Ann: HALFYR: NWF: Interim Report for the six months ended 31 December 2015

• Release Date: 26/02/16 09:40
• Summary: HALFYR: NWF: Interim Report for the six months ended 31 December 2015
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					NWF
26/02/2016 09:40
HALFYR
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REL: 0940 HRS NZ Windfarms Limited

HALFYR: NWF: Interim Report for the six months ended 31 December 2015

NZ WINDFARMS LIMITED
CHAIRMAN'S REVIEW

For the six months ended 31 December 2015

OVERVIEW

NZ Windfarms has made positive progress in key areas in the first six months
of the 2016 financial year.

The level of wind resource and high availability resulted in electricity
output replicating the high level recorded in the corresponding period last
year.

In December an agreement settling all outstanding issues with Windflow
Technology Limited was approved by their shareholders. The agreement resulted
in the write off of all outstanding warranty claims and retentions owing
between the companies and the termination of two arbitration actions
initiated by NZ Windfarms.  The agreement included a $1,000,000 payment to NZ
Windfarms, and the issue of convertible notes in Windflow Technology. The
notes are convertible into ordinary shares within three years of date of
issue. If NZ Windfarms elects to convert all of these notes, NZ Windfarms
will hold a total of 9.9% of the ordinary shares in Windflow Technology.

The results include an impairment reversal of $2,247,000 (December 2014
half-year - nil). The adjustment is due to strengthening in the ASX futures
forecast for electricity prices over the next three years and the update of
the model to reflect the balance sheet position at 31 December 2015.

The overall result is a significant improvement in profit and a cash in-flow.

FINANCIAL PERFORMANCE

The key drivers of the revenue from the wind farm are the wind received at
the site and the wholesale electricity price which are both subject to
natural variability and beyond NZ Windfarms' control. Our annual forecasts
are based on long term averages for output and for electricity prices, the NZ
electricity base load quarterly futures price (OTA - Otahuhu) as quoted on
the ASX on 30 June each year.
Compared to the previous corresponding period, the volume of electricity
generated was constant however prices were lower, particularly in the second
quarter, decreasing in the period under review by more than 8 per cent over
those prevailing in the corresponding six months in the previous year. The
electricity price received was however well above forecast levels which were
based on the futures prices quoted on the ASX as at 30 June 2015.
Half-year electricity sales were $3,828,000. To achieve this, the turbines
generated 68,516 MWh at an average price of $55.87 per MWh. The comparatives
for the six months to 31 December 2014 were revenues of $4,190,000 from
68,674 MWh and an average price of $61.01 per MWh.

As a result of the settlement with Windflow Technology there was no warranty
income for the half year however the impact of this reduction in income was
offset by the one off non-taxable payment of $1,000,000 and the inclusion of
$63,000 in other revenue representing the valuation of the convertible notes
issued.

Operating costs for the period were $3,027,000 a decrease of 10.6 per cent
compared to the previous year. Savings were achieved in most categories of
operational expenses and overhead costs.  However this reduction was
partially offset by increased capital expenditure due to the change in
capitalisation policy for replacement of major turbine components implemented
during the 2015 financial year.

We have investigated the potential to refinance the two leases which finance
the on-site reticulation lines and the pair of transmission lines which
transport the electricity generated from Te Rere Hau to the nearby grid
injection point. At this time, we have not been able to achieve terms of
repayment and suitable alternate finance arrangements that would justify
refinancing of the leases.  We continue to work on negotiating a settlement
and financing on terms that would provide a net benefit to NZ Windfarms both
in terms of cost and risk.

Profit before depreciation, impairment, amortisation, interest and tax was
$1,864,000 for the half-year (December 2014 half-year - profit of
$1,545,000). Interest income earned during the period was $205,000 (December
2014 half-year - $224,000). Interest expense during the period was $480,000
(December 2014 half-year - $484,000).

An impairment reversal of $2,247,000 (December half-year - nil) has been
included in the accounts. The adjustment is due to strengthening in the ASX
futures forecast for electricity prices over the next three years and the
update of the model to reflect the balance sheet position at 31 December
2015. Details of the reasons for the adjustment are included in the notes
to the accounts.

When depreciation, amortisation, impairment, interest and tax are taken into
account, there was a net profit after tax of $2,103,000 (December 2014
half-year - $40,000).

An increase in total cash and term deposits of $585,000 was recorded for the
six months (December 2014 half year - outflow of $390,000).

OPERATIONAL PERFORMANCE

The 68,516 MWh generated in the six months to 31 December 2015 is a 0.2 per
cent decrease on the 68,674 MWh generated in the corresponding period of the
previous financial year. Output of 29,347 MWh in October and November was
19.4 per cent above the budgeted level for those typically high wind months.

The program put in place to address the technical failures of key components
of the WF500 turbines has allowed availability to be further recovered to
96.8 per cent for the first half of the financial year. The level of
availability achieved throughout the period is above the industry standard
availability guarantee of 95 per cent and has been achieved despite the
on-going unavailability of one turbine which has been temporarily
decommissioned to provide additional spares for the gearbox refurbishment
program. This is a 0.5 per cent improvement from the previous corresponding
period. We continue to gain knowledge about the operations of the fleet of
WF500 turbines and have further improved our day to day operations. Examples
of substantial improvements achieved include:

oReducing our permanent windsmith crew from nine to eight technicians;
oReducing the time to change out and commission a refurbished gearbox from
five days to less than two days;
oReducing the crew required to change out and commission a refurbished
gearbox from nine people to five people;
oReducing the time for two people to change out a torque limiting pump from
eight hours to three hours; and,
oSix month preventative maintenance procedure reduced from one day four hours
to six hours with increased checks included in this standard procedure.

Our wind farm operations are conducted in a harsh environment on a steep
site, often employing heavy lifting equipment. The operations and maintenance
team have maintained a strong Health and Safety focus to minimise these
hazards.  The team continually improve their procedures by analysing all
incidents (including near misses) as a team and documenting and applying
agreed improvements to our procedures. We have completed the documentation
(write, approve, check) for all major repairs which total more than sixty
separate procedures, which improves our field crew's performance and reduces
the risk of damage to equipment and/or injury to our technicians.

RESOURCE CONSENTS

We have successfully defended our operational performance in the Environment
Court therefore these Court actions taken by the Palmerston North City
Council are now concluded.  We have met with the Palmerston North City
Council's advisors and now expect the Palmerston North City Council to
initiate a review of our Consents under section 128 of the Resource
Management Act. This process will likely include a hearing before a
commissioner and submissions from interested parties.

REVIEW OF BOARD COMPOSITION

As announced in December, the Board is undertaking a review the composition
of its Board. At the last AGM, the number of Directors was reduced to three
following the retirement of Vicki Buck and Michael Stiassny. As a result, the
remaining Directors have determined that additional appointments are required
to provide a Board with wide shareholder support and an appropriate mix of
skills and experience.

The first appointment made is Stuart Bauld who has been appointed a Director
effective from 15 February 2016.  Stuart Bauld is a Chartered Accountant and
a former partner of PwC and is presently a self-employed consultant providing
services to private clients, principally related to governance, financial
structures and general investment matters.  He has extensive experience in
audit and corporate finance, and has governance experience in both private
and charitable organisations.

The second appointment made is Rodger Kerr-Newell who has been appointed a
Director effective from 1 March 2016.  Rodger Kerr-Newell has extensive
senior management and governance experience in both the public and private
sector.  He is a past Chief Executive of Hutt City Council, New Plymouth
District Council, Rodney District and Taranaki Investment Managers Ltd, and
is a former board member of Business NZ. He brings key strengths in strategy,
financial management, cost cutting and knowledge of local government
regulatory processes to the Board.

In accordance with the Company's constitution, the terms of these
appointments runs until the next AGM when both appointees must retire and
seek re-election by the shareholders.

As announced in December, I advised the rest of the Board of my intention to
retire as a Director once the Board Review process had been completed. Now
that the new appointments have been made, I have given formal notice of my
retirement from the Board effective from 1 March 2016. The Board have
elected Dr Julian Elder to be the Chair from that date, with Stuart Bauld
becoming Chair of the Audit and Risk Committee.

OUTLOOK

Long-term financial performance is dependent upon three key variables of
which two are outside the Company's control - the wind at the site and the
wholesale electricity market prices. The electricity generated for the six
months was marginally ahead of forecast.
ASX futures prices for the electricity market have risen over the last six
months both for the remainder of this financial year and for the next three
years. If the predicted improvement eventuates the likelihood of the Company
recording regular net surpluses and positive cash inflows in the future will
be enhanced.
The third key variable within the Company's control is operational
performance which improved further over the six months with turbine
availability increasing and major repairs decreasing.  The Company's
engineering and maintenance team have a focus on continuous improvement of
both the operation and maintenance of the wind farm. Initiatives taken have
resulted in significant improvements in the installed turbine fleet's
performance, along with process efficiencies that have reduced the time and
cost of key maintenance and refurbishment tasks, whilst at the same time
remaining focused on operating the farm generally as economically and
prudently as possible. We also continue to critically evaluate overhead
costs for potential savings.  This cost improvement focus will continue to be
applied so that further improvements in performance can be achieved going
forward.

Derek Walker
Chairman
26 February 2016
End CA:00278394 For:NWF    Type:HALFYR     Time:2016-02-26 09:40:23