Media release

Year of Two Halves for Energy Producer

14 October 2009

Energy producer Solid Energy New Zealand Ltd has reported an after-tax profit of $111 million (2008: $34 million) for the year ended 30 June 2009, a record but disappointing result, and below half of forecast, after the global economic downturn saw international coal demand and prices plummet in the second half of the year.

The company’s base revenue almost doubled to $980 million (2008: $552 million) supported by record international prices achieved in the first five months of the year with hard coking coal at US$300/tonne.  The company’s 51% share of Spring Creek Mining Company sales ($39 million) took total company revenue over $1 billion for the first time.  The company has paid dividends to its shareholder, the New Zealand Government, totalling $49.5 million for the year, with a final payment of $24 million on 30 September 2009.  In October 2008 the company also paid a $34.4 million dividend for the 2008 financial year.

Solid Energy Chairman, John Palmer, says revenue and profits were above plan through to October 2008 but by November international steel makers were running down coal stockpiles and cutting production, with the worldwide reduction in steel demand.  By January spot coal prices had fallen below US$100/tonne and thermal to US$50/tonne.  Customers began to defer export shipments and seek substantial price reductions.  Every planned December coal shipment was deferred and, through to June, customers continued to cancel or defer significant contracted volumes, impacting heavily on all areas of the business.

Coal exports in the year were down slightly at 1.8 million tonnes (mt) (2008: 1.9 mt) and New Zealand coal sales were 2.2 mt (2008: 2.5 mt).  An additional 0.2 mt, the company’s 51% share of Spring Creek Mine sales[1], lifted total coal sales for the year to 4.2 mt (2008: 4.5 mt).  During the year the company’s Renewable Energy business produced 12,500 tonnes of wood pellets and 0.73 million litres of biodiesel from used cooking oil, and its New Energy business produced 0.34 terajoules of coal seam gas.

John Palmer comments:  “Despite the record profit, the second half of the 2009 year has been extremely difficult for the company.  During the year, we committed to a number of important capital projects to secure future value, but these will draw heavily on our balance sheet over the next few years.  Our operating cash flows will be lower than forecast previously and our debt will increase.  The company will need to work hard over the next 12 months to deliver this major capital investment programme on time and on budget.  Our challenge is maintaining a strong balance sheet to manage out of the downturn, while still progressing our long-term energy projects that are very important for the future.”

The company’s export earnings are in US dollars, and are reported in New Zealand dollars using spot exchange rates. New Zealand dollar revenue increased significantly through 2008 as the New Zealand dollar plummeted against the US dollar, but the company’s standard hedging policy resulted in a significant foreign exchange loss of $83 million, offsetting the higher spot revenue.  As export sales volumes and prices crashed from November, despite firm sales contracts, the company had to close out surplus foreign exchange contracts, resulting in a further foreign exchange loss of $19 million.  With continuing market uncertainty and volatility, the company made impairment and onerous contract adjustments reducing net profit before tax by $26.7 million.

Solid Energy Chief Executive Officer, Dr Don Elder, adds: “As international revenues plummeted, our business approach switched from strong, rapid expansion on the back of high and predictable operational cashflows to a more cautious strategy.  Our top priorities were to secure export cashflows in the immediate short term and preserve our strong balance sheet. 

“We undertook a comprehensive review of the business, reducing production to meet demand and reassessing priorities in a number of areas, slowed down some major projects in our New Energy and Renewables businesses, and reduced costs across the business.  However, reduced production and freeing up some resources that have been overstretched for several years also created an opportunity to accelerate some major long-term capital projects, infrastructure developments and important health and safety initiatives.”

At Stockton Mine, the company has committed about $200 million in a new coal processing plant, mine expansion and development, new plant and equipment and site infrastructure upgrades.  In November we signed a new five-year agreement for coal supply to New Zealand Steel, securing the medium-term future of Huntly East Mine and triggering a $100 million investment in a northern extension of the mine. Planned expansion of biomass business, Nature’s Flame, saw construction start in Taupo on a third wood pellet production plant, worth $35 million.

The biodiesel business had a difficult year due to a sharp decline in diesel prices, changes in legislation and disappointing initial yields from oilseed rape crops.  A $14 million rapeseed oil processing and storage facility was substantially completed at Rolleston, but the production facility put on hold.  As an interim measure the business expanded the existing production facility in Christchurch increasing production capacity to 4 million litres per annum.  From New Zealand’s first coal seam gas field Solid Energy produced commercial quantities of gas which, converted to electricity, was sold into the national grid.

Full Year Summary – Solid Energy audited result for 12 months ended 30 June 2009