Dalrymple Bay Infrastructure Limited (DBI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Dalrymple Bay Infrastructure FY '22 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Anthony Timbrell, Managing Director. Please go ahead.

Good morning, everyone, and welcome to Dalrymple Bay Infrastructure's 2022 financial results. I'm joined today by Stephanie Commons, our CFO. Today, we will be providing an update on our financial performance as well as other key business developments from FY '22, including the development of our transition plan, the regulatory reset, which has seen the company secure an inflation-linked uplift in our infrastructure charges and progress on our organic growth options, including both our nonexpansionary capital program and the 8X project. Starting on Slide 5. Our FY '22 financial performance highlighted the strength of our cash flow supported by our take-or-pay contracts. Our TIC for FY '22 was $3.18 per tonne, a 5.3% increase on the prior year. We delivered a 41% increase in EBITDA to $264 million and a 56% increase in our funds from operations to $177 million. Our net debt at period end was $1.7 billion, and we maintained our investment grade balance sheet. Predictability of cash flow derived from our take-or-pay contracts saw DBI deliver a distribution of $0.191 per security for FY '22. At our current quarterly distribution rate and based on the closing security price last Friday, DBI is generating a distribution yield of over 8.2%. Moving to Slide 6. Operationally, 2022 was a year of steady progress for DBI. We delivered over 53 million tonnes of coal to over 22 countries and, for the first time in a while, saw the reemergence of coal shipments to China in early 2023. Importantly, the safety performance at DBT continued to improve, with a whole-of-site AIFR of 4.8, almost half that of the prior period. Our operator, DBCT Proprietary Limited is to be congratulated for their continued focus on developing a positive safety culture at the terminal. Of course, the major achievement in FY '22 was the 10-year access pricing agreement secured with all DBT customers. Under the revised agreement, we will see the TIC pricing indexed at CPI annually with further growth in the TIC over time as we implement our substantial nonexpansionary capital program. Importantly, under the revised agreements, all contracts remain 100% take-or-pay on substantially the same terms including socialization. Over 2022, we continued to progress our growth options, including proprietary planning for future nonexpansionary capital, which we expect to exceed $500 million over the next decade. As mentioned above, as we progressively implement this capital program, we will see further growth in the TIC. Our 8X FEL3 studies progressed with the technical aspects of the FEL3 studies complete and an updated capital cost estimate of $1.369 billion. With strong and predictable cash flow, a well-defined distribution policy and an investment-grade balance sheet, we remain well positioned to continue to focus on creating value for our security holders. Slide 7. As a business, we remain committed to sustainability and continue to deliver on our ESG goals. And you can see on this slide some of our achievements from the past year. Most importantly, from an ESG perspective, we announced our transition plan in 2022 in our 2022 Sustainability Report, and I will discuss this and how it influences our broader strategy later in the presentation. As a business and a management team, we continue to ensure we deliver best-in-class reporting when it comes to climate-related disclosures, and we continue to progress towards aligning with the TCFD framework. Slide 9. During the year, we announced that DBI agreed commercial terms with all of its customers under the light-handed regulatory framework. The agreement was the culmination of many years of work as DBI progressed from the previous heavy-handed regulatory regime to the light-handed model. We presented the new access price arrangements during 2022, but I'd just like to take the time to highlight the following key points. The base TIC will be indexed for inflation annually each 1 July. A nonexpansionary capital charge component will be added to the TIC annually for commissioned NECAP projects. QCA fees are passed through to users through -- in addition to the TIC, and all revised contracts remain on substantially the same terms, being on 100% take-or-pay basis with no volume risk, with socialization of charges returned on customer defaults and contract expiries. With our access pricing arrangement locked in, DBI and our management team are now focused on exploring and advancing other strategies to create value for our security holders. Slide 10. This slide is illustrative of the potential growth in our TIC over time, assuming 2% and 4% inflation scenarios inclusive of our expected nonexpansionary capital program. The inflation adjustment in the TIC charges is based on the Australian CPI, which runs from March to March each year. We will announce our new TIC charges for the following TIC year in the June quarter. As you can see, the NECAP charge from projects we commissioned provides a meaningful contribution to our total TIC, representing an attractive organic opportunity to grow revenues over time. I will now hand over to our CFO, Stephanie Commons, to talk through the financial results.

Thanks, Anthony, and good morning, everyone. Thanks for joining the call. Moving on to Slide 12, and that's the profit and loss slide. So for FY 2022, DBI reported TIC revenue of $281.7 million and a net operating profit after tax of $69 million. The negotiation of access charges applicable from the 1st of July 2021, under the light-handed regulatory framework, were completed in October 2022. Therefore, the TIC revenue that we're reporting for the 2022 year includes the component related to the prior year of 2021, and that amount is $22.9 million. The final reversal of IPO transaction costs totaling $3.6 million was recorded during FY 2022. These IPO-related costs have now been finalized, with the final installment of excess funds returned to the selling entities. Finance costs payable to external parties increased by $9.3 million over the year, and that was as a result of 3 things: the early USPP issue, which funded 12 months in advance of our future bullet maturities, therefore incurring a cost to carry. We also refinanced [indiscernible] during the year at higher margins. And there was also -- we saw higher benchmark rates impacting our floating debt. The increase in interest expense also includes a number of noncash finance costs, and these increased by $14.3 million during the year. And there is the type, including hedge valuations and unwinding fair value amount that we booked at the IPO. Moving on to the next slide, Slide 13, which is our cash flow statement. The funds from operations during the year was $177 million, and the strong FFO supports our distribution of $0.19185 that we were able to declare during the period. Distributions were paid during the period in the form of both unfranked dividends and partial repayment of the face value of the loan notes, which form part of each stapled security. Capital expenditure of $46 million was focused on spending on NECAP projects as well as the 8X feasibility studies. The next slide, the balance sheet on Slide 14. DBI continues to maintain an investment-grade balance sheet. The cash balance you see at 31 December 2022 includes $56 million of funds raised in the USPP, which funded in March, which were in excess of funds we required to repay debt. And those funds are being held on term deposit until we are required to repay the USPP notes, which mature in March this year in about 2 weeks. The reported cash balance also incorporates the TIC true-up amount, and we also had $24 million of restricted cash, and that's in the form of customer security deposits, which we hold. Note that the statutory reported borrowings include external borrowings as well as fair value adjustments. And so we provide a reconciliation of the statutory reported borrowings and DBI's net debt, and that can be found in the appendix to this investor presentation. The equivalent of AUD 299 million of USPP notes, which mature in March 2023, currently are reported as current liabilities and the company has $440 million of headroom in its existing bank revolver facilities, which we can use to repay the maturity of those notes. The next slide, Slide 15, which is a debt and hedging overview. So we have $2.5 billion of total facility limits, of which $1.93 billion were drawn at the end of the year, leaving headroom of over $500 million of available facilities, including facilities such as a liquidity facility and a debt service reserve facility. The weighted average tenor of our debt is now 6.39 years, and that's improved from the prior period of 5.03 years, and this reflects the recent USPP note issue we did. DBI was able to raise 10-, 12- and 15-year notes going out to 2037, all with clean swap lines, which demonstrate support from our banking group and our USPP investor base. In addition, during 2022, we refinanced and extended the maturity of $280 million of bank debt. We established a new $60 million debt service reserve facility, and that allowed us to release $33 million of restricted cash back into the business, and we also repaid $100 million of AUD notes. DBI takes no foreign exchange risk. All of our U.S. debt is swapped back to AUD, and it removes all foreign exchange risk on both our principal and interest. For the current 10-year pricing period, DBI has hedged over 75% of its debt through to 2026. And during the year, we implemented further staggered hedging averaging 40% of the debt book for 2026 to 2031. The next slide, Slide 16, is our credit rating overview. As mentioned, it's a key priority for us to maintain an investment-grade balance sheet. We maintained 2 investment-grade ratings with Fitch and S&P Global. Fitch recently released the results of its annual review, reconfirming DBI's BBB- rating with a stable outlook. And as a result of the new pricing agreement, Fitch has changed its benchmark for DBI to assess net debt to EBITDA, replacing the previous net debt to asset base it considered. DBI also holds a BBB rating with S&P with a stable outlook, and S&P are expected to release the results of its annual review shortly. I will now hand back to Anthony to talk through our growth and transition plans.

Thanks, Steph. With our TIC locked in for the next 10 years, we have a secure and predictable cash flow, which will underpin our distributions and growth. Our strategy is to build resilience through growth and diversification with opportunities internally through NECAP and 8X and externally through M&A also under consideration. Moving to Slide 18. Our organic growth in revenues will come from our nonexpansionary capital expenditure program at DBT. Our NECAP spend over the next 10 years is expected to be over $500 million. The proposed NECAP spend includes both regular and major project expenditure. Under our negotiated agreements with the users, particularly adjusted each year to ensure DBI earns a return on its NECAP expenditure. TIC revenue from our NECAP spend is earned from the 1 July following commissioning. Therefore, returns from NECAP will be lumpy and will be driven by the value of projects commissioned each year. DBI is expecting to commence a number of major NECAP projects in the near future, including replacement of the original shiploader, SL1. Slide 19. DBT retained significant expansion optionality to accommodate metallurgical coal exports from the Bowen Basin. The 8X project is expected to deliver up to 14.9 million tonnes of additional capacity with over 30 million tonnes of additional demand currently residing in our access queue. The 8X project will only proceed where it is fully underwritten by unconditional long-term take-or-pay contracts, which generate a commercial rate of return. We have secured all primary environmental approvals with the QCA confirming the costs of 8X may be socialized across both new and existing users. The technical component of the FEL3 feasibility study was completed in Q1 '23, with an updated capital cost estimate of $1.36 billion, assuming a 1 April 2024 start date with costs escalated to completion. Associated economic assessments are ongoing and expected to continue into the second half of 2023. Slide 20. In 2021, we announced our intention to explore the opportunity for a regional hydrogen production and exporting facility utilizing existing DBT infrastructure. Dalrymple Bay is ideally positioned from an infrastructure perspective for the export of hydrogen given the port of Hay Point's deepwater nature, abundant nearby land to support further development, proximity to Asian consumers and location within one of Queensland's defined Renewable Energy Zones. We are progressing the feasibility studies focusing on the potential for liquid ammonia exports. We're taking a measured approach, and we'll continue to update the market on the development of our hydrogen strategy and the progression of our study activities. Slide 21. The transition plan that we developed and released as part of our 2022 Sustainability Report underpins our confidence in the long-term demand for coking coal export through DBT, even under the toughest energy transition scenarios. As previously discussed, we see attractive opportunities to grow the business organically for NECAP, the potential 8X project or other diversified uses of DBT. Likewise, we remain alert to opportunities for external growth. We have a number of competitive advantages, which when paired with the expertise of our key security holder partners, gives us confidence to consider the potential for growth via M&A. Our capital management framework will balance strategic growth and diversification opportunities against our commitment to distribution growth. Slide 23. Our comprehensive transition plan gives us confidence that there will be material demand for DBT services beyond 2050 under a range of energy transition and coal supply-demand scenarios. DBI will monitor the progress of the energy transition to ensure its contract structures, regulatory settings and capital management framework remain appropriate as circumstances evolve. Slide 24. Our transition planning included an assessment of the likely supply and demand of metallurgical coal under a range of potential climate change scenarios. We use both the International Energy Agency and Wood Mackenzie's data to understand the potential range of seaborne metallurgical coal demand scenarios that DBI's transition plan may need to accommodate. Slide 25. The analysis that we've conducted shows that material volumes of metallurgical coal will continue to be exported through DBT under all scenarios. Even under the net zero by 2050 or the AET 1.5 scenario, Australia is expected to retain a significant share of the remaining seaborne metallurgical coal trade. DBI anticipates that a growing focus on carbon emissions will drive steel producers towards the premium metallurgical coal products shipped through DBT. The detailed analysis we undertook as part of our transition plan has informed the way we think about growth and diversification. Most importantly, it is clear that, unlike some industries, DBI has the advantage of time as it seeks opportunities that fit its range of competitive advantages. And the last slide, Slide 27. 2022 was a significant year for our company as we put in place the commercial agreements with our customers, which will provide the cash flow certainty we need to plan with confidence for the next stage in our evolution as we strive to deliver value for our security holders. Our strategic priorities for 2023 include commencing our approved NECAP projects; commencing negotiations with access seekers with regard to access pricing terms for the 8X project; identifying opportunities for diversification that align with DBI's transition plan; the progressive alignment of DBI's climate-related risk assessments and disclosures to the TCFD framework over time while delivering our whole-of-terminal ESG and sustainability initiatives; protecting our investment-grade credit rating through optimization of the debt capital structure, including tenor pricing and diversity of source; and completing the initial scoping studies for the green hydrogen production and exporting facility at DBCT. Thank you, and I will now hand back to the operator for the Q&A portion of the call. Operator?

[Operator Instructions] Your first question comes from Owen Birrell from RBC.

Just a few questions from me. The first one is on the TIC charges. Just looking at Slide 10, can you just confirm firstly that this is on a June year-end basis and not a calendar year-end basis? And if so, does it suggest that the calendar '24 TIC charges will be higher than the $3.18 published on that slide?

Owen, sorry, my computer just shut down while I was talking. So I'm rapidly trying to come back to Slide 10 so I can...

$3.18 is to be what we call the TIC yield. So that's the year ending 30 June 2023. Is it $3.18 TIC per tonne that we're currently charging? So that will be revised from the 1st July 2023. So yes, all of those numbers are showing effectively the [indiscernible].

[indiscernible] Yes, the average, so just slightly higher.

Over our calendar or our full year?

Yes.

Yes, yes.

Okay. Just second question for me on the NECAP. Just wondering if you can give us a sense of, I guess, the rate of return on that NECAP spend. Is it as simple as saying, I think, 9% return on the amount of spend that's commissioned each year?

Yes, it is a -- it's a risk-free rate plus a margin. So I mean we haven't released what the margin is as part of the negotiations with the users, but we did agree a fixed margin that's broadly consistent with what you would expect under a building blocks-type approach. And then we measure the risk-free rate every year using the 10-year commonwealth government bond rate. So that rate of return will move as the risk-free rate moves.

And it's worth also saying that, that government bond rate to be measured every year is applied to a cumulative buildup of the TIC that's commissioned. So it's a whole number that's effectively reset every year. We also [indiscernible] a return of the NECAP, so we do recover in cost of the project between the commission [ of that ] in 2054.

And is that NECAP number published anywhere regularly or sort of when it's commissioned?

You're talking about the value of the projects or the rate?

What's commissioned in a particular period?

Yes. We do tend to publish it at the end of each year. So last year, I think you'll find a reference to it. I think it was about $51 million in 2022. But yes, we will publish that number [ at you ].

Okay. And just a final question for me in terms of customers with underutilized contracting capacity. Is there any conversations or that you're aware of as contracted parties looking to on-sell volume to new access [ saving ]?

Not specifically that I'm aware of at the moment, but the users don't need to include us in those discussions until such time as they reach an agreement. They only need our involvement at the final stage in the process to provide our approval to facilitate those transfers. And at that stage of the process, we normally -- depending upon who the capacity is going from and to, we might ask for greater security as part of our -- providing our approval, but there haven't been any transfers that I can recall off the top of my head in the last 12 months or so.

And can I just ask in terms of the pricing around those transfers? Is that commercial terms between those 2 parties? Or is there a regulated price that they must transfer at?

It's -- the answer is a bit of both. So if they transfer the contract, then the party receiving the transfer will pay us the agreed price that was part of the overall package negotiated with the users. But there may be a further commercial agreement between those parties that we're not aware of. We play a part in that [indiscernible]. So to the extent somebody decides to pay more or pay a premium to someone to access the spare capacity, we're not privy to the details of that.

Your next question comes from Sam Seow from Citi.

Just a quick one for me. The TIC has the CPI annual increase. In fact, you got the 6.4 duration debt. It looks favorable at the moment, but just any thoughts on that duration kind of mismatch?

So the duration of the debt, I guess, is us turning out some of the nearer-term maturities into the USPP market to extend the tenor of that debt, which we'll continue to do in terms of accessing longer-dated facilities and markets. So the average that we are in the process of expanding, as I said, it's gone from around 5 years to 6, almost 6.5 now. In terms of the pricing agreements, they go out to 2031 and almost fully contracted out to 2028, and all of those contracts have a recurring or renewal option. So I guess we work between 2 of them and just make sure that the investors are [ confident ] with the profile of both the contracting and pricing arrangements. But I'm not sure if that answers your question, Sam.

Yes, it helps. I'm just kind of asking because I guess your revenue increases annually or decreasing depending on CPI. But obviously, you get -- it sounds like you're extending the duration and is that mismatch which you never really had before, just [indiscernible] are managing that.

Yes, sure. So probably our hedge strategy is probably what underpins that. So we tend to bring back all of our debt to AUD float rate, and then we hedge that for the period of time. So similarly, when we're under heavy hand if we bring all our debt back to float rate and then we fix it for the 5-year regulatory term, and what we're doing now is really taking the view to hedge it for the 10-year pricing plan. So we did hedge 75% up until 2026 for those hedges we entered into in May 2021. And then once we have signed these agreements all in place, then we started to implement hedging from '26 to '31. So that's probably how we're approaching it is. And when -- that's how we approach in terms of matching the resetting of the TIC to our debt book and just so we've got that certainty of cash flow. And then beyond 2021, it's effectively float rate at this stage.

For the debt potential, look, a last bit of color, Sam. Keep in mind as well that even though the base rate component of our debt book is moving upwards at the moment because of the way we structured the deal around NECAP, the returns we're earning on our NECAP expenditure is also moving up at the same time. So it's not a perfect hedge, but there is a degree of hedge between our -- the returns we earn on our NECAP and the way our -- the cost of -- the base rate component with the cost of debt moves.

Yes. We've done correlation exercises between the annual resetting of the 10-year government bond rate and the 3-month BBSW. It's what our float rate debt rolls on. So as that NECAP, I suppose, builds, then there will be -- we will look at that natural hedge component to assess whether or not that is into our hedging strategy.

[Operator Instructions] Your next question comes from Nathan Lead from Morgans.

Congrats on the presentation. 3 or 4, just quick ones from me, if you don't mind. So first one, when the TIC negotiations were announced or completed, there was -- there's a $61 million true-up number. You referenced $22.9 million in this period. So can you just talk us through where that remainder has gone?

Yes, sure. So thanks, it's worth clearing up. So the $61 million true-up amount was from the 1st July 2021 until the 30th of September 2022. And so that we had, previous to that, been charging our customers the $2.46 rate up until 30 September 2022. So we're entitled to a, yes, 18 months true up -- 15 months true up, so that's the $61 million amount. The $22.9 million amount is the amount that relates to just 2021. And therefore, when you look at our total TIC revenue for the year, if you deduct the $22.9 million off, that's effectively what we earned between the $3.02 for the first 6 months and the $3.18 for the second 6 months in terms of TIC revenue.

Okay. Does that mean there's a reduction then coming through in addition to that longer cycling, the delta?

Yes. So if you were to normalize the 2022 year, you take the $22.9 million off your TIC revenue but -- for the purposes of assessing in future years. But I guess the way to look at it is probably on the TIC rate, which was the $3.02 during '21, '22 and the $3.18 for '22, '23, and then you take a view from the TIC rate that applies from 1 July 23.

Yes. But does the $3.18 come down for the [indiscernible]?

No, no, no. No, the $3.18 is the amount that's being charged from 1 July 2022 to 30 June 2023. And that isn't -- that doesn't include any prior [indiscernible]. Yes, that doesn't include the true-up component that's been -- yes, that's the current rate for the time. There's no true-up amount in that.

Okay. Great. Second question for me. It looks like you've gone into a current taxpaying status, I mean, $4.4 million there in the P&L now. Does that mean that you've moved into the taxpaying? Or is that like a bit of a funny that's going on for some reason?

We -- from the model we've done that is now tax -- we are now in taxpaying, and that's as a result of the user deals and the uplift in EBITDA and revenues. And the -- sorry, and the slower deductions of some NECAP spend that we're expecting to come through. So some of the costs that were expected to come through on NECAP and other project has been slower to come through than we can expect in -- so yes, we are structurally tax-payable position going forward.

And so we -- you expect to start to see franking on the dividend also because of that?

Yes. So we will frank dividends to the extent possible, but we'll provide updated guidance in May.

Okay. Great. Anthony, if I can get you to go to that Slide 18, and you're obviously talking on that slide about the proposed major project NECAP. Can I ask you to hazard a guess in terms of like what sort of dollar size and timing those projects may be?

Sure. So at the moment, we have a request out to our customers to approve the commencement of both the replacement of shiploader #1 and one of our original stacker reclaimer machines, SR2. We have a request out for approval now. We'd like to kick off both of those projects this year if possible. Those 2 projects combined are probably a show of $300 million in total value. Now that's a pretty big investment upfront, and there's quite a bit of work that will need to be done to make the business case and to convince our customers that it's appropriate to move forward with both of those projects now. And that's what we meant when we referred to the lumpy nature of the NECAP spend in the deck. If both of those go ahead, then they're probably 3-year projects. So come around 2025, '26, we'd be adding the best part of $250 million, $300 million plus [indiscernible] interest here in construction to the TIC. And then beyond that, we're seeing just our annual run-of-the-mill standard NECAP running at around $30 million to $40 million per year. But there's still many years of offshore pile wrapping still to go. We tend to spend about $10 million a year on that alone. So those 2 projects are on the board for a potential kick-off this year, and then there potentially could be other machines that will need replacing over that 10-year horizon as well. So that gives you kind of a bit of a flavor for the things we're looking at.

Fantastic. And then just final one for me. You referenced the additional hedging that you've put in place from 2026 to 2031. Can you maybe just provide a bit of detail on that in terms of what sort of rates you got and just the hedging profile, the hedging size?

So I can't really give you rates. But in terms of the timing, we did execute the hedging over the last 6 months, and some of them were forward-start 1- and 2-year hedges. Some of them we forward-start up to 5-year hedges. But as I said, it averages -- it's probably on a staggered profile. It's more hedging in the years through '26, '27 and lower amounts of hedging around 2030, '31. But overall, that averages about 40%.

Nathan, can I just come back to your NECAP question. A bit of flavor I wanted to add there is that our NECAP program is something that we have the ability largely to control the timing of. And while the capital numbers we're talking about are significant, they won't affect our ability to meet our distribution commitments to our security holders. So it is the Board's intention that we will implement our NECAP program in a way that grows the TIC over time, but we will be mindful to ensure that the equity component of the NECAP investment that we make does not impinge on our ability to continue to pay distributions. So we see this as a way of continuing to grow charges over time, but we have the flexibility to implement it in a way that ensures that we can keep meeting that distribution guidance that we've been providing.

All right. And actually, on the distribution guidance, the tax seems to be -- having covered the stock for a while, it seems like a tax is actually getting paid earlier than what it was previously. Does that impact on that 3% to 7% medium-term growth per year?

Look, I don't want to make any comments around distributions and how we'll think about franking credits. It's not a discussion we've had with the Board yet. So the right time for a more detailed discussion around that, we'll probably be at the time of the AGM in May.

Are no further questions at this time. I will now hand back to Mr. Timbrell for closing remarks.

Thanks, operator. Thanks, everyone, for dialing in. Hopefully, everyone on the call has our contact details by now. If there are any follow-up questions following the call today, feel free to get in touch. We are happy to take you through the numbers and spend the time making sure you understand the materials. But again, thanks for dialing in. And we look forward to talking to you soon.

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