NWF - NZ Windfarms

[blackcap]

I have been doing some thinking around the hedging policy that NWF have and I think they have stuffed it up a bit.

I received an email from the previous CEO who said that hedging was done between 20-40% of average quarterly volume. I took this to mean 30,000MWH per quarter being about average (expected volume).
So for the December quarter I am presuming they were at the upper end of the scale and hedged about 40% of expected volume or about 12,000MWH. Unfortunately only 25,912MWH were delivered by the turbines even though 30,000MWh may have been expected.
Lets say that the average buy price of the hedge was about $75 so a total outlay of $900,000.
The average price for the 3 months was near about $205.48 (taken from Wholesale information trading system) so a shortfall of $130.48 multiplied by 12,000MWh gives us close enough to our loss of $1,565,760 (either NWF got less than $75 on the contract or they hedged more than 12,000MWH which is unfathomable in my opinion).

Unfortunately the price that we received for our electricity was not $205.48 (the average over the 3 months) but a rather lower $173.83.

I believe that NWF is in a hiding to nothing when it come to hedging. When wind resource is low, generally spot prices are slightly higher (due to less supply) and when wind resource is high, spot prices are marginally lower. That makes hedging rather difficult and counter productive.

In addition, in a bad year the spot price might be $50 (hedges taken out at $70-$75) so the upside is limited to $25 per MWH. But in good years when the price is high hedges destroy upside that is more unlimited.

I think NWF should review their hedging policy and if anything cancel it totally or keep it to a bare minimum, I would be comfortable with a maximum of 20% of expected production or a total of 6,000MWH per quarter.

Just a few random thoughts.

To add. After the AGM, directors were talking about capital initiatives and there was the mooting of a potential dividend or buy back of stock to use excess cash from the prior year good cashflow. But after having seen the loss on the hedging, I am pretty confident there would have been no cash left as margin calls, probably as early as late October and ongoing in November would have cleaned up most of the cash that NWF had.