obviously, you've got Bouldercombe there you've mentioned before on [Technical Difficulty] the projects. Is there some update if you can give to the market on where potentially looking and what may be there beyond Bouldercombe [ energy of ] the batteries storage solution.

[James Harding, executive]

Yes. So we are -- I think we sort of mentioned previously, we're certainly looking to extend our storage capability. And that's predominantly battery, although I would say that we are keen to -- and we are looking closely at other opportunities for on [ hydro processing to lead ] but we've created quite a bit of expertise and experience in developing pumped hydro, and we see well place for deep storage as well.

But in the sort of short to medium term battery storage, probably larger batteries than what we see at Bouldercombe. They're probably in the range of 200 to 300 megawatts or between 2 to 4 hours. And we're looking across Queensland, in particular, we see a particularly strong business case to capture arbitrage revenues and also the FCAS revenues in Queensland, and that's likely to continue.

So we're looking at sites in -- across the state. Bouldercombe is obviously strategically located in the center of Queensland between the strong loads to the east and south and the renewable energy resources to the north. So we're looking equally into the further North -- North Queensland and in the sort of Southeast part of the state where there's strong demand. So I can see that we have 1 or 2 further big battery projects in Queensland, probably across the state in those areas.

[Craig Sansbury]

One on Bouldercombe, when do you anticipate that being -- that generating cash flow for the business, I guess, [indiscernible].

[James Harding, executive]

So yes, it should be energizing in [Technical Difficulty] next year. So we see revenue starting to flow from the third quarter of next calendar year.

[Craig Sansbury]

A few questions coming back to solar and the [Technical Difficulty] how sustainable [Technical Difficulty] with higher LGC prices at the moment and like a base case in those higher LGC prices.

[Craig Francis, executive]

I'm happy to take that one, this is James. So I guess the LGC market in particular, we've seen sort of from the second half of last year, last calendar year, real sort of resurgence in LGC pricing. And it's really been driven by C&I market participants acquiring LGC.

[Audio Gap]

I think over the next time.

[Craig Sansbury]

[Operator Instructions] Next question.

[Audio Gap]

Houston -- with the government top-up were there and also Jemalong.

[Craig Francis, executive]

Yes, happy to. And so Houston so as we know, it's under a PPA with the Queensland government. That PPA provides for a price floor, but not a price ceiling. So the revenue received is based on the generation for the period without adjusting for the MLF or anything and the PPA price being applied.

There was some -- the life of the [Technical Difficulty] quarter, there was top-up payments received. And that's -- however, we did see some really positive pricing in a couple of months, which really reduced those top-up payments to close to 0. So it was quite a good quarter for us and for Queensland government as well.

For Jemalong, as we've said, we are selling all the generation [ 100% ] into the wholesale spot market. Now so that we received a black energy price, and we then quit our LGCs on a monthly basis into the spot market. Again, now we sell them through a record typically battery to the major retailers and the market participants. So that number, there [ $3.5 ] million, equates to a whole generation for the period 33,465 megawatt hours, giving an average price at 105-megawatt hours -- sorry, $105 a megawatt hour.

[Craig Sansbury]

Expected life of the Kidston Pumped Hydro project?

[James Harding, executive]

Yes, so I'll take that one. So these are very long-life assets. All the underground construction, the tunneling, underground spaces will be designed for over a 100-year life. And we talk in terms of an 80-year life for the pumped hydro project.

Clearly, the mechanical electrical equipment, the key pump turbine equipment will be operated and maintained under a long-term contract by ANDRITZ Hydro, which is the technology supplier of that equipment. And there is provision for obviously some replacement of parts along that period. But the bulk of expenditure on sort of replacement of sort of replacement CapEx occurs after year 20, and that's all allocated within the project budget.

[Craig Sansbury]

Simon, I think you mentioned that there was fixed debt with Infradebt. Can you just provide a few comments around the NAIF that's been used to fund the development of Houston project?

[Simon Kidston, executive]

And look, I will, Craig, but just finishing off a comment in terms of our long-life assets. For us, a short project, a short-term project is the Bouldercombe Battery Project, which has a warrant of life of 20 years. Solar farms for 30 years and pumped hydro 80. So I think that underpins the fact that this business, it's long-life assets, it's core energy infrastructure, which is really significant in a national context.

In terms of the funding, that blended interest rate I referred to of 3% is significant. We've hedged our interest costs. We do so at financial close. And that enables, of course, the majority of our cash flows to fall through to the bottom line. So that's important, I think, especially now as the market is in a rising interest rate environment, which could last for quite a few years in the future. So this business, we're hedged, we're locked in and it's a really important point, I think the market hasn't yet fully grossed.

[Craig Sansbury]

Another question on, I guess, longer-term funding. But when all these assets are up live and running and generating cash flow for the business, what do you see is the optimal funding and capital structure for the company looking like?

[Craig Francis, executive]

Yes, I'm going to take this one. So typically, we have sought to reduce the reliance on equity by project financing our projects. And we have quite a high level of gearing across the portfolio, but we have required equity to finance our major capital investments.

We -- the view has been, and we've communicated this before, that when the hydro comes online in calendar year 2024, the company will be generating significant cash flows and be fully cash flow positive and be in a position to consider where that cash is applied, whether it's reinvested into the portfolio growth or returned to shareholders via a dividend.

In the meantime, with having completed the capital raising in February and March, we have now a really solid working capital position, which we think is, I guess, through the contribution from the Bouldercombe Battery Project, and that should, in turn, get us through the question of the hydro project. So we don't foresee any short-term capital requirements for the operation of the business.

We are, as we've talked about, looking to expand the portfolio during the construction phase of Bouldercombe and the hydro project. However, we are very conscious of preserving that working capital. And so we'll be looking to do so through partnership arrangements with third parties and similar manner to what we've done with the wind project and with J-POWER. So we'll hopefully have more to say on that over the balance of this calendar year.

[Craig Sansbury]

Great. Let's talk a little bit about inflation. Do the PPA offtakes have an inflation adjustment in the more or less fixed price.

[Craig Francis, executive]

I can answer that. It's so it's a mix. Some of them are in nominal dollars, [ case 1 ] denominated dollars. However, importantly, the hydro has an indexation factor applied to it so [Technical Difficulty]

[Craig Sansbury]

Great. Simon, that's all the questions for today. Simon, I think I'll hand back to you for any closing remarks.

[Simon Kidston, executive]

Look, I think we've -- the intention here is to have these webinars on a quarterly basis will time them at the conclusion of -- or following the announcement of our quarterly results. So I'm pleased to have delivered on this last quarter, and we look forward to updating everyone on what we've achieved in the following quarter. So thank you very much, everyone.

[James Harding, executive]

Absolutely. Thanks very much, everyone.