CHAIRMAN''S REVIEW
INTRODUCTION
NZ Windfarms made positive progress in key areas in the 2016 financial year,
but a significant fall in electricity prices in the second half and the
requirement for a further impairment of the Company''s assets resulted in a
loss being recorded for the year.
The Company recorded a profit before depreciation, impairment, amortisation
and tax and there was an increase in cash and deposits.
Generation output for the wind farm, rounded to gigawatt hours (GWh), reached
the projected 130 GWh for the first time. This follows two years in which
output, similarly rounded, was 123 GWh. Further improvement has been achieved
since the end of the year, with output for the 12 months to 31 July rising to
a record 136 GWh.
An agreement settling all outstanding issues with Windflow Technology Limited
became unconditional in December. This enabled 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 and the issue of convertible notes in
Windflow Technology to NZ Windfarms. The notes are convertible into ordinary
shares within three years of the date of issue. If NZ Windfarms elects to
convert all the notes it will hold a total of 9.9 percent of the ordinary
shares in Windflow Technology.
There had been no change in the projected fair, or impaired, value of the
Company in the 2015 year, but results for the latest year include an
impairment of $4,900,000. This was caused by an expected reduction in the
long-term wholesale price indicator index, published periodically by the
Ministry of Business, Innovation and Employment, which is used to establish
the projected medium-to-long-term prices used to estimate revenue for
impairment testing.
The process for review of our Consents by the Palmerston North City Council
(PNCC), under Section 128 of the Resource Management Act, has commenced.
ELECTRICITY REVENUE
Electricity generation was 129.6 GWh, a 5.4 percent increase over the 123.0
GWh recorded in the previous year. This was achieved with an average monthly
wind speed of 4.0 metres per second as measured at the Palmerston North
Automated Weather Station, which is less than both the average for the
previous year (4.2 metres per second) and the expected long term average of
4.25. The implied improvement in efficiency can be explained partly by a 1
percent increase in the amount of wind from the west, which is the optimum
direction for the wind farm to operate at maximum efficiency. For the rolling
12 months to 31 July 2016, the average increased further to 136.1 GWH.
The increase in output was more than offset by an 11 percent decrease in
wholesale electricity prices received, resulting in a 6.3 per cent fall in
revenue. Lower spot electricity prices resulted from continued surplus
capacity, above average hydrology (lake storage levels) particularly later in
the year and sluggish demand in the autumn and winter months of 2016.
OPERATIONAL PERFORMANCE
Maintenance expenditure continued to fall, reflecting the Company''s ongoing
program to install enduring solutions to the technical failures suffered and
operational improvements as our knowledge of the WF500 turbine fleet grows.
Average availability for the year was 96.2 percent, consistent with the 96.5
percent recorded for the previous year.
This represents an excellent operating performance reflecting the increase in
wind resource and the ongoing program to refurbish gearboxes, among other
components. This result is a credit to the professionalism of our operational
staff. The improvement in reliability has been achieved through technical
innovation and the continued development of a robust planned maintenance
program to protect the turbines.
FINANCIAL PERFORMANCE
The key drivers of revenue from the wind farm are the wind resource received
at the site and the wholesale electricity price, which are both subject to
natural variability and beyond NZ Windfarms'' control. Electricity sales for
the year totalled $7,174,000, a 6.3 percent decrease over the $7,657,000
recorded in 2015. This reflected a decline in the average wholesale
electricity price received from $62.26 per megawatt hour (MWh) in 2015 to
$55.37 per MWh in the 2016 year, which more than offset the increase in
output.
As a result of the settlement with Windflow Technology all warranty income
payments ceased from the beginning of the year. This reduction in income was
offset by a one-off non-taxable revenue receipt of $1,000,000 and the
inclusion of $11,000 in other revenue, representing the valuation of the
convertible notes issued by Windflow Technology as at 30 June 2016.
Direct maintenance, operating costs and indirect overhead costs all reduced
in comparison with 2015 as a result of our ongoing performance improvement
program.
We have investigated the potential to refinance the two leases that finance
the on-site reticulation lines and the pair of transmission lines that
transport the electricity generated from Te Rere Hau to the nearby grid
injection point. At this time, Powerco Limited has declined to allow early
termination of the leases.
Profit before depreciation, impairment, amortisation and tax was $1,755,000
for the year, which is 21.7 percent lower than the $2,241,000 recorded for
the 2015 year. An increase in cash and deposits of $582,000 was recorded, as
opposed to a $399,000 reduction in the 2015 year.
No impairment adjustment was required to the fair value of the Company in
2015; however an impairment of $4,900,000 has been included in the accounts
for the 2016 year. The impairment is caused by an expected $9,500,000
reduction in modelled revenue resulting from a lowering of the long-term
wholesale price indicator index, published periodically by the Ministry of
Business, Innovation and Employment. This index is used to establish the
projected medium-to-long-term prices in the impairment model. The reduction
in discounted projected revenue was partially offset by net increases in
value in the other assumptions underpinning the model. Further details of the
reasons for the adjustment are included in the notes to the accounts.
The overall result for the year is a loss after tax of $3,979,000 compared
with a loss of $159,000 in 2015.
RESOURCE CONSENTS
Engagement with the Palmerston North City Council (PNCC) to resolve the
Consent issue is ongoing. We have been advised by PNCC that it will conduct
a review of the noise and other conditions of the Consent under Section 128
of the Resource Management Act during the 2017 fiscal year. We remain
committed to achieving an enduring solution to the issues, to the
satisfaction of all parties including the PNCC, affected residents and NZ
Windfarms. PNCC and the Company have entered into a Memorandum of
Understanding that provides for the appointment of an independent acoustic
expert to advise PNCC on which sections of the consent should be reviewed.
FINANCIAL AND ORGANISATIONAL REVIEW
Financial and organisational reviews were in progress in August and final
reports are expected in early September. The objective of the reviews is to
improve the Company''s current cost structure and future cash requirements.
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 $6,500,000 on deposit with the Bank of New Zealand 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 for working capital and for
contingencies such as a period of low wholesale prices, 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 2016 year. However based on the results from the
financial and organisational reviews and through exploring alternative
options for providing the Powerco guarantee the Directors are considering the
possibility of declaring an interim dividend in the 2017 fiscal year.
REVIEW OF BOARD COMPOSITION
At the last Annual General Meeting in November 2015, the number of Directors
was reduced to three following the retirements of Vicki Buck and Michael
Stiassny. The remaining Directors implemented a review of the composition of
the Board and determined that additional appointments were required to
provide a Board with wide shareholder support and an appropriate mix of
skills and experience.
Subsequently, Stuart Bauld was appointed a Director effective from 15
February 2016 and Rodger Kerr-Newell from 1 March 2016. In accordance with
the Company''s constitution, these appointments run until the 2016 AGM, when
both must retire and be elected by the shareholders.
Derek Walker retired from the Board from 1 March 2016 and the Board elected
Dr Julian Elder to replace him as Chairman from that date; however Dr Elder
resigned with effect from 15 June 2016 and Rodger Kerr-Newell was elected
Chairman from 28 June 2016, with Stuart Bauld as Chairman of the subsidiary
committees.
A request for nominations for a fourth Board member with engineering and
corporate governance experience was sent to shareholders in June 2016. With
the AGM to be held in three months, an appointment has been deferred and any
nominations will be included in the Notice of Meeting and considered at the
meeting.
OUTLOOK
Long term financial performance will always be dependent on wind flow at the
site, the electricity market price and the costs associated with keeping the
turbines running. With the decreases in predicted future pricing now
factored into the impairment model, if the predicted improvement in inputs
occurs in the medium term the Company''s performance should move towards the
long-run projections underpinning the net asset value in the balance sheet,
revenue should improve steadily and the likelihood of regular net surpluses
and positive cash inflows in the future will be enhanced.
The Company''s engineering and maintenance team will continue to focus on
continuous improvement of the operation and the repair and maintenance of the
fleet of WF500 turbines. Further design and operational changes will be
implemented to improve the turbine fleet''s performance and more process
efficiencies will be sought to reduce the time and cost of key maintenance
and refurbishment tasks, whilst the focus on operating the farm as
economically and prudently as possible will be retained. We will also
continue to critically evaluate overhead costs for potential savings.
Rodger Kerr-Newell
Chairman
29 August 2016
End CA:00288084 For:NWF Type:FLLYR Time:2016-08-29 16:05:04