Solid Energy reports record $111m profit, loses $102m in foreign exchange

Despite a record result, Solid Energy is blaming plummeting international coal prices and demand in the second half of the year for an annual profit below half of what it forecast.

But the company’s hedging policy also resulted in a foreign exchange loss of $102 million and as market volatility continued, Solid Energy made impairment and onerous contract adjustments that reduced net profit before tax by $26.7 million.

The $111 million record-profit was up from $34 million in 2008 and its base revenue almost doubled to $980 million, from $552 million in 2008.

But the net profit was well below forecasted results, buoyed by rocketing international prices in the first half.

In the first five months of the year, hard coking coal prices reached $US300 a tonne and the company’s 51% share of Spring Creek Mining Company sales ($39 million) took total company revenue over $1 billion.

But by January, spot coal prices fell below $US100 a tonne and thermal to $US50 a tonne.

Coal exports were down from 1.9 million tonnes in 2008 to 1.8 million in 2009, along with domestic sales, which slightly from 2.5 million to 2.2 million tonnes.

The company’s 51% share in Spring Creek Mine lifted total sales by .2 million tonnes to 4.2 million, from 4.5 million in 2008.

Solid Energy has paid the government, its shareholder, a $49.5 million dividend, including a final payment of $24 million on September 30, 2009.

Solid Energy chairman John Palmer said customers began to defer export shipments and seek substantial price reductions in the second half.

Every planned December coal shipment was deferred and, through to June, customers continued to cancel or defer significant contracted volumes, he said.

“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.”

Export earnings are in US dollars but reported in New Zealand dollars using spot exchange rates.

Chief executive Don Elder said as international revenues plummeted, the business approach swung from strong, rapid expansion on the back of high and predictable operational cash flows to a more cautious strategy, with the aim of securing export cash flows in the immediate short term.

The New Zealand dollar revenue increased significantly through 2008 as the NZD went down against the USD, but this was offset by the company’s hedging policy.

As export sales volumes and prices crashed from November, the company had to close out surplus foreign exchange contracts, resulting in a further foreign exchange loss of $19 million and the company made impairment and onerous contract adjustments reducing underlying profit by $26.7 million, he said.

“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.”

The renewable energy business produced 12,500 tonnes of wood pellets and .73 million litres of biodiesel form used cooking oil and its new energy business produced .34 terajoules of coal seam gas.

But the biodiesel business had a difficult year, with declining prices, changes in legislation and disappointing initial yields from oilseed rape crops, the company said.

Its $14 million Rolleston rapeseed oil processing and storage facility was completed but production was put on hold. In the interim, the existing Christchurch facility produced at capacity, to 4 million litres a year.

Solid Energy said it committed about $200 million in a new coal processing plant at the Stockton Mine, it signed a new five-year agreement for coal supply to New Zealand Steel, triggering a $100 million investment to extend and started expansion in Taupo of a third, $35 million wood pellet production plant under biomass business, Nature’s Flame.