Exhibit 99.2
Zond-PanAero Windsystem Partners I,
a California Limited Partnership
Unaudited Financial and Business Information
for the quarterly period ended June 30, 2003
(the "Operating Report")
Introductory Note to the Operating Report
Zond-PanAero Windsystem Partners I, a California Limited Partnership (the
"Partnership") is required to file reports under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). As explained in the Current Report
on Form 8-K filed November 14, 2003, the Partnership has not filed certain
quarterly and annual reports required under the Exchange Act, including the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. The
Partnership did not have an independent auditor from February 5, 2002, when
Arthur Andersen LLP ("Arthur Andersen") resigned, through January 28, 2004.
Accordingly, the Partnership has not been able to file reports on Form 10-Q
and Form 10-K that comply with the requirements of the Exchange Act. Until
such time as the Partnership has audited financial statements, it intends to
file on Form 8-K unaudited financial and business information on a quarterly
basis. On November 25, 2003, the Partnership filed a Form 8-K containing
financial and business information for the fiscal year ended December 31, 2001
(the "November 25 Form 8-K"). On December 19, 2003, the Partnership filed a
Form 8-K containing unaudited financial and business information for the
fiscal year ended December 31, 2002 (the "December 19 Form 8-K"). Unaudited
financial and business information for the quarter ended June 30, 2003 is
contained herein. Except as otherwise expressly noted, the unaudited financial
and business information contained herein does not reflect events occurring
after June 30, 2003. The Partnership intends to file as an exhibit to Form 8-K
unaudited financial and business information for the fiscal year ended
December 31, 2003 as soon as practicable. The Partnership expects such filing
will be made by March 31, 2004 unless the Partnership obtains audited
financial statements and is able to file a Form 10-K by such date. Unaudited
financial and business information for the quarters ended March 31, 2003 and
September 30, 2003 are also filed as exhibits to the Form 8-K filed February 2,
2004.
Due to the Partnership's inability to obtain independent auditor review of its
quarterly financial statements and file a complete Form 10-Q as required under
the Exchange Act for the quarter ended June 30, 2003, the Partnership is
filing this Operating Report on Form 8-K. In preparing this Operating Report,
current management was required to make certain assumptions and relied on the
Partnership's financial statements provided in the operating report for the
quarter ended March 31, 2003 also filed as an exhibit to the Form 8-K filed
February 2, 2004, the December 19 Form 8-K, the November 25 Form 8-K and
financial statements previously audited by Arthur Andersen for the year ended
December 31, 2000. This Operating Report has not been reviewed by an
independent public accountant and it should not be relied upon as a fully
compliant periodic report in accordance with the requirements of the Exchange
Act. This Operating Report is subject to further review and potential
adjustment and may not be indicative of the Partnership's financial condition
or operating results.
Enron Wind Systems, LLC ("EWS"), the parent of Zond Windsystems Management
LLC, the general partner of the Partnership (the "General Partner"), filed for
Chapter 11 Bankruptcy on February 20, 2002. Subsequently, on May 10, 2002, EWS
and certain of its affiliated companies (collectively, "Enron Wind") sold
their entire business except certain assets and liabilities to General
Electric Company. EWS retained its indirect equity interests, including the
general partner interest, in the Partnership. As a consequence of these
events, the management of Enron Wind, the General Partner and the Partnership
changed. The information available to compile this Operating Report has been
provided on the basis of information available to current management at this
date. It is therefore possible that there may be events or issues that have
not yet been discovered by the current management providing the information to
compile this Operating Report and that this Operating Report may not fully
account for these events or issues.
PART I - FINANCIAL INFORMATION.
1. Financial Statements
Unaudited Balance Sheets at June 30, 2003 and December 31, 2002.
Unaudited Statements of Operations for the six months ended June 30, 2003 and
June 30, 2002.
Unaudited Statements of Operations for the three months ended June 30, 2003
and June 30, 2002.
Unaudited Statements of Changes in Partners' Capital (Deficit) at June 30,
2003 and December 31, 2002.
Unaudited Statements of Cash Flows for the six months ended June 30, 2003 and
June 30, 2002.
Notes to Unaudited Interim Financial Statements.
ZOND-PANAERO WINDSYSTEM PARTNERS I,
a California Limited Partnership
UNAUDITED BALANCE SHEETS
(Dollars in thousands)
June 30, 2003 December 31, 2002
------------------------- -------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,559 $ 472
Accounts receivable 105
Accounts receivable from related party 1,705 813
Other current assets 168 39
------------------ -----------------
Total current assets 3,432 1,429
------------------ -----------------
Noncurrent assets:
Buildings 98 98
Property, plant and equipment 49,561 49,561
Less - accumulated depreciation (45,971) (44,723)
------------------ ------------------
Total noncurrent assets 3,688 4,936
------------------ ------------------
Total assets $ 7,120 $ 6,365
================== ==================
Liabilities and partners' (deficit)
Current liabilities:
Accounts payable and accrued expenses $ 292 $ 68
Accounts payable to related party 739 547
Current portion of note payable
to related party 1,008 1,008
Accrued interest to related party 5,773 5,718
------------------ ------------------
Total current liabilities 7,812 7,341
------------------ ------------------
General partner (3) (4)
Limited partners (1,267) (1,549)
Substituted limited partner (Note 1) (3) (4)
Contributed capital 581 581
------------------ ------------------
Total partners' (deficit) (692) (976)
------------------ ------------------
Total liabilities and partners'
(deficit) $ 7,120 $ 6,365
================== ==================
ZOND-PANAERO WINDSYSTEM PARTNERS I,
a California Limited Partnership
UNAUDITED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per Unit value, which is in whole dollars)
For the six months ended,
June 30, 2003 June 30, 2002
-------------------- --------------------
Revenue:
Sale of electricity $ 2,381 $ 2,746
Other income 40
-------------------- -------------------
Total revenue 2,381 2,786
Costs and expenses:
Depreciation 1,248 1,248
Interest expense 55 221
Property taxes 39 33
Easement fees to related party 74 101
Management fees to related party 30 40
Maintenance and other operating costs
to related and other parties 502 418
Insurance expense 135 112
Other operating costs 14 1
-------------------- -------------------
Total costs and expenses 2,097 2,174
-------------------- -------------------
Net income $ 284 $ 612
==================== ===================
Net income per Unit $ 239 $ 514
===================== ===================
Number of outstanding Limited
Partner Units 1,190 1,190
ZOND-PANAERO WINDSYSTEM PARTNERS I,
a California Limited Partnership
UNAUDITED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per Unit value, which is in whole dollars)
For the three months ended,
June 30, 2003 June 30, 2002
----------------- -------------------
Revenue:
Sale of electricity $ 1,706 $ 1,939
--------------- ---------------
Total revenue 1,706 1,939
Costs and expenses:
Depreciation 624 624
Interest expense 28 99
Property taxes 19 21
Easement fees to related party 44 25
Management fees to related party 18 10
Maintenance and other operating costs
to related and other parties 253 103
Insurance expenses 68 55
Other operating costs 14 1
--------------- ---------------
Total costs and expenses 1,068 938
--------------- ---------------
Net income $ 638 $ 1,001
=============== ===============
Net income per Unit $ 537 $ 841
=============== ===============
Number of outstanding Limited
Partner Units 1,190 1,190
ZOND-PANAERO WINDSYSTEM PARTNERS I,
a California Limited Partnership
UNAUDITED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Dollars in thousands)
Substituted
Limited Contributed
General Limited Partner Capital
Total Partner Partners (Note 1) (Note 4)
--------------- ------------------- ---------------- ------------ --------------
Profit and loss allocation 100.00% 0.50% 99.00% 0.50%
------- --- ------- --- ----
Balance at December 31, 2001 (1,442) (6) (2,011) (6) 581
Net income 466 2 462 2
------- --- ------- --- ----
Balance at December 31, 2002 (976) (4) (1,549) (4) 581
Net income 284 1 282 1
------- --- ------- --- ----
Balance at June 30, 2003 $ (692) $(3) $(1,267) $(3) $581
======= === ======= === ====
ZOND-PANAERO WINDSYSTEM PARTNERS I,
a California Limited Partnership
UNAUDITED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the six months ended,
June 30, 2003 June 30, 2002
----------------------- ------------------------
Cash Flow From Operating
Activities:
Net income $ 284 $ 612
Reconciliation of net income to net cash
provided by operating activities:
Depreciation 1,248 1,248
Changes in operating assets and liabilities
Accounts receivable 105 1,262
Accounts receivable from related party (892) (1,939)
Other current assets (129) (38)
Accounts payable and accrued expenses 224 106
Accounts payable to related party 192 (25)
Accrued interest payable to related party 55 221
------- -------
Net cash provided by operating activities 1,087 1,447
Cash flows used in financing activities:
Payments on notes payable to related party (1,007)
------- -------
Net increase in cash and cash equivalents 1,087 440
Cash and cash equivalents at beginning of the period 472 83
------- -------
Cash and cash equivalents at end of period $ 1,559 $ 523
======= =======
ZOND-PANAERO WINDSYSTEM PARTNERS I,
a California Limited Partnership
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - THE PARTNERSHIP
Introduction
Zond-PanAero Windsystem Partners I, a California Limited Partnership (the
"Partnership"), was formed on June 29, 1984 to purchase, own and operate a
system of 300 Vestas Energy A/S Model V-15 wind turbine electric generators
(the "Turbines"). The Turbines, together with certain infrastructural
improvements (the "Infrastructural Improvements") which are owned by Mesa Wind
Developers ("Mesa"), a joint venture between Enron Wind Systems, Inc. ("EWSI")
and an affiliate of PanAero Corporation ("PanAero"), form an integrated
electric power generating facility (the "Windsystem") with a rated capacity of
19.5 megawatts in the San Gorgonio Pass area of the San Bernardino Mountains
near Palm Springs, California (the "Operating Site"). EWSI is a developer and
operator of commercial wind-powered electric generating facilities and PanAero
is a wind resources development company. On January 3, 1997, EWSI's parent,
Zond Corporation, became a wholly-owned subsidiary of Enron Renewable Energy
Corp., which is wholly-owned by Enron Corp. ("Enron"). In May 1997, the name
of Zond Corporation was changed to Enron Wind Corp. ("EWC").
The general partner (the "General Partner") of the Partnership is Zond
Windsystems Management LLC ("ZWM"), a California limited liability company
wholly-owned by Enron Wind Systems, LLC ("EWS"). See "Bankruptcy and Mergers"
regarding certain affiliated mergers and name changes affecting ZWM, EWS and
EWC. The business of the Partnership and the respective rights of its
partners, including the Partnership's limited partners (the "Limited
Partners"), are governed by the First Amended and Restated Certificate and
Agreement of Limited Partnership of Zond-PanAero Windsystem Partners I, a
California Limited Partnership, entered into on November 29, 1984, as amended
(the "Partnership Agreement").
The Partnership will terminate on December 31, 2005, unless earlier terminated
in accordance with the provisions of the Partnership Agreement.
The Windsystem, which became operational in November 1984, was constructed by
Mesa Construction Company ("MCC"), a joint venture between an affiliate of
EWSI and an affiliate of PanAero. The Partnership paid MCC a total of $48.9
million for the purchase, construction and installation of the Turbines,
comprised of $22.4 million in cash and $26.5 million in the form of
eighteen-year, 13% notes payable in equal semi-annual installments of
principal and interest totaling $1.9 million (the "Purchase Notes"). See Notes
3 and 4 below.
Bankruptcy and Mergers
Commencing on December 2, 2001, and periodically thereafter, Enron and certain
of its subsidiaries filed voluntary petitions for relief under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code"). On February 20,
2002, EWC and EWSI each filed a voluntary petition for relief under Chapter 11
of the Bankruptcy Code. Additionally, two California limited liability
companies formed on February 19, 2002 for the purposes of merging with EWC and
EWSI in anticipation of the sale of Enron's wind business also filed voluntary
petitions for relief under Chapter 11 of the Bankruptcy Code.
EWC merged with and into one of such limited liability companies on April 19,
2002 and the surviving limited liability company changed its name to Enron
Wind LLC ("EW"). EWSI merged with and into the other limited liability
company, also on April 19, 2002, and the surviving limited liability
company changed its name to Enron Wind Systems, LLC.
On April 12, 2002, Zond Windsystems Management Corporation ("ZWMC"), the
general partner of the Partnership at such time, merged with and into a third
California limited liability company, formed on March 12, 2002, and the
surviving limited liability company changed its name to Zond Windsystems
Management LLC . On May 3, 2002, Zond Construction Corp. merged with and into
a fourth California limited liability company, formed on March 21, 2002, and
the surviving limited liability company changed its name to Zond Construction
LLC ("ZC").
Substituted Limited Partner
PanAero Management Corporation ("PAMC"), a California corporation wholly-owned
by PanAero, formerly served as a general partner of the Partnership (together
with ZWMC, the "Former General Partners"). In June 1988, the Partnership
solicited a vote by proxy of the Limited Partners to remove PAMC as a general
partner. Pursuant to that vote, PAMC was converted to a substituted limited
partner. Although the term "Substituted Limited Partner" is defined in the
Partnership Agreement as any individual, partnership, corporation, trust or
other entity admitted to the Partnership as a Limited Partner pursuant to
transfer provisions under the Partnership Agreement, the term substituted
limited partner is used in the Unaudited Balance Sheets at June 30, 2003 and
December 31, 2002 and the Unaudited Statements of Changes in Partners' Capital
(Deficit) for the three months ended June 30, 2003 and for the year ended
December 31, 2002 only in reference to the substituted limited partner
interest created by the removal of PAMC as a general partner. Under an
Agreement of Settlement and Mutual Releases (the "Settlement Agreement")
executed on June 26, 2000, PAMC agreed to transfer its substituted limited
partner interest in the Partnership to ZWMC.
Sale to General Electric
On April 10, 2002, Enron, EWC and certain of its subsidiaries, including EWSI,
entered into an Amended and Restated Purchase and Sale Agreement in which such
entities agreed to sell in an asset sale (the "GE Sale") their wind turbine
manufacturing, operation and maintenance and construction businesses to
General Electric Company, acting through its GE power systems business
("GEPS"). The GE Sale was consummated on May 10, 2002. EW retained the
existing wind power projects including the indirect ownership of the general
partnership interest in the Partnership. However, effective as of the sale,
substantially all of the employees who had been involved in the management of
the Partnership transferred to GEPS.
Following the sale to GEPS, new management was appointed to manage and operate
the Partnership, and ZWM's principal executive offices were moved to 1400
Smith Street, Houston, Texas 77002. Eric D. Gadd was appointed President and
Chief Executive Officer of ZWM on September 26, 2002. ZWM has no directors.
Operation and Maintenance Services
EWS manages the Windsystem pursuant to a windsystem management agreement with
the Partnership executed on July 27, 1988 (the "Management Agreement"). The
Management Agreement terminates by its terms on December 31, 2004. Prior to
May 10, 2002, Enron Wind Maintenance LLC, an affiliate of EWS, provided
operations and maintenance services for the Windsystem. On May 10, 2002, in
connection with the GE Sale, EWS contracted with GE Wind Energy, LLC to
perform certain operations and maintenance services relating to the Windsystem
for a period of one year ending on May 10, 2003.
In April 2003, EWS entered into an agreement with SeaWest Asset Management
Services, LLC to provide certain operation and maintenance services relating
to the Windsystem for a 5-year period ending on May 10, 2008.
Substantial Transactions and Operating Agreements
The accompanying unaudited financial statements include substantial
transactions with related parties. These transactions are further described in
Notes 3 and 4.
A summary of the major operating agreements entered into by the Partnership,
directly or indirectly, is set forth below:
(1) The Partnership sells the electricity produced by the Turbines to
Southern California Edison Company ("SCE"), pursuant to a power
purchase and sales agreement (the "Power Agreement"). The Power
Agreement was originally entered into between SCE and PanAero in
April 1982 and covers an aggregate of 29.9 megawatts of generating
capacity. PanAero assigned the Power Agreement to Mesa in July 1984.
Mesa subsequently assigned the portion of the Power Agreement that
covers the aggregate rated capacity of the Turbines (19.5 megawatts),
to the Partnership until December 31, 2004. The remaining 10.4
megawatts of generating capacity available under the Power Agreement
was assigned by Mesa to Zond-PanAero Windsystem Partners II, a
California Limited Partnership ("ZPII"), whose general partner is an
affiliate of the General Partner. SCE purchases electricity produced
by the Turbines at a price equal to the greater of 89% of SCE's "Cost
of Energy" (as defined in the Power Agreement) or a fixed minimum
price of $.102 per kilowatt hour ("kWh"), with the limitation that
when 89% of SCE's Cost of Energy exceeds $.20 kWh, the price per kWh
paid by SCE will be limited to $.20 per kWh plus 70% of the
difference between 89% of SCE's Cost of Energy and $.20 per kWh.
During the six month period ended June 30 2003, the Partnership earned
$.102 per kWh of electricity delivered to SCE.
(2) Since July 1988, the Partnership has contracted with EWS (or its
predecessor) for the operation and maintenance of the Turbines and
the performance of certain ancillary management services, such as
collection of revenues from SCE and the administration and payment of
all Partnership expenses. Under the provisions of the Management
Agreement, the Partnership pays a management fee of 2% of "Gross
Operating Proceeds", which are defined as all gross receipts from the
sale of electricity generated by the Turbines and all amounts paid in
lieu of receipts from the sale of electricity, including, without
limitation, any proceeds of systems performance or wind resource
insurance, casualty loss and business interruption insurance paid in
reimbursement of lost revenues and warranty payments in reimbursement
of lost revenues. Under the Management Agreement, EWS is entitled to
be reimbursed for 115% of the maintenance costs, including labor and
material costs that it incurs in the performance of services
including services performed by third parties. See Note 4 for
additional information.
(3) The Operating Site is situated on two adjoining parcels of land,
consisting of approximately 440 acres, located in the San Gorgonio
Pass area of the San Bernardino Mountains approximately 16 miles
northwest of Palm Springs, California. The Partnership uses the
Infrastructural Improvements and a portion of the Operating Site
pursuant to a 20-year easement granted by Mesa under the terms of a
Wind Park Easement Agreement dated as of September 7, 1984, as
amended (the "Wind Park Easement Agreement"). Mesa has rights to
develop wind energy resources at the Operating Site, which includes
the Infrastructural Improvements, under a right-of-way grant (the
"Right-of-Way Grant") from the United States Bureau of Land
Management ("BLM"). The primary term of the Right-of-Way Grant
expired on January 26, 2003. On December 19, 2002, the Right-of-Way
Grant was extended for a ten-year period commencing on January 27,
2003; however, the Wind Park Easement Agreement still expires on
December 31, 2004.
EWSI, PanAero, and their affiliates have developed and sold
additional wind turbines on the Operating Site to ZPII and Mesa has
granted a similar easement to ZPII.
Under the Wind Park Easement Agreement, Mesa charges the Partnership
rental fees in an amount equal to the greater of 5% of Gross
Operating Proceeds or the Partnership's pro rata share (with the
other producers of electric energy from wind power on the Operating
Site) of the payments due the BLM under the Right-of-Way Grant.
Effective January 1, 1996, the BLM changed the annual rental payment
due under the Right-of-Way Grant to a flat rent of $79,000. ZPI and
ZPII are each charged a pro rata share of the $79,000 in accordance
with the Wind Park Easement Agreement based on their ratios of
aggregated rated capacity of the turbines installed on the Operating
Site as described above. Rental payments may be adjusted by the BLM
annually to reflect any change in the fair rental value of the
Operating Site, which could result in revised easement payments by
the Partnership to Mesa.
Cash Distributions
The Partnership distributes cash in accordance with the terms of the
Partnership Agreement. Due to less-than-projected operating results, the
Partnership has not distributed any cash to the General Partner, Limited
Partners, Dean Witter Reynolds Inc. as a special limited partner, the Former
General Partners or the substituted limited partners during any fiscal year
other than 1985, in which the Partnership distributed an aggregate of
approximately $158,000 to the Limited Partners and $2,000 to the Former
General Partners. Under the Purchase Notes, the Partnership cannot make cash
distributions to its partners unless certain cash reserve balances are
maintained, no events of default exist, and certain ratio tests are met. The
Partnership did not meet these criteria and did not make cash distributions to
its partners in the six months ended June 30, 2003.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's accounting records are maintained on the basis used for
federal income tax reporting purposes. For purposes of filing with the
Securities and Exchange Commission, the accounting records have been adjusted
to reflect generally accepted accounting principles in the United States
("GAAP").
Income Taxes
The Partnership is not subject to federal and state income taxes. Accordingly,
no recognition has been given to income taxes in the accompanying unaudited
financial statements since the income or loss of the Partnership is to be
included in the tax returns of the individual partners. The tax returns of the
Partnership are subject to examination by federal and state taxing
authorities. If such examinations result in adjustments to distributive shares
of taxable income or loss, the tax liability of the partners could be adjusted
accordingly.
The tax attributes of the Partnership's net assets flow directly to each
individual partner. Individual partners will have different investment bases
depending upon the timing and prices of acquisition of Partnership units.
Further, each partner's tax accounting, which is partially dependent upon
their individual tax position, may differ from the accounting followed in the
financial statements. Accordingly, there could be significant differences
between each individual partner's tax basis and their proportionate share of
the net assets reported in the financial statements. Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", requires
disclosure by a publicly held partnership of the aggregate difference in the
basis of its net assets for financial and tax reporting purposes. However, the
Partnership does not have access to information about each individual
partner's tax attributes in the Partnership, and the aggregate tax basis
cannot be readily determined. In any event, management does not believe that,
in the Partnership's circumstances, the aggregate difference would be
meaningful information.
Cash Equivalents
Cash equivalents are considered to be all highly liquid investments purchased
with an original maturity of three months or less.
Depreciation
The Turbines are recorded at cost and are being depreciated on the
straight-line method over a twenty-year life. Capitalized improvements and the
building are being depreciated on a straight-line method over a fifteen-year
life. Expenditures that materially increase the useful lives of assets are
capitalized, while ordinary maintenance and repairs are charged to operations
as incurred. Replacement of defective parts or expenditures designed to modify
Turbines to improve their productivity are expensed as incurred.
Earnings Per Limited Partner Unit
Earnings per Limited Partner Unit are calculated based upon the number of
Limited Partner Units outstanding during each period.
Fair Value of Financial Instruments
For each class of financial instruments, including cash and cash equivalents,
accounts receivable, prepaid insurance and other current assets, accounts
payable and accrued expenses, accounts payable to related party and accrued
interest to related party, the carrying amount approximates fair value because
of the short maturity of those instruments.
The estimated fair value of the Partnership's note payable to related party is
not materially different from its carrying amount. The fair value is based on
discounted present value cash flows using the Partnership's current borrowing
rate.
Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Electricity Sales
Power generated by the Windsystem is recognized as income upon delivery of
power to SCE at prices as defined in the Power Agreement.
NOTE 3 - PURCHASE NOTES
Under an agreement reached in April 1989, MCC reduced the interest rate on the
Purchase Notes to 11% effective in January 1990. The Partnership secured its
payment obligations under the Purchase Notes by granting MCC security
interests in the Turbines and other intangible collateral including the
rights, title and interests of the Partnership under several of the
Partnership's major operating agreements.
The Partnership's cash flows have been insufficient to pay all scheduled
principal and interest associated with the Purchase Notes. The Purchase Notes
matured on December 31, 2002. At that time, there was $1.0 million and $5.7
million of principal and interest in arrears, respectively. As of June 30,
2003 there was $1.0 million and $5.8 million of principal and interest in
arrears, respectively. The Partnership's failure to make timely payments on
the Purchase Notes gave MCC the right to foreclose against the collateral of
its loans as defined in the Purchase Notes.
NOTE 4 - AMOUNTS PAYABLE TO RELATED PARTIES, NET
In addition to the Purchase Notes (See Note 3 above) the Partnership had a
$0.5 million and $0.2 million payable to Mesa and EWS, respectively as of June
30, 2003. Amounts payable to Mesa include easement fees and other
miscellaneous expenses related to Windsystem operations. Amounts payable to
EWS include management fees and other miscellaneous expenses related to
Windsystem operations. Such amounts are unsecured and non-interest bearing.
The Partnership has the following related party transactions and
relationships:
(1) Mesa assigned easement rights to a portion of the Operating Site and
granted rights to use the Infrastructural Improvements to the
Partnership under the Wind Park Easement Agreement (See Note 1
above). The Partnership incurred $0.04 million in easement fees
during the second quarter of 2003 pursuant to the Wind Park Easement
Agreement.
(2) The Partnership contracted with EWSI to operate and maintain the
Turbines and to perform certain management and administrative
services under the Management Agreement (See Note 1 above). The
Partnership incurred expenses of $0.3 million during the second
quarter of 2003 pursuant to the Management Agreement.
In 1988, Mesa assigned $581,000 of receivables from the Partnership to each of
its partners, EWSI and an affiliate of PanAero. EWSI subsequently forgave its
$581,000 of receivables from the Partnership. This forgiveness was treated as
a capital contribution in the accompanying financial statements.
NOTE 5 - LITIGATION
SCE Dispute
Market conditions in the California energy sector during 2000 and 2001 created
a significant cash flow problem for SCE. At the end of January 2001, SCE
advised the Partnership that SCE would not make payments for power deliveries
in November and December 2000. The Partnership, along with other renewable
source generators, engaged in discussions with SCE seeking payment from SCE
for past due amounts under applicable power agreements entered into with SCE.
The Partnership continued to operate the Windsystem and deliver power to SCE
believing that eventually a solution would be negotiated. SCE continued to
default on its contractual obligations by missing payments due for January,
February, and March 2001 power deliveries.
On March 27, 2001, the California Public Utilities Commission (the "CPUC")
issued an order (the "CPUC Order") obligating SCE to begin payments for power
delivered on a going-forward basis. Following the issuance of the Order, SCE
initiated discussions with renewable source generators, including the
Partnership, to agree on a payment plan for power delivered on a going-forward
basis. The Partnership agreed with SCE to receive payments twice monthly for
power delivered. Payments for the last five days in March 2001, from the date
the CPUC Order was effective, through the end of 2001 were received from SCE.
The CPUC Order did not address the issue of payments due for the period
between November 1, 2000 and March 26, 2001.
By the end of April 2001, discussions with SCE regarding payment for power
delivered for the period between November 1, 2000 and March 26, 2001 had not
resulted in a solution. The Partnership, along with other renewable source
generators (collectively, the "Power Generators"), assisted by outside
counsel, explored various legal alternatives to enforce the contractual rights
of the turbine owners. With no realistic prospects seemingly imminent for a
negotiated solution, some of the Power Generators, including the Partnership,
filed suit against SCE on May 2, 2001 in Los Angeles Superior Court (the "SCE
Litigation"). The suit sought to recover compensation from SCE for power
delivered, or at the option of the plaintiffs, relief from the obligation to
deliver power under the existing contracts with SCE coupled with the right to
sell power in the open market across the SCE transmission grid.
In June 2001, SCE sent an offer to renewable source generators to settle the
amounts past due and proposed a structure for payment of the amounts past due.
The offer resulted from lengthy negotiations between SCE and representatives
of independent energy producers, monitored by representatives of the Governor
of California. The offer provided for the payment of all amounts past due with
interest accruing at 7% to the date of payment. On August 22, 2001, Mesa, for
the benefit of the Partnership, entered into a settlement agreement with SCE
that, among other things, set forth the terms for payment of past due amounts
to Mesa, and ultimately the Partnership (the "SCE Payment Agreement").
The SCE Payment Agreement provides that past due amounts be paid in three
installments, 10% of the amount outstanding plus interest on all the past due
amounts to the date of the installment payment to be paid shortly after
execution of the SCE Payment Agreement, another 10% of the amount outstanding
to be paid when the SCE Payment Agreement becomes effective (after CPUC
approval and certain other conditions are satisfied), and the final 80% to be
paid when the California State Legislature approves a plan that restores SCE's
credit. SCE paid the first installment due under the SCE Payment Agreement on
August 31, 2001. All remaining amounts outstanding from SCE under the SCE
Payment Agreement were collected from SCE by the end of March 2002. See Note 7
below.
FERC Investigation
In May 2003, the Federal Energy Regulatory Commission (the "FERC"), pursuant
to FERC Docket No. EL03-47-000, began investigating whether the Windsystem and
certain other power projects owned by Enron or its affiliates failed to meet
the ownership criteria for qualifying facility ("QF") status under the Public
Utility Regulatory Policy Act of 1978 ("PURPA").
Under PURPA, and the applicable FERC regulations, a power project is not a QF
if more than 50% of the equity interest in the project is owned by an electric
utility or electric utility holding company. On July 11, 2003, the
investigation of the QF status of the Windsystem by the FERC was set for
hearing by the FERC. On July 22, 2003, the FERC investigation relating to the
Windsystem was assigned to a FERC settlement judge. Representatives of the
Partnership and the FERC have held several settlement meetings, and settlement
discussions relating to the investigation are ongoing.
NOTE 6 - ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No.
123 to require disclosure about the effects on reported net income of an
entity's stock-based employee compensation in interim financial statements.
See Note 7 below.
Effective January 1, 2003, we adopted FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, and Interpretation of FASB Statements
No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN No.
45"). The interpretation requires that upon issuance of a guarantee, the
entity must recognize a liability for the fair value of the obligation it
assumes under that guarantee. In addition, FIN No. 45 requires disclosures
about the guarantees that an entity has issued, including a roll forward of
the entity's product warranty liabilities. This interpretation is intended to
improve the comparability of financial reporting by requiring identical
accounting for guarantees issued with separately identified consideration and
guarantees issued without separately identified consideration. The Partnership
does not expect the adoption of this statement to have a material impact on
the results of operations and financial condition of the Partnership.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, and Interpretation of ARB No. 51". ("FIN No. 46").
The interpretation requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity investors in the entity
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN No.
46 is effective for all new variable interest entities created or acquired
after January 31, 2003. The Partnership does not expect the adoption of this
statement to have a material impact on the results of operations and financial
condition of the Partnership. .
NOTE 7 - SUBSEQUENT EVENTS
Bankruptcy
As of February 2, 2004, neither ZWM nor ZC has filed for bankruptcy.
SCE Dispute
The Partnership, along with the other Power Generators party to the SCE
Litigation, dismissed the SCE Litigation in August 2003.
Purchase Notes
From July 1, 2003 through February 2, 2004, $0.6 million was paid on the
Purchase Notes, all of which was applied to principal.
As of February 2, 2004, MCC has not exercised its right to foreclose under the
Purchase Notes.
FERC Investigation
The settlement discussions relating to the FERC investigations continue to be
ongoing.
Engagement of Independent Auditor
The Partnership engaged Hein & Associates LLP as the Partnership's new
independent auditor as of January 28, 2004.
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity and Capital Resources
The Partnership continued to experience a lack of liquidity throughout the
first six months of 2003, primarily due to an ongoing shortfall in revenues
from operations in comparison to the costs and expenses of operations.
Accordingly, principal payments on the Purchase Notes in the aggregate amount
of $1.0 million were in arrears, and interest payments in the amount of $5.8
million, were in arrears at June 30, 2003. The Partnership's failure to make
timely payments on the Purchase Notes gave MCC the right to foreclose against
the collateral of its loans as set forth in the Purchase Notes. As of June 30,
2003, MCC had not exercised its right to foreclosure under the Purchase Notes.
The Partnership's primary source of revenues and liquidity to fund operations
of the Windsystem, repay debt, administer the Partnership, and make
distributions to its partners is the production and sale of electricity from
the Windsystem. The Partnership's sole customer is SCE. The price paid by SCE
for the electricity is contractually defined under the Power Agreement.
As of June 30, 2003, the Partnership had no current or planned commitments for
capital expenditures.
Results of Operations for the Six Months Ended June 30, 2003 Compared to June
30, 2002.
For the first six months of 2003, revenues from power sales were $2.4 million,
and the Windsystem produced 23.3 million kWh of electricity for sale to SCE.
This was a decrease of $0.4 million or 13% in revenue and a decrease of 3.6
million kWh of electricity produced or 13% as compared to the same period in
2002. These decreases can mainly be attributed to an average of a 22% lower
wind level in the first six months of 2003 as compared to the same period in
2002.
Costs and expenses in the first six months of 2003 were $2.1 million. This was
a decrease of $0.1 million or 4%, as compared to the first six months of 2002.
This decrease can mainly be attributed to the decrease in interest expense of
$0.2 million, as compared to the 2002 period. Interest expense decreased due to
lower average principal balances on the Purchase Notes outstanding during 2003.
Overall, the Partnership reported net income of $0.3 million for the first six
months of 2003, which is a decrease of $0.3 million or 50% as compared to the
same period in 2002. During the first six months of 2003, total partners'
deficit decreased by $0.3 million or 30% to $0.7 million. Net income per Unit
was $239 for the first six months of 2003 compared with a net income per Unit
of $514 for the first six months of 2002.
Results of Operations for the Three Months Ended June 30, 2003 Compared to
June 30, 2002.
For the three months ending June 30, 2003, revenues from power sales were $1.7
million, and the Windsystem produced 16.7 million kWh of electricity for sale
to SCE for the second quarter of 2003. This was a decrease of $0.3 million or
15% in revenue and a decrease of 2.3 million kWh of electricity produced or
12% as compared to the same period in 2002.
Costs and expenses for the second quarter of 2003 were $1.1 million. This was
an increase of $0.1 million or 10%, as compared to the second quarter of 2002.
Overall, the Partnership reported net income of $0.6 million for the second
quarter of 2003, which is a decrease of $0.4 million or 40% as compared to the
second quarter of 2002. Net income per Unit was $537 for the second quarter of
2003 compared with a net income per Unit of $841 for the second quarter of
2002.
PART II - OTHER INFORMATION
1. Legal proceedings.
Not applicable to the Partnership.
2. Changes in securities and use of proceeds.
Not applicable to the Partnership.
3. Defaults upon senior securities.
Not applicable to the Partnership.
4.Submission of matters to a vote of security holders.
Not applicable to the Partnership.
5. Other information.
This exhibit contains statements that are forward-looking within the meaning
of Section 27(a) of the Securities Act of 1933 and Section 21(e) of the
Exchange Act. Investors are cautioned that any such forward-looking statements
are not guarantees of future performance and that actual results could differ
materially as a result of known and unknown risks and uncertainties, including
general economic conditions, future trends, and other risks, uncertainties and
factors disclosed in this Operating Report.
6. Exhibits and reports of Form 8-K
Not applicable to the Partnership.