HALFYR: NWF: NZ Windfarms Half Year Result

2 Mar 2010 9:14 am

NWF 02/03/2010 HALFYR

REL: 0914 HRS NZ Windfarms Limited

HALFYR: NWF: NZ Windfarms Half Year Result

NZ Windfarms Limited Results for announcement to the market

Reporting Period Six months to 31 December 2009 Previous Reporting Period Six months to 31 December 2008

Amount (000s) Percentage change Revenue from ordinary activities 1,728 (34.9) Profit (loss) from ordinary activities after tax attributable to security holder. (6,535) (351.9) Net profit (loss) attributable to security holders. (6,535) (351.9)

Final Dividend Amount per security Imputed amount per security Nil It is not proposed to pay a dividend Not Applicable

Record Date Not Applicable Dividend Payment Date Not Applicable

Comments: Refer to the attached Chairman's Review

NZ WINDFARMS LIMITED CHAIRMAN'S REVIEW

For the Six Month Period Ended 31 December 2009

The most significant event for the Company during this reporting period occurred during November 2009 when the final Stage 3 turbines at the Te Rere Hau wind farm were commissioned, making a total of 65 commissioned turbines. However this achievement has been somewhat overshadowed by the dispute with our turbine supplier, Windflow Technology Limited and the impact that it has had on the timing of the capital raising.

FINANCIAL PERFORMANCE

Low electricity prices affected financial performance for the six months to 31 December 2009. The Loss for the period before asset impairments, depreciation, amortisation and tax, was $1,044,000 (31 December 2008 - loss of $1,727,000).

Electricity sales for the six months to the end of December 2009 were 40,842 MWh at an average price of $38.92/MWh.

While revenue from electricity sales has increased as turbines are commissioned, the increase in revenue has been offset by lower interest income as the cash funds on deposit are utilised to meet the Te Rere Hau construction expenditure.

The net loss attributable to Equity Holders of the Parent for the six months was $6,535,000 compared to a net profit of $2,594,000 for the six months ended 31 December 2008. The six months to 31 December 2008 result included $3,162,000 Discount on the acquisition of NPBB's 50% share in the Te Rere Hau Wind Farm Joint Venture; the net deficit before the Discount on acquisition was $568,000.

Net loss included $1,590,000 from electricity sales (31 December 2008 - $113,000), however this was offset by lower interest income of $138,000 (31 December 2008 - $3,162,000) as available cash reserves were used to continue construction and commissioning the Te Rere Hau wind farm.

Net assets at 31 December 2009 were $74,557,000, compared to $81,092,000 at 30 June 2009 and $82,724,000 at 31 December 2008.

During the period the Company carried out a review of the carrying values of assets in accordance with NZ IAS 36 - Impairment of Assets, and has determined to make an impairment charge of $6,300,000. The valuation of the Te Rere Hau wind farm assets is very sensitive to assumptions about discount rate and electricity price. In ascertaining the "fair value less costs to sell" in accordance with NZ IAS 36, the Company has applied a post-tax (nominal) discount rate of 10% consistent with the discount rate factored into the Ministry of Economic Development's long run marginal cost modelling on which the adopted future price path is based. Accordingly this rate reflects the Ministry's estimate of the hurdle rate applied by a typical investor evaluating an electricity generation project.

The wholesale electricity price path used in the discounted cash flow model to determine fair value is based on Energy Hedge forward price contracts through to 2012. Post 2012 the price path is based on the Ministry of Economic Development ("MED") Energy Outlook reference scenario which was published in September 2009.

The Company has an agreement with the Crown to receive emission units from the Te Rere Hau project. The Company commenced earning emission reduction units on 1 January 2008 and earned 30,390 units during the calendar year ended 31 December 2009 (31 December 2008: 1,296 units). The emission reduction units will be recognised as an asset at fair value at the time the Crown issues the units and when fair value can be determined by reference to an active market. The 2008 and 2009 units have not yet been issued by the Crown. There is no active market for carbon credits within New Zealand at this time. The current international market price of carbon credits typically ranges from Euro8 to Euro12 per tonne.

TE RERE HAU PROJECT

Since 30 June 2009 the focus has been on commissioning turbines at the Te Rere Hau wind farm and resolving the dispute with our turbine supplier, Windflow Technology Limited. At 31 December 2009 all 28 Stage 2 turbines and 32 Stage 3 turbines have been fully commissioned, making a total of 65 turbines operational and producing electricity into the National Grid.

NZ WINDFARMS LIMITED CHAIRMAN'S REVIEW (Continued)

Windflow Technology Dispute

Your Board had always taken comfort from the fact that Windflow Technology Limited (WTL) was committed to seeking International Electrotechnical Commission (IEC) Class 1A Type Certification for the WF500 turbine. Conformity with a recognised design standard assured us that the turbines would be suitable for use at Te Rere Hau and that we could be confident in seeking public investment in this project. As reported in August 2009, we learned that none of the turbines would be at the standard required for IEC Certification. At that time Windflow Technology advised that to incorporate all the design changes in all turbines would require a fundamental refit of those turbines and the potential cost to do this could be as high as $24 million. This meant it was essential we understood the impacts and risks of not having these design changes.

In December 2009, we were provided with a copy of a report by a Consultant engaged by Windflow Technology into the significance of the design modifications. Since then NZ Windfarms has been in dialogue with Windflow Technology over the implications of the findings from the Consultant's report.

Resolving this matter has not been easy - it has proven difficult to sort out and been time consuming. However the Company has made good progress on resolving this issue with Windflow Technology and continues to work with them to resolve outstanding issues.

Resource Consent

On 29 May 2009 NZ Windfarms lodged a resource consent application with Tararua District Council to install 56 turbines in an area adjoining the current consented Te Rere Hau wind farm. This Extension area has a better wind resource than the lower slopes of the existing farm and hence NZ Windfarms would like to preferentially locate most or all of the Batch 4 turbines in this area.

On 4 February 2010 the Company received the decision of the Joint Hearing Commissioners in respect to the Resource Consent application for the Te Rere Hau wind farm Eastern Extension. The Hearing Commissioners have granted consents for the 56 additional turbines applied for. At the time of authorising these financial statements one appeal had been lodged with the Environment Court in respect to this decision. The Company believes the appellant's concerns can be addressed, and has initiated discussion with the intention of reaching an agreement to have the appeal withdrawn.

Operational performance and outlook

Some problems have been experienced with some of the turbines delivered in the project. These problems have affected turbine availability which for the 2009 calendar year was 93.3% percent. Problems have been experienced with cast gears on 6 turbines where an incorrect heat treatment process has made these gears prone to cracking. All affected gears have been replaced but with some adverse impact on availability. Five turbines have also been affected by operating with incorrect oil filters fitted, which have potentially allowed manufacturing debris to enter the gearboxes. These turbines are all being inspected and parts replaced under warranty if damage is found.

A more recent problem was experienced with overheating of generator assemblies within the turbines installed at Te Rere Hau. Windflow Technology has completed, under warranty, a project to retrofit cooling fans to the generator assemblies and replace generators where necessary to resolve this issue which manifested itself when the turbines were operating for sustained periods at high output. The Company continues to closely monitor the effectiveness of the solution we have been provided by the manufacturer.

Availability levels should improve as these problems are resolved.

CAPITAL RAISING AND SHORT TERM FUNDING

As reported at the Company's Annual Shareholders' meeting held on 18 December 2009, following the completion of the acquisition of NPPB Pty Limited 50 per cent share in the Te Rere Hau wind farm, your Board recognised that the Company needed to raise additional funds to complete the Te Rere Hau project. We assessed the options for doing this and were well advanced with plans to go to shareholders for additional capital when Windflow Technology advised us that none of

NZ WINDFARMS LIMITED CHAIRMAN'S REVIEW (Continued)

the turbines already supplied to the project nor any of the remaining turbines to be supplied would comply with the design submitted by Windflow Technology for IEC Class 1A Certification.

This information meant that the your Board had no option but to delay the capital raising and get a third party assessment so that we understood the impact and risks of not having these design changes incorporated into our turbines, and whether any mitigating actions needed to be taken either with the turbines already supplied or with those that were still to be supplied. This is a project that is expected to have at least a 20 year life and the life and operating cost of the turbines is fundamental to the economics of the project.

In your Board's view, the Consultant's report has confirmed that its decision to disclose this matter to the market and to delay the capital raising until it obtained a clearer understanding of the implications of not receiving IEC Certified turbines from Windflow Technology was appropriate.

As a result, the Company, after assessing alternatives, approached its cornerstone shareholder, Vector Limited, and negotiated a short term bridging loan facility that will provide the funds required to continue the Te Rere Hau project and provide working capital until the capital raising is completed. The two Vector directors on the NZ Windfarms Limited Board immediately declared their conflict of interest in the transaction and had no involvement in negotiations with Vector Limited or the NZ Windfarms Limited Independent Directors' decision to enter into the loan facility.

Due to the tight deadlines in respect of the need for short term funding the Company applied for, and was granted a waiver of NZX Listing Rule 9.2.1 seeking approval from shareholders to the entry into of the loan by way of ordinary resolution, as the Loan constitutes a "material transaction" with a "related party".

The Independent Directors obtained independent advice to the effect that the terms of the Loan Facility Agreement are commercially reasonable in the circumstances.

The last six months have been challenging but your Board remains comfortable that the decision to delay the capital raising until the implications of not receiving IEC certified turbines were understood, and the decision on the resource consent application known, are in the best interest of the Company and shareholders. Further information of the nature of the capital raising will be released to NZX and shareholders shortly.

Despite all these issues we need to recognise that we do now have a 65 turbine, 32 megawatt wind farm operating. While not yet at warranted availability we expect this to be achieved as the causes of downtime are identified and rectified.

Our priority remains the completion of the Te Rere Hau project. The coming year will focus on resolving the outstanding issues with Windflow Technology, completing construction of Stage 4 of Te Rere Hau, and maximising the value of the completed wind farm.

GOING CONCERN

The condensed consolidated interim financial statements have been prepared using the going concern assumption. The continued operations of the Group are dependent on the ability to fund future activities from operational cash flows and funding.

The Company and its subsidiaries have prepared business plans and budgets which indicate that cash generated as a result of operations is insufficient for the Company to continue operating for a period of at least 12 months from the date these financial statements were approved by the Board of Directors.

The Company is proposing to raise funding to complete the development of the Te Rere Hau wind farm and to repay the short term loan from its cornerstone shareholder, Vector Limited, by way of a shareholder rights issue. On completion of the wind farm the Company's cash flow projections demonstrate sufficient net cash surpluses to fund the ongoing operations of the wind farm.

The Board is close to finalising the timing and method of raising funding and further information of the nature of the rights issue will be released to NZX and shareholders shortly.

NZ WINDFARMS LIMITED CHAIRMAN'S REVIEW (Continued)

For the reasons set out above, the Board believes the going concern assumption is a valid basis on which to prepare the financial statements. The Board reached this conclusion having regard to the circumstances which they consider likely to affect the Company during the period of one year from the date these financial statements are approved, and to circumstances which they believe will occur after that date which could affect the validity of the going concern assumption.

While the Board is confident in the Company's ability to continue as a going concern, there is uncertainty with respect to achieving the operational cash flows predicted and the raising of sufficient additional funding prior to utilisation of available cash resources and to complete the Te Rere Hau wind farm project. Accordingly, there is uncertainty as to whether the Company can continue as a going concern and therefore whether it will be able to pay its debts as and when they become due and payable. If the Company was unable to continue in operational existence and pay debts as and when they become due and payable, adjustments may have to be made to reflect the situation that assets may need to be realised and liabilities extinguished other than in the normal course of business, and at amounts which could differ significantly from the amounts at which they are currently recorded in the statement of financial position.

The condensed consolidated interim financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.

The external auditor has referred to the fundamental uncertainty in its audit report.

Derek Walker Chairman End CA:00191956 For:NWF Type:HALFYR Time:2010-03-02:09:14:17

More announcements for NWF