NZR
27/04/2012 15:51
MEETING
REL: 1551 HRS The New Zealand Refining Company Limited
MEETING: NZR: Annual Meeting - Chairmans Address
Good afternoon. My name is David Jackson and I am Chairman of the New Zealand
Refining Company.
It is appropriate to start this meeting by talking about the CCR Project.
I should remind this meeting that the Board, as an entity representing the
interests of the Company, supported the CCR Project and recommended it to the
shareholders for approval at this meeting.
We appreciate that for some of our shareholders the dual role of the major
oil companies, as both customers and shareholders may appear conflicting.
However, these roles are distinct and our Directors are both mindful of, and
adhere to the need to be clear which role they are assuming whenever they
communicate.
There are representatives from some of the major oil companies here today who
are here, first and foremost, in their capacity as Refining NZ shareholders.
We are mindful too of the recent comment by the New Zealand Shareholders
Association regarding the appointment by oil companies of employees to the
Board of Refining NZ the frequency of which does not - they claim - serve the
interests of all shareholders. This meeting will note that the Association
will not be supporting the appointment of either the BP or the Exxon Mobil
nominated director on the basis that those companies have two representatives
on the Refining NZ Board.
Turning first to our financial results ...
2011 was challenging for Refining NZ - yet we achieved a Net Profit after Tax
(NPAT) of NZD 34.5 million, which is a sound result delivered in a difficult
business environment.
The result was in line with the 2011 profit matrix issued in the 2010 Annual
Report. Earnings before interest, tax, depreciation and amortisation
(EBITDA), an indicator of the company's ability to generate cash, was NZD
132.6 million; 15% down on the previous year's result of NZD 156.7 million.
Even in the most difficult business conditions our ability to generate cash
has been critical to reducing our borrowings, and the strength of our balance
sheet ensures we are well positioned to weather volatility and to grow the
business sustainably for the future.
In 2011 we repaid $60 million of debt, with year-end borrowings closing at
$25.6 million. This means that the $190 million Point Forward Project has
effectively been fully repaid within two years of commissioning.
This focus on debt repayment has allowed us to consider an attractive
opportunity to grow our company through the CCR Project - which I will talk
about later.
In January 2011 we saw a return to healthier margins and this continued for
much of the year. Some of the gains were undermined in the last two months of
the year as Singapore refiner's margins fell USD 5 a barrel through November
to late December on the back of a decline in Asia Pacific gasoline prices.
This led to a restatement of our 2011 profit forecast.
This decline reflects the volatility in the refining sector and weakness in
global economies. Generally there is reduced demand for oil products,
particularly in the US and Europe, and while the economic powerhouses of
China and India continue to grow, China's growth rate is less than was
predicted.
That this Company maintained an uplift over Singapore margins is a mark of
our competitive edge, based on the premia earned for New Zealand's high
quality product specifications and our location.
It is worth noting here that Solomon benchmarking of refineries in the region
and globally has shown that Marsden Point is first quartile in many key areas
of our performance. This world-class refinery remains competitive -
outperforming all of the Australian refineries as well as refineries of a
similar size to us.
Overall, the average margin achieved by Refining NZ for the year was USD 6.11
per barrel - close to the 2010 full year result of USD 6.17 per barrel.
The other key variable for the Company is the USD exchange rate
Here the sustained weakness in the US dollar continued to impact our
business. The USD/ NZD exchange rate rose from US 75 cents in January peaked
at US 88 cents in August to average US 79 cents over the year. This compares
to an average of USD 0.72 cents in 2010.
Refining NZ does not hedge its exposure to foreign exchange, or USD
product/crude oil margins and the Board's view is that shareholders invest in
refining knowing that they are exposed to both a commodity and a foreign
exchange risk.
We have a degree of protection from unfavourable refinery margins and
currency moves via the processing fee floor denominated in NZ dollars, and
the stable revenue stream from the Refinery Auckland Pipeline (RAP). This
generated fees of approximately 27 million per annum. The Processing Fee
Floor is currently around NZD 120 million per annum.
Together, the combination of RAP fees and processing fee floor is sufficient
to meet the Company's cash costs - and by maintaining a relatively
conservative balance sheet, we are confident that the business can weather
such volatility.
This is a highly cash generative business. To put that in perspective -over
the last 10 years Refining NZ has:
o Generated around $1.3 billion net cash from operations;
o Invested around $745 million into capital development and growth, and
o Paid shareholders around $610 million in imputed dividends. That amounts to
around $2.55 per share based on the current number of share on issue.
Taking account of the strong cash generating ability and the reduction in
borrowings, the Directors resolved to pay a final dividend of 9 cents per
share with full imputation credits attached.
An interim dividend of 3 cents per share was paid in September, 2011
resulting in a total dividend payment of 12 cents for the year.
In resolving this dividend the Directors noted that should the Growth Project
be supported by shareholders at today's Annual Meeting, the majority of the
investment spend will not happen until 2014, meaning that the Company is well
placed to fund this final dividend payment to shareholders.
Even in a challenging year for the refinery there have been many other
achievements to highlight.
Most noteworthy was the celebration of 50 years in business -which I'm sure
you will agree, is a proud achievement for any New Zealand company.
The continued success of Refining NZ is based on our commitment to core
principles, a clear vision, and a tried and tested business plan and
strategy. This is supported through world class reliability and safety,
talented and capable people, and robust processing arrangements which
generate strong cash flows for our business and shareholders.
The safe and reliable running of our refinery is always top-of-mind for the
Company, our employees and our contracting companies.
2011 proved a good year for our safety performance overall: - In September we
achieved 1.5 million hours without a Lost Time Injury (LTI). This great
performance has continued into 2012, with the Company having now achieved two
million hours without an LTI.
This continued focus on workplace safety reflects our aspiration to achieve
the impeccable safety performance set out in the Company's Safety Action
Plan. In all we recorded just four Recordable Cases - all of them minor
incidents - and none a lost time injury. However, our aspiration is for all
of our people to go Safely Home, Every Day, so we will strive to make further
progress here.
Plant reliability is another key performance factor for Refining NZ.
It is both crucial for our customers and the smooth running of the New
Zealand transport fuels supply chain.
A measure of reliability is our rate of unplanned downtime. In 2011 the rate
was 1.3%; a world-class performance but slightly behind our 1% target. Plant
outages contributed to this performance, driven by an extreme weather event
in January 2011 and a 10 day shutdown to complete emergent maintenance work
on the hydrogen manufacturing unit. Analysis of unplanned downtime and
improvements to processes and systems will ensure we continue to operate
safely and reliably.
In August we successfully completed the planned shutdown on selected
processing units for maintenance and to replace catalyst on the hydrocracker
(top-bed-skim). The seven day shutdown means we can extend the cycle on the
hydrocracker unit from three to four years.
We aim to be our customers' supplier of choice for oil products.
And we can do that by deepening our understanding of their strategic
interests and ensuring that we continue to deliver product reliably and in a
cost effective manner.
In 2011 we worked closely with customers to bring about improvements in
product forecasting and scheduling. This year we have two strategic
initiatives focused on enhancing customer relationships: - through raising
the level of customer service delivery and exploring opportunities to expand
our role in New Zealand's transport fuels supply chain.
Talented people are our greatest asset.
In 2011, we were again recognised by Aon Hewitt Associates and Fortune
magazine as a Top Company for Leaders in the Asia Pacific region. The Company
was first recognised as a Top Company for Leaders in 2009.
Refining NZ was the smallest company to win an award and the only New Zealand
business to make the list. This is a fantastic result that demonstrates
excellence in leadership and places Refining NZ alongside many of Asia
Pacific's largest and most successful companies.
The Independent Directors will review the status of the processing
arrangements again this year.
In 2011 the Independent Directors signalled that an external review of the
processing arrangements would need to be considered. It has subsequently been
agreed that an independent review of the arrangements is appropriate and will
be conducted in 2012. The results will be communicated to shareholders when
this review has been completed.
In the last 12 months the Leadership Team with the Board, has been reviewing
organisational risk,
This has been done using an internationally recognised framework to assess
Refining NZ's strategic, legislative, operational and financial reporting
risks.
There are many risks inherent in refining - operational and otherwise - and
to sustain our business for the future requires a thorough understanding of
what risks could prevent the Company from achieving its strategic aims - and
ensuring that adequate mitigating processes and controls are in place.
This process has provided invaluable insights and established a common
understanding of the critical risks that the enterprise has to manage. The
results have enabled the Board and management to test the robustness of
Refining NZ's strategy, and to refine the focus of our assurance programme.
In 2011 a survey of management culture assessed the control environment at
Refining NZ and provided assurance to the Board. Importantly, the results
showed a healthy control environment in the business, supportive of the
processes and controls for managing risk.
Also during the year, BP undertook a risk management review of our refining
processes and policies. This independent assessment provided a valuable
opportunity for learning. We were extremely encouraged that BP found our
processes and policies to be best practice and in line with their top
refineries globally.
Now to the CCR Project...
The proposed $365 million investment in a Continuous Catalyst Regeneration
Platformer (CCR) is a margin enhancing project that will grow the Company by
replacing a 1960s semi-regeneration unit that would otherwise require a spend
of around $105 million to extend its operational life.
Last February the Board of Directors agreed to fund a Front End Engineering
Design (FEED) report for a Growth Project and this report - with a detailed
breakdown of cost and schedule of work - was included in the investment
proposal put to the Board on 21 February 2012.
This Project is attractive from a financial perspective - and expected to
deliver a significant increase in intake volumes and refining margins. This
will lead to increased revenue, profitability and dividends. A combination of
improved energy efficiency, reduced fuel losses and better product yields
will deliver higher margins, and strengthen our competitiveness against
imports.
The CCR Project is also strategically important: It helps realise Refining
NZ's aims, and delivers significant value and benefits for shareholders,
customers and other stakeholders.
In February, the Directors supported the Project and recommended it to
shareholders for approval at today's meeting.
It is important to clarify here that the majority of the Directors support
the CCR Project - and of that majority, there was unanimous support from the
Independent Directors.
I can also add that there was lengthy and detailed discussion at the Board
about the Project. We ensured that the Directors were given all the
information they needed and had adequate time to consider the merits as well
as the risks of the CCR Project. As you would expect, there was a diversity
of opinions expressed by the Directors and the flavour of those discussions
is captured in the questions and answers included in the Explanatory Note
that all shareholders will have received. We believe that a diversity of
views expressed at the Board table makes for well considered decisions that
are in the best interests of the Company.
Under the NZ Stock Exchange rules a shareholder vote is required where the
value of the proposed investment is greater than half the Company's market
capitalisation, based on the average market value of the Company over 20
working days preceding the Board meeting. On 21 February 2012 the total value
of the Growth Project after allowing for the definition costs (FEED),
construction and capitalised interest was approximately NZD 425 million -
greater than half the Company's average market capitalisation of NZD 785
million.
Last week, we undertook a series of briefings in Whangarei, Auckland,
Wellington and Christchurch with CEO Ken Rivers, myself, fellow Independent
Director, Peter Springford and members of the Leadership Team.
This was a welcome opportunity to talk directly to individual shareholders,
institutions and the media about the proposed expansion. Our purpose was to
ensure that shareholders had all the information they needed to make an
informed decision at today's meeting.
There was strong support from the many smaller shareholders we spoke to at
the briefing sessions and this has been particularly encouraging for the
Company.
The Board is firmly of the opinion that this investment will provide
sustained, long-term benefit to shareholders, customers and other
stakeholders.
This is an important decision and the Board encourages all shareholders to
support the proposal and exercise their vote today if they have not already
done so.
One point of note: Should the CCR Project not be approved by shareholders
today, the Company will immediately move to undertake the $105 million
Re-life alternative. At the same time we will need to write-off the costs of
the CCR Project Front End Engineering and Design (FEED) report in the current
financial year. The cost of the FEED report amounted to around $21 million.
Looking ahead
We have 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.
This matrix recognises that the business environment remains volatile. The
matrix also takes account of the floor mechanism in our processing agreements
with our customers, which is entirely unique in the refining sector.
The Growth Project discussions with customers has identified a diversity of
views but also some points of very close strategic fit which could be
developed to our mutual benefit. We will be exploring this in the coming
months.
We will also be examining the Company's depreciation policy. We have for some
time adopted an aggressive depreciation charge on the Company assets and
management and the Board agree that this now needs to be reviewed.
The Company has also been focused on de-leveraging during the GFC (Global
Financial Crisis). While this was prudent for the times, management and the
Board recognize the need to consider whether this is appropriate for the long
term capital structure of the Company. We will be looking at our approach to
debt later in the year -and at the same time, reviewing the Company's
dividend policy.
The Directors consider the fundamentals of the business to be sound and
capable of weathering volatility: - the business is highly cash generative
and well structured with a strong balance sheet. Having a clear direction, a
robust strategy and business plan executed by talented individuals means we
continue to make headway even in the most challenging circumstances.
Ken Rivers has announced his intention to return to the UK later this year.
Ken has made a significant contribution to the Company during his four and a
half years as Chief Executive and has been instrumental in formulating
strategy and developing leadership capability at Refining NZ.
I would like to thank Ken for his contribution and wish him well for the
future. The Board has commenced an international search and an announcement
on Ken's replacement will be made later in the year.
Thank you to my fellow Directors for their respective contributions during
the year. I also wish to extend thanks to Ken and his Leadership Team,
especially for the preparation of the Growth Project investment proposal and
ensuring the Directors were kept apprised of the details as the proposal came
together.
Thank you.
David Jackson,
Chairman
The New Zealand Refining Company Limited
ENDS.
End CA:00222289 For:NZR Type:MEETING Time:2012-04-27 15:51:47
