3/3/13

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Brian Gaynor: Buck stops with the Solid Energy board
By Brian Gaynor Email Brian

5:30 AM Saturday Mar 2, 2013
Solid Energy's recent problems highlight once again the issue of corporate governance. Who is responsible for the company's difficulties? Why did its borrowings soar from just $15 million in 2007 to $295 million in June 2012 and nearly $400 million at present? Why have the company's costs nearly doubled over the past five years? Solid Energy's recent history begins and ends with Don Elder, the company's ambitious chief executive from May 2000 until early last month. Elder was born in Christchurch and educated at Christ's College and University of Canterbury where he obtained an engineering degree. He then attended Oxford University on a Rhodes scholarship.
Former Solid Energy CEO Don Elder believed the company w ould play a major role in New Zealand's energy development. Photo / Greg Bow ker

Elder worked for 20 years in the United Kingdom, United States, New Zealand and Canada. He was vice-president of a major Canadian engineering firm before he was appointed head of Solid Energy nearly 13 years ago. The company's coal sales grew from 2.8 million tonnes to 4.6 million tonnes under Elder's tenure, revenue surged from $186 million to $978 million and total assets from $136 million to $1.17 billion. Most of this growth was financed by retained earnings and borrowings as no new shares were issued to the Crown during this 12-year period. Elder had a big vision for Solid Energy and believed it would play a major role in New Zealand's energy development, in addition to coal. The company's 2009 annual report noted that the New Zealand economy "depends on energy to survive and thrive" and "Solid Energy is committed to making these energy resources available to support New Zealand's increased economic prosperity and standard of living". However, the company had to make a $26.7 million impairment charge that year because some of its earlier non-coal investments were unsuccessful. These impairments included investments in biodiesel and coal seam gas. In 2010 there was a big step up in capital investment with the company spending $191 million. As the accompanying table shows nearly 40 per cent of this was financed through borrowings, which increased from $62 million to $137 million during the year. The 2010 report also noted potential lignite developments in Southland, a feasibility study for a coalto-fertiliser plant and a $34 million wood pellet fuel plant in Taupo. The 2011 report commented on a $22 million underground coal gasification plant in the Waikato and a $25 million lignite briquette plant in Mataura. Total capital expenditure that year was $115 million, mostly on the Stockton mine and processing plant www.nzherald.co.nz/news/print.cfm?objectid=10868635&pnum=1 1/4

3/3/13

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but large sums were also spent on coal seam gas, lignite gasification, briquetting and renewable energy. The 2012 result was dominated by a massive impairment charge of $149 million which was taken below the gross profit figure in the accompanying table. As a consequence, the company reported a net loss of $40 million yet paid a $30 million dividend to the Crown. The biggest disaster was the Spring Creek Mine which attracted an impairment charge of $64.3 million. Solid Energy bought back the 49 per cent owned by its joint venture partner in February 2012 and one month later the mine, near Greymouth, was closed for safety reasons. The other major 2012 year gross impairments were: Huntly East Mine ($33.8 million), wood pallets ($24.5 million), coal seam gas ($18.5 million) and biodiesel ($9 million). Solid Energy also experienced a massive increase in the cost of sales in its June 2012 year, from $655 million in the previous year to $821 million. The annual report noted that the Spring Creek and Huntly Mines "have been undergoing development phases requiring