NZR
15/05/2014 14:22
ADDRESS
REL: 1422 HRS The New Zealand Refining Company Limited
ADDRESS: NZR: Refining NZ Annual General Meeting - Chairman's Address
Refining NZ Annual General Meeting 2014 15 May 2014
Chairman's Address
It is a pleasure to welcome you all to Refining NZ for this Annual Meeting of
shareholders.
This meeting has a full agenda to work through, but before I review the
Company's performance in 2013 I will comment first on the resolution put by
shareholder, Mr Bryan Halliwell.
The Board is required, pursuant to the Companies Act 1993 and the
constitution of the Company to put this resolution before shareholders and
accordingly, the notice of meeting sets out the resolution with a supporting
statement by Mr Halliwell.
The matters raised by Mr Halliwell's resolution and supporting statement are
not new having now been put to the annual meeting of shareholders three
times, and defeated by shareholder vote on each prior occasion. Indeed,
shareholders will remember that the Company addressed matters raised by Mr
Halliwell at this meeting last year.
Mr Halliwell will have the opportunity to speak to the meeting so I will not
go into length about his resolution. Our considered reply will come later.
At this juncture I would stress for shareholders the simple fact that our
Company is facing an extremely challenging business environment. Shareholders
should appreciate that the Board's decision not to pay a final dividend was
driven by the gravity of this situation.
Given the pressing challenge the Company is presented with, the Independent
directors consider the need to deal repeatedly with the arguments presented
by Mr Halliwell a waste of company resources and time.
The Independent directors disagree with the resolution put forward by Mr
Halliwell and have advised shareholders to vote against it.
Turning now to the Company's financial results
Business conditions were increasingly difficult in 2013, underlined by the
ongoing strength of the New Zealand dollar and low international refiners'
margins, both of which significantly impacted performance and contributed to
the Company reporting an after tax loss of 5 million for the year.
This result is disappointing for shareholders, but in light of the sluggish
growth in demand for oil products globally, the continued overhang in global
refining capacity, and the strength of our dollar, is not surprising:
- Margins were weak for much of the year and market expectations of a rally
in the last quarter, did not materialise. The average Gross Refiners Margin
achieved for the year at US$4.58 was down on the previous year (US$5.77) and
had a marked impact on cash flows from our operations.
- It was notable that the Singapore Complex Margin, over which we maintain an
uplift, weakened significantly in the second half of the year.
Refining NZ
Port Marsden Highway, Ruakaka, Northland 0171, Private Bag 9024, Whangarei
0148, New Zealand
Telephone: +64 9 432 8311 Fax: +64 9 432 8035 Email: [email protected]
www.refiningnz.com
- The New Zealand dollar remained strong in 2013, averaging US$0.82 (2012:
US$ 0.81) and impacted our processing fee income. It's worth noting that the
New Zealand dollar has strengthened in 2014 and right now is trading at
around 86 US cents.
The impact of weak margins and a strong New Zealand dollar are beyond our
control but as ever, they have proved to be challenging for this well-run
business.
We predicted that 2013 would be difficult for the refinery and took steps
early in the year to lift our performance.
The arrival of new CEO Sjoerd Post heralded a refresh of our business
strategy and the development of a strategic action plan aimed at making the
Company more competitive.
The action plan was presented to the market with the Half Year results and we
are on track to deliver on those actions, with good progress in cost
management, and building resilience through a 'fit for purpose' programme.
Sjoerd will talk through the strategic action plan in his presentation, but
shareholders should understand that this Company is focused on effecting
change in those areas that are within our control.
Our rigorous focus on maintaining reliability, reducing overheads, increasing
revenue, and right-sizing of the organisation has generated a host of actions
aimed at lifting our performance:
- In 2013 the Company's cost base was reduced by $6 million - 50 percent
better than the $4 million of cost savings promised to the market.
- We are being smarter with procurement, notably, through renegotiating
contracts with the Company's electricity and gas providers.
- The number of contracting companies on site has been streamlined along with
contract rates. We've established new ways of working that will improve
safety and lift productivity; - dealing directly with contracting companies
instead of via a lead contractor and introducing four 10 hour days for
maintenance teams to replace the five eight hours days they used to work.
- The Company has worked on ensuring we have the right number of skilled
people to run the refinery safely and reliably. We have reviewed our
supervisory capability and removed roles in areas that are well covered and
added in other areas, such as process safety, where more resource was needed.
- In light of the current business conditions pay rates for salaried
employees have been frozen for 2014 and we have introduced lower New Zealand
industry benchmarking of remuneration for non-energy sector related roles in
the business.
In terms of generating additional margin revenue, we are well underway with a
number of proactive measures:
- The technical improvements made to the hydrocracker unit are expected to
deliver an uplift in margin of around US$0.66 cents a barrel.
Refining NZ
Port Marsden Highway, Ruakaka, Northland 0171, Private Bag 9024, Whangarei
0148, New Zealand
Telephone: +64 9 432 8311 Fax: +64 9 432 8035 Email: [email protected]
www.refiningnz.com
Other technical improvements are to come and will lift our margin revenue
even further.
- The Company's involvement in the selection of crude to be processed for Z
Energy and BP as part of the existing Processing Agreement, will bring
commercial benefits from running the refinery more efficiently with an
optimal crude 'diet'.
The Board supports these well engineered actions and believes that they will
stand the Company in good stead for the long-term.
The focus and the ingenuity of Sjoerd, the management team, and the Company's
talented and committed employees has brought a high level of proactive change
to the business and this is having a positive impact. The Board has
recognised the need to leverage the performance of the Company's balance
sheet and at this time last year, committed to undertake a review of the
Company's capital structure as part of our strategy refresh.
In December, the Directors agreed to a long-term debt position of $150
million with our banking partners. Putting in place core long-term debt also
meets an immediate need for higher borrowing, due to the negative impact on
our cash flows from operations of a weak margin environment, and an earlier
peak in the forecast Te Mahi Hou spend than at the time the investment
decision was made.
In February this year, the Company announced an equity raising programme. The
Board had received independent financial advice on the programme and after
careful consideration, the Directors resolved that the Company proceed with
an institutional placement and share purchase plan.
In total, the Company raised $54.7 million in capital from institutions and
shareholders, and allocated a further 32.5 million shares. On that note, I
wish to welcome our new shareholders, and acknowledge the support of existing
shareholders who took the opportunity to purchase additional shares as part
of the Share Purchase Plan.
The Board considers these financial measures undertaken by the Company to be
prudent. With a longer term gearing of 10 to 20 percent we expect a better
performance from the Company's Balance Sheet, and to stimulate market
interest by creating a bigger "free float" of investors than we have had in
the past.
Finally, I referred earlier to the Directors resolution not to pay a final
dividend. An interim dividend of two cents was paid on 26 September, 2013 and
has resulted in a total dividend payment of two cents for the year.
Turning to operational results
Personal safety and the safety of the working environment at the refinery are
top of mind for our people.
In October we reached 1 million hours worked without a loss time incident
(LTI). This is a credit to the attention our people give to working safely on
site as well as the Health and Safety Action plan we follow to ensure
everyone goes '"safely home every day".
The safe and reliable running of our refinery is underpinned by regular
planned maintenance on our key processing units.
In 2013 two planned maintenance shutdowns were carried out safely. However,
despite these prime examples of attention to safety we had 12 recordable
injuries most of them minor, though two injuries resulted in lost time.
Refining NZ
Port Marsden Highway, Ruakaka, Northland 0171, Private Bag 9024, Whangarei
0148, New Zealand
Telephone: +64 9 432 8311 Fax: +64 9 432 8035 Email: [email protected]
www.refiningnz.com
We are giving greater attention to personal and process safety. The need to
lift our performance, to get to world-class personal safety, is being
addressed as part of the Company's 2014 Health and Safety Action plan.
In 2013 our investment in inspection and maintenance contributed to a good
operational performance on our processing units.
In February last year we carried out a ten day shutdown to top-up catalyst on
the Hydrocracker. In October we conducted a three-week shutdown to regenerate
the Platformer catalyst and perform maintenance on a crude distiller and a
desulphurisation unit. Both shutdowns were completed successfully, on time
and without incident.
Plant reliability was further bolstered by the performance of the
Hydrocracker which ran at close to maximum after the February shutdown.
In 2013 our unplanned downtime was good despite a number of unforeseen events
impacting our energy performance.
Unplanned downtime is a key measure of our reliability. In 2013 it stood at
1.1 % for the year, marginally greater than 2012 largely because of an outage
on the Hydrocracker unit in February and preventative maintenance on the
Platformer and the Hydrocracker in December.
Energy performance, which is measured by our Energy Intensity Index, stood at
94.2 for the year, hampered by these minor outages, two shutdowns and the
sometimes less than optimal crudes run through our processing units.
A word about the recent shutdown on the hydrocracker and related units.
To put this in context for shareholders, this was a major undertaking for the
Company alongside the effort that is going into Te Mahi Hou. Much was
achieved to ensure that the refinery can continue to run safely and reliably;
we tied-in some of the Te Mahi Hou piping and valves; and we are well
underway with a series of improvements to the hydrocracker that are expected
to lift our margin by around US$0.66 a barrel.
We continued to manufacture via processing units not included in shutdown,
and by bringing the maintained units back online.
In the event, the repairs to a heat exchanger and a compressor unit, of which
the latter was not part of the shutdown maintenance programme, were primarily
responsible for holding back the start-up of the hydrocracker unit.
It has to be recognized that this shutdown was unusually protracted and
because of that, difficult for everyone involved, including our customers as
fuel stocks came under pressure.
The Company will be undertaking a review of the Shutdown. In the meantime we
have said publicly that we expect the impact of additional days to be limited
to a one-off impact on processing fee revenue of around US$7-9 million -
assisted by good operational performance during this period and the sale of
excess hydrocracker feed at good market premiums.
Refining NZ
Port Marsden Highway, Ruakaka, Northland 0171, Private Bag 9024, Whangarei
0148, New Zealand
Telephone: +64 9 432 8311 Fax: +64 9 432 8035 Email: [email protected]
www.refiningnz.com
On behalf of the Board I wish to acknowledge the many people on the shutdown
who worked continuously to see it through to completion, provided supply
solutions for our customers and kept the refinery running safely during this
period.
We also acknowledge the co-operation of our customers and thank them for
their forbearance in trying circumstances.
The Company's $365 million expansion project Te Mahi Hou is running to plan
safely and to budget with $191 million invested to date.
Major milestones have been achieved including the pouring of the Te Mahi Hou
foundation in November. This was a feat of logistics with 2750 cubic metres
of concrete poured over sixteen hours using 550 truckloads of cement. The
safe completion of this pour is a credit to the Te Mahi Hou team and the many
concrete suppliers and drivers involved.
Key components for Te Mahi Hou have also been delivered to the refinery. In
December we received the reactor unit while other key units (furnace, heat
exchanger, and reciprocating compressors) were delivered earlier this year.
In fact, a further shipment of key modules for the CCR regenerator is
arriving at Northport this afternoon and being readied for transport to the
refinery.
Te Mahi Hou is key to the Company's future. After commissioning late 2015, Te
Mahi Hou is expected to generate operating cash flows of around $60 million
per annum, a structural uplift in processing fee revenue of around $70
million per annum, and increase margin by around USD1.10 per barrel.
Independent Directors review of the Processing Arrangements
The Independent Directors reviewed the Processing Arrangements with Refining
NZ customers in April 2012, and recommended the review that was subsequently
carried out by independent oil industry experts, Purvin and Gertz. That
review considered the arrangements between Refining NZ and the customers to
be generally reasonable to all parties, relative to the risk borne by
Refining NZ and the customers.
Earlier this year, Management completed its annual review of the Processing
Arrangements and made its recommendations to the Independent Directors. The
Independent Directors have subsequently asked Management to consider whether
- in light of high oil prices and a weak refiners' margin environment - an
independent review of the Processing Arrangements would be warranted.
The 2013 financial result has stimulated comment about the Processing
Arrangements and whether these need to be re-negotiated.
Foreshadowing Sjoerd's presentation, suffice it to say that we believe the
processing arrangements are fit for purpose, commercially relevant and geared
towards the maximum extraction of rent.
Refining NZ
Port Marsden Highway, Ruakaka, Northland 0171, Private Bag 9024, Whangarei
0148, New Zealand
Telephone: +64 9 432 8311 Fax: +64 9 432 8035 Email: [email protected]
www.refiningnz.com
In 2013 the Company made a number of key Board appointments
In April, Independent Director Andrew Clements stood down after 12 years
association with the Company. The Board thanks Andrew for his outstanding
contribution. In his place the Directors appointed Vanessa Stoddart who has
25 years' experience across a range of industries: legal, manufacturing,
packaging, airline and engineering, including roles with Carter Holt Harvey
and Air New Zealand.
In May, Peter Morris who represented the interests of Chevron New Zealand
resigned and was replaced by Dean Gilbert, General Manager Chevron New
Zealand.
In terms of governance, the Board has a highly competent mix of oil industry
expertise and broader business experience, which the Independent Directors
bring to the table.
We give careful consideration to the value an appointment of a new Director
will add to the governance of the Company, and employ a competency matrix
which charts the skill sets the Company requires of its directors. Through
our Director Induction programme, we also ensure new Directors have a
thorough understanding of how the Company operates and of their Director
responsibilities.
We believe that the composition of the Board is right and that the Company is
well governed.
Looking ahead
In February this year, we reissued our profit matrix for the coming year
which sets out our profitability expectations based on a series of foreign
exchange and refiners' margin scenarios. A copy of the matrix issued as part
of a presentation to investment analysts on the 28th of February 2014 is
available on the New Zealand Stock Exchange and the Company's website.
The continued likelihood of lower quartile refiners' margins and a strong New
Zealand dollar means we expect business conditions in 2014 to remain
difficult.
That said, the Directors consider the Company capable of weathering what lies
ahead, by building on its strengths and by a committed team of talented
individuals pressing home a strong, strategic plan of action.
David Jackson
Chairman
Refining NZ
End CA:00250502 For:NZR Type:ADDRESS Time:2014-05-15 14:22:48
