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Solid Energy Results for Half Year Ended 31 December 2013

Solid Energy Results for Half Year Ended 31 December 2013

28 February 2014

Summary Overview

• Revenue down 28% as average USD hard coking coal prices fell 14% in very weak global market.

• Coal sales down 21% to 1.7 million tonnes (Mt) (2012: 2.1 Mt).

• Net result after tax was a loss of $40.9 million (2012: $(318.2) million).

• Underlying earnings of negative $28.7 million (2012: positive $3.5 million).

• Operating cash flow of $(1.2) million (2012: $(55.8) million)

Half Year Ended 31 December NZ$M

2013

NZ$M

2012

Change

Revenue236.1328.1-28%
EBIT [1](29.7)(265.5)
EBITDAF [2]15.218.4-17%
Net (loss) after Tax(40.9)(318.2)
Total Underlying Earnings adjustments
(net of tax)
12.2 321.7
Underlying Earnings/(Loss) after tax [3](28.7)3.5
Operating Cash flow(1.2)(55.8)
Gearing Ratio [4]66%79%

Definitions:

(All amounts are NZ$ million unless otherwise stated)

1 EBIT: earnings before interest and taxation

2 EBITDAF: earnings before interest and taxation, depreciation and amortisation and fair value adjustments

3 Underlying Earnings: net profit after tax excluding impairments and large one-off items

4 Gearing Ratio: net debt / (net debt + equity)



MEDIA RELEASE

/

28 February 2014

Weak global market impacts revenue as Solid Energy keeps tight rein on costs

A 28% fall in revenue, due to continued weak international coal prices and reduced off take from New Zealand customers, contributed to a $40.9 million loss (2012: loss of $318.2 million) for coal producer, Solid Energy, for the half year ended 31 December 2013. The result included one-off restructuring costs of $12.4 million.

While this was an improvement on the 2012 half year result, when the company wrote down assets by $222.7 million, underlying earnings for the half year were negative $28.7 million, compared to a positive $3.5 million in the first half of the 2012 financial year.

Solid Energy Acting Chair, Pip Dunphy, said that the half year result was slightly better than expected as the company maintained a strong focus on production efficiency, cash management and on containing operating costs. “The company’s stringent controls on spending and productivity improvements have had a positive impact on the half year result, but weak global coal markets remain challenging. The hard coking coal spot price has weakened in the period, with the monthly average for December 2013 down to US$135/tonne, compared to US$159/tonne for December 2012.

“The company’s financial recovery is likely to be prolonged and will depend on a number of factors including continuing improvement in its business performance and higher prices in international coal markets. The strength of the New Zealand dollar continues to adversely impact profitability; the average USD/NZD exchange rate was 0.82 in December 2013 (2012: 0.83),” Ms Dunphy said.

The slightly better-than-expected result has meant that the company has not needed to draw down under the two $50 million working capital facilities made available by the Crown as part of the financial restructuring package put in place in October 2013.

Revenue for the half year was $236.1 million (2012: $328.1 million). Coal sales were down 21% to 1.7 million tonnes (Mt) (2012: 2.1 Mt). Export sales increased 10% in the half year to 1.1 Mt (2012: 1.0 Mt), while New Zealand sales dropped by 47% in the half year to 0.6 Mt (2012: 1.1 Mt) mainly due to changing supply arrangements with New Zealand Steel and Genesis Energy.

In the half year, Solid Energy completed a major restructuring of its business which it started in August 2012. The company cut management and support jobs at Stockton Mine and made further changes at Huntly East Mine, cutting production to about a third of the previous year as the economics of mining underground at Huntly could no longer justify keeping the operation going in its current form. At the end of December 2013, Solid Energy employed 867 people compared to 1237 at the end of December 2012.

Since 1 July 2012, when Solid Energy employed 1658 people, the company has shed almost 800 jobs, including 150 in its Christchurch corporate office, 220 when Spring Creek Underground Mine was put into care and maintenance and 200 as a result of reducing production at Huntly East Mine.

Financial Review

Earnings before Interest and Taxation (EBIT) for the half year, after restructuring costs, was a loss of $29.7 million, compared to a loss of $265.5 million in the previous corresponding half year. Underlying earnings for the half year were negative $28.7 million, compared to a positive $3.5 million in the first half of the 2012 financial year.

Prices and Foreign Exchange: International coal prices have continued to fall, decreasing EBIT by $37.8 million. At US$142/tonne, the average USD hard coking coal benchmark price was down 14% on the previous corresponding half year. The average NZD/USD exchange rate has remained relatively consistent with the same period of 2012.

Volume: Coal sales volumes were 424,000 tonnes (21%) lower for the period; export sales were up 10% and New Zealand sales down 47%, decreasing EBIT by $10.2 million.

Mix: A change in the mix of product sold increased EBIT by $14.7 million, with hard coking coal sales increasing slightly to 61% of total export sales volumes (2012: 54%). No sales of thermal coal were made due to depressed market prices.

Costs: Management continues to drive improved cash cost performance and look for ways to supplement the initiatives which have already been embedded within each operation. Costs have decreased by $74.2 million to $255.5 million due to significant restructuring which reduced the workforce to 867 at the end of the half year. In addition, all operations and mine plans have been reviewed resulting in optimised production plans and reduced overburden activity at opencast mines. Reduced activity has resulted in significant reduction in both plant and equipment and contractor costs, which are down by $22.2 million and $19.9 million respectively.

Tax Expense: No income tax expense was incurred for the period due to the operating losses.

Underlying Earnings Adjustments: Underlying earnings for the half year were negative $28.7 million, down from positive $3.5 million in the first half of the 2012 financial year. The following items have been excluded from net profit after tax in the calculation of underlying earnings:

Six Months To 31 December

(NZ$ million)

2013

2012

Impairments
Stockton Mine (Export Operations)-104.3
Spring Creek Mine-53.1
Huntly East Mine-6.4
Biodiesel New Zealand- 0.6
Underground Coal Gasification (UCG)- 23.9
Briquette Plant-24.8
Nature’s Flame-5.0
Land-25.6
Total Impairments-243.7
Impairment reversal(0.2)(21.0)
Net Impairments/(Impairment Reversal)(0.2)222.7
One-Off Items
Restructuring Costs (including redundancies and refinancing costs)12.441.4
UCG Pilot Plant Expenses-3.8
Discontinued Labour (excluding Spring Creek Mining Company)- 8.7
Additional loss on Biodiesel New Zealand sale-2.6
Total One-Off Items12.456.5
Total Underlying Earnings Adjustments pre deferred tax write off12.2 279.2
Deferred tax write off-42.5
Total Underlying Earnings Adjustments12.2 321.7
Net Result as reported(40.9)(318.2)
Underlying Earnings(28.7)3.5


Capital Management and Funding: The significant financial restructure in October 2013 resulted in the transfer of $75.0 million of debt into Redeemable Preference Shares and the issuance of a further $25.0 million of Redeemable Preference Shares to the Crown, reducing debt to $322.3 million (31 December 2012: $375.0 million). Debt comprises drawn bank facilities of $239.3 million, medium-term note issues of $81.2 million and an interest-bearing loan of $1.8 million. Gearing improved from 79% to 66% as a result. Total assets at 31 December 2013 were $824.3 million, down $77.0 million due to depreciation, amortisation and movement in working capital (31 December 2012: $901.3 million). There were no material impairments to carrying values in the half year.

Cash flows: Cash flows from operations were negative $1.2 million compared with negative $55.8 million in 2012, with $89.6 million in decreased cash receipts from lower prices and reduced domestic demand. Capital investment totalled $5.0 million compared with $47.4 million for the same period in 2012.

Production: Coal production for the half year was 1.7 Mt, down 0.2 Mt (9%) on the previous half year, mainly due to the restructuring of the Huntly East Mine.

ENDS

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