Windflow Technology Limited announces the release of its preliminary results
for the financial year ended 30 June 3017.
Windflow Technology has continued to make mixed progress in the year to 30
June 2017:
o Two turbines were installed and commissioned by the end of September
2016 in Scotland, including a 50 Hz Class 2 45-500 prototype near Edinburgh,
as well as a third Class 1 Windflow 33-500 in the Orkney Islands, at a site
called Ludenhill on Mainland Orkney
o All eight Windflow turbines now operating in Scotland, six owned by
the Windflow Group, are performing reliably and earning significant revenue
for their owners. The Company''s UK activity is focussed solely on
maintenance of the UK fleet of eight Windflow 500s.
o The Company has continued to promote licensing of its technology in
China and elsewhere, with a new focus being on the synchronous power-train as
a separate technology suitable for mainstream multi-megawatt 3-bladed
turbines.
The Directors are pleased to note that the Company''s first sizeable
production run of turbines, supplied for the 48 MW Te Rere Hau wind farm
owned by NZ Windfarms Limited ("NWF"), continue to run reliably with
availability at 97.8% according to their latest quarterly report. Wholesale
electricity prices averaging only around 5 c/kWh have continued to make their
business (and Windflow''s prospects in New Zealand) challenging, but it is
heartening to read their latest Annual Report confirming what we have always
maintained, that the Windflow 500 is "a fundamentally robust turbine
platform".
We note of course that great credit is due to the fine team at NWF who have
kept the turbines running optimally, building up great operational know-how.
They are backing that up with real design engineering expertise, as they roll
out and continue to develop a number of improvements that we provided before
handing over the ongoing maintenance to them.
A little known attribute of Te Rere Hau has become another source of pride
recently - its synchronous generators, which are needed to help maintain grid
stability. As renewable energy displaces fossil-fuelled power in economies
that are predominantly fossil-fired (New Zealand''s hydro-dominated sector
being an exception to the norm), the issue of synchronous generation is
coming to the fore, particularly as non-synchronous renewables (conventional
wind and all solar photovoltaic) achieve 30-50% penetration or more in any
particular grid. Transmission system operators in places like South
Australia, Ireland, north-western China and Germany are becoming concerned
about the lack of stabilising attributes that synchronous generators provide,
notably inertia and system strength (see box on page 4). There is a general,
but false, perception that wind turbines cannot drive synchronous generators.
Thus an important part of the Company''s message is that 10% of New Zealand''s
wind power is generated synchronously at Te Rere Hau.
The Company''s intellectual property around the synchronous power-train has
recently been enhanced by the invention of a new low-variable speed (LVS)
system which greatly expands the addressable market relative to the original
torque limiting gearbox (TLG) system which primarily suits high-wind sites.
The LVS system has been patented in several countries including China. Thus
there is reason for optimism that the synchronous power-train may be an idea
whose time has come.
However:
o The Company has wound down its UK development team due to
unattractive market conditions, and its UK activity is focussed solely on
maintenance of the UK fleet of eight Windflow 500s.
o The Company has not yet been able to conclude a licence deal,
although there is real interest in both the Company''s existing mid-size
turbine designs and the synchronous power-train for other manufacturers''
multi-megawatt turbines.
o The New Zealand market continues to stagnate because of an oversupply
of power and weak prices for carbon in the global emissions trading markets.
On the other hand, there are good prospects for the next round of wind farm
developments to take place on the back of the Paris Agreement, growing moves
towards electric vehicles, and a tightening supply-demand balance, which
would have been tighter if the country''s remaining coal-fired power station
had been closed on schedule (2018) rather than given an extra lease of life
to 2022.
Financial Summary
A gross profit of $0.9 million was achieved by the Windflow Group on revenue
of $1.7 million. However the overall result after overheads and finance
costs was a loss of $4.3 million. This is clearly unsustainable and raises
the question: where to from here?
Windflow UK Transaction Intended to Strengthen the Balance Sheet
Looking back over the last seven years since Windflow entered the UK market,
it is clear that the investment has not paid off because the final volume of
eight turbines was far below initial expectations. The sales, both internal
and external, have not been sufficient to carry the Company''s overheads as a
turbine manufacturer.
Financially this has manifested as a deteriorating balance sheet going into
negative equity. The loans provided by the Company''s largest shareholder
have funded all of the WTL Group''s costs to build the six wind turbine
projects that WUK still owns, including WTL Group internal costs and
overheads. However the New Zealand equivalents to International Financial
Reporting Standards (NZ IFRS) require that those internal costs and overheads
not be counted when valuing the turbines as fixed assets. So the WTL Group
has negative equity, primarily because it has been accumulating loan
liabilities on its balance sheet, which reflect the full costs (including
internal costs and overheads) and thus are inherently higher than the allowed
value of the assets under NZ IFRS. And being in negative equity makes it
fundamentally difficult to enter into any new long-term business
relationship.
In order to "put a line under" the UK market venture, the Company has entered
into a conditional agreement with its largest shareholder. Under this
agreement, the WTL Group companies would repay all outstanding debts to him
by transferring the UK-based assets to him and converting all outstanding
redeemable convertible preference shares. As a result his shareholding in
WTL would increase from 42% to 73%, and the Company''s equity position would
improve.
The agreement is subject to satisfaction of a number of conditions, including
completion of due diligence, agreement of final transaction documentation,
and the approval of WTL''s shareholders. Due diligence is nearly complete and
a Notice of Special Meeting to approve the transaction will be circulated to
WTL Shareholders in due course.
Further Downsizing Required
Although the proposed transaction is expected to improve the Company''s
balance sheet, further downsizing will be required in order to remain a going
concern. Accordingly the directors regret to advise that the decision has
been taken to close the factory in Christchurch and as a consequence it is
proposed to trim the Company down to minimum staff numbers required to
support the operation of the UK turbines and any other revenue-generating
activities, such as supporting the US prototype of the Class 2 turbine in
Texas.
It is intended that the Company continue as a going concern without
continuing to rely of the sole support of its largest shareholder, with a
small engineering team, primarily focussed on managing the operation and
maintenance of the UK turbines. The Company also intends to address
licensing opportunities as they arise. Details of this downsizing will be
announced in due course following consultation with staff. For further
details, we refer you to the Financial Statements and Notes.
End CA:00307218 For:WTL Type:FLLYR Time:2017-09-14 13:00:00