Finance Minister Bill English confirms Solid Energy issues centre around NZ$1 bln disagreement over value between market and company

By Alex Tarrant

Issues surrounding Solid Energy which needed to be cleared up before the company was put up for partial privatisation centred around disagreement about the company's value, Finance Minister Bill English confirmed today.

Interest.co.nz reported on Monday that issues surrounding the company referred to the Prime Minister yesterday were led by the difference between the market's NZ$1.69 billion valuation of the company, according to analysis by Forsyth Barr, and the company's own NZ$2.77 billion valuation of itself.

Parties involved in getting Solid Energy ready for partial privatisation under the government's mixed-ownership model were currently working through the valuation differences to try and get the two figures closer together in efforts to determine the company's proper value before shares in it are sold.

The delays mean Genesis Energy or Meridian are likely to be second and third off the rank in the mixed-ownership sell-down after up to 49% of Mighty River Power is sold in the third quarter this year.

"As part of this process we're doing a health check on all the companies, and some of them don't have any new issues that we weren't familiar with. [But] in Solid Energy's case there are a few more issues there related to what they see as valuable to the company," English told media in Parliament Buildings on Tuesday.

"That's reflected in the different valuations of the company that the government already has, so we'll just work through those. There's no particular pressure on that - we've signalled it's going to be Mighty River Power [which] will be the company floated this year," he said.

The government was in discussions with Solid Energy's board about the variances in valuations.

"The usual government monitoring of its own businesses has thrown up these issues, and the focus on just what value the market might see in these companies has thrown up a few issues. But each of the companies has got some of those, and at the moment we're focusing mostly on Mighty River Power," English said.

"All of these companies are benefiting from outside scrutiny. Solid Energy's not just your average energy company, it's something a bit different. People have to try and understand what it's been doing for the last few years, what it sees as its future value, and of course there are differences of opinion about that," he said.

The issues

The large gap between the two valuations relates to Solid Energy's larger potential 'New Energy' projects, which Forsyth Barr analysts did not include in their valuation last year, and how Solid Energy generally viewed future operations, interest.co.nz reported on Monday.

The larger New Energy projects include plans to convert lignite to urea and diesel, and underground coal gasification. As these projects were only in early stages and required significant levels of further investment, the Forsyth Barr analysts said they treated them as 'potential upside' to their valuation.

"In future, Solid Energy’s planned New Energy projects have the potential to create very significant upside. However, we note that equity markets elsewhere have been reluctant to ascribe much value to many of these projects (except coal seam gas)," Forsyth Barr analysts say in their November 2011 valuation report.

"Some of them, particularly coal to urea and coal to diesel, involve substantial capital expenditure in the order of billions of dollars. We have treated these projects as early stage potential upside, and (somewhat arbitrarily) have allowed 20% of a simplified DCF for each project as a contribution to our overall valuation," they say.

"We value Solid Energy at NZ$1.6bn, or around NZ$25.50 per existing share. NZ$1.2bn of this is attributable to the existing operations, and the rest to the discounted potential of Solid Energy’s planned New Energy developments. The key to value growth will be the success or otherwise of these projects which have the potential to significantly increase the value of the company," the analysts say.

Noting Solid Energy's plans to develop projects to convert lignite to urea (fertiliser) and fuel (diesel), the Forsyth Barr analysts said the projects would require significant capital expenditure, indicatively around NZ$1.5 billion to NZ$3 billion for the urea project and around NZ$5bn for the diesel project.

'We think it's more'

Meanwhile in its 2011 Statement of Corporate Intent (SOI), Solid Energy said it valued itself at NZ$2.8 billion as at June 30, 2011.

"The valuation is from the perspective of the value-in-use to Solid Energy of its business operations. It does not represent the market value of Solid Energy if it was sold," it says in the SOI.

"The gas development projects and the lignite conversion projects were valued on a reserve multiple basis," it says.

The valuation was based on Solid Energy's internal view of future prices and was not based on market consensus price curves. It was prepared internally by Solid Energy's finance team. The methodology used was the same as a year earlier, which had been externally reviewed that prior year, it said in the SOI.