Remarks to the Transport and Infrastructure Select Committee
INTRODUCTORY REMARKS FROM THE CHAIR OF SOLID ENERGY TO THE TRANSPORT AND INFRASTRUCTURE SELECT COMMITTEE - 1 FEBRUARY 2018
Mr Chairman, committee members - good morning.
With me today is our Deputy Chair and Chair of the Audit Committee, Keiran Horne, our Chief Executive, Tony King, and Chief Financial Officer, Stephen Coe.
Thank you for the opportunity to attend today and inviting me to make these brief introductory comments at what will be the last occasion on which Solid Energy addresses a select committee for an annual review. The year 2016/17 was the last full year of trading by the company albeit that some operations were sold during this year or had been closed down.
The current 2017/18 year will cover a period of two months trading and completion of the sale of assets and transactions up to the time the company goes into solvent liquidation. This will occur in mid-March 2018, that is, in just 6 weeks’ time. Audited accounts for 2017/18 will be prepared and submitted, and a process has been agreed with the Audit Office for this. However by the time the next cycle of annual reviews by the select committee comes around, the company will have been liquidated, almost certainly removed from the companies register and no longer have directors. Given this situation I intend to cover not just the 2016/17 year but also the expected position at the time the company goes into voluntary liquidation.
I will briefly note some very positive outcomes that have resulted from the decision to enter into Voluntary Administration and the negotiation of a Deed of Company Arrangement or DoCA in 2015. But I think it is also important that I acknowledge that these outcomes only represent a silver lining to what is a very dark cloud, which is the failure of Solid Energy.
The background to this failure has been investigated in some depth in previous select committee hearings in 2013 and 2014 and I do not intend to revisit that. Our accounts for 2016/17 have not been prepared on a “going concern” basis as the company is on an irrevocable path to being wound up. The balance sheet is instead prepared on a “held for sale” basis. Comparatives with previous years are of limited value as the mix of operations and activities has changed with asset sales and closures.
The trading result shows a strong level of earnings due to the recovery in export prices. The effect of this is to increase the return to creditors and to reduce the amount they will otherwise write off. For a company in Solid Energy’s position, the ultimate measure of financial performance is the return the creditors will receive. Looking ahead to the expected position in March 2018, we anticipate the total pay-out to creditors will be around 62 cents for each $1.00 of ‘participant debt’. That debt is $380M. On entry into liquidation, and in accordance with the terms of the DoCA the participant creditors will write-off the remaining debt allowing a solvent liquidation. The return to creditors is substantially in excess of the 35 cents to 40 cents forecast when creditors voted to approve the DoCA, and the 15 cents to 20 cents estimated from a liquidation in 2015.
In addition to the 62 cents mentioned above, the company has negotiated a contingent payment that may see up to a further $50M or 13 cents over four years payable depending on export prices achieved by the new owners of the export business. For the first 6 month period, the contingent payment is of the order of an additional $6M. Notwithstanding the excellent outcome above, participant creditors will still have to write of between $100 and $150M. It is worth re-iterating that the effect of the DoCA is that the Crown has no economic interest in the outcome as any shortfall is borne by the creditors.
Key achievements of the DoCA process include that all trade creditors have been paid in full throughout the whole process. This is over 1000 businesses - often small businesses in the regions – that have not suffered the losses that would have occurred through liquidation in 2015. All staff have been paid their full entitlements, again an outcome that would not have occurred. The great majority of staff (estimated at 95%) at sites that have been sold to new operators have retained employment with the new owners, as have many of the Corporate office staff. The preservation of employment is particularly pleasing outcome, given the uncertainty and associated stress that Solid Energy staff have had to endure for a considerable period while the board and corporate management navigated the company through the DOCA and sale process.
In relation to mine site environmental rehabilitation, all sites have either been rehabilitated by Solid Energy or sold to new owners with a funding stream from the existing Crown rehabilitation indemnities in place to cover future costs. This is to ensure there is no lasting adverse legacy from the company’s mining activities over the last 30 years or the Crown’s prior activities that were taken over by Solid Energy when it was formed. All mines that were operational and trading profitably have been sold to new owners. Many businesses and institutions depend on the availability of coal – particularly in the South Island where there is no natural gas – and so it is pleasing that there have been no adverse impacts on those organisations.
During the last 2 months the Company has been constructively engaged with the establishment unit for Te Kahui Whakamana 29, providing all the assistance we can for the orderly transfer of the Pike River site, assets and key staff to the new agency. As part of the wider DoCA process the lack of any prospective buyers for Spring Creek Mine and for Huntly East Mine has led to their closure and sealing, and sale of the sites into private ownership. Combined with the recent closure of the remaining privately owned underground mines on the West Coast, that concludes over 175 years of underground coal mining in New Zealand.
The demise of Solid Energy marks an end to around 100 years of direct Crown involvement in coal mining activities in New Zealand. Those interests were incorporated into Solid Energy when it was formed. In the annual report we refer to the positive legacy that we leave in terms of the environment, mineral and land tenure, data and information, health and safety, and regional economic activity. http://www.solidenergy.co.nz/wp-content/uploads/2017/11/solid-energy-annual-report-2017.pdf It is my view that given the dire state of the company when the current directors joined the board in 2013 and 2014, by which time all the company’s debt had already been incurred, that the best possible outcome for the Crown, staff, creditors, suppliers and customers has been achieved.
NB: Solid Energy anticipates that this will be its final public statement before the administrative processes relating to solvent liquidation are completed.
Background - Solid Energy Asset Sales Process
Solid Energy entered Voluntary Administration in August 2015 after the directors concluded that the company had no realistic prospect of refinancing significant debt. Under the Deed of Company Arrangement agreed with creditors in September 2015 the directors are responsible for running an orderly sell down process to sell the assets of the company. All land, mines and other assets were offered for sale either as a whole or in parts, presenting an opportunity for those assets that are economically viable to continue trading under new ownership; delivering the best outcome for creditors and staff. The company has placed significant focus through the asset sales programme on securing the path forward for the assets and facilitating employment opportunities for staff.
In October 2016 Solid Energy announced that sale and purchase agreements had been signed for the Stockton export coal operation; the two Waikato mines, Rotowaro and Maramarua; New Vale and Ohai coal mines in Southland, and Strongman, Liverpool and the Reefton mines on the West Coast. Settlement for the Ohai and New Vale mines was reached in April with all of the mines’ employees and operations transferring to the new owner Greenbriar. Settlement was also reached in April with Birchfield Coal Mines for the purchase of the Strongman mine, the Island Block project, the Mt Davy/Liverpool permit, and the Reefton coal distribution centre.
During August the sale of the remaining Reefton assets, comprising the Reddale and Burkes Creek mining operations with the associated coal washery and plant and equipment was completed with Moore Mining. On August 31st BT Mining, a joint venture of Bathurst Resources and Talleys Energy Limited, settled for the purchase of the Stockton export coal operation and the two Waikato mines Rotowaro and Maramarua. Spring Creek is the only mine in Solid Energy’s asset sales portfolio that did not sell and has since been closed. Pike River Mine and East Mine were not included in the asset sales programme.
In July 2012 Solid Energy purchased the assets of Pike River Coal Company from that company’s receivers. At that stage the mine was sealed with temporary seals at the ventilation shaft and 170 metres into the drift access tunnel. Pursuant to an agreement with the Crown the company assessed the feasibility of a manned re-entry of the drift. In December 2014 the company determined that while a re-entry was technically feasible, it did not meet the required safety standard. Following this, a decision was made to seal the mine. A new seal was constructed 35 metres into the drift, which has made the mine stable and safe. In February 2017 the then government asked the company to stop further sealing work and assess the feasibility of an unmanned exploration. This assessment proceeded through the middle of 2017 with preparatory work in anticipation of robot exploration taking place in late 2017. This project was terminated by the new government in favour of a manned re-entry project.The Pike River site will be transferred to the new Crown agency in February 2018.