Wednesday 28 October 2015

Has FT turned the corner?

A bit of lipstick makes no difference.

It’s still a pig.

Resources Minister Harriss’ media release that accompanied FT’s 2015 Annual Return was a pathetic attempt to gloss over the reality of FT’s situation.

The cardinal rule when assessing the financials of an insolvent entity is to skip the income statement and focus instead on the cash flow statement detailing what comes in and goes out the door.

The 2015 cash flow statement reveals things are worse.

On a comparable basis, by ignoring the deficit funding of $23 million in 2014 which didn’t reoccur, the operating cash deficit was $17 million (2014: deficit of $9 million).

Adding the amounts spent on capex which includes plantations, roads and equipment the cash deficit was $25 million (2014: deficit of $20 million).

It’s difficult to interpret the deterioration as a sign that FT “is well on the way to delivering a sustainable bottom line on its commercial operation” as Mr Harriss did in his media release.

More than difficult.


Mr Harriss may be vaguely pointing in the right direction, but he’s yet to find the right path. The side on shot shows he’s still walking backwards.

With borrowings of $33 million via a line of credit facility FT ended up with $8 million in the bank after funding the $25 million cash deficit..

The next day on 1st July TasNetworks reluctantly handed over $30 million. The $33 million line of credit was cleared and FT was left with about $5 million in the bank.

When you lose $2 million a month that’ll soon disappear.

The combatitive Minister tendered the observation that “Labor and the Greens offered $30 million a year of taxpayers’ money diverted from hospitals, schools and police with no end in sight”.

Instead Mr Harriss pinched $30 million from TasNetworks .The impact on the overall State sector was the same as deficit funding.

Spin or bare faced lying?

There is an end in sight however.

The Directors of FT were able to sign off the 2015 financials on a going concern basis as it still has a line of credit secured by the Treasurer’s Letter of Comfort and it is confident that whatever it gets from selling what it terms an appropriate proportion of the hardwood plantation estate, will be sufficient to cover the deficits and transition costs over the next 2 years.

FT is clearly in a period of voluntary administration.

Treasury secretary Tony Ferrall has joined the Board to keep a check on progress as other Directors headed for the exits. One Director left in 2015 and one since and neither have been replaced.

If FT survives beyond the transition period its activities will be focused on growing trees, managing land and selling wood to domestic customers. Any responsibility for export sales and value added products will transition to the private sector.

It will be a very much downsized operation if it survives at all. A lot more costs will have to be shifted back to government, particularly the costs of FT’s unfunded superannuation.

It’s likely that export sales of woodchips out of Burnie is what gave FT a small boost in 2015.

Overall timber volumes sold increased by 4%, due to plantation woodchips, both hardwood and softwood. Sawlog production declined as did Ta Ann peelers and export peelers.

Revenue from the sales of timber products was $103 million in 2015 (2014: $96 million).

The post stumpage costs, harvesting freight etc were $93 million (2014: $98 million).

This meant that for the first time in a few years FT managed to make a small gross profit of $10 million from timber sales (2014: loss of $2 million).

Needless to say this gross profit/(loss) figure is before the costs of roads, replanting, employee costs and overheads.

Hallelujahs aren’t in order yet.

Especially as FT will likely soon cease export sales of woodchips before national competition rules are enforced.

Disposing of the hardwood plantation estate too won’t assist the long term sustainability of FT. Its own projections suggest future sawlogs from plantations will be needed to supply the minimum statutory requirement of 137K tonnes of high quality sawlogs.

At this stage nothing has happened to indicate FT has found the path to sustainability. It is still looking.

Yet despite cash losses FT was able to produce an accounting profit.

This was due to 2 book entries, a fall in the unfunded superannuation liability and a rise in the value of its trees.

The methodology that underpins these 2 book entries is similar.

In the case of the super liability the estimated future stream of payments is converted to a present value lump sum amount.

Similarly in the case of trees, an estimated future stream of revenue receipts from timber is converted into a present value lump sum amount to give a current value of the forest estate.

Converting a stream into a present value lump requires adopting a discount rate.... an applicable interest rate.

In the case of the super liability the discount rate has risen which means the present value fell by $18 million. In comparison the government’s latest estimate of its own unfunded superannuation liability contained in the just released Treasurer's Annual Financial Statements for 2014/15 saw the discount rate fall, leading to a consequent rise in the value of the government’s liability.

Pick a rate to suit it seems?

The discount rate selected for valuing trees is not disclosed as it has in past years but it looks like the rate has fallen leading to a higher value for trees, by $38 million.

Of course it may be possible to justify one discount rate falling whilst another used to value another stream rises. But it doesn't often happen.

In any event rises and falls in tree values and unfunded superannuation liabilities may lead to windfall profits and losses but they have little or no effect on the sustainability of FT.

It is air headed nonsense to assert or imply otherwise.

The yearly outflow to meet unfunded superannuation payments to retired FTers hardly changes.

In 2015 it was almost $7 million. This is a very large amount when the net stumpage revenue from timber sales was only $10 million as shown above. In other words two-thirds of the net stumpage amount went to pay retired foresters, only leaving a few crumbs to pay current employee costs, overheads, replanting and roading costs.

The pattern will continue throughout the transition. Cash deficits are unlikely to be less than $20 million per annum or $40 million over 2 years, about what the hardwood plantations will fetch when sold.

Transition or wind up?

Accounting for losses as FT has done can be confusing. The concept of a loss is self explanatory. Because a loss will reduce tax on future profits due to the carried forward loss provisions, a loss creates a deferred tax asset which is the amount of tax a company will save in the future if and when future profits are made.

Up until 2014 FT was a serial offender when it came to making losses. It was decided that future profits were unlikely and therefore the deferred tax assets that had built up would never be used and therefore needed to be written off.

This increased the 2014 loss to $43 million.

But lo and behold in 2015 FT made a profit due to the judicious selection of discount rates as discussed above.

FT had to reverse the derecognition of deferred tax losses, which it is still entitled to claim. This resulted in an increase in this year’s profit of $5 million. Last year’s result was, with hindsight, $5 million better than reported.

The large turnaround from 2014 to 2015 is almost solely due to a couple of book entries and the flow on effect of the esoteric accounting treatment of tax losses.

Minister Harris is seriously delusional if he thinks he has found the way to a sustainable future.

Equally deluded is previous minister Green who reportedly thinks the FT’s profit “was partly the result of massively reduced spending on roads.” It affected the cash position but not profits .Is it any wonder we’re in trouble when shareholder ministers don’t understand the financials?

FT is slowly untangling its involvement with Gunns.

During 2015 it agreed to pay $5.6 to acquire the balance of the Plantation Platform Tasmania joint venture with Gunns and Japanese companies to grow plantation trees on FT’s land. Nothing has been paid yet. It will be paid in 2 instalments over 2 years.

Still unresolved however is the fate of 14,000 hectares of Gunns’ MIS schemes growing on FT’s land. The Annual Report indicates that the liquidator of the MIS schemes has asked FT for $40 million alleging ‘unjust enrichment’. If the pattern of other cases of MIS trees growing on third party land is followed, FT will end up with 14,000 hectares of trees at very little cost, a possible bright cloud on an otherwise dark horizon.

Minister Harriss attempted to take credit for the pickup in New Forests/Forico’s business. He’s kidding himself. The simple fact is that New Forests bought the hardwood plantation ex Gunns for between $5 and $8 per tonne. The timber currently has a stumpage value to New Forest of about $40 per tonne. It was always going to be enormously profitable regardless of whether Minister Harriss or Blind Freddie was at the helm.

Is it too late to draft Freddie?


  1. John

    thank you for a another excellent article.

    You may know that I put in a very determined effort to procure a copy of the URS 2013 report into the GPL forestry assets. Justice Judd said yes I should see it, the liquidators declined, I ran an interlocutory and Justice Judd changed his mind and supported the liquidators retaining it. Then at the allocation hearing I was challenged for not having an alternative valuation, while not having any data on the standing volumes. (Neither does nay grower investor for that matter!)

    I notice you cite $5-$8 per tonne paid by New Forest, can you point me to the source for your volumes please?

    Trevor Burdon

    1. Trevor I salute you for your efforts to date.

      I follow the PPB website, it’s about the only source of info about MISs.

      I am completely at a loss, like you, to know how liquidators of MISs can so brazenly withhold info from growers about their own trees. It’s not like all MIS woodlots are uniform. Each grower unequivocably has a right to full access about growth rates etc for his own woodlot. How else can a grower decide to accept or reject deals they’re asked to consider.

      I can’t direct you to one source for the $5 to $8 per tonne figure for the going rate for standing MIS plantations.

      It’s just a figure I’ve deduced from all the snippets of info I see.

      Starting from GSL, their land was sold to New Forests for I think it was $415m. At that point it was just the land, GNS took over management of the GSL MISs. This gave a rough land price at the time.

      When GNS went bust, New Forest bought, again from memory, about 100,000 has of MIS trees for about $38 million.

      The info on the return to each of the Projects, from PPB, made it possible to roughly estimate the market value of the trees.

      Then the sale of the GNS forest estate to New Forests was a little more complicated because about half the plantation land was growing GNS own plantations and half was growing MISs. MIS projects ended up with about $40 million as you know. What’s the figure after all the legals? $28 million?

      Again it was possible to roughly deduce the market value of the trees and the value of the underlying plantation land as paid by New Forests.

      My guess was the trees were acquired by new Forest for between $5 and $8 per tonne.

      When BRI Ferrier sold the FEA MIS trees I reckon the figure was barely $5.

      They’re just my estimates.

  2. It's much more than lipstick on a pig. It's lipstick on a dead, fetid, rotting zombie pig. The glam zombie pig that just wont stop spreading lies and waste across the Tasmanian landscape. And our gutless politicians who play the forestry wedging game for all its worth. Welcome to Tasmania!

  3. Thanks John,

    I agree the Liquidators lack of transparency is a denial of justice to other parties, precluding the ability to properly query valuations. Goodness knows, I've been criticised by PPB counsel for not having an alternative valuation. Also, this is contrary to ASIC guidelines on MIS investor entitlement to annual reports on their investments.

    URS have produced 2 large survey reports and one review of the VAM (Value Allocation Model) used in the Sale hearing. It's not hard to guess who's paid for these! The first was ~$200k and I expect the others were ~$200k and $100k respectively. That's $500k from growers for reports on their that may yet remain confidential.

    In Court I raised this point, and this is when it became clear that the Liquidators have the upper hand when they cite commercial in confidence. The Liquidators counsel side-stepped his Honour's suggestion that a redacted copy be supplied, and his further request for advice from them on any statute of limitation that might apply. The latter has not been forthcoming.

    Incredibly, the Court holds no copy of the original valuation on file! His honour thought there was one, but had to sheepishly agree when I had the Liquidator briefing solicitor confirm it did not and neither did they! The Liquidators will hold onto it until the last ha on third-party negotiated and sold. And then they would fight it again.

    It is not just.

    BTW I do see most confidential documents and would welcome the opportunity share more under parliamentary privilege. I covered as much as I could with Peter WW in-camera in the SEN committee. I have made the offer to him and Sen Rice.

    Except for Confidential documents all is online at PPB's solicitors ABL site. (Another value-add recovered from grower proceeds, rather than access to Court files.) See

    Cheers Trevor

  4. My apologies, I didn't answer your question.

    As per the PPB grower memorandum i297-Grower-Update-Explanatory-Notice-15-May-2015.pdf, costs to date were $16M. I'd expect another $4m to be lodged for order shortly.