Ann: FLLYR: NWF: Preliminary Full Year Results to 30 June 2015

• Release Date: 27/08/15 09:34
• Summary: FLLYR: NWF: Preliminary Full Year Results to 30 June 2015
• Price Sensitive: No
• Download Document  10.65KB

					NWF
27/08/2015 09:34
FLLYR
PRICE SENSITIVE
REL: 0934 HRS NZ Windfarms Limited

FLLYR: NWF: Preliminary Full Year Results to 30 June 2015

CHAIRMAN'S REVIEW

INTRODUCTION
Our fourth full year of operation has featured improved performance in all
business functions.  Electricity revenue increased, as prices were higher
than in the previous year whilst generation output was maintained. The
significant reduction in warranty income reflected improved turbine
reliability as well as the expiry of the initial five-year warranty period
for the majority of turbines. Improved reliability was also reflected in
significantly improved turbine availability. Operating and overhead costs
were reduced across most categories of expenditure. All these factors have
resulted in a reduction in the level of annual loss sustained.

ELECTRICITY GENERATION
Electricity generation was 123 gigawatt hours (GWh) for the year, a small
increase over the 122.6 GWh recorded in the previous year. This was achieved
with significant variations in average monthly wind speed during the year. As
noted in the Interim Report, the wind resource during calendar year 2014
approached the expected long-term conditions recorded at the Palmerston North
Automated Weather Station of 4.4 meters per second. Output of 127.5 GWh was
achieved in calendar year 2014, supporting the Company's output assumption
for Te Rere Hau of 130 GWh under long-term average wind conditions. The
average wind speed for the financial year was 4.2 metres per second, the same
as that experienced in the previous financial year.
Wholesale electricity revenue for the year increased by 11%, attributable
almost entirely to a corresponding increase in average electricity spot
prices. The price increase for the year would have been higher had high
rainfall and higher than average hydrology (lake storage levels) not caused a
marked fall in prices during May 2015. The reduced prices are likely to
continue in the first half of the 2016 financial year.

OPERATIONAL PERFORMANCE
Maintenance expenditure was reduced, reflecting our on-going improvements in
design and operation and resulting in average availability of 96.5 per cent
for the financial year. This is a favourable increase in average availability
of 2.3 percentage points over the previous year.
This result is a credit to the professionalism of our operational staff. The
improvement in reliability was achieved through technical innovation and the
implementation of a robust planned maintenance program that reduces damage to
the turbines. This excellent operating performance has been achieved whilst
reducing employment costs, reflecting further increases in productivity by
our on-site operations team.

FINANCIAL PERFORMANCE
Electricity sales for the year totalled $7,657,000, which represented a 12%
increase over the $6,887,000 recorded in 2014. The increase was due to the
average wholesale electricity price received increasing from $56.19 per
megawatt hour (MWh) in 2014 to $62.26 per MWh in the current year.
Direct maintenance, operating costs and indirect overhead costs all reduced
in comparison with 2014. Part of the reduction was due to the capitalisation
of some major turbine components from 1 July 2014, which results in an
increase in depreciation and a loss on disposal but reduces operational and
employment expenses.
Warranty recoveries fell significantly from 2014 levels due to the general
reduction in the level of maintenance and the falling number of turbines
still covered under warranty. All the turbines are out of the initial
five-year warranty, as of mid-July 2015.  A significant number of past
warranty claims remained in dispute at the end of the year. The Company made
provision last year to cover all the Windflow Technology overdue debt, and
has done so again this year. The increase in the provision was only $74,000
due to the amount of debt recovered from previous years.
The claims lodged last year under the dispute resolution process in the Sale
and Purchase Agreement were still unresolved at the end of the financial
year.
The overall result for the year was a significant drop in the loss after tax,
to $159,000 in comparison with $1,229,000 in 2014. A significant amount of
cash was generated from operating activities, but an overall reduction in
cash held was recorded. A significant proportion of the reduction was the
$330,000 applied to the construction of an extension to the existing building
on-site. The extension provides more workshop and warehousing space, which
will further improve productivity and reduce future logistics costs.
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 in the review are included in note 12 to
the accounts.
The only changes to the underlying assumptions in the model this year were to
the discounts we provide on wholesale electricity prices.  The wholesale
electricity price path used is based on the prices quoted on the 30 June 2015
ASX futures market projections through to 2018 and thereafter the latest
Ministry of Business, Innovation and Employment Energy Outlook - Mixed
Renewables scenario.  The prices are discounted to allow for location and for
the average price received for generation by the wind farm as compared with
the average spot price.  The discounts have been revised on the basis of
actual results and trends over the past two years. The location discount for
the difference between the Otahuhu node and the Tararua wind farms injection
node has been increased from 2.5% to 4.5%.  The discount for the weighted
average price received versus the arithmetic average price at the Tararua
wind farms injection node has been decreased from 15% to 11%.  The net impact
of the change is shown in note 12 to the accounts.

RESOURCE CONSENTS
An appeal by the Palmerston North Council (PNCC) in the Court of Appeal,
claiming that Te Rere Hau is not compliant with the noise conditions of its
Consent, was decided in NZ Windfarms favour during the year.
This left the parallel action in the Environment Court relating to different
noise conditions within the Consent still to be resolved. The Environment
Court has provided a decision on this matter and, of the four determinations
raised by the PNCC; three were decided in NZ Windfarms favour.
At the end of the year the Consent issues are, therefore, still not
completely resolved. Further discussions with the PNCC have been proposed as
a means to resolve the remaining issues. Our preference remains to achieve an
enduring solution to the issues to the satisfaction of all parties including
the PNCC, affected residents and NZ Windfarms.

WINDFLOW TECHNOLOGY LIMITED
In 2014 NZ Windfarms instigated the dispute resolution process in the Turbine
Sale and Purchase Agreement with Windflow in relation to the warranty on
component failures. We also initiated the dispute resolution process for a
claim under the Power Curve Warranty given by Windflow for adjustments it
makes in calculating the power curve performance of the WF500 turbines.  The
outcome of these processes remains uncertain and no allowance has been made
in our financial forecasts and impairment modelling for future income from a
favourable result.
We have been in discussions with Windflow Technology to reach agreement on a
settlement of the outstanding issues and whilst this is yet to be completed,
significant progress has been made.

CAPITAL MANAGEMENT
NZ Windfarms' intended dividend policy as articulated in the April 2010
Investment Statement and Prospectus has not changed. The Company is presently
required to maintain $6.5m on deposit with the BNZ as security for the
guarantee the bank provides in favour of Powerco in respect of the lease on
electrical infrastructure on the wind farm.  The remaining cash held by the
Company is required to meet working capital requirements and provide a buffer
against a period of low wholesale prices or any adverse future costs
associated with consenting issues or unexpected equipment failures.  The
directors believe, therefore, that it remains prudent to hold the present
cash funds on the balance sheet and the Board has resolved that no dividend
will be declared for the financial year ended 30 June 2015.

OUTLOOK
Performance to date 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. Performance in these
key areas improved in the year to 30 June 2015 and further improvement is
expected over the medium to long term. Four years of full operation is an
insufficient timeframe to judge long term performance. As demonstrated over
the 2014 calendar year, a relatively small shift towards historic wind
patterns will, in all likelihood, deliver the predicted long term electricity
output for the wind farm. The independent long-term price forecast that
underpins the enterprise valuation reflects increasing prices, in real terms,
in the medium to long term. That forecast was updated by the Ministry of
Business, Innovation and Employment in 2015 and the latest prices are
reflected in the impairment calculations.  As time progresses the design and
operating changes already made to the turbines, and future improvements,
should continue to reduce maintenance costs.
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.  If the predicted improvement in those inputs occurs in
the medium term and, as a consequence, the Company's performance moves
towards the long-run projections underpinning the net assets value in the
balance sheet, the market capitalisation should increase correspondingly.
Average electricity prices for the coming year are presently forecast to
decline from the previous year due to good hydro storage levels. In addition,
warranty recoveries will reduce substantially as the initial warranty period
expires for all turbines, leaving only the two-year extended warranty on
subsequent repairs.  As a result, we are projecting a cash deficit for the
year. However latest prices on the ASX hedge market indicate that the market
expects electricity prices to strengthen from 2017, and the probability of
this occurring has also been reinforced by recent announcements on thermal
plant retirements.  If this eventuates financial returns should improve
steadily.
We will continue to work on the issues facing the Company, including by
progressing the resolution of the resource consent and the relationship with
Windflow, and by improving the reliability of the major components of the
turbines.

Derek Walker
Chairman
25 August 2015
End CA:00269165 For:NWF    Type:FLLYR      Time:2015-08-27 09:34:00