- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period __________________ to ___________________
Commission File No. 000-51511
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C,
A CALIFORNIA LIMITED PARTNERSHIP
State or other jurisdiction of incorporation or organization: California
I.R.S. Employer Identification No: 77-0081345
Address of principal executive offices: 1221 Lamar Street, Suite 1600,
Houston, Texas
Zip Code: 77010
Registrant's telephone number, including area code: (713) 853-0530
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES NO X
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer , or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES NO X
1
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C,
A CALIFORNIA LIMITED PARTNERSHIP
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at March 31, 2006 (Unaudited) and
December 31, 2005.
Unaudited Condensed Statements of Operations for the three months ended
March 31, 2006 and March 31, 2005.
Condensed Statements of Changes in Partners' Capital (Deficit) for the
three months ended March 31, 2006 (Unaudited) and for the year ended
December 31, 2005.
Unaudited Condensed Statements of Cash Flows for the three months ended
March 31, 2006 and March 31, 2005.
Notes to Unaudited Condensed Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II
OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
Item 5. Other Information
Item 6. Exhibits
2
Item 1. FINANCIAL STATEMENTS
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C,
A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
(Dollars in thousands)
March 31, 2006 December 31, 2005
------------------ -------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 998 $ 1,056
Accounts receivable - 66
Other current assets 25 18
------------------ -------------------
Total current assets 1,023 1,140
------------------ -------------------
Property, Plant and Equipment
Plant and equipment 32,660 32,660
Less - accumulated depreciation (32,660) (32,660)
------------------ -------------------
Property, plant and equipment, net - -
------------------- -------------------
Total assets $ 1,023 $ 1,140
=================== ===================
Liabilities and partners' deficit
Current liabilities:
Accounts payable and accrued
expenses $ 114 $ 83
Accounts payable to related
party 23 11
Current portion of notes payable
to related party 1,512 1,512
Accrued interest to related party 2,532 2,532
------------------- --------------------
Total current liabilities 4,181 4,138
------------------- --------------------
Partners' deficit
General partner 202 204
Limited partners (6,485) (6,329)
Substituted limited partner 3,125 3,127
------------------ --------------------
Total partners' deficit (3,158) (2,998)
------------------ --------------------
Total liabilities and partners' ------------------ --------------------
deficit $ 1,023 $ 1,140
================== ====================
The accompanying notes are an integral part of the unaudited condensed financial
statements.
- 1 -
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C,
A CALIFORNIA LIMITED PARTNERSHIP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per Unit value, which is in whole dollars)
For the Three Months Ended,
----------------------------------------------------------
March 31, 2006 March 31, 2005
------------------------- ------------------------------
Revenue:
Sale of electricity $ 12 $ 120
Interest income 11 4
------------------------- ------------------------------
Total revenue 23 124
Costs and expenses:
Depreciation - 370
Property taxes 9 8
Easement fees to related party - 64
Management fees to
related party 1 1
Maintenance and other operating costs
to related and other parties 85 124
Insurance costs 6 22
Other operating costs 82 28
------------------------- -----------------------------
Total costs and expenses 183 617
------------------------- -----------------------------
Net loss $ (160) $ (493)
========================= =============================
Net loss per unit $ (211) $ (650)
========================= =============================
Number of outstanding Limited
Partner Units 759 759
========================= =============================
The accompanying notes are an integral part of the unaudited condensed financial
statements.
- 2 -
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C,
A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(Dollars in thousands)
For the three months ended March 31, 2006
and for the year ended December 31, 2005
Substituted
Limited
General Limited Partner
Total Partner Partners (Note 2)
-------------------- ------------------- ---------------- ---------------------
100.00% 1.00% 98.00% 1.00%
-------------------- ------------------- ---------------- ---------------------
Balance at December 31, 2004 $ (2,113) $ 213 $ (5,462) $ 3,136
Net loss (885) (9) (867) (9)
--------------------- -------------------- ---------------- ---------------------
Balance at Dec. 31, 2005 $ (2,998) $ 204 $ (6,329) $ 3,127
Net loss (Unaudited) (160) (2) (156) (2)
--------------------- -------------------- ---------------- ---------------------
Balance at March 31, 2006 (Unaudited) $ (3,158) $ 202 $ (6,485) $ 3,125
===================== ==================== ================ =====================
The accompanying notes are an integral part of the unaudited condensed financial
statements.
- 3 -
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C,
A CALIFORNIA LIMITED PARTNERSHIP
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Three Months Ended,
--------------------------------------------------
March 31, 2006 March 31, 2005
----------------------- -----------------------
Cash Flow From Operating Activities:
Net loss $ (160) $ (493)
Reconciliation of net loss to net cash
used in operating activities:
Depreciation - 370
Changes in operating assets and liabilities:
Accounts receivable 66 (24)
Other current assets (7) (508)
Accounts payable and accrued expenses 31 (30)
Amount payable to related party 12 14
Deferred rent - (88)
----------------------- -----------------------
Net cash used in operating activities (58) (759)
Cash flows used in financing activities -
principal and interest payments on notes
payable to related party - -
----------------------- -----------------------
Net decrease in cash and cash equivalents (58) (759)
Cash and cash equivalents at beginning of the period 1,056 1,050
----------------------- -----------------------
Cash and cash equivalents at end of period $ 998 $ 291
======================= =======================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest - -
The accompanying notes are an integral part of the unaudited condensed financial
statements.
- 4 -
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C,
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The condensed financial statements included herein for the quarterly periods
ended March 31, 2006 and 2005 have been prepared by Zond Windsystem Partners,
Ltd. Series 85-C, a California Limited Partnership (the "Partnership") without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). Accordingly, these statements reflect all
adjustments (consisting only of normal recurring entries), which are, in the
opinion of the Partnership, necessary for a fair statement of the financial
results for the interim periods. Certain information and notes normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such accounting principals. The Partnership believes that
the information and notes included in the financial information are adequate to
make the information presented not misleading. Operating results for the interim
periods presented are not necessarily indicative of the results that may be
expected for the year ended December 31, 2006.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 2 - THE PARTNERSHIP
Introduction
The Partnership was formed on October 25, 1985 to purchase, own and operate a
system of 200 Vestas V-17 wind turbine electric generators (the "Turbines"). The
electricity generated by the Turbines has been sold by the Partnership to its
sole customer, Pacific Gas and Electric Company ("PG&E").
Each Turbine has a rated capacity of 90 kilowatts, and the Turbines have an
aggregate rated capacity of 18.0 megawatts. The Turbines, together with a
substation and power transfer facilities also owned by the Partnership, form an
integrated electric power generating facility (the "Windsystem"). The Windsystem
is located in Alameda County, California (the "Operating Site").
The Turbines are interconnected by a system of transformers and power transfer
lines to a substation owned by the Partnership. The individual power lines from
each of the Turbines are fed into step-up transformers, which increase the
voltage of the Windsystem's power from 480 volts to 12.5 kilovolts ("kVs").
Additional 12.5 kV power transfer lines carry electricity to the Partnership's
substation which steps up the power to 66 kVs. The power generated by the
Windsystem is delivered at this voltage to PG&E at the interconnection point
located adjacent to the Partnership's substation.
- 5 -
The Windsystem, which became operational in December 1985, was constructed by
Zond Construction Corporation IV ("ZCC"), an affiliate of Zond Systems, Inc.
("ZSI"). The Partnership financed its purchase of the Windsystem with cash
raised through a private placement of limited partnership units ("Partnership
Interests" or "Units") and equipment financing in the form of promissory notes
payable to ZCC (the "Purchase Notes"). The Purchase Notes matured in December
2001; however the Purchase Notes remain unpaid and are in default. See Notes 3
and 5 below. ZCC's rights under the Purchase Notes were assigned to ZSI, which
was later renamed Enron Wind Systems, Inc. ("EWSI"), and subsequently merged
into a California limited liability company and renamed Enron Wind Systems, LLC
("EWS"). On January 3, 1997, ZSI'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 V LLC ("ZWM"), a
California limited liability company, which is wholly-owned by EWS. See
"Bankruptcy and Mergers" regarding certain affiliated mergers and name changes
affecting ZWM, EWSI and EWS.
Dissolution of the Partnership
The business of the Partnership and the respective rights of its partners,
including the Partnership's limited partners (the "Limited Partners" and
together with the General Partner, the "Partners"), are governed by the First
Amended and Restated Agreement of Limited Partnership of Zond Windsystem
Partners, Ltd. Series 85-C, a California Limited Partnership, entered into on
December 23, 1985, (the "Partnership Agreement").
The term of the Partnership ended on December 31, 2005 in accordance with the
terms of the Partnership Agreement. The Partnership dissolved effective on the
day on which the term of the Partnership ended. The General Partner will
liquidate the assets of the Partnership, apply and distribute the proceeds
thereof as contemplated by the Partnership Agreement, and plans to cause the
cancellation of the Partnership's Certificate of Limited Partnership with the
Secretary of State of the State of California. The Partnership will then
terminate and the General Partner plans to file with the Commission a Form 15 to
terminate registration of the Units under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The General Partner is in the process of
marketing for sale the assets of the Partnership. See Note 9 for additional
information. The Partnership shutdown the operation of the Windsystem on January
2, 2006 pending the sale of the Partnership's assets in liquidation. See Note 7
for additional information.
Under the terms of the Partnership Agreement, the proceeds of the liquidation of
the assets of the Partnership are to be distributed in the following order: (i)
first, for the payment of any liquidation expenses and Partnership debts (other
than those owing to any of the Partners), such as the Purchase Notes; (ii)
second, for the payment of any Partnership debts owing to any of the Partners;
and (iii) third, for distributions to the Partners in proportion to their
Partnership adjusted capital accounts, after giving effect to all contributions,
distributions and allocations for all taxable years of the Partnership,
including the taxable year during which the final liquidating distribution
occurs. The Partnership believes it is unlikely that there will be enough
proceeds from the liquidation of the Partnership's assets to cover the
liquidation expenses of the Partnership and pay the Partnership's debts,
including the unpaid principal and interest due under the Purchase Notes. As a
result, the Partnership believes it is likely that there will be no remaining
proceeds from the liquidation of the Partnership's assets available for
distribution to the Partners.
- 6 -
Bankruptcy and Mergers
Commencing on December 2, 2001, and periodically thereafter, Enron and certain
of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code"). On February 20, 2002,
EWSI filed a voluntary petition for relief under Chapter 11 of the Bankruptcy
Code. Additionally, a California limited liability company formed on February
19, 2002 for the purpose of merging with EWSI in anticipation of the sale of
Enron's wind turbine manufacturing business also filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code. EWSI merged with and into such
limited liability company 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 V, the general
partner of the Partnership at such time, merged with and into a second
California limited liability company, formed on March 12, 2002, and the
surviving limited liability company changed its name to Zond Windsystems
Management V LLC. ZWM has not 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) 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.
Operation and Maintenance Services
EWS manages the Windsystem pursuant to a Windsystem Management Agreement entered
into with the Partnership on November 4, 1985 (the "Management Agreement"). EWS
has assumed the Management Agreement in connection with the Plan. The Management
Agreement was to terminate by its terms on March 31, 2006; however, the
Partnership and EWS entered into a Second Amendment to the Windsystem Management
Agreement dated as of March 24, 2006, which extended the termination date of the
Management Agreement, as amended, from March 31, 2006 to June 30, 2006. Prior to
May 10, 2002, Enron Wind Maintenance LLC, an affiliate of EWS, provided
operation and maintenance services for the Windsystem. On May 10, 2002, EWS
contracted with GE Wind Energy, LLC to perform certain operation 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 beginning in May 2003 and ending
in May 2008. If EWS terminates the O&M Agreement prior to the end of its stated
term, EWS may be required to pay certain agreed demobilization fees to SeaWest.
If EWS is required to pay such fees, EWS may seek recovery from the Partnership
of some, or all, of the amount of such fees pursuant to the terms of the
Management Agreement. Management currently estimates that as of March 31, 2006,
the amount of the demobilization fee, if any, for which EWS could seek recovery
from the Partnership would not be in excess of approximately $31,000.
Substantial Transactions and Operating Agreements
The accompanying financial statements include substantial transactions with
related parties. These transactions are further described in Note 6 below.
- 7 -
A summary of the major operating agreements entered into by the Partnership,
directly or indirectly, is set forth below:
(1) The Partnership sold the electric power generated by the Turbines to PG&E
under a Power Purchase Agreement (the "Power Agreement"). The Power
Agreement was originally entered into between PG&E and Wind Developers,
Inc. on January 17, 1985 and covered an aggregate of 20 megawatts of
generating capacity. In December 1985, Wind Developers, Inc. assigned its
rights and obligations under the Power Agreement to ZSI, and ZSI assigned
its rights and obligations under the Power Agreement to the Partnership.
The term of the Power Agreement expired on January 31, 2006. See Note 9 for
additional information. However, in connection with the implementation of
various measures to reduce the number of avian fatalities in the Altamont
Pass area, and the termination of the Ground Lease, and in turn, the Wind
Park Easement Agreement, the Windsystem has not been in operation since
January 2, 2006.
Under the Power Agreement, PG&E was required to purchase all of the
electric output from the Turbines. Under the Power Agreement, energy
generated was sold for a total price equal to the sum of (i) capacity rates
based on forecasts of annual as-available capacity and (ii) energy rates.
Through July 15, 2001, the energy rates were based on forecasts of the
short run avoided cost of energy for PG&E. In connection with that certain
agreement dated as of July 13, 2001 between the Partnership and PG&E, PG&E
and the Partnership entered into the Third Amendment to the Power Purchase
Agreement, which amended the energy component of the prices to be paid
under the Power Agreement to provide that, during the period of July 16,
2001 through the end of the term of the Power Agreement, the energy
component was equal to an average price of $0.0537 per kilowatt hour
("kWh") rather than based on the variable short run avoided cost of energy
for PG&E.
The amount of electricity produced by the Turbines depended upon wind
speed, which is subject to significant seasonal variations in the Altamont
area. Wind speed is generally highest during the summer months and lowest
during the winter months. These seasonal variations resulted in significant
variations from month to month in the net power production realized by the
Turbines, and therefore resulted in monthly variations in the amount of
electricity sold to PG&E.
(2) Since November 1985, the Partnership has contracted with EWS (or its
predecessor) for the operation and maintenance of the Turbines and the
performance of certain ancillary management services, such as collection of
revenues from PG&E and the administration and payment of all Partnership
expenses. Under the provisions of the Management Agreement, the Partnership
pays a management fee of 1% of the Partnership's Gross Operating Proceeds.
"Gross Operating Proceeds" is 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), calculated
without offset or other deductions of any nature (except for such amounts
as may be required to be refunded by the Partnership to PG&E). 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 maintenance services, including maintenance services by third parties
relating to the Windsystem. See Note 6 below. The term of the Management
Agreement expires June 30, 2006.
- 8 -
(3) The Operating Site is located in Alameda County, California. The
Partnership owns the Turbines, including the supporting towers and related
concrete support pads and controllers, a power collector system and power
substation. The Partnership uses the Operating Site pursuant to an easement
granted by ZSI under the terms of the Amended and Restated Wind Park
Easement Agreement dated as of July 1, 1986 (the "Wind Park Easement
Agreement").
The Wind Park Easement Agreement terminated on March 6, 2006 (the
"Scheduled Termination Date"); provided, however, that the Partnership's
rights under the Wind Park Easement Agreement are subject and subordinate
to all of the terms and conditions of the Amended Ground Lease for Wind
Park Development on the Rooney Ranch, Alameda County dated October 29, 1985
(the "Ground Lease") by and between the City of Santa Clara (the "City")
and ZSI. Pursuant to the terms of the Ground Lease, the Ground Lease
terminates twenty (20) years from the date the last wind turbine generator
was "placed-in service". The Partnership believes that the last wind
turbine generator was "placed-in-service" in December 1985 and that the
term of the Ground Lease and, as a result, the term of the Wind Park
Easement Agreement, ended in December 2005. See Note 9 for additional
information. Pursuant to the terms of the Ground Lease, within a reasonable
time following the termination of the Ground Lease, not to exceed nine (9)
months, EWS is required to remove the Turbines, related equipment and
substation from the Operating Site.
Under the terms of the Ground Lease and the Wind Park Easement Agreement,
the City had the option to purchase the Windsystem on December 31, 2005 at
a price set forth in the Ground Lease by notifying EWS at least 180 days
prior to the end of the year of its intent to make such purchase. In a
letter dated June 2, 2005 the City informed Enron Wind LLC, a parent
company of EWS, that the City did not wish to exercise the purchase option
under the Ground Lease. In addition, the City's available period for
notifying EWS of its intent to exercise such purchase option lapsed on July
4, 2005, and no further notice of intent to exercise the purchase option
has been provided by the City.
Under the Wind Park Easement Agreement, within thirty (30) days of the
Scheduled Expiration Date, the Partnership is required to remove from the
Operating Site the Turbines, related equipment and substation, unless the
Partnership elects to (i) abandon the Turbines, related equipment and
substation or (ii) sell the Turbines, related equipment and substation.
Pursuant to a letter dated March 28, 2006, the Partnership informed EWS of
the Partnership's election to sell the Turbines, related equipment and
substation. In connection with such sale, the Partnership must first offer
the Turbines to EWS on the same terms and conditions. If the Partnership
does not complete such sale within nine (9) months of the Scheduled
Expiration Date, then the Partnership must immediately remove the Turbines,
related equipment and substation. Failure to remove such equipment will
result in the abandonment of such equipment to EWS, and all right, title
and interest in such equipment shall transfer to EWS without the payment of
any compensation to the Partnership. However, if the Turbines, related
equipment and substation are abandoned, neither EWS nor any affiliate or
assign shall have the right to operate the Turbines, related equipment and
substation unless EWS (or its affiliate or assign) pays to the Partnership
the appraised fair market value (as defined in the Wind Park Easement
Agreement) of the Turbines, related equipment and substation.
- 9 -
Under the Wind Park Easement Agreement, the Partnership has been required
to pay EWS (i) annual easement fees, (ii) the Partnership's pro rata share
of real property taxes and assessments, and (iii) the Partnership's pro
rata share of the repair and maintenance costs of the infrastructure roads
relating to the Operating Site. The Wind Park Easement Agreement required
that the Partnership pay annual easement fees in an amount equal to the
greater of: (i) the Partnership's pro rata share of each annual payment due
from EWS to the City under the Ground Lease, or (ii) a percentage of Gross
Operating Proceeds that increases throughout the term of the Wind Park
Easement Agreement (5% from calendar year 1986 through 1995; 10% from
calendar year 1996 through 2000; and 13% thereafter).
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. Under the
Purchase Notes, the Partnership cannot make cash distributions to its Partners
unless certain cash reserve balances are maintained and no events of default
exist. The Partnership has never met these criteria and did not make cash
distributions to its Partners during the three months ended March 31, 2006.
NOTE 3 - GOING CONCERN
The following matters raise substantial doubt about the Partnership's ability to
continue as a going concern:
1. As discussed in Note 2 and Note 5, the Partnership has ceased to
operate the Windsystem, and has not had, and does not anticipate that
it will have, sufficient cash flows to make payment in full of the
outstanding principal and accrued but unpaid interest on the
outstanding Purchase Notes. The Partnership continues to be in default
of the Purchase Notes. Upon notice of default, EWS has a right to
foreclose against its security interests in the assets of the
Partnership. As of March 31, 2006, the Partnership had not received a
foreclosure notice from EWS with respect to the Purchase Notes. Any
such foreclosure by EWS on its security interests in the assets of the
Partnership would have a material adverse effect on the Partnership.
2. As discussed in Note 2, the term of the Partnership ended on December
31, 2005. The Partnership dissolved effective on the day on which the
term of the Partnership ended. The General Partner will liquidate the
assets of the Partnership, apply and distribute the proceeds thereof
as contemplated by the Partnership Agreement, and plans to cause the
cancellation of the Partnership's Certificate of Limited Partnership
with the Secretary of State of the State of California. The
Partnership will then terminate and the General Partner plans to file
with the Commission a Form 15 to terminate registration of the Units
under the Exchange Act.
NOTE 4 - 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
- 10 -
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.
Property, Plant and Equipment
The Turbines are recorded at cost. The Turbines were depreciated on the
straight-line method over a twenty-year life. Capitalized improvements 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. The Turbines became fully
depreciated in 2005.
Earnings Per Limited Partner Unit
Earnings per Limited Partner Unit are calculated based upon the number of
Partnership Interests 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, accrued expenses and accounts payable to related party, the carrying
amount approximates fair value because of the short maturity of those
instruments.
- 11 -
The estimated fair value of the Partnership's note payable to related party and
accrued interest payable to related party does not approximate the carrying
amount as the Partnership is in default of the Purchase Notes. See Note 5 for
additional information.
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 was recognized as revenue upon delivery of
power to PG&E at prices as defined in the Power Agreement. All power produced
was sold to PG&E under the Power Agreement, the term of which expired on or
about January 31, 2006. Under the Power Agreement, PG&E was to deliver payment
to the Partnership no later than 30 days from the end of the monthly billing
period. See Note 2 for a description of the Power Agreement. Write-offs and or
allowances for doubtful accounts are recognized on an account-by-account basis.
NOTE 5 - PURCHASE NOTES
EWS earned interest from the Partnership under the Purchase Notes. The interest
rate under the Purchase Notes was 10.75% per annum. Prior to maturity on
December 31, 2001, the Purchase Notes were payable in equal semi-annual
installments of principal and interest, commencing in 1986. At March 31, 2006,
approximately $1.5 million of outstanding principal, and $2.5 million of accrued
interest in arrears, was due to EWS under the Purchase Notes. See Note 9 for
additional information.
During the period of 1996 through 2001, the Partnership did not pay all of the
annually scheduled principal payments due under the Purchase Notes and,
notwithstanding the maturity of the Purchase Notes in December 2001, the
Partnership has not paid all of the remaining outstanding principal balance on
the Purchase Notes. Notwithstanding the terms of the Purchase Notes, the payee
under the Purchase Notes required that the Partnership pay only the
originally-scheduled interest on the Purchase Notes as established under the
original amortization schedules that are attached to the Purchase Notes. The
payee under the Purchase Notes did not require the Partnership to pay any
additional interest with respect to (i) the portion of the annual principal
payments that was due and unpaid at the end of any calendar year during such
period and (ii) any principal balance of the Purchase Notes outstanding at any
time after the maturity date of the Purchase Notes. As a result of this
arrangement, the Partnership paid or has been obligated to pay approximately
$2.2 million less in interest through March 31, 2006 than it otherwise would
have paid or been obligated to pay in the absence of such arrangement. This
arrangement is acknowledged and memorialized in that certain Interest Expense
Acknowledgement between the Partnership and EWS dated as of August 30, 2005. In
addition, the terms of the Purchase Notes do not require the Partnership to pay
additional interest on the accrued and unpaid interest due under the Purchase
Notes.
The Partnership is in default under the Purchase Notes. Upon notice of default,
EWS has a right to foreclose against its security interest in the assets of the
- 12 -
Partnership, including the Windsystem. As of March 31, 2006, EWS had not
notified the Partnership of its intent to foreclose on its security interest.
Any such foreclosure by EWS on its security interest in the assets of the
Partnership would have a material adverse effect on the Partnership.
NOTE 6 - TRANSACTIONS WITH RELATED PARTIES
In addition to the Purchase Notes (See Note 5 above), the Partnership had other
amounts payable to EWS. Amounts payable to EWS include easement fees related to
the Partnership's use of the Operating Site and management fees, maintenance
costs and other miscellaneous expenses related to Windsystem operations.
The Partnership has the following related party transactions and relationships:
(1) EWS granted to the Partnership easement rights to the Operating Site under
the Wind Park Easement Agreement (See Note 2 above). The Partnership
incurred $0.0 million and $0.06 million in easement fees during the three
months ended March 31, 2006 and March 31, 2005, respectively, 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 2 above). The Partnership incurred
expenses of $0.09 million and $0.13 million for the three months ended
March 31, 2006 and March 31, 2005, respectively, pursuant to the Management
Agreement.
NOTE 7 - LITIGATION
Avian Fatalities
The Operating Site is located in the Altamont Pass area, which is in Alameda
County, California. There are approximately 5,400 operable wind turbines in the
Altamont Pass area, including the 200 Turbines owned by the Partnership. The
operation of wind turbines in the Altamont Pass area has resulted in a
significant number of avian fatalities, including the deaths of certain hawks,
eagles and owls, among other birds. Certain of these fatalities may be a
violation of law, including The Migratory Bird Treaty Act and the Bald and
Golden Eagle Protection Act. The Partnership and other turbine operators in the
Altamont Pass area worked together to formulate and implement various measures
to reduce the number of avian fatalities. In connection with formulating
measures to address this avian fatality issue, the Partnership, along with the
other Altamont Pass area wind turbine operators, had discussions with
representatives of the California Department of Fish and Game ("CDFG"), the U.S.
Fish and Wildlife Service ("FWS") and the U.S. Department of Justice ("DOJ"),
among others. The Partnership took measures to address this issue, and the cost
(either direct cost or reduction in revenue) of such measures, and the cost of
any actions that may be brought against the Partnership in connection with this
issue, may be material to the Partnership. First, in 2005, the Partnership
completed the removal and dismantling of the nacelles and blades of five
Turbines determined by the Partnership to be relatively high risk relating to
avian fatalities. Second, the Partnership also, in coordination with the other
turbine operators in the Altamont Pass area, shutdown the Windsystem during most
of January and all of February 2006, and has continued the shutdown of the
Windsystem pending the sale of the Partnership's assets in liquidation. At this
point in time, the Partnership is unable to determine whether the measures it
has taken to address the avian fatality concerns applicable to the Operating
Site will be satisfactory and whether CDFG, FWS or DOJ will require further
action by the Partnership, or will bring any actions against the Partnership.
- 13 -
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Leases Payable
None.
NOTE 9 - SUBSEQUENT EVENTS
Purchase Notes
In April 2006, the Partnership made a payment to EWS in the aggregate amount of
$750,000 on the principal outstanding under the Purchase Notes. Following this
payment, $750,000 of principal and $2.5 million of interest were in arrears
under the Purchase Notes.
Sale of Assets
The Partnership is in discussions with the City regarding the possible sale of
substantially all the Partnership's assets to the subsequent lessee of the
Operating Site. The Partnership is providing information regarding the
Windsystem to several potential subsequent lessees in connection with such sales
effort.
Agreement Extensions
In connection with the Partnership's asset sales effort, the Partnership is in
discussions with PG&E regarding a possible extension of the term of the Power
Agreement, and is in discussions with EWS regarding a possible extension of the
term of the Wind Park Easement Agreement. Further, EWS is in discussions with
the City regarding a possible extension of the term of, and a reduction of the
rental rates payable under, the Ground Lease.
- 14 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Going Concern
The following matters raise substantial doubt about the Partnership's ability to
continue as a going concern:
1. The Purchase Notes matured on December 31, 2001 and all of the accrued
and unpaid interest and outstanding principal on the Purchase Notes
was due on that date. As discussed in Note 2 and Note 5 to the
Financial Statements, the Partnership has ceased to operate the
Windsystem, and has not had sufficient cash flows from operations to
make payment in full of the outstanding principal and accrued but
unpaid interest on the outstanding Purchase Notes. The Partnership
continues to be in default of the Purchase Notes. Upon notice of
default, EWS has a right to foreclose against its security interests
in the assets of the Partnership. As of the date of this filing, the
Partnership had not received a foreclosure notice from EWS with
respect to the Purchase Notes. Any such foreclosure by EWS on its
security interests in the assets of the Partnership would have a
material adverse effect on the Partnership.
2. As discussed in Note 2 to the Financial Statements, the term of the
Partnership ended on December 31, 2005. The Partnership dissolved
effective on the day on which the term of the Partnership ended. The
General Partner will liquidate the assets of the Partnership, apply
and distribute the proceeds thereof as contemplated by the Partnership
Agreement, and plans to cause the cancellation of the Partnership's
Certificate of Limited Partnership with the Secretary of State of the
State of California. The Partnership will then terminate and the
General Partner plans to file with the Commission a Form 15 to
terminate registration of the Units under the Exchange Act.
Liquidity and Capital Resources
The Partnership continued to experience a lack of liquidity throughout the first
quarter of 2006, primarily due to an ongoing shortfall in revenues from
operations in comparison to the costs and expenses of operations. Because the
Windsystem was shutdown for most of the first quarter of 2006, the Partnership
had minimal operating revenue but continued to incur costs and expenses
associated with the maintenance of the Windsystem. The Partnership continues to
be unable to meet its obligations under the Purchase Notes. At March 31, 2006,
principal payments on the Purchase Notes in the aggregate amount of $1.5 million
and interest payments in the aggregate amount of $2.5 million were in arrears.
In April 2006, the Partnership made a principal payment on the Purchase Notes to
EWS in the amount of $750,000. The Purchase Notes matured in December 2001 and
the Partnership does not anticipate that the Purchase Notes will be fully repaid
prior to the end of the term of the Partnership. The Partnership's failure to
make timely payments on the Purchase Notes gave EWS the right to foreclose
against the collateral for its loans as set forth in the security agreements
relating to the Purchase Notes. As of the date of this filing, the Partnership
had not received a foreclosure notice from EWS with respect to the Purchase
Notes. See "Results of Operations for the Three Months Ended March 31, 2006
Compared to the Three Months Ended March 31, 2005."
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 has been PG&E. The price paid by PG&E for the
electricity was contractually defined under the Power Agreement, the term of
which expired on January 31, 2006. See Note 2 and Note 9 to the Financial
Statements.
- 15 -
As of March 31, 2006, the Partnership had no current or planned commitments for
capital expenditures.
Results of Operations for the Three Months Ended March 31, 2006 Compared to the
Three Months Ended March 31, 2005
For the three months ended March 31, 2006, revenues from power sales were $0.01
million, and the Windsystem produced .01 million kWh of electricity for sale to
PG&E. This was a decrease of $0.1 million or 90% in revenue and a decrease of
1.7 million kWh of electricity produced or 99% as compared to the same period in
2005. The decrease in electricity produced is due to the fact that the
Windsystem has not been in operation since January 2, 2006. Interest income
increased $0.007 million due to higher cash balances during the three months
ended March 31, 2006 as compared with the three months ended March 31, 2005.
Costs and expenses for the first quarter of 2006 were $0.2 million. This was a
decrease of $0.4 million or 70% as compared to the first quarter of 2005.
Depreciation decreased $0.4 million during the first quarter of 2006 as compared
to the first quarter of 2005, as the Turbines were fully depreciated in 2005.
Property taxes remained comparable during the first quarter of 2006 as compared
to the first quarter of 2005. Easement fees decreased during the first quarter
of 2006 by $0.06 million as compared to the first quarter of 2005, as the Wind
Park Easement Agreement terminated by its terms in December 2005. Management
fees remained comparable during the first quarter of 2006 as compared to the
first quarter of 2005. Maintenance expenses decreased $0.04 million in the first
quarter of 2006 as compared to the first quarter of 2005, due to a decrease in
unscheduled maintenance. Insurance costs decreased by $0.02 million in the first
quarter of 2006 due to a decrease in renewal rates as compared with the first
quarter of 2005. Other operating costs increased $0.05 million in the first
quarter of 2006 as compared to the first quarter of 2005 due to an increase in
the use of outside consultants.
Overall, the Partnership reported a net loss of $0.2 million for the first
quarter of 2006, which is a decrease of $0.3 million or 68% as compared to the
net loss for the first quarter of 2005. Net loss per Unit was $211 for the first
quarter of 2006 compared with a net loss per Unit of $650 for the first quarter
of 2005.
Cash flows from operations increased by $0.7 million in the three month period
ended March 31, 2006 as compared to the three month period ended March 31, 2005.
This increase was primarily due to favorable changes in working capital during
the three month period ended March 31, 2006. Excess cash flows from operations
are used primarily to fund payments of the principal in arrears on the Purchase
Notes.
Contractual Obligations
The Partnership's contractual obligations as of March 31, 2006 are as follows
(in millions):
-------------------------------------- ----------------------
| | 2006* |
-------------------------------------- ----------------------
| | |
-------------------------------------- ----------------------
| Debt | |
-------------------------------------- ----------------------
| Purchase Notes Payable | $1.512 |
-------------------------------------- ----------------------
| | |
-------------------------------------- ----------------------
| Interest Payable | $2.532 |
-------------------------------------- ----------------------
- 16 -
-------------------------------------- ----------------------
| | |
-------------------------------------- ----------------------
| Purchase Obligations: | |
-------------------------------------- ----------------------
| Maintenance fees | $0.090 |
-------------------------------------- ----------------------
| | |
-------------------------------------- ----------------------
| Demobilization Fee | $0.031 |
-------------------------------------- ----------------------
* The Partnership shutdown the Windsystem on January 2, 2006; however, the
Partnership extended the term of the Management Agreement through June 30, 2006.
See Note 2 to the Financial Statements.
Item 3. 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.
Item 4. CONTROLS AND PROCEDURES
(a) Disclosure 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 Commission'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
March 31, 2006. 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 March 31, 2006.
(b) Internal Control Over Financial Reporting
During the three months ended March 31, 2006, the Partnership made no change in
its internal control over financial reporting (as such term is defined in Rules
13a - 15(f) and 15d - 15(f) under the Exchange Act) that materially affected, or
is reasonably likely to materially affect, its internal control over financial
reporting.
- 17 -
PART II - OTHER INFORMATION
Item 3. DEFAULTS UPON SENIOR SECURITIES
The Partnership is in default under the Purchase Notes. As of the date of this
filing, the total amount in default is $3.25 million, which is comprised of
unpaid principal and interest in arrears. See Note 5 and Note 9 to the Financial
Statements for additional information.
Item 5. OTHER INFORMATION
This report contains statements that are forward-looking within the meaning of
Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Exchange
Act. Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and that actual results could differ materially
as a result of known and unknown risks and uncertainties, including general
economic conditions, future trends, and other risks, uncertainties and factors
disclosed in this operating report.
Item 6. EXHIBITS
(a) Exhibits
31.1 Rule 13a-14(a) Certification of Jesse E. Neyman
31.2 Rule 13a-14(a) Certification of Johnna D. Kokenge
32.1 Section 1350 Certification of Jesse E. Neyman
32.2 Section 1350 Certification of Johnna D. Kokenge
- 18 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zond Windsystem Partners, Ltd. Series 85-C, a
California Limited Partnership
Date: May 12, 2006
By: Zond Windsystems Management V LLC,
General Partner
By: /s/ Jesse E. Neyman
--------------------------------
Jesse E. Neyman
Chief Executive Officer of Zond Windsystems
Management V LLC, the General Partner of Zond
Windsystem Partners, Ltd. Series 85-C, a
California Limited Partnership
By: /s/ Johnna D. Kokenge
--------------------------------
Johnna D. Kokenge
Chief Financial Officer of Zond Windsystems
Management V LLC, the General Partner of Zond
Windsystem Partners, Ltd. Series 85-C, a
California Limited Partnership
- 19 -
Exhibit Index
-------------
Number Description
31.1 Rule 13a-14(a) Certification of Jesse E. Neyman
31.2 Rule 13a-14(a) Certification of Johnna D. Kokenge
32.1 Section 1350 Certification of Jesse E. Neyman
32.2 Section 1350 Certification of Johnna D. Kokenge
- 20 -