National Government ministers urged Solid Energy to take on more debt and to pay bigger dividends in 2009 even though the company had warned falling coal prices threatened its future profitability according to official documents obtained by Labour.
This afternoon in Parliament, Labour Leader David Shearer tabled a May 2009 letter sent by then State Owned Enterprises (SOE) Minister Simon Power to John Palmer, the chair of Solid Energy at the time.
In the letter, which was also copied to Finance Minister Bill English, Mr Power told Mr Palmer he wanted all SOEs to increase their gearing or debt levels relative to their value.
"I urge the Solid Energy board to give serious consideration to this proposal."
Mr Power also said he wanted to "standardise and simplify the dividend policy for all SOEs to ensure that a more consistent share of profits is returned to the Crown as shareholder".
He proposed to discuss the dividend policy at a later meeting with Mr Palmer.
However, Mr Power also said he was "disappointed with the forecast decline in Solid Energy's financial performance" over the subsequent three years.
"In particular the dramatic decline in profitability and dividends."
Mr Power wrote that the decline was "understandable, given the significant decline in forecast coal prices".
Mr Shearer also produced another document obtained under the Official Information Act which showed that just two days before Mr Power's letter to Mr Palmer, Treasury's Crown Company Monitoring Unit recommended to Mr Power and Mr English that they "communicate a strong expectation that SOEs increase gearing and dividend yield".
Asked about the documents by Mr Shearer in Parliament today, Mr English confirmed his Government "did make the decision to allow Solid Energy to take on more debt" during its first term and that decision was made "in the context of the mess that the previous Government left with the SOEs".
"The decisions about how much debt to incur were made by the board."
"In the case of Solid Energy it's turned out that a company that's operating in the world coal market which is now so volatile would have been better with no debt. In retrospect that's easy to see, at the time it wasn't."
But Mr Shearer pressed his attack asking why the Government required Solid Energy to increase debt and dividends, "at a time when he knew that coal prices were declining?".
Mr English said that "at the time it wasn't clear that coal prices were declining".
"In fact the best advice from the company with which the Government ended up disagreeing, was that coal prices would continue rise."
Mr Shearer later said Solid Energy had responded to the Government's call, "returning $130 million over four years, including $30 million in late 2011 by which time coal prices had further declined and the company was in financial distress".
He also pointed to the company's increase in borrowing over that period, rising from $13 million in 2009 to $191 million the following year and $313 million by 2012.
"John Key and his ministers are desperately dumping the blame on the Solid Energy board. But the real blame rests with them. They were urging the company to borrow more despite knowing stormy financial times were ahead. They knew the company was in trouble but continued to treat it like a cash cow.
"It's time John Key took responsibility. While Solid Energy's woes are complex and this is not the only factor in its decline, the pressure from ministers to borrow more and pay bigger dividends certainly contributed to its current dire financial straits."
Mr Palmer and former Solid Energy chief executive Don Elder will appear before Parliament's commerce committee tomorrow where they will be grilled on their involvement in the company's decline.
What would you ask former Solid Energy bosses John Palmer and Don Elder? Send your questions here.
Labour's SOE spokesman Clayton Cosgrove has also said he will lay a complaint with Parliament's Speaker that Solid Energy had treated Parliament with contempt by providing media with details of its financial problems just days after refusing to answer similar questions at a hearing last week.
He also claims the company misled Parliament about Dr Elder's availability to appear before the committee.