Submitted January 8, 1996; File Number 0-14452
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRELIMINARY PROXY STATEMENT
AMENDMENT NO. 3
Solicitation of Consent To the Sale of All
Partnership Assets, Distribution of the Proceeds to
Partners, and Termination of the Partnership
With Exhibits
THIS CONSENT IS SOLICITED BY THE GENERAL PARTNER OF THE FUND
Payment of Fee:
$125 per Exchange Act Rule 0-11(c)(1)(ii)
No offsetting fee has been previously paid
Registrant:
Far West Electric Energy Fund, L.P.
921 Executive Park Drive
Salt Lake City, Utah 84117
Tel (801) 268-4444
Fax (801) 266-5155
Correspondent:
Stanford Stoddard Smith
2921 Devon Drive
Bountiful, Utah 84010
Tel/Fax (801) 295-1444
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Solicitation Statement For Far West Electric Energy Fund, L.P.
CONSENT SOLICITATION
This Solicitation of Consent is dated _____, 1996
Voting on the Proposed Transaction will close _____, 1996
Table of Contents
Summary 3
Special Factors 12
The Proposed Transaction 14
The Fund 28
Federal Tax Consequences 37
Opinion of Financial Advisor 45
Exhibits 52
1. Purchase and Sale Agreement (previously submitted)
2. Tax Opinion of Robison Hill & Co. (previously submitted)
3. Fairness Opinion of Corporate Capital Consultants, Inc. (previously
submitted)
4. Form 10-QSB for quarter ending September 30, 1995 (previously submitted)
5. Reply Card (previously submitted)
6. Amended Form 10-KSB for December 31, 1995
7. Commitment Letter to U.S. Envirosystems, Inc. from Smith Management Company
(previously submitted)
8. Commitment Letter to U.S. Envirosystems, Inc. from Gaines Berland, Inc.
(previously submitted)
9. SB-1 appraisal of Ronald P. Baldwin (previously submitted)
10. SB-1 Forecast of Corporate Capital Consultants (previously submitted)
11. Letter to James Budge of SEC (previously submitted)
12. Unaudited condensed balance sheet of Far West Capital, Inc. (previously
submitted)
13. USE's Pro Forma Condensed Combined Statement of Operations for the year
ended December 31, 1995
14. Form 10-QSB for quarter ending March 31, 1996
SUMMARY
Far West Capital, Inc. ("FWC"), the general partner of the Far West Electric
Energy Fund, L.P., a Delaware limited partnership (the "Fund"), hereby solicits
from the limited partners of the Fund (the "Limited Partners") written consent
to-
* The sale, for $1,250,000, of substantially all assets of the Fund's (including
supplies, inventory, plant, equipment, receivables and property; tangible and
intangible, real and personal including without limitation permits, licenses,
policies, contracts, choses in action, records, reports, documents, computer
records, power sales agreements, leases, subleases, designs, operating records,
bank accounts, escrow accounts, funds, wells, rights to brine, and all other
rights which are used or useful or pertain to the ownership, operation and
maintenance of the SB-1 geothermal power plant-the "Assets");
* Distribution of the proceeds of sale to the Limited Partners (estimated to
be approximately $33 per limited partnership unit - a "Unit"); and
* Termination of the Fund (generally resulting in approximately $33 of taxable
gain per Unit).
These three steps are collectively referred to in this Consent Solicitation as
the "Proposed Transaction."
As it has reported to Limited Partners in periodic letters and reports, FWC
has been seeking a purchaser for the Assets since early 1993. It recommends
that the Limited Partners vote to approve the Proposed Transaction.
The following summary of certain information contained in this solicitation of
consent (the "Consent Solicitation") is not intended to be complete; it is
qualified in its entirety by the more detailed information contained elsewhere
in this Consent Solicitation and the Exhibits hereto. Limited Partners are urged
to read this Consent Solicitation and the Exhibits in their entirety.
FWC has fixed the close of business April 1, 1996, as the record date for
determining the Limited Partners entitled to vote on approval or disapproval
of the Proposed Transaction and for determining the Limited Partners entitled
to receive the final liquidating distribution.
FWC has set _____, 1996, as the date by which properly completed Reply Cards
(Exhibit 5 hereto) must be received from Limited Partners wishing to vote on
the Proposed Transaction.
(The "Special Factors" sub-section which previously appeared here has been
made a new section immediately following this "Summary" section.)
Cash Offer for Fund Assets
The Fund has received a cash offer to purchase the Fund's Assets for $1.25
million (plus assumption of liability to Westinghouse Credit Corporation in
the amount of $4,346,848) from U.S. Envirosystems, Inc., a Delaware corporation
("USE"), on the terms set forth in a draft Purchase and Sale Agreement (the
"Sales Agreement," appended as Exhibit 1). This agreement was executed by the
parties on December 31, 1995. On August 9, 1995, USE delivered to FWC a
non-refundable deposit of $50,000 as a show of serious intent to complete the
proposed transaction. Upon receipt of these funds, FWC initiated work on the
consent Solicitation, including contracting with legal, accounting, and
financial advisors.
In addition to purchasing the Steamboat 1 power plant ("SB-1"), the Fund's
only power plant, USE proposes to acquire for $275,000 the adjacent SB-1A
power plant ("SB-1A") from 1-A Enterprises, a Nevada general partnership
controlled by the principals of FWC. Collectively, these plants are referred
to as the "Power Plants."
Conditions of Sale
Performance of the Sales Agreement is subject to certain pre-conditions (the
"Conditions of Sale"):
* The Fund's Limited Partners must approve the Proposed Transaction; and
* USE must raise the capital necessary to fund the purchase of the Power Plants
through an offering of its shares; USE shares are publicly traded on the NASD
OTC Bulletin Board.
Purchase Transaction Steps
To facilitate purchase of the Assets, USE and FWC will create a Utah limited
liability company to be called Steamboat Envirosystems, L.L.C. ("SBE"), which
will be owned 50% by USE and 50% by FWC.
Under the terms of SBE's operating agreement, USE will receive on a
non-cumulative annual basis SBE's net earnings up to 18% (the "Preferred
Return") of the amount USE will seek in public and private offerings up to
$10 million (see "Proposed Transaction-Conditions of Sale"), to purchase the
Assets and pay off the balance of the Westinghouse loan. SBE's net earnings
in excess of this amount, if any, will be divided equally with FWC. Because
of the Preferred Return, FWC's officers believe it highly unlikely that FWC will
receive any income from SBE unless plant electical output can be wubstantially
increased, a very favorable new power sales agreement can be obtained, and/or
the royalty load substantially reduced, all of which appear very problematic.
The Westinghouse loan is described more fully in "Proposed Transaction-Purchase
of Debt"; the Preferred Return, in "Proposed Transaction-The Purchaser."
The formation of SBE was negotiated by the parties as a way for USE to retain
FWC's involvement with the Power Plants. FWC owns other geothermal resource
leases and power plants in the area, and can provide operating expertise,
assistance with obtaining power sales agreements, aid in community relations,
and a uniform approach to resource management in the area.
On August 9, 1995, USE paid to FWC a non-refundable deposit of $50,000 to
begin the consent solicitation process. This deposit will not be credited
toward the $1.25 million to be paid to the Fund.
The major steps of the transaction include the following:
* FWC will establish an escrow account at a Utah bank in which it will place
executed instruments conveying the Assets to SBE. This will occur if and when
the Limited Partners approve, and USE raises sufficient capital to complete,
the Proposed Transaction. FWC estimates that these events will occur within
30 days of the date of a favorable vote is received pursuant to this Consent
Solicitation.
* Within approximately 5 days after the account is opened, USE will deposit
$2.525 million into the escrow account, SBE will be formed and its operating
agreement signed, and the escrowed documents and moneys will be transferred
to SBE.
* Within approximately 5 days after the formation of SBE, it will transfer
$1.25 million to the Fund for purchase of the Assets and $.275 million to 1-A
for purchase of SB-1A and related assets. The remaining $1 million will be
retained by SBE for purchase of royalty interests in, and making improvements
of, the Power Plants.
* Within approximately 5 days after transfer of moneys to the Fund, the Fund
shall make a final cash distribution to Limited Partners of approximately $33
per Unit.
Tax Opinion
A tax opinion from Robison Hill & Co. Inc., Certified Public Accountants (the
"Tax Opinion"), addresses the significant tax issues presented by the Proposed
Transaction. It is summarized in the section entitled "Federal Tax Consequences"
and appended in full as Exhibit 2 to this Consent Solicitation.
In brief, the authors of this opinion believe that a typical Limited Partner
able to utilize the Business credit would, over the life of the Fund, have
received approximately the following (per unit of Fund ownership-a "Unit"):
* A tax benefit of $299 for the Business credit;
* Non-taxable cash distributions of $86;
* If the Proposed Transaction is approved and completed, the Limited Partner's
Form K-1 will report, in the year of closing, a cash distribution of
approximately $33 and ordinary taxable income of approximately $33. If the
Fund's Assets are lost in foreclosure, the tax liability will be approximately
the same, but there will be no cash distributions to Limited Partners.
Each Limited Partner's situation may vary; accordingly, partners are encouraged
to consult their own tax advisers.
Opinion of Financial Advisor
An opinion respecting the fairness of the Proposed Transaction (the "Fairness
Opinion") has been issued by the Fund's financial advisor, Corporate Capital
Consultants Inc. ("CCC"), and appended hereto as Exhibit 3.
An independent appraiser of business assets, CCC concludes that the Proposed
Transaction is fair to the Limited Partners from a financial point of view.
Vote Required to Approve the Proposed Transaction
Under sections 15.9 and 16.1 of the Fund's agreement of limited partnership
(the "Partnership Agreement"), the Proposed Transaction must be approved by a
majority of the Units casting votes, with a quorum of at least 1% of the Units
participating.
There are no arrangements relating to any security holder of the Fund which are
not identical to that relating to other security holders of the same class of
securities of the Fund.
The Proposed Transaction will not be completed unless a majority in interest
of Limited Partners participating by vote approve the Proposed Transaction.
No unaffiliated representative has been retained by the Fund to act solely in
behalf of the unaffiliated security holders.
Recommendation of FWC
FWC will vote its 530 Units, 5.14% of the 10,306 total Fund Units, in favor
of the Proposed Transaction, and urges Limited Partners to do likewise to
prevent loss of SB-1 in foreclosure.
All directors of the general partner favor the Proposed Transaction. No
executive officer, director, or affiliate of the Fund will receive any
compensation or distributions in connection with the Proposed Transaction or
tender of Units.
In December, 1996, the income of the Fund's sole electrical generating plant
, SB-1, will drop below the level necessary to cover operating
expenses, royalties, and debt service. On that date the rate
paid by Sierra Pacific Power Company ("Sierra"), the local utility which
purchases the electrical output of SB-1, declines from the current rate of
7.17 cents per kwh to short-term avoided cost rates (currently estimated to
be 2.8 cents or less per kwh) under the terms of the Fund's power sales
agreement with Sierra. The probable result of this decrease is that the Fund
will be unable to service the debt on SB-1, and the project will taken over
through foreclosure by Westinghouse Credit Corporation ("WCC"), the primary
project lender, resulting in financial loss and possible adverse tax
consequences to the limited partners.
Incentive to Limited Partners to Approve
As an incentive to the Limited Partners to vote in favor of the Proposed
Transaction, and contingent upon such approval, FWC will-
* Transfer to SBE all obligations owed by the Fund to FWC (as of December 31,
1995, approximately $2,276,000, consisting of $1,117,000 in cash advances,
$488,000 interest on those cash advances, and $671,000 owed for uncompensated
services provided by FWC); and
* Decline its 6.09% share of the final liquidating distribution, allocating
these moneys (an estimated $19,898) to other limited partners. (For the
calculation of FWC's interest, see "The Fund-Interest of FWC in the Fund.")
This combination of transfer of debt and declination of distribution, a total
of approximately $2,296,000, will make it possible for the Limited Partners to
receive approximately $33 in liquidating distributions if the Proposed
Transaction is consummated (see "The Proposed Transaction-Cash to be
Distributed)."
Neither FWC nor any affiliate has purchased Units since the commencement of
the Fund's second full fiscal year preceding the date of this Consent
Solicitation.
Interest of FWC and its Principals
FWC is subject to conflicts of interest in connection with the Proposed
Transaction because (i) it will own a 50% interest in SBE, the purchaser of
the Power Plants, and (ii) its principals will continue to own SB Geo, Inc.,
the operator of the Power Plants.
Because of the Preferred Return to USE under SBE's operating agreement, FWC's
officers and directors believe it is highly unlikely that FWC will receive any
income from SBE unless plant electrical output can be substantially increased,
a very favorable new power sales agreement can be obtained, and/or the
royalty load substantially reduced, any of which will be very difficult to
accomplish.
The SBG operating agreement will provide, among other things, that SBG will
operate the Power Plants at rates competitive with those charged by other
independent operators. FWC officers expect that SBG will be able to realize a
profit from these operations.
Cash to be Distributed
FWC estimates that if the Proposed Transaction is approved, the final
distribution will be approximately $326,730, or a total of approximately $33
per limited partnership Unit.
The exact amount to be distributed will depend in part upon (i) the payments
made to third-party creditors of the Fund at the time the business of the
Fund is wound up (currently $832,195), and (ii) the final amount of expenses
associated with this Consent Solicitation (estimated to be $91,075). See "The
Proposed Transaction -Cash to be Distributed."
Purchaser's Plans
USE is willing to enter the Sales Agreement despite the impending drop in the
power sales rate based on its belief that it can, within 2-5 years, terminate
the agreement with Sierra and locate another purchaser for the projects' power
at a rate higher than Sierra will pay.
Further, USE plans to improve SB-1's profitability by:
* Buying out the WCC loan (with a balance of approximately $4,346,848 as of
January 2, 1996) at a discount; and
* Spending approximately $1 million to make plant improvements and to buy out
royalty interests in SB-1 at a discount.
USE plans to take similar steps to improve the profitability of 1-A. The Fund
is unable to take such action because:
* The Fund lacks the resources to search for another purchaser and put together
any wheeling arrangements necessary to deliver the power to the purchaser.
* The Fund lacks the resources to cover SB-1 operating expenses
while the search is in progress.
* The Fund lacks the resources to buy out the Westinghouse loan at a discount,
and hence must carry the full debt-service burden. After the power sales rate
decline in December 1996, it is probable that the Fund will be unable to cover
any debt service, and SB-1 will be lost in foreclosure.
* The Fund lacks the resources to improve SB-1 or attempt to
buy out royalty interests in the revenues of SB-1 .
Unit Holdings of FWC
The table below sets forth the Unit holdings of FWC, general partner of the
Fund, the only holder of more than 5% of the Fund's Units.
Title of Class Name and address Amount and Percent of Class
of beneficial owner nature of
beneficial ownership
Units of limited FWC, 921 530 Units 5.14%
partnership Executive Park
interest Drive, Salt
Lake City, Utah 84117
No Units are held by individual FWC officers, directors, or shareholders. To
the best of FWC's knowledge, there are no arrangements which may result in a
change in control of the Fund. No Principals or affiliates of FWC, or any
pension or profit sharing plans of the foregoing, have any other interest in
the Fund. No transaction in Units has been effected during the past 3 years by
FWC or any affiliate or Principal.
Costs of Consent Solicitation
All costs associated with this Consent Solicitation will be borne by the Fund.
A cost breakdown is set forth in "The Proposed Transaction-Cash Distributions."
All expenses will be paid by the Fund; if the Proposed Transaction is completed,
these expenses will be paid from proceeds of the sale of SB-1 .
Management's Interest in Matters Voted On
FWC owns 6.09% of the total Fund interest (see "The Fund-Interest of FWC in
the Fund"). Messrs. Alan O. Melchior and Thomas A. Quinn, each owns 40% of
FWC, 37.5% of 1-A Enterprises (owner of SB-1A), and 37.5% of SB Geo, Inc.
(operator of SB-1 and SB-1A). Ronald E. Burch, president of FWC, owns 20% of
FWC and 15% of SBG.
Financial and Other Information
The Fund's annual report on Form 10-KSB for the period ended December 31, 1995
(containing audited financial statements) is appended hereto as Exhibit 6 and
incorporated herein by reference. Limited Partners may obtain additional copies
of any of these reports upon request.
Responding to this Consent Solicitation
It is important that you review this proposal carefully and vote either to
approve or disapprove the Proposed Transaction. Please use the stamped,
self-addressed postcard (the "Reply Card") contained in this package to
convey your vote to the Fund. To be counted, your vote must be postmarked no
later than _____, 1996.
The Reply Card must be dated and signed with the name or names appearing on
the original subscription agreement submitted to the Fund at the time of the
initial investment in the Fund. Consents may be revoked or changed by providing
written notice to FWC at 921 Executive Park Drive, Salt Lake City, Utah 84117,
on or before the date voting is closed.
Voting & Termination
Under the terms of the Fund's Limited Partnership Agreement, each Unit, the
only class of Fund security, will have one vote; a majority vote of the Units
voting will bind all Partners. Dissenting Partners have no right under Utah or
Delaware law to compel the Fund or FWC to refund their investment or purchase
their Units should the Proposed Transaction be approved.
The Fund's 10,306 outstanding Units are held by 1,103 investors. If a majority
of the votes cast favor the Proposed Transaction, the Fund shall proceed as
outlined in this Consent Solicitation. A copy of this Consent Solicitation
will be mailed to all Limited Partners.
Reply cards will be tallied by FWC's clerical staff on _____, 1996; no card
bearing a postmark later than _____, 1996, will be counted. No other persons
shall be engaged to make solicitations or recommendations to the Limited
Partners. No oral solicitation will be made by the Fund or any affiliate. The
minority shall be bound by vote of the majority of those voting (abstentions
will be counted as not participating).
The Fund's principals have directed preparation of the Fund's proxy statement
and Schedule 13e-3, and will, if the Proposed Transaction is approved by Limited
Partners, direct the completion of the Proposed Transaction as described in the
Consent Solicitation section entitled "The Proposed Transaction."
Limited Partners have no dissenter's rights of appraisal under Utah or
Delaware law, nor will any be accorded. If a security holder opposes the
Proposed Transaction, such holder may vote against it and seek to influence
others to do likewise. The Proposed Transaction does not involve the exchange
of any debt securities. FWC knows of no Units held by brokers.
Upon request of a Limited Partner, the Fund will provide a list of
names and addresses of all Limited Partners. The Fund knows of no legal
impediments to the Proposed Transaction, but understands that a court may
block a transaction it determines involves fraud, misrepresentation, breach
of duty, or violation of securities laws or regulations.
The Fund's agreement of limited partnership provides that a Limited Partner
may examine the Fund's records upon reasonable notice. No provision has been
made for any Limited Partner to order an appraisal or obtain counsel at the
expense of the Fund or an affiliate.
If a majority of votes approves the Proposed Transaction, FWC will proceed to
sell the Fund's Assets as described in this Consent Solicitation. All Unit
holders (except FWC), regardless of how they voted, will be treated alike for
cash distribution and all other purposes. If less than a majority approves the
Proposed Transaction, FWC will terminate its arrangement with USE and seek
another purchaser. FWC doubts that another purchaser willing to offer terms
as favorable as USE can be found.
If Limited Partners approve the sale, but USE fails to raise the necessary
capital or the Proposed Transaction is not completed for any other reason,
FWC will seek another purchaser for the Assets. If one is found, the Fund
will again seek consent from Limited Partners.
If the Proposed Transaction is approved, certificates evidencing ownership of
Units will become void at the time the final cash distributions are mailed to
Limited Partners of record as of April 1, 1996. This mailing shall occur with
15 days of the Fund's receipt of the purchase price from SBE. Limited Partners
will not be required to surrender Unit certificates to the Fund.
Please act promptly. Return the enclosed, stamped postcard after checking the
appropriate box to indicate your approval or disapproval of the Proposed
Transaction, dating the consent form, and signing your name.
SPECIAL FACTORS
The purpose of the Proposed Transaction is to sell the Fund's Assets before
they are lost in foreclosure by the project lender. In December, 1996, the
income of the Fund's sole electrical generating plant, SB-1 will drop below
the level necessary to cover operating expenses, royalties, and debt service.
On that date the rate paid by Sierra Pacific Power Company ("Sierra"), the
local utility which purchases the electrical output of SB-1, declines from
the current rate of 7.17 cents per kwh to short-term avoided cost rates
(currently estimated to be 2.8 cents or less per kwh) under the terms of the
Fund's power sales agreement with Sierra.
The probable result of this decrease is that the Fund will be unable to
service the debt on SB-1, and the project will be taken over through
foreclosure by Westinghouse Credit Corporation ("WCC"), the primary project
lender, resulting in financial loss and possible adverse tax consequences to
the Limited Partners.
The Fund has been seeking a purchaser for SB-1 for the past 3 years,
believing that a financially capable purchaser may succeed in locating an
alternative purchaser for SB-1's electricity, improving plant equipment,
purchasing plant indebtedness, and buying-out overriding royalty interests in
the plant's production, steps the Fund lacks the resources to pursue. (See
"The Proposed Transaction-Prior Offers".) This is the only alternative measures
deemed practical, and explored by the Fund.
In 1993, the Fund received two insubstantial offers to exchange the Power
Plant solely for non-trading stock in small start-up companies. These offers
were rejected because the firms lacked any significant assets, there was no
market for the stock, and such transactions would have created taxable income
for the Limited Partners without providing cash distributions to pay the amount
of tax due.
On December 31, 1995, FWC was able to reach agreement with U.S. Envirosystems,
Inc. ("USE") for the sale of the Fund's Assets. The Proposed Transaction, which
this Consent Solicitation describes in detail, is being undertaken at this time
to give USE as much time as possible to prevent foreclosure on SB-1 and to
maximize the return to the Limited Partners.
The amount of consideration to be paid to the Fund was determined by USE after
discussions with FWC and conducting a full examination of the Fund and SB-1.
The structure of purchase is described in "The Proposed Transaction-Steps of
the Sales Transaction."
In addition, to purchasing SB-1, USE proposes to acquire for $275,000 the
adjacent SB-1A power plant ("SB-1A") from 1-A Enterprises, a Nevada general
partnership controlled by the principals of FWC. Collectively, SB-1 and SB-1A
are referred to as the "Power Plants."
The Fund has received an opinion from an outside financial advisor to the
effect that the Proposed Transaction is fair to the Limited Partners from a
financial point of view. Corporate Capital Consultants, Inc. ("CCC") is a New
York City-based investment banking firm organized in 1974 which specializes
in providing corporate valuations, often in conjunction with pending purchase
offers. It has issued many "fairness opinions" to public companies and others.
FWC engaged CCC to provide an opinion respecting the fairness of the Proposed
Transaction-(See "Opinion of Financial Advisor" which is provided to Limited
Partners as Exhibit 3 hereto). The method of selection and role of this firm
is described in "Opinion of Financial Advisor."
This firm was recommended to the issuer by Mr. Theodore Rosen, Chairman of
the Board of U.S. Envirosystems, Inc. There is no material relationship
between CCC and the issuer or its affiliates. CCC did not take part in the
discussions between FWC and USE or otherwise make any recommendations.
The effects of the Proposed Transaction upon FWC and the Fund's unaffiliated
security holders (the Limited Partners), and the potential benefits and
detriments of the Proposed Transaction, are described in "The Proposed
Transaction"; tax effects are discussed in "Federal Tax Consequences."
In brief, if the Proposed Transaction is completed, the Fund will sell its
Assets and terminate, and the Limited Partners will receive a final
liquidating distribution of approximately $33 per Unit. The financial
position of FWC will be improved in that it (i) will no longer advance cash
and services to the Fund (see "The Fund-Moneys Owed to FWC"), and (ii) it will
own a 50% interest in the purchaser of the Power Plants, with a subordinated
interest in Power Plant earnings (see "The Proposed Transaction-The Purchaser").
The Proposed Transaction will not be completed unless a majority in interest
of Limited Partners participating by vote approve the Proposed Transaction.
No unaffiliated representative has been retained by the issuer to act solely
in behalf of the unaffiliated security holders.
All directors of the general partner favor the Proposed Transaction. Of the
FWC directors, only Messrs. Bo, Beck, and Francis are not employed by FWC;
they are employed by FWC Properties, Inc., an affiliate of FWC.
THE PROPOSED TRANSACTION
FWC proposes that the Fund sell its Assets, distribute the proceeds of sale
to Limited Partners, and terminate the Fund. As a result of the dissolution,
the Fund's registration pursuant to the Securities Exchange Act of 1934 and
its obligation to file reports thereunder will terminate.
The Fund has received a cash offer to purchase substantially all the Assets
of the Fund by U.S. Envirosystems, Inc. ("USE") on the terms and conditions
set forth in the Sales Agreement. This agreement was executed by the parties
on December 31, 1995.
Reasons for the Proposed Transaction
FWC believes the Fund should complete the Proposed Transaction for the
following reasons:
* In December, 1996, the income of the Fund's sole electrical generating plant,
SB-1, will drop below the level necessary to cover operating expenses,
royalties, and debt service, probably resulting in foreclosure by the project
lender with associated financial loss and possible adverse tax consequences to
the limited partners. If, however, the Proposed Transaction is completed,
Limited Partners will receive approximately $33 per Unit. FWC's officers and
directors believe that it is highly unlikely that the Fund will receive a
comparable or more favorable offer to purchase SB-1.
* FWC is no longer willing (nor will it be indefinitely able) to subsidize
Fund operations. At present, the Fund owes FWC more than $2 million for
unpaid services and cash advances to cover operating expenses. As described
below, FWC will waive payment for these services and repayment of these
advances as an incentive for Limited Partners to approve the Proposed
Transaction.
Prior Offers
In 1993, the Fund was approached by two companies which offered to purchase SB-1
solely for stock in these companies. These approaches were rejected by
FWC before any formal negotiations began because (i) the firms were start-up
companies with no significant assets or public market for their stock, (ii)
initial public offerings with no guarantee of success would have been required
to provide cash for plant operations, (iii) and such transactions may
have created taxable income for the Limited Partners without providing cash
distributions to pay the tax.
The contacts with USE described below represent the only significant contacts,
arrangements, or understandings respecting sale of Fund Assets since the Fund
was organized.
Negotiations with Purchaser
FWC first became acquainted with USE during early 1994. FWC and an
unaffiliated third party, Suma Corporation, had purchased a 17 mw gas-powered
power plant in Lehi, Utah out of a Utah bankruptcy court proceeding in April,
1993. They formed Lehi Independent Power Associates, L.C. ("LIPA"), to own and
operate the plant. Mr. Carl Clark, a person not affiliated with USE or FWC,
introduced USE to FWC, and USE subsequently purchased a 50% interest in LIPA;
FWC and Suma Corporation currently own 25% each.
In subsequent conversations with USE principals, FWC became aware that USE
wished to acquire additional power plants, and suggested that USE consider
SB-1 and SB-1A. A series of conversations respecting the Power Plants followed
during 1994 and early 1995. USE principals Theodore Rosen (Chairman of the
Board) and Richard Nelson (President) visited the plant site in the Spring of
1995.
On July 26, 1995, FWC officers Melchior and Quinn met with Messrs. Rosen and
Nelson in Chicago to negotiate terms for the possible sale of the SB-1 and
SB-1A. A preliminary understanding was reached on that date which culminated
in a letter of intent signed by the parties on August 2, 1995; and a Purchase
and Sale Agreement entered into as of December 31, 1995.
FWC determined to recommend limited partner acceptance of the USE offer because
FWC did not and does not believe it can obtain another comparable or more
favorable offer.
Fairness Determination
FWC, each of its officers and directors (see "The Fund-Management"), and the
Fund, believes the Proposed Transaction is fair to the Limited Partners for
the following reasons:
* In December, 1996, the income of the Fund's sole electrical generating plant,
SB-1, will drop below the level necessary to cover operating expenses,
royalties, and debt service, probably resulting in foreclosure by the project
lender with associated financial loss and possible adverse tax consequences to
the limited partners.
* The Fund has received an opinion from Corporate Capital Consultants, Inc.,
stating that the Proposed Transaction is fair from a financial point of view.
Messrs. Burch, Quinn, and Melchior concur in the CCC analyses.
* It is highly unlikely that the Fund will receive a comparable or more
favorable offer to purchase SB-1. FWC has been attempting to locate a purchaser
since 1993 and has found that the market for SB-1 is extremely limited given
the imminent drop in power sales rates and the limited number of potential
buyers with knowledge of or interest in geothermal power plants.
* If the Proposed Transaction is completed, Limited Partners will receive
approximately $33 per Unit. If SB-1 is not sold before December, 1996, there
will be no cash distribution.
These four factors are stated in the order of relative weight given to them
by FWC, with such weight allocated among them 90%, 5%, 3%, and 2% respectively.
SB-1 was appraised by Ronald P. Baldwin on September 20, 1993
(see Exhibit 9 appended hereto). At the time of this appraisal, the contract
price for the sale of power to Sierra had just over three years to run. At a
price of 7.17 cents per kwh, the plant was covering its mortgage payment
obligation by accruing and deferring substantial amounts of other interest and
obligations to the general partner. The Baldwin appraisal concluded that the
plant's gross value of $5,000,000 was offset by $5,000,000 in debt, resulting
in a net value of zero.
Because SB-1 is facing a substantial reduction in its revenue
generating capability, other potential valuation factors, such as market
prices, book value, going concern value, liquidation value, and comparable
transactions, were not deemed significant by FWC or its officers and directors.
At the present time, with the power sales rate scheduled to drop more than 60%
in December of 1996, SB-1 is worth less than at the time of the Baldwin
appraisal. FWC believes that SB-1 has value only to a buyer
knowledgeable in the alternative energy business with resources to buy out
project debt and royalty obligations, make plant improvements, and carry the
project (for years if necessary), while seeking another purchaser for the
project's electricity and a way to deliver the power to such purchaser. USE
is the only such buyer FWC has been able to locate in more than 3 years of
searching.
Overview of the Proposed Transaction
* The sale of substantially all of the Fund's Assets for $1,250,000;
* Distribution of the proceeds of sale to the Limited Partners (estimated to
be approximately $33 per limited partnership unit - a "Unit"); and
* Termination of the Fund (generally resulting in approximately $33 of taxable
gain per Unit).
If the Proposed Transaction is approved, funded, and completed, SB-1
will be sold, the Fund terminated, and a final liquidating cash distribution
will be made to Limited Partners. From an accounting standpoint, the Proposed
Transaction will be treated as a sale of assets.
The Fund has not provided pro forma data disclosing the effect of the Proposed
Transaction; if the Proposed Transaction is completed, all the Fund's Assets
will be sold, the proceeds will be distributed to Limited Partners, and the
Fund will be terminated.
Limited Partners have no dissenter's rights of appraisal under Utah or
Delaware law, nor will any be accorded. If a security holder opposes the
Proposed Transaction, such holder may vote against it and seek to influence
others to do likewise. Upon request of a Limited Partner, the Fund will
provide a list of names and addresses of all Limited Partners.
The Fund's agreement of limited partnership provides that a Limited Partner
may examine the Fund's records upon reasonable notice. No provision has been
made for any Limited Partner to order an appraisal or obtain counsel at the
expense of the Fund or an affiliate.
The structure of the Proposed Transaction was determined by negotiations
between U.S. Envirosystems, Inc. and FWC. The Proposed Transaction is being
undertaken at this time to give the purchaser of the Fund's Assets as much
time as possible to complete the transaction before SB-1's power sales rate
drops in December, 1996, and to maximize the return to the Limited Partners.
The information below summarizes certain portions of the Sales Agreement which
FWC believes to be significant; reference must be made to the complete copy of
the Sales Agreement appended to this Consent Solicitation as Exhibit 1.
The Purchaser
Under the terms of the Sales Agreement, USE and FWC will form Steamboat
Envirosystems, L.C., a Utah limited liability company ("SBE") to acquire and
operate the Power Plants. Although USE will provide all funds for the purchase
of the Power Plants, the actual purchase of the Power Plants will be made by
SBE.
Under the terms of SBE's operating agreement, USE will receive on a
non-cumulative annual basis the first SBE net earnings of up to 18% of the
amount USE raises in its public and private offerings to purchase the Power
Plants (not to exceed $10 million); earnings above this amount, if any, will
be divided equally with FWC.
As a condition of its purchase, USE required, and FWC agreed, that this
Preferred Return will be based on USE's total capital raised, up to $10
million, even though less than all of this amount may be spent to purchase
the Power Plants, pay off the Westinghouse loan, make project improvements,
and buy out royalty interests in the project. USE expects that a portion of
moneys raised will be retained by USE for working capital. Such retained
moneys, if any, will not affect the purchase price to be paid for SB-1
or the final, liquidating cash distribution to Limited Partners.
Because of the Preferred Return to USE under SBE's operating agreement,
it is highly unlikely that FWC will receive any income from SBE unless plant
electrical output can be substantially increased, a very favorable new power
sales agreement can be obtained, and/or the royalty load substantially reduced,
all of which appear very problematic to FWC's officers or directors.
The formation of SBE, in which FWC would have an interest, was required by
USE as a way of retaining FWC involvement with the Power Plants. FWC owns
other geothermal resource leases and power plants in the area, and can
provide operating expertise, assistance with obtaining power sales agreements,
community relations aid, and a uniform approach to resource management in the
area.
USE will contribute to SBE the following:
* $1.25 million to purchase SB-1 and related assets;
* $.275 million to purchase SB-1A and related assets;
* $1 million to fund improvements in the Power Plants and the purchase, at a
discount, of royalty interests held by third parties in the Power Plants
(these funds will be used as a reserve for operations if the royalty interests
are not purchased); and
* Purchase and cancellation of the Westinghouse loan (the "Loan") on SB-1,
receiving from the Fund the $1,016,774 reserve for debt service. (If the Loan
cannot be purchased for an acceptable price, USE shall make all Loan payments
out of USE's share of SBE's earnings).
FWC will contribute to SBE transfer of its loans and deferred fees incurred
with respect to the Power Plants, and all its interest in the Fund. As of
December 31, 1995, The Fund owed FWC approximately $2,276,000, consisting of
$1,117,000 in cash advances, $488,000 interest on those cash advances, and
$671,000 owed for uncompensated services provided by FWC. 1A owed FWC in excess
of $950,000, consisting of construction loans with an approximate principal
balance of $632,000, cash advances of approximately $88,000, and interest on the
foregoing.
If the Proposed Transaction is completed, FWC will lose its interest in the
Fund (as a holder of both a 1% general partner's interest and 530 Units), will
no longer bear the burden of providing administrative services for the Fund,
and will in effect exchange the $2,276,000 owed to it by the Fund for an
interest in SBE.
The financial position of FWC will be improved in that it (i) will no longer
advance cash and services to the Fund (see "The Fund-Moneys Owed to FWC"),
and (ii) it will own a 50% interest in the purchaser of the Power Plants,
with a subordinated interest in Power Plant earnings (see "The Proposed
Transaction-The Purchaser").
Parties to the Sales Agreement
Listed below are the parties to the Sales Agreement, together with a brief
description of each.
Far West Electric Energy Fund, L.P. (the "Fund") is a Delaware limited
partnership with its principal place of business at 921 Executive Park Drive,
Suite B, Salt Lake City, Utah 84117 (see "The Fund"). The Fund is publicly
held by approximately 1,100 Unit holders; Fund Units are not publicly traded.
The Fund is the owner of SB-1 and related assets, and owns a royalty interest
in SB-1A.
Far West Capital, Inc. ("FWC") is a privately held Utah corporation with its
principal place of business at 921 Executive Park Drive, Suite B, Salt Lake
City, Utah 84117. It is the general partner of the Fund. Its shareholders are
Alan O. Melchior, Thomas A. Quinn, and Ronald E. Burch, who are also the major
stockholders in SB Geo, Inc., and partners in 1-A Enterprises, described below.
U.S. Envirosystems, Inc. ("USE"), is a Delaware corporation engaging in the
business of developing, owning and operating co-generation and independent
power facilities in the United States and overseas. Its offices are located
at 515 North Flagler Drive, Suite 202, West Palm Beach, Florida 33401. Its
stock is publicly traded on the NASDAQ OTC Bulletin Board under the symbol
"USE ."
Steamboat Envirosystems, L.C. ("SBE"), will be a Utah limited liability
company, qualified to do business in Nevada, with its principal place of
business located at 921 Executive Park Drive, Suite B, Salt Lake City, UT
84117. SBE will be formed by USE and FWC to purchase the Fund's Assets.
1-A Enterprises ("1-A") is a Nevada general partnership which owns a
geothermal power plant commonly referred to as SB-1A which is located
adjacent to the SB-1 power plant. The SB-1A power plant, put on line in
1989, utilizes the tail stream from the SB-1 plant to produce power. It has
a nominal capacity of approximately 1.6 kwh, and on average produces
approximately 14 million kwh per year.
Because SB-1A utilizes brine produced from SB-1 wells to produce power, SB-1A
pays a pumping charge and royalty to the Fund, which constitute part of the
Assets which SBE will purchase from the Fund. The Fund received $144,000 in
pumping charges and royalties from 1-A in 1995.
SB Geo, Inc. ("SBG") is a Utah corporation with its principal place of business
at 921 Executive Park Drive, Suite B, Salt Lake City, Utah 84117. A majority of
SBG is owned by principals of FWC. SBG currently operates SB-1 and SB-1A
without making a profit because the operating agreement provides that SBG
cannot make a profit. This provision is enforced by WCC, which under the terms
of the project loan agreement must approve all disbursements made from project
income. In 1995, the Fund accrued obligations to SBG of $419,200 for fixed
operations and maintenance expenses and $158,872 for variable expenses.
If the Proposed Transaction is consummated, SBE and SBG will execute an
operating agreement pursuant to which SBG will operate the SB-1 and SB-1A
geothermal power plants for SBE at rates competitive with rates charged by
other independent power plant operators. Under this arrangement, it is
probable that SBG may realize a profit on its operation of the plants.
Purchase of Assets
Under the Sales Agreement, SBE proposes to purchase the Power Plants and all
related assets.
SB-1
The Fund owns a geothermal power plant located within the Steamboat Springs
Known Geothermal Resource Area located roughly 10 miles due south of downtown
Reno, Nevada near the intersection of U.S. 395 and the Mount Rose Highway.
This SB-1 plant has a nominal net capacity of approximately 4 MW and produces
on the average approximately 37.8 million kwh per year.
SB-1 sells its output under a twenty year power purchase agreement with Sierra
Pacific Power Company ("Sierra"), the local public utility. That power purchase
agreement provides in part that SB-1 will be paid 7.17 cents per kwh for the
first ten years of commercial operation and short-term avoided cost for the
second ten years of operation.
When SB-1 began commercial operations in December of 1986, it was estimated
by the parties that short-term avoided cost at the beginning of the second
ten years of commercial operation would be in the 5-6 cents per kwh range.
At present, however, Sierra's short-term avoided cost is approximately 2.8
cents per kwh.
It is the opinion of FWC that the SB-1 plant cannot sell its output at 2.8
cents and generate sufficient revenues to pay operating expenses and royalties,
and service project debt.
As of January 2, 1996, there was a balance of $4,346,848 on the Westinghouse
loan on SB-1 and a $1,016,774 debt reserve for the loan held in escrow. In
addition the Fund owes FWC approximately $2,276,000.
SB-1A
SB-1A sells its output to Sierra under a thirty year power purchase agreement.
Pursuant to that agreement during the first ten years of commercial operation,
which began in December of 1988, SB-1A is paid a floating rate for energy and
capacity based on the movement of two different indices.
At present SB-1A is paid one rate for capacity and another for energy. These
rates vary at different times of the year. During 1995 the annual blended
rate paid for SB-1A's output has been 0.05433 cents per kwh. During the
balance of the power purchase agreement beginning December of 1998, SB-1A
will be paid for its output at Sierra's short-term avoided cost which
presently approximates 2.8 cents per kwh.
1-A does not believe that SB-1A can sell its output at 2.8 cents per kwh and
generate sufficient revenues to pay operating expenses, pumping charges,
royalties, and debt service.
As of October 1, 1995 there was a balance due on the Westinghouse loan on SB-1A
of $1,746,470 and a debt reserve held in escrow of $79,869. In addition 1-A
owes FWC in excess of $950,000 representing (i) the balance and accrued
interest due on a loan made in connection with the construction of the SB-1A
plant with a principal balance of approximately $632,000), (ii) cash advances
of approximately $88,000, and (iii) interest on the foregoing.
Other Assets
The assets to be sold also include, without limitation, supplies, inventory,
plant, equipment, receivables and property; tangible and intangible, real and
personal including without limitation permits, licenses, policies, contracts,
choses in action, records, reports, documents, computer records, power sales
agreements, leases, subleases, designs, operating records, bank accounts,
escrow accounts, funds, wells, rights to brine, and any other rights held by
the Fund or 1-A which are used or useful or pertain to the ownership, operation
and maintenance of the SB-1 and SB-1A geothermal power plants owned by the Fund
and 1-A.
Negotiations to Modify the Power Sales Agreements
FWC has initiated discussions with Sierra concerning renegotiating the power
purchase agreements applicable to the SB-1 and SB-1A power plants, in an attempt
to increase the rate to be paid for the power generated by those plants during
the period following the first ten years of commercial operations. At this point
FWC is not optimistic that attempts to renegotiate the power purchase agreement
will be successful.
It may be possible for the owner of the Power Plants to terminate the power
purchase agreement with Sierra and find another market for the output of SB-1
and SB-1A at a price that would exceed Sierra's short-term avoided cost rate,
but the possibility of that result is unknown.
Cash Deposit
On August 9, 1995, USE paid to FWC a non-refundable deposit of $50,000 to
begin the consent solicitation process. FWC required these moneys from USE as
a show of serious intent to complete the Proposed Transaction. Upon receipt
of these funds, FWC initiated work on the Consent Solicitation, including
contracting with legal, accounting, and financial advisors.
Conditions of Sale
Performance of the Sales Agreement is subject to certain conditions precedent
("Conditions of Sale"):
* USE raises approximately $10,000,000 in public and private securities
offerings; and
* A majority of the Fund's Limited Partnership interest which votes in
response to this Consent Solicitation approves the Proposed Transaction.
To raise the $10 million necessary to finance the Proposed Transaction, USE
has obtained a $3.5 million commitment from Enviro Partners, L.P. and Energy
Management Corporation (affiliates of Smith Management Company, a private
investment firm) for a private placement of USE's preferred stock), and an
underwriter's letter of intent from Gaines Berland, Inc. for a public offering
of $6.5 million of USE common stock and warrants.
Steps of the Sales Transaction
The Proposed Transaction consists of the following steps:
* The Fund will sell substantially all its Assets for $1,250,000. FWC will
establish an escrow account at a Utah bank in which it will place executed
instruments conveying to SBE the Power Plants and related assets. These assets
shall be free and clear of all claims or encumbrances except those identified
in the Sales Agreement.
* USE will deposit $2.525 million into the escrow account, SBE will be formed,
its operating agreement will be executed by USE and FWC, and the moneys and
instruments of conveyance will be released to SBE.
* SBE will (i) transfer $1.25 to the Fund for purchase of the Assets, (ii)
transfer $.275 million to 1-A for purchase of SB-1A and related assets, and
(iii) retain $1 million for plant improvements and possible buy-out of royalty
rights in the Power Plants.
* All Fund and 1-A receivables, payables, and liabilities shall be prorated as
of the closing date. SBE shall immediately assume responsibility for all direct
obligations and liabilities associated with the ownership and operation of the
SB-1 and SB-1A power plants including, without limitation, operating costs,
royalties, debt service (if any), back feed electricity, interconnect fees, etc.
* SBG will begin operating the SB-1 and SB-1A power plants at rates competitive
with those charged by independent operators.
* The Fund will pay its obligations to third parties, distribute the balance
of the purchase price to the Limited Partners (resulting in a cash distribution
of approximately $33 per Unit), and the Fund will be terminated (resulting in
taxable income of approximately $33 per Unit). Certificates evidencing
ownership of Units will become void; Limited Partners will not be required to
surrender them to the Fund.
Incentive Offered to Limited Partners
As an incentive to the Limited Partners to vote in favor of the Proposed
Transaction, and contingent upon such approval, FWC will:
* Transfer to SBE all obligations owed by the Fund to FWC (as of December 31,
1995, approximately $2,276,000, consisting of $1,117,000 in cash advances,
$488,000 interest on those cash advances, and $671,000 owed for uncompensated
services provided by FWC); and
* Decline its share of any final distribution. But for this declination, FWC
as a general partner and holder of Units would be entitled to receive 6.09%
of the cash to be distributed in the final distribution (see "The Fund-Interest
of FWC in the Fund"), representing approximately $19,898.
By re-directing these moneys from itself to the other Fund unit holders, FWC
believes it is doing everything in its power to maximize the cash distributions
to the Limited Partners.
Cash to be Distributed
The Fund will (i) deduct from the purchase price the debts owed by the Fund to
third parties and the costs of this Consent Solicitation, (ii) eliminate
payments due to FWC but for its waiver of moneys due it as described below,
then (iii) distribute the balance to the Limited Partners of the Fund.
As of February 1, 1996, the Fund's estimated third party debts (debts not
owed to FWC) and accounts payable were as follows:
Creditor Amount
First Security Bank $470,649
Royalties 34,226
Freedman, Levy & Kroll 172,519
Gardiner & Hintze 60,083
Coombs & Greely 4,484
Valley Foods 21,936
Robison Hill & Co. 27,876
SBG 40,422
Total $832,195
Estimated expenses of this Consent Solicitation are as follows:
Service Provider Estimated Cost
Corporate Capital Consultants, Inc. $43,000
Stanford Smith, attorney 30,000
Robison Hill & Co., accountants 13,000
Printing, postage and filing 5,075
Total $91,075
Deducting these costs ($832,195 in third party debts and $91,075 of consent
solicitation expenses) from the purchase price of $1.25 million leaves a
balance of $326,730. Dividing this number by the 9,776 Units outstanding
(10,306 total Units less the 530 Units held by FWC) yields final liquidating
cash distributions to Limited Partners of approximately $33 per Unit.
All expenses of this Consent Solicitation will be paid by the Fund; if the
Proposed Transaction is completed, expenses will be paid from the proceeds of
sale. No part of such funds or other consideration will be directly or
indirectly loaned in the ordinary course of business by a bank or otherwise
borrowed.
FWC will attempt to reduce the amounts paid to third-party creditors through
negotiations. If these efforts are successful, the final cash distribution to
Limited Partners may be increased.
Improvement of Power Plants and Purchase of Royalty Interests
A total of $1,000,000 of the $2,525,000 contributed to SBE by USE shall be
used to finance improvements in the Power Plants and attempt to buy at a
discount the gross royalties and net revenue royalties owned by GDA, Benson,
Helzel and Schwartzoff and Ormat, Inc. in the projects (see Exhibit 1). Any
amounts not utilized for those purposes shall be retained in the accounts of
SBE to be used in the operation and maintenance of the SB-1 and SB-1A power
plants.
Purchase of Debt
USE has negotiated to purchase the position of Westinghouse Credit Corporation,
the primary lender on both the SB-1 and SB-1A projects. USE expects to acquire
the total Westinghouse loan balance ($5,525,758 as of April 20, 1996) at a
discount.
At its election, USE may contribute that debt position to SBE as a part of its
capital contribution to SBE. If that is done, SBE may cancel the debt and all
related encumbrances on the SB-1 and SB-1A projects. If so contributed and
canceled, SBE shall immediately assign to USE all of its right, title and
interest in and to the funds held in the SB-1 and SB-1A loan reserves. These
reserves are required under the terms of the WCC loan so that the Power Plants
can continue debt service in periods of low project income. As of December 31,
1995, these reserves totaled $1,122,022.
The Fund borrowed $8 million from Westinghouse Credit Corporation on January
16, 1990, levelly amortized over 10 years, with payments due quarterly at
11.5% interest. The proceeds were used to refinance an initial project loan
made by Handlesbank and establish a reserve account for payment of debt
service obligations during periods of low project income.
Liabilities Not Assumed
Respecting Fund liabilities, the Agreement provides as follows:
* All operating expenses, royalties, taxes, and other Fund obligations shall
be prorated between the SBE, the Fund, and 1-A as of the closing date.
* The parties to the Sales Agreement are not assuming any of the
liabilities, contracts, commitments and other obligations of any other party
to the Sales Agreement.
* Any obligations or liabilities of any other party arising under the Sales
Agreement;
* Any obligation of any other party to the Sales Agreement for federal, state
or local tax liability (including interest and penalties) arising from the
operation of SB-1 or SB-1A by SBG, FWC, the Fund or 1-A up to the closing
date or arising out of the sale by the Fund or 1-A of their assets;
* Any obligation of the Fund or 1-A for any transfer, sales or other taxes,
fees or levies arising out of the sale of assets;
* Any obligation of the Fund or 1-A for expenses incurred in connection with
the sale of the assets.
* All real or personal property taxes attributable to any of the assets shall
be prorated as of the closing date; any transfer, sales, use or other tax,
including any real estate excise tax or transfer, filing or recording fees,
payable upon or with respect to the sale of the assets hereunder shall be
paid when due by SBE.
Warranties of the Fund
As required by the Sales Agreement, the Fund and 1-A warrant that to the best
of their knowledge:
* The assets will be duly and validly transferred to SBE and upon the
delivery to SBE of appropriate documents; SBE will have good and marketable
title to the assets, free and clear of all liens, claims, encumbrances and
other rights of third parties except for certain interests listed in Exhibit
B to the Sales Agreement.
* There are no pending or threatened claims that are or could be asserted
against the Fund which relate to any toxic or hazardous substance having been
improperly generated, handled, released (or threatened to be released),
treated, stored or disposed of, or otherwise deposited in, on, beneath or in
close proximity to the real property upon which the Power Plants are constructed
including, without limitation, the surface waters and subsurface waters thereof.
There are no underground tanks that are or have been located on, in or in close
proximity to the plant site. There are no pending or threatened environmental
claims that are or could be asserted against the Fund or 1-A or its
predecessors, which relate to the plant site.
* There is no suit, action or proceeding pending or threatened against the
Fund or 1-A, and there is no judgment, order, injunction, decree, regulation
or ruling of any court or governmental department, commission, agency,
instrumentality or arbitration outstanding against the Fund or 1-A having or
which, insofar as can be foreseen in the future, may have any adverse effect
on the operation and use of the Power Plants.
* There are no existing conditions at the Power Plants sites that could cause
those sites to become in violation of, or in noncompliance with, any
governmental rule or regulation.
* The Fund and 1-A have complied in all material respects with all of the
applicable rules, regulations and requirements of all governmental licenses,
permits and authorizations held by each entity in connection with the
ownership, development and operation of their respective power plants. All
information and disclosures made on any applications for licenses, permits or
authorizations were true when made. Neither the Fund nor 1-A has any knowledge
of any claimed violations from any governmental agency or any other person with
respect to the licenses, permits and authorizations held by them in connection
with the operation of the Power Plants and neither the Fund nor 1-A has any
knowledge that any condition exists which may give rise to a claim of
violation in the future.
* All of the permits and contracts associated with the ownership and operation
of the Power Plants are in good standing and in full force and effect, and there
has been no material adverse change in the status of the permits and contracts
which threatens, restricts or prohibits the operation of the power plants.
Warranties of USE
Under the terms of the Agreement, USE warrants as follows:
* USE is a corporation duly organized, validly existing and in good standing
under the laws of the state of Delaware and is authorized or licensed to do
business in all other jurisdictions in which the failure so to qualify would
have a material and adverse impact on its business or properties. USE has the
power and authority to carry on its business as now conducted and as proposed
to be conducted.
* All necessary actions on the part of USE necessary for the authorization,
execution, delivery and performance of the Sales Agreement and the consummation
of the transactions contemplated in the Sales Agreement will be taken prior to
closing. The Sales Agreement shall constitute the legal, valid and binding
obligation of USE, enforceable against USE in accordance with its terms.
Additional Documents of Transfer
Upon the reasonable request of SBE the parties shall execute, acknowledge,
and deliver all such further documents as may be required to convey and
transfer to and vest in SBE and protect its right, title and interest in all
of the assets purchased pursuant to the Sales Agreement, and as may be
otherwise appropriate to carry out the transactions contemplated by the Sales
Agreement.
At closing SBE shall receive a report from First American Title Company of
Reno indicating that there are no mortgages, claims, liens, charges,
encumbrances security interests, restrictions on use or transfer or other
defects of record with respect to the Power Plants other than as set forth in
Exhibit B to the Sales Agreement.
Other Provisions
The Sales Agreement contains several other provisions, among which are the
following:
* The Sales Agreement may not be amended or modified except in a writing
signed by each of the parties.
* Each party to the Sales Agreement will indemnify and hold harmless each
other party from any commission, fee or claim of any person, firm or
corporation employed or retained by, or claiming to be employed or retained
by, the indemnifying party to bring about, or to represent it in, the
transactions contemplated therein. The Proposed Transaction involves no other
indemnification arrangements.
* Each party will pay all expenses incurred by it and in connection with the
negotiation, execution and performance of the Sales Agreement, whether or not
the transactions contemplated therein are consummated, including the fees and
expenses of agents, representatives, accountants and counsel for each party.
* Time is of the essence of the Sales Agreement and each and every covenant,
condition and provision of the Sales Agreement.
* Any dispute arising under the Sales Agreement which the parties cannot
resolve amicably, will first be mediated and if that process does not resolve
the dispute, the dispute will be submitted to binding arbitration. Such
mediation and arbitration will take place in Salt Lake City, Utah in accordance
with the Rules of the American Arbitration Association and the prevailing party
shall be entitled to reasonable attorney's fees in addition to any other relief
to which that party may be entitled.
THE FUND
Organization
Far West Electric Energy Fund L.P., a Delaware limited partnership (the "Fund"),
was originally organized in September 1984 under the Uniform Limited Partnership
Act of Utah as Far West Hydroelectric Fund, Ltd. Its general partners were Far
West Capital, Inc. ("FWC"), Alan O. Melchoir, and Thomas A. Quinn.
The Fund's principal business office is located at 921 Executive Park Drive,
Suite B, Salt Lake City, Utah 84117. Its 10,306 Units are publicly held by
1,103 Unit holders as of March 15, 1996. The Units are not publicly traded.
During the past 3 years no public offering of the Units has been made, nor
has the Fund or any affiliate purchased any Units. There are no arrangements
relating to any security holder of the Fund which are not identical to that
relating to other security holders of the same class of securities of the fund.
The principal revenue-producing activities of the Fund commenced as of
December 31, 1985, following the completion in November 1985 of a public
offering of its Units of limited partnership interests registered under the
Securities Act of 1933.
On December 20, 1988, the Fund changed its name to Far West Electric Energy
Fund, L.P. and changed its domicile to Delaware. Messrs. Melchior and Quinn
resigned as individual general partners of the Fund effective January 1, 1995,
leaving FWC as the sole general partner.
Since 1986, the Fund has realized significant revenues from its business of
selling power generated by its plants to public utilities pursuant to the
Public Utility Regulatory Policies Act ("PURPA"), and in accordance with
regulations of the Federal Energy Regulatory Commission ("FERC") and of the
state public utility commissions of Idaho and Nevada.
No cash distributions to Limited Partners have been made during the past two
years. The sole income producing asset of the Fund, a thermal-hydroelectric
plant located near Reno, Nevada, (the "Power Plant") has been unable to
operate profitably.
The following table presents certain historical data respecting the Fund's
limited partnership Units as well as comparative equivalent data after giving
effect to the sale.
Per Unit Fund Data (in Dollars)
For the Year Ended December 31, 1995
Item Historical Pro Forma (1)
Book value per Unit 499 33
Cash Dividends 0 33
Income (loss) from
continuing operations 27 0
(1) Pro Forma information is presented as if the sale had taken place at the
beginning of the period for which information is presented.
No transactions outside the ordinary course of business have occurred between
the Fund and any affiliate thereof since the commencement of the Fund's second
full fiscal year preceding the date of this Schedule. No contacts, negotiations,
or transactions outside the ordinary course of business have occurred between
the Fund and any affiliate thereof since the commencement of the Fund's second
full fiscal year preceding the date of this Schedule. Except as described in
this Consent Solicitation, no material contracts or negotiations have occured
the commencement of the Fund's second full fiscal year preceding the date of
this Schedule between (i) the Fund or any of its affiliates, or (ii) between
the Fund (or any affiliate) and any person who is not affiliated with the Fund.
Management
The Fund has no employees, but relies on the staff of FWC and Messrs. Melchoir,
Quinn, and Burch, who are officers, directors, and shareholders of FWC and SBG.
The following individuals are the principal officers and directors, and sole
shareholders of FWC. Each is a full-time employee of FWC.
Ronald Burch, President and Director of FWC, age 44, joined the company in
July, 1991, having been previously employed by Calpine Corporation, a
California corporation, as a Business Development Manager. He was named
president of FWC on March 19, 1996.
Alan O. Melchior, Chief Financial Officer and Director of FWC, age 48. Mr.
Melchior was a founder of FWC, which was organized in May, 1983. He has been
its President from its inception until March 19, 1996. From December, 1981 to
May, 1983, he was an account executive with Westlake Securities, Inc., of
Angora Hills, California. Mr. Melchior received a B.S. in business from
Brigham Young University in 1971 and an M.B.A. degree from the University of
Utah in 1974.
Thomas A. Quinn, Vice President, General Counsel and Director of FWC, age 60.
Mr. Quinn was also a founder of FWC. Since February, 1985, Mr. Quinn has been
serving full-time in his capacities with FWC. From 1968 to February, 1985, he
was engaged in the private practice of law in Salt Lake City, Utah. He received
a B.S. degree in political science from Brigham Young University in 1959, and a
Juris Doctor, with honors, from George Washington University Law School in 1963.
Messrs. Melchior and Quinn each own 40% of FWC, 37.5% of 1-A Enterprises
(owner of SB-1A), and 37.5% of SB Geo, Inc. (operator of SB-1 and SB-1A).
Ronald E. Burch owns 20% of FWC and 15% of SBG. Messrs. Burch, Quinn, and
Melchior The remaining 10% interest in SBG is owned by Mr. Eric Call, SBG's
operations supervisor. An additional 4% of SBG ownership will be granted to
Mr. Bill Price, another supervisor, over a 4-year period, with the interest
of the other owners to be proportionately decreased.
The FWC board of directors consists of Messrs. Burch, Quinn, and Melchior, as
well as John S. Bo, Robert K. Mouritsen, Kenneth R. Beck, and Richard V.
Francis. The latter four persons have been employed as officers of a FWC
affiliate, FWC Properties, Inc., since its formation in 1994. Before their
employment by FWC Properties, Inc., Messrs. Bo, Mouritsen, and Francis were
employed by FWC. Before joining FWC properties, Inc. in 1994, Mr. Beck was
employed by Innkeepers, International, Inc. as CFO (1993) and Transcontinental
Properties, Inc. as executive vice president (1986-92).
None of these individuals, the Fund, or FWC, has been convicted of any
criminal action during the past 5 years. Details of legal proceedings are
reported the attached Form 10-KSB and the section herein entitled "The
Fund-Legal Proceedings." The Fund and FWC are entities organized in the
United States; FWC's officers and directors are United States Citizens.
The principal asset of the Fund is the single electric power generation plant
described below. The Fund previously owned a small hydroelectric plant near
Twin Falls, Idaho, known as the Crystal Springs Hydroelectric Plant which was
sold in March, 1995.
Interest of FWC in the Fund
Under the terms of the Fund's Limited Partnership Agreement, the total Fund
interest is allocated 1% to the general partner and 99% to the limited
partners. The limited partnership interest is divided into Units (10, 306
outstanding as of March 1, 1996). In addition to its 1% general partner's
interest in net income of the Fund, FWC owns 530 Fund Units (representing
5.14% of the Units). FWC thus owns a total of 6.09% of the partnership
interest calculated as follow: 1% of the total interest as general partner,
and 5.09% of the total interest as a limited partner (5.14% times 99%).
The Steamboat Springs Thermal-hydroelectric Plant
The Steamboat Springs Plant ("SB-1") is described in "The Proposed
Transaction-Purchase of Assets" above. The present operating agreement
provides for SB Geo, Inc. ("SBG"), an affiliate of FWC, to operate and
maintain the SB-1 plant for a period of 10 years. Under the terms of its
operating agreement, SBG operates the plant on a non-profit basis (salaries
and expenses only).
While this change of operators generally has brought increased power
production and lower operating costs, the Fund incurred increased cost
associated with equipment repairs that otherwise would have been covered by
the Ormat warranty.
In October 1991, the Fund assigned its 77% ownership interest in SBG, and 1-A
Enterprises assigned its 23% ownership in SBG, to Messrs. Melchior and Quinn,
who accepted the assignments and SBG's liabilities. These individuals later
assigned a 15% interest to Mr. Burch (officer of SBG and FWC), a 10% interest
to Mr. Call (SBG plant supervisor), and a 4% interest (full vesting in 1999)
to Mr. Price (SBG supervisor). FWC and SBG are thus controlled by Messrs.
Melchior, Quinn, and Burch.
According to an independent valuation firm, SBG had no value as of the
transfer date due to its obligations and its cost basis operating status.
Consequently, no gain or loss was recognized as a result of the assignment.
Fund Revenues from the 1-A Plant
The 1-A geothermal plant ("1-A") is located adjacent to the Steamboat Springs
Plant. 1-A consists of two separate modules, utilizing binary rankine cycle
turbines with a combined net output of 1.6 megawatts.
1-A was originally a Steamboat Springs expansion project, but was sold in 1988
to a general partnership entitled 1-A Enterprises which is owned 75% by Alan O.
Melchior and Thomas A. Quinn. Until their resignation effective January 1, 1995,
these gentlemen were individual general partners of the Fund; they are currently
officers and shareholders of FWC.
Use of the geothermal resource by 1-A has no adverse effect on the operation
or earnings of SB-1.
In a Second Amendment to Geothermal Resources Lease, provision was made to
accommodate 1-A on the SB-1 lease. A Geothermal Resources Sublease was
entered into granting rights and defining terms and conditions for the
siting and operation of 1-A and setting forth a method of calculating
royalty payments to be made to the Fund. This Sublease was Revised and
Restated on October 9, 1989.
As consideration for the sale of 1-A rights to 1-A Enterprises, the Fund
received a royalty interest in the net operating income of 1-A. Such royalties
equal 10% in 1988 through 1992, 15% in 1993 through 1998, 40% in 1999 through
2010, and 45% in 2011, and thereafter.
The Fund is paid an amount equivalent to the net profit that would be realized
by the Fund if 1-A were bearing 150 kwh of parasitic power load (power consumed
by the plant itself).
The net profit equivalent is calculated as follows: 1,200,000 kwh x the rate
at which power is sold to Sierra Pacific Power Company under the power
purchase agreement applicable to 1-A, less any royalties, note payments, or
net revenue interest or other expenses associated with or payable out of such
additional revenues assuming that 1-A produced an additional 1,200,000 kwh per
annum.
The total royalty payments and pumping charges paid by 1-A to the Fund were
$95,000 in 1989, $94,000 in 1990, $115,000 in 1991, $102,000 in 1992, $135,000
in 1993, $144,000 in 1994, and $144,000 in 1995.
As described in the Sales Agreement, SBE will also purchase the SB-1A power
plant, which currently pays pumping charges and royalties to the Fund, as
described above. These rights to royalties and pumping charges are included
in the assets being sold by the Fund, and were included in calculating the
value of the assets being sold.
Long-term Debt
In January 1990, the Fund received the proceeds of an $8,000,000 non-recourse
refinancing of SB-1 with Westinghouse Credit Corporation ("WCC"). The WCC loan,
which is secured by the Fund's assets including the resource lease, plant and
equipment and related contract rights, bears interest at 11.5% per annum and
must be repaid over ten years in 40 quarterly payments of principal and
interest.
On October 23, 1992 WCC gave the Fund a notice of default with regard to the
long-term financing of the project. The default occurred because-
* The Fund allowed the debt reserve account to fall below $1 million plus an
additional $70,000 annually for 7 years (together with interest) as required
by the terms of the loan; and
* The Ormat arbitration award exceeded $25,000, breaching a loan requirement.
Since that date the parties have met in negotiations on several occasions.
There has been no resolution of the default, but Westinghouse has taken no
action.
Simultaneously with its January 17, 1990 loan to the Fund, WCC made a $3
million non-recourse loan to 1-A on the same terms as the loan made to the
Fund, but secured by the assets associated with 1-A. Of this amount, $400,000
has been reloaned by 1-A Enterprises to the Fund on the same terms the Fund
received from WCC.
As of April 20, 1996, the outstanding principal balance of the
Westinghouse loan to the Fund is $4,094,165.
Fund Financial Position
Summary financial information for the Fund is presented in the following table:
Selected Fund Financial Data: 1991-1995 (in dollars)
Item 1996 (1st Q) 1995 1994 1993 1992 1991
Revenues 871,196 2,674,000 2,879,000 3,784,000 3,443,000 3,530,000
Net Income
(loss)
before
extraordinary
item 186,000 283,000 73,000 527,000 (1,141,000) (437,000)
- --Per Unit 18 27 7 51 (110) (42)
Distributions
to LPs 0 0 0 0 0 0
Total
Assets 13,060,000 13,370,000 15,320,000 15,677,000 16,090,000 17,469,000
Long-Term
Debt* 713,000 725,000 230,000 268,000 673,000 12,181,000
*The Westinghouse loan was reclassified from long-term to current debt in
1992 as a result of the Fund's default in that year.
Fund Operations
In 1987 the Steamboat Springs Plant produced electric power and generated
revenues at approximately 75% of expected operating levels. The production
shortfall was primarily due to shutdowns required to effect certain equipment
changes and modifications, and to operation of that plant at a lower level
than expected.
FWC determined that to achieve the expected capacity and the performance
requirements specified in the plant's purchase contract, the vendor/operator
would have to install additional equipment and make some modifications to
existing equipment. These corrections were made at no cost to the Fund
(although the down-time for modifications and testing impacted revenues). The
modifications and repairs were completed in the summer of 1988, and the Fund
was informed by Ormat that the plant was performing at a level that would
produce 42,000,000 kwh per year.
The Steamboat Springs Plant increased production of electric power from
32,797,000 kwh in 1987 to 36,142,000 kwh in 1988. Ormat, the vendor/operator
of the plant, installed additional equipment and made equipment modifications
which increased the plant's capacity and performance. These additions and
modifications were made at no additional cost to the Fund.
In 1989 the Steamboat Springs Plant produced $2,564,000 in gross revenues
which was $448,000 and $576,000 less than would have been received under the
Ormat projected 42,000,000 kwh and 43,800,000 kwh agreed to under the purchase
agreement per year respectively.
After reviewing plant performance with independent consultants, FWC concluded
that the deficiencies in plant performance were attributable to both poor
operating practices employed by Ormat, the former operator, and certain
problems in plant design. Consequently, FWC notified Ormat that the Fund
believed that Ormat was in default under both its Operating and Purchase
Agreements with the Fund. FWC replaced Ormat as plant operator on October 11,
1990, and sought redress for plant deficiencies under the arbitration clause
of the Purchase Agreement. Arbitration proceedings began October 29, 1990.
The arbitration panel denied the bulk of the Fund's claims and Ormat's
counter claims. The Fund was awarded $175,000 for well field problems, and
Ormat was awarded $254,000 for unpaid operating and warranty service, the
payment of which had been withheld pending the completion of the Arbitration.
The parties have all complied with the ruling of the Arbitrators, including
payment of all awards.
In 1990 the plant produced $2,765,000 in gross revenues which was an increase
over 1989's revenues, but about $247,000 and $376,000 less than would have been
received under the projected 42,000,000 and 43,800,000 kwh per year
respectively.
In 1991 the plant produced $2,791,000 in gross revenues which was $220,000
and $349,000 less than would have been received under the projected 42,000,000
and 43,800,000 kwh per year respectively.
In 1992 the plant produced about $2,360,000 in gross revenues which was
$651,400 and $780,460 less than would have been received under the projected
42,000,000 and 43,800,000 kwh per year respectively. The poor performance in
1992 was directly due to excessive equipment failures and breakdowns which
resulted in plant downtime.
In 1993 the plant produced $2,625,000 in gross revenues which was an increase
over 1992's revenues but about $386,391 and $515,451 less than would have
been received under the projected 42,000,000 and 43,800,000 kwh per year
respectively.
In 1994 the plant produced $2,564,000 in gross revenues, a decrease of
$446,906 from the prior year and $575,966 less than projected. In 1995
production was $2,580,000, an increase of $431,060 over the prior year, but
$560,120 less than projected.
The following table shows the annual production for SB-1; it does not include
SB-1A production:
SB-1 Output
Year Kwh's Produced Gross Revenues ($) % Change from Prior Year
1987 32,797,000 2,352,000
1988 36,142,000 2,591,000 +10.16%
1989 35,760,000 2,564,000 -1.04%
1990 38,563,000 2,765,000 +7.84%
1991 38,926,000 2,791,000 +.94%
1992 32,915,000 2,360,000 -15.44%
1993 36,611,000 2,625,000 +11.23%
1994 35,988,000 2,564,000 -2.32%
1995 35,988,000 2,580,000 +0.62%
Compensation of the General Partner
Pursuant to the Amended and Restated Agreement of Limited Partnership of Far
West Electric Energy Fund, L.P., as consideration for providing management
services to the Fund, FWC is entitled to the following compensation:
* A one percent (1%) interest in the profits, losses, and net income of the
Fund; and
* Units equal to five percent (5%) of the Units outstanding, to be increased
proportionately if and as additional Units are issued in the future (as a
result of purchase of Units, FWC currently owns 530 Units representing 5.14%
of the total Units);
* If and when Units are listed for public trading, or the Limited Partners have
received an amount equal to their capital contributions to the Fund (reduced by
the amount of tax credits allocated to the Limited Partners) together with a sum
equal to a cumulative annual return of 8%, FWC shall receive additional Units
equal to ten percent (10%) of the Units outstanding, and a total of 15% of
any new Units issued.
* Reasonable compensation in connection with the purchase of projects from
FWC or its affiliates, and provision of services to the Fund which are normally
provided by outside consultants, provided any such payments are competitive with
charges for similar projects or services. (No such payments were earned by or
made to FWC in fiscal 1995.)
* Reimbursement on a monthly basis for all direct expenses it incurs on behalf
of the Fund and for that portion of its administrative expenses allocable to
the Fund.
Moneys Owed To FWC
Because SB-1 output has been below anticipated levels, and because of higher
than anticipated operating expenses, FWC has deferred compensation due to it
from the Fund, and has advanced moneys to the Fund, as shown on the following
table:
Fund Obligations to FWC (in dollars)
Year of Operation Unpaid Fees Earned by FWC FWC Loans to the Fund
1988 -- --
1989 -- --
1990 42,000 16,000
1991 173,000 385,000
1992 170,000 350,000
1993 70,000 171,000
1994 118,000 83,000
1995 98,000 112,000
Total 671,000 1,117,000
The FWC loans to the Fund are unsecured, accrue interest at 13%, and are
payable upon demand.
Legal Proceedings
On January 29, 1993, a permanent injunction was entered by the United States
District Court, District of Utah, Central Division, enjoining the Fund, FWC,
and Principal Melchior (previously a general partner of the Fund until his
resignation effective January 1, 1995) from violating Sections 5(a), (b), and
(c), and Sections 17(a)(2) and (3), of the Securities Act of 1933. No monetary
awards were granted by the Court. Details of this proceeding were reported to
Unit holders in the December 31, 1992 Form 10-K.
An action filed against the Fund, FWC, Principal Melchior and others by the
Arizona Corporation Commission was settled on May 19, 1993, without any
expense to the Fund. The defendants were ordered to cease and desist from
offering or selling securities in Arizona absent appropriate registration or
an available exemption, or making any material misrepresentations or
omissions in connection with offers or sales of securities. FWC, Principal
Melchior, and others were ordered to pay $86,690 in restitution to Arizona
investors in Little Wood Hydroelectric Ltd. Details of this proceeding were
reported to Unit holders in the December 31, 1993 Form 10-K.
FEDERAL INCOME TAX CONSEQUENCES
This description of certain federal income tax consequences of the proposed
sale of the assets of the Fund is included solely for the information of the
Limited Partners. No information is provided with respect to the consequences
of any applicable state, local or foreign tax laws.
Applicability of the minimum tax and other tax consequences of the proposed
sale to a Limited Partner may depend upon the individual situation of the
Partner. Therefore, each Partner is urged to consult his or her own tax adviser
concerning the specific tax consequences of the proposed sale to such Partner.
General Considerations
The following summary of the major income tax consequences of the proposed
sale is based, with respect to U.S. tax consequences, on the pertinent
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
applicable regulations promulgated by the Treasury Department under the Code
(the "Regulations"), judicial and administrative interpretations of the Code
and Regulations.
Each Partner of the Fund should be aware that the Code, the Regulations and
interpretations are subject to change and that such changes may be given
retroactive effect.
The Revenue Reconciliation Act of 1990 (the "1990 Act") changes the tax rates
imposed upon individuals commencing January 1, 1991. The new tax law imposes a
36% marginal tax rate plus a surtax resulting in a 39.6% rate rather than a
generally imposed 28% marginal tax bracket on individual taxpayers, increases
the alternative minimum tax rate to 24% (rather than the previous rate of 21%),
and phases out personal exemptions and itemized deductions for persons with
substantial income.
The 1990 Act also limits the tax rate on long-term capital gains to 28% The
1990 Act itself does not have an effect upon the opinion of the Tax Advisor
items (a) through (g) set forth below, but owners of limited partnership Units
should be aware that the changes set forth in the 1990 Act could have an
effect on the rates imposed on the taxpayer.
The Partners in the Fund are variously; corporations, individuals, partnerships
and nominees. Each type of entity may be taxed at different rates or be taxed
based on different sections of the Code or Regulations. It is not feasible to
comment on all of the federal income tax consequences of the proposed sale.
This summary has been prepared based on the opinion of the Fund's tax advisor,
the Code, and the Regulations as now in effect and the current judicial and
administrative interpretations thereof.
There can be no assurance that the Internal Revenue Service will agree with
the interpretations of the Code and the Regulations set forth below. The
following summary does not include any discussion with respect to the
consequences of the proposed sale under state and local taxation laws and
regulations.
Opinion of Tax Advisor
The Tax Advisor to the Fund, Robison, Hill & Co. (a professional corporation),
has issued an opinion addressing certain tax consequences of the proposed sale
of the assets of the Fund. A complete copy of the Tax Advisor's opinion is
included in the exhibits to this proxy statement. The opinion is to the
effect that if the sale occurs as set forth in the Purchase and Sale
Agreement and as described herein, it is more likely than not:
(a) The proposed sale will result in dissolution of the partnership under the
Certificate and Agreement of Limited Partnership of Electric Energy Fund L.P.
(b) Any cash received by the Limited Partners of the Fund will be treated as
having been received in redemption of the limited partner Units so cashed out,
and will result in taxable gain or loss. The amount of such gain or loss will
be the difference between the cash received and the basis of the Units
surrendered in exchange thereof.
(c) The partnership is not a "generic" tax shelter under the two-pronged test
and loss if any will be allowed.
(d) The $100,000 cancellation of indebtedness from First Security Bank will
result in taxable income and increase earnings and profits to the Fund.
(e) The debt to FWC will be transferred to equity in the new entity and is
not forgiveness of debt and should not be recognized as a distribution of
money by the partnership to the Limited Partners.
(f) Partners that did not receive tax benefits from the energy tax credit are
entitled to 50% of the basis reduction as a credit on their income tax return.
(g) Because the Fund records income on an accrual basis for tax purposes
there will not be any unrealized receivables or appreciated inventory sold
that should be recognized as ordinary income.
An opinion of a tax practitioner is not binding upon the IRS or the Courts. It
is uncertain whether the IRS would issue a favorable ruling on the Proposed
Sale. An opinion of Tax Advisors does not provide the same degree of assurance
with respect to the consequences of a transaction as would a private letter
ruling from the IRS.
The Tax Advisor's opinion is subject to a number of assumptions and
qualifications that are critical to the opinion and is based on certain
factual assumptions, and upon certain representations and assurances made by
FWC, the Fund, USE and SBE. If such factual information or the representations,
warranties, or assumptions are not true when made or subsequently change, the
Tax Advisor's opinion may be inapplicable. Robison, Hill & Co. has expressed
no opinion concerning the consequences of the proposed sale on the Limited
Partners under applicable state or local income tax laws.
Calculation of Individual Partner Per Unit Cost Basis
Based on the information provided from the Schedule K of Form 1065 as was filed
by the Fund, a per-Unit basis of original issued Units ($1,000 per Unit) would
be as indicated on the table below.
Tax Consequences of Fund Ownership Per Unit (in dollars)
Year Cash Schedule K Cumulative Cumulative
of Operation Distribution Income (Loss) Suspended Basis
Loss
Initial
purchase
of Unit 1,000
1985
(business
credit of
$279) (28) 972
1986
(business
credit of
$20) (386) 604
1987 31 (374) 199
1988 22 (420) (243)
1989 (366) (609)
1990 (297) (906)
1991 (6) (912)
1992 325 (587)
1993 125 (462)
1994 58 (404)
1995 158 (246)
1996 (Projected
without
sale of SB-1) 166 (80)
1996 (Projected
with sale
of SB-1 33 743 630
The preceding table assumes that the Limited Partner is an individual and was
unable to deduct some of the losses at the times they were incurred either
because of the basis limitations or the passive loss limitations.
In summary, assuming that the partner was able to utilize the Business credit,
the partner should have-
* Received a tax benefit of $299 for the Business credit
* Received non-taxable cash distributions of $86
If the proposed transaction is approved and completed, this Limited Partner's
Form K-1 will report ordinary income of approximately $33.
Each Limited Partner's situation may vary from the above assumptions,
accordingly, partners are encouraged to consult their own tax advisers.
Reduction of Basis
The Fund elected to reduce basis of property for which the energy credit was
claimed by 50% of the energy credit (Code Sec. 50). The reduced basis was
used in determining depreciation and gain on the disposition of property.
In the event that a partner did not realize a tax benefit from the investment
credit for which a downward basis adjustment was made, a deduction is allowed
under Code Sec. 196 to the taxpayer for 50% of the unused energy credit
attributable to the basis reduction.
The Code also imposes an alternative minimum tax and excise taxes on certain
types of transactions. Applicability of such taxes is usually controlled, in
whole or part, by other matters unrelated to the Proposed Sale or by unique
characteristics of the particular taxpayer.
Accordingly, partners are encouraged to consult their tax advisers if they are
or might be subject to such taxes.
Taxation of Partnerships in General
The partnership is not subject to federal income tax, it is an entity which
income or loss "flows through" to partners who are taxable in their individual
capacities on their distributive shares of partnership taxable income. However,
the partnership is a tax reporting entity that must make an annual return of
partnership income or loss.
Each partner is required to treat partnership items on its return in a manner
consistent with the treatment of such items on the partnership return and may
be penalized for intentional disregard of the consistency requirement (Code
Sec. 6222).
The consistency requirement may be waived if the partner files a statement
(Form 8082) identifying the inconsistency or shows that it resulted from an
incorrect schedule furnished by the partnership.
A partner is generally not taxed on distribution of cash or property received
from the partnership, except to the extent that any money distributed exceeds
the partner's adjusted basis in its partnership interest immediately before
the distribution (Code Section 706(a)).
Each partner generally must account for its distributive share of partnership
taxable income in computing its income tax; thus, the basis in its partnership
interest is increased by its distributive share of partnership taxable income.
It is this basis increase that generally allows distributions of taxable income
to be made without recognition of gain, since the basis increase generally
offsets corresponding decreases in basis that result from such distributions
(Code Secs. 705 and 731(a)).
Deductibility of Losses
The benefit of the net operating loss deduction is not allowed to the
partnership, but only to the partners. For purposes of determining its
individual net operating loss, each partner takes into account its
distributive share of income, gain, losses, deductions, or credits of the
partnership as if each item were realized directly from the source from which
realized by the partnership, or incurred in the same manner as incurred by the
partnership (Reg. 1.702-2).
Limitations on Deductibility of Losses
There are three commonly encountered limitations on a partner's ability to
take into account its share of a partnership's loss in computing its individual
tax liability. A partner is entitled to deduct its share of the partnership's
loss only after satisfying all three of these rules.
Since the adoption of the 1954 Code through the present, the partnership
taxation rules have limited a partner's deductible share of losses to its
basis in its partnership interest.
Since 1976, the at-risk rules have limited a partner's deduction for its
share of losses to the amount it is considered to be economically at-risk in
the venture.
Beginning with the effective date of the Tax reform Act of 1986, if a partner's
share of the partnership's losses are considered "passive losses," the partner
must combine them with its passive losses from other sources and is allowed to
deduct the total only to the extent of its passive income from all sources.
Losses that are disallowed due to any of these three limitations are deductible
in the year of the termination of a partnership interest.
Capital Gain or Loss
A decrease in a partner's share of partnership liabilities is treated as a
distribution of money by the partnership, which decreases the distributee
partner's basis in its partnership interest (but not below zero) (Code Secs.
733 and 752(b)). When a partner's basis has been reduced to zero, such "deemed
distributions" can result in the recognition of gain.
Partners' shares of partnership liabilities (and corresponding allocations of
basis) depend upon whether the liability is "recourse" or "nonrecourse." In
addition, separate rules apply in the case of nonrecourse debts of the
partnership if a partner is the lender or has guaranteed repayment of the debt.
A limited partner cannot be allocated recourse liabilities in excess of its
capital contribution unless it has agreed to restore any deficit in its
capital account. Article VIII of the partnership agreement states that the
"Units are not subject to assessment." Nonrecourse liabilities are those for
which no partner bears the economic risk of loss.
Cancellation of Indebtedness
Cancellation of indebtedness usually results in taxable income and increases
earnings and profits. However, where the creditor's adjusted basis in the
debt is at least equal to the principal amount of the debt forgiven, the
forgiveness of debt by a creditor-shareholder may be a capital contribution
that does not increase earnings and profits.
Where the amount of cancellation of indebtedness (COD) income allocated to
the partner is the same as his share of the liability for the canceled debt,
as in the Proposed Transaction, the partner will recognize no gain, because
the COD income will increase the partner's basis sufficiently to cover the
deemed distribution of money to that partner.
But, in the absence of evidence indicating an intent to make a capital
contribution, the cancellation of indebtedness increases earnings and profits
(Rev. Rul. 58-546).
The Fund's tax advisor is of the opinion that the Limited Partners will
suffer no adverse tax consequences as a result of the Proposed Transaction.
Termination of the Fund
The tax year of the partnership closes if there has been a termination of the
partnership. Article XVII (ii) of the Certificate and Agreement of Limited
Partnership states that the sale of substantially all the assets of the Fund
shall work an immediate dissolution of the Fund.
The partnership agreement of the Fund states that the "holders of the Units
shall continue to share profits and or losses during the period of liquidation
in the same proportion as before the dissolution.
Upon the completion of the liquidation of the partnership, the partnership
must file a short-period return for the resulting short tax year. Code
Section 708 provides that termination occurs only if the business activities
of the partnership are no longer carried on by any of the partners or that at
least one-half of the total interest in partnership capital and profits is sold
within a 12-month period.
Such sale or exchange includes a sale or exchange to another member of the
partnership and the exchange of the interest in one partnership for an interest
in another partnership (or limited liability company).
A partnership is considered a continuing entity and observes its regular tax
year unless it is terminated under the rules above, accordingly, the dissolution
or liquidation of the partnership under state law does not necessarily cause a
partnership's tax year to close (Reg. 1.706-1(c)).
Effect of Liquidation
In the case of a liquidating partnership, a relatively simple set of rules
governs the distributee's gain, loss, and basis in distributed assets, if
there are no disproportionate distributions of unrealized receivables and
substantially appreciated inventory items. There are no tax consequences to
the partnership.
If unrealized receivables and substantially appreciated inventory are not
distributed, a liquidation results in gain only to the extent that a partner
receives money in excess of its partnership interest's adjusted basis (Code
Sec. 731(a)).
Liquidating distributions always involve a complete termination of liability
for any share of partnership debt because the partnership ceases to exist. The
termination of partnership requires that decreases in the partner's share of
partnership liabilities be netted with any liabilities the partner takes over
from the partnership (Reg. 1.752-1(f)).
Net debt relief is treated as additional money received (Code Sec. 752 (b) and
Reg. 1.752-1(f)). If a partner takes over only its pro rata share of the
partnership debt, there will be no deemed cash receipt or payment.
A loss may be recognized when only one or more of three types of assets, and
no other property, are distributed in the liquidation. If the liquidated
partner receives only cash, inventory, and/or unrealized receivables and their
bases to the partnership are less than its basis in its partnership interest, it
is allowed to deduct the difference as a capital loss (Code Sec. 731(a)(2)).
Partner's Cost Basis
A partner's basis in its partnership interest must be adjusted periodically to
ensure that the partnership remains a conduit for tax purposes. Income and
deductions are to be taxed only once (Code Sec. 701).
Tax-exempt income, nondeductible expenditures, and distributions made from
previously taxed income and contributions are not to be taken into account in
computing tax liability at all.
The transferor partner's adjusted basis in its partnership interest at the
time of the transfer is the sum of its basis on the day it acquired its
interest plus adjustments reflecting operations during its holding period.
The calculation of a partner's initial basis varies according to whether it
acquired its interest through a contribution to the partnership or by transfer
from another partner (Code Sec. 742 and Reg.1.742-1).
The original basis of a partner's interest is the amount of money and the
adjusted basis of property contributed to a partnership when the partnership
interest is acquired (Code Secs. 705(a) and 722). This basis is increased by
any further capital contributions and by the sum of the partner's distributive
share of taxable income of the partnership, tax-exempt receipts of the
partnership, and The excess of depletion deductions over basis of the
depletable property. Code Sec. 705(a)(1) and Reg. 1.705-1(a)(2).
The basis is decreased (but not below zero) by distributions from the
partnership as provided under Code Sec. 733, and by the sum of the partner's
distributive share of:
* Fund losses, including capital losses (Code Sec. 705(a)(2)(A)),
* Nondeductible partnership expenditures which are not capital expenditures
(Code Sec. 705(a)(2) and Reg. 1.705-1(a)(3)),
* The amount of the partner's deduction for depletion for partnership oil and
gas property to the extent the deduction does not exceed the partner's share of
the adjusted basis of the property (Code Sec. 705(a)(3) and Reg. 1.705-1(a)(4),
and
* Loss from the disposition by the partnership of a domestic oil or gas
property (Reg. 1.705-1(a)(5)).
In all cases when downward adjustments to basis are required, the statute
expressly provides that basis is not to be reduced below zero (Code Sec.
705(b)). A basis in a partnership interest never has a value below zero.
While a negative capital account is very common, a negative basis is
impossible.
The preceding is intended to be only a summary of income tax consequences
relating to the Proposed Sale.
Limited Partners of the Fund should consult their own tax advisors with
respect to issues not covered by the opinion or regarding their own particular
circumstances.
OPINION OF FINANCIAL ADVISOR
Far West Capital, Inc. retained Corporate Capital Consultants, Inc. ("CCC") as
financial advisor to the Far West Electric Energy Fund, L.P. in connection with
determining whether the offer by U.S. Envirosystems, Inc. for the SB-1 plant and
certain other assets of the Fund liabilities, was fair, from a financial point
of view, to the limited partners of the Fund.
In its capacity as an investment banking firm, CCC is regularly engaged in the
valuation of business and their securities in connection with mergers and
acquisitions and other corporate transactions. CCC is a New York City-based
investment banking firm organized in 1974 which specializes in providing
corporate valuations, often in conjunction with pending purchase offers. It
has issued many "fairness opinions" to public companies and others.
This firm was recommended to the Fund by Mr. Theodore Rosen, Chairman of the
Board of U.S. Envirosystems, Inc. There is no material relationship between
CCC and the Fund or its affiliates, or, to the best of FWC's knowledge,
between CCC and USE.
The amount of consideration to be paid was determined by U.S. Envirosystems,
Inc., after discussions with FWC and conducting a full examination of the Fund
and the Power Plants. CCC did not take part in the discussions between FWC
and USE or otherwise make any recommendations.
The procedures followed by CCC are set forth in detail in its opinion (see
Exhibit 3 to the Consent Solicitation-"Fairness Opinion," which is incorporated
herein by reference). A copy of this opinion is appended to this Consent
Solicitation.
No limitations were imposed by FWC with respect to the investigations made or
procedures followed by CCC in rendering its opinion. CCC has not in the past
provided investment banking services to either the Fund or FWC and does not
have any equity interest in either company.
Investigation By CCC
In connection with its opinion CCC reviewed, among other things:
* A draft of the Purchase and Sale Agreement concerning the SB-1 power plant,
with attendant documents;
* Annual Reports on Form 10-K of the Fund for the five years ended December 31,
1994, as well as tax returns for the same period;
* Certain Quarterly Reports on Form 10-Q of the Fund;
* Certain Power Plant revenue and expense prepared by the management of the
Fund;
* Certain internal financial analyses and forecasts for the assets if operated
by SBE, as prepared by the management of USE;
* The Geothermal Resources Lease, as amended between Sierra Pacific Power
Company and Geothermal Development Associates;
* The Agreement for the Purchase and Sale of Electricity, as amended, between
Sierra and Geothermal Development Associates;
* The Operating Agreement between the Fund, 1-A Enterprises, and SB Geo, Inc.;
* The Term Loan Agreement among Westinghouse Credit Corporation and the Fund,
as well as the Term Loan Agreement among WCC and 1-A, along with various Loan
Modification Agreements pertaining thereto;
* The Revised and Restated Geothermal Resources Sublease between the Fund and
FWC;
* The Long-Term Agreement for Purchase and Sale of Energy between Sierra and
FWC;
* The Purchase Agreement between Bonneville Pacific Corporation and FWC dated
September, 1985;
* The Certificate of Limited Partnership and the Partnership Agreement of the
Fund; and
* Various documents pertaining to a loan from the First Security Bank of Utah,
N.A., including the Third Extension and Modification Agreement pertaining
thereto.
In addition, CCC held discussions with members of the senior management of the
Fund and USE regarding the past and current business operations, financial
condition, and future prospects of the SB-1 plant and the Fund. CCC also held
discussions with WCC and Sierra.
Management of CCC also visited the SB-1 facility and met with operating and
management personnel at the site. Additionally, CCC reviewed a two-year old
appraisal of SB-1, a draft to the proposed Form SB-2 prepared by USE, certain
internal financial information prepared by FWC, and information regarding
certain other companies in the independent power production industry
specifically and in other industries generally, and considered such other
information, held such other discussions, and performed such other studies and
analysis as it considered appropriate.
CCC relied without independent verification upon the accuracy and completeness
of all of the financial and other information reviewed by it for purposes of its
opinion.
In addition, CCC did not make an independent valuation or appraisal of the
assets and liabilities of the Fund, FWC, or the SB-1 facility and, aside from
the two-year old appraisal mentioned above, was not furnished with any such
evaluation or appraisal.
Terms of Engagement
The terms of the engagement of CCC by FWC are set forth in a letter agreement
dated September 15, 1995, between CCC and FWC (the "Engagement Letter").
Pursuant to the Engagement Letter, FWC has agreed to pay CCC a fee based on
CCC's hourly rate of $300, with a minimum fee of $10,000. It is anticipated
that CCC's total fees will aggregate approximately $43,000. This fee will be
paid by the Fund; if the Proposed Transaction is completed, the fee will be
paid from the proceeds of the Power Plant sale.
FWC has also agreed to reimburse CCC for its out-of-pocket expenses, and to
indemnify CCC against certain liabilities in connection with its engagement,
including certain liabilities under the federal securities laws.
Financial Analyses Used
The following is a summary of the material financial analyses utilized by CCC
in connection with providing its opinion to FWC.
Stock Trading Analysis. Owing to the fact that the limited partnership interests
of the Fund have no public market and have had virtually no trading activity
since inception of the Fund ten years ago, CCC considered this approach to be
inappropriate.
Selected Company Analysis. CCC examined certain financial, operating, and
stock market information for selected companies in the independent power
production industry, specifically, the AES Corporation, Destec Energy, Inc.,
KENETECH Corporation, and Sithe Energies, Inc.
CCC noted that all of these companies have revenues of at least $100 million
and are considerably diversified. By contrast, the Fund's single SB-1 facility
has been generating revenues of under $3 million and has been incurring losses
before extraordinary items steadily during the current year and in three of the
last five fiscal years.
Consequently, CCC concluded that a selected company analysis, under these
circumstances, was not a meaningful approach to employ, except for terminal
values in the discounted cash flow discussed below.
Selected Transactions Analysis. CCC reviewed the recent acquisition of Magna
Power Company by California Energy Company, Inc. Owing to the enormous size
of both companies and their substantial diversification, as well as the fact
that this transaction was accomplished partly through the issuance of stock by
the acquirer, CCC concluded that this analysis did not provide any reliable
indication of value of the SB-1 facility, and, accordingly, CCC did not rely
on this approach. CCC is not aware of any other similar recent transactions.
Replacement Cost Analysis. CCC took into account estimates from various
industry sources regarding the replacement cost for geothermal plants, with
new plants generally valued at approximately $2,000 per kilowatt.
This would imply a value of $7.5 million for a new plant with the
power-generation aspects of SB-1. However, CCC noted that the SB-1 plant is
ten years old and subject to market conditions governing the sale of power,
which sharply limit the profitability on investment in the facility. Therefore,
CCC considered this approach to have little or no probative value for purposes
of this valuation.
Appraisal of the SB-1 Plant by Ronald P. Baldwin Dated September 20, 1993. At
the time of this appraisal, the contract price for the sale of power to Sierra
had just over three years to run. At a price of 7.17 cents per kwh, the plant
was covering its mortgage payment obligation by accruing and deferring
substantial amounts of other interest and general partner obligations. The
Baldwin appraisal concluded that the plant's gross value of $5,000,000 was
offset by $5,000,000 in debt, for a net value of zero.
There was a possibility that, at the expiration of the contract, market forces
might permit a renegotiated price with Sierra which would allow a reasonable
operating cash flow which would continue to service the mortgage, particularly
if the mortgage lender would renegotiate the loan terms. But even with that
optimistic chain of events, the appraiser determined that SB-1 had a $5
million value against an approximately $5 million mortgage. Consequently, he
opined that there was effectively no equity in the plant.
Mr. Baldwin, of Los Angeles, California, was selected by FWC to appraise the
Power Plant because of his extensive experience in the geothermal industry.
He has had no material relationship with the Fund or FWC. No limitations were
placed on his investigation, nor were any special instructions issued to him.
As stated in his appraisal, Mr. Baldwin visited the project site, met with the
responsible officers of FWC, and reviewed Fund records. The appraisal relies on
a cash flow analysis; after noting that the power sales rate will decline in
December, 1996, he concluded that plant operations could not continue beyond
that date unless somehow plant efficiency were significantly improved, royalty
reductions made, or the power sales rate remained constant. Concluding that none
of these possibilities was realistic, he determined that the plant had no value
in excess of its liabilities.
That appraisal has not been updated. While CCC considers that appraisal to have
some credibility at the time, since it was prepared by a person with
considerable background in the geothermal industry, the market for such power
has become more competitive.
It is now highly likely that at the time the ten-year power contract must be
repriced at short-term avoided cost (January 1, 1997), both market and
short-term avoided cost will be well below break-even after debt service. A
renegotiation of debt service also seems unlikely. Thus, CCC concludes that
the Baldwin appraisal is optimistic in today's environment and with tomorrow's
prospects.
Discounted Cash Flow Analysis. The change in selling price to Sierra that is
likely to occur requires an evaluation of the plant based on what it will
receive in 1996 and over the ten-year life of the contract that starts January
1, 1997 compared to its operating costs and debt service. The net cash flow
after debt service should then be discounted to present value at rates that
reflect the risk, and a terminal value should be determined at the end of the
year 2006 based on a multiple of projected net cash flows.
CCC's discounted cash flow analysis was based upon estimates of financial
performance as prepared by FWC, but adjusted by CCC based on due diligence
conducted by CCC on the plant, its power market, and its secured lender. CCC
ran various projections of prices per kwh, from 2.58 cents to 4.2 cents, with
expenses at their current level, discounted to the present.
No change in working capital and no capital expenditures were assumed. Debt
obligations were calculated at their present projected levels according to
the loan agreement, and also at levels that assumed a voluntary reduction in
interest and principal as well as a revised long-term payout level.
The reduction in principal was assumed to be on the same basis as currently
being negotiated by USE to pay off the lender entirely. It should be noted,
however, that the lender had advised CCC that it will not consider such a
reduction and revision by the Fund without a total payoff. The Fund has no
independent means of accomplishing this restructuring.
These forecasts, even in their most optimistic form, were discounted at rates
of 10% to 12% and 14%. The projected terminal value was based upon a multiple
of 10 times net cash flow in 2006, discounted back at the above rates. The
discount rates and terminal value multiple used by CCC in its analyses were
based upon its own judgment as to required rates for the risk involved, and a
discount from average multiples of the group of power companies described above.
CCC made a number of adjustments to Far West Capital's SB 1 projections.
CCC used two different projections of revenues to reflect the average gross
kilowatt hours produced by SB-1 from 1987-1994, as well as a high salable
kilowatt hours that assumed that generator overhauls are able to increase
output just over 5%.
The lowest energy rate used by FWC (2.8 cents or less /kwh) was reduced to the
rate estimated by CCC that would be actually paid by the buyer starting January
1, 1997 (2.587 cents). CCC also used the higher rate of 4.2 cents used by FWC
in alternative iterations for each scenario.
Operating expenses were modified from FWC's forecast to reflect the higher of
the Fund's projected operating and maintenance expenses for 1997 and the
annualization of the latest 6-month maintenance expenses per the June 30,
1995 Form 10-QSB. From 1997 forward, various expense items were increased
annually from 1% to 4% to account for inflation. Some items were lower than
FWC's forecast. The results do not vary greatly from FWC's forecast. Lease
royalties to Sierra Pacific Power which were used by CCC were provided by FWC
subsequent to the preparation of its forecast.
General & Administrative expenses were increased 3% by CCC to account for
inflation, a slightly lower rate than the one used by FWC.
Debt service was modified to reflect different scenarios as projected by CCC -
the current debt service, a renegotiated debt service extending the term to 10
years, and a reduction in principal balance to reflect USE's discussions with
Westinghouse.
The Net Royalty Payable changes from FWC as the forecasts change - this is a
function of the royalty agreements.
As a further check on its results, CCC computed the sales price of power per
kwh required to reach a value of $1,250,000 (the price offered for purchase
of SB-1 and associated assets) on a discounted cash flow basis. This was
determined to be 4.1 to 4.3 cents per kwh for the most optimistic debt payment
level. CCC is of the opinion that achievement of such a price range is highly
unlikely at the start of 1997 due to the number of plants selling electricity
in the region at prices under 2 cents, the unlikely chance that short-term
avoided cost (currently estimated to be 2.8 cents or less per kwh) would change
materially in the near future, the fact that Sierra can buy power for less
than that price and has been for several years, and the likelihood that demand,
while improving, is not projected to exceed supply in the near future.
Conclusion
In arriving at the CCC opinion, CCC reviewed all of the above analyses,
relying most heavily on the discounted cash flow analysis, and concluded that
the results of such analyses, when considered as a whole supports its opinion
that the sale of SB-1 and associated assets on the terms contemplated is fair,
from a financial point of view, to the limited partners of the Fund.
Any estimates incorporated in such analyses, particularly in discounted cash
flow, are not necessarily indicative of actual past or future results or
values, which may be significantly more or less favorable than such estimates,
and which are inherently subject to uncertainty.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Consent Solicitation to be signed on its
behalf by the undersigned duly authorized persons on the date indicated.
Far West Electric Energy Fund, L.P.,
By Far West Capital, Inc., its general partner
June 11, 1996
/s/_______________________________________
Thomas A. Quinn, Authorized Officer
EXHIBITS
1. Purchase and Sale Agreement (previously submitted)
2. Tax Opinion of Robison Hill & Co. (previously submitted)
3. Fairness Opinion of Corporate Capital Consultants, Inc. (previously
submitted)
4. Form 10-QSB for quarter ending September 30, 1995 (previously submitted)
5. Reply Card (previously submitted)
6. Amended Form 10-KSB for December 31, 1995
7. Commitment Letter to U.S. Envirosystems, Inc. from Smith Management Company
(previously submitted)
8. Commitment Letter to U.S. Envirosystems, Inc. from Gaines Berland, Inc.
(previously submitted)
9. SB-1 appraisal of Ronald P. Baldwin (previously submitted)
10. SB-1 Forecast of Corporate Capital Consultants (previously submitted)
11. Letter to James Budge of SEC (previously submitted)
12. Unaudited condensed balance sheet of Far West Capital, Inc. (previously
submitted)
13. USE's Pro Forma Condensed Combined Statement of Operations for the year
ended December 31, 1995
14. Form 10-QSB for quarter ending March 31, 1996