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    Collins Bennetts

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    Correspondence between Energy and Resources Minister Judith Collins and Z Energy chief executive Mike Bennetts.

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    Collins Bennetts

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    Hamish
    84K views7 pages
    Correspondence between Energy and Resources Minister Judith Collins and Z Energy chief executive Mike Bennetts.

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    Collins-Bennetts

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    Correspondence between Energy and Resources Minister Judith Collins and Z Energy chief executive Mike Bennetts.

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    © All Rights Reserved
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    84K views7 pages

    Collins Bennetts

    Uploaded by

    Hamish
    Correspondence between Energy and Resources Minister Judith Collins and Z Energy chief executive Mike Bennetts.

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    © All Rights Reserved
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    From: Sent: Tuesday, 12 September 2017 11:30 AM To: Subject: FW: 2's media statement. From: Sent: Tuesday, 4 July 2017 10:45 AM To: mike.bennetts@z.co.nz Ce: Jonathan Hill ; @parliament.govt.nt>; @parliament.govt.nz> \ Subject: FW: Z's media statement. Hi Mike, Ana Please refer to the email below regarding Z's media statement beldw/: We look forward to hearing from you. Thanks 0) \ Regards Press Secretary | Office of Hon Judit Communities| MP for Papakura 4 Ning. | Patliarmsi sll. DDI: 04 817 9819 | Mabie: www.beehive,gevt.nd <->! Collins | Misister of Rexenue | iMinister of Energy & Resources |Minister for Ethnic cutive wie “9450, br Pealard From: 2 Sent: Tuesday, 4 July 201740:17 a.m. To: Jonathan Hil Ce: :@parliament.govt.nz>; a @parliament.govt.nz> Sbfect: Z's media statement. Hi Jonathan, ‘Thank you for sending though Z's statement. As discussed, there are a few factual inaccuracies which need to be corrected. * The bit that reads: “the data being reviewed did not include the past 18 months...” is inaccurate and should be corrected. This claim would mean that no data for 2016 had been incorporated into the Study. This is not the case. All of the margin analysis undertaken in Chapter 4 carried through to FY2017. ‘* Additionally, the statement notes the “singular recommendation” of the report. This is incorrect. The report makes three recommendations. ‘+ I note the section of the media release that reads “Z has offered to provide MBIE with more data to ensure higher levels of transparency, including daily pricing data to enable more accurate monitoring... ". The ‘Study validates MBIE’s margin monitoring. Section 4.6 of the Study reaffirmed the robustness of the method used by MBIE to calculate and monitor margins over time. Differences between MBIE’s reported margins and the gross margins provided by fuel market participants can be attributed to the inclusion of 1 additional expense items in the fuel market participant calculations. We therefore consider it erroneous to ‘convey to the market that changes to MBIE’s margin monitoring are needed to ensure higher transparency. Thanks and Regards Press Secretary | Office of Hon Judith Collins | Minister of Revenue | Minister of Energy & Resources | Minister for Ethnic Communities} MP for Papakura 4.1 Executive Wing | Parliament Buildings, Wellington 6160, New Zealand DDI: 04 817 9819 | Mobile www beehive.govt.nz > @. ENERGY 8 August 2017 Hon Judith Cotins Energy Minister Poriament Buildings WELLINGTON Via email NZIER Fuel Market Performance Study A Dear Minister a This leer is 2's response fo your letter of 3 July 2017 following jhe felease ol the 'NTIER Fue! Market Performance Study (the Study). a OC \8) wishes to formally record its disappointment witii'the Sludy. The fepor was incomplete in terms of both content and participation; quality was compromised by immovable deadlines; it was based on ‘avery poor level of understanding of this industry and almost exchusively failed to address the Study's ‘own terms of reference This inckided fundamental issues such Gs the "financial performance of the industry" - specifically ROAGE othe}, financial meltics relevant to the industry, cost of capital benchmarking, net margins'and other markél performance measures. The report almust CUinblotely ignored Z's own comprehensive submission into the process which actually addresssa of aspects of the terms of reference. We ackfioitedke the Study didl heel the terms of reference for gross margins and, to some extent, the Uifferences in piicing between regional morkets. However whatever conclusions were made in these areas wefe devoidiof any market context. For example. the price differences belween regions was explored but the report was entirely absent of analysis or commentary about the same price diversify that exsts within large urban markets lke Auckland. Fodhermore, he much quoted 13 cents per litre increase in Retail gross margins is completely without ralgrence fo how that relates to capital invested or increased operating Costs. For the record, Z's inet margins for the comparable period only increased by cents perfire, and this was evidenced in our submission and the financiat data that was provided, With respect to your suggestion that Z submit alongside other industry participants, Z will not be pursuing that option. Z already has concems about the way in which existing Industry structures are interpreted and does not wish to conflate that further. The Stuay’s frustrations with the diigence and pace of some participants’ responses is another reason why Z will not pursue this option. The next step Z will take will be to submit as requested by the end of September. Our submission will be made without any discussion with any other market participants for competitive reasons and will cover four key areas: + As requested in recommendation 2, an analysis of the current data sharing structure, i.e. borrow nd joan agreements with a cost/benefit analysis around any changes in this area, including those Z might lead. ‘3Qveens What POBox 2091 Welington 6149, Now Zeolond 800 474 385 + Edending what was requested in recommendation 3, an analysis of the pros and cons of the suggested spot wholesale market in contrast fo the existing contracted wholesale market. This wil include a cost/benefit analysis of any changes in this area, including those Z might lead independent of what other participants may choose fo do. + Not requested but essential fo your comments around NZ's fuel prices relative fo the OECD data, review of the current MBIE margin monitoring programme and OECD tuet pricing analysis with ‘accompanying recommendations. We have akeady shored with MBIE some potential ‘weaknesses in how the calculation of selling prices (from which margins ate derived) is not sufficlently representative of the market, especially in certain marke! conditions lke rapidly tating import prices. KONE \ + Recording our response fo the more significant and matetiol gapsin the Study's Feport again! terms of reference. z= SS T has always operated its business mindful of our responsibilies trois customers, our stakeholders, cand our investors. We fully appreciate ihat energy in ab of ts formnsis something which. at times, can be of intense public and political interest. Z doesn't believe we can Canfinue to run a successful operation that leroy powers the New Zealand economy if there ate-fundamental questions Unresolved or significant areas of dissatisfaction omongst ony,af these groups. On that basis there will be o discusign within7 as ta whdther We make a public call for a market study by the Commerce Comssion Under thepeniting legislative changes. An independent, Professional and welLresourted-iuiket study wouk! enable Z to prove that this industry is highly compeiitive; there we no matéiid bartiefs toyentry; and retums ore fair and reasonable. Such a process would be @ alifCally durable Gnd highly transparent solution that Z beleves would likely Satisfy oll our cUsfomefs, stakeholders and investors. In the freanynile we wil work cOnstrUctively with your officials and thoroughly meet ail aspects of the study's fecommendations. t ‘ean \ ¥ )ike Bennetts Chiet Executive Office of Hon Judith Collins ‘MP for Papakura Minster of Revenue yi Minister of Energy and Resources 9 August 2017. Minister for Ethnic Communities Mike Bennetts Chief Executive Z Energy 3 Queens Wharf PO Box 2091 Wellington 6140 Dear Mike Thank you for your letter sent via e-mail dated 8 August 2017 regarding the Fuel Market Financial Performance Study. : As Ihave stated publicly, | am concemed that 2 steady trend of rising retail fuel margins may not be serving the best interests of consumers. | was surprised, in our recent meeting, that you mentioned taking my public commiéts on this matter with a “grain of ‘salt’. | can assure you that any comments | make to the public or media are, without exception, my genuinaly Held views and position, The conclusion of the Study certainly supports my view, a3 does feedback | have had from New Zealanders, and | find it surprising that you would not take those views seriously. Z Energy's concems with the Study ‘Your letter raises 'a number of points with regard to the Study itself and to your proposed ‘approach moving forward. | will respond to each in turn. While the Study was not able to definitively answer the question as to whether industry Tetums were reasonable due to shortcomings in data availability and data comparability, it did bear out my concerns and confirmed the trend of rising retail margins across the industry, with some parts of the country seeing a sharper rise in retail margins compared to others. | am advised that Z Energy's provision of data and information has consistently been generous but at times confuses rather than enlightens the situation. Your letter is a case in point. You state that the increase of 13 cents per litre in retail gross margins quoted in the Study is non-representative of Z Energy's net margin increase over the period. The letter states that Z Energy's net margin increased by cents per litre, and that this had been communicated in your submission and in the financial data provided as part of the Study. This statement is misleading and incorrect on a number of levels and borders on the disingenuous. Specifically: * You are not comparing retail petro! and diesel margins. The increase in retall gross margins of 13 cents per litre stated in the Study relates to retail petrol and diese! margins whereas the net margin of __cents per litre referred to in your letter relates to all fuel and non-fuel sales across all channels. 1 Private Bag 18041, Parliament Buittings, Wellingion 6160, New Zealand, Telephone +54 4 817 6806 Facsimile +64 4 817 6506, * Your own financial data provided as part of the Study showed that retail gross. margins had increased by cents per litre between FY2012 ( cents per litre) and F¥2017 ( cents per litre). This is higher than the industry average ‘porease in gross retail margins of 15.0 cents per lire calcuaed ss part of the iy. * The net margin increase of __ cents per litre stated in your letter was not provided in your submission. The submission referred to a net profit after tax increase of cents per litre from 2012 to 2016 (page 14). «Neither the net margin increase of |_cents per litre stated in your letter nor the cents per litre net margin increase stated in your submission correspond to your publicly reported financial statements which show 2 1-77 cant per litre increase over the period, as shown in the table below. ZEnergy replacement cost earnings 2. FY 2012 FY 2017 Difference ‘Sales volumes (milion tres) 2647.) 3705 148 Net profit replacement cost (million $) 6 Ae co Not ttre (cents per itt) su . The leer 535 Gol ore A27G ptSlonce hh the Shady to how val grasa margins relate {9 capital invested. This is not true. In fact, the amount of capital investment-undertaken by industry was specifically reviewad by the Study’s authors who were able to conclude on page 37 that: “Our review of the financial statements for the major participants did not identify significant capital investment ‘by the participant [sic] during the period under review which would explain such an increase in margin.” Similar observations can also be made around your concems that an analysis of Retum ‘on Avarage Capital Employed (ROACE) was not undertaken in the Study. The initial data template sent to fuel suppliers in March 2017 was intended to provide a standardised form by which retums could be compared across industry participants. Z Energy, alongside all the other fuel suppliers, argued that it would be unable to complete the data request as if did not “substantially reflect how Z captures, manages and uses data to operate our business."* By agreeing to allow fuel suppliers to provide data in a format and a form that was easiest for them, there was an inevitable risk that data provided by fuel suppliers would not be comparable. This is exactly what transpired, notwithstanding the shortcomings in the data provided by some fuel suppliers. * Letter by Lindis Jones to Jamie Kerr, 17 March 2017. 2 Where returns data were provided, as in the case of Z Energy, it differed materially from retums analysis previously undertaken by my officials and extensively reviewed by Z Energy's corporate finance team. Specifically, in October 2016, Z Energy reviewed and “did not disagree” with analysis undertaken by MBIE that showed that Z Energy's teplacement cost ROACE (excluding refining and revaluations) for FY2016 was 22.5 percent. As part of the Study, Z Energy submitted that its ROACE for FY2016 was, per cent. A number of reasons were put forward to explain the significant difference in results (inclusion of Refining NZ, capitalisation of operating leases onto the balance sheet, use of a 12 point average rather than a 2 point average, and inclusion of additional expense items, among other reasons). Given the discretion available to fuel suppliers in the range of assumptions used, it is revealing that even a specialist accounting firm of the repute of Grark Thomton was unable to compare the retums data provided between fuel suppliers. ae | find it puzzling that you should criticize the absence of any discussion in the Study around margin differences within large urban markets like Aubkiand given 2 Energy's previous express agreement, communicated to MBIE‘on 28 February 2017 via email?, to use the focal authority fuel tax areas set out in, Schadule 7 of the Local Government Act 1974 as the definition of “region” for the purpose of the Study. Finally, 1 would like to note my cahcerh about the Way Z Energy communicated the findings of the Study in your initial media statement. My office raised a number of factual inaccuracies with you which\were not-corrected, Given the importance of accurate disclosure to the market < as'raised by 2 Energy with my office on several occasions — | was concemed that you took this stance. Next steps Moving forward, I‘note Z Energy's decision to respond individually, rather than alongside

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