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Fletcher Challenge Consolidated Results

28 February 2001
Six months ended 31 December 2000

Six Months Six Months Six Months
Dec 2000 June 2000 Dec 1999
NZ$ m NZ$ m NZ$ m

Operating Revenue 2,749 4,096 3,812
Operating Earnings (EBIT)
Including Unusual Items 176 437 455
Excluding Unusual Items 352 577 365

Net Earnings
Including Net Unusual Items 22 143 239
Excluding Net Unusual Items 119 232 135

Cash Flow from Operations 654 870 690

Debt to Total Capitalisation % 13.1 28.5 32.3
Interest Coverage (times)
Including Unusual Items 7.65 3.52 3.79
Excluding Unusual Items 15.30 4.65 3.04

Note: All currency amounts are NZD, unless otherwise stated.


Comparative period results for the Fletcher Challenge Group include both discontinued operations (the Paper Division, sold to Norske Skog in July 2000), and the remaining Divisions, Energy, Forests, and Building. The main impact from the Paper transaction is a gain on sale, as detailed below.

Net Earnings from continuing operations excluding unusual items were $122 million compared with $185 million for the previous six months, and $117 million for the previous corresponding period. These were achieved during a time of difficult trading conditions for Fletcher Challenge Building and Fletcher Challenge Forests, as well as strong global oil prices.

Consolidated Net Earnings (including unusual items) were $22 million, compared with $143 million in the previous six months.

Unusual items totalled a net loss of $97 million after tax, compared with a net loss of $89 million in the previous six months. Significant items were a write-down of $529 million for the shortfall in the realisable value of our investment in the Central North Island Forest Partnership in the event of a sale, and a net gain of $457 million on the sale of the Paper Division. A permanent impairment of $13 million was recorded against the carrying value of the Kupe oil and gas field following a review of the market value of the interest. A net gain of $25 million was recorded on the sale of shares in the New Zealand Refining Company, and of $50 million on the sale of Capstone Turbine shares. A provision of $25 million has been established for a dispute in respect of the construction of co-generation plants in Australia, a write-down of $7 million has been taken with respect to the value of Auckland properties. A $5 million provision has been made for defending claims made by CITIC New Zealand Limited, and restructuring of parts of the concrete business results in a charge of $5 million. Group restructuring costs incurred in the period of $45 million are also included.

Operating Earnings (EBIT) from continuing operations, excluding unusual items, were $295 million, an improvement on the $277 million for the previous six months, and the $215 million for the corresponding period in the previous year.

Cash flow from continuing operations, at $568 million, continued the steady improvement of the previous period ($526 million) and the equivalent six month period ($469 million), and reflects a particularly good result from Fletcher Challenge Energy. Including Fletcher Challenge Paper, cash generated from operations during the current six month period was $654 million.

The ratio of debt to total capitalisation improved significantly, from 28.5% at 30 June 2000 to 13.1% at 31 December 2000, principally due to the sale of Fletcher Challenge Paper. Interest coverage (operating earnings divided by funding costs) increased from 3.52 times in the six months to June 2000 to 7.65 times this period. Excluding unusual items, the increase was more than 200 per cent: from 4.65 times to 15.30 times.

In line with its current dividend policy, Forests has not declared a dividend. No interim dividend is declared for Energy. Building¡¦s performance this year has been less strong than last year, and as a result, a reduced interim dividend of 6 cents per share (within the dividend policy) is declared, and will be fully tax credited.

The divisional breakdown of net earnings was:

Excluding Unusual Items Including Unusual Items
Six Months
Dec 2000
NZ$m Six Months
June 2000
NZ$m Six Months
Dec 1999
NZ$m Six Months
Dec 2000
NZ$m Six Months
June 2000
NZ$m Six Months
Dec 1999

8 60 46 Fletcher Challenge Building (41) 17 46
99 101 61 Fletcher Challenge Energy 308 87 174
1 19 4 Fletcher Challenge Forests (498) 66 15
(3) 47 18 Fletcher Challenge Paper 239 (32) (2)
14 5 6 Consolidated Adjustment 14 5 6
119 232 135 Consolidated Net Earnings 22 143 239


Detailed reports on operations and results are contained in the separate announcements for each of the three divisions.

Fletcher Challenge Building (FCB) recorded net earnings, excluding $49 million of unusual losses after tax, of $8 million compared to $46 million in the previous corresponding period. The result reflected a deterioration in EBIT before unusual items to $37 million compared with $81 million in the previous corresponding period, as well as higher funding costs. Trading conditions were depressed in most markets, with residential building consents in both New Zealand and Australia falling significantly. A number of businesses incurred downsizing and restructuring costs, and some long outstanding claims in the construction area in Australia have been provided for. Margin management initiatives undertaken in Fletcher Easysteel helped to lift EBIT for this business, despite lower revenues. Papua New Guinea was the only area where construction activity increased.

Fletcher Challenge Energy (FCE) achieved record operating earnings (including unusuals) of $308 million for the six month period. This compares with $87 million in the previous six months, and $174 million for the corresponding period last year. Excluding unusuals, these results were $99 million for the period, compared with $61 million for the corresponding period last year. Combined gas and liquid production rose 1.6 per cent at a time of strong oil, and in North America, gas prices. The Group continued its energy price risk management programme which resulted in the full benefits of high commodity prices experienced during the period not being realised. Commissioning of the Maui BD oil development project boosted production volume, offsetting declines in other reservoirs. Demand for natural gas in New Zealand and North America remained strong. Sales through the Challenge retail network rose 81% over the previous six months, and the number of service stations increased from 55 one year ago to 111.

Earnings for Fletcher Challenge Forests (FCF) before interest and tax, but excluding unusuals, were $38 million compared to $41 million in the previous six months. The financial results for the period, with a net loss of $498 million being recorded, reflect mostly the write-down of $529 million in the estimated realisable value of the investment in the Central North Island Forest Partnership. Trading conditions continued to be difficult in most markets, with reduced demand for construction products in New Zealand and Australia. Increased sales of mouldings to the United States (up 43% to $67 million) along with exchange rate gains, provided a positive impact.

In December 1999, the Board of Fletcher Challenge Limited announced a decision to dismantle the Group's targeted share structure for its four Divisions: Building, Energy, Forests, and Paper. In April 2000, the Board announced that it had reached agreement to sell Fletcher Challenge Paper to Norske Skog, a global publication paper producer based in Norway. The Transaction was approved by shareholders in July 2000 and the sale concluded on 28 July 2000. In October 2000, separation recommendations were announced for the remaining Divisions: Building, Energy and Forests. The recommendations are:
„h Fletcher Challenge Building will become a stand-alone company called Fletcher Building Limited;
„h Fletcher Challenge Forests will remain as the only Division of Fletcher Challenge Limited, and Fletcher Challenge will be renamed Fletcher Challenge Forests Limited;
„h Fletcher Challenge Energy will be sold to Shell and Apache Corporation; and
„h The creation of a new company, Rubicon Limited.

On 27 February 2001 the Board announced it had received a proposal from Greymouth Petroleum to acquire Fletcher Challenge Energy. The Board is to seek more information about this proposal. As the entire separation process is inter-dependent and must be implemented in its entirety this may impact the proposed separation process.
Separation documentation relating to the recommendations was mailed to shareholders in mid February 2001, following submission to the regulatory authorities and receipt of the Initial Court Orders. These recommendations will be voted on at a Special Meeting of Shareholders on 6 March 2001. If the recommendations are approved, the Effective Date is expected to be 23 March 2001. Detailed information on the recommendations is published on the Fletcher Challenge Limited web site on (Separation Update page).


As previously announced, Fletcher Challenge Building is currently conducting a full strategic review of its operations. As part of this process it is highly likely that there will be a realignment of Fletcher Challenge Building¡¦s existing portfolio of businesses. An announcement is expected to be made by late April regarding the outcomes of the strategic review. Areas for further margin improvement and cost reduction have been identified, and will be targeted during the ensuing 12 months.

Fletcher Challenge Energy has initiated the development of the Mangahewa discovery in onshore Taranaki, with related gas sales agreements in place. Optimal development of the Pohokura field is being planned, and reserves estimates in this area have been significantly upgraded. In Canada, gas and oil development projects have been accelerated to take advantage of the strong gas and oil price environment. In Brunei, the Maharaja Lela plant successfully completed a high rate gas test, which will help support a gas contract extension and expansion. In view of the impending sale of the Division, a number of strategic initiatives previously undertaken are being closed out, including the shareholding in Petroz NL, a Brisbane based explorer, for an A$7.8 million gain.

The recapitalisation of Fletcher Challenge Forests was achieved during the period, with a Rights Offer of new preference shares in December 2000. The net proceeds of $414 million raised through this new offering has reduced net debt to $501 million as at 31 December 2000. This represents a 25.4% debt-to-capitalisation ratio based on book values following the write-down of the Central North Island Forest Partnership investment. This Partnership breached certain loan ratios and covenants at 31 December 2000, and the senior bank debt facility is now in default. The lending banks have reserved all their legal rights and remedies as a consequence of the default, and this may result in the appointment of a receiver or other outcomes. In turn, this could result in the cancellation of the Fletcher Challenge Forests¡¦ contract for the management of the Partnership.

In October 2000 Fletcher Challenge Forests was granted Forest Stewardship Council (FSC) accreditation for its New Zealand forest estate management. This certification will provide a significant marketing opportunity for those markets which differentiate products sourced from sustainable resources.


Cash generated from operations, excluding Fletcher Challenge Paper, during the current six month period showed a continued improvement at $568 million compared to $526 million in the previous six months and $469 million in the comparative six month period. Including Fletcher Challenge Paper, cash generated from operations during the current six month period was $654 million.

The divisional breakdown of cash flow from operations was:

Six Months
Dec 2000
NZ$ m Six Months
June 2000
NZ$ m Six Months
Dec 1999
NZ$ m

Fletcher Challenge Building 42 86 86
Fletcher Challenge Energy 445 345 295
Fletcher Challenge Forests 45 66 61
Fletcher Challenge Paper 86 344 221
Consolidation Adjustment 36 29 27
Consolidated Cash Flow from Operations 654 870 690

Capital Expenditure for the period totalled $698 million compared with $422 million and $394 million in the previous two six-month periods. Included within Capital Expenditure for the current period was $386 million for the purchase at fair value of bonds issued by Gas Investments New Zealand Limited. Other expenditure included exploration and development expenditure by Fletcher Challenge Energy of $124 million and expenditure of $58 million within Fletcher Challenge Building. Interest capitalised to the plantation forests of $69 million was recorded in the period.

Offsetting the expenditure were divestments totalling $2,874 million following the sale of Fletcher Challenge Paper ($2,724 million), the sale of the New Zealand Refining Company ($34 million), as well as proceeds from the sale of Capstone Turbine shares ($56 million).

Group Equity and Capital Funds totalled $5,853 million compared with $9,431 million at June 2000. The main movements were an increase in reported capital and capital funds ($385 million) due primarily to the equity issue of Fletcher Challenge Forests Preference Shares, and an increase in reserves arising from currency translation variations ($363 million). Offsetting these increases was a decrease of $272 million relating to the revaluation of investments (primarily the investment in Capstone Turbine Corporation), the reversal of revaluations upon disposal of investments ($96 million), a reduction of $201 million following the adoption of FAS133 which requires all hedges to be carried within the balance sheet at fair value, and a reduction of $3,768 million following the disposal of Fletcher Challenge Paper to Norske Skog.

The Group maintains a policy of holding its assets and matching debt in the dominant functional currency of the business units: for Energy and Forests, this is US dollars. During the period, the New Zealand dollar weakened against the United States dollar (from $0.4686 to $0.4405). As a result, on translation for reporting purposes from the functional currency, both assets and debt values in NZ$ increased, with the net variation being an increase in reserves of $363 million.

Net Interest-bearing Debt was $885 million, down from $3,763 million at 30 June 2000. The movement reflects the disposal of Fletcher Challenge Paper to Norske Skog during the period and the net proceeds of $414 million raised through the Rights Offer of new Fletcher Challenge Forests Preference Shares.

The Group ratio of debt to total capitalisation (debt to debt plus equity and capital funds) at book value, improved to 13.1% from 28.5% in June 2000. Cash coverage of gross interest (operating cash flow excluding funding costs, divided by funding costs plus capitalised interest) increased to 7.36 times compared to 5.43 times and 4.63 times in the previous two six month periods. Cash coverage of net interest (operating cash flow excluding funding cost divided by funding cost) was 29.43 times, compared with 8.02 times for the six months to June 2000.


Comments in the Outlook section, about anticipated market conditions, earnings and activities, are forward-looking and are made pursuant to the safe harbour provisions of the US Private Securities Litigation Reform Act of 1995. Refer to the separate announcements for each of the three divisions for an explanation of the factors that could cause actual results to differ materially from those expressed in this section.

Fletcher Challenge Building: Residential construction markets have softened significantly, and most forecasters predict a continuation of this lower level of activity for at least the remainder of the financial year. The domestic economy remains relatively flat although there is evidence of a lift in consumer confidence due to the continued flow through of export earnings to the domestic sector, particularly the rural economy. Implementation of the strategic review referred to earlier is expected to improve the performance of key businesses, and involve exit from some non-performing businesses.

Fletcher Challenge Energy: The buoyant oil and gas prices seen in this six month period have had a positive impact on performance. They will always be significant factors in earnings for this business. The oil and Canadian gas risk management programme will significantly offset the impact of any continuation of the current high commodity prices. If separation transactions are not completed as timetabled, reinvestment of a significant portion of the cash flows will need to be undertaken.

Fletcher Challenge Forests: Soft construction markets in New Zealand and Australia will continue to influence sales by Fletcher Challenge Forests. The United States economic slowdown could have some effect on the repair and remodelling sector. In addition, the NZD is likely to be stronger in the coming six months. However, overall, no significant drop in demand is expected, and prices in the US are showing some signs of improving. Asian demand remains volatile, and is currently too low to create upward pressure on prices. Ongoing efforts to grow the demand for environmentally certified Radiata pine products will be the key to earnings improvement in the mid-term.

Details on the Fletcher Challenge Group and its operations in the half year ended 31 December 2000 can be viewed at the company¡¦s World Wide Web site, at


Interim Dividend Building Energy Forests
NZ cents per share

New Zealand resident shareholder
(plus DWP credits) 6.0000 Nil Nil
Non-resident shareholder 6.0000 Nil Nil
Conduit Tax Relief Additional Dividend 2.9552
Less 15% Non-resident Withholding Tax 1.3433
Net Dividend for Non-resident Shareholder 7.6119

American Depository Receipt Holder (ADR) 76.119 Nil Nil

As individual shareholders¡¦ circumstances may differ, the above New Zealand Tax and
Non- resident Withholding Tax calculations are a guide only.

If the proposed separation of Fletcher Challenge Building from the Fletcher Challenge Group is approved by Shareholders on 6 March 2001, then payment of the Fletcher Challenge Building Interim Dividend will be made by Fletcher Building, subject to the requirements of the Companies Act and the Fletcher Building Constitution.

Shares quoted cum dividend on New Zealand Stock Exchange until close of business 6 April 2001. Dividend entitlement date: 6 April 2001. Payment date: 24 April 2001.

Shares quoted cum dividend on Australian Stock Exchange until close of business 30 March 2001. Dividend entitlement date: 6 April 2001. Payment date: 24 April 2001.

ADRs quoted cum dividend on New York Stock Exchange until close of business 4 April 2001. Dividend entitlement date: 6 April 2001. Payment date: 25 April 2001.


Resident shareholders have their dividends fully credited with Dividend Withholding Payment credits. Dividends paid to non-resident shareholders are credited with Conduit Tax Relief (¡§CTR¡¨) credits. Non-resident shareholders receive an additional dividend equal to the amount of the CTR credits attached to their ordinary dividends. The additional dividends are paid at the same time as the ordinary dividends. Both the additional dividends and the ordinary dividends are subject to 15 per cent New Zealand non-resident withholding tax.

Resident shareholders are not eligible to receive CTR credits.

Payment date is 24 April 2001 and for American Depository Receipt holders, 25 April 2001.


There will be no dividend reinvestment plan operative for this first dividend by Fletcher Building. Fletcher Building will reconsider the position with respect to the operation of the dividend reinvestment plan for future dividends.

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