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

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

Good morning, everyone, and welcome to Refining NZ's 2021 Interim Financial Results Briefing. I'm Naomi James, CEO of Refining NZ, and I'm joined by our CFO, Denise Jensen. I hope you're all keeping safe and well at home in your bubbles during this lockdown. Denise and I are thinking that there must be something about the timing of our results, having done our last -- our full year results in February when Auckland had been locked down. Before getting started, I draw your attention to the disclaimer upfront in the presentation on Slide 2. The briefing today will effectively be divided into 2 parts, the first a briefing on our 2021 interim performance and a strategic review update on the import terminal conversion. Please go to Slide 4 in the investor pack. Starting first with our performance in the first half, where the Refining NZ team has delivered what we set out to achieve. In short, that was to operate cash neutral at the fee floor, while providing the time and space to assist the import terminal option, negotiate commercial arrangements with customers and to ready our community and workforce for this change. We will go through the detail as we walk through the pack, but in summary, we have maintained our focus on safe operations and meeting our customer commitments. We have completed a major turnaround and the first statutory inspection of the CCR unit safely on time and below budget. And we continued our financial discipline to maintain cash-neutral operations at the fee floor. This has enabled us to look to the future as an infrastructure business, negotiate a commercial agreement, which was competitive for our customers and also delivered fair value for shareholders for our infrastructure. We now have a mandate to progress to an import terminal model, having received strong shareholder support, with 99% of shareholders voting in favor of the proposal, including each of the oil company shareholders. Please turn to Slide 5. This slide shows a snapshot of some of our key metrics. Our personal safety performance was strong. We delivered to customer plans. And with the simplified refinery changes, where we reduced capacity, changed maintenance philosophy and reduced headcount, we were able to fund the turnaround and maintain cash-neutral operations at the fee floor, with net debt closing flat at $230 million. Now to run through the details of our first half '21 performance. Starting with safety in Slide 6. Safety, as we always do. We had no recordable cases in the first half of 2021, which means that we have not had a recordable personal safety incident for over 18 months. This is an outstanding result and more noteworthy for the fact that we completed a major turnaround during this period, a real testament to the skill and commitment of our people and the safety culture on display every day at our site. Two process safety incidents were recorded in the period, with both being responded to quickly, resulting in no significant damage to the plant. The company recorded several unauthorized releases outside of consent when noncompliant firefighting foam was used during recent fire-training exercises. We have the company undertaking an independent investigation and taking prompt action to mitigate the effects of the discharge, further strengthen on-site controls and undertaking testing to determine if further treatment or remediation is required. From testing results to date, we have found that concentrations of contaminants discharged to the harbor were insignificant, and we are obtaining advice on what further remediation might be required on. During the period, we were granted a 35-year resource consent to operate both the refinery and import terminal operations at our Marsden Point site. As part of the reconsenting process, the company undertook an extensive assessment of the environmental impacts associated with continued operations at Marsden Point, including the effects of our activities on the harbor, land, air quality and the surrounding community. Since this time, we have been engaging openly with our [ Ewing ] partners to share the active management plans that we have in place to ensure that we do not have a negative impact on our surrounding environment. The conditions of our consent include protections to maintain the high standards that we have in place. And for many of our team based up at Marsden Point, this is our community, too, so we have a strong personal commitment to preserving and protecting the natural environment around us. Turning to Slide 7. The simplified refinery was implemented from the start of this year, reducing refinery capacity by around 18%. This change, coupled with the impact of the 4-week maintenance turnaround, which impacted operational availability, reduced the refinery throughput by around 15% compared to the previous corresponding period. Demand for jet fuel remains weak at around 40% of pre-COVID levels due to the travel restrictions which continue to impact upon RAP throughput, although gasoline and diesel demand prior to the current lockdown had recovered to pre-COVID levels. In terms of the impacts of this current lockdown, which, of course, is not covered by the period we're discussing today, it's simply too early to tell what effect this will have on demand at this stage. Turning to Slide 8. Very little has changed in the broader environment in which we operate. Refining margins continue to be weak and excess refining capacity in the Asia Pacific region remains. While Refining remain volatile, we have seen limited improvement in the supply-demand balance, and expert analysis agrees that we should not expect a significant improvement in margins in the near term. The Singapore complex margin, averaged negative USD 2.09 per barrel, with the uplift earned by Refining NZ strong at USD 5.28 per barrel due to lower fuel and loss compared with the previous corresponding period when the plant was operated on a cyclic basis, coupled with a lower fuel oil make in the current half and a cheaper crude slate relative to the Dubai benchmark. And refinery earned an average GRM for the year of USD 3.19 per barrel, which was below the fee floor throughout the half, and our customers made fee floor top-up payments of $29 million in the first half. GRM has now remained below the fee floor throughout the 18 months ended 30 June '21. And our customers have made fee floor subsidy payments amounting to around $118 million over this period of time. I will now hand over to Denise to take us through the financials.

Thank you, Naomi, and good morning, everybody. So let's pick up on Slide 9 of the presentation and start with a snapshot of the financial results. Processing fee revenue was at the fee floor, as Naomi has mentioned, for the 6 months ended 30 June 2021, as it was in the previous corresponding period. Total Refining revenue was down around $6 million due to the constrained supply of natural gas in the New Zealand market, which, of course, we procure on behalf of our customers. Although pipeline volumes were down by 5%, infrastructure earnings were up by $2.5 million due to an additional $5 million revenue earnings from the import of refined product into Marsden Point by our customers during the full week maintenance turnaround. Our total revenue was in line with the corresponding period. Adjusted EBITDA, which really means EBITDA adjusted for noncash items, was up 70% or $15 million higher reflects the impact of the simplification changes we have made at the start of the year, and I'll come back to this shortly. CapEx was largely the same as the previous corresponding period at around $21 million, of which $12 million was spent on the maintenance turnaround, including the first statutory inspection of the CCR unit. And of course, as Naomi mentioned, that was completed below budget. The changes we made to the operating model, coupled with strong financial discipline, enabled us to maintain cash-neutral operations at the fee floor, with net debt closing at $230 million. Overall, we report a net loss after tax of $4.9 million compared to the loss of $186 million in the previous year, which, of course, included a noncash impairment of Refining asset of around $158 million. Now if we could just turn to Slide 10. This slide really provides a waterfall between EBITDA for the 6 months ended 30 June 2021, to the previous corresponding period. And you'll see that overall EBITDA has increased by 169% or around $26 million due to the successful delivery of our plans. You can see the split between the margin and volume impacts on refining revenue, noting that the margin was higher in the current period but still below fee floor as it was in the corresponding prior period. Our customers provided $29 million worth of fee floor subsidy payments, increasing the gross refining margin by around USD 2.27 per barrel, which, of course, protected us from the full impact of that weaker business environment. We see the benefit of the refinery simplification on our cost base, with savings of around $14 million due to reduced variable costs primarily electricity and the impacts of other changes, such as the campaign maintenance approach that we have adopted that -- and also the 25% reduction in our staff numbers on site. As Naomi mentioned earlier, the refinery simplification really was necessary to enable us to maintain net cash-neutral operations at the fee floor. In parallel, we've also undertaken a balance sheet optimization project which included making offers to pensioner members of both our defined benefit pension plan and our post-retirement medical scheme to convert the benefit entitlement for cash lump-sum. A large number of our pensioners chose to accept the offer on an actuarial mutual terms, which reduced the overall or gross balance sheet liabilities by around $22 million, which resulted in a settlement gain of around $9 million being reported in EBITDA, which is really due to the difference between the lower risk-free discounting rates used for financial reporting purposes. And on that, I will hand back to Naomi to provide a strategic review update.

Thanks, Denise. We will now move into the second part of today's presentation, which provides an update on our strategic review and starting on Slide 12 of the presentation. On this slide, we outline the significant milestones that have been achieved in the last 6 months to progress strategic review outcomes. We reached a principal agreement in February with BP, followed by Z Energy in May and then well progressed now with Mobil. We received strong shareholder support at the special meeting held on 6 August, with 99% voting in favor of the proposed import terminal model including Mobil, BP and Z Energy, our oil company shareholders. This gives us a mandate from shareholders to finalize customer negotiations and for the Board to proceed to a final decision. Since the vote, we have announced this morning, we have received consent from all of our lenders for the conversion and signed facility agreements to secure the funding for conversion costs. These are subject to satisfaction of conditions precedent, such as signing of terminal services agreements with each of our customers and a final investment decision by the Board. Front-end engineering and design and detailed planning work is now well progressed with a strong focus as we prepare for a final decision on supporting our people through the change. We have also completed our initial assessment of potential Marsden Point repurposing options with a number of options being progressed, and we'll talk to this more shortly. This means we remain on track for a final investment decision around the end of September this year, which would enable a conversion to occur by mid-2022. Moving now to Slide 13. This slide presents the stages of our strategic review to this point as well as those still to come. The key effect for us to finalize before a final investment decision is taken is negotiation of binding terminal services agreements with our customers, consistent with the terms approved by shareholders as well as the detailed planning required to confirm conversion plans and timing. And we are working to complete both of these by around the end of September. Once the final investment decision is made, the next phase is then focused on running the refinery through to closure, and processing and cleaning out the product on site as well as undertaking the work needed for commencement of general operations and preparing our organization and workforce to operate as a terminal, decommission the refinery, and support the transition of our staff through this change. Following the refinery close, the decommissioning works will continue for around 2 years and terminal upgrade works for 5 to 6 years. We understand that the transition to an import terminal over this time will involve significant change for our highly capable employees who have been committed to operating the refinery safely and to a high standard over many, many years. And I want to once again thank our whole team for their professionalism and dedication to maintaining safe operations throughout this period of change for us all. We remain focused on supporting our workforce through this transition and are continuing to work with members of the refinery transition working group, including central government, Northland councils and regional development authorities, [ Ewing ] and Union to put in place the plans needed to support this transition. Turning to Slide 14. We have now completed our initial assessment of the range of opportunities to repurpose the Marsden Point site. There is a very long list of opportunities raised, and we have focused on those opportunities that have nearer-term potential, including to create jobs and economic development in Northland as well as those opportunities to utilize Marsden Point's unique capabilities to support the decarbonization of transport fuels over time. We're continuing to negotiate with customers additional private storage arrangements, which would increase our utilization of existing take capacity at Marsden Point and provide incremental returns to shareholders. We also remain ready to support any government measures to support minimum stockholding levels in New Zealand. We are also exploring opportunities for other imports into Marsden Point such as very low sulfur fuel oil and bitumen. And we have recommenced work on our Maranga Ra solar project to determine the best approach to secure a competitive long-term electricity supplied to the terminal. We are engaging with the New Zealand government in relation to their proposed biofuels mandate and the opportunity to manufacture sustainable aviation fuel at Marsden Point in the future, which will be needed to decarbonize fuel for aviation as well as opportunities that use Marsden Point infrastructure to support biofuel imports. And longer term, with parties interested in the potential for hydrogen production, import or storage at Marsden Point, looking at the opportunity to do that at Marsden Point with export and import capacity and proximity to the largest population vote in New Zealand. Each of these opportunities is likely to involve partnership with others as we reposition our company as an infrastructure business, underpinned by long-term customer contracts and a disciplined approach to investment. And each of the opportunities have different time horizons, giving our company a long-term future contributing to New Zealand's energy needs. That concludes our formal presentation for today, and I will now hand back to the operator for questions.

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

A couple of questions from me. First one is actually just around, I guess, the discussions with the customers, and I guess, in particular, Mobil, the one we still haven't heard from. And is it right, probably for us to assume that unlikely to have an in-principle agreement announced from them is going to be going straight to the sort of the formal TSA agreement and timing? I got the sense you're talking about the back end of September, so we shouldn't necessarily expect any announcement until then.

Andrew, yes, thanks for the question. So in terms of will there be a term sheet or do we go straight to general services agreement, I'd just say there, watch this space. We obviously don't comment on specifics of customer negotiations as they're continuing. But what I can say is we're working with all 3, including Mobil, to get to a point where we've got those detailed binding terminal services agreements in place by the end of September. And so to the second part of your question, the timing one, and when that's all likely to come together, both the customer agreements as well as a Board decision. I think your assumption there is right that, that will happen at the same time, when we've been able to finalize all the aspects. And what we are working to timing-wise right now is around the end of September. So call that in September, start -- early October.

Just a couple of things, I guess, on the results itself. The CapEx number seemed to be a little bit lighter than certainly what I was looking forward to in the first half. And I guess the chunk of that is due to the outage came in below budget. Are you able to just give an idea of what CapEx there is left to go for the rest of this year, in terms of just operating the refinery?

Yes. I want to pass that one to Denise to respond then.

Andrew, look, you're right. I mean we were very pleased that the turnaround did come in under what we were expecting from a budget perspective. As I sort of look forward to the balance of the year, obviously, we'll be spending less in the second half, given that we don't have that major turnaround, and the results we did say that we have spent about $12 million on net turnaround in this half. So I would sort of guide you towards at least to what we spent in the first half and if you adjust for that turnaround would be what we're planning for.

This sort of sounds around about 2-ish based on what you did in the first half to non-turnaround with?

Maybe slightly higher than that, Andrew, I think.

Yes. Yes. Okay. Second question -- my next question I just had was just around the redundancy costs, and I guess, the treatment of the defined benefit obligations and the accounting around that. Am I right in saying that all of those costs -- all the cash has gone out and those redundancy costs are sort of built into that gain that you had? Because it looked like there wasn't much on the OpEx side of things to show up for there.

Yes. Thanks, Naomi. Just on the defined benefit, obviously, there's -- what's sitting within the defined benefit itself, there are cash reserves and investments to enable those liabilities to be paid out from the funds itself. Now really, what flows through the P&L into EBITDA is, because we have a different discounting rate for, obviously, what -- was actually really neutral for the members, so they were paid out via complete entitlements from the fund, and that's based on long-term investment rates being the discounting factor that's applied, which were accounting purposes, we had to apply a free rate, which is significantly lower than that. Hence, when you reduce the liability, you get a flow-through into the P&L, which is the settlement gain. So the redundancy costs, I think that's a separate question. So the redundancies that were made as part of the simplification changes at the start of the year were actually provided in the full-year results in 2020. And obviously, some of those -- that cash was paid out from the company earlier on in this year.

That makes sense. And final one is another accounting one, just in terms of -- going through your accounts. Am I right in saying that the impairment that will go against the refinery, that will be based on the FID decision? So assuming that, that goes through to point your conversion that impairment will take place this financial year as opposed to next financial year?