Writedowns push Solid Energy to $40 million loss

BUSINESSDESK: Writedowns on the value of its underground coal mines, renewable energy projects and an experimental coal seam gas plant have pushed Solid Energy to a $40.2 million loss, although underlying earnings after tax were 16% higher than the previous year.

The $99.2 million underlying earnings figure excludes $151.7 million of writedowns and is described by outgoing chairman John Palmer as "good in a deteriorating market".

The company is using the writedowns, based on slumping global coal prices, to justify as many as 370 job losses at its Huntly East and Spring Creek underground mines, and in other parts of the business, including head office.

The restructuring was announced on Wednesday, ahead of today's profit release.

The government has already signalled that Solid Energy, one of five SOEs slated for partial privatisation, is off the list for a share float while it works to get back on track financially.

But Mr Palmer says this show why Solid Energy should be partially privatised.

"It's ironic, given the issues around Solid Energy today, is that if you wanted the best reason for partial privatisation, then the commodity nature of the business and its dramatic turnaround in fortunes is the very best reason."

Unsuitable risk profile

Such a risk profile was "unsuited to total Crown ownership," Mr Palmer says, expressing "some regret" at leaving the Solid Energy board after six years as the company faces a difficult couple of years.

While revenues for the year increased 18% to $978.4 million, that was partly because coal due for shipment from Lyttelton Port before the end of the last financial year were delayed by the June 2011 earthquakes.

Earnings before interest, tax, depreciation and amortisation were just $44.9 million for the year to June 30, a 78% drop from the previous year's $200.8 million.

The result is also well shy of broking house Forsyth Barr's $204.4 million ebitda forecast, prepared last November for the Treasury's Crown Ownership Monitoring Unit, which oversees the performance of state-owned businesses.

While the company has not released audited accounts to back today's profit announcement, a simplified financial results table also shows that gearing has rising to 42% from 30% a year earlier, reflecting $250 million of capital expenditure over the last four years.

Solid has cancelled some $100 million of capex for the current financial year.

Palmer said the company's financial situation would be "challenging and is worse than during the 2008 global financial crisis".

"In 2008-09, when US dollar export prices collapsed, the New Zealand dollar followed.

"Coal prices rebounded relatively quickly in the following year, whereas this time, with a high New Zealand dollar, we expect prices to be weak for a prolonged period."

Today's statement also makes explicit that the state-owned coal miner will spend no further money developing renewable energy options.

"The company has made a significant investment developing renewable energy businesses," Mr Palmer says. "The harsh reality is that other fuels are far more competitive in the current financial environment.

"We took a long run of these businesses, which relied on a sustained price premium which has largely failed to materialise."

Selling bio-diesel business

As a result, the company is selling its bio-diesel business, which it has written down from $17.7 million to $8.7 million, and its Nature's Flame wood pellet burner fuel manufacturing unit from $37.5 million to $13 million.

The book value of the Spring Creek mine has almost halved from $137.3 million to $73 million, while Huntly East, on which major capital expenditure has been cancelled, sees its book value fall by $33.8 million to $32.1 million.

Solid is also writing off the $18.5 million it spent developing an underground coal seam gas unit at Huntly, although it intends establishing new UCG operations in larger coalfields in Taranaki as part of its turnaround plan.

A further $22 million of on-off costs were also declared, including $9.5 million on the value of Spring Creek stores and Nature's Flame inventory and onerous contracts.

There was also an after-tax impact of $9.1 million, caused by backing out tax losses relating to Spring Creek, which the balance sheet restructuring cancels out.

State-Owned Enterprises Minister Tony Ryall confirmed this morning that Mark Ford, the senior executive shoulder-tapped to lead the Auckland super-city amalgamation, will be Solid Energy's new chairman.

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The Solid Energy Board and Management should be held accountable for this - although accountability isnt something they have ever been good at.

I also wonder how the West Coast Mayor Tony Kokshoorn, and for that matter the Unions involved, feel about supporting Solid Energy to buy Pike, and Solid's tactics in buying the railsiding and making it ineconomic for other buyers.

If Solid Energy are, as speculated, closing Spring Creek, which it must be remembered has had major safety issues before Pike and since Pike, then Pike River will almost certainly never re-open. That that was seemingly obvious to all except Mr Kokshoorn. The purchase was purely to ensure that there was no competition for workforce. the price paid was less than the bridges on the access road, apparently, cost to construct and only a few times more than Don Elder got paid last year. I certainly hope he is taking a significant haircut in his package this year for getting it so wrong and leading to such a huge write-off.

For the sake of the Pike families i hope that Solid will be honest about their intent to retrieve the bodies of the 29. This important task, and their commitment to this must not be forgotten as part of cost cutting. There are families involved and their interests must come ahead of others.

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Forsyth Barr have excelled again with their investment anaylsis - this result from a $204M profit forecast.

Hopefully it wasn't Mr Hallright who did the analysis after his experience with an Asian under the bonnet.

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That $40m loss represents probably half the head office salaries of the joint

Like a lot of NZ big business the bloated bureaucracy means the tail wags the dog(witness 99.999999% of Government Departments, health boards, SOE's multi national companies etc etc etc)

And it is ironic that the Coast/Buller earns most of Solid Energy's income but they cannot even stoop to have their head office there. And even more ironic that the head office is in a city where one is not allowed a coal fire

And I will bet when prices inevitably recover and they inevitably recommission Spring Creek the costs to get it back to where it is know will dwarf the costs to keep it ticking over in the meantime.

One hand has no idea what the other is doing

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Palmer has presided over a period when thIs dog was hopelessly over promoted and over valued.
I would be very interested what the provision for site reparation is. It almost certainly is much higher than the value of the assets.

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