In writing this article I had a read of Frank Macskasy’s excellent blogpost which is here. Regrettably the earlier annual reports that were available on Solid Energy’s website appear to have been removed. What gives? Is a state owned entity hiding information which is important for us to understand what happened?
So Bill English is denying Government responsibility for Solid Energy’s problems. I hope that this gets analysed more carefully by the mainstream media. Because it is clearly not correct.
The Herald has reported on a recent Bill English interview:
The continuing slide in the price of hard coking coal on the international market has been blamed for the decline of the debt-laden company, but Opposition parties have pointed the finger at the Government, saying it must take some responsibility for Solid Energy’s current misfortune.
But Finance Minister Bill English today dismissed those accusations, saying it was not bad management on National’s part that pushed the company over the edge.
“No I don’t agree with that,” he said on TV3’s The Nation this morning. “It’s the coal price that’s sunk this company, and the assumptions it made five or six years ago about where their coal price would be.
“They thought it would be twice as high as it is now, in fact their estimates were higher than the market. So as the Government came to grips with what the company’s plans were there was disagreement between the company and the Government and the Treasury, there were changes in the board, changes in the management, and we’ve been in a process ever since dealing with this ever dropping coal price.”
But did Solid Energy have such a bullish view of the world?
I wrote this post in March 2013 where I went through Solid Energy’s problems at the time. I thought the Government’s insistence on increasing dividends were a major factor.
The final claim about the company’s woes being related to risky investments directly contradicts a letter that Labour unearthed whereby in [May] 2009 Solid Energy was instructed by then Minister Simon Power to increase debt and the payment of dividends. Key has claimed that Solid Energy’s view of the future price of coal was bullish and out of kilter with the Government’s view but if this is so then you really have to wonder about why the Government still insisted on increased debt and dividends. Interestingly the letter reinforces this and in the letter Power says the following:
“I am disappointed with the forecast decline in Solid Energy’s financial performance over the next three years, in particular the dramatic decline in profitability and dividends. While this is understandable, given the significant decline in forecast coal prices, it is far from clear why Solid Energy forecasts [redacted].”
Solid Energy was telling the Government its financial performance was going to worsen but the Government still insisted on increasing dividends.
Over the next four years $130 million in dividends were paid to the Crown while at the same time Solid Energy’s position worsened. When you allow for compounding interest those payments represent a significant amount of the company’s debt. And requiring a $30 million dividend to be paid in the year that a substantial loss was made was always going to cause problems.
And the cost so far? There was the payment of $100 million by the Government from the Future Investment Fund. I do not think that it was intended that the fund would be used in this way. There are also the $25 million worth of redeemable preference shares the Government owns which appear to be worthless. And there is the shell of a company that was previously thought to be worth in the vicinity of $2 billion dollars.
Ministers are meant to be in control of things and have some oversight of and management of State owned entities. Solid Energy suggests that English and co have failed miserably in discharging their obligations.