FLLYR: NWF: NZ Windfarms Preliminary Announcement

26 Aug 2010 10:21 am

NWF 26/08/2010 FLLYR

REL: 1021 HRS NZ Windfarms Limited

FLLYR: NWF: NZ Windfarms Preliminary Announcement

NZ Windfarms Limited Results for announcement to the market

Reporting Period Year to 30 June 2010 Previous Reporting Period Year to 30 June 2009

Amount (000s) Percentage change Revenue from ordinary activities 5,120 30.3% Profit (loss) from ordinary activities after tax attributable to security holder (7,593) - Net profit (loss) attributable to security holders (7,593) -

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 PRELIMINARY ANNOUNCEMENT

On behalf of the Directors it is my pleasure to report on the progress the Company has made in the financial year to 30 June 2010.

The highlights in the financial year were commissioning the final Stage 3 turbines at the Te Rere Hau wind farm in November 2009, making a total of 65 commissioned turbines; receiving a favourable resource consent for the Eastern Extension of Te Rere Hau wind farm during February 2010 and the successful rights issue raising $31,426,000 in May 2010.

The Company has also been able to get clarity over the likely impact of having turbines that have some differences to the design submitted by Windflow Technology Limited ("WTL") for IEC certification. A settlement agreement was completed with WTL in April 2010 which provides for WTL to make modification to the turbines supplied to NZ Windfarms or provide extended warranties to cover the issues provided.

The Company now has all the consents and funding in place to complete the construction of the final 32 turbines on the extension site which will yield significantly greater output than the remaining sites on the original consented site.

FINANCIAL PERFORMANCE

Financial performance for the year to 30 June 2010 was a loss before asset impairments, depreciation, amortisation, discount on acquisition and tax of $533,000 (30 June 2009 - loss of $626,000). This compares with the April 2010 prospectus forecast of a loss of $435,000. The projected income from electricity sales was not achieved as the wind resource was lower during May and June than the projected long term average resource, and wholesale electricity prices were lower than projected due to above average hydro-lake levels from late April.

Revenue from electricity generation increased from $812,000 in the 2009 financial year to $4,147,000 as turbines were livened to the grid and became operational. However, this revenue increase was offset by higher operational costs and depreciation on the extra commissioned turbines. Electricity revenue has been impacted by lower than expected electricity prices resulting from higher than average inflows of water into the hydro lakes and lower demand due to the economic recession.

Interest income of $334,000 was $2,604,000 less than in the 2009 financial year due to lower interest rates prevailing in the market and as a result of expending funds on the Te Rere Hau build programme.

The Company has entered into an emission reduction project agreement with the Crown in relation to the Te Rere Hau wind farm. The Company commenced earning emission reduction units on 1 January 2008 and earned 1,296 units during the year ended 31 December 2008 and 30,390 units during the year ended 31 December 2009. The 2008 and 2009 emission units were sold during the current year for $18.75 per unit During the year, the Company carried out a review of the carrying values of assets in accordance with NZ IAS 36 - Impairment of Assets, and made an impairment charge of $6,300,000 in the 31 December 2009 Interim Financial Statements. 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% (equivalent to a 11.8% pre-tax (nominal) discount rate), consistent with the discount rate factored into the Ministry of Economic Development's long run marginal cost modeling 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.

After taking into account the asset impairment charge, depreciation, amortisation, discount on acquisition and tax, net loss for the year was $7,593,000 (30 June 2009 - net profit of $961,000). Total assets at 30 June 2010 were $113,488,000 (30 June 2009 - $94,413,000).

FUNDING

Following the successful capital raising in May 2010, the Company secured the financial resources to complete the Te Rere Hau wind farm and this remains the focus of the Company.

DIVIDEND The 2010 Prospectus forecasted that no dividends are expected to be paid in the financial years ending 30 June 2010 and accordingly the Board has resolved that no dividend will be declared for the financial year ended 30 June 2010.

TE RERE HAU PROJECT

Since 30 June 2009 the overall focus has been to complete the Te Rere Hau project. The initial focus for the year was on completing the commissioning of all turbines up to Stage 3 at the Te Rere Hau wind farm and resolving the dispute with our turbine supplier, Windflow Technology Limited. In the second half of the year the focus was on completing all the steps necessary to allow the installation of the final 32 turbines on order on the area known as the Eastern Extension.

Resource Consent - Te Rere Hau Eastern Extension

On 26 March 2010 shareholders were advised that NZ Windfarms has clear consent from Tararua District Council to locate the 32 Batch 4 turbines in the Eastern Extension area. The Extension area has a better wind resource than the lower slopes of the original site.

Construction Progress

By 30 November 2009 all 28 Stage 2 turbines and 32 Stage 3 turbines had been fully commissioned, making a total of 65 turbines operational and producing electricity into the National Grid.

The construction works for stage 4 turbines installation on the Eastern Extension commenced as soon as the capital raising was completed and are now well underway. We have experienced some delays which have put our anticipated construction programme back by approximately four months but we are working to try and minimise the effect of these delays. Earthworks commenced during May 2010 and earthworks construction of the first 16 turbine sites is 80% complete.

Foundations drilling has been completed for five turbine sites, four tower bases have been erected and work has commenced on power reticulation to the turbine sites.

The delay in completing commissioning of the last 32 turbines will have an impact on expected revenue for the 2011 year to the extent that revenue producing generation is delayed.

Windflow Technology Dispute

As reported in the 2010 Interim Report, in August 2009 we learned that none of the turbines supplied for the Te Rere Hau project would be of the design submitted by WTL for IEC Class 1A Certification as a number of design changes had been made to meet the requirements for certification. At that time WTL 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.

This issue took some time to resolve as it required third party review of the changes and the expected implications of not having the changes incorporated in the turbines installed at Te Rere Hau.

Following the review, the Company and WTL reached agreement on a monitoring programme with respect to some components in the early turbines at Te Rere Hau which were subsequently modified as part of WTL's IEC Certification process because they did not meet IEC requirements for a 20 year life. Agreement has been reached that, in respect of these components, the Company will retain a sum of $966,200 plus GST (being the total estimated remediation cost) which will be released to WTL if and when remediation works are undertaken during the five year warranty period or, if prior to the end of the current five year warranty period a report from an independent consultant provides an opinion that the affected components can be expected to achieve a 20 year life and accordingly do not need to be upgraded. In the absence of such a report, any components not upgraded will be subject to a warranty from WTL that extends to the end of the 20 year design life, provided WTL remains the operations and maintenance contractor. Any retention held at the end of the five year warranty period is repaid once the extended 20 year warranty is provided.

In addition to dealing with the IEC design issue the settlement agreement also deals with the holding of retentions for outstanding work; the consequences of delaying installation of Batch 4 turbines and other miscellaneous issues. As a result of this all outstanding claims between both companies have been settled.

Wind Rights Agreement

In a separate development, the wind rights agreement with Aeolian Property Company Limited ("APCL") was renegotiated to allow preferential development of the proposed extension to the existing consented wind farm area ("Eastern Extension"), ahead of full development of the APCL land. Under the wind rights agreement, the Company was prohibited from installing turbines within a 10 km radius of the Te Rere Hau site until the APCL land was fully developed with 97 turbines. APCL agreed to remove this restriction in exchange for an adjustment to the royalty rate applicable to the APCL land such that the royalty payable is equal to the royalty that would be expected if all 97 turbines had been installed on the APCL land. Adjustments have also been made to minimum annual royalty thresholds as part of the amendments to the agreement with APCL.

A put option agreement dated 22 December 2006 allows APCL to require NZ Windfarms to purchase the APCL land at a price calculated by reference to a formula which includes the value of the land as a grazing unit plus the net present value of the future royalty payments APCL will forego over the duration of the wind rights agreement and any renewals. In April 2010 as part of an agreement reached with APCL, New Zealand Windfarms and APCL have agreed that, instead of the formula, a fixed price of $3.55 million (plus GST if applicable) shall apply if APCL exercises the put option any time between 30 June 2010 and 31 December 2010. On 8 July 2010 APCL served notice under the Put Option Agreement for purchase of the Te Rere Hau property. Settlement is expected to be completed by the end of August 2010.

Exercise of the put option extinguishes any requirement for the Company to pay royalties for turbines located on APCL land and gives NZ Windfarms ownership of the land on which the turbines are sited.

DIRECTORS AND STAFF

On 30 June 2010 Juliet McKee resigned as director of NZ Windfarms Limited. The Board undertook a process to identify a suitable replacement director and on 23 August 2010 the Company announced the appointment of Michael Allen as a director of the Company with effect from 1 September 2010. In accordance with the Company's constitution, this appointment runs until the next Annual General Meeting when he must retire and seek re-election by the shareholders.

Steve Cross gave the Board notice of his intention not to extend his contract beyond 31 July 2010 and in June the Company announced the appointment of Chris Sadler as its new Chief Executive Officer. From 10 August 2010, Chris Sadler will take over the responsibilities as Chief Executive of NZ Windfarms, before taking up the permanent role on 20 September 2010.

My thanks go to Directors and staff for their support over another challenging year.

FUTURE PROSPECTS

Our top priorities remain the completion of the Te Rere Hau project and optimising the operation of the completed turbines.

By the end of the financial year we should have the project fully completed.

We are forecasting a profit for the year ended 30 June 2011, with the Company generating positive operating cash flows.

The forecasts are based on average expected electricity price and wind levels. However, revenue is likely to be volatile due to the wide variability of both price and wind levels, with both factors essentially outside the Company's control.

Some hedging of price is possible but to date the discount for obtaining price certainty for a short term variable volume product such as wind generation has been quite high.

We continue to monitor this and assess the trade-offs between revenue certainty and the cost of achieving that certainty. The delay in completing commissioning of the last 32 turbines will have an impact on expected revenue for the 2011 year.

Based on the price and wind speed assumptions in the April 2010 Investment Statement forecasts, the latest forecast is that EBITDA will be 16% below the Investment Statement forecast for the year ended 30 June 2011.

Derek Walker Chairman 25 August 2010 End CA:00198880 For:NWF Type:FLLYR Time:2010-08-26:10:21:48

More announcements for NWF