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

Thank you for standing by, and welcome to the Channel Infrastructure Full Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Ms. Naomi James, CEO. Please go ahead.

Good morning, and welcome, everyone, to our conference call for our 2022 full year financial results, which includes our first 9 months operating as an import terminal with a new and improved business model. Today, I will run through how we have delivered on all of our 2022 priorities and the key operational highlights for the year. Then I'll hand over to Jarek, our CFO, to run through the financial results. I'll then finish with an update on our growth opportunities, at which point, I will introduce Rob Buchanan, our incoming CEO, who will outline 10 priorities for the current financial year. You would have seen the investor presentation released to NZX this morning. So if you have that in front of you, we will refer to page numbers as we move through the presentation. Page 2 contains the usual disclaimer information. On now to Page 3. I think it's fair to say that Channel Infrastructure has had an incredible year, with the transformation of the business, the financial results we have delivered and the sustainable business model we now have in place. As you are all well aware, in what was a significant milestone, we safely completed the shutdown of the refinery operations and transitioned to an input terminal on 1 April last year. The conversion project, which includes the decommissioning of the refinery, transitioning our workforce and commissioning of contracted private storage, continued to track to plan and to budget, and is now significantly derisked. Our refinancing program was successfully completed, with the cost of funding reset in line with an infrastructure company. And our new business model has delivered the first profit we have seen in over 3 years. And this, along with strong cash flow, has meant a return to dividends to shareholders. I will start with the highlights and the operating update on Page 5. At the start of each year, we talk to our priorities. This page lays out our priorities for '22, as I shared them with you at this time last year. I'll go into more detail in the following pages, but I'm pleased to say we have delivered against all of our '22 priorities. I'm really proud of the hard work and dedication of the entire team that has enabled us to successfully deliver on all of these significant commitments. If you could turn to Page 6, which outlines our progress across our key safety, environmental and people metrics. We have always had a firm focus on our health and safety and protecting our environment. And this was even more important through the period of the refinery closure and intensive decommissioning that we undertook in the first half of 2022. We have much to be proud of here, including that there were no significant safety incidents throughout 2022, a huge achievement and testament to the strong safety culture we have at Marsden Point. In 2022, we saw a big step down in our staff numbers, and I'm proud to report that we have surpassed our target, with 97% of those impacted last year supported into new roles, training, or opportunities within 6 months. Finally, through our transition, we have reduced our environmental impact and made a step change in our carbon emissions. We have seen a 98% reduction in Scope 1 and 2 emissions, we have recycled over 1,250 tonnes of decommissioning waste materials, and there has been a 30% reduction in legacy groundwater contamination in the past 6 years. Before we get into the other aspects of 2022, I wanted to briefly touch on the recent cyclone on Page 7. Our assets came through Cyclone Gabrielle really well, with limited impacts to our site and the pipeline. This reflects the work done over many years and the efforts of the Marsden Point team, who prepared well ahead and managed continuous operations throughout. A flyover along the full length of the pipeline late last week confirmed very limited impact from the cyclone to land stability around the pipeline, and we continue to manage on a proactive basis reinforcement of land areas along the pipeline road where there is a risk of movement. We are still assessing scheduled impacts on this year's private storage following the cyclone and the unusually wet weather we have experienced since November. And our thoughts do go out to all of those who are working to clean up from this devastating event and for the first responders who have been working tirelessly to help all of those in need. Today, as well as releasing our annual report, we have also released our second sustainability report, which I do encourage you to read. Included in this report and on Slide 8 are an update on our progress to achieving the ambitious targets we set ourselves last year, which were to support our workforce to a just transition; achieve net zero Scope 1 and 2 emissions this decade; and to support our customers to decarbonize the fuel supply chain. We are making excellent progress against all of these, and our sustainability report provides more details on this. Turning to Page 9. We have continued to see strong recovery in fuel demand from the impact of COVID travel restrictions. Jet fuel demand has recovered to 70% of pre-COVID levels prior to the most recent weather events in Auckland, which represents a doubling of demand since borders reopened at the end of February 2022. Diesel demand remains strong, as it has regardless of the impacts of COVID, and we have seen petrol recovering from COVID impacts through the year as people have returned to the office. The volume chart on Page 10 shows the strong recovery in fuel demand over the last 12 months as COVID restrictions have eased. Q4 throughput has been the highest level since before COVID and is up 11% on Q3 2022, reflecting growth in all fuel types. Since becoming an import terminal, we have discharged some 56 ships, and we have invested in a significant increase in fuel storage through the transition to terminal operations, which we complete -- which, when complete, will have 86% more fuel storage capacity at Marsden Point compared to running operations as a refinery. Please turn to Page 11. Importantly, our conversion project continues to track to budget as we have communicated in our quarterly updates. Conversion project spend was approximately $114 million to the end of December. Given the refinery decommissioning and workforce transition are now largely complete, and we have spent or committed 65% of conversion project costs, this project is now significantly derisked. Like others, we are continuing to see supply chain and inflation pressures and are managing them with limited drawdown to date on our project contingency. Looking at Page 12, this outlines the 3 key components of the conversion project, being: decommissioning the refinery; the workforce and business transitions; and projects to upgrade our terminal facilities; and what has been completed for each of these components and what is still to come. The pie graph shows how the budget of $200 million to $220 million is allocated and how much expense were committed to date. There is a lot of detail on this slide, which I'll leave to read. But in short, the decommissioning and workforce transition is largely complete, with the focus now on completing terminal upgrade projects and embedding our new terminal systems and processes. Moving to Slide 13 and our private storage growth. We have now commissioned over 1/2 of the contracted private storage, with the remainder of the tanks due to be commissioned around mid-2023, subject to the weather impacts I mentioned earlier. In the second half of 2022, we signed an additional terminal storage agreement worth $25 million of additional revenue over the next 5 years, with $4 million of this included in our 2023 guidance. Now I will hand over to Jarek to run through the financials.

Thanks, Naomi, and welcome, everyone, today. Turning to financial highlights on Page 15, I'm really pleased to report a strong set of financial results, reflecting operations under the new business model for the last 9 months. Our results today are those from the refinery operating in the first quarter and presented as discontinued operations, and the import terminal operating from 1 April to 31 December, presented as continuing operations. We have delivered a strong EBITDA and EBITDA margin and generated our first profit in 3 years. We have completed a comprehensive financing program, the benefits of which we have started seeing already. And last but not least, we have declared a fully imputed final dividend of $0.05 per share and a fully imputed special dividend of $0.02 per share. Let me turn to Page 16, which reflects continuing operations. Underpinned by strong take-or-pay commitments, the terminal delivered a strong EBITDA of $57.5 million, implying an attractive EBITDA margin of 65%. I'm pleased to say it successfully resets the cost of funding and maintains a significant portion of net debt fixed, which provided us with significant funding cost certainty in the period of increasing interest rates. This, together with lower ongoing depreciation following a review of terminal asset lives' completed in the first half, delivered a strong profit of $17 million from continuing operations. Please turn to Page 17. As you are aware, our earnings profile is now more stable. Our revenue is underpinned by our strong contract productions. 94% of 2022 revenue was underpinned by fixed or take-or-pay dues and almost 90% of revenue is subject to indexation from this year. The PPI announced in November last year effectively set our fees for 2023 with terminal fees uplift of $6.2 million year-on-year. Please turn to Page 18, where we take a closer look at operating costs, which have now been reset to terminal levels. 1/4 of operating costs comes from electricity, which we see as a key opportunity to reduce our cost base further, and Naomi will talk to this shortly. Like many businesses, we have been operating in an inflationary environment. Though we are seeing cost pressures in some areas, we have been able to manage this to well below PPI. Turning next to cash flows on Page 19. If you look at the waterfall, our net debt position increased to $257 million at the end of 2022 as expected. We continued to see strong cash flows from our operations which funded more than 3/4 of the conversion spend. In the first year of terminal operations, we have been focused on maintaining our terminal facilities as well as investing in additional tank storage and the capital spend at for stay-in business and growth CapEx is in line with our expectations. While financing costs were in line with our guidance in 2022, we have carried a higher level of client fees and a significant portion of our bank facilities remains undrawn. We are expecting this to drop as bank facilities are mostly drawn, which together with more competitive bank interest pricing, is expected to reduce the effective interest rate. We maintain a strong balance sheet with leverage at 3.4x as of December, within the targeted range of 3x to 4x. Moving to Page 20. I'm really proud too of the work that we have done resetting the cost of funding last year. We have established a strong presence in both bonds and bank markets, with significant funding capacity offered by the market. We continue to maintain significant standing headroom as we progress terminal upgrade works, and we are expecting our debt to peak in the next 12 to 18 months at $70 million to $90 million above current levels. We will continue to benefit from our hedges with 97% of debt fixed at the end of 2022 and with a significant portion of fixed in the following years, we have certainty of funding costs. And in 2023, we plan to review options for the $75 million subordinated notes, which are due for renewal in March 2024. Please join me on Page 21. In November, following the PPI announcement and additional storage contracted, we upgraded our 2023 financial guidance. And today, we confirm the guidance you know hasn't changed. I will now turn over to Naomi who will provide our strategic updates.

Thank you, Jarek. I'm not going to go through the next 2 pages, 23 and 24. I will leave you to read the detail. The purpose of these pages is really to outline against the strategic framework that we've previously shared with shareholders, our progress in 2022 and our key areas of focus for 2023. Turning now to what is new news today, which is the update to the Hale & Twomey long-term fuel demand outlook found on Page 25. Page 25 gives you the whole of New Zealand's picture. Late last year, with more clarity around the COVID-19 recovery and the latest industry and government policy developments in mind, we engaged industry experts, Hale & Twomey, to update their fuel demand outlook for us. This fuel demand outlook gives us more detailed bottom-up modeling and has been done before. Hale & Twomey has used DKMA passenger data supplied by Auckland Airport to give us a really clear sense of the future jet fuel demand as well as bottom-up forecasting across each consumption sector for diesel demand, and by each vehicle type for petrol demand, to give a more accurate picture of fuel demand and the fuel transition over time. Looking now on Page 26 and the part of most interest to Channel Infrastructure, which is throughput at our Marsden Point facilities. What we can see here is a much faster recovery for jet in the midterm and a much stronger outlook for diesel over the long term. This means that based on this latest view, terminal revenue would rise above take-or-pay levels in 2025. The other thing I'll draw your attention to is that over time, the proportion of renewable fuel throughput at our facility is expected to increase based on the gradual uptake and transition to sustainable aviation fuel and biodiesel. With the transition getting easy for drop-in fuels from an infrastructure position, these second-generation fuels are able to utilize existing facilities. In the interest of time, I'm not go talk to the detail of the additional analysis on diesel and petrol demand found on Page 27. I'll just point out that what we are seeing in simple terms is that petrol demand is peaking and then declining as expected as the vehicle fleet electrifies. Diesel demand is expected to stay stronger and transition much more gradually, particularly for agriculture, industry and heavy transport. Now turning to the most interesting part, which is the jet growth story on Page 28. Auckland International Airport, as announced yesterday, expects recovery in passenger numbers to pre-COVID levels by 2025. And this is aligned with Hale & Twomey's forecast for jet fuel demand recovery by 2026, with the lag reflecting fleet fuel efficiency improvements since pre-COVID. As we saw in the 5 years pre-COVID, jet fuel demand increased at a rate above passenger growth due to the increase in long and ultra-long-haul flights as well as premium travel. Hale & Twomey expect these trends to continue to drive growing jet fuel demand. Turning now to Page 29. Over the past 12 months, the Ukraine war and, even more recently, Cyclone Gabrielle, have reminded us of the importance of supply chain resilience. With the transition from importing crude oil into New Zealand to importing refined product, the key to resilience is the amount of products we have stored in country to provide a buffer against a range of disruption scenarios. Our focus as an infrastructure company is on having storage available to support this. There's a big increase in storage capacity occurring at Marsden Point through the transition from refinery to terminal with even more capacity due to come online later this year. At the same time, the government is working to implement minimum domestic stockholding levels to ensure the right level of resilience exists in the system. And with the recovery that we can see coming in jet fuel demand, we believe it's important now more than ever that the recommendations that came out of the inquiry into the 2017 pipeline disruption are addressed to ensure a resilient fuel supply chain. If we turn to Page 30, I think it's really important to note that the steps taken by the New Zealand government to improve fuel resilience in New Zealand represent a real opportunity for Marsden Point. With our unutilized tank capacity and connections to the largest fuel demand sources on New Zealand, we have a key opportunity to support the establishment of the 70 million liter diesel fuel reserve as well as any additional storage that might be required from the incoming minimum domestic stockholding policy. Turning to Page 32 -- 31 sorry. Last year, we released an RFI, which aims to bring down the cost of our electricity supply. This is a key execution priority for us this year given the size of our electricity cost base, and we see a significant opportunity to take cost out, with the step down in transmission costs, a key part of that. Finally, before I hand over to the new CEO, I'm very pleased today to be announcing to shareholders a preferred set of dividends by Channel Infrastructure, which are at the top end of our dividend guidance range of 70% of normalized free cash flow, comprising a fully imputed final dividend of $0.05 and a fully imputed special dividend of $0.02 per share. This is in effect a 9-month dividend, and the way we've tried to [ serve ] reflects the target of a 40-60 split between the interim and final. So that will give you a feel for how we see the forward dividend profile together with our indicative dividend range for next year of $0.09 to $0.11 based on the earnings guidance range we've shared and our dividend payout policy of 60% to 70% of normalized free cash flow. With the contracts we have and the extent of fixed revenue, and the indexation of revenue and hedging of debt protecting us against inflation, there should be a strong degree of confidence in how this business is consistently delivering dividends. I'll now hand over to our incoming CEO, Rob Buchanan, to say a few words of introduction.

Thanks, Naomi, and hi, everyone. It's great to have so many shareholders on the line with us today. I've been with the business since the end of January, and I'm really looking forward to stepping into the CEO role on the 6th of March. I've been incredibly impressed with the clear vision and the capable team at Channel Infrastructure. They continue to work hard to deliver on its plans for the future. As you can see from the 2022 results, the business is in great shape. And it's a real tribute to Naomi and the wider team at Channel Infrastructure that worked hard to transform the company during an extremely challenging period of time. If you could join me on Slide 34. As incoming Chief Executive, it will be my priority to continue delivering on the strategy set up for the company which is, of course, to grow shareholder value through continuing optimization of our business, while delivering on our aspiration to be a world-class import terminal. Our priority this year will be to ensure we deliver safe, reliable and cost-efficient terminal operations and maintenance, and the on-budget and on-time completing of remaining conversion project works. We're continuing to work hard with the government and our customers to ensure supply chain resilience, which is good for New Zealand, and we will be delivering on the near-term growth opportunities that we've talked about here today. And ultimately, we'll be working to deliver increasing returns to shareholders through dividends in an inflationary environment. I believe the opportunities for Channel Infrastructure deliver to its unique and highly strategic asset base as New Zealand navigates the energy transition are significant, and I'm really excited we're bringing our plans to operation over the coming years. I look forward to meeting many of you at our AGM, and now, I'll hand back to Naomi to wrap up.

Thanks, Rob. So to wrap up for 2022 on Page 35, after significant planning and preparation, we've safely shut down the refinery and commenced terminal operations and relaunched as Channel Infrastructure. The transition went smoothly, and we have had a successful 9 months of terminal operations in 2022. Importantly, our conversion project is now significantly derisked, and we have kept it to plan and to budget. Our cost of funding has been reset. In our first 9 months of terminal operations, we delivered our first profit in 3 years, and our strong cash flow has enabled our Board to declare a return to dividends for our shareholders. That concludes our formal presentation for today, and I'll now hand back to the operator for questions.

[Operator Instructions] Your first question comes from Andrew Harvey-Green with Forsyth Barr.

Just a couple of questions from me. First of all, just looking at that contingency, I guess that $30 million of spend move from 2022 to 2023. I guess, I mean, that seems really, really encouraging in terms of you've still got quite a bit of contingency there by the sounds of it. How far do you think you would get it through this process before you were able to give us some firm idea of whether that contingency is no longer needed or not?

Andrew, yes, look, I think that's going to be a question for the new CEO, so you can ask him that in due course. What we have done to date is met our contingencies are in, particularly while we're still in an environment where we're, to be honest, seeing weather impacts which we haven't really experienced before, and also we're in an inflationary environment. But as we get further through 2023 and the work program and particularly the general project upgrades that are underway right now, I think that question you're asking is definitely going to be the right question, and you can ask that of Rob the half year, I think.

Very good. Next question I just had was just looking at the OpEx base in the second half. And that came in a little bit higher than I guess what I was expecting. I just wanted to double-check. Is there anything your spend there when you had described this, I guess, carrying slightly higher extra costs in the second half following -- well, as you went through that conversion process, which will be coming out going forward? I realize you've got the guidance out there for FY '23. But just wanted to double-check whether there was anything in there that was, I guess, more than just business as usual?

Not really, Andrew. The first tanks are important in our operations since the time when we get into this new business really, and the OpEx there that you're seeing for the 9 months and second half is in line what we expected. Ultimately, look at FY '23 guidance for OpEx to get at what we think it will look like going forward for terminal.

Next question, just in terms of Hale & Twomey's forecasts and I guess the big change really is that long-term outlook and obviously that we've got more jet in the near term, but that long-term outlook seems a lot more positive than it was previously. I'd just be interested to know, I guess, in terms of -- since checking those particular forecasts with other channels, whether you've done anything along those lines or what Hale & Twomey had done to sort of get comfortable about that relatively significant increase at the back end here?

Yes. That's been something, Andrew, we've been quite conscious of in getting this updated outlook done, and so part of our process was to ask Hale & Twomey to do just that, so they have engaged across the aviation sector and with customers where the customers were open to a discussion on that. Because of the changing mix in fuel, so the supply chain, we think it's actually quite important that there is a common basis for infrastructure planning. And that's really led to us working quite closely with Auckland International Airport, in particular, recognizing the importance of jet demand to our business long term to be working on a common planning basis and set of assumptions. So that has absolutely been part of the process leading up to announce sort of the updated outlook today.

Great. And last question for me is just in terms of the potential asset sales. I think I saw you had to buy some platinum at the back end of the year, which I assume is that going to be sold this year? And also, I guess, the refinery, I think you've still got sitting on the books a bit under [ $7 million ] of value associated with that, that you sort of update in terms of the sale of that.

So firstly, on platinum, Andrew, we're expecting that sale to occur in the next probably 12 to 24 months until the value will be effectively monetized in that period of time. On your second part of the value of the units that sit in the balance sheet, just a reminder that it's the combination of scrap and sale value that we hold in them, and it's not really probably a best indication of what that could be maybe so far. We had some interest in refining units and are in discussions with a few parties of potential sales, but at this stage, probably it's too early to provide more details. As we firm up those discussions, we'll provide you an update.

Okay. And just one, I just would like to wish you, Naomi, all the best going forward. And you've had a fairly interesting 2 years or so here. And yes, so all the best with your move back to Australia and welcome, Rob.

Thanks, Andrew.

Thanks, Andrew.

Your next question comes from Cameron Parker with Craigs Investment Partners.

Congratulations on a great FY '22. Just two for me. In terms of the capacity end versus the throughput that's been presented from Hale & Twomey, you've got on, say, a slow substitution basis of up to 4 billion liters getting through the pipeline. Can you just remind me of what the capacity is for you to manage that sort of throughput?

Cam, yes. So what we've looked at from a capacity perspective is really those peak periods. You're looking at the annualized volumes when you're looking at that 4 million -- 4 billion, sorry, or so of throughput in a slow transition case being a high throughput case. And so what we would see in that case and test against is really those summer months for jet throughput. And the way that the pipeline operates today is that we supply our product that goes all the way down into the Waikato. We get paid slightly less for that. And so to the extent that more capacity is needed to meet Auckland's demand, in effect, there is lower-margin throughput which can offset and come by road from [indiscernible] which there is capacity to do. So we don't see any issue with our capacity from Marsden Point to the Wiri terminal in Auckland in any of the Hale & Twomey fuel demand outlook scenarios.

Okay. Great. Thanks. Thanks, Naomi. And also, just in regards to the pipeline. Could you just remind me of the, say, CapEx requirements going forward in terms of the useful life and if there's an extension and so forth or upgrades required going forward? And, Jarek, say, is there a step up in CapEx that might be required as the life of the asset kind of expires? Or are you able to give us a bit of color around that?

Sure. So Cam, you might remember the guidance we've given on CapEx over the life of contracts is $5 million to $12 million per annum. And that range takes into account both our Marsden Point terminal and pipeline at CapEx requirements. With the pipeline, there is some lumpiness in terms of -- from about every 10 years, you need to do a little bit more work on it, but it's within that range, so it's not any kind of sort of major re-lifing events that we would expect to see over the term of the Hale & Twomey forecasts to continue to those assets in use as they are today.

Great. Okay. And just the last one with me, just with regards to your imputation going forward. Could you just confirm what you think will be imputed in on those dividends?

So these dividends, Cam, that we've declared today are fully imputed. We carry -- before paying the dividends, we carry imputation credits being an equivalent of $0.14 in dividends. So paying $0.07 now in total effectively will utilize 1/2 of that imputation credit balance, with the other 1/2 effectively remaining for next years. Beyond that, obviously, we carry a significant value of tax losses in the balance sheet, $500 million, which will mean that the group pays no tax, income tax for a number of years, and that means that we will not be sort of increasing the imputation credit balance over time.

[Operator Instructions] Your next question comes from David Oxley with ACC.

Could you explain why the first half PAT showed the discontinued operations' EBITDA at $26.5 million, and that's become $24 million today?

So let me just go through some slides.

So David, I think the difference between the 2 is that through the discontinued ops line, you've got the conversion costs that, for accounting purposes, you weren't able to provision for at the end of FY '21. There's certain costs, things like some of the costs related to workforce transition, that we aren't able to transition -- that we aren't able to provide for. So you've still got those running through that discontinued ops line. And so obviously, there's not revenue in the second half. They were finally shut down, but there's still some conversion costs running through. The thing to note with all of the conversion costs, though, is that they are all going within that total conversion cost budget of $200 million to $220 million, which is a cash cost budget consisting of both CapEx as well as OpEx, and the OpEx proportion of that budget has mostly been provisioned for on the balance sheet, where that is permitted by the accounting rules. But there's a small amount where we're not able to do that, and that's what you see just running through that discontinued P&L line.

Your next question comes from David Birrell with Croxon Capital.

Great job as always. Just had a few questions around the biofuels mandate, the DSO and the government diesel reserve. So the biofuels, does that imply that by volume, there will need to be about 3.5% of diesel by volume coming from biofuels and about 5% of petrol volume coming from ethanol? And if that's right, how does that work in practice, and how does it affect the storage requirements?

David, so there has been an update on biofuels in New Zealand which we may not have got to Australia, but let me just start by updating you on that. That proposed mandate was 1 of the policy measures that the New Zealand government has decided not to proceed with ahead of this year's election. Of course, by the time that announcement was made, the Hale & Twomey forecast had already -- the work had already been done. So what the forecasts assume is that there is a mandate brought in at some point in time, and that gives us a feel for, assuming that does happen at some future date, what's the impact on throughput for our facilities. What you see if you look at the petrol demand chart is that there is a wedge of ethanol fuels coming into the petrol mix to meet a biofuels mandate and a wedge of biodiesel coming into the diesel fuel demand to meet it on the diesel side. The ethanol fuel can't go through our pipeline because it would contaminate the jet, so that's assumed not to be included, and we show those Marsden Point throughput volumes that don't include any of that volume. Our ethane mandate is not brought in, as is, I guess, the current state of play in terms of active policy. What you would see through our facilities, we would expect, is about a 5% increase in petrol volumes in the absence of a mandate, affecting those first-generation ethanol volumes. On the diesel side, it's a bit different because we would expect diesel biofuels to be renewable second-generation biofuels, which can be used as drop-in fuels. So they can utilize all of the existing infrastructure. There's no new requirements for those. And in effect, they just displace or substitute existing volumes, and so you don't really get a change in overall volumes from that substitution over time from bottle diesel to biodiesel. I'll just check. There's a little bit in that, but I'll just check if it makes sense.

Yes. No, that makes sense. And I'm really sort of thinking more about -- I'm assuming, New Zealand being New Zealand, that the mandate will eventually come in at some point. And what the storage volume requirements are then, particularly as you say, with regard to ethanol, you can't put it through the pipe. So would you imagine you'd be storing some of that and same with the biodiesel before it gets blended? Or do you think you'd get a blended form of diesel arriving at the terminal, and therefore, you wouldn't need to blend it?

Yes. Look, they're good questions. And the short answer is that, that will be up to our customers, the fuel companies, as to how they would choose to meet those mandates. First-generation fuels like ethanol will clearly need separate infrastructure, separate tanks. And you could do that at Marsden Point and truck it. That's absolutely an option. In terms of whether it's brought in pre-blended or blended in New Zealand, they're all part of those supply chain considerations, which are really one for our customers. So certainly, if and when any mandate comes back on the table, they're the sort of discussions that we'll be having to understand how we can support what's required from an infrastructure perspective.

Got you. And hoping I haven't missed anything on the DSO, but what additional storage volume do you think is going to be required over and above what's planned?

Look, we don't quite know that yet. And that really reflects that the government is still working through the detailed design of that policy. One of the things they're looking at is how they will measure days cover, and whether that's sort of an average over a period of time or an absolute minimum to ensure an absolute minimum buffer in the system, that's one of the things that's been worked through. Once that detailed, design work is done, I think it will be clearer for everyone to assess whether the capacity we've got today can accommodate that, or whether any additional capacity might be needed. I think the third part of your question, David, was on the diesel and clearly, that needs new capacity because that is capacity over and above what we have in service today for the fuel companies. And we've got plenty of capacity to do that at Marsden Point. We could do all of the 70 million liters. We could do a part of it. That's really part of the government's process to tender that reserved part, which is currently underway.

Yes. And the only other thing that I guess you would have better insight into than us perhaps is, I would imagine the government would want to split between North and South Island, and maybe between Northland and the rest of the North Island. Do you have any view as to their thinking on that at this point, or at least the state of play, thoughts to consider around that?

Yes. The question of regional diversification is certainly something that will get considered. As a practical aspect of this though is that diesel's not like wine; you have to turn it over. You have to do that about every 6 months, and so this is intended to be a permanent reserve. And so it needs to sit close to a market that can actually turn it over. And most of the diesel demand outside of the North is in relatively low throughput locations, making it very difficult to do that. So too early to say, but I would expect there quite possibly will be some smaller reserves elsewhere in the country, but the vast majority of the diesel reserved is very likely to sit on -- in the place where you've got the most throughput to allow that to be turned over.

Such a mystery as to where that would be.

We have a few tanks there. We have 400 million liters of unrealized fuel capacity, so we're ready, willing and able to support the government with that.

Great. Thanks, Naomi. I look forward to following your career from now on. And welcome, Rob.

Thank you.

Thanks, David.

Your next question comes from Nevill Gluyas with Jarden.

Right. I have 4 pencil sharpening questions really. And to kick it right off, if I run the ruler over the chart you've got for the CapEx profile, I come to a number that's sort of above the $200 million to $220 million range. I just want to check that's due to uncertainty around the timing of when the CapEx falls in the year, and the $200 million to $220 million is still a nominal value for that period.

We [ hoped ], Nevill, $220 million out of the total conversion project budget there, so it will be just probably that shading that it's a bit misleading when you look at the chart.

Yes. Great. So good.

The columns are not intended to add up to more we assure you.

Good. Never let an analyst loose with a rule. Okay. Next question then, just on the tax losses. I see in this latest report, you've got the $507 million booked, tax losses; at the half year, you had $467 million. I presume some of that is related to the way in which the terminal costs get treated by the tax department, which means, obviously, you've got further conversion outlay to come. Does that mean the $507 million could creep up further over the course of this and next year?

So just to be clear, the $560 million that we reported at half year was effectively truly actually due to the write-up of preparing assets for that services at that point in time. And what happened in the second half of the year, obviously, was a significant portion of the conversion costs were paid and the transition of the [indiscernible] expense, and that's really when those costs become perhaps deductible. So it's really the [ variation ] of the conversion costs accepted in the second half. There's still a fair amount of costs to be incurred that we carry on the balance sheet under provisions. So -- but equally, next year 2023 will be a year of full terminal operations with the full benefit of the cash ratio and profit. So that will offset the cost conversion cost I've alluded to [ we have to ] spend. So to answer your question, I wouldn't expect a significant increase of that number and probably that's where we land, $0.5 billion.

Perhaps another way to ask the question is sort of what kind of tax shield will the remaining internal CapEx have? Obviously, it's split between OpEx and CapEx, and I'm not sure how the tax authorities treat that. You'll have some idea how much tax shield should we think about for the next two years?

Are you asking maybe about sort of tax depreciation going forward, or...

Well, I'm not sure exactly how the mechanisms work, but clearly, there's some tax loss/gain or tax loss/benefit for you guys offsetting the outlays. And if you've got further outlays to come, it's whether or not there are further tax shield benefits coming from that.

Nevill, probably the one I'd refer you to on that is, if you have a look at the pie charts on the different component sales for the conversion project, you'll see the costs still to come are predominantly terminal upgrades, which are CapEx in nature. So you just get based on the normal depreciation rates, but for tax purposes, you get the benefit of that. And then the other parts still to come is predominantly remaining decommissioning costs, which has been provided for already in the balance sheet. So you're not getting additional protection, as Jarek's talked about the loss of [indiscernible] being recognized there.

Yes. Okay. Good. That's clear. Then just moving on to Slide 26 and the useful commentary there. You mentioned that sort of that circa 3.4 billion liters in 2025, you're looking at about breakeven versus take-or-pay. If I understand the contract timing correctly, 2025 is the year in which you've sort of got at one with the first quarter, is at the old take-or-pay, the current take-or-pay levels and fixed payments, and then you transition to the sort of $90 million take-or-pay. In that statement, the 3.4 billion liters you see, the breakeven, what is assumed there? Is it the starting number, the ending number, or sort of the 1 quarter, 3 quarter [indiscernible] the [indiscernible]?

So the 3.4 billion level is really the point at which you hit breakeven on your $100 million level of take-or-pay and so that's getting indexed every previous year, which we expect to occur in 2025 while we're still at that level.

That's good. So that's the $100 million plus the fixed fee that's still applying at the start of that. Am I correctly assuming then that 1 April, 2025, is when you transition down to the $90 million take-or-pay, or have I got that incorrectly?

So that's from 1 April, 2025, correct.

Good. Okay.

So just to clarify, Nevill, so the breakeven was complemented against the fee levels, both fixed fee and take-or-pay levels across that calendar year.

So it's a [indiscernible] of average. So it's the $100 million for a quarter and $90 million and the similar [indiscernible]?

Yes.

Yes. Good. Okay. That's super clear. Great. Just one last one for me, which is around the electricity cost reductions. And again, just clarifying [indiscernible] around what you said there. I think in the past, you've said -- and I think this [indiscernible] also, most of the reasons for the $41 million to $44 million guidance range for OpEx in '23 is related to uncertainty around what happens around the grid costs. Is it right for me to assume that all of that uncertainty, that $3 million gap is due to you're at the bottom end at the best outcome for grid, and the top end for no change in grid?

Yes, that sort of assessment hasn't changed really, Nevill. So we do note an upside you could see in that, we have an in principal confirmation of the duration for Marsden plans, but that's sort of yet to confirm, to be confirmed by Head of Financial. And other costs, connection and distribution, are still sort of work in progress.

And I think really just to -- I think what was your question, which was, is the electricity all the range? No, it's not. It's clearly a key part of that range. But like [indiscernible] business, we're managing all the range of factors, cyclones, inflation, all those sorts of things. And so what we've done is obviously getting into this result, had another look at that, made sure we remain comfortable with the range, which we do based on our latest outlook for the business.

Great. And I'm assuming whatever gains you may realize at 1 April, we can scale it for a full year for the following periods. Just on the $2 million plus gain expectation. I've read that as specifically relating to the energy charges so excluding grid. You mentioned on sort of during that side as well. Have I interpreted that correctly?

[indiscernible]

It looked like quite a small number.

That's supply.

Great. Okay. And is it crazy to think that, that could be a much larger number? Clearly, you've got the plus in there, but $3 million to $4 million?

I'd just like to keep it at [indiscernible] I don't think that, I don't want to [indiscernible].

Yes. Yes. Waiting with baited breath. Very good. Okay. That's all from me.

There are no further questions at this time. I'll now hand back to Ms. James for any closing remarks.

Thanks, everyone, for joining us today, and I look forward to catching up with many of you over the next month before I finish up at the end of March.

That does conclude our conference for today. Thank you for participating. You may now disconnect.