Govt blocked grandiose Solid Energy plans in 2009

The government blocked proposals in 2009 from its coal mining company Solid Energy for a billion-dollar capital injection to allow it to become "the Petrobras of this country", Prime Minister John Key says.

The Solid Energy plan grew from encouragement by the last Labour-led government for state-owned enterprises to expand their activities and would have arrived at the cabinet table at a time when then Energy Minister Gerry Brownlee was entertaining advice from other quarters to establish a national oil company.

NOCs, such as Brazil's Petrobras or Norway's Statol, are government-owned oil and gas companies whose profits are invested for national benefit.

While the New Zealand government was unwilling to back Solid Energy in that role, it appears to have been powerless to prevent the company from taking what Mr Key described as "baby steps" towards such a future.

"The company did have the right to draw down debt and make investments without shareholder authority" up to a certain level, Mr Key says.

That included investigation of coal seam gas plays, which former chief executive Don Elder was still touting last year when he announced Solid Energy's $40 million loss for the last full financial year, and investment in farmland in Southland to allow exploitation of low-grade lignite coal for conversion to diesel, urea and burnable briquettes for industrial heat.

Concentration on these new areas of business were part of the reason the company's head office staff grew substantially and Mr Key says the company defended an identified lack of proven coal reserves to support its future business on the grounds it was pursuing a wider brief than just coal mining.

They were, however, "worthless investments", Mr Key says. Other initiatives included bio-fuels and pellets for wood pellet burner investments.

The company has a $29 million demonstration briquette plant awaiting commissioning in Mataura, which Solid Energy's new chairman, Mark Ford, said last week was for sale along with all other lignite development assets.

The company began talks with its bankers, Treasury and the government as shareholder, last week over its future after concerns that it was adding around $10 million a month to its balance sheet debt, now sitting at around $389 million.

The government has said it will not let the company go into receivership, but is looking for it to be reconstituted on a much more conservative basis, as a company focused solely on mining coal.

Asked yesterday whether Solid Energy was worth anything at present once its debts were repaid, Mr Key said: "I would be surprised if it's worth more than it owes."

However, that was "a snapshot based on current coal prices", which have plunged in the last 18 months but are showing some signs of recovery and could allow the business to become viable again.

The problems at Solid Energy first came to light when the government started scoping the business for partial privatisation, at which time it became clear the Solid Energy board's valuation of around $2.8 billion was wildly at odds with an independent valuation of $1.5 billion.

The board, chaired by Air New Zealand chairman John Palmer at the time, had projected the path of world coal prices "completely and utterly wrong", said Mr Key, and insisted until the middle of last year that officials' criticism was unfounded.

(BusinessDesk)

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Maybe Don Elder should pay back his bonuses he received over the past few years and also any other benefits.

Based on John Keys statement all recent board members should also be held accountable. This is a state owned company and therefore taxpayer owned.

Mark Ford should hire additional staff to get to the bottom of this.
From all accounts Solid Energy was just an ego feeding toy for Don Elder and his yes men. Anyone with differing views to Don Elder were pushed aside at the company.

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Issue is not bonus payments but criteria for bonus payments by board to management. By definition, if prices increase due to world demand then that has very little to do with the CEO and therefore a profit-related bonus on increased price should not be paid. In that way, when price tanks, the CEO can validly say, 'beyond my control and don't blame me'. But I suspect bonuses were probably paid on market price shifts. Different if profits arose from increased volumes on static price. The CEO can probably take credit for such with senior management.

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Agree - Don Elder showed the classic poor judgement of an an "emperor with no clothes", having surrounded himself with those more concerned with their inflated salaries than pointing out the unrealistic level his fantasies had grown to. Those in the company who did speak up, calling Don Elder out, were turned on. The board also went along with everything, displaying little commercial nous. A pity that Solid Energy should be hitting the ropes again. Perhaps someone who actually wants to run a successful coal company should be appointed as CEO rather than those who wish to self-aggrandise.

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All look like Green economy plans - projecting downside on coal prices was a definite management failure. So is this a classic case of why Green policies will never work mixing with capitalisitic intentions.

KiwiRail comes to mind as well. Unions can't say boo on this either as they would of been more than happy with workers being employed.

Why do SOEs get their balance sheets so wrong? Stress tests need to stronger. Oh well, I see a Air NZ type turnaround now and when it does come rights let's sell it!

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Agree. As the article says "The Solid Energy plan grew from encouragement by the last Labour-led government for state-owned enterprises to expand their activities ", the opposition are yet again the architects of the demise of NZ jobs and business.

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Another outstanding example of state management. No need to continue whining about market prices of coal. Every business needs to, and does, deal with such situations all the time. There needs to be a full inquiry into how this "business" has operated in its recent past.

Buying land in Eastern Southland was almost a lolly scramble. There is more than just anecdotal evidence that some vendors of land were substantially enriched with this state "business" largesse. Largesse bordering, with the benefit of hindsight, as almost irresponsible.

With such generosity becoming almost institutionalised, with sponsorship deals, etc, there were undercurrents suggesting that the Gore District Council may become the first local body governing without charging rates. There being so much endless financial benefit emanating from "Solid Energy".

Well now it is back to the real world. Bare bones, wealthy disappearing executives, and a taxpayer bailout.

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This article appeared in the Southland Times 12/01/2010

Golden Gore future anticipated

Sonia Gerken In GORE

Gore District chief executive Steve Parry has predicted this year would be "bigger than Ben Hur" if Solid Energy advances plans for a multibillion-dollar plant to process its vast lignite resources in Eastern Southland.

"It's exciting, yet frightening," said Mr Parry as he reflected on what had been a remarkable 2009.

After years of speculation, last year the Government-owned coal miner announced investigations that could result in the development of the biggest industrial complex in New Zealand.

It was involved in a joint venture study with Colorado-based GTL Energy into a briquetting plant at the old Mataura paper mill, another with fertiliser company Ravensdown into a $1.4 billion coal-to-urea plant, and studies into a $10b to $14b lignite-to-liquid fuels plant.

Solid Energy new energy general manager Brett Gamble said investigations into the latter two plants were being carried out in tandem because of their complexity and scale but it was likely the smaller project would proceed first.

By June the company should know whether or not it would progress to the next stage, a feasibility study. That would involve assessing which technology would be used, where the plant would be located, and environmental and social impact assessment work, Mr Gamble said.

Mr Parry said the environmental issues were significant but the resource consent process would take care of them.

It would be the social and urban development issues that would test the council, he said.

The coal-to-urea plant would require a work force of about 1500 and provide 500 permanent jobs.

Among the questions already being tossed around were the impact of assimilating 1500 people into the community, where would they live and what would be the demand on infrastructure and services, Mr Parry said.

Then there was the issue of where the support industries would be established and whether the council should promote a brownfields development, where existing land was used and revitalised, or a greenfields site.

Mr Parry admitted he had already had people knocking on his door wanting to get involved or offer their services.

Gore could become a real economic powerhouse, even regain the golden glow of the 1960s, when it was one of the richest towns in New Zealand per capita, Mr Parry said.

Solid Energy had already made many new millionaires in the Gore district with its estimated $50 million spendup on farms a few years ago to secure the lignite.

Mr Parry said personally he was eager to see the arrival of big corporates in the district. Gore has Solid Energy and Dongwha, with Fonterra on its boundary. There were local authorities that would love to have just one of those in their back yard, he said.

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Why no public inquiry into SCF? Because too many wealthy and prominent people would fall.
Solid Energy: from Southland Times 12/01/2010 [above] – “Solid Energy had already made many new millionaires in the Gore district with its estimated $50 million spendup on farms a few years ago to secure the lignite.”
It would appear the wealthy are being saved again by the taxpayer.

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For mine, it's surprising it has taken so long to flush out the commercially unrealistic and grandiose designs of Don Elder, his management and board.
There would be few involved in mining in NZ and abroad who didn't know the bloated SOE was simply a failure waiting to be announced over its alternative fuels plans.
And they said so. But who was listening?
What was the Crown doing as a mining operator? Its role is to regulate mining environment, not operate within it.

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Astonishing Elder claims the reason for his appalling performance is the drop in coal prices. Solid Energy was very profitable 10 and 20 years ago, with prices at a quarter of the current level. The truth is Elder expanded the company and staff count with pie-in-the-sky alternative energy schemes instead of looking after the knitting - coal mining.

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This is why businesses need directors that have a focus on shareholder wealth rather than empire building. Surely with the market regulating this company the executives would have never been able to get away with this. And if they did, it would have been those shareholders stupid enough to invest with self-interested directors who would have been punished, rather than taxpayers.

I guess it is all right to be self-interested, especially if it is likely you will be able to retire and live well even if everything goes wrong. But that is why proper incentives need to be put into compensation packages. In my view, all director contracts should have a clause where if the company goes under all directors' compensation for the previous five or so years must be paid back.

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Governments have no business being in business. Politicians know nothing.

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If they have time to run a business, we're not keeping them busy enough. All these politicians that are unwilling to comment... they shouldn't be there. It's their bloody job to comment. We're paying these monkeys. Gotta stop perpetuating inaction by taking the extreme opposite side in a two party political stasis too. Both sides need serious refinement and involvement from all New Zealanders. We all swallow too much fantasy and end up calling it reality... she'll be right, eh.

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Wake up NBR readers and writers.

Labour has not been in government since 2008. How long are you going to blame the present on the past?

Although this article contains many ambiguities, whatever government did in 2009, it did it under National.

With all the government acts passed under urgency since then by Actional, evidently, this is one they missed. Asleep at the wheel, indeed. Maybe not asleep. More like distracted and daydreaming of a privatised planet key, *as such*.

Anyway: reviews and bonys payback won't do jack. So far, the only plan is to keep an unprofitable asset, and sell profitable ones. I, personally, didn't get rich following that logic.

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