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 September 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 nine months ended September 30, 2004
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 2004 (Unaudited) and December 31,
2003.
Unaudited Condensed Statements of Operations for the nine months ended
September 30, 2004 and September 30, 2003.
Unaudited Condensed Statements of Operations for the three months ended
September 30, 2004 and September 30, 2003.
Unaudited Condensed Statements of Changes in Partners' Deficit for the nine
months ended September 30, 2004 and the year ended December 31, 2003.
Unaudited Condensed Statements of Cash Flows for the nine months ended
September 30, 2004 and September 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 3. Defaults Upon Senior Securities
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, 2004 December 31, 2003
------------------ -----------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,862 $ 2,125
Accounts receivable from related party 658 921
Other current assets 107 40
----------- -----------
Total current assets 2,627 3,086
----------- -----------
Property, Plant and Equipment
Buildings 98 98
Plant and Equipment 49,561 49,561
Less - accumulated depreciation (49,089) (47,218)
----------- -----------
Property, Plant and Equipment, net 570 2,441
----------- -----------
Total assets $ 3,197 $ 5,527
=========== ===========
Liabilities and partners' deficit
Current liabilities:
Accounts payable and accrued expenses $ 248 $ 392
Accounts payable to related party 209 255
Current portion of notes payable
to related party - 458
Accrued interest to related party 4,265 5,804
----------- -----------
Total current liabilities 4,722 6,909
----------- -----------
Partners' deficit
General partner (7) (6)
Limited partners (2,092) (1,951)
Substituted limited partner (Note 2) (7) (6)
Contributed Capital 581 581
----------- -----------
Total partners' deficit (1,525) (1,382)
----------- -----------
Total liabilities and partners' ----------- -----------
deficit $ 3,197 $ 5,527
=========== ===========
The accompanying notes are an integral part of the unaudited condensed financial
statements.
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)
For the Three Months Ended,
September 30, 2004 September 30, 2003
------------------ ------------------
Revenue:
Sale of electricity $ 1,094 $ 785
----------- -----------
Total revenue 1,094 785
Costs and expenses:
Depreciation 624 624
Interest expense - 17
Property taxes (28) 20
Easement fees to related party 85 51
Management fees to
related party 34 20
Maintenance and other operating costs
to related and other parties 202 225
Insurance costs 44 67
Other operating costs 41 17
----------- -----------
Total costs and expenses 1,002 1,041
----------- -----------
Net (loss) income $ 92 $ (256)
=========== ===========
Net (loss) income per Unit $ 77 $ (215)
=========== ===========
Number of outstanding Limited
Partner Units 1,190 1,190
=========== ===========
The accompanying notes are an integral part of the unaudited condensed financial
statements.
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)
For the Nine Months Ended,
September 30, 2004 September 30, 2003
------------------ ------------------
Revenue:
Sale of electricity $ 2,963 $ 3,166
----------- -----------
Total revenue 2,963 3,166
Costs and expenses:
Depreciation 1,871 1,872
Interest expense 2 72
Property taxes 63 59
Easement fees to related party 163 125
Management fees to
related party 65 50
Maintenance and other operating costs
to related and other parties 662 727
Insurance costs 131 202
Other operating costs 149 31
----------- -----------
Total costs and expenses 3,106 3,138
----------- -----------
Net (loss) income $ (143) $ 28
=========== ===========
Net (loss) income per Unit $ (120) $ 24
=========== ===========
Number of outstanding Limited
Partner Units 1,190 1,190
=========== ===========
The accompanying notes are an integral part of the unaudited condensed financial
statements.
ZOND-PANAERO WINDSYSTEM PARTNERS I,
A CALIFORNIA LIMITED PARTNERSHIP
UNAUDITED CONDENSED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(Dollars in thousands)
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, 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) (143) (1) (141) (1) -
-------- ------- -------- -------- -----------
Balance at September 30,
2004 (Unaudited) $ (1,525) $ (7) $(2,092) $ (7) $ 581
======== ======= ======== ======== ===========
The accompanying notes are an integral part of the unaudited condensed financial
statements.
ZOND-PANAERO WINDSYSTEM PARTNERS I,
A CALIFORNIA LIMITED PARTNERSHIP
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Nine Months Ended,
September 30, 2004 September 30, 2003
------------------ ------------------
Cash Flow From Operating Activities:
Net (loss) income $ (143) $ 28
Reconciliation of net (loss) income
to net cash provided by operating
activities:
Depreciation 1,871 1,872
Changes in operating assets
and liabilities:
Accounts receivable - 105
Accounts receivable from related party 263 (659)
Other current assets (67) (88)
Accounts payable and accrued expenses (144) 291
Amount payable to related party (46) (354)
Accrued interest payable to related
party (1,539) 73
----------- -----------
Net cash provided by operating
activities 195 1,268
Cash flows used in financing
activities:
Principal payments on notes payable
to related party (458) (550)
----------- -----------
Net (decrease) increase in cash
and cash equivalents (263) 718
Cash and cash equivalents at beginning
of the period 2,125 472
----------- -----------
Cash and cash equivalents at end of
period $ 1,862 $ 1,190
=========== ===========
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.
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 and nine
month periods ended September 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 of Zond
Corporation was changed to Enron Wind Corp. ("EWC").
The general partner (the "General Partner") of the Partnership is Zond
Windsystems Management LLC ("ZWM"), a California limited liability company
wholly-owned by Enron Wind Systems, LLC ("EWS"). See "Bankruptcy and Mergers"
regarding certain affiliated mergers and name changes affecting ZWM, EWS and
EWC. The business of the Partnership and the respective rights of its partners,
including the Partnership's limited partners (the "Limited Partners"), are
governed by the First Amended and Restated Certificate and Agreement of Limited
Partnership of Zond-PanAero Windsystem Partners I, a California Limited
Partnership, entered into on November 29, 1984, as amended (the "Partnership
Agreement").
The Partnership 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, 4 and 6 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
September 30, 2004 (Unaudited) and December 31, 2003 and the Unaudited Condensed
Statements of Changes in Partners' Deficit for September 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 (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 H. 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 have made 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
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. The
Partnership timely filed with the SEC the Partnership's Forms 10-Q for the first
and second quarters 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 may 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
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 nine months ended September 30, 2004
and 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
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. 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
nine month periods ended September 30, 2004 or September 30, 2003.
SCE Curtailment
SCE substantially curtailed the Partnership's electrical production from the
Windsystem from April 13, 2004 through May 17, 2004 (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. 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.
Of the approximately $750,000 invoiced to SCE, approximately $482,000 represents
lost revenue that otherwise would have been paid to the Partnership. By letter
dated September 22, 2004, SCE informed Enron Wind LLC that the SCE Curtailment
was in compliance with all applicable power purchase agreements, and that SCE
would not reimburse any projects, including the Partnership, for any revenues
that may have been lost during the SCE Curtailment. As a result, none of the
amount invoiced to SCE has been recorded as revenue for the Partnership. The
Partnership is currently considering its options relating to SCE's refusal to
compensate the Partnership for its lost revenues resulting from the SCE
Curtailment. See Note 6.
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, and does not
anticipate that it will have, sufficient cash flows from operations to make
payment in full of the accrued but unpaid interest on the outstanding
Purchase Notes. The Partnership continues to be 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. The Partnership is currently in negotiations with Mesa to obtain
extensions of the assignment of rights under the Power Agreement and of the
Wind Park Easement Agreement through June 2005. There is no assurance that
these negotiations will result in extensions of the applicable agreements.
If the Partnership is unable to obtain these extensions, the Partnership
will have no contractual right to sell power to SCE under the Power
Agreement after December 31, 2004. Furthermore, pursuant to the Wind Park
Easement Agreement, the Partnership either will be required to remove the
Turbines from the Operating Site, abandon the Turbines, or sell the
Turbines to Mesa pursuant to Mesa's right of first refusal as set forth in
the Wind Park Easement Agreement. The Partnership is currently evaluating
these alternatives in the event the applicable extensions are not obtained.
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.
The Purchase Notes matured on December 31, 2002. The principal on the Purchase
Notes was fully repaid in the first quarter of 2004, but there remains $4.3
million of interest in arrears on the Purchase Notes. 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. The Partnership has not had, and does not anticipate that it will
have, sufficient cash flows from operations to make payment in full of the
accrued but unpaid interest on the outstanding Purchase Notes. 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.
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 September 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 $0.09 million in easement fees during the third quarter of 2004 as
compared to $0.05 million during the third quarter of 2003, pursuant to the
Wind Park Easement Agreement.
(2) The Partnership contracted with EWS 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 $0.3 million during the third quarter of 2004 as compared to $0.2
million during the third 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, EWS and an affiliate of PanAero. EWS 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 - 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 the date
of this filing, the total amount in default on the Purchase Notes is $4.3
million, which is comprised entirely of interest in arrears. See Notes 3 and 4
for additional information.
SCE Curtailment
The Partnership is currently considering its options relating to SCE's refusal
to compensate the Partnership for its lost revenues resulting from the SCE
Curtailment. See Note 2, SCE Curtailment, above.
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, and does not anticipate that it will have,
sufficient cash flows from operations to make scheduled payments of
principal and interest on the outstanding Purchase Notes. The Partnership
continues to be 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. The Partnership is currently in negotiations with Mesa to obtain
extensions of the assignment of rights under the Power Agreement and of the
Wind Park Easement Agreement through June 2005. There is no assurance that
these negotiations will result in extensions of the applicable agreements.
If the Partnership is unable to obtain these extensions, the Partnership
will have no contractual right to sell power to SCE under the Power
Agreement after December 31, 2004. Furthermore, pursuant to the Wind Park
Easement Agreement, the Partnership either will be required to remove the
Turbines from the Operating Site, abandon the Turbines, or sell the
Turbines to Mesa pursuant to Mesa's right of first refusal as set forth in
the Wind Park Easement Agreement. The Partnership is currently evaluating
these alternatives in the event the applicable extensions are not obtained.
Liquidity and Capital Resources
The Partnership experienced a lack of liquidity throughout the third 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 remaining 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 September 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 foreclose against the collateral of its loans as set forth in the Purchase
Notes.
As of September 30, 2004 and as of the date of the filing of this report, MCC
had not exercised its right to foreclose under the Purchase Notes. See "Results
of Operations for the Three Months Ended September 30, 2004 Compared to the
Three Months Ended September 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.
As of September 30, 2004, the Partnership had no current or planned commitments
for capital expenditures.
Results of Operations for the Nine Months Ended September 30, 2004 Compared to
the Nine Months Ended September 30, 2003.
For the first nine months of 2004, revenues from power sales were $3.0 million,
and the Windsystem produced 29.0 million kWh of electricity for sale to SCE.
This was a decrease of $0.2 million or 6% in revenue and a decrease of 2.0
million kWh of electricity produced or 6% as compared to the same period in
2003. This decrease was primarily due to the SCE Curtailment during the second
quarter of 2004.
Total costs and expenses in the first nine months of each of 2004 and 2003 were
$3.1 million. Interest expense decreased $0.07 million in the first nine months
of 2004 as compared to the same period in 2003 due to lower average principal
balances on the Purchase Notes outstanding during 2004. Maintenance expenses
decreased $0.07 million in the first nine months of 2004 due to a decrease in
unscheduled maintenance as compared to the first nine months of 2003. Insurance
expenses decreased $0.07 million in the first nine months of 2004 due to a
decrease in premiums as compared to the same period in 2003. Easement fees,
which are calculated as 5% of gross operating proceeds, increased $0.04 million
in the first nine months of 2004 as compared to the first nine months of 2003
due to the timing of the receipt of cash proceeds from the sale of electricity.
Similarly, management fees, which are calculated as 2% of gross operating
proceeds, increased $0.02 million in the first nine months of 2004 as compared
to the first nine months of 2003 due to the timing of the receipt of cash
proceeds from the sale of electricity. Other operating costs increased $0.12
million in the first nine 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 $0.1 million for the first nine
months of 2004, which is a decrease of $0.2 million as compared to the first
nine months of 2003. During the first nine months of 2004, total partners'
deficit increased by $0.1 million or 10% to $1.5 million from the first nine
months of 2003. Net loss per Unit was $120 for the first nine months of 2004
compared with a net income per Unit of $24 for the first nine months of 2003.
Cash flows from operations decreased $1.1 million in the first nine months of
2004 as compared to the first nine months of 2003. This decrease was primarily
due to the payment of $1.5 million in interest on the Purchase Notes on January
16, 2004. The decrease was offset in part by increased collections of accounts
receivable in the first nine months of 2004 as compared to the first nine months
of 2003. Cash flows used in financing activities during the first nine months of
2004 decreased $0.01 million as compared to the first nine months of 2003. The
use of cash in financing activities in both periods related to principal
payments on the Purchase Notes.
Results of Operations for the Three Months Ended September 30, 2004 Compared to
the Three Months Ended September 30, 2003.
For the three months ended September 30, 2004, revenues from power sales were
$1.1 million, and the Windsystem produced 10.7 million kWh of electricity for
sale to SCE for the third quarter of 2004. This was an increase of $0.3 million
or 39% in revenue and an increase of 3.0 million kWh of electricity produced or
39% as compared to the same period in 2003.
Total costs and expenses for the third quarter of each of 2004 and 2003 were
$1.0 million. Interest expense decreased $0.02 million in the third quarter of
2004 as compared to the same period in 2003 due to the full payment of the
principal balance on the Purchase Notes in January 2004. Maintenance expenses
decreased $0.02 million in the third quarter of 2004 due to a decrease in
unscheduled maintenance as compared to the third quarter of 2003. Insurance
expenses decreased $0.02 million in the third quarter of 2004 due to a decrease
in premiums as compared to the same period in 2003. Property tax expense was
negative in the third quarter of 2004 due to an adjustment to previously
recorded property tax expense, based on a reimbursement from EWS to the
Partnership of penalties paid by the Partnership relating to the late payment of
property taxes. Easement fees, which are calculated as 5% of gross operating
proceeds, increased $0.03 million in the third quarter of 2004 as compared to
the third quarter of 2003 due to the timing of the receipt of cash proceeds from
the sale of electricity. Similarly, Management fees, which are calculated as 2%
of gross operating proceeds, increased $0.01 million in the third quarter of
2004 as compared to the third quarter of 2003 due to the timing of the receipt
of cash proceeds from the sale of electricity. Other operating costs increased
$0.02 million in the third quarter of 2004 due to an increase in the use of
outside consultants as compared to the same period in 2003.
Overall, the Partnership reported net income of $0.09 million for the third
quarter of 2004, which is an increase of $0.3 million as compared to the third
quarter of 2003. Net income per Unit was $77 for the third quarter of 2004
compared with a net loss per Unit of $215 for the third 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.
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, 2004. Based on this evaluation, the General Partner's Chief
Executive Officer and Chief Financial Officer concluded that the Partnership's
disclosure controls and procedures were effective as of September 30, 2004.
During the three months ended September 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.
PART II - OTHER INFORMATION
Item 3. Defaults upon senior securities.
The Partnership is in default of the Purchase Notes. As of the date of this
filing, the total amount in default on the Purchase Notes is $4.3 million, which
is comprised of unpaid interest in arrears. The outstanding principal of the
Purchase Notes was paid in full by the Partnership in January of 2004. See Notes
3, 4 and 6 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.
Item 6. Exhibits and reports on 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.
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
California Limited Partnership
Date: November 12, 2004
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
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