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Treasury could have made more forceful response on Solid Energy, Deloitte says

Tuesday 11th June 2013

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The Treasury could have responded more forcefully over concerns about Solid Energy, which is now awaiting a rescue plan from the government and its banks, but the state coal miner's financial woes don't signal a failure of monitoring, Deloitte says.

The Treasury today released a report it commissioned from accounting firm Deloitte on how well it monitored Solid Energy, which embarked on a debt-funded strategy to morph from a coal miner into a diversified energy business. The strategy was backed by what turned out to be over-optimistic coal price forecasts and foundered when prices tumbled in 2012.

"We do not believe that the failure of Solid Energy has highlighted a material failure in Treasury's monitoring processes," Deloitte says in the report. "We do believe that the failure does raise questions about how these processes are applied and whether Treasury's response was forceful enough or occurred soon enough given that the company provided cause for concern over an extended period."

The Treasury today announced it will strengthen its management of the Crown's $240 billion balance sheet after a review that included potential new monitoring approaches for the 49 commercial enterprises it watches.

Solid Energy is in talks with its banks and Treasury officials as part of a wide-ranging review of the business, which posted a $40 million loss last year, mothballed its Spring Creek mine and dropped or put up for sale a range of projects including plans to turn lignite into diesel.

The Deloitte report notes that there would have been a separate set of risks, had the Treasury elevated its concerns about Solid Energy's price path assumptions and strategy. It could have precipitated a change of management at the coal mining company and depending on the response of directors, could have led to a change of board.

A more forceful response would also have meant challenging highly regarded chairman John Palmer and an executive team led by CEO Don Elder that had turned the business around from financial distress in 2000.

In the event, Elder left in February, following most of the board.

The Deloitte report does highlight a difficult relationship between Elder, Palmer and Treasury staff, with several officials describing "a sense of tension" especially when Elder and Palmer "were challenged on more fundamental aspects of their business and strategy."

The impression of Solid Energy over time was "of an entity that was not as respectful of Treasury's role/responsibility as ministers would expect from an SOE," the report says.

The Treasury accepted the recommendations in the Deloitte report. They included ensuring the work of the department's Crown Ownership Monitoring Unit is valued by SOEs and their chairmen, enlisting external advisers when needed, insisting on support for an SOE's fundamental assumptions and, when concerns have been identified, an understanding of debt facilities including available headroom and key covenants.

Deloitte said it wasn't plausible for COMU or the wider Treasury to maintain deep sector or technical expertise on SOEs' business activities though they should be able to call up such experts when required.

"In the context of Solid Energy, it is possible that the use of a respected industry professional as a circuit breaker in so far as they could mediate a position between the company and COMU may have been useful," the report said.

BusinessDesk.co.nz

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