Kidston's building solar in Kidston

Today’s CEO is Simon Kidston, the CEO of Genex Power Ltd which is a listed renewable energy company.  They’ve built a s 50 megawatts solar farm in Queensland but Simon’s name, Kidston, happens to be the same name of the place that they’re building the major project which is a pumped hydro storage facility based on the old Kidston gold mine which is sort of half way between Cairns and Townsville.  In the interview Simon will explain what the connection is between his name and the place they’re building the project which is quite an interesting story in itself, but the company just announced a $516 million funding facility by the Northern Australian Infrastructure Facility which is the government funding body.  

This thing still has a fair way to go, they haven’t built the major project, they’ve built the first stage of it which is the smaller solar array but the main thing is the pumped hydro facility that’s based on a gold mine and that’s a little way off.  Once it’s done they’re going to have an offtake agreement that will provide annuity style streaming income that will fund this company as basically an income stock.  It’ll probably re-rate if and when they build the thing, so you’ll get some capital growth there assuming that it all goes ahead and nothing goes wrong.  Then it’ll be a long term, we’re talking 20 or 50 years, income provider assuming they do nothing else.  It’s an interesting prospect, long term income stock and a capital growth re-rating prospect in the meantime but some risk obviously with the possibility that things could go wrong.  But at this stage it’s all going right.

Here's Simon Kidston, the CEO of Genex Power.

Simon, I wonder if you could explain to us the connection between your name, Kidston, and the place where your project is which is also Kidston.

Yes, my great great grandfather was once the Premier of Queensland and that was a time when gold was discovered in 1906, so they named the mine after the Premier.  It is coincidental that I’m involved with the site more than 100 years later.

Right, that’s an amazing coincidence.

It is, yes, but we sort of conducted a search for an asset which had the characteristics of the mine that was left behind and the Kidston Gold Mine came up as the top of our list.

I thought maybe that you owned the town or something, or your family did.

Alan, the town today has got three residents and we’re glad to employ all three of those residents so the town has got 100% employment.  Of course, back 100 years ago it was a gold rush town and there was more than a couple of thousand people living there but as the gold dwindled so did the population.

It’s also ironic that there’s a heritage listed battery there, the Kidston State Battery, which is ironic because you’re building a kind of battery which is a power storage thing.

We are building a giant water battery.  The one that was left behind from the gold mine is sadly in a state of disrepair but essentially what we’re seeking to do, Alan, is our giant water battery essentially harnesses the energy from a solar farm that’s collocated with our pump storage hydro and through pumping the water from a lower to an upper reservoir enables us to dispatch the water and generate power on command, so it’s just like a giant battery.

Is it the gold mine from Kidston that you’re using?

It is, it’s the Kidston Gold Mine, it operated as an industrial modern mine from 1985 until 2001 and when they closed in 2001 they left behind a lot of infrastructure which we’re now repurposing, the key obviously being the two enormous mine pits which are adjacent to each other but also other infrastructure such as a transmission line and workers’ accommodation camp, good road access, a dam nearby with a pipeline to enable us to top up the water in the event of drought or evaporation.  All of that infrastructure was just sitting there and we came along and acquired the asset from the then owner, Barrick Goldfields, for the grand sum of $1.

$1.

$1, there is a catch of course.  We need to maintain the site in good standing from an environmental perspective so we’re now responsible for the ongoing sort of care and maintenance of the site.

We should perhaps explain where it is, it’s in land from Mission Beach, halfway between Cairns and Townsville.

That’s right, yes.

The business was listed, you listed in 2015 and raised what?  $8 million at the time, I think.

$8 million and the focus of the listing was to pursue the strategy we’re nor prosecuting which is the pump storage hydro project.

But one difference is that your prospectus said it was going to be a 330 megawatt project, the hydro storage, but it’s turning out to be 250 megawatts, why the change?

The key change was to do with the size and nature of the Queensland electricity market and essentially pump storage projects when they draw power from the grid they have an upward pressure on electricity prices and when they generate they have a supressing impact on electricity prices and the key profit for this business is the arbitrage between the peak and off peak price.  The view we formed with our consultants is that a larger project of say 300 or 400 megawatts would unduly impact the electricity price and thereby reduce the economics of the project.  250 megawatts generating for eight hours on a typical day is deemed to be the ideal size for the project in the Queensland market.

I don’t understand how you’re playing an arbitrage if you’re using solar power to pump the water up to the higher dam and obviously you’re then generating the electricity during peak hours but you’re not actually using off-peak power are you?  Or are you?

The beauty of these hydro assets is they’re very flexible, so the core strategy behind our business is to utilise the energy from our collocated solar farm and essentially use that energy to pump the water to the other reservoir and release that water and generate power at times of peak demand which is usually in the evening when the sun is not shining.  That’s the core strategy behind the business model.  There is of course the ability to draw power from the grid should prices be very low overnight which is often the case and then generate into the morning peak or even longer into the evening peak.

You’ve got the option, your input power could either be the solar array that you’ve got or from the grid.

Absolutely, correct.  It’s a very flexible machine and the trading strategy can be adjusted depending on the electricity price at the time.

You haven’t built that machine yet but what you have built is a smaller solar array, why did you do that first?

We have got the site and we’re developing it in stages.  The first stage is 50 megawatts and that was build last year, that really demonstrated that the site is very conducive to the creation of a renewable energy hub and that, I guess, was proof of concept.  We’re now focussed on funding our stage two project which is the expanded solar farm integrated with a pump storage hydro.  We do have a wind project down the line which is subject to a feasibility study which would really provide the holy grail of renewables which is the integration of wind, solar and hydro, and to the extent there’s gaps in generation from the wind or the solar make good that through the hydro and thus delivering sort of 24/7 base load renewable energy.

Could you take us through the funding of the whole thing because you’re getting quite a lot of money from the government through the Northern Australian Infrastructure Fund I think plus some other bits and pieces of money from various places.  Can you just give us a rundown of where it’s all coming from and how much is it costing?

We’ve had tremendous support from both Queensland and the Commonwealth Government.  In terms of the Queensland government they were very instrumental in terms of the phase one project, the 50 megawatts.  They provided a revenue support deed, or PPA type agreement, which underpinned the revenues from a project funds perspective.  In terms of the stage two project…

What are the terms of that?

We haven’t disclosed a floor price but it essentially is a one way contract for difference and what that means is the project generates electricity into the grid and to the extent the price received on an average month is below floor price there’s a top up to the floor price but to the extent of course revenues exceed the floor price there’s no top up required.  It’s a very neat and elegant situation.

You’re able to take that deed to the bank?

And due to that credit support the banks were wiling to lend close to 80% of the construction costs which meant Genex as a public company was able to fund the balance through capital raisings on the market.

Just before we get onto stage two then tell us what the operational P&L of that 50 megawatt station – how that works.

Okay, well the construction cost was in the order of $115 million and the revenues we expect from this are circa $13 to $15 million depending on the electricity price into the future.

Per year?

Per year, so that’s anticipated to generate a very stable cash flow for the next 30 years whilst the project is operating. 

Right, okay, stage two?

So stage two is a much larger project, the cornerstone to our funding strategy was announced last week and that’s the conditional funding from the Northern Australian Infrastructure Facility.  It’s circa 516 million dollars and that funding is supported because it’s concessional in terms of its tenor, it’s a long term funding facility, it’s subordinated in terms of its interaction with the senior banks and it’s concessional in terms of the interest rate they charge.  That really provides the bulk of the funding we need for the project but in addition to that we’re now focussed on finalising a senior debt package with some traditional banks and an equity funding facility which we’re putting in place at the moment.

How much do you need in total?

We haven’t finalised our capital costs, our intention is to do that in the next six to eight weeks with a fixed price contract with some major Australian builders but the numbers are in the order of $800 million so in that context $516 million from NAIF is a very significant start to our funding which we plan to put in place before the end of this calendar year. 

According to the presentation that was on the website it’s going to be a joint venture with third party investors, how is that going to work?

The stage two projects we earn up to 50% of the stage two project and by doing so Genex would get a free carry to reward it for the time, money and effort it’s taken to get the project to a de-risked state at the financial close.  Essentially Genex is a $100 million circa public company, we’d have a free carry and for up to 50% of the stage two project.

It won’t be a Genex project entirely, it’ll be 50%.

50%, yeah.  We retain 100% of stage one and stage two we’re targeting 50% and owning that project alongside a major international domestic equity investor.

Why don’t you own all of it?  You seem to be raising tonnes of money.

I think we’re very conscious of making sure we enter into an arrangement which preserves the value for Genex equity and the view we’ve formed, and this is based on the strong engagement we’ve had from some of these major groups, is the value the project would have in the joint venture would be much higher than the value we get on the ASX.  If that’s the case it makes sense for us to raise money at the project level and minimise any equity raising at the Genex level just from a pure valuation perspective.

Right.  Tell us what the sort of finances or the operational finances of stage two are?  You’ll basically sell power from the pumped hydro operation into the grid during peak hour so how much will you make?

Alan, the key to that is our intention to enter into a long term offtake arrangement with a major utility in the Queensland market and our intention is that counterparty will be responsible for trading the electricity from the pump storage and they in return will pay a fixed annual rental back to Genex.  What we’re seeking is, effectively as an infrastructure owner, a long term annuity type earnings stream and the electricity company which we partner with would be responsible for all of the trading of the energy from the hydro project.

Right.  Will the revenue be kind of fixed and known, is that the idea?

It would be fixed if we achieve that arrangement, it would be a fixed and known cash flow.  That really does support our strategy of entering into project finance arrangements to fund the bulk of the capital cost.  By doing so have an outcome which is favourable to Genex equity.

Really the whole Genex Power thing is basically it’s a funding mechanism, isn’t it?

Well Genex is a developer of this renewable energy hub and the assets themselves should generate very stable cash flows for, in the case of the hydro project, more than 100 years.  It’s a major piece of infrastructure, we think it’s strategic infrastructure given the market is now focussed on the importance of energy storage to compliment the growth renewables.  We want to do that in a way which partners with major energy utilities in Queensland, potentially a major equity investor coming in at the project level to deliver stable cash flow for Genex shareholders.

Do you have an idea in your head of how much cash flow it will generate?

Until we finalise those negotiations it would be reckless for me to put numbers out there but I think it’s fair to say we’re in very advanced discussions with a major Queensland focussed energy company and we’d expect to finalise those arrangements over the next couple of months.

I take it that investors should see Genex Power as an income stock, a yield.  I presume what you’ll do is you’ll generate dividends.

That’s right, once the projects are developed and operating it’s very likely the project will generate annuity style earnings back to Genex.  Until that point of time is achieved we expect to make a number of milestone announcements which will demonstrate the project is moving towards financial close by the end of this year and thereby expect to see some re-rating in our share price.

Right.  I was just trying to get a sense because as you say you’re close to 100 million market cap now, can you give some guidance for our investors as to what they could expect to see in terms of income down the track?

Alan, I’d love to give you that number now but I think we’ll just need to wait for a few months until we’ve finalised those discussions and once we’ve made that announcement I’d be delighted to give you some clearer guidance.

Okay.  If someone bought shares now would they have to expect to have to cough up some more money, will you be raising more cash off them?

What they would get if they bought shares in Genex now is exposure to the fourth largest solar farm, our stage one project, and exposure to I guess the upside from stage two as we deliver it to funding at the end of this year.

What you’re saying therefore is it’s at this stage a relatively speculative investment but it depends, I guess, on how certain you are that you can deliver the project.

I think the strong support we’ve received from both the Queensland government and the Commonwealth government gives us confidence that we can get this project back this year.  There’s clearly more work to be done but the announcement of the NAIF funding last week was really the cornerstone of our funding strategy.  Once we combine that with the offtake arrangement for our hydro project we believe there’s line of sight to backing this project by the end of this year.

To what extent do you need the COAG meeting to pass the national energy guarantee, the NEG?

There’s no doubt that a policy setting that favours both renewable energy and reliable energy is favourable to pump storage hydro.  We have done our economics based on the current legislation but clearly if the NEG policy settings are finalised that would only help or add value to this project into the future.

I read this morning that Tony Abbott is making a speech tonight in which he is saying that the NEG is insanity.  There’s a little way to go yet it would seem.

There’s no doubt that the whole energy policy is contentious in Australia.  We have become slightly immune to that over time, we’ve learned to live with the regulations that exist today and hence we have focussed our business model on the case today but there’s no doubt that stability of regulation and legislation would add investment into the electricity sector which will reduce prices over time.  We think this project or any other pump storage project is going to compliment the growth renewables, make them reliable by enabling the dispatch of energy on command by virtue of the hydro project.

In fact in some ways the NEG favours you a bit more than an emissions trading scheme would have because of the way that it has a reliability guarantee as well.

It does.  I guess any form of energy storage, whether that’s a battery or a hydro project pump storage would, I guess, have the same benefits from the policy certainty but also a policy that rewards reliability and dispatchability.

Some of the slides on your website compare hydro storage to batteries, quite obviously favourably for hydro.  Explain to us the difference.

There’s two elements.  Pump storage hydro has been around for 100 years and hence the technology is very mature and extremely low cost given its scale.  The capital cost advantage of hydro relative to batteries is by virtue of the cheaper installation cost for hydro on a per megawatt hour of energy stored but also it’s to do with the economic life of the assets.  Hydro with an asset life of say 100 years obviously is far greater than a typical battery which has degradation over a 10 to 15 year period.  It’s the combination of economic life and upfront installation cost which gives hydro the benefits that it does enjoy which I guess in part is due to scale.  Hydro assets are very large scale energy storage machines whereas batteries tend to have a much smaller application at the domestic or household level.

Is hydro storage slower than batteries?  I know that batteries can pump electricity into the grid in milliseconds, does it take longer for the hydro turbines to wind up?

It does take a little bit longer.  We with our project will have a start capability within 30 seconds, we estimate that to be around 15 to 20 seconds.  Essentially the time it takes for the water to fall 250 metres and start spinning the turbine, so it’s a very fast start up but not quite as fast as a battery is able to kick into gear.

There was a map on your website or in the presentation showing the number of pumped hydro storage facilities in the US which was amazing, there’s tonnes of them.

There’s more than 1,000 around the world and plenty in the US and Europe.  There’s only three that are operating in this country, there’s the Tumut 3 project which is the Snowy 2.0 potential expansion, there’s one near Sydney called Shoalhaven owned by Origin and there’s one near Brisbane called Wivenhoe.  Three in this country and many hundreds elsewhere in the world both in North America, Europe and Asia.

Snowy 2.0 hasn’t actually been built yet, has it?

The Tumut 3 part has been built, the expansion I think is a doubling of that capacity, it’s still going through feasibility study and that’s obviously getting quite a bit of press at the moment.

It’s interesting that your share price didn’t respond to the announcement last week of the funding from the North Australian Infrastructure Facility.  Why was that?

We were very surprised, we saw that as a major milestone.  I think in our mind at least it unlocks the funding potential that we’re seeking to put in place for the stage two project.  Of course the funding is conditional on us achieving a number of other milestones so perhaps the market focussed on that as opposed to the fact that it’s the cornerstone of our funding strategy.  Our plan really is to just focus on knocking off these key milestones over the next six months and over time the share price, we believe, will re-rate to reflect I guess the inherent value this project will deliver to Genex but also more broadly to the market when it’s operating in 2021. 

Did you and the board have a trading window after that announcement and did you take advantage of it?

We are currently in blackout for a couple of reasons.  One, we’re finalising our accounts but also we’ve got a milestone in the form of energy offtake which we’re seeking to put in place over the next couple of months.  That itself is a very material announcement and so we’re currently in the blackout.

Who are the owners, how much of the business do you, the board and the staff own and who else are big shareholders?

The board and management own around 17% of the business, a large Chinese hydro turbine company owns 11%.  Australian institutional investors account for around 20% and the balance of Australian retailer investors, some 2,500, who have bought in on market over the last two or three years.

Right.  It’s very interesting.  Thank you very much for joining us, Simon.

Alan, it’s a pleasure, great chatting to you.

That was Simon Kidston, the CEO of Genex Power.