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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________to __________________
Commission File No. 0-51511
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: 77-0093739
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of Limited
Partnership Interest
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ ] NO [X]
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES [ ] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [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 Act). YES [ ] NO [X]
State the aggregate market value of the voting and non-voting common equity held
by nonaffiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter. Not applicable - The registrant is a limited partnership and its units
of limited partnership interests are not traded.
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ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C
A CALIFORNIA LIMITED PARTNERSHIP
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
ITEM NUMBER PAGE
- ----------- ----
PART I
1. Business.................................................... 1
1A. Risk Factors................................................ 4
2. Properties.................................................. 5
3. Legal Proceedings........................................... 6
4. Submission of Matters to a Vote of Security Holders......... 6
PART II
5. Market for Registrant's Common Equity and Related
Unitholder Matters......................................... 7
6. Selected Financial Data .................................... 7
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 8
7A. Quantitative and Qualitative Disclosures about Market Risk.. 11
8. Financial Statements and Supplementary Data................. 11
9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure..................... 11
9A. Controls and Procedures..................................... 11
9B. Other Information........................................... 12
PART III
10. Directors and Executive Officers of the Registrant ......... 12
11. Executive Compensation ..................................... 14
12. Security Ownership of Certain Beneficial Owners
and Management and Related Unitholder Matters.............. 14
13. Certain Relationships and Related Transactions ............. 14
14. Principal Accountant Fees and Services...................... 16
PART IV
15. Exhibits and Financial Statements Schedules................ 17
ITEM 1. BUSINESS
INTRODUCTION
Zond Windsystem Partners, Ltd. Series 85-C, a California limited partnership
(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").
Through January 2, 2006, the electricity generated by the Turbines was sold by
the Partnership to its sole customer, Pacific Gas and Electric Company ("PG&E").
On January 2, 2006, the Partnership shutdown the operation of the Turbines and
has not generated or sold any electricity since that date. See "Item 1.
BUSINESS - Dissolution of Partnership."
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.
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"). ZCC's rights under the Purchase Notes
were assigned to ZSI, which was later renamed Enron Wind Systems, Inc. ("EWSI"),
which was later merged into a California limited liability company and renamed
Enron Wind Systems, LLC ("EWS"). See "Bankruptcy and Mergers" below. The
Purchase Notes matured in December 2001; however, the Purchase Notes remain
unpaid. At December 31, 2001, there was outstanding $4.1 million of principal
and $ 2.5 million of interest in arrears with respect to the Purchase Notes. As
of December 31, 2005, there was outstanding $1.5 million of principal and $ 2.5
million of interest in arrears with respect to the Purchase Notes. For further
information regarding the Purchase Notes and the amount of interest owing
thereunder, see "Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -
Purchase Note Financing" and Note 4 to the Financial Statements.
Competition
The Partnership does not compete with others in the wind power industry. On
January 2, 2006, the Partnership shutdown the operation of the Turbines and has
not generated or sold any electricity since that date. Even when the
Partnership operated the Turbines, the Partnership sold the power solely to
PG&E pursuant to a binding long-term power contract, and did not attempt to sell
the power on the open market or otherwise. The Partnership is marketing its
assets for sale, and expects to liquidate upon the sale of its assets. See
"Item 1. BUSINESS - Dissolution of the Partnership".
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"), 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 of the
Partnership, Zond Windsystems Management V LLC
1
(the "General Partner" or "ZWM"), a California limited liability company, which
is wholly-owned by EWS, 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
Securities and Exchange Commission (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. The Partnership shutdown the operation of
the Windsystem on January 2, 2006, pending the sale of the Partnership's
assets in dissolution, and has not operated the Windsystem since that date. See
"Item 3. LEGAL PROCEEDINGS - Avian Fatalities".
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 in connection with 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 Limited Partners. If the Partnership is unable to fully
repay the principal and interest accrued under the Purchase Notes prior to the
termination and winding-up of the Partnership, the Partnership will realize
discharge of indebtedness income for federal income tax purposes. The
Partnership's income from the discharge of indebtedness will be allocated to
each partners, on a pro rata basis, and reported to each partner on Schedule
K-1 for the year in which the discharge of indebtedness takes place.
BANKRUPTCY AND MERGERS
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"). 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 the other 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.
2
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, as amended, 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 (the "Management Agreement Amendment") dated as of
March 24, 2006 which extended the termination date of the Management Agreement
from March 31, 2006 to June 30, 2006. Although the Partnership shutdown the
operation of the Windsystem on January 2, 2006 and has not operated the
Windsystem since that date, EWS continues to maintain and manage the Windsystem
pursuant to the Management Agreement.
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, in
connection with the GE Sale, 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 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.
SALE OF ELECTRIC POWER
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 was
originally scheduled to terminate on December 31, 2005. PG&E and the
Partnership extended the termination date of the Power Agreement to January 31,
2006 pursuant to a letter agreement dated December 28, 2005. On May 19, 2006,
the Partnership entered into the Fourth Amendment to the Power Purchase
Agreement (the "Fourth Amendment"), which extended the termination date of the
Power Agreement from January 31, 2006 to December 29, 2010, provided that the
Partnership may terminate the Power Agreement earlier upon the delivery to PG&E
of a written notice at least thirty days prior to the requested termination
date. However, the Windsystem has not been in operation since January 2, 2006,
and the Partnership has not sold any electricity to PG&E under the Power
Agreement since that date. The Partnership is, however, currently evaluating
whether or not to commence operation of the Windsystem.
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 Fourth Amendment provides that PG&E shall pay the
Partnership for energy deliveries (i) through July 16, 2006, pursuant to the
fixed energy price specified in the Third Amendment to the Power Purchase
Agreement dated November 13, 2001 and (ii) on and after July 17, 2006, at prices
equal to PG&E's short-run avoided cost, as determined pursuant to the
methodology that is approved, and as may be revised from time to time, by the
California Public Utilities Commission for payments to qualifying facilities.
The Fourth Amendment also provides that PG&E shall pay the Partnership for
as-delivered capacity during the remainder of the term of the Power Agreement
(as amended by the Fourth Amendment) at prices authorized, and as may be
revised from time to time by the California Public Utilities Commission, as
opposed to the prices for capacity set forth in the Power Agreement prior to the
effectiveness of the Fourth Amendment. Pursuant to the Fourth Amendment, the
Partnership also agrees to transfer to PG&E all environmental attributes
associated with the electrical energy to be purchased by PG&E under the Power
Agreement. Environmental attributes are defined under the Fourth Amendment to
mean any and all benefits, emissions, reductions, offsets and allowances
directly attributable to the generation of electricity by the Partnership's
Windsystem, including any avoided emissions of pollutants to the air such as
sulfur oxides (SOx), nitrogen oxides (NOx), carbon monoxide (CO) and other
similar pollutants.
WINDSYSTEM PERFORMANCE
3
The amount of electricity produced by the Turbines depended upon wind speed,
which was subject to significant seasonal variations in the Altamont area. Wind
speed was 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.
During 2005, PG&E purchased an aggregate of 24.5 million kWh of electricity from
the Partnership for an aggregate purchase price of $1.6 million.
GOING CONCERN
1. As discussed in "Item 1. BUSINESS - Introduction" and in Note 4 to the
Financial Statements, the Partnership 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 the date of
filing of this registration statement, 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 "Item 1. BUSINESS - Dissolution of the Partnership"
and in Note 1 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.
EMPLOYEES
The Partnership has no employees. EWS manages, operates and maintains the
Windsystem pursuant to the Management Agreement. The General Partner, utilizing
employees of Enron, attends to the remaining day-to-day activities of the
Partnership.
ITEM 1A. RISK FACTORS
AVIAN FATALITIES
The past operation of the Turbines resulted in a significant number of avian
fatalities. Certain of these fatalities may have been a violation of law,
including The Migratory Bird Treaty Act and the Bald and Golden Eagle Protection
Act. The Partnership is unable to determine if applicable governmental agencies
or others will bring any actions against the Partnership relating to these past
fatalities.
ENVIRONMENTAL RISK
4
There is a risk that the operation and maintenance of the Windsystem at the
Operating Site has resulted, or will result, in environmental damage to the
Operating Site, or some portion thereof, and that the Partnership could have
liability associated with such damage.
NO MARKET FOR PARTNERSHIP INTERESTS
There is no public market for the Partnership Interests. Partnership Interests
may not be transferred without the consent of the General Partner. There is a
substantial risk that any holder of Partnership Interests will have no ability
to transfer, sell or assign any such Partnership Interests.
VALUATION RISK IN SALE PROCESS
The Partnership is currently in liquidation and is marketing its assets for
sale. There is no assurance of the amount of proceeds, if any, the Partnership
will receive for the assets of the Partnership. As a result, there is
significant risk that the Partnership will be unable to pay off its debts prior
to the termination of the Partnership, and that the holders of the Partnership
Interests will receive no distributions following the termination of the
Partnership.
ITEM 2. PROPERTIES
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 has used 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, unless earlier terminated, terminated on March
6, 2006 (the "Scheduled Expiration 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. Pursuant to the terms of the Ground Lease, in 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
5
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.
ITEM 3. LEGAL PROCEEDINGS
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, in coordination with the other
turbine operators in the Altamont Pass area, shutdown the Windsystem during
January and 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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the partners of the Partnership during
2005.
PART II
6
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDER MATTERS
MARKET INFORMATION
There is no established public trading market for the Units. The Partnership
Agreement includes various restrictions on the transfer of Units. The
Partnership did not repurchase any Units during 2005.
HOLDERS
The Partnership's records indicate that at December 31, 2005 there were 561
holders of record of the 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. 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 year ended December 31, 2005.
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 for purposes of filings
with the Commission to reflect accounting principles generally accepted in the
United States. The selected financial data should be read in conjunction with
the financial statements and related footnotes included in Item 15.
As of and for the years ended December 31,
----------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
(Dollars in thousands, except per Unit values which are in whole dollars)
Total revenue $ 1,660 $ 2,474 $ 2,082 $ 2,255 $ 3,020
Net loss $ (885) $ (318) $ (730) $ (561) $ (96)
Per unit:
Net loss (1,166) (419) (962) (739) (126)
Partners' deficit (3,950) (2,784) (2,365) (1,403) (664)
Total assets $ 1,140 $ 2,605 $ 5,307 $ 6,834 $ 7,364
Current portion of notes
payable to related party $ 1,512 $ 1,702 $ 3,452 $ 4,052 $ 4,052
Accrued interest to related party $ 2,532 $ 2,532 $ 2,532 $ 2,532 $ 2,532
Partners' deficit $ (2,998) $ (2,113) $ (1,795) $ (1,065) $ (504)
7
All per Unit values were calculated based on 759 Units.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, 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 the
date of filing of this registration statement, 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 Part I, "Item 1. BUSINESS - Dissolution of the
Partnership" and Note 1 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 experienced a lack of liquidity throughout 2005, primarily due
to an ongoing shortfall in revenues from operations in comparison to the costs
and expenses of operations. Cash flows from the Partnership's operations were
sufficient to fund the Partnership's operating expenses; however, the
Partnership has been unable to meet its obligations under the Purchase Notes. At
December 31, 2005, 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. The Purchase Notes matured in December 2001 and the
Partnership does not anticipate that the Purchase Notes will be fully repaid
prior to the termination 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 Year Ended December 31, 2005 Compared to
December 31, 2004."
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 has been the production and sale to PG&E of electricity from the
Windsystem. Since the Windsystem was shutdown on January 2, 2006, the
Partnership has no current source of revenue.
As of December 31, 2005, the Partnership had no current or planned commitments
for capital expenditures.
8
PURCHASE NOTES
The Partnership is in default of the Purchase Notes. As of December 31, 2005 the
total amount in default was $1.5 million and $2.5 million, which was comprised
of principal and interest in arrears, respectively. See "Item 1 - BUSINESS -
Going Concern" and Notes 2 and 4 to the Financial Statements for additional
information.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005 COMPARED TO
DECEMBER 31, 2004
During the year ended December 31, 2005, the Partnership's electricity revenue
was $1.6 million, and the Windsystem produced 24.5 million kWh of electricity
sold to PG&E. This was a decrease of $0.8 million or 33% in revenue and a
decrease of 8.3 million kWh or 25% of electricity produced as compared to the
year ended December 31, 2004. The Partnership believes the decrease in
electricity produced is primarily due to lower average wind speeds during the
year ended December 31, 2005 as compared to the year ended December 31, 2004.
Interest income increased $0.009 million during 2005 as compared to 2004.
Operating cash was invested in an interest bearing account during the entire
year ended December 31, 2005; however, the operating cash was invested in an
interest bearing account only during the fourth quarter of the year ended
December 31, 2004.
Costs and expenses during 2005 were $2.5 million, a decrease of $0.2 million or
9% as compared to 2004. Depreciation decreased $0.2 million during 2005 as
compared to 2004 due to the Turbines becoming fully depreciated during 2004.
Property taxes remained comparable during 2005 as compared to 2004. Management
fees decreased $0.009 million during 2005 as compared to 2004. The decrease in
management fees is directly related to the decrease in Gross Operating Proceeds
received during the year ended December 31, 2005. "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).
Easement fees remained comparable during 2005 as compared to 2004. Maintenance
expenses decreased $0.02 million during 2005 as compared to 2004 due to a
decrease in unscheduled maintenance. Insurance costs decreased by $0.06 million
during 2005 as compared to 2004 due to decreased premiums. Other operating costs
increased $0.01 million during 2005 as compared to 2004 due to increased outside
consultant expenses in 2005.
Overall, the Partnership reported a net loss of $0.9 million for 2005, a change
of $0.6 million from the net loss of $0.3 million in 2004. During 2005, the
total partners' deficit increased by $0.9 million to $3.0 million. The net loss
per Unit was $1,166 for 2005 compared with a net loss per Unit of $419 for 2004.
Cash flows from operations decreased by $0.5 million in 2005 as compared to
2004. This decrease was primarily due to decreased revenues during the year
ended December 31, 2005 as compared to the year ended December 31, 2004. Cash
flows used in financing activities decreased by $1.6 million during 2005 as
compared to 2004 due to decreased principal payments on the Purchase Notes.
Excess cash flows from operations were used primarily to fund payments of the
principal and interest in arrears on the Purchase Notes.
9
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004 COMPARED TO
DECEMBER 31, 2003
During the year ended December 31, 2004, the Partnership's electricity revenue
was $2.5 million, and the Windsystem produced 35.6 million kWh of electricity
sold to PG&E. This was an increase of $0.4 million or 19% in revenue and an
increase of 5.7 million kWh or 19% of electricity produced as compared to the
year ended December 31, 2003. The Partnership believes the increase in
electricity produced is primarily due to higher average wind speeds during the
year ended December 31, 2004 as compared to the year ended December 31, 2003.
Costs and expenses were $2.8 million during each of 2004 and 2003. Depreciation
was $1.6 million in both 2004 and 2003. During 2003, the Partnership recaptured
$0.3 million of bad debt expense originally recognized in 2001. The bad debt
expense related to receivables from PG&E for electricity delivered by the
Partnership in 2000 and 2001, which had been deemed uncollectible. Once past due
amounts were received in 2003, the bad debt expense was recaptured. There was no
bad debt expense recaptured during 2004. Property taxes, easement fees and
management fees remained comparable in 2004 as compared to 2003. Maintenance
expenses decreased by $0.3 million due to a decrease in unscheduled maintenance
in 2004 as compared to 2003. Insurance costs decreased by $0.05 million in 2004
as compared to 2003 due to decreased premiums. Other operating costs increased
$0.04 million in 2004 as compared to 2003 due to increased backfeed electricity
charges resulting from increased production in 2004.
Overall, the Partnership reported a net loss of $0.3 million for 2004, a change
of $0.4 million from the net loss of $0.7 million in 2003. During 2004, the
total partners' deficit increased by $0.3 million to $2.1 million. The net loss
per Unit was $419 for 2004 compared with a net loss per Unit of $962 for 2003.
Cash flows from operations decreased by $0.4 million in 2004 as compared to
2003. This decrease was primarily due to unfavorable changes in working capital
during 2004 as compared to 2003. Cash flows used in financing activities
increased by $1.2 million during 2004 as compared to 2003 due to increased
principal payments on the Purchase Notes. Excess cash flows from operations were
used primarily to fund payments of the principal and interest in arrears on the
Purchase Notes.
CONTRACTUAL OBLIGATIONS
The Partnership's contractual obligations as of December 31, 2005 are as follows
(in millions):
2006*
-------
Debt
Purchase Notes Payable $ 1.512
Interest Payments $ 2.532
Purchase Obligations:
Maintenance fees $ 0.133
Demobilization fee $ 0.031
10
* The term of the Partnership ended, and the Partnership shutdown the operation
of the Windsystem, on December 31, 2005; however, the Partnership extended the
Management Agreement through June 30, 2006.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's management, with the participation of the General Partner's
Chief Executive Officer and Chief Financial Officer, has evaluated the
disclosure requirements of Item 305 of Regulation S-K "Quantitative and
Qualitative Disclosures about Market Risk," and has concluded that the
Partnership has no market risk sensitive instruments for which this disclosure
is required.
SAFE HARBOR STATEMENT REGARDING OUTLOOK AND OTHER FORWARD LOOKING DATA
Portions of this report, including but not limited to Items 1 and 2, 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; fluctuations in
fossil fuel prices; higher than expected costs; regulatory changes; potential
liability resulting from pending or future litigation or administrative action;
domestic and international political conditions; political events or insurgent
activity; and capital expenditure, acquisition or disposition. 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. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Partnership for the fiscal year ended December
31, 2005, filed as part of this Form 10-K and listed in response to "Item 15.
EXHIBITS, AND FINANCIAL STATEMENTS SCHEDULES" hereof, are incorporated by
reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Partnership initially retained Hein & Associates LLP as its independent
auditor as of January 27, 2005. During the 2003 and 2004 fiscal years and during
the 2005 fiscal year through January 27, 2005, the Partnership did not consult
with 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. 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
11
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, 2005. 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, 2005.
During the three months ended December 31, 2005, 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. OTHER INFORMATION
Not applicable.
PART III
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 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 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 Commission reporting purposes.
Jesse E. Neyman, age 62, has served as President and Chief Executive Officer of
ZWM since January 3, 2006. Mr. Neyman is responsible for managing and
liquidating the global wind business operations of Enron and its affiliates. Mr.
Neyman also has served as Vice President, Principal Investments, of Enron, since
March 2002. He is responsible for managing financial investment portfolios of
Enron and its affiliates. From January 1998 through August 2002, Mr. Neyman
served as Vice President of Enron North America Corp., an Enron affiliate.
Mr. Neyman was an executive officer of various subsidiaries of Enron that filed
voluntary petitions for Chapter 11 reorganization with the U.S. Bankruptcy Court
for the Southern District of New York filed in connection with the Enron
bankruptcy. See "Item 1. BUSINESS - Bankruptcy and Mergers" for additional
information.
12
Johnna D. Kokenge, age 35, has served as Chief Financial Officer of ZWM since
March 22, 2005. Since February 1, 2006 Ms. Kokenge has worked as a consultant
for Enron providing accounting services to EWS and its affiliates. From April
2003 until January 31, 2006, she was a Director of Accounting at EWS. From
January 2002 through April 2003, Ms. Kokenge worked as a Director of Accounting
at Enron Networks, and from March 2001 through December 31, 2001, she was a
Director of Accounting at ECT Resources, each an Enron affiliate.
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. As a director
of EREC, each individual listed below may also be deemed to be a director of
Zond Windsystem Partners, Ltd. Series 85-A, Zond Windsystem Partners, Ltd.
Series 85-B, and Zond-PanAero Windsystem Partners I, each a California Limited
Partnership. Set forth below is certain information regarding the directors of
EREC.
K. Wade Cline, age 43, has been a director of EREC since November 17, 2004. Mr.
Cline served as Managing Director and Assistant General Counsel of Enron from
February 2002 through September 2005, and has served as Managing Director and
General Counsel of Enron since September 2005. Mr. Cline also served as the
Managing Director of Enron India LLC, an Enron affiliate, from July 1999 through
November 2004.
Richard Lydecker, age 61, has been a director of EREC since January 3, 2006, and
has served as Managing Director and Chief Accounting Officer of Enron since
February 2002. Mr. Lydecker also has served as Enron's Chief Financial Officer
since December 20, 2005. From November 1999 through August 2002, Mr. Lydecker
was Vice President of Enron North America Corp., an Enron affiliate.
The board of directors of EREC has determined that Mr. Lydecker is an "audit
committee financial expert" as such term is defined by the rules of the
Commission. Mr. Lydecker is not "independent" as such term is defined under the
listing standards of the New York Stock Exchange.
Messrs. Cline and Lydecker were executive officers of various subsidiaries of
Enron that filed voluntary petitions for Chapter 11 reorganization with the U.S.
Bankruptcy Court for the Southern District of New York filed in connection with
the Enron bankruptcy. See "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. Based solely on its review of the copies of such reports
received by the Partnership, or written representations from certain reporting
persons, the Partnership believes that during the last fiscal year, all Section
16 filing requirements applicable to its reporting persons were complied with.
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
13
directors). The foregoing entities 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 "Item 1. BUSINESS - Operation and Maintenance Services".
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. The Partnership
makes distributions in accordance with the terms of the Partnership Agreement.
The Partnership did not distribute any amounts to the General Partner during
2005. Individuals that may be deemed executive officers of the Partnership are
compensated by Enron or subsidiaries of Enron for all of their services rendered
to Enron or its affiliates, including services to the General Partner, and are
not compensated directly by the Partnership. Compensation paid to executive
officers by Enron or subsidiaries of Enron for services rendered to Enron and
its affiliates, including services to the General Partner, is not allocated
among the various Enron entities that receive such services. Accordingly, there
is no specific dollar figure for compensation that can be attributed to services
performed for the benefit of the Partnership by those who may be deemed
executive officers of the Partnership. Eric D. Gadd served as President and
Chief Executive Officer of ZWM from September 26, 2002 through December 31,
2005, and was compensated solely by Enron for services rendered to Enron and its
affiliates, including services to the General Partner. Mr. Neyman and Ms.
Kokenge have been and continue to be compensated solely by Enron for services
rendered to Enron and its affiliates, including services to the General Partner.
The directors of EREC are compensated by Enron for all of their services
rendered, including services to the General Partner, and they are not
compensated directly by the Partnership for their services as directors of EREC.
See also "Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" for a
discussion of payments made by the Partnership to EWS.
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. 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
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
14
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 Purchase Notes, the
Management Agreement, and the Wind Park Easement Agreement.
In connection with the implementation of the Plan, Enron reduced the number of
officer positions among the Enron-related entities. Accordingly, on August 8,
2005 the executive officers of EWS were removed from their officer positions
with EWS and, since such date, the executive officers of EREC may be deemed
executive officers of EWS. Eric D. Gadd was Chief Executive Officer and
President of EWS from May 11, 2002 through August 7, 2005. Richard Lydecker has
been Chief Accounting Officer of EREC since September 8, 2005. Jesse Neyman, Jr.
has been President and Chief Operating Officer of EREC since January 3, 2006,
and has been President of EWS since his appointment on January 24, 2006.
Robert Semple was a director of EREC from December 12, 2002 through December 31,
2005 and was an Associate Restructuring Director of EWS from November 17, 2004
through August 7, 2005. K. Wade Cline was a Vice-President of EWS from November
17, 2004 through August 7, 2005, and has been the Executive Vice President of
EREC since September 6, 2005.
PURCHASE NOTE FINANCING
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. During 2005, the
Partnership made principal payments to EWS on the Purchase Notes of $0.2
million. At December 31, 2005, approximately $1.5 million of outstanding
principal, and $2.5 million of accrued interest in arrears, was due to EWS under
the Purchase Notes.
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 owing under
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
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 December 31, 2005 than it otherwise would have paid or been
obligated to pay in the absence of such arrangement. This arrangement is
acknowledged and memorialized in the 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
Partnership, including the Windsystem. As of the date of filing of this
registration statement, EWS had not notified the Partnership of EWS' 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.
MANAGEMENT OF THE WINDSYSTEM
15
Under the Management Agreement, EWS, as an independent contractor, is the
manager with respect to the operation, management, maintenance and repair of the
Windsystem. EWS is obligated to exercise due diligence in performing its duties
and obligations. EWS' duties and obligations under the Management Agreement
include, but are not limited to: (1) representing the Partnership in its
dealings with PG&E, (2) hiring and supervising operating and maintenance
personnel, (3) causing the Turbines to be maintained in good condition and
repair, (4) complying with any orders or obligations imposed by any governmental
agency with jurisdiction, unless the Partnership instructs to the contrary, (5)
investigating all accidents or damage relating to the ownership, operation or
maintenance of the Turbines or infrastructural facilities, (6) enforcing
warranty and insurance claims associated with the Turbines, the infrastructural
facilities and components thereof, (7) maximizing production of electric power
and performing other services that it may deem necessary in its reasonable
judgment, (8) using best efforts to ensure costs and expenses are reasonable and
competitive with those of unaffiliated third parties, and (9) providing such
reports and information as may reasonably be requested by the lenders to, or
other persons with an interest in, the Partnership. See "Item 1. BUSINESS -
Operation and Maintenance Services."
As compensation for its services under the Management Agreement, EWS receives a
management fee of 1% of the Partnership's Gross Operating Proceeds. Under the
Management Agreement, EWS is also reimbursed for 115% of the maintenance costs
incurred in connection with the Windsystem, including labor and material costs
that it incurs in the performance of maintenance services, including maintenance
services by third parties relating to the Windsystem.
During 2005, the Partnership made payments under the Management Agreement to or
on behalf of EWS in an amount of $0.02 million for management fees and
approximately $0.5 million for cost reimbursement of maintenance and other
operating costs.
WIND PARK EASEMENT AGREEMENT
The Partnership has used the Operating Site pursuant to the Wind Park Easement
Agreement. 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). The Partnership has recognized the easement expense on a
straight-line basis over the life of the Wind Park Easement Agreement. For 2005,
the Partnership's easement fees were $0.3 million.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees for professional audit services rendered to the Partnership
by Hein & Associates LLP for the years ended December 31, 2005 and 2004 were
$32,000 and $0, respectively. The board of directors of EREC pre-approves all
audit and non-audit services provided by Hein & Associates LLP to the
Partnership.
16
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1 FINANCIAL STATEMENTS
Balance Sheets at December 31, 2005 and 2004
Statements of Operations for the years ended December 31, 2005, 2004
and 2003
Statements of Changes in Partners' Deficit for the years ended
December 31, 2005, 2004 and 2003
Statements of Cash Flows for the years ended December 31, 2005, 2004,
and 2003
Notes to Financial Statements
(a)2 Schedules
None
(a)3 Exhibits
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------
3.1 Certificate of Limited Partnership filed in the office of the
California Secretary of State on October 25, 1985 (Incorporated by reference
from Exhibit 3.1 to the Partnership's Registration Statement on Form 10 filed
August 31, 2005).
3.2 First Amended and Restated Agreement of Limited Partnership of Zond
Windsystem Partners, Ltd. Series 85-C, dated as of December 23, 1985
(Incorporated by reference from Exhibit 3.2 to the Partnership's Registration
Statement on Form 10 filed August 31, 2005).
10.1 Windsystem Construction Agreement, dated as of November 4, 1985,
between Zond Construction Corporation IV ("ZCC") and Zond Windsystem Partners,
Ltd. Series 85-C (the "Partnership") (Incorporated by reference from Exhibit
10.1 to the Partnership's Registration Statement on Form 10 filed August 31,
2005).
10.2 Purchase Note and Security Agreement (Series C) dated as of December 2,
1985 between ZCC and the Partnership; Amendment to Purchase Note and Security
Agreement between ZCC and the Partnership dated as of July 1, 1986 Supplemental
Security Agreement (Series C) between Zond Windsystems Holding Company
(successor by merger to ZCC) and the Partnership dated as of June 30, 1992
(Incorporated by reference from Exhibit 10.2 to the Partnership's Registration
Statement on Form 10 filed August 31, 2005).
17
10.3 Series C Promissory Note dated as of December 23, 1985 in the amount of
$7,920,000 issued by the Partnership in favor of ZCC; Series C Promissory Note
dated as of December 27, 1985 in the amount of $7,920,000 issued by the
Partnership in favor of ZCC (Incorporated by reference from Exhibit 10.3 to the
Partnership's Registration Statement on Form 10 filed August 31, 2005).
10.4 Deed of Trust and Assignment of Rents dated as of December 2, 1985 by
the Partnership in favor of ZCC; First Amendment to Deed of Trust and Assignment
of Rents dated as of July 1, 1986 between the Partnership and ZCC (Incorporated
by reference from Exhibit 10.4 to the Partnership's Registration Statement on
Form 10 filed August 31, 2005).
10.5 Amended Ground Lease For Wind Park Development on the Rooney Ranch,
Alameda County dated October 29, 1985 by and between the City of Santa Clara and
Zond Systems, Inc. ("ZSI") (Incorporated by reference from Exhibit 10.5 to the
Partnership's Registration Statement on Form 10 filed August 31, 2005).
10.6 Amended and Restated Wind Park Easement Agreement, dated as of July 1,
1986, between ZSI and the Partnership (Incorporated by reference from Exhibit
10.6 to the Partnership's Registration Statement on Form 10 filed August 31,
2005).
10.7 Windsystem Management Agreement, dated as of November 4, 1985, between
ZSI and the Partnership (Incorporated by reference from Exhibit 10.7 to the
Partnership's Registration Statement on Form 10 filed August 31, 2005); First
Amendment to Windsystem Management Agreement (Incorporated by reference from
Exhibit 10.2 to the Partnership's Current Report on Form 8-K dated December 31,
2005); and Second Amendment to Windsystem Management Agreement (Incorporated by
reference from Exhibit 10.1 to the Partnership's Current Report on Form 8-K
dated March 30, 2006).
10.8 Power Purchase Agreement For Long-Term Energy and Capacity, dated
January 17, 1985, between Wind Developers, Inc. and Pacific Gas and Electric
Company ("PG & E"); Assignment of Power Purchase Agreement effective as of
September 17, 1985, between Wind Developers, Inc. and ZSI; Assignment of Power
Purchase Agreement dated November 4, 1985, between ZSI and the Partnership;
First Amendment to Power Purchase Agreement between PG&E and the Partnership
dated December 11, 1985; Second Amendment to the Long-Term Energy and Capacity
Power Purchase Agreement between PG&E and the Partnership dated September 19,
1988; Third Amendment to the Power Purchase Agreement between PG&E and the
Partnership dated November 13, 2001 (Incorporated by reference from Exhibit 10.8
to the Partnership's Registration Statement on Form 10 filed August 31, 2005);
and Letter Agreement between PG&E and the Partnership dated December 28, 2005
(Incorporated by reference from Exhibit 10.1 to the Partnership's Current Report
on Form 8-K dated December 31, 2005); Fourth Amendment to the Power Purchase
Agreement between PG&E and the Partnership dated May 19, 2006.*
10.9 Agreement dated as of July 13, 2001 between PG&E and the Partnership
(Incorporated by reference from Exhibit 10.9 to the Partnership's Registration
Statement on Form 10 filed August 31, 2005).
10.10 Interest Expense Acknowledgement dated as of August 30, 2005 between
EWS and the Partnership (Incorporated by reference from Exhibit 10.10 to the
Partnership's Registration Statement on Form 10 filed August 31, 2005).
23.1* Consent of Hein & Associates LLP, independent registered accounting
firm.
31.1* Rule 13a-14(a) Certification of Jesse E. Neyman
18
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
* Filed with this report
19
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 WINDSYSTEM PARTNERS, LTD.
SERIES 85-C, a California limited partnership
By: Zond Windsystems
Management V LLC,
General Partner
Dated June 12, 2006 By:
Name: /s/ Jesse E. Neyman
--------------------------------------
Title: President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------------------------- ------------------------------------------- --------------
By: /s/ Jesse E. Neyman Chief Executive Officer of Zond Windsystems June 12, 2006
---------------------- Management V LLC, the General Partner of
Jesse E. Neyman Zond Windsystem Partners, Ltd. Series 85-C
By: /s/ Johnna D. Kokenge Chief Financial Officer of Zond Windsystems June 12, 2006
---------------------- Management V LLC, the General Partner of
Johnna D. Kokenge Zond Windsystem Partners, Ltd. Series 85-C
By: /s/ Richard Lydecker Director of Enron Renewable Energy Corp. June 12, 2006
----------------------
Richard Lydecker
By: /s/ Kenneth Wade Cline Director of Enron Renewable Energy Corp. June 12, 2006
----------------------
Kenneth Wade Cline
20
EXHIBIT INDEX
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------
3.1 Certificate of Limited Partnership filed in the office of the
California Secretary of State on October 25, 1985 (Incorporated by
reference from Exhibit 3.1 to the Partnership's Registration Statement
on Form 10 filed August 31, 2005).
3.2 First Amended and Restated Agreement of Limited Partnership of Zond
Windsystem Partners, Ltd. Series 85-C, dated as of December 23, 1985
(Incorporated by reference from Exhibit 3.2 to the Partnership's
Registration Statement on Form 10 filed August 31, 2005).
10.1 Windsystem Construction Agreement, dated as of November 4, 1985,
between Zond Construction Corporation IV ("ZCC") and Zond Windsystem
Partners, Ltd. Series 85-C (the "Partnership") (Incorporated by
reference from Exhibit 10.1 to the Partnership's Registration Statement
on Form 10 filed August 31, 2005).
10.2 Purchase Note and Security Agreement (Series C) dated as of December 2,
1985 between ZCC and the Partnership; Amendment to Purchase Note and
Security Agreement between ZCC and the Partnership dated as of July 1,
1986 Supplemental Security Agreement (Series C) between Zond
Windsystems Holding Company (successor by merger to ZCC) and the
Partnership dated as of June 30, 1992 (Incorporated by reference from
Exhibit 10.2 to the Partnership's Registration Statement on Form 10
filed August 31, 2005).
10.3 Series C Promissory Note dated as of December 23, 1985 in the amount of
$7,920,000 issued by the Partnership in favor of ZCC; Series C
Promissory Note dated as of December 27, 1985 in the amount of
$7,920,000 issued by the Partnership in favor of ZCC (Incorporated by
reference from Exhibit 10.3 to the Partnership's Registration Statement
on Form 10 filed August 31, 2005).
10.4 Deed of Trust and Assignment of Rents dated as of December 2, 1985 by
the Partnership in favor of ZCC; First Amendment to Deed of Trust and
Assignment of Rents dated as of July 1, 1986 between the Partnership
and ZCC (Incorporated by reference from Exhibit 10.4 to the
Partnership's Registration Statement on Form 10 filed August 31, 2005).
10.5 Amended Ground Lease For Wind Park Development on the Rooney Ranch,
Alameda County dated October 29, 1985 by and between the City of Santa
Clara and Zond Systems, Inc. ("ZSI") (Incorporated by reference from
Exhibit 10.5 to the Partnership's Registration Statement on Form 10
filed August 31, 2005).
10.6 Amended and Restated Wind Park Easement Agreement, dated as of July 1,
1986, between ZSI and the Partnership (Incorporated by reference from
Exhibit 10.6 to the Partnership's Registration Statement on Form 10
filed August 31, 2005).
21
10.7 Windsystem Management Agreement, dated as of November 4, 1985, between
ZSI and the Partnership (Incorporated by reference from Exhibit 10.7 to
the Partnership's Registration Statement on Form 10 filed August 31,
2005); First Amendment to Windsystem Management Agreement (Incorporated
by reference from Exhibit 10.2 to the Partnership's Current Report on
Form 8-K dated December 31, 2005); and Second Amendment to Windsystem
Management Agreement (Incorporated by reference from Exhibit 10.1 to
the Partnership's Current Report on Form 8-K dated March 30, 2006).
10.8 Power Purchase Agreement For Long-Term Energy and Capacity, dated
January 17, 1985, between Wind Developers, Inc. and Pacific Gas and
Electric Company ("PG & E"); Assignment of Power Purchase Agreement
effective as of September 17, 1985, between Wind Developers, Inc. and
ZSI; Assignment of Power Purchase Agreement dated November 4, 1985,
between ZSI and the Partnership; First Amendment to Power Purchase
Agreement between PG&E and the Partnership dated December 11, 1985;
Second Amendment to the Long-Term Energy and Capacity Power Purchase
Agreement between PG&E and the Partnership dated September 19, 1988;
Third Amendment to the Power Purchase Agreement between PG&E and the
Partnership dated November 13, 2001 (Incorporated by reference from
Exhibit 10.8 to the Partnership's Registration Statement on Form 10
filed August 31, 2005); and Letter Agreement between PG&E and the
Partnership dated December 28, 2005 (Incorporated by reference from
Exhibit 10.1 to the Partnership's Current Report on Form 8-K dated
December 31, 2005); Fourth Amendment to the Power Purchase Agreement
between PG&E and the Partnership dated May 19, 2006.*
10.9 Agreement dated as of July 13, 2001 between PG&E and the Partnership
(Incorporated by reference from Exhibit 10.9 to the Partnership's
Registration Statement on Form 10 filed August 31, 2005).
10.10 Interest Expense Acknowledgement dated as of August 30, 2005 between
EWS and the Partnership (Incorporated by reference from Exhibit 10.10
to the Partnership's Registration Statement on Form 10 filed August 31,
2005).
23.1* Consent of Hein & Associates LLP, independent registered accounting
firm.
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
* Filed with this report
22
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C,
A CALIFORNIA LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
Balance Sheets at December 31, 2005 and 2004 F-1
Statements of Operations for the years ended December 31, 2005, 2004
and 2003 F-2
Statements of Changes in Partners' Deficit
for the years ended December 31, 2005, 2004 and 2003 F-3
Statements of Cash Flows for the years ended December 31, 2005, 2004
and 2003 F-4
Notes to Financial Statements F-5
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Zond Windsystem Partners, Ltd. Series 85-C:
We have audited the accompanying balance sheets of Zond Windsystem Partners,
Ltd. Series 85-C (the "Partnership") as of December 31, 2005 and 2004 and the
related statements of operations, changes in partners' deficit and cash flows
for the years ended December 31, 2005, 2004 and 2003. 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 (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Partnership has determined
that it is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Partnership's internal control
over financial reporting. Accordingly, we express no such opinion. 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, 2005 and 2004 and the results of its operations and its cash flows for the
years ended December 31, 2005, 2004 and 2003 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 principal and interest in arrears on outstanding
debt and certain agreements relating to the Partnership's ability to generate
electricity expired in 2005. The Partnership is expected to liquidate and
terminate in 2006. 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.
March 1, 2006
HEIN & ASSOCIATES LLP
Houston, Texas
24
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C,
A CALIFORNIA LIMITED PARTNERSHIP
BALANCE SHEETS
(Dollars in thousands)
December 31, 2005 December 31, 2004
----------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 1,056 $ 1,050
Accounts receivable 66 60
Other current assets 18 16
----------------- -----------------
Total current assets 1,140 1,126
----------------- -----------------
Property, plant and equipment:
Plant and equipment 32,660 32,660
Less - accumulated depreciation (32,660) (31,181)
----------------- -----------------
Property, plant and equipment, net - 1,479
----------------- -----------------
Total assets $ 1,140 $ 2,605
================= =================
Liabilities and partners' deficit
Current liabilities:
Accounts payable and accrued expenses $ 83 $ 78
Accounts payable to related party 11 53
Current portion of notes payable to related party 1,512 1,702
Accrued interest to related party 2,532 2,532
Deferred rent - 353
----------------- -----------------
Total current liabilities 4,138 4,718
----------------- -----------------
Partners' deficit:
General partner 204 213
Limited partners (6,329) (5,462)
Special limited partners 3,127 3,136
----------------- -----------------
Total partners' deficit (2,998) (2,113)
----------------- -----------------
Total liabilities and partners' deficit $ 1,140 $ 2,605
================= =================
The accompanying notes are an integral part of the financial statements.
F-1
25
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C,
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(Dollars in thousands, except per Unit value, which is in whole dollars)
For the years ended,
---------------------------------------------------------
December 31, 2005 December 31, 2004 December 31, 2003
----------------- ----------------- -----------------
Revenue:
Sale of electricity $ 1,645 $ 2,468 $ 2,080
Other income 15 6 2
----------------- ----------------- -----------------
Total revenue 1,660 2,474 2,082
Costs and expenses:
Depreciation 1,479 1,647 1,647
Bad dept expense - - (298)
Property taxes 32 34 32
Easement fees to related party 257 257 257
Management fees to related party 16 25 26
Maintenance and other operating costs
to related and other parties 518 534 852
Insurance costs 90 154 199
Other operating costs 153 141 97
----------------- ----------------- -----------------
Total costs and expenses 2,545 2,792 2,812
----------------- ----------------- -----------------
Net loss $ (885) $ (318) $ (730)
================= ================= =================
Net loss per Unit $ (1,166) $ (419) $ (962)
================= ================= =================
Number of outstanding Limited
Partner Units 759 759 759
================= ================= =================
The accompanying notes are an integral part of the financial statements.
F-2
26
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C,
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(Dollars in thousands)
For the years ended December 31, 2005, 2004 and 2003
-----------------------------------------------------
Special
General Limited Limited
Total Partner Partners Partners
----------- ----------- ----------- -----------
Profit and loss allocation 100.00% 1.00% 98.00% 1.00%
----------- ----------- ----------- -----------
Balance at December 31, 2002 $ (1,065) $ 223 $ (4,434) $ 3,146
Net loss (730) (7) (716) (7)
Balance at December 31, 2003 $ (1,795) $ 216 $ (5,150) $ 3,139
Net loss (318) (3) (312) (3)
----------- ----------- ----------- -----------
Balance at December 31, 2004 $ (2,113) $ 213 $ (5,462) $ 3,136
Net loss (885) (9) (867) (9)
----------- ----------- ----------- -----------
Balance at December 31, 2005 $ (2,998) $ 204 $ (6,329) $ 3,127
=========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-3
27
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C,
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the years ended,
----------------------------------------------
December 31, December 31, December 31,
2005 2004 2003
-------------- -------------- --------------
Cash Flow From Operating Activities:
Net loss $ (885) $ (318) $ (730)
Reconciliation of net loss to net cash provided
by operating activities:
Depreciation 1,479 1,647 1,647
Changes in operating assets and liabilities:
Accounts receivable (6) 5 384
Other current assets (2) - -
Accounts payable and accrued expenses 5 (159) 205
Amount payable to related party (42) (164) (23)
Deferred rent (353) (311) (379)
-------------- -------------- --------------
Net cash provided by operating activities 196 700 1,104
Cash flows used in financing activities - principal
payments on notes payable to related party (190) (1,750) (600)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 6 (1,050) 504
Cash and cash equivalents at beginning of year 1,050 2,100 1,596
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 1,056 $ 1,050 $ 2,100
============== ============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ - $ - $ -
The accompanying notes are an integral part of the financial statements.
F-4
28
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C,
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE PARTNERSHIP
INTRODUCTION
Zond Windsystem Partners, Ltd. Series 85-C, a California limited partnership
(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").
Through January 2, 2006, the electricity generated by the Turbines was sold by
the Partnership to its sole customer, Pacific Gas and Electric Company ("PG&E").
On January 2, 2006, the Partnership shutdown the operation of the Turbines and
has not generated or sold any electricity since that date.
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.
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. See Notes 2 and 4 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"), are
governed by the First Amended and Restated Agreement of Limited Partnership of
Zond Windsystem Partners, Ltd. Series 85-C, a
F-5
29
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 Securities and Exchange
Commission (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. The Partnership shutdown the operation of the Windsystem on January
2, 2006, pending the sale of the Partnership's assets in dissolution, and has
not operated the Windsystem since that date. See Note 6 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 in connection with 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 Limited Partners. If the Partnership is unable to fully
repay the principal and interest accrued under the Purchase Notes prior to the
termination and winding-up of the Partnership, the Partnership will realize
discharge of indebtedness income for federal income tax purposes. The
Partnership's income from the discharge of indebtedness will be allocated to
each partners, on a pro rata basis, and reported to each partner on Schedule
K-1 for the year in which the discharge of indebtedness takes place.
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.
30
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 December 31, 2005; however, the
Partnership and EWS extended the termination date of the Management Agreement
from December 31, 2005 to June 30, 2006. Although the Partnership shutdown
the operation of the Windsystem on January 2, 2006 and has not operated the
Windsystem since that date, EWS continues to maintain and manage the Windsystem
pursuant to the Management Agreement. See Note 9 for additional information.
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, in
connection with the GE Sale, 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 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 5 below.
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. However, the
Windsystem has not been in operation since January 2, 2006. See Note 9
for additional information.
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
31
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 5 below.
(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, unless earlier terminated, terminated on
March 6, 2006 ("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. Pursuant to the terms of the
Ground Lease, in 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.
32
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. See Note 9 for additional information. 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.
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 year ended December 31, 2005.
33
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 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 December 31, 2005, 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 1, 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 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
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
34
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 were fully
depreciated in 2004.
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.
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 4 for
additional information.
DEFERRED RENT
The Partnership leased the Operating Site from EWS, pursuant to the Wind Park
Easement Agreement, at an amount that accelerated each year over the life of the
agreement. The Partnership recorded rent expense straight line over the life of
the lease in the amount of $0.3 million annually. See Note 1 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.
35
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 a contract that expired on or about January 31, 2006.
PG&E was to deliver payment to the Partnership no later than 30 days from the
end of the monthly billing period. See Note 1 for a description of the Power
Agreement. Write-offs and or allowances for doubtful accounts are recognized on
an account-by-account basis.
NOTE 4 - 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. During 2005, the
Partnership made principal payments to EWS on the Purchase Notes of $0.2
million. At December 31, 2005, approximately $1.5 million of outstanding
principal, and $2.5 million of accrued interest in arrears, was due to EWS under
the Purchase Notes.
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 December 31, 2005 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
Partnership, including the Windsystem. As of December 31, 2005, 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 5 - TRANSACTIONS WITH RELATED PARTIES
In addition to the Purchase Notes (See Note 4 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:
36
(1) EWS assigned to the Partnership easement rights to the Operating Site under
the Wind Park Easement Agreement (See Note 1 above). The Partnership paid
$0.3 million in easement fees during each of the years ended December 31,
2005 and December 31, 2004 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 $0.5 million and $0.6 million, respectively, for the years
ended December 31, 2005 and December 31, 2004 pursuant to the Management
Agreement.
NOTE 6- 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
January and February 2006, and has continued the shutdown of the Windsystem
pending the sale of the Partnership's assets in liquidation. See Note 9 for
additional information. 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.
NOTE 7 - ACCOUNTING PRONOUNCEMENTS
None.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
LEASES PAYABLE
None.
37
NOTE 9 - SUBSEQUENT EVENTS
DIRECTORS AND EXECUTIVE OFFICERS
Effective December 31, 2005, Eric D. Gadd resigned from his positions as
President and Chief Executive Officer of the General Partner. Effective January
3, 2006, Jesse E. Neyman was elected President and Chief Executive Officer of
the General Partner.
Effective December 31, 2005, Robert Semple resigned from his position as a
director of EREC. Effective January 3, 2006, Richard Lydecker and K. Wade Cline
were elected as the directors of EREC.
WINDSYSTEM SHUTDOWN
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 Power
Agreement and the Ground Lease, and in turn, the Wind Park Easement Agreement,
the Windsystem has not been in operation since January 2, 2006.
MANAGEMENT AGREEMENT
The Partnership and EWS entered into a First Amendment to the Windsystem
Management Agreement effective as of December 31, 2005 which extended the
termination date of the Management Agreement from December 31, 2005 to March 31,
2006. 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.
POWER AGREEMENT
On May 19, 2006, the Partnership and PG&E entered into the Fourth Amendment to
the Power Purchase Agreement (the "Fourth Amendment"), which extended the
termination date of the Power Agreement from January 31, 2006 to December 29,
2010, provided that the Partnership may terminate the Power Agreement earlier
upon the delivery to PG&E of a written notice at least thirty days prior to the
requested termination date. However, the Windsystem has not been in operation
since January 2, 2006, and the Partnership has not sold any electricity to PG&E
under the Power Agreement since that date. The Partnership is, however,
currently evaluating whether or not to commence operation of the Windsystem.
The Fourth Amendment provides that PG&E shall pay the Partnership for energy
deliveries (i) through July 16, 2006, pursuant to the fixed energy price
specified in the Third Amendment to the Power Purchase Agreement dated November
13, 2001 and (ii) on and after July 17, 2006, at prices equal to PG&E's short-
run avoided cost, as determined pursuant to the methodology that is approved,
and as may be revised from time to time, by the California Public Utilities
commission for payments to qualifying facilities.
The Fourth Amendment also provides that PG&E shall pay the Partnership for as-
delivered capacity during the remainder of the term of the Power Agreement (as
amended by the Fourth Amendment) at prices authorized, and as may be revised
from time to time by the California Public Utilities Commission, as opposed to
the prices for capacity set forth in the Power Agreement prior to the
effectiveness of the Fourth Amendment. Pursuant to the Fourth Amendment, the
Partnership also agrees to transfer to PG&E all environmental attributes
associated with the electrical energy to be purchased by PG&E under the Power
Agreement. Environmental attributes are defined under the Fourth Amendment to
mean any and all benefits, emissions, reductions, offsets and allowances
directly attributable to the generation of electricity by the Partnership's
Windsystem, including any avoided emissions of pollutants to the air such as
sulfur oxides (SOx), nitrogen oxides (NOx), carbon monoxide (CO) and other
similar pollutants.
WIND PARK EASEMENT AGREEMENT
Pursuant to a letter dated March 28, 2006, the Partnership informed EWS that the
Partnership was not abandoning the Turbines, related equipment and substation,
and of the Partnership's election under the Wind Park Easement Agreement to sell
the Turbines, related equipment and substation.
38
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:
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-C,
A CALIFORNIA LIMITED PARTNERSHIP
RECONCILIATION OF GAAP BASIS AND TAX BASIS FINANCIAL STATMENTS
(Dollars in thousands)
For the years ended December 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
Tax basis income $ 280 $ 1,018 $ 592
Tax basis depreciation less than
GAAP depreciation (1,479) (1,647) (1,647)
Other 314 311 325
---------- ---------- ----------
GAAP basis loss $ (885) $ (318) $ (730)
========== ========== ==========
Tax basis partners' deficit $ (2,998) $ (3,278) $ (4,296)
Cumulative tax basis (income) losses
in excess of cumulative GAAP (income) losses - 1,165 2,501
---------- ---------- ----------
GAAP basis partners' deficit $ (2,998) $ (2,113) $ (1,795)
========== ========== ==========
Tax basis total assets $ 1,140 $ 1,126 $ 2,181
Cumulative tax depreciation and basis reduction
in excess of GAAP depreciation - 1,479 3,126
---------- ---------- ----------
GAAP basis total assets $ 1,140 $ 2,605 $ 5,307
========== ========== ==========
39
NOTE 11 - UNAUDITED QUARTERLY FINANCIAL INFORMATION (Dollars in thousands):
2005
----------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Revenue:
Sale of electricity $ 120 $ 607 $ 736 $ 182
Other Income 4 1 3 7
------------- -------------- ------------- --------------
Total revenue 124 608 739 189
Costs and expenses:
Depreciation 370 370 369 370
Property taxes 8 8 4 12
Easement fees to related party 64 65 64 64
Management fees to related party 1 1 11 3
Maintenance and other operating costs
to related and other parties 124 165 133 96
Insurance costs 22 22 22 24
Other operating costs 28 9 46 70
------------- -------------- ------------- --------------
Total costs and expenses 617 640 649 639
------------- -------------- ------------- --------------
Net loss $ (493) $ (32) $ 90 $ (450)
============= ============== ============= ==============
Net loss per Unit $ (650) $ (42) $ 119 $ (593)
============= ============== ============= ==============
Number of outstanding Limited
Partner Units 759 759 759 759
40
NOTE 11 - UNAUDITED QUARTERLY FINANCIAL INFORMATION (Dollars in thousands):
2004
----------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Revenue:
Sale of electricity $ 223 $ 1,078 $ 993 $ 174
Other Income - - - 6
------------- -------------- ------------- --------------
Total revenue 223 1,078 993 180
Costs and expenses:
Depreciation 412 412 411 412
Bad dept expense
Interest expense
Property taxes 9 8 8 9
Easement fees to related party 64 65 64 64
Management fees to related party 2 11 10 2
Maintenance and other operating costs
to related and other parties 135 157 119 123
Insurance costs 38 39 38 39
Other operating costs 28 65 24 24
------------- -------------- ------------- --------------
Total costs and expenses 688 757 674 673
------------- -------------- ------------- --------------
Net income (loss) $ (465) $ 321 $ 319 $ (493)
============= ============== ============= ==============
Net income (loss) per Unit $ (613) $ 423 $ 421 $ (650)
============= ============== ============= ==============
Number of outstanding Limited
Partner Units 759 759 759 759
------------- -------------- ------------- --------------
41
NOTE 11 - UNAUDITED QUARTERLY FINANCIAL INFORMATION (Dollars in thousands):
2003
----------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Revenue:
Sale of electricity $ 201 $ 785 $ 834 $ 260
Other Income 2 - - -
------------- -------------- ------------- --------------
Total revenue 203 785 834 260
Costs and expenses:
Depreciation 412 412 411 412
Bad dept expense (298)
Interest expense
Property taxes 7 9 8 8
Easement fees to related party 64 65 64 64
Management fees to related party 2 8 8 8
Maintenance and other operating costs
to related and other parties 182 207 150 313
Insurance costs 50 50 50 49
Other operating costs 20 23 31 23
------------- -------------- ------------- --------------
Total costs and expenses 737 476 722 877
------------- -------------- ------------- --------------
Net income (loss) $ (534) $ 309 $ 112 $ (617)
============= ============== ============= ==============
Net income (loss) per Unit $ (704) $ 407 $ 148 $ (813)
============= ============== ============= ==============
Number of outstanding Limited
Partner Units 759 759 759 759
============= ============== ============= ==============
42