UNITED STATES 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 June 30, 2004
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
Zip Code: 77010
Registrant's telephone number, including area code: (713) 345-3582
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 X NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
ZOND-PANAERO WINDSYSTEM PARTNERS I,
A CALIFORNIA LIMITED PARTNERSHIP
For the three and six months ended June 30, 2004
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets at June 30, 2004 (Unaudited) and December 31,
2003.
Unaudited Condensed Statements of Operations for the six months ended June
30, 2004 and June 30, 2003.
Unaudited Condensed Statements of Operations for the three months ended
June 30, 2004 and June 30, 2003.
Unaudited Condensed Statements of Changes in Partners' Deficit for the six
months ended June 30, 2004 and the year ended December 31, 2003.
Unaudited Condensed Statements of Cash Flows for the six months ended June
30, 2004 and June 30, 2003.
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 3. Defaults Upon Senior Securities
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
ZOND-PANAERO WINDSYSTEM PARTNERS I,
A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
(Dollars in thousands)
June 30, 2004 December 31, 2003
----------------- ---------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 442 $ 2,125
Accounts receivable from related party 1,237 921
Other current assets 87 40
---------------- -------------------
Total current assets 1,766 3,086
---------------- ------------------
Property, Plant and Equipment
Buildings 98 98
Plant and Equipment 49,561 49,561
Less - accumulated depreciation (48,465) (47,218)
---------------- ------------------
Property, Plant and Equipment, net 1,194 2,441
---------------- ------------------
Total assets $ 2,960 $ 5,527
================ ==================
Liabilities and partners' deficit
Current liabilities:
Accounts payable and accrued expenses $ 250 $ 392
Accounts payable to related party 63 255
Current portion of notes payable
to related party - 458
Accrued interest to related party 4,264 5,804
---------------- ------------------
Total current liabilities 4,577 6,909
---------------- ------------------
Partners' deficit
General partner (7) (6)
Limited partners (2,184) (1,951)
Substituted limited partner (Note 1) (7) (6)
Contributed Capital 581 581
---------------- ------------------
Total partners' deficit (1,617) (1,382)
---------------- ------------------
Total liabilities and partners'
deficit $ 2,960 $ 5,527
================ ==================
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 STATEMENT OF OPERATIONS
(Dollars in thousands, except per Unit value, which is in whole dollars)
For the Six Months Ended,
June 30, 2004 June 30, 2003
-------------------- --------------------
Revenue:
Sale of electricity $ 1,869 $ 2,381
-------------------- --------------------
Total revenue
1,869 2,381
Costs and expenses:
Depreciation 1,247 1,248
Interest expense 2 55
Property taxes 91 39
Easement fees to related party 78 74
Management fees to
related party 31 30
Maintenance and other operating costs
to related and other parties 460 502
Insurance costs 87 135
Other operating costs 108 14
-------------------- --------------------
Total costs and expenses 2,104 2,097
-------------------- --------------------
Net (loss) income $ (235) $ 284
-------------------- --------------------
Net (loss) income per Unit $ (197) $ 239
-------------------- --------------------
Number of outstanding Limited
Partner Units 1,190 1,190
==================== ====================
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 STATEMENT OF OPERATIONS
(Dollars in thousands, except per Unit value, which is in whole dollars)
For the Three Months Ended,
June 30, 2004 June 30, 2003
-------------------- --------------------
Revenue:
Sale of electricity $ 1,238 $ 1,706
-------------------- --------------------
Total revenue
1,238 1,706
Costs and expenses:
Depreciation 623 624
Interest expense - 28
Property taxes 20 19
Easement fees to related party 32 44
Management fees to
related party 13 18
Maintenance and other operating costs
to related and other parties 186 253
Insurance costs 44 68
Other operating costs 38 14
-------------------- --------------------
Total costs and expenses 956 1,068
-------------------- --------------------
Net income $ 282 $ 638
-------------------- --------------------
Net income per Unit $ 237 $ 536
-------------------- --------------------
Number of outstanding Limited
Partner Units 1,190 1,190
==================== ====================
The accompanying notes are an integral part of the unaudited condensed financial statements.
5
ZOND-PANAERO WINDSYSTEM PARTNERS I,
A CALIFORNIA LIMITED PARTNERSHIP
UNAUDITED CONDENSED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Dollars in thousands)
Substituted
Limited Contributed
General Limited Partner Capital
Total Partner Partners (Note 1) (Note 5)
-------------- -------------- ------------ -------------- --------------
Profit and loss allocation 100.00% 0.50% 99.00% 0.50%
-------------- -------------- ------------ -------------- --------------
Balance at December 31, 2002 (976) (4) (1,549) (4) 581
Net loss (406) (2) (402) (2) -
-------------- -------------- ------------ -------------- --------------
Balance at December 31, 2003 (1,382) (6) (1,951) (6) 581
Net loss (Unaudited) (235) (1) (233) (1) -
-------------- -------------- ------------ -------------- --------------
Balance at June 30, 2004 (Unaudited) $ (1,617) $ (7) $ (2,184) $ (7) $ 581
============== ============== ============ ============== ==============
The accompanying notes are an integral part of the unaudited condensed financial statements.
6
ZOND-PANAERO WINDSYSTEM PARTNERS I,
A CALIFORNIA LIMITED PARTNERSHIP
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
(Dollars in thousands)
For the Six Months Ended,
June 30, 2004 June 30, 2003
------------------- -------------------
Cash Flow From Operating Activities:
Net (loss) income $ (235) $ 284
Reconciliation of net (loss) income to net cash (used)
provided by operating activities:
Depreciation 1,247 1,248
Changes in operating assets and liabilities:
Accounts receivable - 105
Accounts receivable from related party (316) (892)
Other current assets (47) (129)
Accounts payable and accrued expenses (142) 224
Amount payable to related party (192) 192
Accrued interest payable to related party (1,540) 55
------------------- -------------------
Net cash (used in) provided by operating activities (1,225) 1,087
Cash flows used in financing activities:
Principal payments on notes payable to related party (458) -
------------------- -------------------
Net (decrease) increase in cash and cash equivalents (1,683) 1,087
Cash and cash equivalents at beginning of the period 2,125 472
------------------- -------------------
Cash and cash equivalents at end of period 442 1,559
------------------- -------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest 1,540 -
The accompanying notes are an integral part of the unaudited condensed financial statements.
7
ZOND-PANAERO WINDSYSTEM PARTNERS I,
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The Condensed financial statements included herein for the quarterly periods
ended June 30, 2004 and 2003 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 Securities and Exchange Commission
("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 presentation of the financial results for the interim
periods. Certain information and notes normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America 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. Operating results for
the interim periods presented are not necessarily indicative of the results that
may be expected for the year ended December 31, 2004.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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
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 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
8
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 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"). Neither ZWM nor ZC has
filed for bankruptcy.
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 accompanying Condensed Balance Sheets at June 30,
2004 (Unaudited) and December 31, 2003 and the Unaudited Condensed Statements of
Changes in Partners' Deficit for June 30, 2004 and December 31, 2003 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
9
(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 and its subsidiaries retained their
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 and subsequently were moved to 1221 Lamar Street,
Suite 1600, Houston, Texas 77010. Eric D. Gadd was appointed President and Chief
Executive Officer of ZWM on September 26, 2002. Mary Cilia was appointed Chief
Financial Officer and Treasurer of ZWM on May 3, 2004.
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 Securities
Exchange Act of 1934 ("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 (collectively, the "Historical Reports"). 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. In response to correspondence
from the Partnership requesting guidance regarding the filing of the Historical
Reports, the Partnership received a letter from the SEC dated June 16, 2004
that, among other things, stated that the Partnership should promptly file its
remaining delinquent Forms 10-K and Forms 10-Q. The Partnership is currently
reviewing copies of the Historical Reports. To date, the Partnership has not
filed any of the Historical Reports with the SEC.
During 2003, current management of the Partnership reviewed 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. At
that time, 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 would make it extraordinarily
difficult for the Partnership to find an independent auditor to replace Arthur
Andersen LLP. In 2003, the Partnership decided to file quarterly and annual
operating reports on Form 8-K disclosing unaudited financial and business
information about the Partnership on a quarterly basis until the Partnership was
10
able to retain an independent auditor and recommence filing periodic reports on
Forms 10-K and 10-Q.
On November 5, 2003, the Partnership filed a Form 8-K with the SEC disclosing
the foregoing information. Thereafter, using Form 8-K, the Partnership filed
operating reports with unaudited financial and business information for the
fiscal years ended December 31, 2001, 2002 and 2003, and for the fiscal quarters
ended March 31, 2003, June 30, 2003 and September 30, 2003. By filing these
operating reports, the Partnership publicly disclosed more recent financial and
business information. However, the operating reports contained unaudited
financial statements and were not in compliance with the requirements of the
Exchange Act. In addition, the operating reports did not cover all periods for
which the Partnership failed to file periodic reports. On January 28, 2004, the
Partnership retained Hein & Associates LLP as its independent accountant. On May
10, 2004, the Partnership filed with the SEC the Partnership's comprehensive
Form 10-K for the fiscal years ended December 31, 2001, 2002 and 2003 and the
Partnership's Forms 10-Q for each of the first three quarters of 2003. On May
14, 2004, the Partnership timely filed with the SEC the Partnership's Form 10-Q
for the first quarter of 2004.
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 attempt to 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 at December 31,
2004, 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
11
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 both of the six months ended June 30, 2003 and
June 30, 2004, the Partnership earned $.102 per kWh of electricity
delivered to SCE. Absent an extension of rights under 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
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 terminates 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
12
the annual rental payment due under the Right-of-Way Grant to a flat rent
of $79,000. 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 has not met these criteria since
1985. The Partnership did not make cash distributions to its partners during the
six month periods ended June 30, 2003 or June 30, 2004.
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 interests. 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 were extended beyond that date or some other
arrangements were made.
3. The Partnership's operation and maintenance service provider was
provided notice from SCE that beginning April 13, 2004 the amount of
electricity that the Windsystem could generate and deliver to SCE was
being curtailed by approximately 75%. A representative from SCE
explained that the curtailment action was being taken due to the
re-routing of power as a result of the construction of a new power
line. SCE substantially curtailed the Partnership's electrical
production from the Windsystem beginning April 13, 2004 and continuing
through May 17, 2004 (the "SCE Curtailment"). Historically, the second
quarter of the year has been a relatively high production quarter. The
SCE Curtailment resulted in lower production and correspondingly lower
cash flows for the Partnership than would have been expected based
upon past results. See Note 7. After making payments related to
13
ongoing operations, the Partnership was unable to make payments of
accrued interest on the Purchase Notes which are currently in default.
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 June 30, 2004, the principal has been fully repaid but there remains $4.3
million of interest in arrears on the Purchase Notes.
The Partnership's cash flows have been insufficient to make scheduled payments
associated with the Purchase Notes. Under the terms of the Purchase Notes,
payments made by the Partnership are applied towards principal and then towards
accrued and unpaid interest. The Purchase Notes matured on December 31, 2002. As
a result, all outstanding principal and unpaid interest on the Purchase Notes
was due at that time. The Partnership's non-payment of interest in arrears on
the Purchase Notes gives MCC the right to foreclose against its security
interests 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 above) and EWS, respectively as of June 30,
2004. 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 2 above). The Partnership
incurred $0.03 million in easement fees during the second quarter of 2004
as compared to $0.04 million 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 2 above). The Partnership incurred expenses
of $0.2 million during the second quarter of 2004 as compared to $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 two general 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.
14
NOTE 6 - LITIGATION
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. The Partnership and the FERC Trial Staff have settled the
issues under investigation and entered into a Consent Agreement dated March 10,
2004 (the "Consent Agreement"). Pursuant to the Consent Agreement, the
Partnership and the FERC Trial Staff agreed that the Windsystem is a QF
notwithstanding Enron's indirect equity interest in the Windsystem and the other
contractual relationships between the Partnership and various affiliates of
Enron. The FERC approved the Consent Agreement effective June 2, 2004.
NOTE 7 - SUBSEQUENT EVENTS
Purchase Notes
The Partnership is in default of the Purchase Notes. MCC has not notified the
Partnership of its intent to foreclose on its security interest. As of August
13, 2004, the total amount in default is $4.3 million, which is comprised
entirely of interest in arrears. The terms of the Purchase Notes do not require
that the Partnership pay additional interest on the accrued and unpaid interest
due under the Purchase Notes. See Notes 3 and 4 for additional information.
SCE Curtailment
By letter dated June 22, 2004, Enron Wind LLC, on behalf of the sellers under
the Power Agreement, issued for payment an invoice to SCE in the amount of
approximately $750,000 to compensate the Partnership and ZP II for their
estimated losses during the SCE Curtailment. During this period, SCE curtailed
the Partnership's production of electric power by approximately 75%, resulting
in the Partnership's inability to produce and sell a significant portion of
electric power. Of the approximately $750,000 invoiced to SCE, approximately
$482,000 represents lost revenue that otherwise would have been paid to the
Partnership. To date, SCE has not responded to the demand for payment and none
of the amount invoiced to SCE has yet been recorded as revenue for the
Partnership. See Note 3.
15
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 interests. 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 were extended beyond that date or some other
arrangements were made.
3. The Partnership's operation and maintenance service provider was
provided notice from SCE that beginning April 13, 2004 the amount of
electricity that the Windsystem could generate and deliver to SCE was
being curtailed by approximately 75%. A representative from SCE
explained that the curtailment action was being taken due to the
re-routing of power as a result of the construction of a new power
line. SCE substantially curtailed the Partnership's electrical
production from the Windsystem during the period from April 13, 2004
through May 17, 2004 (the "SCE Curtailment"). Historically, the second
quarter of the year has been a relatively high production quarter. The
SCE Curtailment resulted in lower production and correspondingly lower
cash flows for the Partnership than would have been expected based
upon past results. After making payments related to ongoing
operations, the Partnership was unable to make payments of accrued
interest on the Purchase Notes which are currently in default.
Liquidity and Capital Resources
The Partnership experienced a lack of liquidity throughout the second quarter of
2004, primarily due to an ongoing shortfall in revenues from operations in
comparison to the costs and expenses of operations. The Purchase Notes matured
on December 31, 2002, and all of the outstanding principal and accrued and
unpaid interest under the Purchase Notes was due at that time. The Partnership
has not generated sufficient cash flow to pay the accrued and unpaid interest on
the Purchase Notes. As a result, interest payments on the Purchase Notes in the
aggregate amount of $4.3 million, were in arrears at June 30, 2004. The
Partnership's failure to pay on December 31, 2002 such outstanding principal and
accrued interest in arrears on the Purchase Notes resulted in a default under
the Purchase Notes, and such default is continuing with respect to the
nonpayment of accrued interest. This continuing default gives MCC the right to
16
foreclose against the collateral of its loans as set forth in the Purchase
Notes.
As of June 30, 2004 and as of the filing of this report, MCC had not exercised
its right to foreclosure under the Purchase Notes. See "Results of Operations
for the Three Months Ended June 30, 2004 Compared to the Three Months Ended June
30, 2003".
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. During the
second quarter of 2004, the Partnership's production and revenues were less than
expected due to the SCE Curtailment.
As of June 30, 2004, the Partnership had no current or planned commitments for
capital expenditures.
Results of Operations for the Six Months Ended June 30, 2004 Compared to the Six
Months Ended June 30, 2003.
For the first six months of 2004, revenues from power sales were $1.9 million,
and the Windsystem produced 18.3 million kWh of electricity for sale to SCE.
This was a decrease of $0.5 million or 22% in revenue and a decrease of 5.0
million kWh of electricity produced or 21% as compared to the same period in
2003. This decrease was primarily due to the SCE Curtailment.
Total costs and expenses in the first six months of 2004 and 2003 were $2.1
million. Interest expense decreased $0.05 million in the first half of 2004 as
compared to the same period in 2003 due to lower average principal balances on
the Purchase Notes outstanding during 2004. Property taxes increased $0.05
million in the first half of 2004 as compared to the same period in 2003 due to
tax penalties related to prior periods being assessed in 2004. Maintenance
expenses decreased $0.04 million in the first six months of 2004 due to a
decrease in unscheduled maintenance as compared to the first six months of 2003.
Insurance expenses decreased $0.05 million in the first six months of 2004 due
to a decrease in premiums as compared to the same period in 2003. Other
operating costs increased $0.09 million in the first six months of 2004 due to
an increase in the use of outside consultants as compared to the same period in
2003.
Overall, the Partnership reported a net loss of $0.2 million for the first six
months of 2004, which is a decrease of $0.5 million as compared to the first six
months of 2003. During the first six months of 2004, total partners' deficit
increased by $0.2 million or 17% to $1.7 million from the first six months of
2003. Net loss per Unit was $197 for the first six months of 2004 compared with
a net income per Unit of $239 for the first six months of 2003.
Cash flows from operations decreased $2.3 million in the first six months of
2004 as compared to 2003. This decrease was primarily due to the payment of $1.5
million in interest on the Purchase Notes on January 16, 2004. Other factors
contributing to the decrease included a net impact of unfavorable changes in
working capital as well as reduced earnings in the first half of 2004 due
primarily to the SCE Curtailment. Cash flows used in financing activities
increased by $0.5 million due to principal payments made on the Purchase Notes
during the six months ended June 30, 2004, while none were made during the six
months ended June 30, 2003.
17
Results of Operations for the Three Months Ended June 30, 2004 Compared to the
Three Months Ended June 30, 2003.
For the three months ended June 30, 2004, revenues from power sales were $1.2
million, and the Windsystem produced 12.1 million kWh of electricity for sale to
SCE for the second quarter of 2004. This was a decrease of $0.5 million or 27%
in revenue and a decrease of 4.6 million kWh of electricity produced or 27% as
compared to the same period in 2003. This decrease was primarily due to the SCE
Curtailment.
Costs and expenses for the second quarter of 2004 were $1.0 million. This was a
decrease of $0.1 million or 11%, as compared to the second quarter of 2003.
Overall, the Partnership reported net income of $0.3 million for the second
quarter of 2004, which is a decrease of $0.4 million or 56% as compared to the
second quarter of 2003. Net income per Unit was $237 for the second quarter of
2004 compared with a net income per Unit of $536 for the second quarter of 2003.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's management, with the participation of the General Partner's
Chief Executive Officer and Chief Financial Officer has evaluated the disclosure
requirements of Item 305 of Regulation S-K "Quantitative and Qualitative
Disclosures about Market Risk,"and has concluded that the Partnership has no
market risk sensitive instruments for which this disclosure is required.
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 2003, the Partnership 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. In
April of 2004, the Partnership formalized, in writing, its disclosure controls
and procedures. 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 June 30, 2004. 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 effective as of June 30,
2004.
18
During the three months ended June 30, 2004, 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.
19
PART II - OTHER INFORMATION
Item 1. Legal proceedings.
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. The Partnership and FERC Trial Staff have settled the issues
under investigation and entered into a Consent Agreement dated March 10, 2004
(the "Consent Agreement"). Pursuant to the Consent Agreement, the Partnership
and FERC Trial Staff agreed that the Windsystem is a QF notwithstanding Enron's
indirect equity interest in the Windsystem and the other contractual
relationships between the Partnership and various affiliates of Enron. The FERC
approved the Consent Agreement effective June 2, 2004.
Item 3. Defaults upon senior securities.
The Partnership is in default of the Purchase Notes. As of August 13, 2004, the
total amount in default is $4.3 million, which is comprised of unpaid interest
in arrears. The outstanding principal balance of the Purchase Notes was paid by
the Partnership in January of 2004. See Notes 3, 4 and 7 to the Financial
Statements for additional information.
Item 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.
20
Item 6. Exhibits and reports of Form 8-K
(a) 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
(b) Reports on Form 8-K
None.
21
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, a
Date: August 13, 2004 California Limited Partnership
---------------
By: Zond Windsystems Management LLC,
General Partner
By: /s/ Eric D. Gadd
-------------------------------
Eric D. Gadd
Chief Executive Officer of Zond Windsystems
Management LLC,
The General Partner of Zond-PanAero
Windsystem Partners I,
a California Limited Partnership
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,
a California Limited Partnership
22
Exhibit Index
Number Description
31.1* Rule 13a-14(a) Certification of Eric D. Gadd
31.2* Rule 13a-14(a) Certification of Eric D. Gadd
32.1* Section 1350 Certification of Eric D. Gadd
32.2* Section 1350 Certification of Mary H. Cilia
* Filed with this report
23