WNEA (E) 10Q moving into Wind pretty heavily...
Wind Energy Business
Averill Wind Farm - In early 2007, the Company entered into its first transaction to engage in the industry of generating electricity from wind power turbines, which consisted of its purchase of a $200,000 equity interest in Averill Wind, LLC , a 10 megawatt (10,000 kilowatts) wind farm under development in Minnesota near Fargo/Moorhead.
Shaokatan Hills/Lakota Ridge Wind Farms - In August 2007, the Company completed a strategic asset purchase through its acquisition of Northern Alternative Energy Shaokatan, LLC, which owns the developer’s stake in two adjoining wind farms in Lincoln County, Minnesota. The acquisition price was $2,300,000 in cash.
These two wind farms, known as Shaokatan Hills LLC and Lakota Ridge LLC, were completed in 1999 and have been generating wind power electricity from their prime location on Buffalo Ridge for several years. These two wind farms contain 33 modern wind turbines, having a total rated power capacity of 23 megawatts. (23,000 kilowatts). The Company’s ownership of the developer’s stake in the wind farms will be only a minimal percentage interest with negligible cash flow until 2010, when the developer’s stake (the Company’s interest) converts into an 80% equity ownership of the two wind farms. Over the past few years, these 33 wind turbines have generated electricity at an average annual rate of 68,300,000 kilowatt hours.
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Zulu Wind, LLC - In May 2007, the Company, in connection with a Memorandum of Understanding, (“MOU” with Boreal Energy, Inc., a Minnesota corporation, invested $50,000 in an Interconnection System Impact Study to connect 300 MW (megawatts) of wind generated electricity to Excel Energy’s ZULU substation in southeast Lincoln County, Minnesota. The Company will supply 50% of the capital and be 50% partner in the proposed 300 MW wind farm, located just east of the Zulu substation. This ZULU wind farm cannot be developed until a planned large power transmission line is completed from Minneapolis to Buffalo Ridge.
CHI Energy Wind Farms — In December 2007, the Company completed acquiring the developer’s stake in a group of 16 separate small wind farms which are managed and maintained collectively and contain 46 modern wind turbines having a total rated power capacity of 30.36 megawatts. Virtually all of these CHI Energy wind farms are located on Buffalo Ridge in Lincoln County MN, and for the past several years they have generated electricity at an average annual rate of 93,000,000 kilowatt hours (kwh). The Company will receive only minimal revenues from the CHI Energy wind farms until 2010 when its interest in revenues will convert to 30-50% thereafter and then provide substantial net cash flow for many years.
Recent Acquisition of Boreal Assets — In February 2008, the Company acquired a substantial pipeline of wind energy projects from Boreal Energy, Inc., consisting of three wind farm projects under development and a “pipeline” of approximately 1,200 megawatts (MW) of various projects in various stages of design and development. We also agreed to acquire the assets, including, but not limited to, wind turbines, substations, land and buildings, which Boreal was in the process of negotiating in exchange for its’ 3,761,000 shares of Navitas Energy, Inc. common stock, if we are satisfied that the value of these assets is at least $11,000,000, the carrying value of the Navitas stock on Boreal’s books. In the alternative, provided that Boreal can deliver us clear title to such Navitas common stock the Company could acquire the Navitas stock itself. A complete description of our acquisition of Boreal assets is included in Item 2 of Part I of this document.
Entry Into Wind Energy Business
In early 2007, we entered the wind power industry as our sole operational business and incident thereto also changed our name from Dotronix, Inc. to Wind Energy America, Inc. In February 2007, we completed our first transaction in the wind energy business which was our purchase of a $200,000 equity interest in Averill Wind, LLC (Averill), a 10-megawatt wind farm being developed in Minnesota near Fargo Moorhead.
The Company holds various ownership interests in wind farms in Minnesota, and intends to acquire or develop additional wind power assets located in certain Midwestern and upper Great Plains regions of the USA. These regions are particularly suitable for generation of electricity from wind power since they feature sparsely populated and extensive flat prairies having high and consistent wind speeds. Moreover, farmers and ranchers and other rural citizens in our targeted regions welcome the substantial and profitable additional “crop” of wind farming along with the related and newly created “green collar” permanent jobs.
The primary strategic goal of the Company is to build and manage efficiently a large and diversified portfolio of profitable wind energy assets. The Company’s wind power assets are located primarily in southwestern Minnesota in Lincoln County, and they consist of the developer’s stake in various wind farms on Buffalo Ridge, a geologic formation that cuts across much of Lincoln County and provides a leading wind regime for efficient and renewable energy from wind power turbines. Buffalo Ridge is well-known in the alternative energy industry for its high quality wind energy resources.
The producing wind farms in which the Company owns its interests contain 79 modern wind turbines having a total rated capacity of 53.5 megawatts (53,500 kilowatts), and they collectively generate approximately 160,000,000 kilowatt hours (kWh) of electricity annually. Acquisition by the Company of the developer’s stake in this core holding of premium Buffalo Ridge wind power assets has accomplished a major step toward our strategic goal of building a large portfolio of diversified wind power assets.
Recent Development — Purchase of Boreal Energy Assets
In February 2008, the Company acquired wind power assets owned by Boreal Energy, Inc. (“Boreal”, a Minnesota corporation based in suburban St. Paul, Minnesota. These assets were purchased pursuant to an agreement entered into in December 2007, which provided for the purchase of two separate Boreal asset categories. One category consists of development and
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design “pipeline” projects consisting of approximately 1,200 megawatts (MW) located primarily in Midwestern and upper Great Plains states, for which we issued and delivered 18.5 Million shares of our common stock to Boreal. The second category of Boreal assets consists of 3,761,000 shares of common stock, a 15% equity interest, in Navitas Energy Inc., a Minneapolis-based wind farm developer which is majority-owned by a large Spanish wind turbine manufacturer. As of the closing date of the subject purchase, Boreal was in continuing negotiation with Navitas for the sale of the stock to Navitas in exchange for wind turbines and other wind farm assets and projects. We have agreed to pay 10 Million shares of our common stock for the assets received by Boreal from this stock sale, subject to our determination that these assets have a fair value of at least $11,000,000, which was the carrying value of the Navitas stock on Boreal’s books. In the alternative, if Boreal can obtain a valid, free and clear transfer of title to us of the Navitas shares we could accept them as full consideration. We have issued the 10 Million shares of our common stock into an escrow account explained later in this document, and these shares will not be delivered to Boreal and become outstanding unless the escrow terms are satisfied.
Boreal was incorporated in 2004 to identify and develop or acquire multiple wind farms to be owned and operated by Boreal. The primary focus of Boreal has been directed toward wind power projects located in leading on-shore wind regimes of North America. Over the past few years, Boreal has accumulated a substantial proprietary “pipeline” of specific projects in various design or development stages and located in the Midwestern and upper Great Plains states and in Ontario, Canada. The founders and management of Boreal had been involved actively in the wind power industry for the past 15 years, during which they had successfully designed and completed development of many wind farms with combined power capacity exceeding 300 megawatts. However, due to a lack of capital and legal issues Boreal had lost its employees and had no significant wind operating activities after the Summer of 2007.
After acquiring these wind energy project assets from Boreal, the Company has continued to be managed by officers and directors who had no prior affiliation with Boreal. One director has now been appointed by Boreal to the Company’s board pursuant to the purchase agreement.
Description of Assets
Boreal wind energy assets which have been acquired by the Company in this transaction include the following:
i) all ownership and development rights and interests of Boreal in and to wind farm projects in North America now under development or being assessed and designed for future development;
ii) any equipment and tools, turbine and transmission assets and any purchase or option rights thereto;
iii) all contracts or other rights related to current or future Boreal wind farm projects, including interconnection and power off-take rights, power purchase agreements, governmental permits and consents, and any other direct or indirect contract rights of Boreal related to current or proposed wind farm development;
iv) all wind power leases, options or easements held by Boreal; and
vi) all intellectual and other intangible property rights of Boreal related to wind farm development.
Voting Trust
Approximately 10,000,000 of the common shares of the Company issued to Boreal incident to this transaction are subject to a two-year voting trust whereby two persons will vote these shares incident to any matter being voted upon by shareholders, with one person being a current director of the Company and the other being a future director nominee of the Company designated by Boreal.
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The Company‘s Reasons for Purchasing Boreal Assets
In reaching its determination to acquire wind energy assets from Boreal, the Company’s Board of Directors considered a number of factors, including the following:
* Boreal’s current ongoing development assets will provide the Company with immediate access to firm projects already well into their development stages.
* Boreal’ s extensive proprietary pipeline of 1,200 megawatts of wind farm projects will provide the Company with many potential future development projects in leading wind regimes.
* The Company believes it will be able to attract and obtain substantial future capital from debt and/or equity financing due to the nature and quality of wind energy prospects in the Boreal pipeline.
* Future development of the Boreal pipeline projects will provide the Company with the opportunity to become a growing and recognized participant in the wind energy industry, thus improving the visibility and status of the Company as a publicly traded company.
Valuation of Boreal Assets
Our valuation of Boreal assets was based on a number of tangible and intangible factors including the book value of certain assets on Boreal’s audited balance sheet, the development status of certain wind farms now underway, the extensive Boreal pipeline of future prospects, recent industry transactions reflecting value creation payments for completed wind farms and early stage pipeline prospects, anticipated price/earnings ratios from comparisons to peer group public companies, and other considerations of the Board of Directors of the Company.
Although many of these valuation factors are very subjective in nature, the Company’s Board believes that its evaluation process has been sound and considered the standard factors used in our industry to evaluate wind energy assets.
The Company did not seek or obtain any independent appraisal of the Boreal assets being purchased in this transaction.
Escrow Agreement
Regarding the uncompleted Navitas stock portion of the acquisition of Boreal assets, the related 10 Million shares of our common stock have been delivered into an independent escrow account to only be delivered to Boreal when and if the Navitas common shares (or the substituted assets received by Boreal from the sale of the stock back to Navitas, satisfactory to the Company as to their value) have been validly transferred to us free and clear of any liens or encumbrances. The escrow agreement expires by its terms on April 30, 2008,with the option to extend the term of escrow until June 30, 2008. If the terms of the escrow cannot be satisfied by Boreal, the 10 million escrowed shares of our common stock will be returned to us.
Wind Energy Assets Owned by the Company
During 2007, the Company purchased a substantial core holding of wind energy assets from Northern Alternative Energy mc, consisting of the developer’s stake in various wind farms located on Buffalo Ridge in southwestern Minnesota. The geologic formation of Buffalo Ridge is well known in the wind power industry for its consistently high wind speeds, and accordingly is one of the best locations in the USA for generation of electricity through wind power. The Company believes its Buffalo Ridge wind farm interests provide it with key opportunities for future development and profitability.
The Company’s purchase of Buffalo Ridge wind assets included two transactions, the first including the developer’s stake in the two wind farms of Shaokatan Hills LLC and Lakota Ridge LLC, and the second transaction including the developer’s stake in 16 small wind farms collectively known as CHI Energy wind farms. All Buffalo Ridge wind farm interests owned by the Company are located in Lincoln County, which adjoins South Dakota.
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Shaokatan Hills/Lakota Ridge —The Shaokatan Hills wind farm has 18 modern wind turbines (Vestas 660 kw) on 1,000 acres having a total rated capacity of 11.88 megawatts, and the Lakota Ridge wind farm has 15 modern wind turbines (Micon 750 kw) on 640 acres having a total rated capacity of 11.25 megawatts. For the past several years, the 33 wind turbines on Shaokatan Hills/Lakota Ridge have generated electricity at an average annual rate of 68,300,000 kilowatt hours (kwh). Lakota Ridge is north of and adjoins Shaokatan Hills.
Chi Energy Wind Farms - This group of small wind farms consists of 16 separate wind farms which are managed and maintained collectively, and they contain a total of 46 modern wind turbines (Vestas 660 kw) having a total rated capacity of 30.36 megawatts. For the past several years, these Chi Energy wind farms have generated electricity at an average annual rate of 93,000,000 kilowatt hours (kwh). Chi Energy wind farms are located both in the north end of Lincoln County near Shaokatan Hills/Lakota Ridge and in the south end of Lincoln County near Lake Benton.
Our ownership interests of the developer’s stake in these Buffalo Ridge wind farms only amounts to a tiny interest with minimal revenues until 2010, when the Company’s ownership will increase dramatically to from 30% to 80% interests depending on the specific wind farms. When the developer’s stake in these wind farms converts to substantial percentage interests in 2010, the wind farms will then provide the Company with substantial net cash flow for many years.
Averill - Besides its Buffalo Ridge wind farm properties, the Company in 2007 also acquired a $200,000 equity interest in Averill Wind LLC, which is a 10 megawatt wind farm currently being developed in Minnesota near Fargo, North Dakota. As with Buffalo Ridge, the Averill site is located in a particularly favorable region of the country for wind power resources. The Company believes its Averill wind asset acquisition will provide a good and predictable future cash flow return on this investment.
The Company intends to continue acquiring additional wind farm assets, both on Buffalo Ridge and in other favorable wind regimes in the country. The Company believes that improved wind turbine technology, increasing worldwide energy demands, mandated renewable energy requirements of utilities, global warming concerns, and other factors offer the Company an outstanding opportunity to participate both responsibly and profitably in this fast-growing sector of the “green energy” marketplace.
WIND POWER OPPORTUNITY IN THE USA
Electric generating capacity of the USA wind power industry has increased significantly over the past few years. In 2006 alone, for example, generating electricity from wind power turbines increased almost 30%, and it is estimated that 2007 had a much larger increase of over 45% in new wind farm developments. The Company believes that these impressive growth levels of wind farm installations will continue for many future years. There is currently approximately 15,000 megawatts of installed wind power capacity in the USA.
Nonetheless, the proportion of electricity from wind power in the USA is still only approximately 1% of the country’s total electricity demands. The American Wind Energy Association (AWEA) has projected that the cumulative installed wind power capacity in the USA will exceed 25,000 megawatts by 2010. One megawatt of wind power capacity produces enough electricity during a typical year to satisfy the electricity needs of 250- 300 residences.
The USA has enormous wind power potential, far exceeding the established leading European wind regimes. In particular, the huge and sparsely populated flat plains areas in certain Midwestern and all Great Plains states provide virtually unlimited wind power resources. Accordingly, the Company has directed its strategic business plan toward wind power asset acquisition and development in these plains regions, which the Company believes have the best
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and most accessible wind regimes in the USA. Moreover, these targeted regions of the Company are located relatively near to the Company’s base of operations in the Minneapolis metropolitan area.
Factors contributing to and driving the rapid growth of wind farm installations in the USA include:
* The huge wind power potential in the USA has been only slightly exploited, especially in our targeted Great Plains region. Despite recent strong growth of wind farm development in the USA, actual penetration of the ample wind power potential is very small notwithstanding the vast areas of excellent and untapped wind regimes;
* The federal Production Tax Credit (PTC) provides significant credits for wind gener- ated electricity of $.02 per kilowatt hour (kWh) for ten years.
* Since the air driving wind turbines represents a free fuel, wind power provides utilities with a natural hedge to contend with the variable and volatile nature of fossil fuel costs.
* There exists a large and growing demand from utility companies to obtain power from renewable energy sources in order to satisfy their mandated requirements to add renewable energy production to their overall electricity production (Renewable Portfolio Standards), which wind energy is uniquely able to satisfy.
* Strong and growing public pressures are being exerted on legislative and executive politicians to promote and develop green renewable energy sources to combat global warming and other adverse environmental effects now caused by burning fossil fuels to generate electricity.
* Wind power constitutes an important element of our national policy to attain domestic energy independence by reducing the amount of imported fossil fuels by our nation.
Plan of Operation and Liquidity .
We intend to concentrate our acquisition and development of wind energy assets primarily toward the upper Great Plains and certain Midwestern regions of the USA, including Minnesota, Iowa, and the Dakotas. This region is particularly suitable for wind farms because it features large areas of flat and sparsely populated prairies having high and consistent wind speeds. Farmers, ranchers and citizens of rural towns in the Great Plains strongly welcome the additional profitable “crop” of farming wind from annual turbine rental payments, as well as the substantial construction and maintenance employment for local residents with some of these “green collar” jobs being permanent. Also significant, there is no NIIMBY (not-in-my-back-yard) factor to contend with in our targeted region such as is frequently encountered in more populated areas of the country.
Our primary focus for at least the next twelve months is to obtain substantial financing in order to complete development of wind farm projects now under development which were acquired from Boreal Energy Inc. We do not currently possess the substantial funding necessary to continue such development or make any additional acquisitions of wind energy assets, although we intend to obtain the needed funding through private or public placements of equity or debt securities. There is no assurance, however, that we can obtain any anticipated material funding through any source. If we cannot raise such planned funding, we will be unable to implement our business plan effectively to develop the significant wind energy assets we acquired from Boreal Energy. We currently only have enough working capital to support our management and
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