Channel Infrastructure NZ Limited (CHI) Earnings Call Transcript & Summary

Welcome, everyone. It's great to have you all here for our first Investor Day as Channel Infrastructure to share with you in a bit more detail our new business model and also opportunities that come with it. Before we get started, I'd just draw your attention to the information on the second page of the presentation booklet. Most of you know me. I'm Naomi James, Channel Infrastructure's CEO. I joined the refining team in April 2020. And as you all know, since then, we have undergone significant change. We are videoing this today to enable us to share the content with investors who couldn't be here, so I'd appreciate if you could put your cell phones on silent. We'd like this event to give you an opportunity to answer all the questions that you have on Channel Infrastructure and to be interactive. Some of your questions will be answered as we go through the presentation. And we also have 2 Q&A sessions scheduled through the afternoon. We hope that these, together with the afternoon tea break, drinks with management and the Board at the end of today and also the site visit tomorrow will give you ample opportunity to have your questions answered. The Channel Infrastructure team has a clear direction and a path to get us there. And today is a great opportunity for you to hear more about this from our management team. We have split the afternoon into 2 parts. We're going to start with the future, looking at our strategy, the outlook for fuel demand and our growth opportunities. Then after a short break, we will dive into the terminal business we have today. Looking at our Marsden Point operations, the status of our conversion project work, our contracts and our financial profile. James Miller, who took over as Chair from Simon Allen at the start of this month, will then talk briefly to governance, and then we'll wrap up for the day. And if you're able to, we would love for you to join us for a drink after that. You will have seen this slide before. We always start with it as it summarizes really succinctly the strong investment proposition of Channel Infrastructure. Firstly, the critical nature of our infrastructure. We own and operate infrastructure essential to the supply of fuel to the north of New Zealand and New Zealand's largest fuel market in Auckland. This includes the only supply route for aviation fuel to the Auckland International Airport. We have negotiated and are now operating under long-term customer contracts. These contracts are a significant asset for our business with strong credit counterparts, a fixed and variable fee structure, which both incentivizes utilization of our infrastructure and protects us against market disruptions like COVID and PPI indexation of all fees, which protects us in an inflationary environment. These contracts underpin stable earnings and cash flow with high conversion of both revenue and EBITDA to cash flow. And our tax loss position means no tax is expected to be paid for many years to come. We have a strong balance sheet made even stronger by our recent successful bond offer, supporting a return to dividends for our shareholders in 2023. Through our transition from refinery to terminal operations, we have made a significant contribution to the decarbonization of New Zealand's economy and have plans to continue to contribute as we work to decarbonize the fuel supply chain. And finally, with our transition, there are many exciting growth opportunities for our business, which position us really well to grow and diversify our earnings base and increase the utilization of the critical infrastructure that we own as New Zealand's fuel needs change. It's great today to be able to introduce you to our leadership team, who will lead our business forward. Jack Stewart, our GM Operations, leads our operations, maintenance, project works and delivery of terminal services to our customers. You'll hear directly from Jack today about our first quarter of terminal operations and the conversion project work we have underway on site. Jarek Dobrowolski, our Chief Financial Officer, who many of you know already, was appointed on 1 April after 6 years with Refining NZ. You'll hear from Jarek today on the contract and financial profile of our new business and our refinancing program. Peter van Cingel is our Business Development Manager and is responsible for Channel's growth strategy and business development activities. Peter will share with you the latest insights around the outlook for fuel demand and the range of growth opportunities we have in front of us. Also here today are Chris Bowden, our General Counsel and Company Secretary; and Caz Jackson, our Chief People Officer. Not with us today is Steve Levell, our General Manager of our fuel testing business IPO. We also have a number of our directors with us today. James Miller, our new Chairman; Anna Molloy, who joined our Board earlier this year; and Vanessa Stoddart. Now let's start with our strategy. This is our strategic framework that we shared with shareholders last year when we sought shareholder approval for the conversion to import terminal operations. Our vision is to be New Zealand's leading fuel infrastructure company. And we have 3 strategic priorities to deliver value to our shareholders: to leverage our existing capabilities of safe, reliable, low-cost operations and a high-performance culture; to transform to deliver value through a competitive cost of capital and realizing the full value of our infrastructure; to position our business for future growth by supporting the transition to low carbon fuels and growing and diversifying our earnings. I'll step through each of these on the coming pages and highlight some of the progress being made. Starting with leveraging our existing capabilities. Even though we have a much less hazardous and complex operation as a terminal compared to the refinery, we have had a strong focus on maintaining our capability as a safe and reliable operator through the transition, and Jack will talk further to this later this afternoon. We've also had a strong focus on capability through our transition. The last 2 years with our strategic review process, simplification of our refinery, the decision to convert to import terminal operations, the execution of those plans and doing all this through the COVID pandemic, has brought great challenge for our team, but also the opportunity to develop our talent. And through our workforce transition, we have focused on retaining strong capability in our new terminal organization as well as for the execution of our conversion projects that we have underway. Moving next to transforming to deliver value, which has 2 parts. First of all, having a really competitive cost of capital. This is essential for us as an infrastructure business to be the best owner of the assets that we are operating, but also to be competitive as an acquirer of new assets, which is something that we aspire to do in the future. Jarek will talk to our recent bond issue later this afternoon. And we have a new capital allocation framework on the next page, which builds on what we have previously communicated to the market about how we will allocate capital between dividends, deleveraging and growth. In terms of realizing value from the infrastructure we own, the long-term contracts we have negotiated with customers were key to us realizing value from our infrastructure through our business transformation. We are very focused on completing the curb version project work to budget, and Jack will talk more to that later this afternoon. And with our new contracts in place and the transition from refinery to terminal behind us being the highest risk part of our transition, that underpins our confidence in a return to dividend payments in 2023. Today, we have announced Channel Infrastructure's capital allocation framework to grow shareholder value by delivering both dividends and growth. Starting with dividends. We have been clear for some time that with the stability that comes from our long-term contracts, we are focused on returning to dividends with a dividend policy to pay out 60% to 70% of normalized free cash flow. We have excluded growth CapEx and conversion costs from that, providing confidence in the consistency of dividends. And again, today, we reconfirm our expectation of a return to dividends in 2023 with the first opportunity for dividend payment in March next year. This dividend policy leaves the other 30% to 40% of free cash flow available to allocate to deleveraging and growth. On deleveraging, we have said we are targeting net debt-to-EBITDA of 3 to 4x, consistent with an investment-grade BBB+ rating. Based on earnings in the next year or 2, we expect this to translate to target net debt of around $300 million. We do not expect debt to peak significantly up higher than this level. And so while there will be some deleveraging to be done, it is less than what we had previously expected. And finally, growth, where we have today provided our key investment criteria being an above WACC return on capital and customer contracts that provide a good level of revenue certainty to keep our cost of capital lower than our customers. You will have seen the discipline around contract terms in what our team have negotiated in the terminal services agreements, especially the fee structures, and with a disciplined approach to growth that in turn generates more cash flow from contracts to fund dividends and growth, driving long-term shareholder value. Now let's work through the capital allocation framework in action. This slide uses the indicative financial metrics for FY '23, which will be our first full year operating as an import terminal, which we released in May. An EBITDA range of $76 million to $84 million after CapEx, financing costs and no tax with the significant tax losses we have, translates to free cash flow before growth CapEx and conversion costs in the range of $46 million to $64 million. Based on this, we're providing an indicative dividend range of between $30 million and $40 million per annum or $0.08 to $0.11 per share. This leaves us with some $15 million to $20 million available to pay down debt and invest in growing the earnings base. Our third and final strategic priority focuses on positioning our business to make the most of the growth opportunities before us. The first part of this is how we support the transition to lower carbon fuels. Very intentionally, one of the first steps that we took as -- after the relaunch of our company as Channel Infrastructure was to issue our very first sustainability report, setting out our road map and our targets to contribute to decarbonization. The second part is to grow and diversify our earnings, and this will be a focus for Peter's section this afternoon. So I'll leave it for him to speak to. But I just wanted to highlight 2 key themes upfront. Firstly, that we see opportunity to deliver significantly more value from the site and assets that we own at Marsden Point. And those coming on the site visit tomorrow will have a firsthand opportunity to see that. And we see opportunity beyond Marsden Point to leverage the business model and capabilities that we have across other fuel infrastructure assets. As you'll hear from Peter, we see the growth opportunities for our business across short-, medium- and long-term horizons. Before I hand over to Peter, I want to talk to the role we are playing to support the decarbonization of the fuel supply chain. We published our first sustainability report earlier this year, which was aligned to TCFD reporting standards more than 1 year ahead of mandatory reporting commencing in New Zealand. Some of the key messages we shared in that report were that keeping fuel and energy affordable and available to everyone is a key part of this transition being sustainable. That to achieve this, existing infrastructure has a key role to play. And while we don't have all of the answers for how we make future fuels, like drop in biofuels and hydrogen affordable, we have set ourselves clear targets to drive our actions as an infrastructure company as we work with others to make the transition achievable and sustainable for all. Our first target starts with the significant change we have undertaken at Marsden Point. It recognizes that the way we respond to climate change is about more than just bringing down emissions. For this reason, we set ourselves the target of having at least 90% of employees impacted by the refinery closure to find new roles, will be retrained within 6 months of leaving our business. I'm really proud to report our progress on this target so far with over 70% of our staff who have left the business so far already having found their next opportunity. We have set ourselves the ambitious target of achieving net-zero Scope 1 and 2 emissions by 2030. Our transition from refinery to import terminal operations has already delivered significant reduction in carbon emissions for New Zealand. Scope 1 and 2 direct emissions reduced by around 1 million tonnes per annum or a bit over 1% of New Zealand's greenhouse gas emissions. At today's carbon price of around $70 a tonne, that's worth $70 million to the country each and every year. And we've committed to using our infrastructure to support the decarbonization of the wider transport sector and facilitate customer Scope 3 emissions reduction by 2030. You can see the significant reduction in our Scope 1 and 2 emissions footprint on this next slide. But we know that even with these changes, we continue to operate in a carbon-intensive supply chain. And so we're also focused on how we can use our infrastructure and capabilities to support efforts to decarbonize the transport supply chain. Peter will talk to specific opportunities shortly. But before that, I wanted to highlight the range of fuel products we support today and the range of fuel products that are likely to exist in 15 years' time. While petrol and diesel demand will peak in the future and start to decline, it will continue to be needed for many years to come. And as new fuels enter the mix, they will come with new and different infrastructure requirements. So we see great opportunity to grow and diversify our business, assets and earnings base as we use our infrastructure to support both emissions reduction and steel security as New Zealand's fuel and energy needs evolve. Now let me hand over to Peter who will run through fuel demand and growth, after which we'll provide an opportunity for questions.

Thank you, Naomi, and welcome to you all. I'm Peter van Cingel. I'm the Business Development Manager for Channel Infrastructure. Today, I want to talk about 2 things. First of all, about the future fuels demand through our assets, followed by a discussion on the growth opportunities for our business. Before I talk about future demand, I just want to emphasize that we own and operate a very efficient infrastructure to supply transport fuels to the Auckland and Northland markets. Part of the efficiency stems from our scale. We're the largest fuels import and storage facility in the country. And on top of that, we have very high throughputs. In fact, we have as much throughput as the 10 fuel terminals in the ports of Tauranga, Wellington and Lyttelton combined. To put it into context, it's equivalent to filling more than 2 cars per second, every second, every hour, every day. The bulk of the fuels that we handle go through our pipeline to Auckland. That made sufficient capacity in that service capacity in the pipeline to handle all projected future fuels demand. We're the only supply chain into Auckland Airport for all the jet fuel. And we supply Auckland and Northland markets, which represent about 40% of the country's transport fuels needs. On top of that, we're the only terminal in the country that can handle LR1 or long-range tankers. These are the larger type of tankers. They take about 40% more cargo than the medium range tankers of [indiscernible] ports. This represents enormous value for our customers in terms of improved freight economics. You'll see in the chart on the slides before, we've shared those with you previously. They show the product demand forecast for our infrastructure as prepared by Hale & Twomey, New Zealand's eminent energy consultancy, in 2021. That slide does not include any volumes of biofuels, which would be in addition to this. As you can see from the slide, Petrol and diesel are expected to peak and then decline starting this decade. But jet fuel will continue to grow for many, many years to come. I'm going through the outlook for this pure demand scenario in more detail over the following slides. But before I do that, I just want to focus on what the impacts have been of COVID and Level 4 lockdowns on Auckland transport fuels demand. The chart on the slide pack shows the pipeline utilization or throughput versus the 2018, 2019 average for the same respective months. You will notice that large dips in Auckland transport fuel demand during the Level 4 lockdowns, followed by rapid recovery shortly thereafter as we step down through Level 3, 2 and 1. Remembering, of course, that Level 4 lockdown represented enormous constraint to mobility with only essential services being allowed to operate. Looking at the charts, we see that diesel demand has been very strong throughout the period other than that Level 4 lockdowns. And petrol has also shown good recovery. If you look at petrol demand, though, the recovery in recent times hasn't been quite so strong, and we think that element of high fuel prices and also something we're still working from home are playing a part here. Now jet demand tells a different story with a huge step-down in demand in March 2020, when our Board is closed to international travel. There's been some recovery since then from increase in domestic travel and some air cargo, but the bulk of pre-COVID jet demand comes from international travel. We're starting to see a recovery now in jet demand, thanks to the borders opening up, and we're currently at about 50% of pre-COVID levels. Prior experience from [ SAS ] in the 9/11 event suggest there'll be mostly a rapid recovery from here. The historical growth for diesel has been strong and the outlook for diesel is also strong. There's been steady growth for diesel amount over the prior 10 years, driven by growing economic activity, but also a growing diesel vehicle fleet. And in fact, in the last 15 years, we've seen almost doubling of the diesel fleet in New Zealand, part of it due to the dieselization of the light passenger petrol fleet. When we look at future diesel demand, we can see in light vehicle, light diesel vehicles, and we're thinking here of utes, trades vans, SUVs, decarbonizing by going electric. But heavy transport is much more challenging, and this represents the bulk of diesel demand in New Zealand. If we think of buses, they can go electric. We're going to carry 2.5 tonnes of battery onboard, will be plugged into a charge for at least 4 hours a day. Now that can be challenging. If you got a fleet of 100 buses, you're going to pack them up at the same time, plug into a charger, all at the same time on location. And a battery for a heavy haul truck is about 7.5 tonnes of weight, and this comes straight off the payload. So initially biofuel. At a later stage, perhaps hydrogen. I'd like it to be the key to decarbonizing heavy transport. But hydrogen is still quite some way from being commercially viable with hydrogen fuel cell traction costs at 4x that of a diesel equivalent and also having higher operating costs. And because of that, we still think that this -- we'll continue to see strong growth in diesel for quite some time yet as economic activity, GDP continues to grow. Although we do, as you see in the previous slides, expect us to peak at some stage this decade. The outlook for petrol wasn't quite as strong. But remembering, of course, petrol only represents about 1/4 of our throughput. We've seen strong COVID impacts in the years 2020 and 2021, but we're expecting good recovery this year and next. If we think of the outlook for future petrol demand, we think that petrol demand were primarily influenced by the uptake of electric vehicles. Now whilst EVs are available today, they are not yet affordable for many consumers, and the rate of EV uptake remains an uncertainty. Turning now to jet fuel, which we saw earlier was heavily impacted by COVID and the closing of the borders to international travel. We see this as having a very strong future and this will underpin our future and long-term utilization of our assets. We think that by 2040, jet will represent about 70% of our product mix going throughout our infrastructure. When you consider more than 3/4 of all international flights departing New Zealand, leave from Auckland. You understand why Auckland Airport consumes 80% of the country's jet fuel needs. All of this come through our terminal. Now the key drivers for jet demand are the number of flights leaving Auckland and the destination. So clearly, having more flights means more jet consumption. But the flight destination is a critical factor in determining how much fuel is being loaded onto the plane. So we think for a second, the plane loading in Auckland to fly to Wellington, might load about 3,000 liters of jet fuel. A plane next to it flying to L.A. will be loading 120,000 liters of fuel. That means 1 flight to L.A. is worth about 40 flights to Wellington in terms of jet fuel consumption. Now historical jet demand has been fairly static over the years prior to 2015 because the increased demands on air travel have been offset by improving fuel economy on the aircraft. That all changed in 2016 with a huge step-up in jet consumption. And that was driven by increased air travel, more passengers, but also it was compounded by the fact of the whole range of new long-haul and ultra-long-haul destinations, new routes. Whilst the 25% increase in international passenger numbers going through Auckland Airport in the 5 years of 2019. At that same time, there's an almost 40% increase in jet fuel demand. And that was all due to the flurry of new long-haul flights down to new destinations like all the Chinese cities, to Doha, the A380 to Dubai and other long-haul destinations. Now our forecast for jet recovery post COVID has taken several years. And it may well be that recoveries faster than this, especially when we reflect on what's happened previously with [ SAS ] and 9/11. This pervasive jet demand recovery will be influenced by a few factors, which will include the ability for the airlines to rebuild capability, the global economic environment and the appetite for people to travel. We think that the high oil prices and therefore, the higher cost of travel, will lead the airlines to focus on the premium seats and premium routes, which are less price-elastic to demand. These routes will underpin a more rapid uptake of jet fuel consumption. Now we're already seeing New Zealand announce flights to long-haul destinations like New York, Chicago and Houston. And they're reflying now to Hong Kong, Narita, Seoul Shanghai, Taipei and Singapore. Over the longer-term, we expect the growth in middle classes in India and China to underpin growing jet demand for some time to come, as New Zealand remains a desirable tourist destination. In the longer-term, we expect that some jet fuel demand will shift towards sustainable aviation fuels, or SAF. Now while SAF hasn't been included in terms of factoring those volumes into outlooks, our infrastructure can handle those kind of fuels as a second-generation biofuels, which leads me to my next slides, looking at biofuels. So like I said, though, the previous outlook for those volumes do not include biofuel volumes. But nonetheless, our customers on the 1st of April next year have to meet the new Biofuels Sales Obligations, and they'll do that by adding increasing amounts of biofuel to the land transport fuels that they sell. Alternatively, they're going to pay a penalty. Now the policy for domestic biofuel production and for aviation fuels are yet to be developed. In the near-term, we expect the obligation for the emission reductions in land transport fuels will be met by imports because domestic production of biofuels is very limited. Even then, we think that the timeframe to stand up new supply chains for biofuels, which may well require new infrastructure, is very tight. So we may well be on track for a default penalty regime with those costs ultimately being passed on to the consumer. We think our customers will start with the lowest cost first-generation biofuels first, likely starting with ethanol and then biodiesel. But first-generation biofuels are only a short-term fix because of the low blending limits and the life cycle reductions for this first-generation biofuels is variable, depending on where they come from and how they're produced. Some of these reductions are up to 30% versus fossil fuels, whilst others may be 90% greater than the life cycle emissions of fossil fuels. No limitation for this first-generation biofuels, that they can go through our pipeline to Auckland. That means the Auckland volumes must be tracked to Auckland with an emissions footprint 10x higher than if the fuel is being carried through our pipeline. So as the mandated emission reduction obligations rise with time, our customers need to shift towards second-generation biofuels or renewable fuels. These second-generation biofuels can achieve greater emission reductions because it's going to be blended at much higher volume -- much higher blend ratios or even fully substitute fossil fuels. They can also be distributed by existing infrastructure, including our pipeline to Auckland. Now currently, there's very limited global supply of second-generation biofuels, and they're significantly more expensive. So it'd be interesting to see how the biofuel supply chain develops in New Zealand. We are certainly well placed to play a key part in that. Now about the growth opportunities for our business. When we think about the growth opportunities for our business, we're excited by 2 key trends playing out right now in this country. First, there's a lot of change taking place in our industry in the commercial arrangements. And secondly, this country is on an energy transition journey. And this means that the fuels power mobility in the future will likely to be different to what we're seeing today. Now this is exciting for us, but it will create huge opportunities. So I'll talk about these 2 key trends over the next few slides. Let me first begin the first trend, the significant changes underway in New Zealand transport fuels industry. We see a growing industry trend towards open access for fuels infrastructure in New Zealand. And when we look back at the 2019 government fuels retail pricing study, 1 of the outcomes there was terminal gate pricing, which provided access for any wholesaler to any tank in the country. We've also seen it in mobile's application, the Commerce Commission for the jet infrastructure in Auckland and also the subsequent submissions being made by industry stakeholders. This year, we've seen the sale of Z Energy to Ampol, with Z transformed from being a New Zealand-focused business to one where it's part of a much larger business, Australasia-centric focus and core competencies in refining and trading as well. And then return to all the legacy agreements for the product distribution and national stock coordination in the country, which are disappearing currently and being replaced by new commercial arrangements. Now those all stem from the Marsden Point refinery for all the 4 oil companies operating the country at a time had exclusive access to our refining capacity. This resulted in a joint venture shipping operation to take product from our refinery to the coast of port in New Zealand. And the national inventory system, where stocks were being coordinated across the whole country. Now the refinery is no longer in production, these legacy arrangements are disappearing and are being replaced by new commercial arrangements. Other changes in the industry include the proposal by the government for increased domestic stockholding requirements and also the biofuel mandate. Now arguably, in aggregate, these represent the most significant changes our industry has seen since deregulation in 1980s. And this is good for us because these will represent opportunities for our business. We have the available capacity to grow our footprint on our site. As Naomi mentioned, our current contracts with our customers are structured to incentivize utilization. They also provide for open access for newcomers to use our assets post the COVID impacted period from 2025. This industry changes also create an opportunity for potential infrastructure acquisitions or consolidation. So on the previous slide, I talked about the first trend playing out, the changes taking place in the industry. I'll now talk about the second key trend, which is energy transition taking place as the industry decarbonizes. Currently the key transport fuels are petrol, diesel and jet. The options for fuels in the future would likely expand to include things like ethanol, biodiesel, sustainable aviation fuel, renewable electricity and hydrogen. These may well require new or additional infrastructure. When we think about how the energy transition, it is critical that energy remains affordable and available to all. This is key to make it sustainable. There will be choices that will need to be made between security supply, fuel affordability, the degree of emissions reductions being sold. So we note that the production of drop-in biofuels, sustainable aviation fuels and green hydrogen are not yet commercially feasible. And that's why we think that the use of existing infrastructure will be critical to make new fuels, both affordable and secure in the future. So when we look at the changes at play in the industry and in the energy mix, we look at what this could mean for our business. With the cessation of manufacturing at our site, we now have surplus land and surplus tank capacity that can be repurposed. This could be used to assist our customers to meet the domestic stock holding requirements being introduced by the government. This may require up to 50 million or 70 million liters of additional diesel stored capacity in the country. Over the near-term, opportunities may also account from assisting our customers with new infrastructure required to meet the biofuel obligations, but also if we're handling other products, whether that be bitumen or marine fuels. We also see potential for terminal consolidation and optimization resulting from these changes. We also see opportunity for us to leverage our capabilities across other terminal assets. We have a reputation for prudent asset management and making timely investments in infrastructure capacity, and we think this can offer value to our customers if we extended these traits across other terminal assets. So I've talked about our near-term opportunities by growing our terminal footprint. I now would like to talk about the midterm and longer-term opportunity for our business, and these include electricity, sustainable aviation fuels and green hydrogen. The electricity consumption of our terminal is much lower than what it was at the refinery, but it still represents about 1/3 of our operating costs. So therefore, we'll be pursuing opportunities to provide an earnings uplift through a reset of those costs. We'll pursue a reset of the transmission and distribution pricing electricity, which is currently based on our historical usage as a refinery. We may even consider going off the grid. And we'll seek to secure long-term electricity at cost, possibly by way of our Maranga Ra solar project. The Maranga Ra solar project was fully consented in 2019 for a 34-gigawatt hour per annum facility, and there may even be potential to upsize that because of improvements in panel technology since then. That project has the capacity to supply our terminal -- meet our terminal requirements and export to the grid as well. And you may be aware that adjacent to our site, Meridian proposed a solar firm and 100-megawatt battery project as well. Another growth opportunity for our business is sustainable aviation fuels or SAF. This seems a long way away from anywhere. And as I mentioned earlier, the greatest consumption of jet fuel come from long-haul international flights. These flights cannot be electrified, and so SAF will be critical to decarbonize long-haul aviation. But SAF is not yet readily available because there are a couple of key challenges to overcome for economically feasible SAF production. The first is to identify and source renewable feedstock of sufficient volume that doesn't compete with food production. And second is the cost of the feedstock and the high cost of the technology to convert that feedstock into aviation fuels. There's a process being run currently by Air New Zealand and MBIE, looking for industry proposals to set up a domestic production facility in New Zealand. Given the attributes of our site with our deepwater port, our consented in industrial land and a pipeline to Auckland, Marsden Point is the logical location for imports in the near-term and for advanced processing in the longer-term. Now the longer-term opportunity for us is green hydrogen, which is a fantastic fuel in the sense that it's got a high energy density, fast refuel times and 0 tailpipe emissions. It does, however, have a couple of challenges relating to commercial feasibility. This stem from their cost of production and recognize that only about 30% of the energy being put into the process is available as an energy output after conversion losses that are taken into account. There's also the current high cost of renewable electricity even whilst recognizing offsetting value from storage -- electricity storage and abatement that the process enables. And then there's a safe and efficient transport of hydrogen to overcome as well. We have the perfect location to support future hydrogen imports or production with our deepwater port with import and export capacity, proximity to significant future renewable production in Northland and also the proposal to establish a Northland Renewal Energy Zone. And of course, our proximity to Auckland's -- New Zealand's largest market, Auckland. We, therefore, see green hydrogen as part of a longer-term solution that requires some of these challenges to be overcome. We're currently working with Fortescue Future Industries to understand what it would take to make industrial-scale green hydrogen production feasible at Marsden Point. So just to summarize the growth opportunities I've been talking about. There are a number of changes taking place in the industry relating to change in commercial arrangements, government directors and the country's decarbonizing ambitions. These provide a range of near-term, midterm and longer-term opportunities for us to leverage our capabilities and our strategic asset advantages to deliver more value for our customers and for our shareholders. As Naomi covered earlier, we will take -- I beg your pardon -- we'll take a disciplined approach to any new growth opportunities in line with the cap allocation framework that's been talked about. I'll now hand it back to Naomi to take questions from the floor. Thank you.

Thanks, Peter. That was a great run-through of the future opportunities ahead of us. So as I mentioned upfront, we're going to have 2 Q&A sessions this afternoon. And so I encourage your questions on the terminal business sort of today here [indiscernible] side, and the financial side to hold those for after Jack and Jarek speak in the second part of this afternoon. And that we try and focus this first Q&A session really on the future, on the industry, on the growth opportunities ahead of us as a business. So I'll, with that, open up to the floor for questions.

What's the biofuel? I understand that [indiscernible]. So if you buy ethanol on-site storage, do you [indiscernible] to create new stores for ethanol?

So the question was around biofuels, the ability to put them down the pipeline and also CapEx potentially on site to add additional biofuel storage. So this is where the distinction between first-generation and second-generation biofuels comes in. And the key difference is in really simple terms, the level of processing. So with first-generation fuels like ethanol-based fuels, we can store them on site. So they could be tracked from our site into the northern part of New Zealand. And we have unutilized tank capacity on-site available to do that. What we can't do is put them in the pipeline down to Auckland primarily because they would contaminate the jet fuel, which is the fuel that goes down that pipeline that we have to really maintain spec to the highest standard for obvious reasons. But with second-generation fuels, because they are effectively dropping fuel, so you can substitute them. They are suitable for going in the existing infrastructure and in the existing pipeline. And so there's not that same need for as much additional infrastructure as there is with first generation.

[indiscernible]?

So the question was around sustainable aviation fuel and whether that can go down the pipeline. So all sustainable aviation fuel is second-generation fuels. There is no first-generation fuels that are suitable for aviation use because of the higher standards that requires. And so all of that is able to go through the existing infrastructure.

So Naomi, could you just talk about some of the contractual terms you'd be looking for to support development of emerging fuels, hydrogen sort of things [indiscernible]?

Yes, absolutely. So the question was around with some of the growth opportunities and future fuels, what might be the contractual terms we'd look to. I'd pass to Peter to comment on this as well. Just to upfront side, the starting position is really looking for those above WACC returns and our level of revenue certainty to support the level of investment that's needing to be made. But Peter, do you want to add to that one?

Yes. Look, I would just mention that we've come an environment as being a fuels manufacturer and our revenues were very volatile, very exposed to the oil markets, to the exchange rates. And we're now consciously, we've changed. We stopped being a manufacturer, and we're now an infrastructure fuels provider with predictable and ratable returns. And so it's really important for us in any contract going forward that we protect that position. We also recognize that we are not and don't intend to become specialists in green hydrogen production or SAF production or anything else, and we'll certainly be partnering with others. So it's an opportunity for us to leverage the assets and capabilities of others whilst achieving our own objectives at the same time.

[indiscernible]?

Yes. So the question was around the electricity OpEx and the opportunity to reduce that. So as we've talked about, electricity is roughly 1/3 of our OpEx costs as a terminal. And there's really 2 halves to that, part transmission distribution in effect, fixed -- largely fixed costs and the other part, supply base for the electricity usage. So on the transmission and distribution side, we have ongoing discussions underway with Transpower and with Northpower, which are follow-on from the recent transmission pricing methodology changes, really aimed at resetting those costs to be competitive for a much lower supply base. And it's fair to say they're ongoing, how the system works, the cost has got to go somewhere. And that's why it's important for us to also have some alternatives, and that's why we're not constraining ourselves to the grid. We're also looking at how the off-grid options might look like [indiscernible]. On the generation side, on the supply side, we know that today in New Zealand, generation costs are sitting -- sorry, the market costs, spot prices are sitting very significantly above our cost of supply for -- certainly for renewable electricity generation. And so what we're looking at there is really how whether by developing Maranga Ra ourselves or doing that in partnership with others, we can lock in a long-term electricity supply source at a cost plus pricing level, which really gives us a much more competitive price than what we could secure from the market structure as it is performing today in New Zealand. So there's really those 2 parts that we want to go after. How much can we get off our electricity supply base? I don't know. But I think there's some significant opportunity there relative to where we are today.

[indiscernible]

So the question was, globally, are we seeing things that might bring some of the future fuels [indiscernible]? Are you thinking there of global agreements that would bring new obligations into New Zealand or just steps being taken in other markets?

[indiscernible]

Yes. Look, I think, I'll ask Peter for his view as well. If anything, I'd see New Zealand is significantly lagging in its current regulatory incentives in place. If you look around the world, Europe, America, other places already have incentives for local biofuels manufacture. And that's just recognizing that there's a bit of a race going on because there's a limited amount of biofuel feedstock. And so countries are trying to accelerate development of their own industries to secure their own supply chains. New Zealand is a little bit doing it in an interesting order in the sense it's bringing in the biofuels mandate before it actually develops a domestic manufacturing policy. But hopefully, we can get there. There is some good feedstock in New Zealand in terms of the food sector. But currently, we would see other countries are providing significantly more incentive. And so it makes more sense for us to follow in effect rather than try and lead in a jurisdiction that just doesn't have the same incentives available for the supply of those fuels. Peter, would you add anything to that?

Yes. The experience overseas has been that without regulatory support, whether it be the 3 subsidies or whether it be through this regulation that they should have domestic production, these things just too risky or not even commercially feasible to invest in. So the market can solve it by itself. I think [indiscernible] the world is decarbonizing everywhere and yet the production capability isn't really keeping up. And so there's like to be quite an issue around pricing, and that will be a challenge for the whole industry. What will be interest to see is whether New Zealand remains dependent on those imports and having to source the world in its gas market for those commodities or whether we will see some intervention in New Zealand. If there is domestic production here, there needs to be competitive with imports. So that will still be a challenge with the cost of energy in New Zealand, and that's one of the key focus area for us and an imperative to overcome is to have affordable and reliable renewable energy in New Zealand.

Just you talked about the very long-range [indiscernible]. Did you expect that to be the norm going forward [indiscernible]?

So the -- because those vessels are significantly larger than this 1% historically in a medium-range business going to the ports, the economic incentive is enormous for our customers to be pursuing those. And with the storage capacity we have at Marsden point, they're able to unload those cargoes. It does mean that the options for securing those vessels and the locations where they can load them maybe slightly narrow than what they used to today. And certainly, if those vessels come through our terminal, they wanted the flexibility to then send it to another port because they pretty can't handle them. So there are some limitations. And therefore, I suspect they won't all become long-range. But a large proportion, I'd be surprised if that didn't become long-range vessels.

I think it's fair, Peter, to say that it's a big part of the scale advantage that Marsden Point has that it can both receive and fully discharge the LR vessels, which other ports in New Zealand can't do. And as Peter was talking to in his presentation, up to now before the refinery closure, there were no imports allowed into Marsden Point. And those who wanted to import into the North, really had to go to Mt. Maunganui to do that. And so that's really the industry structure that's coming to an end with the end of the refinery, the end of exclusivity, the end of coastal shipping. And we think there's probably quite a bit of optimization across the whole of the fuel sector, not just our 3 customers today, to get the most efficient path to market happening for the fuel into the north of New Zealand.

[indiscernible]

Providing a sense of scale. So we can talk about it, we can show you pictures, but it's pretty hard to share that with you. And therefore, I'm very excited by some of you guys coming to start tomorrow, which will be good to get a center scale. But also, I'll just reemphasize our throughput through our terminal will be the same as the next 10 terminals in New Zealand in those 3 ports of Wellington, Mt. Maunganui and Lyttelton. So it's significant.

No, I mean just the slide on capacity. So what [indiscernible]?

So the level of capacity we're quoting there -- I'm sorry, there's a question on what capacity assumptions and throughput assumptions we've got underpinning the utilization numbers in the pack. On the storage side, the capacities in effect independent of throughput in the sense that you can choose how much allege you have in your terminal, which then just drives how bigger ships and how big a discharge is and the frequency to which you run. So the 35% is based on the shared terminal capacity of 180 million liters, plus the additional 100 million liters of private storage that we have contracted. And that 280 million liters of capacity is utilizing that proportion of the storage capacity that we still have available from our previous operations as a refinery.

[indiscernible]?

Yes, sure. So -- and I'll hand to Peter on this one as well. I think the first thing just to upfront say is, obviously, the critical thing with hydrogen is really low-cost renewable electricity. And if you look globally, New Zealand doesn't have the lowest cost of that and the north of New Zealand certainly doesn't have that. But what we have at Marsden Point is proximity to demand. And so that's really where we're focused on looking at how our location could support hydrogen as it comes into the transport fuel mix in the future and gets used in the north of New Zealand. Peter, do you want to add to that?

Yes. I didn't suggest, if you take a perspective, if you're a Fortescue Future Industries or you are similar intending to be a large industrial manufacturer of green hydrogen, where in the country would you have access to a deepwater port, import or export, where do you have access to the largest demand center in New Zealand, an industrial consented land. But because the footprint for the facilities are significant. They are large industrial sites. So by the very nature of the strategic advantage of our site, we're a natural fit. As Naomi points out, one of the key challenges is the -- currently the high cost of renewable electricity, and that will be one of the key things that are that Fortescue would be focused on. And we were seeing a lot of announcements through the media already around proposals for large-scale renewable production in Northland.

So I think a key to getting hydrogen to work is that scale piece. While there's a lot and very well publicized hydrogen pilot projects around New Zealand, they are very significantly subsidized on both the capital and the OpEx side. So to get hydrogen economic, you've really got to find a way to do it at scale. And in turn, that proximity that we have to market, as well as all those site attributes that we have at Marsden Point, we see as being sort of the key proposition for hydrogen at Marsden Point.

[indiscernible]

So a good question from [ Aaron ] was just around adding to sort of the Scope 1 and 2 emissions reduction that we've done, leaving us with predominantly Scope 3 emissions in our profile and whether we set a specific target for that. Step 1 is really getting to a point where those Scope 3 emissions are being measured, and we are dependent on our customers for that. So that first step is really to work with those companies and they themselves have that challenge of measuring those Scope 3 emissions to get a clear picture of that. Some of that will come with the biofuels mandate as people look more closely at what is the Scope 3 emissions footprint of their existing supply. But look, I think as we prove up some of these opportunities, that's really what is going to allow realistic targets to be set. So we know Air New Zealand set their 10% target by 2030 for sustainable aviation fuel as a proportion of their jet supply, that's fantastic because we can support that with our existing infrastructure. The government is obviously setting that those targets through their biofuels sales mandate coming in from next year, which is intended to grow over time. And we know that really we have to get on to second-generation biofuels. That's the only way to material emissions reduction through biofuels. And so that's really our focus with government, with our customer base is how do we support that and have those long-term infrastructure plans in place because that's key to getting at low cost. So yes, our work in progress, but definitely part of that third target that we've set ourselves in our sustainability report. I can't believe you've waited this long, [ Andrew ] go.

[indiscernible]?

Yes. Look, the comment I'd make, [ Andrew ], is because it's hard to distinguish between them. But the thing I think is most exciting is you've got them across all the time horizons. So the terminal growth opportunities, which we see everything from consolidation of the infrastructure at Mt. Maunganui to bring more fuel through our facilities, what might come through open access, what can come through domestic stockholding, what can come through other products, they are all near-term real incremental opportunities for us. And so in terms of here and now, we certainly feel those ones are. I think in the medium-term, electricity is very exciting. And while we're focused on the terminal's electricity requirements now, it doesn't need to stop there if you look at what's happening in Northland, that there's that real opportunity to partner and deliver even more value out of the land we have as well as out of the supply demand we bring through the longer-term fuels, which we know, need to come into the fuel mix. We just don't yet have all the solutions. So I think while we show you that demand profile that has petrol and diesel declining, what we're really looking forward to is in the future being able to show you that demand profile that has these new fuels coming in and replacing that. And that will come as the technology and innovation and New Zealand plan for these evolves and develops, we'll get more and more certain around when and how that's going to come about. Okay. We might wrap up the first of our Q&A sessions there then.

Good afternoon. I'm Jack Stewart, General Manager of Operations at Channel. I've been with the business for 20 years in a variety of roles, traversing all aspects of channels operations and most recently led the conversion to import terminal as Conversion Project Director. This afternoon, I'd like to take you through our current business and give you an update on how our conversion project is tracking. And for those of you traveling up to site tomorrow, I'm really looking forward to showing you around our terminal facilities. I'd like to start with providing you an update on our first quarter of terminal operations and help you get a sense of the significant scale of our terminal facilities that Peter spoke of. After the safe shutdown of the refinery, we took our first shipment of refined fuel on the 1st of April and have received a total of 19 import shipments during the quarter. Each of these shipments can be up to 40 million to 50 million liters. That's up to 20 Olympic swimming pools of fuel on each vessel. Overall, in its first quarter of operation, the terminal supplied well over 0.5 billion liters to the Auckland and Northern markets. In that time, we've also seen an increase in jet fuel demand, increasing by 70% over the previous quarter and now sitting at around 50% of pre-COVID demand. On the other hand, petrol and diesel throughputs have remained steady. Now to put the significance of these figures into perspective, in those 3 months, we handled enough petrol to fill your car over 5 million times. We transported enough jet fuel to fill 5000, 737 airliners and enough diesel to refuel over 1 million trucks. And despite these numbers, our assets have plenty of capacity to accommodate higher demand for fuel. Even with that increased demand for jet fuel, our pipeline utilization set at only 68% in the quarter. Naomi earlier spoke of our strategic priorities, including to leverage our existing capabilities as a safe and reliable operator. And this is something that we are tremendously proud of. A huge amount of my focus this year has been to ensure the safe shutdown of the refinery and I was very pleased to achieve the significant milestone as scheduled in March. This complex task involved over a year of planning and was critically important to ensuring a safe and smooth transition for the business and our people. And with this now behind us, we have substantially reduced the operational risk and complexity in the business. Despite this significant transition and the disruption of COVID-19, I was very pleased that we have been able to maintain an overall better safety performance than the prior refinery operation with the only reflection in our performance being 2 very minor injuries this year. This performance has been supported by our peer-to-peer and leadership safety engagements and continued emphasis on the quality of our safety critical controls, and the good performance is a reflection of our team's commitment to these principles. Getting everyone home safely every day remains central to all that we do. We do still operate a high hazard facility and to demonstrate our ability to operate safely. We developed a comprehensive safety case, which was accepted by the regulator in May. The new case reflects additional safety measures applied for import operations while retaining the same comprehensive underlying safety systems. In the environmental context, a key asset for the business is our 35-year resource consent granted last year to continue to operate a heavy industrial site. The consent covers both our past operations as well as our import terminal and provides for future plans we may have for Marsden Point. A critical part of the consent process has been engaging with local Iwi. We have worked hard to build strong relationships with Iwi and now have relationship agreements in place and a framework for regular Iwi, which enables us to understand each other's perspectives and work through issues. We're often asked by stakeholders about the state of our land and our plans for remediation of the site. We do have a very good understanding of the condition of our site. And importantly, unlike other industrial facilities, we do not have stockpiles of waste or byproducts that we need to remove. What we do have is some legacy oil contamination of our groundwater. And that is from a historic refinery operation. And while the refinery has been shut down, we have not stopped the groundwater recovery network, which is continuously remediating our groundwater. We've made good progress over the last decade, and we expect to see a continued reduction in this legacy contamination over time. Through our consent and decommissioning studies, we've undertaken extensive independent assessments of the effects of past site contamination and these demonstrate that there is minimal impact beyond the site boundary, including to our marine area, and we work closely with regional authorities and our Iwi partners on monitoring our surrounding environment -- to illustrate the magnitude of change in our operation, I'd like to step you through what has changed at Marsden Point through the recent transition. Starting with our past operation. This map shows our site with an overlay of how it was used when we operated as a refinery. At Marsden Point, we own a total of 177 hectares of land, while the refinery side itself was 100 hectares. And as you can see, we used the whole site within the process of operating the refinery. The refining process demanded more area for storage of crude and feedstocks, intermediate components and the refinery plant itself along with the necessary utilities and services. In the refinery, we had a total of over 650 million liters of crude and residue storage and 400 million liters of product and intermediate component storage on site. Today, as the import terminal, we are only using around 30% of the available capacity, as you can see by the much smaller footprint, and the terminal operation is also much simpler than that of a refinery. In the same way, we offloaded imported crude from our ship set our 2 deepwater jetties we now bring in refined product imported by our customers. Product can be imported through either of the 2 jetties and is tested to ensure quality before the import commences. Additives are dosed as it comes ashore and the product is stored in the tank before being tested again before being released for delivery through the pipeline or to the adjacent truck loading facility. Our independent petroleum laboratory business continues to have an important part to play for Channel and our customers and testing product before it leaves Marsden Point. IPL is New Zealand's largest and most capable petroleum laboratory and provides testing services to a wide range of customers across New Zealand through its laboratory at Marsden Point and in Taranaki. IPL has also established extensive biofuels testing capabilities, positioning the business well to support the coming transition to renewable fuels. Looking now to the future for our site. I'm really excited about the potential of Marsden Point with the significant growth opportunities that Peter outlined earlier, our site has the potential to support all of this activity and more. Alongside the import terminal assets, we have the capacity to provide additional storage over and above the already contracted private storage and beyond this, the site is well positioned to host hydrogen and biofuels manufacturing and storage facilities. And of course, on our adjacent land, we have the already designed and consented Solar farm, Maranga Ra ready for potential development. I'd now like to turn to the conversion project and provide you with an update on this significant piece of work. And before I go into the detail of what has been happening on site, I wanted to take you through how the project was tracking to time line and budget. In terms of our time line, we've now completed the refinery shutdown and are well underway with decommissioning. The main decommissioning works will continue until 2023, and the terminal upgrade projects are expected to take another 3 to 4 years to complete. Our workforce transition is now largely complete, and I'll talk about how we're supporting our people through this change shortly. The conversion project remains on plan and to budget. As we communicated in quarter 4 last year, our budget for conversion is $120 million with an additional $45 million to $50 million for private storage. And at the end of June, we have spent a total of $70 million. In the detail, you'll see there's been a shift in spend from this year to 2023 compared to our last forecast. This shift has developed as we have matured our project schedules and estimates and reflects our better understanding of the terminal upgrade construction program. From the outset, we have been very mindful of the challenging environment and have proactively managed our supply risks through early ordering of long lead items and active engagement of our already site experienced contractors. This means that significant portions of our forward work plan are now known and committed with contracts in place and rates established. And with this in mind, we've looked at our current inflationary pressures and remain comfortable with how we are tracking and the contingency we are holding to absorb the current market disruption. Looking now at the decommissioning works. We have now completed an intensive 24/7 phase of decommissioning. This was the highest risk phase of the work, and I'm really pleased that we've completed this work safely, a result which is a credit to the commitment of the team at Marsden Point and the tremendous amount of planning and preparation they have put into this work. This phase included steaming and chemical decontamination of the refining plant, catalyst removal and flushing and draining of plant and pipe work. All of this work is important to ensure that the refinery assets are safely prepared for the next stage, which includes the preservation of some equipment for potential repurposing or resale. Noting that the decommissioning process for the refinery as a whole is permanent, and there is no plan to provide for a restart of refining operations in the future. Over the next year, we will be completing works required to leave the main refinery process plant in a safe state for up to 10 years, allowing time to work through repurposing and resale options before any demolition works commence. Work will continue on the remainder of the site for another 12 months to decommission tankage facilities. Alongside the decommissioning project, we're in the midst of executing a range of projects to facilitate the conversion to import terminal. In preparation for commencement of terminal operation on the 1st of April, a number of key modifications were required to the refinery facilities, including the addition of safeguards for import operations, additive dosing facilities, piping reconfigurations and modifications to utilities to remove dependencies on the refinery systems. Construction work commenced in 2021, and all of this work has been completed to schedule and budget, quite an achievement in the current environment, allowing for a smooth transition to terminal operations. Future works include the commissioning of additional jet fuel storage for import terminal to cater for increasing demand, improvements to tanker unloading rates and substantial upgrades to firefighting and secondary containment systems. The schedule for the secondary containment systems is the longest and that extends out to 2026. Projects to provide additional private storage to customers are also well underway with the first private storage tanks already in service and the remainder to be commissioned over the next year. The largest of the works involve conversion of crude tanks to jet fuel service, which due to the strict product quality requirements for jet fuel service involves substantial modifications to the tank, including installing new roofs. Alongside all this physical work that has been taken place on site, we have also been working hard on our business systems to get them up and running to support the new terminal operation. I've already mentioned the safety case and why that has been a priority. We've also been working through contract updates, and that includes termination of contracts for byproducts that the refinery used to produce. With the reset of the business, we've also taken the opportunity to update our business management and information systems to better align with our terminal operations and are implementing a strategic asset management plan to ensure the repurposed assets continue to serve the needs of the business. A big milestone for us has been our significant workforce transition through May and June as many of us farewelled our long-serving friends and colleagues. It has been really important to me that we do everything we can to support our people through this change, whether they are leaving the business or continuing on to new roles at Channel. For those staying on, we have modernized our employment terms and conditions, aligning to the new terminal operations and organization. And of those that left the business, over 70% had their next opportunity secured before they left us. We have a target of at least 90% of those who leave being supported into new roles, training or other opportunities within 6 months of their departure. To back up this commitment, the business has provided extensive support to transitioning staff, including financial planning workshops, vocational training, increased redundancy provisions and facilitating connections with new employers, including through a job expo to which 28 prospective employers attended I'd now like to hand you over to Jarek, who will take you through the financial position and outlook.

Thank you, Jack, and welcome, everyone. And today, it's good to see so many familiar faces in the room. Before we go into the financial position and outlook, let's just remind ourselves of the key features of our long-term contracts that we have now in place that will really underpin our financial performance going forward. There are key 3 features of those contracts. And hopefully, none of this will be new information to you. Firstly, those are long-term contracts and all are with BP, Mobile and Z, now owned by Ampol and who, as you know, are strong credit counterparts. Secondly, take-or-pay commitments that we have guaranteed under those contracts of between $90 million to $100 million per annum over the initial 6 years period of time will underpin our earnings but also will provide protection against any market disruptions like we have seen from COVID. And high level of fixed fees and that we have guaranteed under the contracts and also incentivize utilization of our infrastructure assets by our customers. And in fact, from 2025, we will be able to bring in new customers on board to use any available capacity at this point in time. So those 2 points are really important and relevant to the industry opportunities that Peter talks to a bit earlier. And finally, all fees under those contracts, including fixed fees, take-or-pay commitments and private storage fees are subject to indexation. Now talking a bit more about the indexation mechanism. Our contracts have an agreed level of fees for this financial year 2022. In 2023, all fees will be indexed based on a 9-month inflation, in effect, capturing the benefit of operation as an import terminal for the period from 1 April to 31 December this year. Beyond that, from 2024 onwards, all fees will be indexed based on 12 monthly inflation. Now the indexation is based on the producer price index or the PPI for all industries outputs, which as you would be well aware, measures prices of goods and services from private sector enterprises. And that includes electricity supply, sector, construction, transport or professional and financial services, just to name a few. While we are in an inflationary environment, we don't know exactly what the PPI will be this year that will apply to 2023 fees. However, if for illustrational purposes, we use the actual 9-month inflation to the end of March this year, which happens to be 6%, That will translate to an additional revenue in 2023 of $6.5 million. We will obviously always aim at managing increases in our cost base below inflation. But even if we assume under this scenario that the costs increased at the same pace of 6%, the bottom line impact will be additional free cash flow of $4 million in 2023, which is an equivalent of $0.01 per share of additional dividends. So what that really highlights is the value upside from our contracts that is particularly visible in this high inflation environment. Now at the time of recent bond issue, we provided some indicative financial metrics for FY 2023, which is the first full year of operation as an import terminal. The revenue range there largely remains unchanged and really reflects the potential ranges of the PPI indexation outcomes, but also the phasing of private storage tanks that will be brought into service through 2022 and to meet next year. I will talk to the operating costs in a moment, but I just would like to note here a significant 65% revenue to EBITDA conversion, given relatively small and cost base for import terminal. Capital expenditure range is relatively wide. And that's because it really depends on tank maintenance schedules. We are, at the moment, working on our strategic asset management plan, which will provide us with a detailed long-term view of the import terminal asset maintenance requirements. Now turning to OpEx. Majority of operating costs is fixed and really covered with the fixed fee that we have guaranteed under the terminal contracts. Key variable cost there is electricity, which presents 1/3 of total OpEx. And as Peter referred to earlier, that's an obvious opportunity for our business to be pursued in the midterm. We are working currently on resetting our transmission and distribution costs to align with the much lower load for import terminal compared to a refinery. But over and above, we see opportunities to lock in more affordable supply of electricity and definitely at a lower cost than what we're seeing currently in the market and through exploring options such as solar farm project, Maranga Ra. In terms of other operating costs, as I said earlier, those are largely fixed, and that provides us with great operating leverage from increased volumes in the future and really in the current environment, we are focused on managing cost base to ensure that any inflationary impact on our costs are below the PPI. Now moving on to what is a significant value to our business tax losses. So you would be well aware of the benefit of those tax losses, particularly from refining assets write-offs. Those are significant and by now largely crystallized with the transition occurring on 1 April. Having now delivered the transition even if there was a change in shareholding leading to the shareholder continuity test not being matched, we expect to be able to meet the business continuity test, which provides us with confidence in terms of being able to utilize those losses in the future. And based on our current earnings profile, we are expecting to not pay income tax for 9 years, noting that any growth opportunities that are ahead of us that Peter talked to can only accelerate the pace at which those losses will be utilized. Also, following the acquisition of Z Energy by Ampol, we have reassessed the risks associated with imputation credits. The balance of imputation credits that we currently carry forward is an equivalent of nearly $55 million of fully imputed dividends or $0.14 per share. And we are very mindful that the best way to pass this benefit to our shareholders is through the resumption of dividends. Now turning to the balance sheet and specifically funding. Our current net debt position is approximately $215 million. As we deliver the conversion project and the private storage related tank works, we are expecting our debt to increase and, in fact, peak in 2023. And -- we continue to maintain a significant borrowings headroom of $160 million as of today, within the total facilities available of $375 million. No significant near-term maturities, significant liquidity buffer above the expected peak debt and positive cash flows from day 1 of import terminal operations altogether provide us with certainty in terms of our funding position, which is so important in the periods of volatile markets that we are currently in. We have also strong protection against rising interest rates. As of today, virtually all debt that is drawn down is fixed. -- fixed either through fixed interest instruments such as retail bonds that I will talk to in a moment or fixed through interest rate swaps that we have currently in place. Currently, we maintain $75 million hedges with further $40 million coming live from the beginning of 2023, the timing of which aligns with our debt profile. For me, personally, stepping into the CFO role as of 1 April, it is important that we ensure that our financing strategy is executed well to deliver desired outcomes being diversification of funding, competitive funding cost and increased tenure of our funds. The first step towards this goal was issuing our inaugural corporate bonds. -- which we now have successfully completed. And this increased our funding sources through debt capital markets to nearly half of our total available facilities. We have seen a strong support from retail investors through the process, which gives us confidence ahead of the bank refinancing process, that is the second step of our financing strategy this year. Our current bank funding is relatively expensive as we pay high facility fees and have significant undrawn lines. We are expecting, however, the effective interest rate to reduce over time as lines are drawn down. Through the bank refinancing process, though, we are expecting to reset our cost of debt to more closely align with the infrastructure nature of Channels business. and will contribute -- that will contribute to our overall reduction in funding costs, but also cost of capital for our business going forward. And last but not least, our existing covenants provide us with flexibility in the balance sheet to both fund growth opportunities, but also to fund dividends, which positions us well for the growth opportunities that Peter talked about earlier. And now something that probably most of you have been waiting for and today, dividend update. So with the equity raise and to fund private storage, our first opportunity last year, our peak leverage has significantly reduced. And now we are expecting to be able to recommence the payment of dividends after the end of this year provided that debt is at below 4.5x EBITDA. The first opportunity for dividend payments will be in March 2023 following our FY '22 financial results. And this is really in line with what we talked to you all at the time of shareholder vote last year when we announced our intention to resume dividends within 1 to 2 years post conversion. And as Naomi discussed earlier, the capital allocation framework that we have announced today implies a dividend range of between $30 million to $40 million for FY 2023, which is an equivalent of $ 0.08 to $ 0.11 per share. And this capital allocation framework also provides cash flow to fund growth as well as for deleveraging to the target 3x to 4x EBITDA and net debt level, which is consistent with investment-grade rated infrastructure business. And lastly, we are confirming today our guidance for FY 2022, which was provided to you back in February with our FY '21 results. The key change there is to expected average borrowings for this year, which we now expect to track lower due to the shift of some spend related to conversion projects from 2022 into 2023 that Jack covered earlier. I will now pass back to Naomi for our second Q&A session.

Thanks, Jarek. So again, I'll open up to the floor for questions. And at this point, really on anything because this is the second of our Q&A session for the afternoon. But I know there's been a lot of more specific details shared on that last session with Jack's run through on how the terminal operations are going so far, that detailed update on the conversion project as well as what Jarek stepped through on the contracts, the balance sheet, the dividend position and the tax position. So open up to the floor for questions Chris?

Assuming that facilities are drawn, what's the weighted average cost of debts including costs.

Jarek, do you want to talk to that one? So the question was what's the -- assuming facilities are drawn, what's the weighted average cost of debt, including swaps. And I guess, Chris, that's kind of current facilities post the latest retail bond issue.

So without giving a number, there's probably a few relevant reference points there, Chris, to consider. And obviously, the coupon we are paying on the existing retail bonds and subordinated debt is publicly available information. And so that's really readily available. In terms of our overall funding costs, we do provide guidance of what the financing costs will look like for FY '22 and 2023 as well as we provide an average debt position for this year. So those 3 pieces of information can be quickly put together to come up with what the effective funding cost is as of today and going to be in the near term?

I was hoping you were going to short-circuit.

And I think, Chris, obviously, on the retail and the sub bond it's fixed and known. We do expect to continue to carry a level of liquidity, particularly probably higher than we would long term through the period of the conversion project, just as we go through that period of peak debt, we can then pull that back and reduce those undrawn line fees. And I think we'd be with those hedges we've got in place, be hoping to get that back in line or below where we've just placed the retail bond.

I just got a couple of questions on balance between dividends and growth. You talked about wanting to produce both. what does it actually mean?

So the question was the balance between dividends and growth and producing both I guess, showing the intention in being quite explicit on the capital allocation framework is that we're clear on where the cash flow gets directed and intentionally, dividends is the top line. So the first allocation, if you like, out of the free cash flow before growth, before conversion costs is to those dividends. From a growth perspective, there's obviously a portion of funding left over, which, for some of the smaller opportunities. So in that sort of terminal expansion space that Peter talked to would expect those opportunities to probably be funded within that. There's obviously a size of step-out growth, particularly when you get into new assets or completely new plays where you wouldn't have sufficient cash flow to fund and obviously, you need to look at equity in those cases. But -- but I think really what we're trying to say is the intention is to prioritize dividends while also having capital available for growth and for deleveraging and run between those train tracks that we're sort of setting for the next period of time.

My final question is, [indiscernible] capital range that you used in shot-listing projects?

Yes. So if you have a look at our cost of capital that was used in the independent valuation of the terminal assets at the end of last year. I think it was a range 6.7% average with a range of 6.2%.

7.1%.

7.1%. Yes. So that's obviously the calculated version. We've seen some shift in certainly cost of debt since that time. But to give you a feel for what we'd look at as threshold sort of hurdle rates, it's in that 10% order, obviously, dependent on the project, the level of risk that we see. And that's very much tied back then to those contract terms as to making sure we're -- it's not just the cost of capital, but making sure we've got confidence in making an above cost of capital return.

In the revenue guidance of $116 million to $120 million. Can you just kind of give more color on the phasing of the private storage, the $9 million? What's the low point and the high point, what is the range of the private storage [indiscernible].

So I'll just repeat the question before I hand it to Jarek. So in terms of that FY '23 revenue guidance range, just talking to the -- what's driving that range into including what we're assuming around private storage.

Yes. So the following all tanks from private storage tanks being brought into use and becoming fully operational. And per annum, we are expecting the revenue there to be in the order of $9 million pre-inflation, pre-indexation. We -- the private storage tank works are currently underway. And those tanks, as I said earlier, will be brought into service successively through to mid-2023. So those tanks will be sort of half year -- for the half year for the second half of 2023, fully operational. And some of them may be already operational prior to reaching that mid-2023 date. So if you sort of assume a meaningful portion of that $9 million and apply inflation to it, that will be probably close enough estimate of what was included in that $116 million to $120 million range for next year.

So the 2 key drivers in that range are really in terms of driving the reason for the range are really PPI because we don't -- until later this year, know exactly where that might end up and then also just the rate at which that private storage comes online. The first lot of that is already in operation. We already have some tanks that didn't require work that are in operation, but the balance is progressively coming online through back end of this year and into next year, particularly those large crude tank conversions are into next year. And so you're at full run rate, we'd expect by the middle of next year, but we're just -- because you don't get paid until the capacity is online, we're just giving ourselves a little bit of range in those estimates to take account of that.

Yes. So the 19 ships that came in just for security of supply concern, they all came in from 1 location or was it a portfolio of different locations where they're coming from?

So the question was in terms of the 19 ships we've had into Marsden Point in Q2, what's the range of locations they're coming from. So the 3 fuel companies all source from different locations and different refineries. And that's a combination of their own refineries as well as traded product and procured product, so coming from a range of refineries around Asia. Just to talk further, I guess, to that sort of security of supply question, we haven't to date seen any disruption in fuel supply chains with the global supply chain issues that have occurred. We have certainly seen an increase in shipping costs though, so that is driving part of the higher fuel costs, that increase in shipping costs. But we have so far seen pretty reliable discharges and deliveries to our site. And I guess the key thing from a security of supply perspective that I think is still being worked through is really that government policy around domestic stockholding because we have now drawn down and used all of the crude that we held at Marsden Point as a refinery that was equivalent to about 17 days worth of fuel cover for the country. And so finalizing that new policy to have an adequate degree of domestic fuel is an important step with the government to close out and something we're very keen to support and able to support in terms of the available storage capacity that we have at Marsden Point. David, did you have a question?

[indiscernible] the ramp-up of the storage and the rest of it is query and to be correct [indiscernible].

David, I think we increased guidance, we provided an indication of [ weary ] fees of around $6.5 million per annum, and the other would be sort of the balance to the $10 million.

[indiscernible] story at a number [indiscernible].

So the question was around domestic storage to support the domestic stockholding policy and what's the quantum of that and potential need for funding. So very dependent on the size of storage required. We have estimated it could require an additional 50 million to 70 million liters of diesel storage because diesel has a higher requirement under the policy that's been proposed. And I guess the best reference point is probably the private storage we have done so far. So the 100 million liters of storage that we've contracted through to February, had an upfront cost of $45 million to $50 million. It is a bit dependent on the size of tank you're using and the specifics of the upgrade works that are required for that, but also to remember that, that spend is spread. So it's not in a single year. It has a very similar profile to the terminal projects spend that Jack spoke to where things like the fire system upgrades, the bundling upgrades are sort of spread over a number of years. So potentially able to accommodate that within the capital allocation framework, but we have that alternative if equity were needed, yes.

[indiscernible]

So the question was whether we're assuming any cost savings on our electricity and our OpEx guidance. One of the key reasons for the range in the OpEx guidance is electricity. And just how far we're going to get particularly by next year in addressing the transmission and distribution pricing, as well as where we'll be able to contract the supply side because we're obviously seeing very high electricity prices in the market at the moment in New Zealand. So we've given ourselves some room for that. I'd say, electricity is one of the key reasons for that range, not all of it, but one of the key drivers of that range. So a key focus for us in the second half of this year is looking at how we can get those costs down to that lower end.

[indiscernible] would that reduce that number that we're looking at for 2024 [indiscernible].

Yes, so I'd view it as there's savings available over and above the bottom end of that range. I think that's probably the question you're asking. That very much comes down to how -- where can you drive those transmission and distribution costs and what long-term, all-in cost can you lock in for Maranga Ra plus something firm supply base for the business. But yes, we do see good operating leverage opportunity there in the near term.

Just with regard to [indiscernible] technology basis where we are today [indiscernible].

So the question was just with the progression of technology, does Maranga Ra provide us with the opportunity to be a net exporter to the grid? It certainly does. We don't today, Aaron, to be honest, have a good feel for that because the project was really wholly engineered 3 years ago now. So what we will do is as we progress that be going back and looking at how we can, in effect, scale that up with the progress that's been made in technology. And that should give us a feel for how much bigger that might be. The other really important thing, I think, as well is -- and you'll see this if you come up to site tomorrow, just the proximity to those other developments in the area. So the Meridian Ruakaka project is literally across the road from us. And so that's a very big battery that's being put in there by Meridian -- and I think one of the things we'll be looking at, not just Meridian because others are looking at storage in the region. But how -- what's the optimal way of developing sort of our solar opportunity in combination with other things that are happening in the region to minimize, lock in that lowest cost price for us, but also maximize what's available from supply to the grid as well.

Perhaps just on the residual conversion projects to take back to the biggest projects accrued [indiscernible] biggest residual risk in your back system and the risks around the residual conversion component?

Jack, do you want to talk to that one?

Sure, yes. So I guess the 3 big parts to it, I guess, is the tank conversion, as you mentioned and the firefighting and secondary containment upgrades. So the firefighting upgrades are over the next couple of years, and the bonding is the longest 3 to 4 years so to go on those. And yes, relatively equal spend between those 3.

Nothing that you can see a wide range of outcomes [indiscernible].

Yes, so all 3 of those pieces are well advanced in terms of design and engineering and contracting works at the moment. And so a high degree of certainty around the work that we need to do. And a good portion of that committed too.

I think what we've found, Shane, in terms of a lot of the work that's already been done, both on terminal upgrades as well as on the decommissioning side is just the importance of early ordering of long leads. You can't assume things are available or that you can get product and equipment into the country quickly. And so that's really been a key focus for our project team to make sure we're very well planned and very good long way ahead of when we're needing things and provided we can do that. We've managed to manage those longer supply chains that we're seeing into New Zealand at the moment.

Could you have been saving for inflation from $200 million to $220 million decommissioning shutdown losses that kind of transition from being kind of 2021 cost or 2022. I guess you still quoting that $200 million to $220 million, they do not have the same [indiscernible].

So I think the question is $200 million to $220 million a real or a nominal number in effect. So it's a hard dollars number. It's not a subject to inflation. We obviously need to manage inflation. And part of what we were looking to do in those charts that we included in the pack is to give you a feel for within each of the buckets how much is either spent or committed, i.e., we've kind of locked in the cost subject to just execution risk versus how much is still yet to be contracted. And so you would see across the 3 buckets. Workforce transition is largely known and fixed now because we know the redundancy entitlements, we know the timing of that. And so we don't see significant risk there. Terminal projects is probably the one that's got the longest lead time and so it has a smaller proportion that's been contracted so far. But as Jack mentioned, we're stepping through that every week. And so in another quarter, I'd expect that to be another significant way along in terms of that committed portion. And decom is a long way through now. We've either -- we have completed the most intensive period of decom, and then a lot of the work for the balance of this year is in effect committed. So yes, we've definitely derisked, I think, more than half of that spend. The other thing that we have talked about previously is we have contingency. And so what we're constantly looking at is how we manage that contingency. It's fair to say there's been unders as well as overs as we move through contracting and execution of the conversion project works, and we continue to be comfortable with the level of contingency, we're holding.

[indiscernible]

So the question was on the chart we have on, I think Page 17, if you want to bring it up. So you probably noticed that they are still our original 2021 forecast. And when we have thought about the right timing for redoing them, we've really viewed that as being when we're coming out of COVID. Because until that happens, we're kind of just guessing. And so we didn't see a lot of value in redoing it, sort of end of last year or start of this. But right now, we are looking particularly on the jet side at doing more work on that in the second half of this year with others who have an interest in that supply chain. And look, I think we think there's certainly a potential for a much faster acceleration in that jet recovery. But it's really today capacity constrained in terms of how quickly the airlines can bring capacity back on. So we'll be doing some more work on that, I think, in the second half of this year to bring back an updated view on it.

Another thing worth mentioning also is that whilst there's been new development since the forecast was done, like, as you mentioned, the feedback scheme of things, those kind of initiatives weren't unforeseen. So in terms of having 2 million outlook, they didn't just assume the same old, same old. They could see the growing political pressure towards decarbonized New Zealand. And although they weren't aware of the specific initiatives that might evolve, there are certain expectations in the premises, but there would be initiatives which would lead to faster uptake of more fuel-efficient vehicles, including hybrids, electric vehicles.

Yes, so I think to Peter's point, that's all in the forecast already. And I don't think the things that have played out sort of in the last year are inconsistent with anything that was assumed upfront. Sorry, David.

[indiscernible]

So the question was on the private storage contracts with the $9 million real revenue and whether that assumed full capacity utilization. The structure of those contracts is different to the main terminal services agreement, in that they are structured as fixed rental agreements. And so whether they're used at all or fully, that doesn't drive a difference in the revenue for the private storage. Obviously, more throughput through the facility increases our base terminal services agreement revenues with the variable portion of those fee structures. And a big part of those private storage agreements was really about creating the ullage for our customers to be able to bring in the larger ships. And so if you think about -- if new customers come through the facilities, if new customers are looking for those freight synergies, they equally need the ullage in the facility just to maximize those shipping savings. So look, we think there's probably more private storage ahead but we'll let the private -- the domestic stockholding policy sort of play out and just this and the private storage coming online and the shipping arrangements to sort of reach a more steady state to form a more specific view on that. Any other final questions before pastor James to talk to governance? Okay, I will hand over to our new Chairman, James Miller.

Yes, hello, all. My name is James Miller. Most of you know me, but for those who don't, just call that out. And it's really great to see a good turnout for the first Investor Day Channel infrastructure and the first event I've attended as Chair of the Board. I'm honored to be taking over from Simon Allen, who stood down last week. Now I'm well aware I stand between you and drinks. And I'm talking about corporate governance, which is known to be deadly boring. But there's been some landmark changes that have happened last year, and I do think it's important that I run through some of those for you. Yes, good. I ask for this picture to be put up because it tells us 1,000 words for us. So on the left there, you've got the refinery and the skills matrix that was needed for that is a strong capability and process safety management, the energy industry and oil product supply chain and obviously, super complexity. Going forward, the new skills matrix focus around infrastructure, midstream fuel industry and the future fields, and we've repositioned the Board to take account of that. Now reflecting this at the AGM, we said goodbye to John Burke from ExxonMobil who brought first-class refining expertise to the Board and had expertise on the transition from Altona's experience. Following the corporate -- the completion of the corporate governance review, Simon Allen stepped down from the Board as Chair. I'd like to acknowledge his leadership through the intensive transition process. At the AGM, we elected 2 new directors, which I'll talk to shortly. We continue to maintain a strong independent Board with 5 of the 7 directors being independent directors, and we've ceased the historical practice of inviting nominations from the 3 customer shareholders of candidates for appointment to the Board. The corporate governance review included changes to the Board subcommittee structure and support of the Board oversight and financial and nonfinancial risks with climate change and ESG matters enhancing the board charter. Let's go into the Board here. So I'm capable, we've got a strong capable Board with the right skill set to support management to drive the strategy forward, providing the infrastructure to support the New Zealand's decarbonization and lowering our cost of capital. Each of the directors have critical skills we need. We have a number of experts sitting around the Board table, so just go through them, call out some key points for you guys. Paul, he brings exceptional operational expertise and his health and safety and asset management knowledge is second to none. Accordingly, he is in the health and safety environment and operational committee. Now Vanessa over here, she'll be -- she is the best chair in the country and combine her with [indiscernible] over there, it makes a formidable team for us, and as such, Vanessa's chairing our Peoples Committee. Next up is Lindis. Most of you guys will know Lindis, obviously, deeply knowledgeable on financial matters and the oil industry in general. And now just to mention Lucy. When we appointed Lucy, we're looking from BP to get expertise in midstream and future fields expert and she brings that in spades and outstanding talent. And 2 new directors, we brought on Andy Holmes. He was CEO of Global Fuels, U.K. from BP, He's retired from there. That's $30 billion of revenue, 55 countries under its management. He's an expert in Avgas and the hydrogen and fuel development for the future. And then, of course, Anna Molloy. So finally, we can put her chemical engineering degree to use. She's probably well known to most people in this room, but she's obviously got financial analytics and listed company governance. And as such, she will take over from me as Chair of the Audit and Risk Committee. Now just going to what we're focusing on, it's important you know this. You don't really need a PhD to work out what we're focusing on, but it's important that we're clear on it. So first of all, it's completion of the conversion program on time and on budget, continued safe, reliable and cost-efficient operations and maintenance. Improve -- continue to improve our ESG performance and of course, continue to work to lower our cost of capital. And then ultimately, the returning of dividend and invest in growth to drive long-term shareholder value. So thank you for your time today, and I look forward to catching up with you guys over drinks and after Naomi does a quick wrap up.

Thanks, James. So we're in the home stretch. I'll just wrap up with a quick summary of some of the key points from the day. And going to that investment proposition we have at Channel infrastructure and taking you back there again, so Peter has taken you through really the critical nature of our infrastructure being the only supply route for jet fuel to the Auckland Airport and the outlook for fuel demand. Near term, we see jet fuel growing strongly as international travel returns. And over the long term, we see aviation continuing to grow and underpinning our long-term asset utilization. Jarek talked to our customer contracts and the protection those contracts provide with their fixed fee structures, incentivizing utilization and providing us with protection from market disruptions, as well as the PPI indexation of all fees, which both protects us but also provides value upside in an inflationary environment. Jack's update confirmed a successful first quarter of terminal operations. and that the terminal conversion project works continue to track to budget. Jarek talked to our FY '23 guidance and refinancing plans, which, together with our capital allocation framework, provides a clear pathway for the return to dividend payments in 2023 with the first opportunity to pay in March '23. And we've also today reconfirmed our FY '22 guidance as well. I outlined the significant contribution the company has already made to decarbonization in New Zealand. and our plans to continue to contribute and work together with our customers to decarbonize the supply chain. And Peter talked you through the key areas of focus for us in terms of growth with a range of realistic short-, medium- and long-term opportunities ahead of us. With the disciplined approach to investments set out in our capital allocation framework, we are focused on delivering increased shareholder value through the opportunities that are open to us at Marsden Point and beyond. With our new business model, we have an exciting and sustainable future. We've got a clear direction, a strong and capable team to deliver on this strategy and ultimately drive shareholder value. So that concludes today's presentation. Thank you all for attending and for your questions and interest today. I hope we've been able to answer all the questions you have, but please do raise them over drinks if you -- if we haven't had them answered. And we are really looking forward to seeing a number of you up at Marsden Point tomorrow. It would also be great to have your feedback from today's presentation and on our Investor Relations program generally. So Anna and Jarek will be in touch to hear from you on that. So if you are now able to join us for drinks out in the lobby area. We look forward to speaking with you then. Thank you.