SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _______________________
Commission File No. 0-13510
ZOND-PANAERO WINDSYSTEM PARTNERS I, A CALIFORNIA LIMITED PARTNERSHIP
State or other jurisdiction of incorporation or organization: California
I.R.S. Employer Identification No: 77-0035358
Address of principal executive offices: 1221 Lamar Street, Suite 1600, Houston,
Texas 77010
Registrant's telephone number, including area code: (713) 345-3582
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of Limited
Partnership Interest
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES NO X
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
Explanatory Note
Zond-PanAero Windsystem Partners I ("the Partnership") has been delinquent in
the filing of certain periodic reports required by the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). The reasons for this delinquency are
more fully described in the Current Report on Form 8-K filed by the Partnership
with the Securities and Exchange Commission (the "SEC") on November 5, 2003.
This Quarterly Report on Form 10-Q contains unaudited business and financial
information for the nine months ended September 30, 2003 and subsequent event
disclosures through November 15, 2003. Concurrent with the filing of this
Quarterly Report, the Partnership is filing with the SEC its Annual Report on
Form 10-K for the three years ended December 31, 2001, 2002 and 2003.
Zond-PanAero Windsystem Partners I,
a California Limited Partnership
For the three months ended September 30, 2003
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 2003 (Unaudited) and
December 31, 2002.
Unaudited Condensed Statements of Operations for the nine months ended
September 30, 2003 and September 30, 2002.
Unaudited Condensed Statements of Operations for the three months ended
September 30, 2003 and September 30, 2002.
Unaudited Condensed Statements of Changes in Partners' Capital (Deficit) at
September 30, 2003 and December 31, 2002.
Unaudited Condensed Statements of Cash Flows for the nine months ended
September 30, 2003 and September 30, 2002.
Notes to Unaudited Condensed Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
ZOND-PANAERO WINDSYSTEM PARTNERS I,
A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
(Dollars in thousands)
September 30, 2003 December 31, 2002
------------------------ -----------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,190 $ 472
Accounts receivable - 105
Accounts receivable from related party 1,472 813
Other current assets 127 39
------------------------ ----------------------
Total current assets 2,789 1,429
------------------------ ----------------------
Property, Plant and Equipment
Buildings 98 98
Plant and Equipment 49,561 49,561
Less - accumulated depreciation (46,595) (44,723)
------------------------ --------------------------
Property, Plant and Equipment, net 3,064 4,936
------------------------ --------------------------
Total assets $ 5,853 $ 6,365
======================== ==========================
Liabilities and partners' deficit
Current liabilities:
Accounts payable and accrued expenses $ 359 $ 68
Accounts payable to related party 193 547
Current portion of notes payable
to related party 458 1,008
Accrued interest to related party 5,791 5,718
------------------------ --------------------------
Total current liabilities 6,801 7,341
------------------------ --------------------------
Partners' deficit
General partner (4) (4)
Limited partners (1,521) (1,549)
Substituted limited partner (Note 1) (4) (4)
Contributed capital 581 581
------------------------ --------------------------
Total partners' deficit (948) (976)
------------------------ --------------------------
Total liabilities and partners' ------------------------ --------------------------
deficit $ 5,853 $ 6,365
======================== ==========================
The accompanying notes are an integral part of the unaudited condensed financial
statements.
1
ZOND-PANAERO WINDSYSTEM PARTNERS I,
A CALIFORNIA LIMITED PARTNERSHIP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per Unit value, which is in whole dollars)
(Unaudited)
For the three months ended
September 30, 2003 September 30, 2002
---------------------------- ------------------------------
Revenue:
Sale of electricity $ 785 $ 1,255
Other income - 1
---------------------------- ------------------------------
Total revenue 785 1,256
Costs and expenses:
Depreciation 624 624
Interest expense 17 80
Property taxes 20 19
Easement fees to related party 51 -
Management fees to
related party 20 -
Maintenance and other operating costs
to related and other parties 225 260
Insurance costs 67 55
Other operating costs 17 -
---------------------------- ------------------------------
Total costs and expenses 1,041 1,038
---------------------------- ------------------------------
Net income (loss) $ (256) $ 218
============================ ==============================
Net income (loss) per Unit $ (215) $ 183
============================ ==============================
Number of outstanding Limited
Partner Units 1,190 1,190
============================ ==============================
The accompanying notes are an integral part of the unaudited condensed financial
statements.
2
ZOND-PANAERO WINDSYSTEM PARTNERS I,
A CALIFORNIA LIMITED PARTNERSHIP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per Unit value, which is in whole dollars)
(Unaudited)
For the nine months ended
September 30, 2003 September 30, 2002
---------------------------- ------------------------------
Revenue:
Sale of electricity $ 3,166 $ 4,001
Other income - 41
---------------------------- ------------------------------
Total revenue 3,166 4,042
Costs and expenses:
Depreciation 1,872 1,872
Interest expense 72 301
Property taxes 59 52
Easement fees to related party 125 101
Management fees to
related party 50 40
Maintenance and other operating costs
to related and other parties 727 678
Insurance costs 202 167
Other operating costs 31 1
---------------------------- ------------------------------
Total costs and expenses 3,138 3,212
---------------------------- ------------------------------
Net income $ 28 830
============================ ==============================
Net income per Unit $ 24 $ 697
============================ ==============================
Number of outstanding Limited
Partner Units 1,190 1,190
============================ ==============================
The accompanying notes are an integral part of the unaudited condensed financial
statements.
3
ZOND-PANAERO WINDSYSTEM PARTNERS I,
A CALIFORNIA LIMITED PARTNERSHIP
UNAUDITED CONDENSED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(Dollars in thousands)
(Unaudited)
Substituted
Limited Contributed
General Limited Partner Capital
Total Partner Partners (Note 2) (Note 5)
-------------- -------------- -------------- -------------- --------------
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 28 - 28 - -
-------------- -------------- -------------- -------------- --------------
Balance at September 30, 2003 $ (948) (4) $ (1,521) (4) $ 581
==========================================================================
The accompanying notes are an integral part of the unaudited condensed financial
statements.
4
ZOND-PANAERO WINDSYSTEM PARTNERS I,
A CALIFORNIA LIMITED PARTNERSHIP
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
For the nine months Ended
September 30, 2003 September 30, 2002
---------------------------- ------------------------------
Cash Flow From Operating Activities:
Net income $ 28 $ 830
Reconciliation of net loss to net cash
provided by operating activities:
Depreciation 1,872 1,872
Changes in operating assets and liabilities
Accounts receivable 105 1,239
Acccounts receivable from related party (659) (2,565)
Prepaid insurance and other (88) 2
Accounts payable and accrued expenses 291 142
Amount payable to related party (354) 36
Accrued interest payable to related party 73 301
---------------------------- ------------------------------
Net cash provided by operating activities 1,268 1,857
Cash flows used in financing activities:
Principal payments on notes payable to related party (550) (1,307)
---------------------------- ------------------------------
Net increase in cash and cash equivalents 718 550
Cash and cash equivalents at beginning of the period 472 83
---------------------------- ------------------------------
Cash and cash equivalents at end of period $ 1,190 $ 633
============================ ==============================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ - $ -
The accompanying notes are an integral part of the unaudited condensed financial
statements.
5
ZOND-PANAERO WINDSYSTEM PARTNERS I,
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The financial statements included herein for the quarterly periods ended
September 30, 2003 and 2002 have been prepared by Zond-PanAero Windsystem
Partners I, a California Limited Partnership (the "Partnership") without audit
pursuant to the rules and regulations of the SEC. Accordingly, these statements
reflect all adjustments (consisting only of normal recurring entries), which
are, in the opinion of the Partnership, necessary for a fair statement of the
financial results for the interim periods. Certain information and notes
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Partnership believes that the disclosures
are adequate to make the information presented not misleading.
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
NOTE 2 - 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
6
Partnership of Zond-PanAero Windsystem Partners I, a California Limited
Partnership, entered into on November 29, 1984, as amended (the "Partnership
Agreement").
The Partnership Agreement states that 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"). As of the date of filing of this report,
the Partnership is in default of 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 Condensed Balance Sheets at September
30, 2003 and December 31, 2002 and the Unaudited Condensed Statements of Changes
in Partners' Capital (Deficit) for the three and nine months ended September 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
7
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 and its subsidiary companies retained
its 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.
New Management and Financial Reports
Until its appointment, the new management of the Partnership had no material
involvement with the business and operations of the Partnership. In the process
of reviewing the Partnership's books and records and through conversations with
prior management, it appeared to new management that the Partnership had
attempted, but failed, to file with the SEC certain Partnership Exchange Act
reports for certain time periods preceding the Enron bankruptcy. The submissions
of such reports into the EDGAR filing system were not accepted although prior
management apparently believed the filings were made successfully. These reports
consist of the Partnership's Form 10-K for the year ended December 31, 1999, the
Partnership's Forms 10-Q for each of the three quarters of 2000, the
Partnership's Form 10-K for the year ended December 31, 2000, and the
Partnership's Forms 10-Q for the first and second quarters of 2001. These
reports appear to have been prepared by prior management of the Partnership and
audited or reviewed, as the case may be, by Arthur Andersen LLP. The Partnership
has copies of the EDGARized version of each of such reports as well as most of
the cover sheets reflecting the attempted EDGAR submissions. To date, the
Partnership has not filed any of these reports with the SEC.
During the third quarter of 2003, current management of the Partnership
continued its review of the current and historical financial information
available to it, but was unable to prepare quarterly and annual reports that
complied with Exchange Act requirements because the Partnership had not been
able to retain an independent auditor. Management believed that the fact that
EWS is a debtor-in-possession under Chapter 11 of the Bankruptcy Code and the
fact that it and ZWM are indirect wholly owned subsidiaries of Enron made it
extraordinarily difficult for the Partnership to find an independent auditor to
replace Arthur Andersen LLP. As of November 15, 2003, in addition to the reports
disclosed in the previous paragraph, the Partnership had not filed the
Partnership's Form 10-K for the year ended December 31, 2001, the Partnership's
Forms 10-Q for each of the three quarters of 2002, the Partnership's Form 10-K
for the year ended December 31, 2002, or the Partnership's Forms 10-Q for each
of the three quarters of 2003.
8
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 (the "O&M Agreement") with SeaWest
Asset Management Services, LLC ("SeaWest") to provide certain operation and
maintenance services relating to the Windsystem for a 5 year period ending on
May 10, 2008. If EWS terminates the O&M Agreement prior to the end of its stated
term, EWS may be required to pay certain agreed demobilization fees to SeaWest.
If EWS is required to pay such fees, EWS may seek recovery from the Partnership
of some or all of the amount of such fees pursuant to the terms of the
Management Agreement. Management currently estimates that the amount of the
demobilization fee, if any, for which EWS would seek recovery from the
Partnership would not be in excess of approximately $100,000, with the amount of
such demobilization fee declining as of May 10 of each subsequent year until
contract expiration.
Substantial Transactions and Operating Agreements
The accompanying unaudited condensed financial statements include substantial
transactions with related parties. These transactions are further described in
Notes 4 and 5.
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 nine month period ended
September 30, 2003, the Partnership earned $.102 per kWh of electricity
delivered to SCE. Absent an extension of the Power Agreement, the
Partnership will not have the ability to sell power subsequent to
December 31, 2004. See Note 3 for additional information.
(2) Since July 1988, the Partnership has contracted with EWS (or its
predecessor) for the operation and maintenance of the Turbines and the
9
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 5 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. See Note 3 for
additional information.
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
10
certain ratio tests are met. The Partnership did not meet these criteria since
1985 and did not make cash distributions to its partners in the nine month
period ended September 30, 2002 or September 30, 2003.
NOTE 3 - GOING CONCERN
The following matters raise substantial doubt about the Partnership's ability to
continue as a going concern:
1. As discussed in Note 4 below, the Partnership has not had sufficient
cash flows from operations to make scheduled payments of principal and
interest on the outstanding Purchase Notes. Accordingly, the
Partnership is in default of the Purchase Notes. Upon notice of
default, MCC has a right to foreclose against its security interests in
the assets of the Partnership. As of the date of filing of this report,
MCC has not notified the Partnership of its intent to foreclose on its
security interest. Any such foreclosure by MCC on its security
interests in the assets of the Partnership would have a material
adverse effect on the Partnership.
2. The Partnership's assignment of rights under the Power Agreement
expires on December 31, 2004 and the Power Agreement expires in June
2005. Additionally, the Wind Park Easement Agreement expires on
December 31, 2004. The Partnership will have no ability to sell the
power it generates after December 31, 2004 without an extension of the
assignment of rights under the Power Agreement and an extension of the
Wind Park Easement Agreement. Additionally, if the Partnership were to
obtain an extension of its assignment of rights under the Power
Agreement, it could only be effective until June 2005, unless the Power
Agreement itself were extended beyond that date or some other
arrangements were made.
NOTE 4 - PURCHASE NOTES
Under an agreement reached in April 1989, MCC reduced the interest rate on the
Purchase Notes from 13% to 11% per annum 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.
As of September 30, 2003 there was $0.5 million and $5.8 million of principal
and interest in arrears, respectively on the Purchase Notes.
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. The Partnership's failure to make timely payments
on the Purchase Notes gave MCC the right to foreclose against its security
interest in the assets of the Partnership. MCC has not notified the Partnership
of its intent to foreclose on its security interests.
NOTE 5 - AMOUNTS PAYABLE TO RELATED PARTIES, NET
In addition to the Purchase Notes (See Note 4 above) the Partnership had amounts
payable to Mesa (See Note 2) and EWS, respectively as of September 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.
11
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 2 above).
The Partnership incurred $0.05 million in easement fees during the
third quarter of 2003 pursuant to the Wind Park Easement Agreement and
$0.1 million during the nine month period ended September 30, 2003.
(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 2 above). The Partnership
incurred expenses of $0.2 million during the third quarter of 2003
pursuant to the Management Agreement and $0.8 million during the nine
month period ended September 30, 2003.
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 6 - 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 prospective basis. Following the issuance of the CPUC Order, SCE
initiated discussions with renewable source generators, including the
Partnership, to agree on a payment plan for power delivered on a prospective
basis. The Partnership and SCE agreed that SCE would pay for delivered power
twice a month. This payment plan was effective from March 27, 2001, the date of
the CPUC Order through December 31, 2004. The CPUC Order did not address the
issue of payments due for the period from November 1, 2000 to March 26, 2001.
By the end of April 2001, the Partnership and SCE were not able to resolve SCE's
non-payment for power delivered for the period between November 1, 2000 and
March 26, 2001. 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 Power
Generators. On May 2, 2001, certain Power Generators, including the Partnership,
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filed suit against SCE 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 offered to settle all amounts past due, including a payment
for the past due amounts, with the Power Generators. The offer provided for the
payment of all amounts past due with interest accruing at 7% through 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 will restore 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. The Partnership, along with
the other Power Generators party to the SCE Litigation, dismissed the SCE
Litigation in August 2003.
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 Policies Act of 1978 ("PURPA") following Enron's acquisition
of Portland General Electric Company in 1997. 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 7 - SUBSEQUENT EVENTS
Purchase Notes
The Partnership is in default of the Purchase Notes. As of May 10, 2004, the
total amount in default is $4.3 million, which is totally comprised of interest
in arrears. The principal was paid off in January of 2004. See Notes 3 and 4 for
additional information.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Going Concern
The following matters raise substantial doubt about the Partnership's ability to
continue as a going concern:
1. The Partnership has not had sufficient cash flows from operations to
make scheduled payments of principal and interest on the outstanding
Purchase Notes. Accordingly, the Partnership is in default of the
Purchase Notes. Upon notice of default, MCC has a right to foreclose
against its security interests in the assets of the Partnership. As of
the date of filing of this report, MCC has not notified the Partnership
of its intent to foreclose on its security interest. Any such
foreclosure by MCC on its security interests in the assets of the
Partnership would have a material adverse effect on the Partnership.
2. The Partnership's assignment of rights under the Power Agreement
expires on December 31, 2004 and the Power Agreement expires in June
2005. Additionally, the Wind Park Easement Agreement expires on
December 31, 2004. The Partnership will have no ability to sell the
power it generates after December 31, 2004 without an extension of the
assignment of rights under the Power Agreement and an extension of the
Wind Park Easement Agreement. Additionally, if the Partnership were to
obtain an extension of its assignment of rights under the Power
Agreement, it could only be effective until June 2005, unless the Power
Agreement itself were extended beyond that date or some other
arrangements were made.
Liquidity and Capital Resources
The Partnership experienced a lack of liquidity throughout the third quarter 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 $0.5 million were in
arrears, and interest payments in the amount of $5.8 million, were in arrears at
September 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 September 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 September 30, 2003, the Partnership had no current or planned commitments
for capital expenditures.
Results of Operations for the Nine Months Ended September 30, 2003 Compared to
the Nine Months Ended September 30, 2002.
For the first nine months of 2003, revenues from power sales were $3.2 million,
and the Windsystem produced 30.1 million kWh of electricity for sale to SCE.
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This was a decrease of $0.9 million or 21% in revenue and a decrease of 8.2
million kWh of electricity produced or 21% as compared to 2002.
Costs and expenses in the first nine months of 2003 were $3.1 million, a
decrease of $0.1 million or 2%, as compared to 2002. This decrease can mainly be
attributed to the decrease in interest expense of $0.2 million, as compared to
2002 due to lower average principal balances on the Purchase Notes outstanding
during 2003.
Overall, the Partnership reported net income of $0.03 million for the nine
months of 2003, a decrease of $0.8 million or 96% as compared to 2002. During
the first nine months of 2003, total partners' deficit decreased by $0.03
million or 3% to ($0.9) million. Net income per Unit was $24 for the first nine
months of 2003 compared with a net income per Unit of $697 for the first nine
months of 2002.
Cash flows from operations decreased $0.6 million in the first nine months of
2003 as compared to 2002. This decrease was primarily due to a net impact of
unfavorable changes in working capital during 2003 and reduced earnings in 2003.
These decreases were offset by a decrease in principal payments on the Purchase
Notes. Cash flows used in financing activities decreased by $0.8 million due to
no payments being made on the Purchase Notes during the nine months ended
September 30, 2003.
Results of Operations for the Three Months Ended September 30, 2003 Compared to
the Three Months Ended September 30, 2002.
For the three months ending September 30, 2003, revenues from power sales were
$0.8 million and the Windsystem produced 7.7 million kWh of electricity for sale
to SCE, a decrease of $0.5 million or 14% in revenue and a decrease of 4.6
million kWh of electricity produced or 37% as compared to 2002.
Costs and expenses for the third quarter of 2003 were $1.0 million and were flat
as compared to the same period in 2002.
Overall, the Partnership reported a net loss of $0.3 million for the third
quarter of 2003, a decrease of $0.5 million as compared to the third quarter of
2002. Net loss per Unit was $215 for the third quarter of 2003 compared with a
net income per Unit of $183 for the third quarter of 2002.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The financial performance of the Partnership is affected by, among other things,
general economic, financial, competitive, legislative, legal, regulatory and
other factors that are beyond management's control. Changes in these factors
could make it more expensive to operate the Windsystem, or require additional
capital expenditures, or reduce certain benefits currently available to the
Partnership. There are a variety of other risks that affect the financial
performance of the Partnership, some of which are beyond management's control,
including but not limited to:
o The Partnership could perform below expected levels of output or
efficiency, which would reduce revenue;
15
o Changes or modifications to the rules and regulations of the Western
energy markets, and particularly the regulatory environment in
California, may negatively impact SCE's financial viability and the
Partnership's status as a QF;
o Operating and royalty costs could increase;
o Energy prices paid by SCE could decrease or terminate;
o Delivery of electrical energy to SCE could be curtailed, disrupted or
otherwise terminated;
o Environmental problems or regulation changes could arise which could lead
to fines or a shutdown of the Windsystem;
o Windsystem units and equipment have broken down or failed in the past and
could break down or fail in the future;
o The operators of the Windsystem could suffer labor disputes;
o The government could change permit or governmental approval requirements
restricting operations;
o Third parties could fail to perform their contractual obligations to the
Partnership; and
o Catastrophic events, such as fires, earthquakes, explosions, floods,
severe declines in wind volume, severe storms or other occurrences
including terrorism or war, could affect the Windsystem or SCE.
Item 4. CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act. This term means controls and other procedures of
a company that are designed to ensure that information required to be disclosed
by the company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company's
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
During 2002, following the resignation of Arthur Andersen LLP effective February
5, 2002, the Partnership did not have an independent accountant and did not file
periodic reports required by the Exchange Act. The Partnership has been actively
seeking to retain an independent accountant. In addition, during the third
quarter of 2003, the Partnership continued its efforts to put into place
procedures for gathering, analyzing, communicating to management and disclosing
the information the Partnership is required to disclose in the periodic reports
required by the Exchange Act. However, the Partnership was unable to file the
required periodic report for the three month period ended September 30, 2003
required under the Exchange Act, within the time period specified in the SEC's
rules and forms.
The Partnership's management, with the participation of the General Partner's
Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Partnership's disclosure controls and procedures as of
September 30, 2003. Based on these evaluations, the General Partner's Chief
Executive Officer and Chief Financial Officer concluded that the Partnership's
disclosure controls and procedures were not effective as of September 30, 2003
because (i) disclosure controls and procedures were not fully implemented by
September 30, 2003 and (ii) the Partnership did not timely file its
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required periodic report for the quarterly period ended September 30, 2003.
During the three months ended September 30, 2003, the Partnership made no change
in its internal controls over financial reporting that materially affected, or
is reasonably likely to materially affect, its internal controls over financial
reporting.
PART II - OTHER INFORMATION
1. Legal proceedings.
Litigation is discussed in Note 6 of the Condensed Financial Statements.
2. Changes in securities and use of proceeds.
Not applicable to the Partnership.
3. Defaults upon senior securities.
The Partnership is in default of the Purchase Notes. As of May 10, 2004, the
total amount in default is $4.3 million, which is totally comprised of interest
in arrears. The principal was paid off in January of 2004. See Notes 3, 4 and 7
to the Financial Statements for additional information.
4. Submission of matters to a vote of security holders.
Not applicable to the Partnership.
5. Other information.
This report 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
Exhibits
31.1 Rule 13a-14(a) Certification of Eric D. Gadd
31.2 Rule 13a-14(a) Certification of Mary H. Cilia
32.1 Section 1350 Certification of Eric D. Gadd
32.2 Section 1350 Certification of Mary H. Cilia
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zond-PanAero Windsystem Partners I
Date: May 10, 2004
------------
By: Zond Windsystems Management LLC,
General Partner
By: /s/ Eric D. Gadd
--------------------------------
Eric D. Gadd
Chief Executive Officer
By: /s/ Mary H. Cilia
--------------------------------
Mary H. Cilia
Chief Financial Officer of Zond Windsystems
Management LLC,
the General Partner of Zond-PanAero
Windsystem Partners I
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Exhibit Index
Number Description
31.1* Rule 13a-14(a) Certification of Eric D. Gadd
31.2* Rule 13a-14(a) Certification of Mary H. Cilia
32.1* Section 1350 Certification of Eric D. Gadd
32.2* Section 1350 Certification of Mary H. Cilia
* Filed with this report
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