Govt won't let Solid Energy fail, looks to banks to wear their share

Bill English

Solid Energy will remain trading during a "difficult two or three months" while the company, its bankers and the government find a way to keep a smaller, coal-only business alive.

At a press conference in the Beehive, Finance Minister Bill English said the government was not injecting any funds into Solid Energy at present and had offered no formal government guarantee, but also that "we will not let it go into receivership".

He says Solid Energy will continue to be able to pay suppliers and workers' wages while its problems are carefully considered and a solution devised.

"We're committed to getting it to the stage where it's a viable, ongoing business," says Mr English of a company that employs some 1200 staff and was at one time on the list of SOEs to be partially privatised.

That formulation suggests the state-owned coal company, which put its own value at $3.5 billion in 2011, is only able to access bank finance because of an implicit government guarantee.

Mr English also made it clear that while the government will be under pressure to put capital into Solid Energy to keep it afloat, he expects the company's bankers to share the pain, having backed it with loan finance to date.

"Who contributes to its recovery is a matter that will be discussed over the next month or so between the company, banks and Treasury."

The government's "best advice" was that a core coal-based business was capable of being created from the current set of assets. The government could manage a capital injection if it had to.

"It looks like another government bailout," says Grant Williamson, a director at brokerage Hamilton Hindin Greene. "It is pretty disappointing and shows another reason why these companies should be on the listed market and better scrutinised."

Mr English says Solid Energy's overly optimistic view of its potential first became apparent during a scoping study ahead of its possible part privatisation, which identified a gap of nearly $2 billion between what the company thought it was worth and an independent valuation.

Solid Energy has been racking up debts at the rate of around $10 million a month since last June, when it reported it was carrying $300 million of debt, which now stands at $389 million. That rate of debt growth triggered alarm among the company's syndicate of bankers, who have been in discussions with Solid and the government's economic advisers at Treasury.

It had already announced huge write-downs on assets at its last annual profit result, most of the former board has either retired or been replaced and its chief executive of the last decade, Don Elder, resigned earlier this month.

Mr Elder was on a package paying more than $1 million, although he refused bonus elements last year and was given a 40 percent performance score by the board for the 2011-12 year.

The company's difficulties stem from a failure to appreciate how vulnerable it was to a drop in the international price of coal, Mr English says. That was a major driver for last year's $40.2 million loss, the mothballing of the Spring Creek underground mine on the West Coast and a halt to expansion of the Huntly East coal mine in the Waikato.

Coal prices peaked in January 2011 at $US350 a tonne, but fell to a low of $US140 per tonne in September last year in response to a sharp slowdown in steel demand from China, in particular.

They had recovered modestly since, but the company was carrying substantial debt and any further recovery would be prolonged, new chairman Mark Ford said in a statement.

The half-year result, due in two to three weeks, would record "a significant loss", he said.

Further downsizing now appears inevitable. The company has reportedly been trying to sell farmland it had bought to allow lignite developments.

It is also putting the finishing touches to a $29 million demonstration briquette manufacturing plant in Mataura, which may now never open, amid reports that prospective customers Fonterra and Ravensdown recently withdrew their interest.

At the same time, a number of alternative energy projects, including the development of diesel and fertiliser manufacturing from low-grade Southland lignite coal, were consuming management and board attention, with a blowout in staff at head office devoted to areas other than Solid's traditional coal extraction business.

Mr English and State-Owned Enterprises Minister Tony Ryall refused to be drawn on the question of the quality of the board and management who created the current problem, saying questions about Mr Elder's performance and pay packet should be referred to the board,.

"At some stage, there will be an opportunity to make judgments about that," Mr English says.

(BusinessDesk)

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9 Comments & Questions

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There goes that word again,' State" and its endless supply of someone elses money that influences every decision. You cannot miss.

Let the winds of private enterprise remove the dead wood and riskless decision making. Let it fail and let the new growth emerge.

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@comment 1

Yes look how well private enterprise has being doing in the US in recent years, no bail outs there...

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The $50 billion bailout of GM in America and the following cash for clunkers deal was pure politics. No recognition of what happens to the people you take the money from and their subsequent decision making.

Don't let the same happen here in NZ. Failure is part of the system. It eliminates bad decisions and investments quickly allowing the new growth to emerge.

Private enterprise has its own money at risk and not the taxpayers. Decision making is totally different.

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Now dont tell me that their resigning CEO gets a bonus.

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Should also have a look at NZ Post management... 5 week 'course' in France at tax payers expense, just crazy.

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Yes. And may the resources focused in dirty, extractive industries be redirected into the exploration and development of the clean, new energy sources that have driven this dinosaur out of business.

What hope is their for "NZ Inc" if this "business savvy" government cant even run a coal mine or two. (And why would they want too...)

Pity the workers. They wont be enjoying the golden handshakes or bonuses Nationals rich mates did while they sank the company.

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The bonuses paid by Solid Energy in the last few years is obscene and immoral. In light of their current dire financial position, I would hope that these will be clawed back in full. Totally gutless if not. This country's management is going from the sublime to the ridiculous and the politicians seem to condone it, or at best find they are at a loss to know what to do. Seems it's the tail wagging the dog. Maybe those of us with the money should "bail" while we can to greener and better pastures or should we stand up to this mismanagement and demand accountability and answers as shareholders and taxpayers (most would rather enjoy the boat, the beamer and the bach, though, than rock the boat ... but soon all that could be history as we are taxed into oblivion to pay for the bonuses!). Come on the middle class, make your voice heard.

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Guess whose going to pay for the bail out? The bloody wage slaves again!

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Why didn't Rabobank and Westpac have to "wear their share" of their irresponsible $200 million exposure to the Crafars? The worst outcome of all of this would be flogging off the assets of Solid Energy to the Chinese again.

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