Govt in intensive discussions with Solid Energy about future after falling coal prices, high NZ$ force it to review operations; Sale timing questioned

By Alex Tarrant

The government is in intensive talks with state-owned coal miner Solid Energy about its operations as falling coal prices and the high currency hit its revenues and future expansion plans. 

The "extremely challenging market conditions" Solid Energy referred to in a profit warning last week have raised questions about the viability of plans to partially privatise the company sometime in the next three to five years.

Solid Energy needed to get itself into "considerably better shape" before the government could sell up to 49% of the company under its 'mixed-ownership model' policy, Finance Minister Bill English told media in Parliament on Tuesday.

Interest.co.nz reported in March that due to disagreements over the company's valuation, Solid Energy would be the last off the block in the mixed-ownership sale process, following energy companies Mighty River Power, Genesis Energy and Meridian Energy.

The government wants to raise NZ$5-7 billion from the partial sales, which also include selling the government's three-quarter stake in Air New Zealand to no less than 51%. Challenging airline market conditions also mean the Air NZ share sale is set to follow the energy companies as the government waits for that market - and the global economy - to pick up. 

Market conditions could “quite possibly” be appropriate to float the rest of Air NZ this Parliamentary term, English said on Tuesday. That process would be a much smaller and simpler exercise than the Solid Energy float because Air New Zealand was already a mixed-ownership company, he said.

The NZ$5-7 billion in proceeds from the share sales would be put towards new capital spending earmarked from Budget 2012 through to 2016, such as a NZ$1 billion investment in school upgrades, NZ$400 million towards irrigation investments, and NZ$250 million for KiwiRail's rail network upgrade.

Solid problems

Solid Energy last week warned that falling coal prices and the stubbornly high New Zealand dollar meant its revenues were likely to fall NZ$200 million in the current financial year.

"International prices for high-grade coking coal have fallen over 40% to below US$200 per tonne (from well above US$300 per tonne in 2011) and are at their lowest point for some years," the company said in a statement to the NZX.

"The outlook is different to that faced by the company during the 2008/09 Global Financial Crisis. In early 2009, as commodity prices plunged, the New Zealand dollar followed, softening the fall in New Zealand dollar prices. Spot prices then rebounded within a matter of months," the company said.

"At present there is no certainty about when international growth will resume and lift international coal demand and prices."

Solid Energy's CEO, Don Elder, said the industry consensus was that the market bottom remained some way off.

"While many in the industry still expect demand, driven by Asia, to pick up again strongly sometime in 2013, Solid Energy needs to plan to withstand these market conditions for at least the next 12 months and possibly for 24 months or longer," Elder said.

"As a consequence, we are reviewing all areas of our business, including current and future operations, all fixed and variable costs, and the values of some of our assets, which will result in us taking significant impairments. Our aim is to preserve cash through reduced spending while, as far as possible, maintaining our longer-term value opportunities," he said.

In March, Interest.co.nz reported the government was concerned about the difference between the market's NZ$1.69 billion valuation of Solid Energy, according to analysis by Forsyth Barr, and the company's own NZ$2.77 billion valuation of itself.

The large gap between the two valuations related to Solid Energy's larger potential 'New Energy' projects, which Forsyth Barr analysts did not include in their valuation, and how Solid Energy generally viewed its future operations,

The larger New Energy projects included plans to convert lignite to urea and diesel, and underground coal gasification. See more on the New Energy projects, and the comments from Forbar and Solid's board on the valuations, as well as earlier comments from English on the issue, here.

Will it get sold?

Speaking to media in Parliament Buildings on Tuesday morning, English would not be drawn on whether the problems could push the partial privatisation process for Solid Energy beyond the 2014 election.

The government would make a judgement over the next week on how many of the energy companies it could partially float this term following the Waitangi Tribunal’s interim report on water rights, set to be released on Friday, he said.

However, there would still be a question mark over Solid Energy.

“It’s a taxpayer asset, it’s experiencing the difficulties of the global economic crisis, and we’ve got to act as good stewards and get that asset in good shape," English said.

The process of getting the company ready for a partial float had been beneficial as outside parties had looked into the business and contested views of what was of value and what was not.

Solid Energy needed to be in “considerably better shape” than it was now before it could be floated, English said.

“There’s always some uncertainty with this kind of process about the value of the assets, about the global condition, about – in this case – the coal market," he said.

“We’re fully aware of those uncertainties, and we’ve been fairly careful about making decisions in the [sale] programme so we’re not getting ahead of time, or putting ourselves in a situation where we’d have to have a less-than-appropriate sale.”

"Right now, there are issues with Solid Energy driven by the big fall off in the coal price, and the board of Solid Energy is getting on with dealing with those issues," he said.

The government was in intensive discussions with the board about the viability of its future operations, including the New Energy plans.

“We’ve just been discussing Solid Energy’s strategy on and off with them for a couple of years. Right now they’re talking with the government about what decisions they think need to be made to ensure there’s a viable company there," English said.

The primary concern was making sure Solid Energy was a viable and stable taxpayer-owned company, regardless of whether it was going to be partially privatised, he said.

“They’ve got some big challenges because of the change in the coal price.”

The Solid Energy board seemed to "have a good grip on the challenges they face, and we want to work through the decisions they want to make," English said.

“Up until the coal price started falling it looked like a company that was able to run its core business plus its research and development activities," he said.

"These are matters that are being discussed between the Crown and the board right now, we’ll get on with that because it’s important that that is a well-run company that’s providing benefits for the government.”

No direct surplus hit

Meanwhile, the problems with Solid Energy would not have a direct impact on the government's 2014/15 surplus track, English said.

“We have set up the Future Investment Fund which we’re going to put the proceeds of these sales into," he said.

"We think, from what we can see so far, we should be able to match the investment requirements for the rebuild of Christchurch, rolling out broadband through our schools, and that sort of thing, with proceeds from the sales."