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Genesis Energy: A new beginning

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Genesis Energy has a plan to significantly increase its use of renewable energy by 2035. The company intends to utilise profits from the Kupe gas field to fund a $1.1 billion program dedicated to constructing new renewable energy sources and large-scale battery storage by 2030.

In this strategy reset, known as Gen35, Genesis Energy aims to invest in solar, grid-scale battery storage, and wind projects. The goal is to expand their renewable energy portfolio to approximately 8,300 GWh, marking a 160% increase from their current 3,200 GWh. Genesis

Energy plans to raise its proportion of renewable generation to 95% by 2035, aligning with New Zealand’s overall generation level.

CEO Malcolm Johns and the executive team provided details on the development pipeline, a new cost-effective retail operating model, and a 10-year financial plan to market participants.

Johns emphasises the importance of electrifying the economy to achieve a net-zero target by 2050. Genesis Energy aims to accelerate the transition by partnering with customers to electrify their homes, workplaces, and transportation. On the supply side, the company plans to optimise existing assets, develop more renewables, and invest in grid- scale firming and flexible generation.

The Huntly Power Station, with its strategic location, remains a focal point for Genesis Energy’s supply-side plans.

The company is also exploring biomass as a replacement for coal, with potential economic development opportunities and job creation. Additionally, plans for battery capacity expansion and potential adaptation for hydrogen generation are in progress.

Genesis Energy will shift its focus from pure offtake agreements to a portfolio of development options, including power purchase agreements (PPAs), joint ventures (JVs) with PPAs, and building generation and storage assets on its own balance sheet. The initial stages involve securing four solar sites generating around 450MW and investing in grid-scale batteries. The Kupe field is an option for developing offshore wind projects.

Financially, the company anticipates Gen35 to drive earnings growth, with EBITDAF expected to be around $500 million in FY25 and in the mid-high $500 million between FY26 and FY28. Operating expenditure is forecasted to be lower than current levels by FY28. The dividend policy has been updated to allocate free cash flow from Kupe to renewable development, with a targeted FY24 dividend of 14.0 cents per share.

Despite uncertainties like hydrological conditions and gas availability, Genesis Energy remains optimistic about achieving its renewable energy goals, emphasizing a shift toward a more sustainable and forward- looking investment approach.

Our take: This change in strategy is significant for Genesis. The company was predominantly viewed as a “cash cow,” offering the highest dividend yield amongst the listed ‘gen-tailers.’ The redirection of Kupe revenues will lower the dividend yield and increase execution risk. Investors who held the stock primarily for income may wish to reconsider their investment.

The development of renewables was inevitable for Genesis. The discount for their “dirty” generation was perceived to be holding back the share price. In the longer term, these changes make sense, and the company will be future-proofed as a result.

Genesis Energy’s current market capitalization is $2.58 billion NZD. An investment of $1.1 billion in renewable energy is undeniably a shift worth paying attention to.

Ask yourself: do you want to own an electricity generation company planning to spend approximately 43% of its market capitalization on development, knowing this will increase the risk and lead to a dividend reduction?

This marks a new beginning for Genesis. It remains a good investment, but suitability depends on the investor’s objectives and risk tolerance.

Jeremy Sullivan – Investment Adviser.

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