Item 1. BUSINESS
Introduction
Zond-PanAero Windsystem Partners I, a California Limited Partnership (the "Partnership") was formed on June 29, 1984, to purchase, own and operate a system of 300 Vestas Energy A/S Model V15 wind turbine electric generators (the "Turbines"). The electricity generated by the Turbines is sold by the Partnership to its sole customer, Southern California Edison Company ("SCE").
Each Turbine has a rated capacity of 65 kilowatts, and the Turbines have an aggregate rated capacity of 19.5 megawatts. The Turbines, together with certain infrastructural improvements (the "Infrastructural Improvements"), form an integrated electric power generating facility (the "Windsystem"). The Windsystem is located in the San Gorgonio Pass area of the San Bernardino Mountains near Palm Springs, California (the "Operating Site").
The Turbines are interconnected by a system of transformers and power transfer lines to a substation and SCE's transmission grid. The individual power lines from each of the Turbines are fed into step-up transformers, which increase the voltage from 480 volts to 12.5 kilovolts. Additional 12.5 kilovolt power transfer lines carry electricity to a substation, which steps up the electric power to 115 kilovolts for delivery to SCE.
The Windsystem, which became operational in November 1984, was constructed by Mesa Construction Company ("MCC"), a joint venture formed between an affiliate of Enron Wind Systems, Inc. ("EWSI") and an affiliate of PanAero Corporation ("PanAero"). The Partnership paid MCC a total of $48.9 million, comprised of $22.4 million in cash and $26.5 million in the form of notes (the "Purchase Notes"), for the purchase, construction and installation of the Turbines. The Purchase Notes matured on December 31, 2002. At that time, there was $1.0 million and $5.7 million of principal and interest in arrears, respectively. As of the date of this filing, the total amount in default is $2.8 million, which is comprised of interest in arrears. 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 terminates on December 31, 2005, unless terminated earlier in accordance with the terms of the Partnership Agreement. On January 3, 1997, EWSI's parent company, Zond Corporation, became a wholly-owned subsidiary of Enron Renewable Energy Corp. ("EREC"), which is wholly owned by Enron Corp. ("Enron"). The general partner of the Partnership (the "General Partner") is Zond Windsystems Management LLC ("ZWM"), a California limited liability company wholly-owned by Enron Wind Systems, LLC ("EWS").
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"). This matter is referred to herein as the "Enron Bankruptcy". On February 20, 2002, Enron Wind Corp. ("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 turbine manufacturing 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 Windsystem 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.
On November 17, 2004, the Chapter 11 Plan (the "Plan") relating to the Enron Bankruptcy became effective. The Plan provides for Enron and its affiliated debtor companies (including EWS and EW) to sell most of their assets and distribute to their creditors the proceeds of such sales. In connection with the Plan, EWS assumed the Management Agreement (as defined below) and that agreement remains in effect.
Sale to General Electric
On April 10, 2002, Enron, EWC and certain of its subsidiaries, including EWSI, entered into an Amended and Restated Purchase and Sale Agreement in which such entities agreed to sell in an asset sale (the "GE Sale") their wind turbine manufacturing, operation and maintenance and construction businesses to General Electric Company, acting through its GE power systems business ("GEPS"). The GE Sale was consummated on May 10, 2002. EW and its subsidiary companies retained its existing wind power projects, including the indirect ownership of the general partnership interest in the Partnership. However, effective as of the sale, substantially all of the employees who had been involved in the management of the Partnership transferred to GEPS.
Following the sale to GEPS, certain Enron personnel who were not formerly involved with the management or operations of the Partnership were appointed to manage and operate the Partnership and ZWM's principal executive offices were moved to 1400 Smith Street, Houston Texas 77002. In March 2004, the principal executive offices 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. ZWM has no directors. The directors of EREC may be deemed directors of the Partnership under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Change in Management and Financial Reports
Until its appointment in May 2002, following the sale of assets to GEPS, the current 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 current management that the Partnership had attempted, but failed, to file with the Securities and Exchange Commission (the "SEC") certain
Partnership Exchange Act reports for certain time periods preceding the Enron Bankruptcy. The submissions of such reports into the EDGAR filing system were not accepted although prior management apparently believed the filings were made successfully. These reports consist of the Partnership's Form 10-K for the year ended December 31, 1999, the Partnership's Forms 10-Q for each of the three quarters of 2000, the Partnership's Form 10-K for the year ended December 31, 2000, and the Partnership's Forms 10-Q for the first and second quarters of 2001 (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 ("Arthur Anderson"). The Partnership has copies of the EDGAR 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 has filed a comprehensive Form 10-K dated March 29, 2005 for the fiscal years ended December 31, 1999 and 2000 in lieu of filing separate annual and interim reports for such periods.
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 was to terminate by its terms on December 31, 2004, however, on February 16, 2005, the Partnership and EWS entered into a Third Amendment to Windsystem Management Agreement (the "Management Agreement Amendment"), which amendment was effective as of December 31, 2004. The Management Agreement Amendment extended the termination date of the Management Agreement from December 31, 2004 to June 23, 2005. See Part I, "Item 1. BUSINESS - - Going Concern." 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, 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 $72,000.
Sale of Electric Power
The Partnership sells the electric power generated by the Turbines to SCE under 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 Wind Developers ("Mesa"), a joint venture between EWSI and an affiliate of PanAero, 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 pursuant to that certain Partial Assignment of Wind Park Power Purchase and Sales Agreement dated September 28, 1984 (the "Partial Assignment"). Such assignment was to terminate effective
December 31, 2004, however, on February 16, 2005 the Partnership and Mesa entered into an Amendment to Partial Assignment of Wind Park Power Purchase and Sales Agreement (the "Partial Assignment Amendment") which amendment was effective as of December 31, 2004. The Partial Assignment Amendment extended the termination date of the Partial Assignment from December 31, 2004 to June 23, 2005. See Part I, "Item 1. BUSINESS - Going Concern." 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.
Under the Power Agreement, SCE is required to purchase all of the electric output from the Turbines at a rate equal to the greater of, either 89% of SCE's "cost of energy" or a fixed minimum price of $0.102 per kilowatt hour ("kWh"). The Power Agreement provides, however, that if SCE's cost of energy exceeds $0.20 per kWh, the price per kWh paid by SCE will be limited to $0.20 per kWh plus 70% of the difference between 89% of its cost of energy and $0.20 per kWh. Since formation of the Partnership, SCE has paid only the fixed minimum price of $0.102 per kWh. SCE takes monthly meter readings of the amount of electricity delivered to SCE under the Power Agreement and makes payments based on such meter readings.
SCE Curtailment
SCE substantially curtailed the Partnership's electrical production from the Windsystem from April 13, 2004 though May 17, 2004 (the "SCE Curtailment") in connection with the construction by SCE of a new transmission line for SCE's transmission system. During this period, SCE curtailed the Partnership's production of electric power by approximately 75% resulting in the Partnership's inability to sell a significant portion of electric power. By letter dated June 22, 2004, EW, 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 EW 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.
Windsystem Performance
The amount of electricity produced by the Turbines depends upon wind speed, which is subject to significant seasonal variations in the San Gorgonio Pass area. Wind speed is generally highest during the summer months and lowest during the winter months. These seasonal variations result in significant variations from month to month in the net power production realized by the Turbines, and therefore result in monthly variations in the amount of electricity sold to SCE.
During 2004, SCE purchased an aggregate of 35.4 million kWh of electricity from the Partnership for an aggregate purchase price of $3.6 million.
Going Concern
The following matters raise substantial doubt about the Partnership's ability to continue as a going concern:
1. As discussed in Part I, "Item 1 - BUSINESS - Introduction" and in Note 4 to the Financial Statements, the Partnership has not had sufficient cash flows from operations to make scheduled payments of interest in arrears 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, including the Turbines. As of the date of filing of this report, MCC has not notified the Partnership of its intent to foreclose on its security interest. Any such foreclosure by MCC on its security interests in the assets of the Partnership would have a material adverse effect on the Partnership.
2. The Power Agreement, the Partial Assignment and the Wind Park Easement Agreement (as defined in "Item 2.
Item 2. PROPERTIES
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 owns the Turbines, including the supporting towers and related concrete support pads and controllers. The Partnership uses a portion of the Operating Site and the Infrastructural Improvements pursuant to an 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").
The Infrastructural Improvements include roads, fences, power transfer system, substation and maintenance facilities. Mesa has title to the Infrastructural Improvements, but has granted the Partnership a security interest in such assets under the Wind Park Easement Agreement. The Infrastructural Improvements are also utilized by ZPII under a similar arrangement with Mesa.
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 Right-of-Way Grant was originally issued to PanAero on January 26, 1983, and was assigned by PanAero to Mesa in April 1984. 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 was to terminate on December 31, 2004. On February 16, 2005 the Partnership and Mesa entered into an Amendment to the Wind Park Easement Agreement (the "Easement Amendment"), which was effective as of December 31, 2004. The Easement Amendment extended the termination date of the Wind Park Easement Agreement from December 31, 2004 to June 23, 2005. See Part I, "Item 1. BUSINESS - Going Concern." 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. The general partner of ZPII is an affiliate of the General Partner.
Item 3.
Item 3. LEGAL PROCEEDINGS
Not applicable.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the partners of the Partnership during 2004.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDER MATTERS
Market Information
There is no established public trading market for the Partnership's limited partnership units (the "Units"). The Partnership Agreement includes various restrictions on the transfer of Units. The Partnership did not repurchase any Units during the fourth quarter of 2004.
Holders
The Partnership's records indicate that at December 31, 2004 there were 891 holders of record of the Partnership's Units.
Cash Distributions
The Partnership makes cash distributions in accordance with the terms of the Partnership Agreement. Due to less-than-projected operating results, the Partnership has not distributed any cash 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 then 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 and did not make any cash distributions to its partners during 2004.
Item 6.
Item 6. SELECTED FINANCIAL DATA
From and after 1987, the Partnership's accounting records have been maintained on a federal tax accrual basis, consistent with appropriate provisions of the Internal Revenue Code. Such records have been adjusted to reflect accounting principles generally accepted in the United States for purposes of filings with the SEC. The selected financial data should be read in conjunction with the financial statements and related footnotes included in Item 8.
All per Unit values were calculated based on 1,190 Units.
Item 7.
Item 7. 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. As discussed in Part I, "Item 1 - BUSINESS - Introduction" and in Note 4 to the Financial Statements, the Partnership has not had sufficient cash flows from operations to make scheduled payments of interest in arrears 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, including the Turbines. As of the date of filing of this report, MCC has not notified the Partnership of its intent to foreclose on its security interest. Any such foreclosure
by MCC on its security interests in the assets of the Partnership would have a material adverse effect on the Partnership.
2. The Power Agreement, the Partial Assignment and the Wind Park Easement Agreement each expire on June 23, 2005. The Partnership is currently exploring various opportunities to extend the operation of the Windsystem at the Operating Site and the sale of electric power generated by the Windsystem beyond June 23, 2005. However, if the Partnership cannot obtain new power sales and land right agreements or extend the existing agreements, the Partnership will not have a contractual right to generate power at the Operating Site or to sell any power it may generate after June 23, 2005. In that case, the Partnership expects to cease operation of the Windsystem on or about June 23, 2005 and to explore various marketing alternatives for the disposition of the Partnership's assets in connection with the anticipated December 31, 2005 end of the term of the Partnership under the Partnership Agreement.
In addition, the Management Agreement will also terminate on June 23, 2005. If the Partnership's rights under the Power Agreement, the Partial Assignment and the Wind Park Easement Agreement are extended or replaced for a period of time after June 23, 2005, the Partnership plans to explore opportunities to extend or replace the Management Agreement. If such power sales and land rights agreements are not extended or replaced, the Partnership expects to enter into an agreement with EWS or a third party to provide for the maintenance of the Partnership's Turbines for the period during which they are not operating, from June 23, 2005 through the disposition of the Turbines by the Partnership.
Liquidity and Capital Resources
The Partnership experienced a lack of liquidity throughout 2004, primarily due to an ongoing shortfall in revenues from operations in comparison to the costs and expenses of operations. As a result, interest payments on the Purchase Notes in the aggregate amount of $4.3 million, were in arrears as of December 31, 2004. The Partnership's failure to make timely payments on the Purchase Notes gave MCC the right to foreclose against its security interest in all the assets of the Partnership, including the Turbines. MCC has not exercised its right to foreclosure under the Purchase Notes. See "Results of Operations for the Year Ended December 31, 2004 Compared to December 31, 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.
See Part I, "Item 1. BUSINESS - Sale of Electric Power" for additional information.
As of December 31, 2004, the Partnership had no current or planned commitments for capital expenditures.
Purchase Notes
The Partnership is in default of the Purchase Notes. As of December 31, 2004 the total amount in default was $4.3 million, which was comprised of interest in arrears. In January 2005, a payment of $1.5 million was applied against the interest in arrears. As of the date of this filing, the total amount in default
is $2.8 million of interest in arrears. See Part I, "Item 1 - BUSINESS - Going Concern" and Notes 2, 4 and 9 to the Financial Statements for additional information.
Results of Operations for the Year Ended December 31, 2004 Compared to December 31, 2003
During 2004, the Partnership's electricity revenue was $3.6 million, and the Windsystem produced 35.4 million kWh of electricity sold to SCE. This was a decrease of $0.3 million or 6% in revenue and a decrease of 2.4 million kWh or 6% of electricity produced as compared to 2003. The decrease was primarily due to the SCE Curtailment. See Part I, "Item 1. BUSINESS - SCE Curtailment."
Costs and expenses during 2004 were $3.6 million, a decrease of $0.7 million or 15%, as compared to 2003. Depreciation decreased $0.4 million in 2004 as compared to 2003 due to the Turbines being fully depreciated during 2004. Interest expense decreased by $0.1 million as compared to 2003 due to lower average principal balances on the Purchase Notes outstanding in 2004. Maintenance expenses decreased by $0.1 million due to a decrease in unscheduled maintenance in 2004 as compared to 2003. Easement fees remained constant in 2004 as compared to 2003. Insurance costs decreased by $0.1 million in 2004 as compared to 2003 due to decreased premiums. See Part III, "Item 11. EXECUTIVE COMPENSATION - Operating Site Rentals" for additional information.
Overall, the Partnership reported a net loss of $0.02 million for 2004, a change of $0.4 million from the net loss of $0.4 million in 2003. During 2004, the total partners' deficit increased by $0.02 million to $1.4 million. The net loss per Unit was $17 for 2004 compared with a net loss per Unit of $341 for 2003.
Cash flows from operations decreased by $1.3 million in 2004 as compared to 2003. This decrease was primarily due to increased payments of outstanding interest in arrears on the Purchase Notes in 2004 as compared to 2003 and decreased revenues. Cash flows used in financing activities decreased by $0.1 million due to decreased principal payments on the Purchase Notes. Excess cash flows from operations are used primarily to fund payments of the interest in arrears on the Purchase Notes.
Results of Operations for the Year Ended December 31, 2003 Compared to December 31, 2002
During 2003, the Partnership's electricity revenue was $3.9 million, and the Windsystem produced 37.8 million kWh of electricity sold to SCE. This was a decrease of $1.0 million or 20% in revenue and a decrease of 9.4 million kWh or 20% of electricity produced as compared to 2002.
Costs and expenses during 2003 were $4.3 million, a decrease of $0.1 million or 3%, as compared to 2002. Interest expense decreased by $0.3 million as compared to 2002 due to lower average principal balances on the Purchase Notes outstanding in 2003. Maintenance expenses increased $0.1 million and easement fees decreased $0.1 million in 2003 as compared to 2002. The decrease in easement fees is directly related to the decrease in Gross Operating Proceeds received in 2003. During 2003, Gross Operating Proceeds were $3.8 million, a decrease of $1.6 million over 2002. Gross Operating Proceeds 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. Additionally, accounting related expenses increased by $0.1 million in 2003 as compared to 2002. See Part III, "Item 11.EXECUTIVE COMPENSATION - Operating Site Rentals" for additional information.
Overall, the Partnership reported a net loss of $0.4 million for 2003, a change of $0.9 million from the net income of $0.5 million in 2002. During 2003, the total partners' deficit increased by $0.4 million to $1.4 million. The net loss per Unit was $341 for 2003 compared with a net income per Unit of $392 for 2002.
Cash flows from operations decreased by $1.7 million in 2003 as compared to 2002. This decrease was primarily due to the decrease in revenues in 2003 as compared to 2002 and unfavorable changes in working capital during 2003. The decrease in revenues and unfavorable changes in working capital during 2003 were offset by the reduction in interest expense in 2003 as compared to 2002. Cash flows used in financing activities decreased by $2.9 million due to decreased principal payments on the Purchase Notes. Excess cash flows from operations are used primarily to fund payments on the Purchase Notes.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's management with the participation of the General Partners' 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 currently has no market risk sensitive instruments for which this disclosure is required.
Safe Harbor Statement Regarding Outlook and Other Forward Looking Data
Portions of this report, including but not limited to Items 1 and 2 and the information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain forward-looking statements and involve risks and uncertainties that could significantly affect expected results of operations, liquidity, cash flows and business prospects. Factors that could cause results to differ materially include, but are not limited to: competitive pricing pressures; higher than expected costs; potential liability resulting from pending or future litigation; domestic and international political conditions; political events or insurgent activity; and capital expenditures, acquisitions or dispositions. Forward-looking statements are generally accompanied by words such as "estimate", "project", "predict", "will", "anticipate", "plan", "intend", "believe", "expect" or similar expressions that convey the uncertainty of future events or outcomes. The Partnership expressly disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of new information or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed might not occur.
Item 8.
Item 8. FINANCIAL STATEMENTS
The financial statements of the Partnership for the fiscal year ended December 31, 2004, filed as part of this Form 10-K and listed in response to Part IV, "Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K" hereof, are incorporated by reference herein.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective February 5, 2002, Arthur Andersen LLP resigned as independent auditors of the Partnership. The Partnership's Current Report on Form 8-K, filed with the SEC on February 13, 2002, as amended by Form 8-K/A, filed with the SEC on February 27, 2002, disclosed that during the preceding two years and in the subsequent interim period through February 5, 2002, there were no "reportable events" within the meaning of Item 304(a)(1)(v) of Regulation S-K.
The Partnership initially engaged Hein & Associates LLP as the Partnership's independent auditor as of January 28, 2004. During the 2002 and 2003 fiscal years and during the 2004 fiscal year through January 28, 2004, the Partnership did not consult Hein & Associates LLP regarding (i) the application of accounting principles to a specified transaction, either completed or proposed; (ii) the type of audit opinion that might be rendered on the Partnership's financial statements; or (iii) any matter which was the subject of a disagreement or a reportable event, as such terms are defined in Item 304(a)(1) of Regulation S-K and its related instructions.
Item 9A.
Item 9A. 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 December 31, 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 December 31, 2004. During the three months ended December 31, 2004, the Partnership made no change in its internal control over financial reporting that materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Item 9B.
Item 9B. OTHER INFORMATION
Not applicable.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership does not have any employees or directors. The General Partner of the Partnership is ZWM, a California limited liability company, wholly-owned by EWS. Under the terms of the Partnership Agreement, the General Partner holds the exclusive right to manage the business and affairs of the Partnership. The Limited Partners, a special limited partner, and the substituted limited
partners as defined in the Partnership Agreement are not entitled to exercise any rights or powers to manage the business and affairs of the Partnership. The Limited Partners, special limited partner and substituted limited partners have voting rights only with respect to certain fundamental changes in the nature and operation of the Partnership, as set forth in the Partnership Agreement.
Executive Officers
Set forth below is certain information regarding officers of ZWM that may be deemed executive officers of the Partnership for SEC reporting purposes.
Eric D. Gadd, age 49, has served as President and Chief Executive Officer of ZWM since September 26, 2002, and has served as President and Chief Executive Officer of EWS since May 11, 2002. Mr. Gadd is responsible for managing and restructuring the global wind business operations of EWS and affiliates. Prior to his current assignment, Mr. Gadd served as vice president of business development for one of Enron's natural gas pipeline affiliates. From 1995 to 2001, he was involved in business development and commercial management in Enron's London office.
Mary H. Cilia, age 43, has served as Chief Financial Officer and Treasurer of ZWM since May 3, 2004 and served as Chief Financial Officer and Treasurer of EWS from June 24, 2003 through November 16, 2004. Prior to her current assignment, Ms. Cilia served in various accounting capacities for Enron and certain Enron affiliates from 1999 to 2002.
Mr. Gadd and Ms. Cilia were executive officers of various subsidiaries of Enron that filed voluntary petitions for Chapter 11 reorganization with the U.S. Bankruptcy Court for Southern District of New York filed in connection with the Enron Bankruptcy. See Part I, "Item 1. BUSINESS - Bankruptcy and Mergers" for additional information.
Directors
ZWM has no directors. EREC, which indirectly holds the sole membership interest in ZWM, has a board of directors. Because neither the Partnership nor ZWM has an audit committee or a board of directors, the board of directors of EREC serves the role of the audit committee for the Partnership and these directors may be deemed to be directors of the Partnership under the Exchange Act. Set forth below is certain information regarding the directors of EREC.
K. Wade Cline, age 42, has been a director of EREC since November 17, 2004. Mr. Cline was elected as Managing Director and Assistant General Counsel of Enron in February 2002. Mr. Cline has served multiple Enron companies in various legal and management roles since 1992.
Robert Semple, age 59, has been a director of EREC since December 12, 2002 and has served as a financial insolvency consultant with Kroll Zolfo Cooper LLC ("Kroll") since 2000. In connection with the Enron Bankruptcy, the debtors retained the services of Stephen Forbes Cooper, LLC ("SFC"), an affiliate of Kroll, as an independent contractor to provide management services for the debtors. SFC has a shared-employee arrangement with Kroll and Mr. Semple provides management services to Enron and its subsidiaries in connection with his relationship with Kroll. Mr. Semple served as an independent management consultant for various companies prior to his association with Kroll. The board of directors of EREC has determined that Mr. Semple is an "audit committee financial expert" as such term is defined by the rules of the SEC. Mr. Semple is
not "independent" as such term is defined under the listing standards of the New York Stock Exchange.
Robert H. Walls, Jr., age 44, has been a director of EREC since November 17, 2004. Mr. Walls was elected as Executive Vice President and General Counsel of Enron in March 2002. Mr. Walls has served multiple Enron companies in various senior legal roles since 1992. Mr. Walls is also a member of the board of directors of Portland General Electric Company.
Eric D. Gadd was a director of EREC from September 26, 2002 through November 16, 2004.
Messrs. Cline, Semple and Walls were executive officers of various subsidiaries of Enron that filed voluntary petitions for Chapter 11 reorganization with the U.S. Bankruptcy Court for Southern District of New York filed in connection with the Enron Bankruptcy. See Part I, "Item 1 BUSINESS - Bankruptcy and Mergers" for additional information. In addition, Mr. Cline was an executive officer of Dabhol Power Company, a foreign Enron affiliated entity, for which a receiver was appointed.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, requires the Partnership's directors, officers, and persons who own more than 10% of a registered class of the Partnership's equity securities to file reports of ownership and changes in ownership with the SEC. Robert H. Walls, Jr. and K. Wade Cline, directors of EREC, each filed a late Form 3 with the SEC on December 17, 2004.
Code of Ethics
Enron (and all of its subsidiary companies, including ZWM and EWS) is subject to and covered by the Enron Corp. Code of Ethics (which applies to all covered employees, officers and directors). The foregoing individuals are also subject to and governed by the Enron Corp. Accounting and Financial Reporting Code of Ethics, which also applies to all employees of Enron and its subsidiaries, including ZWM and EWS. A copy of the Enron Corp. Code of Ethics is available, without charge, upon request in writing to the Partnership at 1221 Lamar Street, Suite 1600, Houston, Texas 77010 Attention: Investor Relations.
Delegation of Management
The Partnership has delegated certain aspects of the operation, management, maintenance and repair of the Windsystem to EWS pursuant to the Management Agreement. See Part I, "Item 1. BUSINESS - Operation and Maintenance Services".
Item 11.
Item 11. EXECUTIVE COMPENSATION
As the Partnership has no employees, it does not pay executive compensation to any individual. The General Partner participates in the profits and losses of the Partnership by virtue of its partnership interests, and EWS receives payment under the Management Agreement for services rendered thereunder. During 2004, Mr. Gadd and Ms. Cilia were compensated by Enron, or subsidiaries of Enron, for all of their services rendered, including their services to the Partnership, and were not compensated directly by the Partnership. Mr.Semple was compensated for all of his services rendered, including services to the Partnership, by Kroll, an affiliate of SFC, which was retained by the debtors in the Enron Bankruptcy to provide management services for the debtors. SFC has a shared-employee arrangement with Kroll and Mr. Semple provides management services to Enron and
its subsidiaries in connection with his relationship with Kroll. Messrs. Walls and Cline were compensated for all of their services rendered, including services to the Partnership, by Enron. Messrs. Gadd, Semple, Walls and Cline have not been compensated directly by the Partnership for their services as directors of EREC.
Distributions
Following its removal as a general partner of the Partnership in June 1988, PanAero Management Corporation ("PAMC") became a substituted limited partner of the Partnership. Under an agreement of Settlement and Mutual Release, dated June 26, 2000, settling all claims in the lawsuit entitled PanAero Management Corporation et. al. v. Zond System, Inc. et al., Los Angeles Superior Court Case No. BC 130959 (the "Settlement Agreement"), PAMC transferred its substituted limited partner interest to ZWMC.
The Partnership makes distributions in accordance with the terms of the Partnership Agreement. The Partnership did not distribute any amounts during 2004.
Windsystem Management Fees
As compensation for its services under the Management Agreement, EWS receives a management fee of 2% of the Partnership's gross operating proceeds ("Gross Operating Proceeds"). Gross Operating Proceeds 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 also reimbursed for 115% of the maintenance costs, including labor and material costs that it incurs in the performance of services, including services by third parties. Upon termination of the Management Agreement in June 2005, EWS will be entitled to receive an incentive fee equal to the balance of the cash reserve maintained in connection with the Purchase Notes. As of the date of this filing, no cash reserve had been established. During 2004, the Partnership incurred $0.1 million for management fees. During the same period, the Partnership incurred $0.8 million for cost reimbursement of maintenance and other operating costs under the Management Agreement.
Operating Site Rentals
Under the Wind Park Easement Agreement, Mesa charges the Partnership easement fees for use of the Operating Site and Infrastructural Improvements 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. For 2004, the Partnership's easement fees were $0.2 million.
Interest on Purchase Notes
MCC earns interest from the Partnership on the principal balance outstanding under the Purchase Notes (from inception until January 1990, at a rate of 13% per annum and at a rate of 11% per annum thereafter). See Part III, "Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Purchase Note Financing" for additional information. The principal under the Purchase Notes was fully repaid during January 2004. In 2004, MCC earned $2,000 of interest on principal under the Purchase Notes from the Partnership.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain Beneficial Owners
To the Partnership's knowledge, no person (including a "group" as that term is used in Section 13(d)(3) of the Exchange Act) is the beneficial owner of more than 5% of the Partnership's equity interests.
Ownership of Management
ZWM owns the sole general partner interest in the Partnership. ZWM also owns the substituted limited partner interest transferred by PAMC as discussed in Part III, "Item 11 - EXECUTIVE COMPENSATION - Distributions" and two Units. No person who is deemed to be an executive officer or director of the Partnership owns any interest in the Partnership, ZWM, EREC or any of its subsidiaries.
Changes In Control
In March 1988, ZWMC executed a conditional resignation of its position as a General Partner, such resignation to become effective upon a material breach of any of ZWMC's agreements contained in a Letter of Understanding dated March 24, 1988 among ZWMC, EWSI, Dean Witter Reynolds Inc. and certain EWSI affiliates (the "Letter of Understanding"). It is not clear whether there was a material breach of any of ZWMC's agreements under the Letter of Understanding; however, based on a review of the Partnership's books and records, it does not appear that any affirmative steps have been taken to effectuate a resignation by ZWMC (or as of April 19, 2002, ZWM) of its position as a General Partner. Furthermore, even if a material breach of any of ZWMC's agreements under the Letter of Understanding had occurred, such a breach arguably would not result in ZWMC's resignation as a General Partner because such a resignation would breach the terms of the Partnership Agreement.
This description of the terms of ZWMC's conditional resignation is qualified in its entirety by the Letter of Understanding, including its exhibits, a copy of which was attached as Exhibit 28.1 to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following summarizes payments made to and proposed to be made to, and made by and proposed to be made by, the Partnership to the General Partner and its affiliates in connection with certain agreements. These payments were determined by and among affiliated entities and, consequently, are not the result of arm's-length negotiations.
EWS receives payments from the Partnership pursuant to the Management Agreement. EWS has an indirect 50% interest in MCC, which receives payments from the Partnership pursuant to the Purchase Notes. EWS also has a 50% interest in Mesa, which receives easement payments from the Partnership pursuant to the Wind Park Easement Agreement. In addition, Mesa allocates payments received from SCE pursuant to the Power Agreement to the Partnership based upon the amount of electricity generated by the Partnership. Eric Gadd is the President and Chief Executive Officer of EWS. Wade Cline became a Vice President of EWS effective November 17, 2004. From March 17, 2003 through November 16, 2004 Robert Semple was Managing Director of EWS and effective November 17, 2004, he became Associate Restructuring Director of EWS.
Purchase Note Financing
Prior to maturity on December 31, 2002, the Purchase Notes were payable in equal semi-annual installments of principal and interest over 18 years, commencing in 1984. Interest was accrued from 1984 to January 1990 at a 13% rate per annum and at an 11% rate per annum thereafter. During 2004, the Partnership made principal payments to MCC on the Purchase Notes of $0.5 million. At December 31, 2004, $4.3 million of accrued interest was due to MCC under the Purchase Notes. In January 2005, $1.5 million of accrued interest was paid by the Partnership to MCC reducing the accrued but unpaid interest balance to $2.8 million. The Partnership is in default of the Purchase Notes. Upon notice of default, MCC has a right to foreclose against its security interest in the assets of the Partnership, including the Turbines. As of the date of filing of this report, MCC has not notified the Partnership of its intent to foreclose on its security interest. See Part II, "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources" for additional information.
Management of the Windsystem
Under the Management Agreement, EWS is obligated to exercise due diligence in performing its duties and obligations. EWS's duties and obligations include, but are not limited to: (1) representing the Partnership in its dealings with SCE, (2) collecting all revenues from SCE, (3) disbursing funds to cover necessary operating costs, including without limitation, repairs and maintenance, easements, property taxes, debt service and insurance, (4) hiring and supervising operating and maintenance personnel, (5) causing the Turbines to be maintained in good condition and repair, (6) complying with any orders or obligations imposed by any governmental agency with jurisdiction, unless the Partnership instructs to the contrary, (7) investigating all accidents or damage relating to the ownership, operation or maintenance of the Turbines or infrastructural facilities, (8) enforcing warranty and insurance claims associated with the Turbines, the infrastructural facilities and components thereof, (9) complying with the Right-of-Way Grant operating conditions and requirements, (10) operating, maintaining and repairing the infrastructural facilities, (11) maximizing production of electric power, (12) using best efforts to ensure costs and expenses are reasonable and competitive with those of unaffiliated third parties, (13) providing quarterly accounting and operating reports, and (14) performing other services, in its reasonable judgment, that it may deem necessary.
As compensation for its services under the Management Agreement, EWS receives a management fee of 2% of the Partnership's Gross Operating Proceeds. 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 by third parties. See Part III, "Item 11. EXECUTIVE COMPENSATION - Windsystem Management Fees" for additional information.
During 2004, the Partnership made payments under the Management Agreement to or on behalf of EWS in an aggregate amount of approximately $0.9 million. See Part I, "Item 1 - BUSINESS - Operation and Maintenance Services".
Wind Park Easement Agreement
The Partnership uses a portion of the Operating Site and the Infrastructural Improvements pursuant to the Wind Park Easement Agreement. Under the Wind Park
Easement Agreement, Mesa charges the Partnership easement 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. During the year ended December 31, 2004, the Partnership paid $0.2 million in easement fees to Mesa.
Effective January 1, 1996, the BLM changed the annual easement payment due under the Right-of-Way Grant to a flat rent of $79,000. ZPI and ZPII are each charged a pro rata share of the $79,000 in accordance with the Wind Park Easement Agreement based on their ratios of aggregated rated capacity of the turbines installed on the Operating Site. Easement payments may be adjusted by the BLM annually to reflect any change in the fair easement value of the Operating Site, which could result in revised easement payments by the Partnership to Mesa.
Partial Assignment
Under the Partial Assignment, Mesa is an agent for the Partnership in connection with the collection of the payments from SCE for deliveries of electric power to SCE by the Partnership under the Power Agreement. Mesa also serves as an agent for ZPII under a similar partial assignment of the Power Agreement relating to that entity. Mesa allocates the payments received from SCE under the Power Agreement between the Partnership and ZPII based upon the prorated amount of electricity generated by each entity with respect to the period applicable to such payment. During 2004, Mesa allocated and distributed to the Partnership approximately $4.2 million of revenues received from SCE under the Power Agreement.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees paid for professional audit services rendered to the Partnership by Hein & Associates LLP during 2004 were approximately $48,000. The board of directors of EREC pre-approves all audit and non-audit services provided by Hein & Associates LLP to the Partnership.
PART IV
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1 Financial Statements
Balance Sheets at December 31, 2004 and 2003 Statements of Operations for the years ended December 31, 2004, 2003 and 2002
Statements of Changes in Partners' Deficit for the years ended December 31, 2004, 2003 and 2002
Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
Notes to Financial Statements
(a)2 Schedules
None
(a)3 Exhibits
Number Description
3.1 First Amended and Restated Certificate and Agreement of Limited Partnership of Zond-PanAero Windsystem Partners I entered into on November 29, 1984 (Incorporated by reference from Exhibit A to the Partnership's Registration Statement on Form 10 dated April 29, 1985).
3.2 First Amendment to First Amended and Restated Certificate dated as of June 27, 1988 (Incorporated by reference from Exhibit 3.2 to the Partnership's Annual Report on Form 10-K (File No. 0-13510) for the fiscal year ended December 31, 1988).
10.1 Wind Park Power Purchase and Sales Agreement between PanAero and Southern California Edison Company dated April 12, 1982; Assignment of Wind Park Power Purchase and Sales Agreement dated July 28, 1984, between PanAero and Mesa; and Partial Assignment of Wind Park Power Purchase and Sales Agreement effective September 25, 1984, between Mesa and the Partnership (Incorporated by reference from Exhibit B to the Partnership's Registration Statement on Form 10 dated April 29, 1985); and Amendment to Partial Assignment of Wind Park Power Purchase and Sales Agreement effective December 31, 2004, between Mesa and the Partnership (Incorporated by reference from Exhibit 10.1 to the Partnership's Current Report on Form 8-K dated February 16, 2005).
10.2 Right-of-Way Grant (Serial No. CA-11688-A) issued by the Bureau of Land Management of the United States Department of the Interior to PanAero and assigned to Mesa (Incorporated by reference from Exhibit C to the Partnership's Registration Statement on Form 10 dated April 29, 1985); as amended by the Decision of the United States Department of the Interior Bureau of Land Management dated December 19, 2002 (Incorporated by reference from Exhibit 10.2 to the Partnership's Annual Report on Form 10-K (File No. 0-13510) for the fiscal years ended December 31, 2001, 2002 and 2003).
10.3 Wind Park Easement Agreement dated as of September 7, 1984, between Mesa and the Partnership; Amendment to Wind Park Easement Agreement dated as of November 28, 1984 (Incorporated by reference from Exhibit D to the Partnership's Registration Statement on Form 10 dated April 29, 1985); and Amendment to Wind Park Easement Agreement effective December 31, 2004 between Mesa and the Partnership (Incorporated by reference from Exhibit 10.3 to the Partnership's Current Report on Form 8-K dated February 16, 2005).
10.4 Windsystem Management Agreement dated July 27, 1988, between EWS and the Partnership, and First Amendment to Windsystem Management Agreement, (Incorporated by reference from Exhibit 10.5 to the Partnership's Annual Report on Form 10-K (File No. 0-13510) for the fiscal year ended December 31, 1988).
10.5 Second Amendment to Windsystem Management Agreement between EWS and the Partnership (Incorporated by reference from Exhibit 10.5 to the Partnership's Annual Report on Form 10-K (File No. 0-13510) for the fiscal year ended December 31, 1989) and Third Amendment to Windsystem Management Agreement effective December 31, 2004 between EWS and the Partnership (Incorporated by reference from Exhibit 10.2 to the Partnership's Current Report on Form 8-K dated February 16, 2005).
10.6 Purchase Note and Security Agreement dated as of November 26, 1984, between MCC and the Partnership (Incorporated by reference from Exhibit G to the Partnership's Registration Statement on Form 10 dated April 29, 1985).
10.7 First Amendment to Purchase Note and Security Agreement dated as of November 7, 1989, between MCC and the Partnership (Incorporated by reference from Exhibit 10.7 to the Partnership's Annual Report on Form 10-K (File No. 0-13510) for the fiscal year ended December 31, 1989).
10.8 Agreement Addressing Renewable Energy Pricing and Payment Issues dated as of August 22, 2001 between Mesa and SCE (Incorporated by reference from Exhibit 99.1 to the Partnership's Current Report on Form 8-K dated November 25, 2003).
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
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: Zond Windsystems Management LLC, General Partner
By: /s/ Eric D. Gadd ------------------------------------- Eric D. Gadd Chief Executive Officer
March 31, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date _________ _____ ____
By: /s/ Eric D. Gadd Chief Executive Officer of March 31, 2005 -------------------- Zond Windsystems Management Eric D. Gadd LLC, the General Partner of Zond-PanAero Windsystem Partners I.
By: /s/ Mary H. Cilia Chief Financial Officer of March 31, 2005 -------------------- Zond Windsystems Management Mary H. Cilia LLC, the General Partner of Zond-PanAero Windsystem Partners I.
By: /s/ Robert Semple Director of Enron Renewable March 31, 2005 --------------------- Energy Corp. Robert Semple
By: /s/ Robert H. Walls Jr. Director of Enron Renewable March 31, 2005 ------------------------- Energy Corp. Robert H. Walls Jr.
By: /s/ Kenneth Wade Cline Director of Enron Renewable March 31, 2005 -------------------------- Energy Corp. Kenneth Wade Cline
Exhibit Index _____________
Number Description
3.1 First Amended and Restated Certificate and Agreement of Limited Partnership of Zond-PanAero Windsystem Partners I (Incorporated by reference from Exhibit A to the Partnership's Registration Statement on Form 10 dated April 29, 1985).
3.2 First Amendment to First Amended and Restated Certificate dated as of June 27, 1988 (Incorporated by reference from Exhibit 3.2 to the Partnership's Annual Report on Form 10-K (File No. 0-13510) for the fiscal year ended December 31, 1988).
10.1 Wind Park Power Purchase and Sales Agreement between PanAero and Southern California Edison Company dated April 12, 1982; Assignment of Wind Park Power Purchase and Sales Agreement dated July 28, 1984, between PanAero and Mesa; and Partial Assignment of Wind Park Power Purchase and Sales Agreement effective September 25, 1984, between Mesa and the Partnership (Incorporated by reference from Exhibit B to the Partnership's Registration Statement on Form 10 dated April 29, 1985); and Amendment to Partial Assignment of Wind Park Power Purchase and Sales Agreement effective December 31, 2004, between Mesa and the Partnership (Incorporated by reference from Exhibit 10.1 to the Partnership's Current Report on Form 8-K dated February 16, 2005).
10.2 Right-of-Way Grant (Serial No. CA-11688-A) issued by the Bureau of Land Management of the United States Department of the Interior to PanAero and assigned to Mesa (Incorporated by reference from Exhibit C to the Partnership's Registration Statement on Form 10 dated April 29, 1985); amended by Decision of the United States Department of the Interior Bureau of Land Management dated December 19, 2002 (Incorporated by reference from Exhibit 10.2 to the Partnership's Annual Report on Form 10-K (File No. 0-13510) for the fiscal years ended December 31, 2001, 2002 and 2003).
10.3 Wind Park Easement Agreement dated as of September 7, 1984, between Mesa and the Partnership; Amendment to Wind Park Easement Agreement dated as of November 28, 1984 (Incorporated by reference from Exhibit D to the Partnership's Registration Statement on Form 10 dated April 29, 1985); and Amendment to Wind Park Easement Agreement effective December 31, 2004 between Mesa and the Partnership (Incorporated by reference from Exhibit 10.3 to the Partnership's Current Report on Form 8-K dated February 16, 2005).
10.4 Windsystem Management Agreement dated July 27, 1988, between EWS and the Partnership, and First Amendment to Windsystem Management Agreement, (Incorporated by reference from Exhibit 10.5 to the Partnership's Annual Report on Form 10-K (File No. 0-13510) for the fiscal year ended December 31, 1988).
10.5 Second Amendment to Windsystem Management Agreement between EWS and the Partnership (Incorporated by reference from Exhibit 10.5
to the Partnership's Annual Report on Form 10-K (File No. 0-13510) for the fiscal year ended December 31, 1989); and Third Amendment to Windsystem Management Agreement effective December 31, 2004 between EWS and the Partnership (Incorporated by reference from Exhibit 10.2 to the Partnership's Current Report on Form 8-K dated February 16, 2005).
10.6 Purchase Note and Security Agreement dated as of November 26, 1984, between MCC and the Partnership (Incorporated by reference from Exhibit G to the Partnership's Registration Statement on Form 10 dated April 29, 1985).
10.7 First Amendment to Purchase Note and Security Agreement dated as of November 7, 1989, between MCC and the Partnership (Incorporated by reference from Exhibit 10.7 to the Partnership's Annual Report on Form 10-K (File No. 0-13510) for the fiscal year ended December 31, 1989).
10.8 Agreement Addressing Renewable Energy Pricing and Payment Issues dated as of August 22, 2001 between Mesa and SCE (Incorporated by reference from Exhibit 99.1 to the Partnership's Current Report on Form 8-K dated November 25, 2003).
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
ZOND-PANAERO WINDSYSTEM PARTNERS I, A CALIFORNIA LIMITED PARTNERSHIP FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Balance Sheets at December 31, 2004 and 2003
Statements of Operations for the years ended December 31, 2004, 2003 and 2002
Statements of Changes in Partners' Deficit for the years ended December 31, 2004, 2003 and 2002
Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
Notes to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Zond-PanAero Windsystem Partners I:
We have audited the accompanying balance sheet of Zond-PanAero Windsystem Partners I (the "Partnership") as of December 31, 2004 and 2003 and the related statements of operations, changes in partners' deficit and cash flows for the years ended December 31, 2004, 2003 and 2002. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Partnership as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years ended December 31, 2004, 2003 and 2002 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in note 2 to the financial statements, the Partnership has not had sufficient cash flows from operations to make payments of interest in arrears on outstanding debt and certain agreements relating to the Partnership's ability to generate electricity expire in 2005. These matters raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
HEIN & ASSOCIATES LLP
Houston, Texas March 16, 2005
ZOND-PANAERO WINDSYSTEM PARTNERS I, A CALIFORNIA LIMITED PARTNERSHIP BALANCE SHEETS (Dollars in thousands)
December 31, 2004 December 31, 2003 ______________________ ______________________
Assets Current assets: Cash and cash equivalents $ 2,603 $ 2,125 Accounts receivable from related party 401 921 Other current assets 44 40
______________________ ______________________ Total current assets 3,048 3,086 ______________________ ______________________
Property, plant and equipment: Buildings 98 98 Plant and Equipment 49,561 49,561 Less - accumulated depreciation (49,305) (47,218) ______________________ ______________________ Property, plant and equipment, net 354 2,441 ______________________ ______________________ Total assets $ 3,402 $ 5,527 ______________________ ______________________ ______________________ ______________________
Liabilities and partners' deficit Current liabilities: Accounts payable and accrued expenses $ 243 $ 392 Accounts payable to related party 296 255 Current portion of notes payable to related party - 458 Accrued interest to related party 4,265 5,804
______________________ ______________________ Total current liabilities 4,804 6,909 ______________________ ______________________
Partners' deficit: General partner (6) (6) Limited partners (1,971) (1,951) Substituted limited partner (Note 1) (6) (6) Contributed capital 581 581 ______________________ ______________________ Total partners' deficit (1,402) (1,382) ______________________ ______________________
Total liabilities and partners' deficit $ 3,402 $ 5,527 ______________________ ______________________ ______________________ ______________________
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
ZOND-PANAERO WINDSYSTEM PARTNERS I, A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE PARTNERSHIP
Introduction
Zond-PanAero Windsystem Partners I, a California Limited Partnership (the "Partnership"), was formed on June 29, 1984, to purchase, own and operate a system of 300 Vestas Energy A/S Model V-15 wind turbine electric generators (the "Turbines"). The electricity generated by the Turbines is sold by the Partnership to its sole customer, Southern California Edison Company ("SCE").
Each Turbine has a rated capacity of 65 kilowatts, and the Turbines have an aggregate rated capacity of 19.5 megawatts. 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"). The Windsystem is located in the San Gorgonio Pass area of the San Bernardino Mountains near Palm Springs, California (the "Operating Site").
The Turbines are interconnected by a system of transformers and power transfer lines to a substation and SCE's transmission grid. The individual power lines from each of the Turbines are fed into step-up transformers, which increase the voltage from 480 volts to 12.5 kilovolts. Additional 12.5 kilovolt power transfer lines carry electricity to a substation, which steps up the electric power to 115 kilovolts for delivery to SCE.
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 terminates 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 2 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"). This matter is referred to herein as the "Enron Bankruptcy". 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 turbine manufacturing 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.
On November 17, 2004, the Chapter 11 Plan (the "Plan") relating to the Enron Bankruptcy became effective. The Plan provides for Enron and its affiliated debtor companies (including EWS and EW) to sell most of their assets and distribute to their creditors the proceeds of such sales. In connection with the Plan, EWS assumed the Management Agreement (as defined in "Operation and Maintenance Services" below) and that agreement remains in effect.
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 financial statements 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 subsidiary companies retained its existing wind power projects including the indirect ownership of the general partnership interest in the Partnership. However, effective as of the sale, substantially all of the employees who had been involved in the management of the Partnership transferred to GEPS.
Following the sale to GEPS, certain Enron personnel who were not formerly involved with the management or operations of the Partnership were appointed to manage and operate the Partnership, and ZWM's principal executive offices were moved to 1400 Smith Street, Houston, Texas 77002. In March 2004, the principal executive offices 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. ZWM has no directors. The directors of EREC may be deemed directors of the Partnership under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
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 by its term was to terminate on December 31, 2004; however, on February 16, 2005, the Partnership and EWS entered into a Third Amendment to Windsystem Management Agreement (the "Management Agreement Amendment"), which amendment was effective as of December 31, 2004. The Management Agreement Amendment extended the termination date of the Management Agreement from December 31, 2004 to June 23, 2005. See Note 2 for additional information.
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, 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 $72,000.
Substantial Transactions and Operating Agreements
The accompanying financial statements include substantial transactions with related parties. These transactions are further described in Note 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 electric power generated 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 pursuant to that certain Partial Assignment of Wind Park Power Purchase and Sales Agreement dated September 28, 1984 (the "Partial Assignment"). Such assignment was to terminate effective December 31, 2004; however, on February 16, 2005, the Partnership and Mesa entered into an Amendment to Partial Assignment of Wind Park Power Purchase and Sales Agreement (the "Partial Assignment Amendment") which amendment was effective as of December 31, 2004. The Partial Assignment Amendment extended the termination date of the Partial Assignment from December 31, 2004 to June 23, 2005. See Note 2 for additional information. 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. Under the Power Agreement, SCE is required to purchase all of the electric output from the Turbines at a rate equal to the greater of, either 89% of SCE's "Cost of Energy" or a fixed minimum price of $.102 per kilowatt hour ("kWh"). The Power Agreement provides, however, that if SCE's cost of energy exceeds $.20 kWh, the price per kWh paid by SCE will be limited to $.20 per kWh plus 70% of the difference between 89% of SCE's cost of energy and $.20 per kWh. During the years ended December 31, 2004 and 2003, the Partnership earned $.102 per kWh of electricity delivered to SCE.
(2) Since July 1988, the Partnership has contracted with EWS (or its predecessor) for the operation and maintenance of the Turbines and the performance of certain ancillary management services, such as the administration and payment of all Partnership expenses. Under the provisions of the Management Agreement, the Partnership pays a management fee of 2% of the Partnership's gross operating proceeds ("Gross Operating Proceeds"). Gross Operating Proceeds 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 also 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.
(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 owns the Turbines, including the supporting towers and related concrete support pads and controllers. The Partnership uses the Infrastructural Improvements and a portion of the Operating Site pursuant to an 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"). The Infrastructural Improvements include roads, fences, power transfer system, substation and maintenance facilities. Mesa has title to the Infrastructural Improvements, but has granted the Partnership a security interest in such assets under the Wind Park Easement Agreement. The Infrastructural Improvements are also utilized by ZPII under a similar arrangement with Mesa.
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 Right-of-Way Grant was originally issued to PanAero on January 26, 1983, and was assigned by PanAero to Mesa in April 1984. 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 was to terminate on December 31, 2004. On February 16, 2005 the Partnership and Mesa entered into an Amendment to the Wind Park Easement Agreement (the "Easement Amendment"), which was effective as of December 31, 2004. The Easement Amendment extended the termination date of the Wind Park Easement Agreement from December 31, 2004 to June 23, 2005. See Note 2 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 easement fees for use of the Operating Site and Infrastructural Improvements 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.
SCE Curtailment
SCE substantially curtailed the Partnership's electrical production from the Windsystem from April 13, 2004 though May 17, 2004 (the "SCE Curtailment") in connection with the construction by SCE of a new transmission line for SCE's transmission system. During this period, SCE curtailed the Partnership's production of electric power by approximately 75% resulting in the Partnership's inability to 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.
Cash Distributions
The Partnership makes cash distributions in accordance with the terms of the Partnership Agreement. Due to less-than-projected operating results, the Partnership has not distributed any cash 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 then 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 and did not make any cash distributions to its partners during 2004.
NOTE 2 - 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, the Partnership has not had, and does not anticipate that it will have sufficient cash flows from operations to make scheduled payments of interest in arrears 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, including the Turbines. As of the date of filing of this report, MCC has not notified the Partnership of its intent to foreclose on its security interest. Any such foreclosure by MCC on its security interests in the assets of the Partnership would have a material adverse effect on the Partnership.
2. The Power Agreement, the Partial Assignment and the Wind Park Easement Agreement each expire on June 23, 2005. The Partnership is currently exploring various opportunities to extend the operation of the Windsystem at the Operating Site and the sale of electric power generated by the Windsystem beyond June 23, 2005. However, if the Partnership cannot obtain new power sales and land right agreements or extend the existing agreements, the Partnership will not have a contractual right to generate power at the Operating Site or to sell any power it may generate after June 23, 2005. In that case, the Partnership expects to cease operation of the Windsystem on or about June 23, 2005 and to explore various marketing alternatives for the disposition of the Partnership's assets in connection with the anticipated December 31, 2005 end of the term of the Partnership under the Partnership Agreement.
In addition, the Management Agreement will also terminate on June 23, 2005. If the Partnership's rights under the Power Agreement, the Partial Assignment and the Wind Park Easement Agreement are extended or replaced for a period of time after June 23, 2005, the Partnership plans to explore opportunities to extend or replace the Management Agreement. If such power sales and land rights agreements are not extended or replaced, the Partnership expects to enter into an agreement with EWS or a third party to provide for the maintenance of the Partnership's Turbines for the period during which they are not operating, from June 23, 2005 through the disposition of the Turbines by the Partnership.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's accounting records are maintained on the basis used for federal income tax reporting purposes. For purposes of filing with the Securities and Exchange Commission, the accounting records have been adjusted to reflect accounting principles generally accepted in the United States of America ("GAAP").
Income Taxes
The Partnership is not subject to federal and state income taxes. Accordingly, no recognition has been given to income taxes in the accompanying financial statements since the income or loss of the Partnership is to be included in the tax returns of the individual partners. The tax returns of the Partnership are subject to examination by federal and state taxing authorities. If such examinations result in adjustments to distributive shares of taxable income or loss, the tax liability of the partners could be adjusted accordingly.
The tax attributes of the Partnership's net assets flow directly to each individual partner. Individual partners will have different investment bases depending upon the timing and prices of acquisition of Partnership units. Further, each partner's tax accounting, which is partially dependent upon their individual tax position, may differ from the accounting followed in the financial statements. Accordingly, there could be significant differences between each individual partner's tax basis and their proportionate share of the net assets reported in the financial statements. Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", requires disclosure by a publicly held partnership of the aggregate difference in the basis of its net assets for financial and tax reporting purposes. However, the Partnership does not have access to information about each individual partner's tax attributes in the Partnership, and the aggregate tax basis cannot be readily determined. In any event, management does not believe that, in the Partnership's circumstances, the aggregate difference would be meaningful information.
Cash Equivalents
Cash equivalents are considered to be all highly liquid investments purchased with an original maturity of three months or less.
Depreciation
The Turbines are recorded at cost. The Turbines were fully depreciated as of December 31, 2004. The Turbines were depreciated on the straight-line method over a twenty-year life. Capitalized improvements and the building are being depreciated on a straight-line method over a fifteen-year life. Expenditures that materially increase the useful lives of assets are capitalized, while ordinary maintenance and repairs are charged to operations as incurred. Replacement of defective parts or expenditures designed to modify Turbines to improve their productivity are expensed as incurred.
Earnings Per Limited Partner Unit
Earnings per Limited Partner unit are calculated based upon the number of Limited Partner units outstanding during each year.
Fair Value of Financial Instruments
For each class of financial instruments, including cash and cash equivalents, accounts receivable, prepaid insurance and other current assets, accounts payable and accrued expenses, accounts payable to related party and accrued interest to related party, the carrying amount approximates fair value because of the short maturity of those instruments.
The estimated fair value of the Partnership's note payable to related party is not materially different from its carrying amount. The fair value is based on discounted present value cash flows using the Partnership's current borrowing rate.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Electricity Sales and Significant Customer
Power generated by the Windsystem is recognized as revenue upon delivery of power to SCE at prices as defined in the Power Agreement. All power produced is sold to SCE under contracts that expire on June 23, 2005. See Note 2.
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 Partnership has not had, and may not have, sufficient cash flows from operations to make all payments of interest on the outstanding Purchase Notes. The principal on the Purchase Notes was paid off in January 2004. As of December 31, 2004, the amount in default was $4.3 million, which was comprised solely of interest in arrears. See Note 9 for additional information. Accordingly, the Partnership is in default of the Purchase Notes. Upon notice of default, MCC has a right to foreclose against its security interest in all the assets of the Partnership, including the Turbines. As of the date of this filing, 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.
NOTE 5 - TRANSACTIONS WITH RELATED PARTIES
In addition to the Purchase Notes (See Note 4 above) the Partnership had amounts payable to Mesa and EWS, respectively. Amounts payable to Mesa include easement fees and other miscellaneous expenses related to Windsystem operations. Amounts payable to EWS include management fees, maintenance costs and other miscellaneous expenses related to Windsystem operations.
The Partnership has the following related party transactions and relationships:
(1) Mesa assigned easement rights to a portion of the Operating Site and granted rights to use the Infrastructural Improvements to the Partnership under the Wind Park Easement Agreement (See Note 1 above). The Partnership paid $0.2 million in easement fees during each of 2004 and 2003 pursuant to the Wind Park Easement Agreement.
(2) The Partnership has a contract with EWS to operate and maintain the Turbines and to perform certain management and administrative services under the Management Agreement (See Note 1 above). The Partnership incurred expenses of $0.9 million and $1.0 million during 2004 and 2003, respectively, pursuant to the Management Agreement.
In 1988, Mesa assigned $581,000 of receivables from the Partnership to each of its partners, EWSI and an affiliate of PanAero. EWSI subsequently forgave its $581,000 of receivables from the Partnership. This forgiveness was treated as a capital contribution in the accompanying financial statements.
NOTE 6- LITIGATION
Not applicable.
NOTE 7 - ACCOUNTING PRONOUNCEMENTS
Not applicable.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Leases Payable
Future annual minimum payments under non-cancelable obligations as of December 31, 2004 are $0.1 million. There are no lease obligations subsequent to June 23, 2005.
NOTE 9 - SUBSEQUENT EVENTS
Purchase Notes
The Partnership is in default of the Purchase Notes. As of December 31, 2004 the total amount in default was $4.3 million, which was comprised of interest in arrears. In January 2005, a payment of $1.5 million was applied against the interest in arrears. As of the date of this filing, the total amount in default is $2.8 million of interest in arrears. See Notes 2 and 4 for additional information.
NOTE 10 - RECONCILIATION OF GAAP BASIS AND TAX BASIS FINANCIAL STATEMENTS:
Listed below are the reconciliations between the Partnership's tax basis financial statements and the financial statements included herein for results of operations, partners' deficit balances and total assets: