Thank you for standing by, and welcome to the Dalrymple Bay Infrastructure FY 2022 result conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer section. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Mr. Anthony Timbrell, Managing Director. Please go ahead.
Good morning, everyone, welcome to Dalrymple Bay Infrastructure's 2022 financial results. I'm joined today by Stephanie Commons, our CFO. Today, we will be providing an update on our financial performance, as well as other key business developments from FY 2022, including the development of our transition plan, the regulatory reset, which has seen the company secure an inflation-linked uplift in our infrastructure charges, and progress on our organic growth options, including both our non-expansionary capital program and the ADEX project. Starting on slide 5. Our FY 2022 financial performance highlighted the strength of our cash flows supported by our take-or-pay contracts. Our TIC for FY 2022 was AUD 3.18 per tonne, a 5.3% increase on the prior year.
We delivered a 41% increase in EBITDA to AUD 264 million and a 56% increase in our funds from operations to AUD 177 million. Our net debt at period end was AUD 1.7 billion. We maintained our investment-grade balance sheet. Predictability of cash flow derived from our take-or-pay contracts saw DBI deliver a distribution of AUD 0.191 per security for FY 2022. At our current quarterly distribution rate, based on the closing security price last Friday, DBI is generating a distribution yield of over 8.2%. Moving to slide six. Operationally, 2022 was a year of steady progress for DBI. We delivered over 53 million tonnes of coal to over 22 countries. For the first time in a while, saw the re-emergence of coal shipments to China in early 2023.
Importantly, the safety performance at DBT continued to improve with a whole of site AIFR of 4.8, almost half that of the prior period. Our operator, Dalrymple Bay Coal Terminal Pty Ltd, is to be congratulated for their continued focus on developing a positive safety culture at the terminal. Of course, the major achievement in FY 2022 was the 10-year access pricing agreement secured with all DBT customers. Under the revised agreements, we will see the TIC pricing indexed at CPI annually, with further growth in the TIC over time as we implement our substantial non-expansionary capital program. Importantly, under the revised agreements, all contracts remain 100% take-or-pay on substantially the same terms, including socialization. Over 2022, we continued to progress our growth options, including proprietary planning for future non-expansionary capital, which we expect to exceed AUD 500 million over the next decade.
As mentioned above, as we progressively implement this capital program, we will see further growth in the TIC. Our ADEX FEL 3 studies progressed, with the technical aspects of the FEL 3 studies complete and an updated capital cost estimate of AUD 1.369 billion. With strong and predictable cash flow, a well-defined distribution policy, and an investment-grade balance sheet, we remain well-positioned to continue to focus on creating value for our security holders. Slide seven. As a business, we remain committed to sustainability and continue to look to deliver on our ESG goals. You can see on this slide some of our achievements from the past year. Most importantly, from an ESG perspective, we announced our transition plan in 2022 in our 2022 sustainability report. I will discuss this and how it influences our broader strategy later in the presentation.
As a business and a management team, we continue to ensure we deliver best-in-class reporting when it comes to climate-related disclosures, we continue to progress towards alignment with the TCFD framework. Slide 9. During the year, we announced that DBI agreed commercial terms with all of its customers under the light-handed regulatory framework. The agreement was the culmination of many years of work as DBI progressed from the previous heavy-handed regulatory regime to the light-handed model. We presented the new access price arrangements during 2022, I'd just like to take the time to highlight the following key points. The base TIC will be indexed for inflation annually each 1 July. A non-expansionary capital charge component will be added to the TIC annually for commissioned NECAP projects.
QCA fees are passed through to users through an addition to the TIC. All revised contracts remain on substantially the same terms, being on a 100% take-or-pay basis with no volume risk, with socialization of charges retained on customer defaults and contract expiries. With our access pricing arrangements locked in, DBI and our management team are now focused on exploring and advancing other strategies to create value for our security holders. Slide 10. This slide is illustrative of the potential growth in our TIC over time, assuming 2% and 4% inflation scenarios, inclusive of our expected non-expansionary capital program. The inflation adjustment in the TIC charges is based on the Australian CPI, which runs from March to March each year. We will announce our new TIC charges for the following TIC year in the June quarter.
As you can see, the NECAP charge from projects we commission provides a meaningful contribution to our total TIC, with that representing an attractive organic opportunity to grow revenues over time. I will now hand over to our CFO, Stephanie Commons, to talk through the financial results.
Thanks, Anthony, and good morning, everyone. Thanks for joining the call. Moving on to slide 12, that's the profit and loss slide. For FY 2022, DBI recorded TIC revenue of AUD 281.7 million and a net operating profit after tax of AUD 69 million. The negotiation of access charges applicable from July 1, 2021, under the light-handed regulatory framework were completed in October 2022. The TIC revenue that we're reporting for the 2022 year includes a component relating to the prior year, 2021, and that amount is AUD 22.9 million. The final reversal of IPO transaction costs, totaling AUD 3.6 million, was recorded during FY 2022. These IPO related costs have now been finalized, with the final installment of excess funds returned to the seller entities.
Finance costs payable to external parties increased by AUD 9.2 million over the year. That was as a result of three things. The early USPP issue, which funded 12 months in advance of our future bullet maturity, therefore incurring a cost to carry. We also refinanced cheaper debt during the year at higher margins. There was also, we saw higher benchmark rates impacting our floating debt. The increase in interest expense also includes a number of non-cash finance costs. These increased by AUD 14.3 million during the year. They're the type including hedge valuations and unwinding fair value amounts that we booked at the IPO. Moving on to the next slide 13, which is our cash flow statement.
The funds from operations during the year was AUD 177 million, and the strong FFO supports our distribution of AUD 0.19185 that we were able to declare during the period. Distributions were paid during the period in the form of both unfranked dividends and partial repayment of the face value of the loan notes, which form part of each stapled security. Capital expenditure of AUD 46 million was focused on spending on NECAP projects as well as the ADEX feasibility studies. The next slide, the balance sheet on slide 14. DBI continues to maintain an investment-grade balance sheet. The cash balance you see at December 31, 2022 includes AUD 56 million of funds raised in the USPP, which funded it in March, which were in excess of funds we required to repay debt.
Those funds are being held on term deposit until we are required to repay the USPP notes, which mature in March this year, in about two weeks. The reported cash balance also incorporates the TIC true-up amount, and we also have $24 million of restricted cash, and that's in the form of customer security deposits, which we hold. Note that the statutory reported borrowings include external borrowings as well as fair value adjustments. We provide a reconciliation of the statutory reported borrowings and DBI's net debt, and that can be found in the appendix to this investor presentation.
The equivalent of AUD 299 million of USPP notes, which mature in March 2023, are reported as current liabilities, and the company has AUD 440 million of headroom in its existing bank revolver facilities, which we can use to repay the maturity of those notes. The next slide 15, which is a debt and hedging overview. We have AUD 2.5 billion of total facility limits, of which AUD 1.93 billion were drawn at the end of the year, leaving headroom of over AUD 500 million of available facilities, including facilities such as a liquidity facility and a debt service reserve facility. The weighted average tenor of our debt is now 6.39 years, and that's improved from the prior period of 5.03 years.
This reflects the recent USPP note issue we did. DBI was able to raise 10, 12, and 15-year notes going out to 2037, all with clean spot lines, which demonstrate support from our banking group and our USPP investor base. In addition, during 2022, we refinanced and extended the maturity of AUD 280 million of bank debt. We established a new AUD 60 million debt service reserve facility, and that allowed us to release AUD 33 million in restricted cash back into the business, and we also repaid AUD 100 million of AUD notes. DBI takes no foreign exchange risk. All of our U.S. debt is swapped back to AUD, and it removes all foreign exchange risk on both our principal and interest. For the current 10-year pricing period, DBI has hedged over 75% of its debt through to 2026.
During the year, we implemented further staggered hedging, averaging 40% of the debt book for 2026 to 2031. The next slide 16, is our credit rating overview. I've mentioned it's a key priority for us to maintain an investment-grade balance sheet. We maintain two investment-grade ratings with Fitch and S&P Global. Fitch recently released the results of its annual review, reconfirming DBI's BBB- rating with a stable outlook. As a result of the new pricing agreement, Fitch has changed its benchmark for DBI to assess Net Debt to EBITDA, replacing the previous net debt to asset base it considered. DBI also holds a BBB rating with S&P with a stable outlook. S&P are expected to release the results of its annual review shortly. I will now hand back to Anthony to talk through our growth and transition plans.
Thanks, Steph. With our TIC locked in for the next 10 years, we have a secure and predictable cash flow, which will underpin our distribution and growth. Our strategy is to build resilience through growth and diversification, with opportunities internally through NECAP and ADEX, externally through M&A also under consideration. Moving to slide 18. Our organic growth in revenues will come from our non-expansion capital expenditure program at DBT. Our NECAP spend over the next 10 years is expected to be over AUD 500 million. The proposed NECAP spend includes both regular and major project expenditure. Under our negotiated agreements with the users, the TIC is adjusted each year to ensure DBI earns a return on its NECAP expenditure. TIC revenue from our NECAP spend is earned from the July 1 following commissioning.
Returns from NECAP will be lumpy and will be driven by the value of projects commissioned each year. DBI is expecting to commence a number of major NECAP projects in the near future, including replacement of the original ship loader, SL1. Slide 19. DBT retains significant expansion optionality to accommodate metallurgical coal exports from the Bowen Basin. The ADEX project is expected to deliver up to 14.9 million tons of additional capacity with over 30 million tons of additional demand currently residing in our access queue. The ADEX project will only proceed where it is fully underwritten by unconditional long-term take-or-pay contracts, which generate a commercial rate of return. We have secured all primary environmental approvals, with the QCA confirming the costs of ADEX may be socialized across both new and existing users.
The technical component of the FEL3 Feasibility Study was completed in Q1 2023, with an updated capital cost estimate of AUD 1.36 billion, assuming an April 1, 2024 start date, with costs escalated to completion. Associated economic assessments are ongoing and expected to continue into the second half of 2023. Slide 20. In 2021, we announced our intention to explore the opportunity for a regional hydrogen production and exporting facility utilizing existing DBT infrastructure. Dalrymple Bay is ideally positioned from an infrastructure perspective for the export of hydrogen, given the Port of Hay Point's deep water nature, abundant nearby land to support further development, proximity to Asian consumers, and location within one of Queensland's defined renewable energy zones. We are progressing feasibility studies focusing on the potential for liquid ammonia exports.
We're taking a measured approach and will continue to update the market on the development of our hydrogen strategy and the progression of our study activities. Slide 21. The transition plan that we developed and released as part of our 2022 Sustainability Report underpins our confidence in the long-term demand for coking coal export through DBT, even under the toughest energy transition scenarios. As previously discussed, we see attractive opportunities to grow the business organically through NECAP, the potential ADEX project, or other diversified uses of DBT. Likewise, we remain alert to opportunities for external growth. We have a number of competitive advantages, which when paired with the expertise of our key security holder partners, gives us confidence to consider the potential for growth via M&A. Our capital management framework will balance strategic growth and diversification opportunities against our commitment to distribution growth. Slide 23.
Our comprehensive transition plan gives us confidence that there will be material demand for DBT services beyond 2050 under a range of energy transition and coal supply demand scenarios. DBI will monitor the progress of the energy transition to ensure its contract structures, regulatory settings, and capital management framework remain appropriate as circumstances evolve. Slide 24. Our transition planning included an assessment of the likely supply and demand of metallurgical coal under a range of potential climate change scenarios. We used both the International Energy Agency and Wood Mackenzie's data to understand the potential range of seaborne metallurgical coal demand scenarios that DBI's transition plan may need to accommodate. Slide 25. The analysis that we've conducted shows that material volumes of metallurgical coal will continue to be exported through DBT under all scenarios.
Even under the Net Zero by 2050 or the IEA 1.5 scenario, Australia is expected to retain a significant share of the remaining seaborne metallurgical coal trade. DBI anticipates that a growing focus on carbon emissions will drive steel producers towards the premium metallurgical coal products shipped through DBT. The detailed analysis we undertook as part of our transition planning has informed the way we think about growth and diversification. Most importantly, it is clear that unlike some industries, DBI has the advantage of time as it seeks opportunities that fit its range of competitive advantages. The last slide 27.
2022 was a significant year for our company as we put in place the commercial agreements with our customers, which will provide the cash flow certainty we need to plan with confidence for the next stage in our evolution as we strive to deliver value for our security holders. Our strategic priorities for 2023 include commencing our approved NECAP projects, commencing negotiations with access seekers with regard to access pricing terms for the ADEX project. Identifying opportunities for diversification that align with DBI's transition plan. The progressive alignment of DBI's climate-related risk assessments and disclosures to the TCFD framework over time, while delivering our whole terminal ESG and sustainability initiatives.
Protecting our investment-grade credit rating through optimization of the debt capital structure, including tenor pricing and diversity of source, and completing the initial scoping studies for the green hydrogen production and exporting facility at DBCT. Thank you. I will now hand back to the operator for the Q&A portion of the call. Operator?
Thank you. Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the headset to ask your question. The first question comes from Owen Birrell from RBC. Please go ahead.
Morning, guys. A few questions from me. The first one is on the TIC charges. I was looking at slide 10. Can you just confirm firstly that this is on a June year-end basis and not a calendar year-end basis? If so, would it suggest that the calendar 2024 TIC charges will be higher than the AUD 3.18 published on that slide?
Hi, Owen. Sorry, my computer just shut down while I was talking, so I'm rapidly trying to come back to slide 10 here so I can answer your question.
The AUD 3.18 is for the what we call the TIC year. That's the year ending June 30, 2023, is at AUD 3.18 per TIC per ton that we're currently charging. That will be revised from July 1, 2023. Yes, all of those numbers are showing effectively the July to June year.
It becomes even more. Yeah, the average will be slightly higher.
Over our calendar or our reporting year?
Yes.
Yes. Yes.
Okay. Just second question from me on the NECAP. Just wondering if you can give us a sense of the rate of return on that NECAP spend. Is it as simple as saying, a 15% return on the amount of spend that's commissioned each year?
Yeah. It is.
What is that rate of return?
It's a risk-free rate plus a margin. I mean, we haven't released what the margin is. It's part of the negotiations with the users, but we did agree a fixed margin that's broadly consistent with what you would expect under a building blocks type approach. We measure the risk-free rate every year using the 10-year Commonwealth Government bond rate. That rate of return will move as the risk-free rate moves.
It's worth also saying that government bond rate that's remeasured every year is applied to a cumulative buildup of the TIC that's commissioned. It's a whole number that's effectively reset every year. We also earn a return of the NECAP, so we do recover the cost of the projects between the commissioning date and 2054.
Is that NECAP number published anywhere, regularly or, sort of, when it's commissioned?
You're talking about the value of the projects or the?
Right.
The value commissioned.
What's commissioned in a particular period?
Yeah. We do tend to publish that at the end of each year. Last year, I think you'll find a reference to it. I think it was about AUD 51 million in 2022. Yeah, we will publish that number each year.
Okay. Just got a final question from me, in terms of customers with underutilized contracted capacity. Is there any conversations or that you're aware of, you know, contracted parties looking to onsell volume to new access seekers?
Not specifically that I'm aware of at the moment, the users don't need to include us in those discussions until such time as they reach an agreement. They only need our involvement at the final stage in the process to provide our approval to facilitate those transfers. At that stage of the process, we normally, depending upon who the capacity is going from and to, we might ask for greater security as part of our providing our approval. There haven't been any transfers that I can recall off the top of my head in the last 12 months or so.
Can I just ask in terms of the pricing around those transfers, is that commercial terms between those two parties, or is there a regulated price that they must transfer at?
It's the answer is a bit of both. If they transfer the contract, then the party receiving the transfer will pay us the agreed price that was part of the overall package negotiated with the users. There may be a further commercial agreement between those parties, that we're not aware of. We play no part in that negotiation. To the extent somebody decides to pay more or pay a premium for someone to access their capacity, we're not privy to the details of that.
That's fine. Thank you.
Thank you. Your next question comes from Sam Seow from Citi. Please go ahead.
Morning, guys. Just a quick one from me. The TIC has the CPI annual increase. You got the 6.4 duration debt. It looks favorable at the moment. Just any thoughts on that duration kind of mismatch?
The duration of the debt, I guess, is us turning out some of the nearer term maturities into the USPP market to extend the tenure of that debt, which we'll continue to do in terms of accessing those longer-dated facilities and markets. The average tenure that we are in the process of expanding, as I said, it's gone from around five years to six, you know, almost six and a half now. In terms of the pricing agreements, they go out to 2031. We're fully contracted out to 2028, and all of those contracts have a growing renewal option. I guess there we work between two of them and just make sure that the investors are comfortable with the profile of both the contracting and pricing arrangements. I'm not sure if that answers your question, Sam.
Yeah, it helps. I'm just kind of asking because I guess your revenue increases annually or decreases annually depending on CPI. Obviously, you know, your debt, it sounds like you're extending the duration and there's that mismatch which you never really had before.
Oh, okay.
How you're managing that.
Yeah, sure. Probably our hedging strategy is probably what underpins that. We tend to bring back all of our debt to AUD floating rate, and then we hedge that for periods of time. Similarly, when we're under heavy hedges, we bring all our debt back to float rate, and then we fix it for the five-year regulatory term. What we're doing now is really taking the view to hedge it for the ten-year pricing term. We did hedge 75% up until 2026, and those hedges we entered into in May 2021.
Once we had signed these agreements and we knew they were in place, then we started to implement hedging from 2026 to 2031. That's probably how we're approaching it is. Because that's how we approach it in terms of matching the resetting of the TIC to our debt book. I'll just say we've got that certainty of cash flow. Then beyond 2021, it's effectively float rate at this stage.
Yeah, just a last bit of color, Sam. Keep in mind as well that even though the base rate component of our debt book is moving upwards at the moment because of the way we structured the deal around NECAP, the returns we're earning on our NECAP expenditure is also moving up at the same time. It's not a perfect hedge, but there is a degree of hedge between our, the returns we earn of our, on our NECAP and the way our, the costs of the base rate component of the cost of debt moves.
Yeah. We've done the correlation exercise between the annual resetting of the 10-year government bond rate and the 3-month BBSW, which is what our float rate debt rolls on. Yeah, as that NECAP asset base builds, then there will be... We will look at that natural hedge component to assess whether or not that feeds into our hedging strategy.
Okay, that's helpful. Thanks, guys.
Once again, if you wish to ask a question, please press star one on the telephone and wait for your name to be announced. Your next question comes from Nathan Lee from Morgan. Please go ahead.
G'day, Anthony. G'day, Steph. Congrats on the presentation. Three or four just quick ones from me, if you don't mind. First up, when the TIC negotiations were announced or completed, there was a AUD 61 million true-up number. You referenced AUD 22.9 million in this period. Can you just walk us through where that remainder has gone?
Sure. Thanks for that. That's worth clearing up. The AUD 61 million true-up amount was from July 1, 2021, until September 30, 2022. We had previous to that, been charging our customers the AUD 2.46 rate up until September 30, 2022. We're entitled to a 15-month true-up. That's the AUD 61 million amount. The AUD 22.9 million amount is the amount that relates to just 2021. Therefore, when you look at our total TIC revenue for the year, if you deduct the 22.9 off, that's effectively what we earned between the AUD 3.02 for the first six months and the AUD 3.18 for the second six months in terms of TIC revenue.
Okay. Does that mean there's a reduction then coming through because you're no longer cycling the delta?
If you were to normalize the 2022 year, and you take the AUD 22.9 million off your TIC revenue for the purposes of assessing future years. I guess the way to look at it is probably on the TIC rate, which was the AUD 3.02 during 2021/2022, and the AUD 3.18 for 2022/2023, you take a view from the TIC rate that applies from 1 July 2023.
Yeah. does the AUD 318 come down for the?
Oh, sorry. From the moment we've done that is now tax. We are now in tax paying, and that's as a result of the user deal and the uplift in EBITDA and revenues. Sorry. The slower deductions of some NECAP spend that we're expecting to come through. Some of the costs that we're expecting to come through on NECAP and other projects has been slower to come through than we were generally expecting. Yes, we are in a structurally tax payable position going forward.
We can expect to start to see franking on the dividend also because of that?
Yeah. We will frank dividends to the extent possible, but we'll provide updated guidance in May.
Okay, great. Anthony, if I can get you to go to that slide 18. You're obviously talking on that slide about a proposed major project NECAP. Can I ask you to hazard a guess in terms of, like, what sort of dollar size and timing those projects may be?
Sure. At the moment, we have a request out to our customers to approve the commencement of both the replacement of ship loader number one and one of our original stack reclaimer machines, SR2. We have a request out for approval now. We'd like to kick off both of those projects this year, if possible. Those two projects combined are probably a shade shy of AUD 300 million in total value. Now that's a pretty big investment up front, and there's quite a bit of work that will need to be done to make the business case and to convince our customers that it's appropriate to move forward with both of those projects now. And that's what we meant when we referred to the lumpy nature of the NECAP spend in the deck.
If both of those go ahead, then they're probably three-year projects. Come around 2025, 2026, we'd be adding the best part of AUD 250 million-AUD 300 million plus Interest During Construction (IDC) to the TIC. Beyond that, we're seeing our, just our annual run-of-the-mill, standard NECAP work running at around AUD 30 million-AUD 40 million per year. There's still many years of offshore pile wrapping still to go. We tend to spend about AUD 10 million a year on that alone. Those two projects are on the board for potential kickoff this year. There potentially could be other machines that will need replacing over that 10-year horizon as well. That gives you a kind of a bit of a flavor for the things we're looking at.
Fantastic. Thanks. Just final one from me. You referenced the additional hedging that you've put in place from 2026 to 2031. Can you maybe just provide a bit of a detail on that in terms of, you know, what sort of rates you got and just the hedging profile, the hedging size?
Can't really give rates, but in terms of the timing, we did execute the hedging over the last six months, and some of them were forward start one and two-year hedges. Some of them were forward start up to five-year hedges. As I said, it averages, it's probably on a staggered profile. It's, there's more hedging in the years from 2026, 2027 and lower amounts of hedging around 2030, 2031. Overall it averages about 40%.
Okay, great. Thank you very much.
Nathan, could I just come back to your NECAP question? There's a bit of flavor I wanted to add there is that our NECAP program is something that we have the ability largely to control the timing of. While the capital numbers we're talking about are significant, they won't affect our ability to meet our distribution commitments to our security holders. It is the board's intention that we will implement our NECAP program in a way that grows the TIC over time.
We will be mindful to ensure that the equity component of the NECAP investment that we make does not impinge on our ability to continue to pay distributions. We see this as a way of continuing to grow charges over time, but we have the flexibility to implement it in a way that ensures that, you know, we can keep meeting that distribution guidance that we've been providing.
All right. Actually on the distribution guidance, the tax seems to be, you know, having covered the stock for a while, it seems like a tax is actually getting paid earlier than what it was previously. Does that impact on that 3%-7% medium-term growth per year?
Look, I don't wanna make any comments around around distributions and how we'll think about franking credits. It's not a discussion we've had with the board yet. The right time for a more detailed discussion around that will probably be at the time of the AGM in May.
Okay, great. Thank you.
Cheers.
There are no further questions at this time. I'll now hand back to Mr. Timbrell for closing remarks.
Thanks, operator. Thanks everyone for dialing in. Hopefully everyone on the call has our contact details by now. If there are any follow-up questions, following the call today, feel free to get in touch. We're happy to take you through the numbers and spend the time making sure you understand the materials. Again, thanks for dialing in, and we look forward to talking to you soon.
That does conclude our conference call today. Thank you for participating. You may now disconnect.