Ann: FLLYR: NWF: Preliminary Full Year Results to 30 June 2014

• Release Date: 28/08/14 16:03
• Summary: FLLYR: NWF: Preliminary Full Year Results to 30 June 2014
• Price Sensitive: No
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					NWF
28/08/2014 16:03
FLLYR

REL: 1603 HRS NZ Windfarms Limited

FLLYR: NWF: Preliminary Full Year Results to 30 June 2014

CHAIRMAN'S REVIEW

INTRODUCTION
The highlight of our third full year of operation was achieving our highest
power generation to date. However wholesale electricity prices were lower
than forecast and we incurred higher than expected turbine repairs although
most of the increase in repair costs was recovered under warranty from the
turbine supplier Windflow Technology Limited (Windflow) We continued to incur
costs from litigation with Palmerston North City Council over consents and
Windflow over warranty issues.
The total electricity generated during the year was 122.6 GWh, an increase of
16% over last year. The result was pleasing given that wind conditions were
not ideal with only seven months recording prevailing winds from the
preferred north northwest quadrant. The average wind speed of 4.2 metres per
second recorded at the Palmerston North Automated Weather Station for the
year was the highest recorded over the three full years of operation of the
wind farm. The previous two years averaged 4.0 metres per second.  Work
recently undertaken on longer term historical records suggests that average
wind speed over the last three years has been below the long term average.
The output over the last year, together with the analysis of historical wind
speeds, suggest that our target average 130 GWh annual output for the wind
farm can be achieved by a combination of improved availability and the return
to historic norms of wind patterns.
Wholesale electricity prices for the year were down 7% on last year and 12 %
below budget. The low prices were caused by better than average hydrology
(lake storage levels) and continued over capacity. The suppressed wholesale
prices are expected to continue into the start of the 2015 financial year as
hydro storage is high and demand remains subdued.

OPERATIONAL PERFORMANCE
Turbine availability for the year was down at 94.2% (FY2013: 95.4%)
reflecting the higher than expected maintenance requirements and associated
outages. The failure rate of some major components including gearboxes,
generators, and pitch bearings in particular reduced output and, to the
extent the costs could not be claimed under warranty, increased net
maintenance costs. The failure rate for gearboxes is expected to fall over
time as improvements to the design and changes to lubricants which have been
trialled are implemented across all turbines. A solution to the early failure
of pitch bearings is still being pursued.
It is a credit to the professionalism of our operational staff that
availability still remained close to warranted levels and the output of the
wind farm and maintained state of the turbines improved despite the high
levels of repairs and on-going maintenance requirements.

FINANCIAL PERFORMANCE
NZ Windfarms earned $6,887,000 from electricity sales (2013: $6,384,000). The
97 turbines generated 122,566 MWh (2013: 105,663) but at a disappointing
average price of $56.20/MWh (2013: $60.42).
As noted above the maintenance required on the turbines increased
significantly over the previous year and this was largely due to increased
component failure. Savings were achieved in indirect overheads but were
largely offset by continuing high consulting and legal costs, due principally
to defending our position in respect of our Land Use Consent and protecting
our position in relation to future warranty claims.
To date most of the costs of component failure have been recovered from
Windflow under the five year warranty. We consider that if there is a known
defect that may result in a component failing outside the warranty period,
then there is still a liability on the supplier to repair or replace that
item.  We are referring this matter to the dispute resolution process under
the Sale and Purchase Agreement.  If this claim is successful, then we will
be entitled to claim warranty recoveries for an extended period.
At the end of last year we had provided for all of the Windflow warranty
outstanding debt at 30 June 2013 of $776,000. This year we recovered most of
that debt but to be conservative have increased the provision to allow for
this year's outstanding debt at 30 June 2014 of $789,000.
The overall result was a net profit before depreciation, amortisation,
impairment and tax of $1,416,000 for the year (2013: $1,654,000).  The
company has significant cash reserves and a net cash inflow of $436,000
(2013: $356,000) was achieved even though an accounting loss was recorded in
the year.
We have carried out a review of the value of the assets on the balance sheet
which has indicated no further impairment is presently required. Details of
the methodology and assumptions used to support this decision are included in
note 12 in the accounts.
The most significant assumption changes made in our modelling relate to
future maintenance and replacement costs.  Based on our operating experience
to date, we have increased on-going annual maintenance and component
replacement cost assumptions.  This has a negative impact on future cash
flows and the valuation.  However, as a consequence of the change in these
assumptions, we have reviewed the present assumption of a full replacement of
the turbines at the end of twenty years and changed this to a lower cost
mid-life refurbishment. This change has a significant positive effect on the
valuation. The Board believes the changes are appropriate, as with regular
maintenance and replacement of the key turbine components, it is more likely
that only a mid-life refurbishment will be required after twenty years, and
the existing turbines will continue to operate for the planned remaining
thirty seven year life of the wind farm.

RESOURCE CONSENTS
Actions to resolve the Land Use Consent issues around noise continue. The
Palmerston North Council (PNCC) has appealed the High Court decision that
overturned the Environment Court's Declaration that Te Rere Hau is not
compliant with the noise conditions of its Consent and we are awaiting the
Court's judgement on the matter.
Our preference remains to achieve an enduring solution to the issues to the
satisfaction of all parties including PNCC and affected residents. We have
therefore applied for an amendment to the original consent under Section 127
of the Resource Management Act. This amendment is intended to clarify the
sound level consent conditions the farm must meet and therefore assist in
bringing the associated litigation to a conclusion.  We have performed
extensive sound level monitoring and are confident of meeting the proposed
specific noise level consent conditions. The proposed conditions include
increases to the monitoring locations and updating the measurement
methodology to reflect the current industry standard which will enable
compliance to be clearly assessed. Any remedial actions that are considered
will therefore address specific measurable issues.  We believe this approach
is the best way to reduce or eliminate further litigation.

WINDFLOW TECHNOLOGY LIMITED
Windflow is the manufacturer and warrantor of the machinery and performance
of our turbines. Based on the most recent publicly available information
Windflow are continuing to experience trading difficulties. NZ Windfarms
still receives warranty revenue and limited technical support from Windflow.
As noted above NZ Windfarms has instigated the dispute resolution process in
the Turbine Sale and Purchase Agreement with Windflow in relation to the
warranty on component failures. We have also initiated a dispute resolution
around the adjustments Windflow makes in calculating the power curve
performance of the WF500 turbines.  As the outcome of these processes is
uncertain, no allowance has been made for future income from a favourable
result in our financial forecasts and impairment modelling.

CAPITAL MANAGEMENT
The Company advised last year that it had been unsuccessful in its attempts
to renegotiate lease terms with Powerco and that the Company is instead
investigating with banks improved arrangements to support the lease until
such time as we have contractual rights to repay. The guarantee supporting
the lease was subsequently renegotiated with BNZ at more favourable terms and
is currently being renegotiated for a further year.
NZ Windfarms' intended dividend policy as articulated in the April 2010
Investment Statement and Prospectus has not changed. However the Company
continues to face uncertainties over, any major costs likely to arise from
the on-going resource consent issue, Windflow and other issues facing the
Company. Therefore it remains prudent to hold some surplus funds on the
balance sheet to provide available resources. The result is that for the
financial year ended 30 June 2014 the Board has resolved that no dividend
will be declared.

CHANGES IN DIRECTORS
During the year there were changes in the Directors of the Company. Wyatt
Creech resigned as Chairman and Mike Allen as a Director. I was elected as
the replacement Chairman and Dr Julian Elder was appointed as a Director.
Julian brings a wide range of local and international management experience
including seven years as a Utility Chief Executive to the organisation.

OUTLOOK
There is a continuing difference between the market capitalisation of the
Group and the net asset value of the assets on the balance sheet. The
Directors believe the reason for the gap is that market capitalisation is
being driven by recent historic performance and a lack of dividend payments
resulting in weak market demand, whereas the asset carrying value in the
impairment calculation is based on expected performance over the long term.
Recent performance has not met expectations due to lower than predicted wind
resources, relatively weak electricity prices and higher than expected
maintenance costs incurred in bedding down the turbines. However these
unfavourable conditions are not expected to continue to the same extent over
the long term. Three years of full operation is an insufficient timeframe to
judge long term performance. A relatively small shift towards historic wind
patterns will deliver the predicted long term electricity output for the wind
farm. The independent long term price forecasts that underpin the enterprise
valuation reflect increasing prices, in real terms, in the medium to long
term.  As time progresses the design and operating changes already made to
the turbines, and future improvements, should reduce maintenance costs. A
mid-life refurbishment of the turbines, involving a moderate amount of
capital expenditure, will enable the existing turbines to operate cost
effectively for 40 years which is double the turbines design life.
NZ Windfarms' financial performance will always be dependent on the wind flow
at the site, the electricity market price and costs associated with keeping
the turbines running. As the Company's performance moves towards the long run
projections underpinning the net assets value in the balance sheet, the
market capitalisation can be expected to increase correspondingly.
For next year prices are forecast to remain at lower than the long term
average levels and it will be the last year in which we receive substantial
warranty recoveries. We are projecting a modest cash surplus for the year.
The latest prices on the ASX indicate the market expects that electricity
prices will strengthen from 2016 and if this eventuates then financial
returns should improve.
We will continue to work on the issues facing the Company, including
progressing the resolution of the resource consent, the relationship with
Windflow and improving the reliability of the major components of the
turbines.

Derek Walker
Chairman
26 August 2014
End CA:00254546 For:NWF    Type:FLLYR      Time:2014-08-28 16:03:43