Thank you for standing by and welcome to the Channel Infrastructure full-year results briefing. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Ms Naomi James, CEO. Please go ahead.
Good morning and welcome everyone to our conference call for our 2022 Full Year Financial Results, which includes our first nine months operating as an import terminal with a new and improved business model. Today, we'll run through how we have delivered on all of our 2022 priorities and the key operational highlights for the year. I will hand over to Jarek, our CFO, to run through the financial results. I'll then finish with an update on our growth opportunities, at which point I will introduce Rob Buchanan, our incoming CEO, who will outline Channel's priorities for the current financial year. You would have seen the investor presentation released to NZX this morning. If you have that in front of you, we will refer to page numbers as we move through the presentation. Page two contains the usual disclaimer information. On now to page three.
I think it's fair to say that Channel Infrastructure has had an incredible year with the transformation of the business, the financial results we have delivered, and the sustainable business model we now have in place. As you are all well aware, in what was a significant milestone, we safely completed the shutdown of the refinery operations and transitioned to an import terminal on April 1 last year. The conversion project, which includes the decommissioning of the refinery, transitioning our workforce, and commissioning of contracted private storage, continued to track to plan and to budget, and is now significantly de-risked. Our refinancing program was successfully completed with the cost of funding reset in line with an infrastructure company. Our new business model has delivered the first profit we have seen in over three years, and this, along with strong cash flow, has meant a return to dividends to shareholders.
I will start with the highlights and the operating update on page five. At the start of each year, we talked to our priorities. This page lays out our priorities for 2022, as I shared them with you at this time last year. I'll go into more detail in the following pages, but I'm pleased to say we have delivered against all of our 2022 priorities. I'm really proud of the hard work and dedication of the entire team that has enabled us to successfully deliver on all of these significant commitments. If you could turn to page six, which outlines our progress across our key safety, environmental, and people metrics.
We have always had a firm focus on our health and safety and protecting our environment, and this was even more important through the period of the refinery closure and intensive decommissioning that we undertook in the first half of 2022. We have much to be proud of here, including that there were no significant safety incidents throughout 2022, a huge achievement and testament to the strong safety culture we have at Marsden Point. In 2022, we saw a big step down in our staff numbers, and I'm proud to report that we have surpassed our target, with 97% of those impacted last year supported into new roles, training, or opportunities within six months. Through our transition, we have reduced our environmental impact and made a step change in our carbon emissions. We have seen a 98% reduction in Scope 1 and 2 emissions.
We have recycled over 1,250 tons of decommissioning waste materials. There has been a 30% reduction in legacy groundwater contamination in the past six years. Before we get into the other aspects of 2022, I wanted to briefly touch on the recent cyclone on page seven. Our assets came through Cyclone Gabrielle really well, with limited impacts to our site and the pipeline. This reflects the work done over many years and the efforts of the Marsden Point team, who prepared well ahead and managed continuous operations throughout. A flyover along the full length of the pipeline late last week confirmed very limited impact from the cyclone to land stability around the pipeline. We continue to manage on a proactive basis reinforcement of land areas along the pipeline route where there is a risk of movement.
We are still assessing schedule impacts on this year's private storage following the cyclone and the unusually wet weather we have experienced since November. Our thoughts do go out to all of those who are working to clean up from this devastating event and to the first responders who have been working tirelessly to help all those in need. Today, as well as releasing our annual report, we have also released our second sustainability report, which I do encourage you to read.
Included in this report and on slide eight are an update on our progress to achieving the ambitious targets we set ourselves last year, which were to support our workforce through a just transition, achieving net zero Scope 1 and 2 emissions this decade, and to support our customers to decarbonize the fuel supply chain. We are making excellent progress against all of these, and our sustainability report provides more details on this. Turning to page nine. We have continued to see strong recovery in fuel demand from the impacts of COVID travel restrictions. Jet fuel demand has recovered to 70% of pre-COVID levels prior to the most recent weather events in Auckland, which represents a doubling of demand since borders reopened at the end of February 2022.
Diesel demand remains strong, as it has regardless of the impacts of COVID, we have seen petrol recovering from COVID impacts through the year as people have returned to the office. The volume chart on page 10 shows the strong recovery in fuel demand over the last 12 months as COVID restrictions have eased. Q4 throughput has been the highest level since before COVID, is up 11% on Q3-2022, reflecting growth in all fuel types. Since becoming an import terminal, we have discharged some 56 ships, we have invested in a significant increase in fuel storage through the transition to terminal operations, which when complete, will have 86% more fuel storage capacity at Marsden Point compared to when we operated as a refinery. Please turn to page 11.
Importantly, our conversion project continues to track to budget, as we have communicated in our quarterly updates. Conversion project spend was approximately NZD 114 million to the end of December. Given the refinery decommissioning and workforce transition are now largely complete, and we have spent or committed 65% of the conversion project costs, this project is now significantly de-risked. Like others, we are continuing to see supply chain and inflation pressures, and are managing them with limited draw down to date on our project contingency. Looking at page 12, this outlines the three key components of the conversion project, being decommissioning the refinery, the workforce and business transition, and projects to upgrade our terminal facilities. What has been completed for each of these components and what is still to come.
The pie graphs show you how the budget of NZD 200 million-NZD 220 million is allocated and how much is spent or committed to date. There is a lot of detail on this slide, which I'll leave you to read, but in short, the decommissioning and workforce transition is largely complete, with the focus now on completing terminal upgrade projects and embedding our new terminal systems and processes. Moving to slide 13 and our private storage growth. We have now commissioned over half of the contracted private storage, with the remainder of the tanks due to be commissioned around mid-2023, subject to the weather impacts I mentioned earlier. In the second half of 2022, we signed an additional terminal storage agreement worth NZD 25 million of additional revenue over the next five years, with NZD 4 million of this included in our 2023 guidance.
Now I will hand over to Jarek to run through the financials.
Thanks, Naomi. Welcome everyone today. Turning to financial highlights on page 15, I'm really pleased to report a strong set of financial results reflecting operations under the new business model for the last nine months. Our results today are those from the refinery operating in the first quarter and presented as discontinued operations, and the import terminal operating from April 1 to December 31 presented as continuing operations. We have delivered a strong EBITDA and EBITDA margin and generated our first profit in three years. We have completed a comprehensive refinancing program, the benefits of which we have started seeing already. Last but not least, we have declared a fully imputed final dividend of NZD 0.05 per share and a fully imputed special dividend of NZD 0.02 per share. Let me turn to page 16, which reflects continuing operations.
Underpinned by strong take-or-pay commitments, the terminal delivered a strong EBITDA of NZD 57.5 million, implying an attractive EBITDA margin of 65%. I'm pleased to say we have successfully reset the cost of funding and maintained a significant portion of debt that fits, which provided us with significant funding cost certainty in the period of increasing interest rates. This, together with lower ongoing depreciation following a review of terminal asset slides completed in the first half, delivered a strong profit of NZD 17 million from continuing operations. Please turn to page 17. As you are aware, our earnings profile is now more stable. Our revenue is underpinned by our strong contra-contract protections. 94% of 2022 revenue was underpinned by fixed or take-or-pay fees, and almost 90% of revenue is subject to indexation from this year.
The PPI announced in November last year effectively set our fees for 2023, with terminal fees uplift of NZD 6.2 million year-over-year. Please turn to page 18, where we take a closer look at operating costs, which have now been reset to terminal levels. A quarter of operating costs comes from electricity, which we see as a key opportunity to reduce our costs by further. Naomi will talk to this shortly. Like many businesses, we have been operating in an inflationary environment. Whilst we are seeing cost pressures in some areas, we have been able to manage this to well below PPI. Turning next to cash flows on page 19. If you look at the waterfall, our net debt position increased to NZD 257 million at the end of 2022 as expected.
We continue to see strong cash flows from our operations, which funded more than 3/4 of the conversion spends. In the first year of terminal operations, we have been focused on maintaining our terminal facilities, as well as investing in additional tank storage. The capital spend across same business and both CapEx is in line with our expectations. While financing costs were in line with our guidance in 2022, we have carried a higher level of finances as a significant portion of our bank facilities remain undrawn. We're expecting this to drop as bank facilities are more fully drawn, which together with more competitive bank debt pricing, is expected to reduce the effective interest rate. We maintain a strong balance sheet with leverage at 2.4 x as of December, within the targeted range of 3x-4 x. Moving to page 20.
I'm really proud to of the work that we have done resetting the cost of funding last year. We have established a strong presence in both bonds and bank markets, with significant funding capacity offered by the market. We continue to maintain significant funding headroom as we progress terminal upgrade works, and we are expecting our debt to peak in the next 12-18 months at NZD 70 million-NZD 90 million above current levels. We will continue to benefit from our hedges, with 97% of debt fixed at the end of 2022, and with a significant portion fixed in the following years, we have certainty of funding costs. In 2023, we plan to review options for the NZD 75 million subordinated notes, which are due for renewal in March 2024. Please journey on page 21.
In November, following the PPI announcement and additional storage contracted, we upgraded our 2023 financial guidance. Today we confirm the guidance remains unchanged. I will now hand over to Naomi to provide a strategic update.
Thank you, Jarek. I'm not going to go through the next two pages, 23 and 24. I'll leave you to read the details. The purpose of these pages is really to outline against the strategic framework that we've previously shared with shareholders our progress in 2022 and our key areas of focus for 2023. Turning now to what is new news today, which is the update to the Hale & Twomey long-term fuel demand outlook found on page 25. Page 25 gives you the whole of New Zealand's picture. Late last year, with more clarity around the COVID-19 recovery and the latest industry and government policy developments in mind, we engaged industry experts, Hale & Twomey, to update their fuel demand outlook for us. This fuel demand outlook gives us more detailed bottom-up modeling than has been done before.
Hale & Twomey have used DKMA passenger data supplied by Auckland Airport to give us a really clear sense of the future jet fuel demand, as well as bottom-up forecasting across each consumption sector for diesel demand and by each vehicle type for petrol demand to give a more accurate picture of fuel demand and the fuel transition over time. Looking now on page 26 and the part of most interest to Channel Infrastructure, which is throughput at our Marsden Point facilities. What we can see here is a much faster recovery for jet in the near term and a much stronger outlook for diesel over the long term. This means that based on this latest view, terminal revenue would rise above take-or-pay levels in 2025.
The other thing I'll draw your attention to is that over time, the proportion of renewable fuel throughput at our facilities is expected to increase based on the gradual uptake and transition to sustainable aviation fuel and biodiesel. With the transition fairly easy for drop-in fuels from an infrastructure position, these second-generation fuels are able to utilize existing facilities. In the interest of time, I'm not going to talk to the detail of the additional analysis on diesel and petrol demand found on page 27. I'll just point out that what we are seeing in simple terms is that petrol demand is peaking and then declining as expected as the vehicle fleet electrifies. Diesel demand is expected to stay stronger and transition much more gradually, particularly for agriculture, industry, and heavy transport.
Turning to the most interesting part, which is the jet growth story on page 28. Auckland International Airport, as announced yesterday, expects recovery in passenger numbers to pre-COVID levels by 2025. This is aligned with Hale & Twomey's forecast for jet fuel demand recovery by 2026, with the lag reflecting fleet fuel efficiency improvements since pre-COVID. As we saw in the five years pre-COVID, jet fuel demand increased at a rate above passenger growth due to the increase in long and ultra-long haul flights, as well as premium travel. We certainly expect these trends to continue to drive growing jet fuel demand. Turning now to page 29. Over the past 12 months, the Ukraine war and even more recently, Cyclone Gabrielle, have reminded us of the importance of supply chain resilience.
With the transition from importing crude oil into New Zealand to importing refined products, the key to resilience is the amount of products we have stored in country to provide a buffer against a range of disruption scenarios. Our focus as an infrastructure company is on having storage available to support this. There's a big increase in storage capacity occurring at Marsden Point through the transition from refinery to terminal, with even more capacity due to come online later this year. At the same time, the government is working to implement minimum domestic stock holding levels to ensure the right level of resilience exists in the system.
With the recovery that we can see coming in jet fuel demand, we believe it's important now more than ever, that the recommendations that came out of the inquiry into the 2017 pipeline disruption are addressed to ensure a resilient fuel supply chain. If we turn to page 30, I think it's really important to note that the steps taken by the New Zealand Government to improve fuel resilience in New Zealand represent a real opportunity for Marsden Point. With our unutilized tank capacity and connections to the largest fuel demand sources in New Zealand, we have a key opportunity to support the establishment of the 70 million liter diesel fuel reserve, as well as any additional storage that might be required from the incoming minimum stockholding obligation. Turning to page 32, 31, sorry.
Last year, we released an RFI, which aims to bring down the cost of our electricity supply. This is a key execution priority for us this year, given the size of our electricity cost base, and we see a significant opportunity to take cost out with the step down in transmission costs, a key part of that. Finally, before I hand over to the new CEO, I'm very pleased today to be announcing to shareholders the first set of dividends by Channel Infrastructure, which are at the top end of our dividend guidance range of 70% of normalized free cash flow, comprising a fully imputed final dividend of NZD 0.05 and a fully imputed special dividend of NZD 0.02 per share. This is in effect a nine-month dividend, and the way we've tried to split it reflects the target of a 40-60 split between the interim and final.
That'll give you a feel for how we see the forward dividend profile, together with our indicative dividend range for next year of NZD 0.09-NZD 0.11, based on the earnings guidance range we've shared and our dividend payout policy of 60%-70% of normalized free cash flow. With the contracts we have and the extent of fixed revenue and the indexation of revenue and hedging of debts protecting us against inflation, there should be a strong degree of confidence in how this business is consistently delivering dividends. I'll now hand over to our incoming CEO, Rob Buchanan, to say a few words of introduction.
Thanks, Naomi. Hi, everyone. It's great to have so many shareholders on the line with us today. I've been with the business since the end of January, and I'm really looking forward to stepping into the CEO role on the 6th of March. I've been incredibly impressed with the clear vision and the capable team at Channel Infrastructure. They continue to work hard to deliver on its plans for the future. As you can see from the 2022 results, the business is in great shape, and it's a real tribute to Naomi and the wider team at Channel Infrastructure that worked hard to transform the company during an extremely challenging period of time. If you could join me on slide 34.
As incoming chief executive, it will be my priority to continue delivering on the strategy set up for the company, which is of course to grow shareholder value through continuing optimization of our business, while delivering on our aspiration to be a world-class import terminal. Our priority this year will be to ensure we deliver safe, reliable, and cost-efficient terminal operations and maintenance, and the on budget and on time completion of remaining conversion project works. We're continuing to work hard with the government and our customers to ensure supply chain resilience, which is good for New Zealand, and we'll be delivering on the near-term growth opportunities that we've talked about here today. Ultimately, we'll be working to deliver increasing returns to shareholders through dividends in an inflationary environment.
I believe the opportunities for Channel Infrastructure delivered to its unique and highly strategic asset base that New Zealand navigates the energy transition are significant. I'm really excited to be bringing our plans to fruition over the coming years. I look forward to meeting many of you at our AGM. Now I'll hand back to Naomi to wrap up.
Thanks, Rob. To wrap up for 2022 on page 35, after significant planning and preparation, we successfully shut down the refinery and commenced terminal operations and relaunched as Channel Infrastructure. The transition went smoothly, and we have had a successful nine months of terminal operations in 2022. Importantly, our conversion project is now significantly de-risked, and we have kept it to plan and to budget. Our cost of funding has been reset. Our first nine months of terminal operations, we delivered our first profit in three years. Our strong cash flow has enabled our board to declare a return to dividends for our shareholders. That concludes our formal presentation for today, and I'll now hand back to the operator for questions.
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 handset to ask your question. Your first question comes from Andrew Harvey-Green with Forsyth Barr. Please go ahead.
Hi. Morning. Morning, everyone. Just a couple of questions from me. First of all, just looking at that contingency and obviously NZD 30 million of spend move from 2022 to 2023. I guess, I mean, that seems really encouraging in terms of you've still got quite a bit of contingency there by the sounds of it. How far do you think you need to get through this process before you're able to give us some firm idea of whether that contingency is no longer needed or not?
Hi, Andrew. Yeah, look, I think that's gonna be a question for the new CEO. You can ask him that in due course. What we have done to date is left our contingency in, particularly while we're still in an environment where to be honest, seeing weather impacts, which we haven't really experienced before, and also we're in an inflationary environment. As we get further through 2023 and the work program, and particularly, the terminal project upgrades that are underway right now, I think that question you're asking, is absolutely going to be the right question. You can ask that, one of.
at the half year, I think.
Very good. Next question I just had was, just looking at the OpEx base for the second half, and it came in a little bit higher than, I guess what I was expecting. I just wanted to double-check. Was there anything, I guess, in there where you described as, I guess, carrying slightly higher extra costs in the second half, you know, following or as you went through that conversion process, which will be coming out going forward? I realize you've got the guidance out there for FY 2023, but just wanted to double-check whether there was anything in there that was, I guess, more than just business as usual?
Not really, Andrew. You know, the first months of interterminal operations is the time when we, you know, get into the nitty-gritty and the OpEx there that you're seeing for the nine months and second half is in line what we expected. I'll probably look at FY 2023 guidance for OpEx to get a feel of, you know, what we think it will look like going forward for terminal.
Okay. Thanks, Jarek. Next question, just in terms of Hale & Twomey's forecasts. I guess the big change really is that long-term outlook. Obviously, we've got more jet in the near term. That long-term outlook certainly seems a lot more positive than it was previously. I'd just been interested to know, I guess in terms of sense checking those particular forecasts with other channels, whether you've done anything along those lines or what Hale & Twomey have done to sort of get comfortable about that relatively significant increase at the back end there?
Yeah. That's been something, Andrew, we've been quite conscious of in getting this updated outlook done. Part of our process was to ask Hale & Twomey to do just that. They've engaged across the aviation sector, and with customers where customers were open to a discussion on that. Because of the changing mix in fuels through the supply chain, we think it's actually quite important that there is a common basis for infrastructure planning. That's really led to us working quite closely with Auckland International Airport in particular, recognizing the importance of jet demand to our business long term to be working on a common planning basis and set of assumptions.
That has absolutely been part of the process leading up to announcement of the updated outlook today.
Great. Thanks. Last question from me is just in terms of, you know, potential asset sales. I think I saw you had to buy some platinum at the back end of the year, which, I assume, is that gonna be sold this year? Also, I guess the refinery, I think we've still got sitting on the books, but under NZD 30 million of value associated with that. Any sort of update in terms of the sale of that?
Firstly on platinum, Andrew, we're expecting that sale to occur in the next probably 12-24 months. That value will be effectively monetized in that period of time. On your second part of the value of the units that are sitting in the balance sheets, just a reminder that it's a combination of scrap and sale value that we hold in there. It's certainly probably a best indication of what that could be maybe sold for. We have some interest in refining units and are in discussions with a few parties on potential sale. At this stage, probably it's too early to provide more details.
As we firm up those discussions, we'll provide you an update.
Okay. Just finally, I'd just like to, you know, wish you, Naomi, all the best going forward and had a fairly interesting two years or so here. Yeah, all the best to you and move back to Australia and, welcome, Rob.
Thanks, Andrew.
Thanks, Andrew.
The next question comes from Cameron Parker with Craigs Investment Partners. Please go ahead.
Hi, guys, and congratulations on a great FY 2022. Just a couple from me in terms of the capacity and versus the, you know, the throughput that's been presented from Hale & Twomey. You've got on a, say, a slow substitution basis of up to 4 billion liters heading through the pipeline. Can you just remind me of what the capacity is for you to manage that sort of throughput?
Hi, Cam. Yes. What we've looked at from a capacity perspective is really those peak periods. You're looking at the annualized volumes when you're looking at that 4 billion, sorry, or also a throughput in a slow transition case, being a high throughput case. What we would see in that case and test against is really those summer months for jet throughput. The way that the pipeline operates today is that we supply our product that goes all the way down into the Waikato. We get paid slightly less for that.
To the extent that more capacity is needed to meet Auckland's demand, in effect, there is lower margin throughput, which can be offset and come by road from Taupō, which there is capacity to do. We don't see any issue with capacity from Marsden Point to the Wiri terminal in Auckland, in any of the Hale & Twomey fuel demand outlook scenarios.
Okay, great. Thanks, Naomi. Also, just in regards to the pipeline, could you just remind me of what, say, the CapEx requirements going forward in terms of useful life and if there's an extension and so forth or upgrades required going forward? Is there a step up in CapEx that might be required as the life of the asset kind of expires, or are you able to give a bit of color around that?
Sure. Cam, you might remember the guidance we've given on CapEx over the life of contracts is NZD 5 million-NZD 12 million per annum. That range takes into account both Marsden Point terminal and pipeline CapEx requirements. With the pipeline, there is some lumpiness in terms of from about every 10 years, you need to do a little bit more work on it, but it's within that range. It's not any kind of sort of major relighting events that we would expect to see over the term of the Hale & Twomey forecast to continue that those assets in use as they are today.
Great. Okay. Thanks. Just the last one with me, just with regards to your imputation going forward, could you just confirm what you think will be imputed on those dividends?
These dividends, count that we declared today are fully imputed. Before paying these dividends, we carry imputation credits, being an equivalent of NZD 0.14 in dividends. Paying NZD 0.07 now in total effectively will utilize half of that imputation credit balance with the other half effectively remaining for next years. Beyond that, obviously, we carry a significant value of tax losses in the balance sheet, NZD 400 million, which will mean that we'll pay no tax, income tax for a number of years. And that means that we will not be sort of increasing the imputation credit balance over time.
Great. Okay. That's all from me. Thank you.
Once again, if you wish to ask a question, please press star one on your telephone. We will now pause momentarily to allow questions to be registered. Your next question comes from David Oxley with ACC. Please go ahead. David Oxley, your line is now live. Please proceed with your question.
Sorry. Thank you. Hey, could you explain why the first half pack showed the discontinued operations EBITDA at NZD 26.5 million, and that's become NZD 24 million today? Thanks.
Let me just go through that slide. David, I think the difference between the two is that through the discontinued ops line, you've got the conversion costs that for accounting purposes, you weren't able to provision for at the end of FY 2021. There's certain costs, things like some of the costs related to workforce transition that we aren't able to provide for. You've still got those running through that discontinued ops line. Obviously there's not revenue in the second half. The refinery's shut down, but there's still some conversion costs running through.
The thing to note with all of the conversion costs, though, is that they are all going within that total conversion cost budget of NZD 200 million-NZD 220 million, which is a cash cost budget consisting of both CapEx as well as OpEx. The OpEx proportion of that budget has mostly been provisioned for on the balance sheet, where that is permitted by the accounting rules. There's a small amount where we're not able to do that, and that's what you see just running through that discontinued P&L line.
That makes sense. Thanks very much.
Your next question comes from David Birrell with Croxon Capital. Please go ahead.
Hi, guys. great job as always. Just had a few questions around the biofuels mandate, the DSO, and the government diesel reserve. The biofuels, does that imply that the by volume, there will need to be about 3.5% of diesel by volume coming from biofuels and about 5% of petrol volume coming from ethanol? If that's right, how does that work in practice, and how does it affect the storage requirements?
Hi, David. There has been an update on biofuels in New Zealand which may not have got to Australia. Let me just start by updating you on that. That proposed mandate was one of the policy measures that the New Zealand government has decided not to proceed with ahead of this year's election. Of course, by the time that announcement was made, the Hale & Twomey forecast work had already been done. What the forecast assumes is that there is a mandate brought in at some point in time, and that gives us a feel for, assuming that does happen at some future date, what's the impact on throughput for our facilities.
What you see if you look at the petrol demand chart is that there is a wedge of ethanol fuel coming into the petrol mix to meet a biofuels mandate and a wedge of biodiesel coming into the diesel fuel demand to meet it on the diesel side. The ethanol fuel can't go through our pipeline because it would contaminate the jet. That's assumed not to be included when we show those Marsden Point throughput volumes. They don't include any of that volume.
If a mandate is not brought in, as is, I guess the current state of play in terms of active policy, what you would see through our facilities, we would expect is about a 5% increase in petrol volumes in the absence of a mandate reflecting those first-generation ethanol volumes. On the diesel side, it's a bit different because we would expect diesel biofuels to be renewable second-generation biofuels, which can be used as drop-in fuels. They can utilize all of the existing infrastructure. There's no new requirements for those. In effect, they just replace or substitute existing volumes. You don't really get a change in overall volumes from that substitution over time from fossil diesel to biodiesel. I'll just check.
There's a little bit in that, but I'll just check if it makes sense.
Yeah. No, that makes sense. I'm really sort of thinking more about... I'm assuming New Zealand being New Zealand that the mandate will eventually come in at some point, and what the storage volume requirements are then, particularly, as you say, with regard to ethanol. You can't put it through the pipe, would you imagine you'd be storing some of that and same with the biodiesel before it gets blended or do you think you'd get a blended form of diesel arriving at the terminal and therefore you wouldn't need to blend it?
Yeah, look, they're good questions and the short answer is that that will be up to our customers, the fuel companies as to how they would choose to meet those mandates. First-generation fuels like ethanol will clearly need separate infrastructure, separate tanks. You could do that at Marsden Point and truck it. That's absolutely an option. The in terms of whether it's brought in pre-blended or blended in New Zealand, they're all part of those supply chain considerations which are really one for our customers. Certainly, as and when any mandate comes back on the table, they're the sort of discussions we would be having to, you know, to understand how we can support what's required from an infrastructure perspective.
Gotcha. and hoping I haven't missed anything on the DSO, but, what additional storage volume do you think is gonna be required over and above what's planned?
Look, we don't quite know that yet, that really reflects that the government is still working through the detailed design of that policy. One of the things they're looking at is how they will measure days cover, whether that's sort of an average over a period of time or an absolute minimum to ensure an absolute minimum buffer in the system. That's one of the things that's being worked through. Once that detailed design work is done, I think it will be clearer for everyone to assess whether the capacity we've got today can accommodate that or whether any additional capacity might be needed. I think the third part of your question, David, was on the diesel reserve.
Clearly, that needs new capacity because that is capacity over and above what we have in service today for the fuel companies. We've got plenty of capacity to do that at Marsden Point. We could do all of the 17 million liters. We could do a part of that. That's really part of the government's process to tender that reserve which is currently underway.
Yes. Thanks. The only other thing that I guess you would have better insight into than us perhaps is, I would imagine the government would wanna split between North and South Island and maybe between Northland and the rest of the North Island. Do you have any view as to their thinking on that at this point? Or at least a state of play, thoughts?
Yeah.
consider around that?
Yeah. The question of regional diversification is certainly something that will get considered. A practical aspect of this, though, is that, you know, diesel is not like wine. You have to turn it over. You have to do that about every six months. This is intended to be a permanent reserve, and so it needs to sit close to a market that can actually turn it over. Most of the diesel demand outside of the north is in relatively low throughput locations, making it very difficult to do that.
Too early to say, but I would expect there quite possibly will be some smaller reserves elsewhere in the country, but that the vast majority of the diesel reserve is very likely to sit, you know, in the place where you've got the most throughput to allow that to be turned over.
Such a mystery as to where that would be.
We have a few tanks there. We have 400 million liters of unutilized capacity, so, we're ready, willing, and able to support the government with that.
Great. Thanks so much. Thanks, Naomi. I look forward to following your career from now on, and welcome, Rob.
Thank you.
Thanks, Dave.
Your next question comes from Nevill Gluyas with Jarden. Please go ahead.
Good morning, team. Can you hear me all right?
We can. Hi, Nevill.
Excellent. Good. Good morning. Right. I have four pencil sharpening questions, really. To kick it right off, if I run the ruler over the chart you've got for the CapEx profile, I come to a number that's sort of above the 200 to 220 range. I just wanna check that that's due to uncertainty around the timing of when the CapEx falls into years and the 200 to 220 is still a nominal value for that period.
We hold, Nevill, NZD 220 as the total conversion, project budget there. It will be just probably that shading that is a bit misleading when you look at the chart there.
Yeah. Great. Good.
The columns are not intended to add up to more when we show you.
Good. Thank you. Every analyst loses the rule. Okay, next question, just on the tax losses. I see in this latest report, you've got NZD 507 million booked tax losses. At the half year, you had NZD 467 million. I presume some of that is related to the way in which the terminal costs get treated by the tax department, which means obviously you've got further conversion outlaid to come. Does that mean the NZD 507 million could creep up further over the course of this and next year?
Just to be clear, the NZD 560 that we reported at half-year was effectively truly actually due to the write-off of refining assets for tax purposes at that point in time. What happened, what happened in the second half of the year obviously was a significant portion of the conversion costs were paid in the transition of the business, and that's really when those costs become tax-deductible. It's really the realization of the conversion costs that happened in the second half. There's still fair amount of costs to be incurred that we carry in the balance sheet under provisions.
Equally, next year, 2022 will be a year of full terminal operations with the full benefit of the cash social and profit. That will offset those conversion costs that are yet to be spent. To answer your question, I wouldn't expect a significant increase of that number, and probably that's where we land half a billion dollars.
Perhaps another way to ask the question is sort of what kind of tax shield will the remaining terminal CapEx have? Obviously, it's split between OpEx and CapEx, and I'm not sure how the tax authorities treat that. You'll have some idea. How much tax shield should we think about for the next three years?
Are you asking, Nevill, about sort of tax depreciation going forward or?
Well, I'm not sure exactly how the mechanisms work. Clearly, you know, there's some tax loss gain or tax loss benefit for you guys offsetting the outlays. If you've got further outlays to come, it's whether or not there are further tax shield benefits coming from that.
Nevill, probably the one I'd refer you to on that is if you have a look at the pie charts on the different components of the conversion project, you'll see the costs still to come are predominantly terminal upgrades, which are CapEx in nature, so you just get, you know, based on the normal depreciation rates. For tax purposes, you get the benefit of that. The other part still to come is predominantly remaining decommissioning costs, which have been provided for already in the balance sheet. So you're not, you're not getting additional protection. As Jarek's talked about, you know, the losses have been recognized there.
Yeah. Okay, good. That's clear. Thank you. Then just moving on to slide 26 and the useful commentary there. Where you mentioned the sort of circa 3.4 billion liters in 2025, you're looking at about breakeven versus take or pay. If, if I understand the contract timing correctly, you know, 2025 is the year in which you sort of got a The first quarter is at the old take or pay, the current take or pay levels and fixed payments. Then you transition to the sort of NZD 90 million take or pay. In that statement, the 3.4 billion liters is sort of the breakeven. What's assumed there? Is it the starting number, the ending number or sort of the one quarter, three-quarter blended of the total?
The NZD 3.4 billion, Nevill, is really the point at which you hit breakeven on your NZD 100 million level of take-or-pay.
Great.
that's getting indexed every year, which we expect to occur in 2025 while we're still at that level.
Yeah.
Yeah.
Yeah. That's good. Thank you. That's the NZD 100 million plus the NZD 60 million that's still applying at the start of that. Am I correctly assuming that April 1, 2025, is when you transition down to the NZD 90 million take-or-pay, or have I got that incorrectly?
That's from April 1 2025, correct?
Good. Okay.
So, so-
Great.
Just to clarify, Nevill, the breakeven was calculated against the fee levels, both fixed fee and take-or-pay levels across that calendar year.
It's a blended average. It's NZD 100 million for a quarter and NZD 90 million in the similar, you know, the respective...
For the two quarters. Yeah. Yeah. Right.
Good. Okay. That's super clear. Thank you. Great. Here, just one last one from me, which is around the electricity cost reductions and again, just clarifying, pencil sharpening around what you say there. I think in the past you've said, and I think this tax says also, most of the reason for the NZD 41 million-NZD 44 million guidance range for OpEx for 2023 is related to uncertainty around what happens around the grid costs. Is it right for me to assume that all of that uncertainty, that NZD 3 million gap is due to, you know, you're at the bottom end at the best outcome for grid and the top end for no change in grid?
No, it's, I think. Yeah, that sort of assessment hasn't changed really, Nevill.
Great.
On that slide, you could see that we had an in-principle confirmation of the rating for both the plants. That's sort of yet to confirm, to be confirmed by end of April 1. Other costs, collection and distribution are still work in progress.
I think, Nevill, just to... I think what was your question, which was is the electricity all the range? No, it's not. It's clearly a key part of that range.
Yes.
Like every business, we're managing, you know, all the range of factors, float loans, inflation, all those sorts of things.
Yeah.
What we've done, is obviously heading into this result, had another look at that, made sure we remain, comfortable with the range which we do based on our latest outlook for the business.
Great, thank you. I'm assuming whatever gains you may realize at April 1, you know, we can scale those up for full year for the following periods. Just on the NZD 2 million+ gain expectation, I've read that as specifically relating to the energy charges, so excluding grid. You mentioned on sort of during that slide as well. Have I interpreted that correctly? Because NZD 2 million looks like quite a small number.
That's right.
Great. Okay, thank you. I, is it crazy to think that that could be a much larger number? Clearly, you've got the plus in there, but three-four-
That's a planning team and a-.
Sorry.
That's a planning team. That's what we're looking to achieve.
Good. Yes.
In the planning.
Not biting the bread. Very good. Okay. That's all from me. Thank you very much.
There are no further questions at this time. I'll now hand back to Ms. Jane for any closing remarks.
Thanks, everyone, for joining us today, and I look forward to catching up with many of you over the next month before I finish up at the end of March.
That does conclude our conference for today. Thank you for participating. You may now disconnect.