Ambition, dated thinking drained Solid Energy
The search for answers to a few fundamental questions about the crisis at Solid Energy.
WHO IS DON ELDER?
Don Elder is a highly educated environmental engineer and Rhodes scholar whose first top job was at the helm of New Zealand's biggest coalminer.
Headhunted in 2000 to wind up Solid Energy which had lost money on hedging contracts and a fall in coal prices, instead he saw a viable business with valuable coal reserves that could be beaten back into shape and kept as an asset for the nation.
Within a few years the business was back on an even keel. By the late 2000s the business had about five times as many staff as when Elder started but produced only double the amount of coal.
The soaring coal prices hit their highwater mark in late 2011 before crashing down and dragging the company to the brink of receivership. Elder was back to square one.
He has been a relentless champion of coal and, in particular, alternative coal technologies, convinced the future of Solid Energy was in becoming a diversified energy business.
He put his faith in ever-rising coal prices and convinced the Solid Energy board that the conversion of vast resources of Southland lignite to fuel were the answer to New Zealand's over-dependence on imported fuel.
It is unclear what Elder will do after his final months with Solid Energy. He gives the media a wide berth.
The Christ's College old boy and University of Canterbury-educated civil engineer had worked for a Canadian engineering firm for 10 years before taking his career-defining role at the head of New Zealand's state-owned coalminer.
He is married to Therese Arseneau, a political scientist at the University of Canterbury and political commentator.
An insider says Solid Energy was a small coal producer that kept striving to grow into something bigger, but it never got its head above the parapet long enough to draw a big-picture plan to get there. There was only so much coal the trains and ports could move from the West Coast without massive spending.
He believes the company did not have enough experience within its management in building or running a large export commodity business.
"There was a clear sense of arrogance there, and with some of the managers in that they were still back in the 1980s and 1990s with the mentality that this is the way we will run it."
He says Elder was open and receptive to ideas, but over time became surrounded by like-minded people.
"It was a bit like Icarus, flying too close to the sun. If you challenge the big head honcho, you ended up getting burnt pretty quickly."
WHAT WENT WRONG?
The trigger for the financial crisis at Solid Energy is the big slump in international coal prices from 2011. Coal prices are nearly half what they were at their peak.
Solid Energy is not alone in suffering from the fall in coal prices. Falling demand for coal from the world's big consumers such as China and healthy supplies from the big producers - Australia, South Africa and Colombia - have caused a glut and threatened the viability of coal mines in Australia and Indonesia.
Solid Energy's new chairman Mark Ford told the commerce select committee last week that "the market" was to blame - that is the slump in coal prices.
And it meant Solid Energy's revenues would sink by more than $300m this year, to $645m from $978m.
What has not been answered is how prepared, if at all, was Solid Energy for the typical ups and downs in the international coal price. There are ways of lessening that risk in a coal business. Was the company's risk assessment and forecasting up to scratch? How well did it read the market?
In the end when the proverbial hit the fan at Solid Energy this year, it had nowhere to go except on its knees to its owner and the banks.
It had spent about $230m on renewables and alternative coal technologies since 2003.
The Government had sucked out $130m in dividends since 2009, annual reports show.
And its debt was already too high for a coal company which Prime Minister John Key said typically had little debt.
From 2009 Solid Energy started borrowing a lot more than it had done in the previous years for developments at Stockton as well as its other strategies.
That the board and management took their eye off the coal operations that brought in the bacon and were swept up in "alternative coal technologies" championed by the persuasive chief executive can be deduced from what Ford has said about the state coal miner.
His recipe to rescue the company and return it to profitability by 2015 strongly suggests that the coal-mining operations were and are not being run well enough.
Ford said the company had to focus on being a conventional coalminer, developing coalmines and selling coal internationally - pretty basic stuff. The coal operations can be run differently, more efficiently, there are ways to cut costs, and the company has to get out of renewables and alternative coal technologies.
Ford said Solid Energy faces a $100m cash deficit in this financial year to June 30. Can we take it that the company needs that much to keep the business running and pay the staff?
If it cashed up all its assets could it pay all its bills? It has debt of $390m and Key has said the company might not be worth $400m.
WHAT ROLE DID ITS INNOVATION AND R&D SPENDING PLAY?
Solid Energy spent a massive $230 million over several years on coal technologies intended to replace coal as its main income earner but got little cash back.
The company has disclosed that it spent $75m on its alternative coal technologies. These include its underground coal gasification pilot plant at Huntly, coal seam gas developments at Huntly and the Mataura domestic-scale briquette plant.
The cost of buying land in Southland for the lignite underneath amounted to $77m. The land is leased to farmers.
Its investigations into the feasibility of turning lignite into fuel and fertiliser cost $6.9m. And the capital spent on renewable energy projects was $70m. The renewables were not profitable.
It could easily be argued the $230m would have been better spent on enhancing its mine development and paying back its debt so it could reborrow when times were tough.
WHEN WERE THE PROBLEMS IDENTIFIED?
Finance Minister Bill English said problems first came to light in 2011 when the company was put under the microscope by officials preparing it for partial sale.
Key has been dropping bits of information that suggest the Government started to really worry in 2011.
He said in Christchurch after the February 22 earthquake memorial service, "The second thing is that they made a number of investments which have proved not to be very valuable and the Government has been working on that process for the last couple of years."
Back in 2009 Solid Energy asked the Government for a huge $1 billion so it could pursue its "alternative coal technologies" strategy of turning Southland's vast lignite reserves into urea for fertiliser and diesel, and was rejected.
The state-owned enterprises legislation gives the shareholding ministers the power to step in, and change the board of directors but it did not.
A month ago the Government revealed that Solid Energy was on the brink of receivership and in an even worse state, after questions from Labour MP Damien O'Connor in the House.
GOVT DEFENDS SOLID ENERGY PAYOUTS
The Government drained $130 million of dividends from the now debt-ridden Solid Energy since setting up shop in the Beehive four years ago.
During the previous eight years under the Labour government, the state-owned coalminer paid $64.4m to the Crown.
The Government has defended taking its cut, saying the miner was producing strong profits and it was up to the company's board to balance funding, dividends and spending.
Solid Energy has imploded in the past six months, stumbling from the weight of ballooning staff numbers, failed investments and a falling coal price.
The Government has said it started having concerns about Solid Energy's position in 2011, yet it accepted $50m in dividends that year.
It had already been paid about $80m from 2009 and 2010.
The higher dividends coincided with the miner's swelling debt, from $15m in 2008 to $100m two years later. By June 2012 it had hit $295m and it now stands at $390m.
State-owned Enterprises Minister Tony Ryall said the coalminer was reporting record profits in 2008/09 on the back of high coal prices.
"Solid Energy's dividend payments were low in relation to Solid Energy's operating cashflow and capital expenditure," he said.
A pre-asset-sale study in 2011 for the Government had highlighted optimistic coal price assumptions and questionable alternative fuels investments which led ultimately to changes to the board and management, he said.
Labour's West Coast MP Damien O'Connor said the previous government had supported Solid Energy as a sustainable business that was looking into alternative developments, while National saw it as a cash cow which could help it fund tax cuts.
"Clearly the National Government has mined the company with no long-term vision for its future other than the sell-down of half of the company."
The lucrative profits offered by high coal prices were part of a cycle that meant a price fall was inevitable and dividends should have been determined on that basis, he said.