It is a pleasure to welcome you all to the Company's Annual Meeting of Shareholders.
The dominant theme of the Company's performance in 2018 is the essential value that the strong and reliable running of our refinery has for the future of our business, for our shareholders, customers and for New Zealand's energy future.
In 2018 we successfully completed the first planned total refinery shutdown in 14 years which is a credit to the shutdown crew and to everyone at the refinery. This vital re-investment in our infrastructure sets us up well for the years ahead and its successful completion has already contributed to the optimal running of the refinery's processing units as evidenced by the highest ever second half throughput at the refinery.
The Net Profit after Tax (NPAT) of $29.6 million, reported for the year ended 31 December 2018 down from $78.5 million in 2017, reflects the impact of the shutdown in the first half of the year and the higher capital spend this required. This was partially offset by healthy refining margins, a weaker exchange rate and a strong operational performance in the second half of the year. However, we are conscious that the total returns to our shareholders were unsatisfactory. Addressing this issue is of an immediate priority for your board and management and is at the heart of the strategic review which we signalled in February. We are very pleased with the progress made and will have more detail available for shareholders at our strategy day in June.
Mike will go into more detail about the Company's performance in his presentation. For now I will focus on a number of the highlights.
The Gross Refining Margin averaged USD 6.31 for the year down from USD 8.02 per barrel the year prior or USD 7.33 when normalised for the 2018 shutdown. This is at the top of its historical USD 4.00 to USD 6.00 per barrel range (prior to the Te Mahi Hou investment), reflecting global demand growth and our continued progress in optimising the Refinery's operations.
The planned maintenance shutdown was completed safely in June. A combination of complex major work, emergent work and inclement weather meant that the shutdown took longer and therefore cost more than was expected. The restart of the Hydrocracker following the shutdown was delayed by eight days due to a manufacturing weld failure on a newly installed isolation valve on the Hydrocracking Unit and we are continuing to follow this up with the supplier involved.
Despite these setbacks, in conjunction with the shutdown we were also able to successfully complete the major refurbishing of the Refinery's Hydrogen Manufacturing Unit. This investment underpins the Refinery's role in the fuels supply chain and presents the exciting possibility of developing further hydrogen infrastructure, which we believe is critical to supporting a low carbon economy, and to New Zealand continuing to meet its climate change obligations.
Health, and Safety
As a high hazard facility we are extremely conscious of our health and safety performance. We hold ourselves accountable for the health and safety of every individual at the refinery and are always looking to lift our safety performance so that all of our people go home safely every day.
In 2018, we achieved a major milestone with the submission of our Safety Case to WorkSafe, a written demonstration that our refinery has the ability and means to control major incident hazards effectively and have engaged extensively with the community on this.
Our personal and process safety performance in 2018 was impacted during the shutdown but was much improved in the second half of the year. We continue to look for ways to improve our health and safety performance and Mike will go into more detail on this in his presentation.
We aim to deliver a world class environmental performance and as one of the larger industrial emitters of carbon dioxide in New Zealand we are highly conscious of our responsibility to minimise the environmental impact of our refining operations.
Our commitment to improving our energy performance is longstanding and has seen our CO2 intensity reduce by around 20% since 2008, helped by the agreed reductions pathway under the Negotiated Greenhouse Agreement (NGA) with the Crown and by the Te Mahi Hou project which dropped CO2 emissions by 120,000 tonnes per year - the emissions equivalent of taking 60,000 Toyota Corollas off the road, or New Zealanders investing $4.6 billion in the Tesla 3.
The work we've undertaken to reduce our carbon emissions means that our refining business is well placed to meet the challenge of climate change and in light of the Government's regulatory agenda - to help New Zealand meet its obligations under the Paris Agreement.
In the regulatory space the Company is close to agreeing the status of the refinery for when the Negotiated Greenhouse Agreement we have with the Crown expires at the end of 2022. We are expecting this to be formally confirmed by the Government later in the year. Separately, the early renewal of the refinery's resource consent ahead of their expiry in 2022 provides a platform to pursue a refreshed business strategy based on improved performance and growth opportunities capable of significantly enhancing shareholder value while also contributing to the Government's green agenda.
This aligns with our belief that real and sustained value is created when the benefits are delivered across multiple fronts: - financially, environmentally and socially.
In December, the Government commenced its Inquiry into the September 2017 pipeline outage. Its purpose is to draw lessons from the outage to inform how the fuel industry and the Government could improve the resilience of fuel supply to the Auckland region. The Refinery is actively working with the Inquiry team.
While the Company has publicly welcomed the Inquiry, the Board wishes to emphasise the findings from the Northland Regional Council investigation namely, that the rupture was beyond the control of RefiningNZ and could not reasonably have been foreseen or provided against, and that Refining NZ took all reasonable steps to prevent the rupture and adequately mitigated and remedied the environmental effects.
The Board also notes that a considerable amount of management time and expertise is being expended to ensure that the panel has all the information required to conduct a thorough and robust Inquiry. At the same time we are also providing information to the Commerce Commission study into retail fuel markets. Our expectation is that the Inquiry will arrive at constructive measures that will improve the resilience of Auckland's fuel supply and secure the confidence of government, our customers, business and the travelling public.
Since the pipeline was originally commissioned in the mid 1980's, Refining NZ has demonstrated its ability to deliver high quality fuels reliably to NZ's largest market; increasing the capacity on the pipeline, through a substantial capital investment programme, by around 60% or 1.4 billion litres per annum. As a result, a record 21 million barrels of fuel was able to be delivered through the pipeline in 2018 which is equivalent of 101,000 tanker trucks between Marsden Point and Auckland city.
With regards to improving the resilience of fuel supply to Auckland, we remain willing and able to invest and have made a number of recommendations to industry and Government.
Over the past seven months, Refining NZ's Management and Board have been focused on defining a business strategy that will shape the future direction of the Company. It recognises the major contribution of the Refinery to the national fuels supply chain and to Northland as well as the national economy. It also acknowledges the challenges presented by the need to decarbonise the country's energy infrastructure.
At the heart of our new strategy we are driving for a profitable core refining business: commercially attractive, safe and reliable. The volatile nature of refining means that in the last 12 months shareholder returns have not been as favourable as they have been over the medium term. The Board and Management are highly aware of this and are looking to establish a more stable earnings base for our shareholders. Our strategy will look to generate further value out of the core business, leveraging existing assets and capabilities to lift the Refinery's operational performance and improve shareholder returns. At the same time we are exploring adjacent energy opportunities that will contribute to a sustainable refining business for the medium and long term.
We are an essential player in the energy sector with a significant role to play in helping New Zealand meet its climate change commitments and shaping the future of transport fuels. With New Zealand's energy future in mind, we are looking to build on the core critical infrastructure that we operate through the judicious choice and implementation of economic new technologies.
As I referred to earlier, there will be more detail to share about our new strategy in June 2019.
Subordinated notes issue
During 2018 the Board evaluated alternatives to optimise the capital structure of the business and this work culminated in the issue on 14th December of $75 million of unsecured, subordinated notes for a term of approximately 15 years. The notes provide greater financial flexibility by diversifying Refining NZ's funding sources. The net proceeds of the issue were used to repay a portion of the Company's existing bank debt.
The Company's Directors resolved to pay a fully imputed final dividend of 4.5 cents per share which was paid on 21 March. With an interim dividend of 3 cents paid in September, the total dividend payment for the 2018 year was 7.5 cents. This was in line with the company's dividend policy of paying 80% of Free Cash Flow, subject to the Board's consideration of the Company's medium-term asset investment programme, 20% targeted average gearing level and future circumstances. While this year's dividend was lower than the previous year, as I outlined earlier, the 14 year shutdown did impact the Company's performance in 2018. Our focus remains on building on the investments we have made and continuing to improve our operating efficiency to lift the Company's performance.
Board and management changes
In November James Miller was appointed as an Independent Director who brings a wealth of experience and insight to the Refining NZ Board from the financial markets. You will have an opportunity to hear from James a little later, when you will be asked to confirm James' election to the Board. In February 2019, Mark Tume resigned as a Director after eleven years on the Board. Mark has made a significant contribution to the Refining NZ Board including two years as the chairman of the Audit, Risk and Finance Committee. He is held in high esteem by fellow Directors for his professionalism, depth of experience and the commercial acumen he brought to the Refining NZ Board table.
Thank you Mark for your significant contribution and I would like to welcome James to the Refining NZ Board.
Following an extensive international search, the Board was pleased to announce the appointment of Mike Fuge to the role of Chief Executive Officer in August of last year. Mike replaced Sjoerd Post who had held the role since 2013. The Board is confident that Mike's leadership and experience in the oil and gas, energy and renewables sectors is extremely well placed to lead Refining NZ through the next phase of the Company's journey as we leverage the Refinery's contribution to the low carbon initiatives arising out of the Government's commitment to zero carbon emissions by 2050.
Looking ahead, a secure future for the refinery will be built on continuing to improve our operational performance, which is a core strength for the business, continuing to manage our cost base, and realising the opportunities to continue to transform our business in realistic, credible steps, into a sustainable, lower carbon energy producer.