Continuous Disclosure

Results for the year ended 30 June 2012

31 August 2012

Summary Highlights

  • Underlying earnings of $99.7 million, up 16% (2011: $86.2 million).
  • Net loss after tax of $40.2 million, compared with a profit of $87.2 million in 2011.
  • Assets impairments of $110.6 million net of tax relating to write downs of underground mining, renewable energy and coal seam gas assets, combining with other earnings adjustments to total $139.9 million net of tax.
  • Coal sales of 4.6 million tonnes (Mt), up 13% (2011: 4.1 Mt); revenue of $978.4 million, up 18% (2011: $828.7 million).
  • Average NZD prices received up 6% for the full year, with export coal prices weakening substantially throughout the year.
  • Key project milestones achieved for new developments in lignite conversion and underground coal gasification.
  • Dividend of $30 million paid in September 2011, but company has not declared a further dividend.
 
Year Ended 30 June 2012
NZ$M
2012
NZ$M
2011
 
Change
Revenue978.4828.7+18%
EBITDA[1]44.9200.8-78%
EBIT[2](27.7)137.2-120%
Net Profit after Tax(40.2)87.2-146%
Total Underlying Earnings adjustments (net of tax)139.9(1.0)-
Underlying Earnings after tax[3]99.786.2+16%
Operating Cashflow142.2128.9+10%
Dividends Paid3020-
Return on Equity[4]-9%18%-
Gearing Ratio[5]42%30%-

Definitions:
(All amounts are NZ$ million unless otherwise stated)

  1. EBITDA: Earnings Before Interest, Tax, Depreciation & Amortisation
  2. EBIT: Earnings Before Interest & Tax
  3. Underlying Earnings: Net Profit after Tax excluding, impairments, & large one off items
  4. Return on Equity: Net profit after tax / Average shareholders' equity
  5. Gearing Ratio: Net debt / (Net debt + equity)

Good operating performance overtaken by asset writedowns

Solid Energy's underlying earnings of $99.7 million (2011: $86.2 million) for the year ended 30 June 2012 is good in a deteriorating market, says Solid Energy Chairman, John Palmer. However, the company's decision to impair a number of assets has resulted in a loss of $40.2 million (2011: profit of $87.2 million). Total asset impairments, net of tax, of $110.6 million have been booked as at 30 June 2012.

Earlier this week, Solid Energy announced that it plans to reduce underground coal mining operations and exit renewable fuel production. The company plans to wind back operations at Huntly East Underground Mine and is reviewing the future of Spring Creek Underground Mine. The Nature's Flame wood pellet business has been set up as a standalone operation and the biodiesel business will be divested. As a result, Solid Energy is taking the opportunity to write down these and other assets.

"This result and the changes we are proposing to preserve the long-term value of the business clearly reflect the impact of the global economic downturn and the impact of worldwide commodity markets on the business," says John Palmer. "Our underground mines have struggled for some time to be profitable as costs have escalated, while at the same time export coal prices have weakened substantially. The current carrying values of these mines cannot be justified based on projected earnings and have therefore been written down.

"In recent years the company has made a significant investment developing renewable energy businesses. The harsh reality is that other fuels are far more competitive in the current financial environment. We took a long-run view of these businesses which relied on a sustained price premium which has largely failed to materialise."

Revenue of $978.4 million was up 18% on the previous year (2011: $828.7 million), the second-highest annual revenue (2009: $979.5 million). Coal sales were up 13% to 4.6 million tonnes (Mt) (2011: 4.1 Mt) boosted by product stockpiled due to shipping delays at the Port of Lyttelton following the Canterbury earthquakes in June 2011. Coal exports of 2.4 Mt were up 20% on the previous year (2011: 2.0 Mt) with New Zealand coal sales up 6% at 2.2 Mt (2011: 2.1 Mt). Prices ranged from a high of US$300/tonne for hard coking coal at the start of the financial year, to a low of US$206/tonne, then up to US$225 at year end. The average US dollar price received in the first half of the year was up 31% on the prior year, but softened to up 9% overall for the full year. Average New Zealand dollars prices were up 6% for the full year."

The company paid a dividend of $30 million on 30 September 2011. Mr Palmer says that given the volatility and continued weakness of international coal markets, the company has not declared a further dividend for the year.

During the year, Solid Energy met a number of key milestones in delivering its long-term growth strategy. The $22 million underground coal gasification pilot plant started producing syngas in April 2012 and the $29 million Mataura domestic-scale briquette plant is about to start production. In May 2012, the company proved coal seam gas technology at its Huntly demonstration plant, producing high-quality gas, converted to electricity on site and exported into the national grid. The company is closing down the plant to focus its commercialisation efforts on the significantly larger Taranaki field.

Outlook

John Palmer concludes: "Solid Energy's financial situation for the next period will continue to be challenging and is worse than during the 2008 global financial crisis. In 2008-09 when US dollar export coal prices collapsed, the New Zealand dollar followed. Coal prices rebounded relatively quickly in the following year, whereas this time, with a high New Zealand dollar, we expect prices to be weak for a prolonged period.

"In addition, the company's investments over the last four years increased its debt by $250 million. We are actively managing the business to minimise the impacts of a weak international coal market and to maintain performance. Management's focus is generating cash and reorganising the company to manage through this difficult period. In the short-term international coal markets will continue to be volatile, but we remain confident in our long-term demand outlook which is strong and unchanged."

Solid Energy FY12 — Financial Review

Net Profit After Tax (NPAT) as reported, after impairments, was a loss of $40.2 million, down 146% from the $87.2 million in the 2011 financial year. Underlying earnings for the year were $99.7 million, up 16% from $86.2 million in the 2011 financial year.

Prices and Foreign Exchange: The combined effect of pricing and foreign exchange increased EBIT by $44.6 million. International coal prices in US dollars remained firm in the first quarter of the financial year supported by residual impacts of the Queensland floods in early 2011, but then fell by almost 35% through the middle of the year. Overall, average USD prices received were up 6% on the previous year, increasing EBIT by $76.1 million. The stronger New Zealand dollar against the US dollar reduced EBIT by $31.5 million after hedging.

Mix: A change in the mix of product sold decreased EBIT by $28.3 million, with hard coking coal sales falling to 54% of total export sales volumes due to decreased coking coal demand (2011: 63%). Semi-hard and semi-soft coking coal sales decreased to 30% (2011: 37%). Thermal coal sales increased to 15% of total export sales to take advantage of market conditions and sell stockpiled lower grade coal (2011: Nil).

Carryover Margin: The impacts of the June 2011 earthquakes on Lyttelton Port's ship-loading facilities meant that three coal shipments were deferred into this financial year, resulting in an increase to EBIT of $19.8 million.

Volume: Excluding these carryover shipments, coal sales volumes were 397,000 tonnes higher for the period, increasing EBIT by $27.5 million.

Costs: Cost of sales, exploration and other costs increased year-on-year by $55.9 million. Solid Energy has faced significant on-going escalation of mining costs, particularly at its Spring Creek and Huntly East underground mines. Both mines have been undergoing development phases requiring significant expenditure while facing increased regulatory scrutiny in the wake of the Pike River disaster. The full acquisition of Spring Creek Mine in February 2012 added a further $12.2 million of operational expenditure to this increasing cost base during the second half of the year.

Solid Energy's direct and indirect exploration, evaluation and development costs have increased as the company ramped up capability and activity across its portfolio, with particular focus on key West Coast export coking coal resources.

Tax Expense: The group tax expense decreased by $40.2 million. Included in the tax expense for the year was the $15.2 million derecognition of tax losses carried forward for Spring Creek Mining Company.

Underlying Earnings Adjustments: Underlying earnings for the year were $99.7 million, up 16% from $86.2 million in the 2011 financial year. The following items have been excluded from net profit after tax in the calculation of underlying earnings for the year:

Year Ended 30 June 2012
(NZ$ million)
Gross
Write Down
 
Tax effect
Net Impairment
Spring Creek64.3(17.2)47.1
Huntly East Mine33.8(9.5)24.3
Nature's Flame24.5(6.9)17.6
Switch 1.6-1.6
Coal Seam Gas18.5(5.2)13.3
Biodiesel New Zealand 9.0(2.3)6.7
Total Impairments151.7(41.1)110.6
Impairment Reversal - Ignite Loan Recovered(2.5)0.7(1.8)
Net Impairment149.2(40.4)108.8
One-Off Items
Contractor Claim Settlement12.5(3.5)9.0
Spring Creek stores write-down3.6(1.0)2.6
Nature's Flame inventory write-downs and provisions for onerous contracts5.9(1.6)4.3
Spring Creek Mining Co Tax losses derecognised-15.215.2
Total Underlying Earnings Adjustments171.2(31.3)139.9
NPAT as reported(40.2)
Underlying Earnings99.7

Reviews of our underground mining, renewable energy, and coal seam gas assets resulted in impairments of $110.6 million net of tax. Weakening export coal markets, together with the increasingly complex geology in underground development areas, have resulted in impairments of Spring Creek Mine of $47.1 million net of tax, and Huntly East Mine of $24.3 million net of tax.

Solid Energy impaired its wood pellet business by $17.6 million as international markets weakened resulting in idle capacity which looks likely to remain for some time. The company wrote down Nature's Flame's raw material stocks and made associated provisions totalling $4.3 million net of tax. Goodwill associated with wholesale renewable energy distribution business, Switch, was also written off at $1.6 million.

A review of the biodiesel business, taking into account the end of the Government's Biodiesel Grant Scheme, following removal of the previous mandated biofuel requirements, has resulted in an impairment of $6.7 million net of tax.

The company wrote down its investment in the Huntly coal seam gas demonstration plant by $13.3 million net of tax as it refocused work on its Taranaki holdings.

Other underlying earnings adjustments included a payment of $12.5 million (before tax) in final settlement of a legal claim relating to a former mine contractor, and the write down of stores and derecognition of the carry forward tax losses of $15.2 million in relation to Spring Creek Mining Company.

Capital Management and Funding: Total assets at 30 June 2012 were $1.2 billion, up $33 million on 2011. Total debt at the end of the period was $295 million (2011: $220 million) which included $35.6 million of debt assumed from Cargill following the acquisition of Cargill's 49% share of Spring Creek Mining Company. Gearing increased to 42% after asset impairments. Debt comprised drawn bank facilities of $225 million and Medium-term Note issues of $70 million. During the period $115 million of existing banking facilities which were due to expire in November 2012 were extended out over periods up to six years. An additional $100 million of new facilities was placed with existing banks for periods up to five years.

Cashflows: Cashflows from operations were $142.2 million compared to $128.9 million in 2011, with increased cash receipts from higher prices. Capital investment totalled $162.4 million compared with $115.4 million for 2011. Of this, about $81 million related to sustaining current operations and $81 million to new growth initiatives. The acquisition of Spring Creek Mining Company and subsequent capital expenditure at the mine resulted in $37.8 million of additional capital investment for the group.

Production: At 4.1 Mt, coal production was up 3% on last year (2011: 4.0 Mt). Production at Stockton Mine increased 16% to 1.9 Mt. Production at Spring Creek Mine was down to 240,000 tonnes as the mine was in development phase.

Production at Huntly East Mine was down 10% to 336,000 tonnes due to harder mining conditions in some of the extraction blocks and ventilation constraints. At Rotowaro Mine production was down 1% to 1.2 Mt due to decreased demand from Huntly Power Station. Production at New Vale Mine in Southland was up 6% to 318,000 tonnes.

Wood pellet production decreased by 9% to 42,000 tonnes. Sales volumes decreased by 12% to 43,000 tonnes. Biodiesel production for the year was 2.0 million litres, up 15%, with sales volumes of B100 down 11% to 1.8 million litres as the focus moved to sales of blended product.

Segment Results

NZ$millionRevenueEBIT
20122011Change20122011Change
Coal944.7794.3+19%197.3207.1-5%
Renewable Energy32.533.9-4%(23.8)(18.2)-31%
New Developments---(21.5)(19.8)-9%
Corporate & Other1.20.5-(30.5)(33.3)+8%
Trading results before impairment---121.5 135.8+11%
Net (impairment) / impairment reversal---(149.2)1.4-
Total978.4828.7+18%(27.7)137.2-120%
Postscript: On 13 November 2012 Solid Energy completed the sale of the agri-business division of Biodiesel New Zealand Ltd to Pure Oil New Zealand Ltd. On 3 February 2013, the biodiesel production arm, including the Biogold™ brand, was sold to Green Fuels NZ Ltd.