Ann: FLLYR: NWF: Preliminary Full Year Results to

• Release Date: 29/08/13 19:04
• Summary: FLLYR: NWF: Preliminary Full Year Results to 30 June 2013
• Price Sensitive: No
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NWF
29/08/2013 17:04
FLLYR

REL: 1704 HRS NZ Windfarms Limited

FLLYR: NWF: Preliminary Full Year Results to 30 June 2013

CHAIRMAN'S REVIEW

INTRODUCTION

Financial year 2013 (FY2013) sees us complete two years of a fully operating
wind farm with all 97 turbines in place and a generating capacity of 48.5MW.
While the financial result is disappointing, it reflects the exposure this
particular investment has to two key elements over which we have no control -
wind resource and the spot market wholesale electricity price.

The main factor leading to the poor performance in FY2013 was the lack of
wind. It was below average in both direction and speed. We generate best in
the prevailing west north west octant; this year saw less wind from that
direction. And the wind we did have had less than average speed hence
strength. As a result we generated 31% less power than we had budgeted. Added
to this, for FY2013 we experienced weaker wholesale market electricity
prices, although this had materially less impact on the outcome than the
lower wind resource. Wholesale electricity prices are weaker due to issues
like increased system capacity, subdued demand and reasonable hydrology
(there was generally adequate water stored in the hydro lakes).

OPERATIONAL PERFORMANCE

Turbine performance showed mixed results. On the positive side, we exceeded
our forecast availability for the financial year by achieving 95.4% versus
the expected 95%. Availability measures the proportion of time that the
turbines are available to generate power. General operations and maintenance
costs came in below the budgeted levels. This is satisfying in that it
indicates our understanding of these costs with our turbines, but not
unexpected as lower windflows put less stress on the machinery. On the
negative side we experienced emerging failures with some key turbine
components e.g. gearboxes and pitch bearings. Our maintenance team installed
additional monitoring equipment to ensure early detection of any pre-failure
gearbox deterioration. This provides for early intervention to minimise the
costs of repairs. Other actions, including changes to lubricants, are being
considered. Lubricant changes for pitch bearings have extended the working
life of this critical component.

Shareholders will recall that we assumed full responsibility for operating
and maintaining the wind farm in October 2011. This arrangement continues to
work well. Windflow Technology's contractual warranty obligations are
unaffected by this change. Our staff completes the warranty work on behalf of
Windflow Technology and we invoice them for the costs incurred plus a margin.

FINANCIAL PERFORMANCE

As noted above, the financial performance of NZ Windfarms is heavily
dependent on both wind conditions and wholesale electricity prices, both
subject to considerable variability. Our FY2013 revenue line reflects the
impacts on this year's result of these two factors.

Overall operating costs were in line with expectations. These costs tend to
remain reasonably constant; they do not change that much over time.
In FY2013 NZ Windfarms earned $6,383,000 from electricity sales. To achieve
this outcome, the 97 turbines generated 105,662 MWh at an average price of
$60.40/MWh. The comparatives for 2012 were revenue of $8,252,000 from 114,498
MWh generated at an average price of $72.10/MWh.

While as a renewable energy generator the Company earned emission units on
its activities up to 31 December 2012, the current market prices for the
emission units were at such a low level that this is only a minor contributor
to the performance. This was the final year for emission unit entitlement.
As noted below the company is still involved in court proceedings related to
its resource consents and as a consequence incurred material one-off costs
not associated with normal operations, including legal and associated expert
expenses of $412,000.

Interest income during this period was $339,000 (2012: $357,000).
This resulted in a profit before depreciation, amortisation, impairment and
tax of $1,654,000 for the year (2012: $2,058,000).

We also report on a second significant aspect of our financial result. We
have decided this year that we should account for a further impairment of the
Company's assets. We asked the same questions on value as last year, and in
recognition of uncertainties that have arisen in this period, the Board
(again taking the same cautious approach as was taken last year) has provided
for an additional impairment of the assets of $10,266,000.
The decision to make this impairment followed an in-depth review by
Directors. This review took into account all factors of which Directors are
aware that affect the value of NZ Windfarms. These factors included:
recognition of a recently released price path by the Ministry of Business
Innovation and Employment, which has lowered outyear price predictions; a
reduced production capability estimate for the farm of 130,000 MWh per annum
which reflects our output experience with the farm; a reduction in the
discount rate from 11% to 10% to reflect the appropriate rate in the current
environment; and the inclusion of a more up-to-date assessment of operation
and maintenance costs. A more detailed explanation and sensitivity analysis
can be found at note 12 to the financial statements.
The result after accounting for this impairment represents a valuation of
20.6 cents per share. The Board notes the ongoing difference between the
value of the business implied by our share price and our view of value
contained in our impairment considerations. The Board is actively
investigating its ability to buy back shares funded from future free cash
flows and is expecting to seek shareholder support for this initiative at the
AGM.

When depreciation, amortisation, the large impairment and tax are included,
the loss for the year was $8,736,000 (2012: loss of $24,599,000).
Net assets at 30 June 2013 were $65,910,000, compared to $74,646,000 at 30
June 2012. The decline from June 2012 to June 2013 is principally due to the
impairment of the wind farm assets.

RESOURCE CONSENTS

It is taking a very long time to resolve our resource consents issues. As
shareholders will be aware from earlier reports, the Palmerston North City
Council sought a Declaration from the Environment Court as to whether Te Rere
Hau is compliant with the noise conditions of its resource consent. This
Palmerston North City Council consent covers the 65 turbines on the original
wind farm. The consents for the 32 Batch 4 turbines on the Eastern Extension
come under the jurisdiction of the Tararua District Council.
The Environment Court released its decision on 4 July 2012. The Environment
Court's decision was contrary to our expectation based on our legal advice.
In response we took two actions. First, we lodged an appeal with the High
Court, and second, we opened discussions with the affected residents under
the auspices of the Palmerston North City Council. The preference was then,
and in fact remains, to achieve an enduring solution to our resource consent
issues through this negotiation process. Unfortunately, despite attending a
number of meetings with residents, we were unable to reach a resolution. This
left the Court option as the way this matter is being progressed.

The High Court hearing of our appeal was heard in February 2013. The High
Court released its decision in June and found in our favour, setting aside
the earlier declaration by the Environment Court that we had appealed. While
we hoped that would end the matter, the Palmerston North City Council has now
sought leave to appeal this High Court decision to the Court of Appeal. At
the time of writing the outcome of that approach is unknown. Should leave be
granted, the court process will continue. Based on advice, the Company
remains confident of its legal position.
NZ Windfarms remains committed to ensuring that the Te Rere Hau wind farm
operations contribute positively to the community and are fully compliant
with the resource consent conditions.

WINDFLOW TECHNOLOGY LIMITED

Windflow Technology Limited is the manufacturer and warrantor of the
machinery and performance of our turbines. While obviously we do not have
internal information on Windflow Technology, we understand from publicly
available information that the financial position of Windflow Technology is
more stable than it was at this time last year. We have received regular
warranty payments from Windflow Technology. That noted, there are still
issues that we are working through with Windflow Technology to ensure the
appropriate operation and maintenance of the turbines and to protect our
entitlements under the warranty agreement.

CAPITAL MANAGEMENT

The Company announced to shareholders last year that it was looking at ways
to restructure the Powerco lease. Considerable savings could be achieved if
the lease was repaid and the bank guarantee removed. Unfortunately the
Company has been unsuccessful in its attempts to renegotiate Lease Terms with
Powerco and the Company is instead investigating with banks improved
arrangements to support the Lease until such point as we have contractual
rights to repay.
NZ Windfarms' intended dividend policy as articulated in the April 2010
Investment Statement and Prospectus has not changed. The objective is to
distribute to shareholders 100% of funds surplus to the investment and
operating requirements of the Company, as determined by the Board, and
subject always to: the solvency requirements of the Companies Act 1993; any
banking or other funding covenants by which the Company is bound from time to
time; and the investment and operating requirements and expectations of the
Company.

As the Company continues to face uncertainties, it remains prudent to hold
some surplus funds on its balance sheet to provide resources which may be
required to address any major costs likely to arise from the ongoing resource
consent issue, Windflow Technology uncertainties and other issues facing the
Company.

This does not imply a change in the dividend policy. The dividend policy
recognises the need to have regard to the operating requirements of the
Company. But the result is that for the financial year ended 30 June 2013 the
Board has resolved that no dividend will be declared.

In parallel with the matters noted above, the Board has observed that there
is a substantial difference between the value of the business implied by the
net asset value per share as at 30 June 2013 (after taking in to account
impairment charges), and the current share price.

The Board is therefore investigating whether the most efficient use of any
surplus funds that the Company may have in the near term would be to buy back
shares. Further work will be undertaken on this proposal. A further update on
this initiative will be provided either prior to, or at, the AGM.

OUTLOOK

We intend to continue to work over the next year on the issues facing the
Company, including progressing the resolution of the resource consent issues,
the relationship with Windflow Technology, the major component reconditioning
programme and the other issues facing the Company. We remain prepared for the
eventualities that may well face the Company should our warranties become
inoperative.

As shareholders have been advised on a number of occasions, NZ Windfarms'
financial performance will always be dependent on the wind flow at the site
and the electricity market wholesale price. In what was a bad year for wind
and prices (both below average) we did achieve a small cash surplus after
paying off the principal component of the finance lease. We must continue to
rely on the long term averages for prices and wind flow at the site to
forecast the financial outcome. Like all averages, there will be years of
unders and overs that go to make the average. Over time we expect that we
will meet the long term averages.

Finally I note that I advised the Board that I intended to stand down from
the Board of NZ Windfarms. Being a director of this company has been a
particularly challenging task. The Company faces difficult issues, many of
which take a long time to resolve. Shareholders have been asked to show
considerable patience as the Company addresses these challenges. As each
challenge is ticked off, the position improves. It will require time and
persistence to see the challenges concluded. I wish my colleagues well in
continuing this work.

Wyatt Creech
Chairman
27 August 2013
End CA:00240415 For:NWF    Type:FLLYR      Time:2013-08-29 17:04:21