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Labour's David Shearer goes on attack over troubled Solid Energy, says Govt wanted the SOE to increase debt so it could ramp up dividends

Posted in News
David Shearer, leader, Labour Party

Government pressure for State Owned Enterprise Solid Energy to borrow more and pay bigger dividends contributed to its current financial woes and Prime Minister John Key ought to take some responsibility, Labour Party leader David Shearer says.

Shearer says the Government pressured Solid Energy to increase debt so it could ramp up dividends despite knowing the company was facing financial difficulties.

“Bill English knew that coal prices were forecast to decline in 2009 but still urged Solid Energy to increase its gearing (debt to equity) ratio," Shearer said. "That means ‘go out and borrow more’ despite knowing there was trouble ahead."

“The Finance Minister told Parliament today he didn’t know coal prices were going to decline. But documents obtained by Labour show that he did."

Shearer says in May 2009, shareholding ministers, including English, wrote to Solid Energy expressing disappointment with the firm's "forecast decline" in its financial performance and "dramatic decline in profitability and dividends." He reportedly tabled a May 2009 letter in Parliament today that was sent by then State Owned Enterprises Minister Simon Power to Solid Energy's then chairman John Palmer.

“In it, they urge Solid Energy to increase its gearing ratio despite confirming that they’re aware there has been a ‘significant decline’ in forecast coal prices," Shearer said.

“At the same time, the Government was demanding increased dividends. And Solid Energy paid up, returning NZ$130 million over four years, including NZ$30 million in late 2011 by which time coal prices had further declined and the company was in financial distress."

Responding to Shearer, English said ultimately the decisions about how much debt Solid Energy took on was made by the company's board. Power is now managing director of Westpac NZ's wealth, insurance and private banking, overseeing 250 staff.

The Government revealed last month that Solid Energy is in talks with its banks over restructuring options. English and Minister for State Owned Enterprises Tony Ryall said Solid Energy had NZ$389 million of debt and its interim financial result, due soon, would show a "significant" loss.

Solid Energy's banks are Westpac, ASB, ANZ, Bank of Tokyo-Mitsubishi and BNZ. Their loans to the company are unsecured. Treasury has hired investment bank Macquarie to advice on the Government's options for the SOE.

Shearer said Key and his ministers were "desperately" dumping the blame for Solid Energy's woes on its board.

"But the real blame rests with them. They were urging the company to borrow more despite knowing stormy financial times were ahead. They knew the company was in trouble but continued to treat it like a cash cow," said Shearer.

“It’s time John Key took responsibility. While Solid Energy’s woes are complex and this is not the only factor in its decline, the pressure from ministers to borrow more and pay bigger dividends certainly contributed to its current dire financial straits,” Shearer said.

Solid Energy's former CEO Don Elder, and its ex-chairman John Palmer, will appear before Parliament's Commerce Select Committee on Thursday.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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14 Comments

This is all a load of rubbish

This is all a load of rubbish , the LIGNITE  operations which are the cause of the problems were a LABOUR GOVERNMENT initiative, going back to 2005, 2006 and 2007  .
I would like to see the correspondence in which National encouraged reckless borrowing
National inherited something that was already far down the road.  
Pretty much the entire board was put there in the Labour administration

Pretty much the entire board

Pretty much the entire board was put there in the Labour administration
 
And John Key and Co had no intention of bringing them to heel as is evidenced by Bill English's protestations that Labour should not can lignite mining. Read article 
 
The Labour Party's plans to put the brakes on Solid Energy's lignite conversion projects in the Gore district, if it wins the election, have been slammed by the area's MP Bill English.
The deputy prime minister described it as just another example of Labour standing in the way of jobs and progress in Southland.

And then there's the small

And then there's the small issue of Bill English confirming today in Parliament - yes, it was us;
 
Labour has tabled documents in Parliament showing that ministers put pressure on Solid Energy in 2009 to increase its debt levels and pay bigger dividends, despite warnings a falling coal price could crimp its profits.
Finance Minister Bill English confirmed the instruction in a letter from then state-owned enterprises minister Simon Power to the state coalminer's chairman, John Palmer.
 
http://www.stuff.co.nz/national/politics/8420942/Ministers-pressured-Solid-Energy-Parliament-told
 
 

PDK looks to have it spot on

PDK looks to have it spot on over at the top ten. Boatman = Spindoctor

Cheers Scarfie - the irony is

Cheers Scarfie - the irony is that Boatman is right about Labour - they are stupid about energy too. I had David Parker on about this, but he doesn't get EROEI, either.

It's standard operating

It's standard operating procedure for corporations these days to load up on debt and increase dividends, salaries and bonuses. First thing a private equity group will do when buying a company. Why so many of them get into trouble. Not appropriate for a SOE with a government backstop. The first thing they will probably do is start selling assets like land and buildings, distributing the proceeds and leasing them back. More "efficient use of capital".
 
Labour, especially Cullen were clueless and easily manipulated by Treasury and self interested advisors in the financial sector. National and Key - singing to the choir.
 
I don't agree with the SOE sales but if they're going to do it partially and run them on a highly leveraged private equity type model, better to sell 100% because like Air NZ, Tranz Rail, BNZ, DFC, Solid Energy, some of them are going to go tits up and need a bailout and some golden parachutes for the executives. Then again even when 100% privately owned they still get bailed out.

Economics 101 according to

Economics 101 according to Bill English
Borrow a few hundred million. Pay Govt a few hundred million.Then I can pretend I earned it.Or made the Govt books look slightly better??(how?, as Govt owns Solid Energy )
When it all craps out, I can say  (as I did on TV tonight)  that it is all standard business practice (and if you don't realise that you are obviously thick), it's normal .
Hey, I borrow $300,000,000 a week sometimes to buy votes, what is your PROBLEM???

Seems more than a bit

Seems more than a bit corrupt... And to think that the Nats got into power advocating the reduction of the bludggers on the benefit.But then, what does a lousy boxer know about economics?
What does one get by crossing JK and BE? Why, one gets Johnny English! He knows no danger. He knows no fear. He knows nothing!
Cheers... or tears?
HGW

Too much debt...too much

Too much debt...too much shoddy govt...next up...the whole sorry joke of an economy!
Borrow borrow borrow.....who gives a *&^% about tomorrow.

Confuse-us says Englishman

Confuse-us says Englishman speak with fawked tongue.
Velly funny! Sole-Losel... Pliceless!!
HGW