Treasury is blamed for Solid's exposure

By Brian Fallow

WELLINGTON - Solid Energy was unable to address an increasingly untenable foreign exchange exposure last year because it was under Treasury orders to keep the business as it was while buyers looked it over, Parliament's commerce select committee heard yesterday.

Plans to sell the State-owned coal miner were aborted late last year at least partly because its forward foreign exchange cover was not just seriously out of the money but exceeded its forecast physical sales.

Its chairman, Tim Saunders, who was not a director at the time, told the MPs: "My understanding is the reason for the board not taking the cover off - and I understand management did recommend cover should come off - was that the company was in the middle of the sales process.

"It was difficult for the company to take significant actions which could affect the value of the company and which could upset the sales process."

During the year to June 1998, Solid Energy foreign cover ballooned from $165 million to $468 million (or in US dollar terms from $113 million to $242 million). The bulk of the additional cover was taken out in the last quarter of 1997, before the enormity of the Asian crisis was apparent, at a rate around US63c.

If the position had been closed out at June 30, the realised loss would have been $138 million. By the end of last November, when the kiwi dollar had recovered 1.5c to 53c, the loss would have been $75 million, according to an Audit Office report last month.

In its accounts for the half-year to December 31, Solid Energy wrote off $23.3 million in foreign exchange losses - but that only relates to cover left stranded by a sharp decline in forecast sales.

The new chief executive, Jon Hartley, declined to comment yesterday on where it would stand if the unprovisioned part of its position was marked to market. As Solid Energy has an entirely new board as well as a new chief executive, the task of responding to the MPs' grilling yesterday largely fell to its chief financial officer Geoff Bell.

He said the Treasury, and sales agents CS First Boston, had been aware of the position on forward cover since the sales process began in early 1998.

"It was discussed at several [board] meetings but the board's view was just to let it continue, particularly once the sales process was under way, because we were under clear instructions that we were to keep the business running at the status quo," he said.

There had been an extended due diligence period, from June to late October, and the concern was that the business stayed effectively the same , "so that the first party through doing due diligence, if its bid was successful, would find the business they bought was the same business they saw at the beginning of due diligence."