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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to
------------------ -------------------
Commission File No. 000-51875
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-B,
A CALIFORNIA LIMITED PARTNERSHIP
State or other jurisdiction of incorporation or organization: California
I.R.S. Employer Identification No: 77-0081345
Address of principal executive offices: 1221 Lamar Street, Suite 1600, Houston,
Texas
Zip Code: 77010
Registrant's telephone number, including area code: (713) 853-0530
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES NO X
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer , or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES NO X
1
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-B,
A CALIFORNIA LIMITED PARTNERSHIP
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at June 30, 2006 (Unaudited) and December 31, 2005.
Unaudited Condensed Statements of Operations for the six months ended June
30, 2006 and June 30, 2005.
Unaudited Condensed Statements of Operations for the three months ended June
30, 2006 and June 30, 2005.
Condensed Statements of Changes in Partners' Deficit for the six months
ended June 30, 2006 (Unaudited) and for the year ended December 31, 2005.
Unaudited Condensed Statements of Cash Flows for the six months ended June
30, 2006 and June 30, 2005.
Notes to Unaudited Condensed Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II
OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
Item 5. Other Information
Item 6. Exhibits
2
Item 1. FINANCIAL STATEMENTS
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-B,
A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
(Dollars in thousands)
June 30, 2006 December 31, 2005
(Unaudited)
------------------------ ------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,593 $ 1,284
Accounts receivable 405 222
Accounts receivable from related party 2 1
Other current assets 7 40
------------------------ ------------------------
Total current assets 2,007 1,547
------------------------ ------------------------
Property, plant and equipment - assets held for sale:
Plant and equipment 41,162 41,162
Less - accumulated depreciation (41,162) (41,162)
------------------------ ------------------------
Property, plant and equipment, net - assets held
for sale - -
------------------------ ------------------------
Total assets $ 2,007 $ 1,547
======================== ========================
Liabilities and partners' deficit
Current liabilities:
Accounts payable and accrued expenses $ 215 $ 228
Accounts payable to related party 325 132
Deferred Revenue 4,741 4,722
------------------------ ------------------------
Total current liabilities 5,281 5,082
------------------------ ------------------------
Partners' capital (deficit):
General partner 282 279
Limited partners (7,456) (7,711)
Substituted limited partner 3,900 3,897
------------------------ ------------------------
Total partners' deficit (3,274) (3,535)
------------------------ ------------------------
------------------------ ------------------------
Total liabilities and partners' deficit $ 2,007 $ 1,547
======================== ========================
The accompanying notes are an integral part of the unaudited condensed financial statements.
3
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-B,
A CALIFORNIA LIMITED PARTNERSHIP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per Unit value, which is in
whole dollars)
For the Six Months Ended,
-------------------------------------------------------
June 30, 2006 June 30, 2005
------------------------- --------------------------
Revenue:
Sale of electricity $ 847 $ 985
Other income 31 6
------------------------- --------------------------
Total revenue 878 991
Costs and expenses:
Depreciation - 1,038
Property taxes 39 39
Easement fees 13 15
Royalty fees 139 -
Management fees to related party 20 26
Maintenance and other operating costs
to related and other parties 338 335
Insurance costs 8 38
Other operating costs 60 58
------------------------- --------------------------
Total costs and expenses 617 1,549
------------------------- --------------------------
Net income (loss) $ 261 $ (558)
========================= ==========================
Net income (loss) per Unit $ 297 $ (634)
========================= ==========================
Number of outstanding Limited
Partner Units 880 880
========================= ==========================
The accompanying notes are an integral part of the unaudited condensed financial statements.
4
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-B,
A CALIFORNIA LIMITED PARTNERSHIP
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per Unit value, which is in
whole dollars)
For the Three Months Ended,
------------------------------------------------
June 30, 2006 June 30, 2005
---------------------- ----------------------
Revenue:
Sale of electricity $ 486 $ 679
Other income 18 3
---------------------- ----------------------
Total revenue 504 682
Costs and expenses:
Depreciation - 519
Property taxes 20 19
Easement fees 6 7
Royalty fees 139 -
Management fees to related party 8 12
Maintenance and other operating costs
to related and other parties 166 169
Insurance costs 4 29
Other operating costs 3 -
---------------------- ----------------------
Total costs and expenses 346 755
---------------------- ----------------------
Net income (loss) $ 158 (73)
====================== ======================
Net income (loss) per Unit $ 180 (83)
====================== ======================
Number of outstanding Limited
Partner Units 880 880
====================== ======================
The accompanying notes are an integral part of the unaudited condensed financial statements.
5
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-B,
A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(Dollars in thousands)
For the six months ended June 30, 2006 and
For the years ended December 31, 2005
Substituted
General Limited Limited
Total Partner Partners Partner
-----------------------------------------------------------------------------
Profit and loss allocation 100.00% 1.00% 98.00% 1.00%
------------------------------------------------------------------------------
Balance at December 31, 2004 $ (2,553) $ 288 $ (6,747) $ 3,906
Net loss (982) (9) (964) (9)
------------------------------------------------------------------------------
Balance at December 31, 2005 $ (3,535) $ 279 $ (7,711) $ 3,897
Net income (Unaudited) 261 3 255 3
-------------------------------------------------------------------------------
Balance at June 30, 2006 (Unaudited) $ (3,274) $ 282 $ (7,456) $ 3,900
===============================================================================
The accompanying notes are an integral part of the unaudited condensed financial statements.
6
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-B,
A CALIFORNIA LIMITED PARTNERSHIP
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Six Months Ended,
--------------------------------------------------
June 30, 2006 June 30, 2005
---------------------- ----------------------
Cash Flow From Operating Activities:
Net income (loss) $ 261 $ (558)
Reconciliation of net income (loss) to net cash
provided by operating activities:
Depreciation - 1,038
Changes in operating assets and liabilities:
Accounts receivable (183) (120)
Accounts receivable from related party (1) (12)
Other current assets 33 (19)
Accounts payable and accrued expenses (13) (27)
Amount payable to related party 193 77
Deferred revenue 19 19
---------------------- ----------------------
Net cash provided by operating activities 309 398
Net increase in cash and cash equivalents 309 398
Cash and cash equivalents at beginning of the period 1,284 355
---------------------- ----------------------
Cash and cash equivalents at end of period $ 1,593 $ 753
====================== ======================
The accompanying notes are an integral part of the unaudited condensed financial statements.
7
ZOND WINDSYSTEM PARTNERS, LTD. SERIES 85-B,
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The condensed financial statements included herein for the quarterly periods
ended June 30, 2006 and 2005 have been prepared by Zond Windsystem Partners,
Ltd. Series 85-B, a California Limited Partnership (the "Partnership") without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). Accordingly, these statements reflect all
adjustments (consisting only of normal recurring entries), which are, in the
opinion of the Partnership, necessary for a fair statement of the financial
results for the interim periods. Certain information and notes normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such accounting principles. The Partnership believes that
the information and notes included in the financial information are adequate to
make the information presented not misleading. Operating results for the interim
periods presented are not necessarily indicative of the results that may be
expected for the year ended December 31, 2006.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 2 - THE PARTNERSHIP
Introduction
Zond Windsystem Partners, Ltd. Series 85-B, a California limited partnership
(the "Partnership"), was formed on August 19, 1985 to purchase, own and operate
a system of 240 Vestas V-17 wind turbine electric generators (the "Turbines").
The electricity generated by the Turbines has always been and continues to be
sold by the Partnership to its sole customer, Southern California Edison company
("SCE").
Each Turbine has a rated capacity of 90 kilowatts, and the Turbines have an
aggregate rated capacity of 21.6 megawatts. The Turbines, together with certain
power transfer facilities and an electrical substation owned by the Partnership,
form an integrated electric power generating facility (the "Windsystem"). The
Windsystem is located in Kern 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 electricity 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.
8
The Windsystem is interconnected to SCE's transmission grid through a series of
transmission lines and substations. The electricity generated by the Windsystem
is transferred from the Partnership's substation to a substation (the "Tehachapi
Substation") pursuant to a 66 kV transmission line, which is owned by ZWHC LLC
("ZWHC"), an affiliate of the general partner of the Partnership. The
transformers at the Tehachapi Substation increase the voltage of the
Windsystem's electricity from 66 kVs to 230 kVs. The electricity produced by the
Windsystem is then transmitted from the Tehachapi Substation pursuant to a 230
kV transmission line (the "Westwind Transmission Line") to another substation
(the "Westwind Substation"). From the Westwind Substation the electricity is
transmitted pursuant to another 230 kV transmission line (the "Sagebrush
Transmission Line") to a SCE substation located in Vincent, California (the
"Vincent Substation"). The electricity produced by the Windsystem is transmitted
to SCE's transmission grid at the Vincent Substation. The Tehachapi Substation,
Westwind Transmission Line and the Westwind Substation are owned in co-tenancy
by the Partnership and several other wind power project owners. The Sagebrush
Transmission Line is owned by Sagebrush General Co-ownership Partnership
("Sagebrush Partnership"). The Partnership indirectly owns an undivided 5.66%
interest in Sagebrush Partnership through the Partnership's wholly-owned direct
subsidiary Sagebrush Partner Eighteen, Inc.
The Windsystem, which became operational in December 1985, was constructed by
Zond Construction Corporation III ("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"). 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 III 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-B, a California Limited Partnership,
entered into on November 15, 1985 (the "Partnership Agreement").
The term of the Partnership ended on December 31, 2005. The Partnership
dissolved effective on the day on which the Partnership ended. On April 17,
2006, the Partnership, together with Zond Windsystem Partners, Ltd. Series 85-A,
a California limited partnership ("ZWP Series 85-A"), ZWHC and EWS (EWS, the
Partnership, ZWP Series 85-A and ZWHC are collectively referred to as the
"Sellers") entered into a Purchase and Sale Agreement with AES Tehachapi Wind
LLC ("AES Tehachapi") and SeaWest Holdings Inc. to sell to AES Tehachapi all of
the assets held by each of the Sellers used in connection with the wind power
projects owned by each of ZWP Series 85-A and the Partnership (the "Purchase and
Sale Agreement"). See Note 7 for additional information.
The assets to be sold by the Sellers pursuant to the Purchase and Sale Agreement
include, but are not limited to, the wind turbines and transmission assets owned
9
by each of ZWP Series 85-A and the Partnership, the real estate interests
relating to such projects owned by ZWHC and EWS and the power purchase
agreements used in connection with the projects held by EWS.
Pursuant to the terms of the Purchase and Sale Agreement, in consideration for
the purchase of such assets, AES Tehachapi has agreed to pay the Sellers an
aggregate purchase price of $15,800,000 and has agreed to assume those
liabilities and obligations arising under the assumed contracts on and after the
closing date of the transaction, those liabilities and obligations arising in
connection with the operation, ownership and maintenance of the wind projects on
and after such closing date and certain other obligations and liabilities
relating to the projects arising on and after such closing date. The Sellers and
AES Tehachapi have agreed to allocate the purchase price among the various
assets no later than ten days prior to the closing of the transaction. As a
result, prior to such allocation, the Partnership is unable to determine the
amount of the purchase price that will be allocated to the assets of the
Partnership, and therefore, is unable to estimate the amount of proceeds that
will be distributed on a per Unit basis. However, the Partnership currently
expects that if the asset sale transaction is completed, a portion of the
proceeds from the asset sale transaction received by the Partnership will be
distributed to the Limited Partners.
The closing of the sale transaction pursuant to the Purchase and Sale Agreement
is subject to the satisfaction of certain conditions precedent, including the
receipt of certain consents from third parties relating to the transfer of
various contracts. The closing of the sale transaction is expected to occur on
or before August 31, 2006.
The Partnership expects to continue the operation of the Windsystem through the
closing of the asset sale transaction. Upon the sale of the assets of the
Partnership, the General Partner will apply and distribute the proceeds thereof
as contemplated by the Partnership Agreement. Following the distribution of the
proceeds from the sale of the Partnership's assets, the General Partner plans to
cause the cancellation of the Partnership's Certificate of Limited Partnership
with the Secretary of State of the State of California. Upon cancellation of the
Partnership's Certificate of Limited Partnership, the Partnership will 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").
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 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 IV, 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 IV 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
10
debtor companies (including EWS) to sell most of their assets and distribute to
their creditors the proceeds of such sales. In connection with the Plan, EWS
assumed the Management Agreement (as defined in "Operation and Maintenance
Services" below) and that agreement remains in effect.
Operation and Maintenance Services
EWS manages the Windsystem pursuant to a Windsystem Management Agreement entered
into with the Partnership as of September 9, 1985 (the "Management Agreement").
EWS assumed the Management Agreement in connection with the Plan. The original
term of the Management Agreement ended on December 31, 2005. EWS and the
Partnership entered into (i) a First Amendment to Windsystem Management
Agreement dated as of January 13, 2006, extending the termination date of the
Management Agreement from December 31, 2005 to March 31, 2006; (ii) a Second
Amendment to Windsystem Management Agreement dated as of March 21, 2006,
extending the termination date of the Management Agreement to June 30, 2006; and
(iii) a Third Amendment to Windsystem Management Agreement dated as of July 10,
2006, extending the termination date of the Management Agreement to September
30, 2006. See Note 7 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 ("GE") 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 enXco
Service Corp. ("enXco") 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 enXco. If EWS is required
to pay such fees, EWS may seek recovery from the Partnership of some, or all, of
the amount of such fees pursuant to the terms of the Management Agreement.
Management currently estimates that as of June 30, 2006, the amount of the
demobilization fee, if any, for which EWS could seek recovery from the
Partnership would not be in excess of approximately $24,000.
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 sells all of the electric power generated by the
Turbines to SCE under two Power Purchase Contracts between SCE and
EWS, as successor to ZSI (the "Power Agreements"). The Partnership and
EWS entered into that certain Reservation of Rights Agreement,
executed on February 15, 2006 and effective as of January 1, 2006 (the
"85-B Reservation of Rights Agreement"), pursuant to which the
Partnership sells all of the electric power generated by the Turbines
to SCE under the Power Agreements. The 85-B Reservation of Rights
Agreement was amended as of July 10, 2006 to extend the termination
date from June 30, 2006 to September 30, 2006, unless terminated
earlier by either party upon ten (10) days advance notice. See Note 7
for additional information.
11
Each of the Power Agreements was originally entered into between SCE
and ZSI in June 1984 and each agreement covered 7 megawatts of
generating capacity. Each of the Power Agreements can be terminated by
either party upon the delivery to the other party, at least 90 days
prior to the proposed termination date, of a written notice that
specifies a termination date of any time on or after June 21, 2014. In
September 1985, ZSI assigned one of the Power Agreements (the "85-B
Power Agreement") to the Partnership and the other Power Agreement
(the "85-A Power Agreement") to ZWP Series 85-A. Each such assignment
terminated on December 31, 2005. The assignment by ZSI to the
Partnership of the 85-B Power Agreement was entered into in connection
with the purchase by the Partnership of the Windsystem, as well as the
assumption of certain contracts, including the 85-B Power Agreement;
however, separate consideration was not delineated for the assignment
of the 85-B Power Agreement. Accordingly, through the date of
termination of the assignment, the Partnership did not pay any
additional fee for the right to sell electricity to SCE under the 85-B
Power Agreement.
When the assignment of the 85-B Power Agreement terminated on December
31, 2005, the Partnership entered into the 85-B Reservation of Rights
Agreement in order to continue to sell power to SCE under the Power
Agreements. In consideration for the granting by EWS to the
Partnership of the right to sell electric power to SCE under the Power
Agreements in accordance with the terms of the 85-B Reservation of
Rights Agreement, the Partnership agreed to pay to EWS an amount equal
to 45% of the net operating proceeds of the Partnership attributable
to the period commencing on February 15, 2006 (the date of execution
of the 85-B Reservation of Rights Agreement) and ending on the last
day that the Partnership delivers power to SCE under the Power
Agreements. If the Partnership had not entered into the 85-B
Reservation of Rights Agreement, the Partnership would have been
unable to continue to sell power to SCE under the Power Agreements,
and the Partnership believed it was unlikely to find an alternative
short-term purchaser of electricity generated by the Windsystem. The
General Partner determined that it was in the best interest of the
Partnership to enter into the 85-B Reservation of Rights Agreement and
continue to generate revenue from the sale to SCE of electricity
generated from the Windsystem, pending the sale of the Partnership's
assets. The compensation to be paid by the Partnership to EWS under
the 85-B Reservation of Rights Agreement was determined by using the
compensation negotiated in a comparable arms-length transaction for
the use of land and a power purchase agreement by another wind power
project that sells power to SCE. In this comparable project, the
applicable partnership paid 55% of net operating proceeds for the use
of the land and the power agreement in connection with the sale of
electricity generated by its windsystem. EWS estimated that 45% of net
operating proceeds, plus the royalty of 1% of gross operating proceeds
payable under the Wind Park Easement Agreement approximated the 55% of
net operating proceeds paid for land and power agreement rights under
the comparable wind power project.
The 85-B Power Agreement was amended in September 1985 to increase the
generating capacity to 25 MWs. In August 1989, the 85-B Power
Agreement was amended to correctly identify the location of the
Windsystem site and to limit the size of the Windsystem, based on the
aggregate name-plate capacity of the Turbines, that the Partnership
could install at the Windsystem site. In October 1991, the 85-B Power
Agreement was amended to add ZSI as an additional seller under the
agreement. In December 1991, the 85-B Power Agreement was further
amended to reduce the aggregate capacity of the power contract from an
aggregate of 25 MWs to 22.5 MWs. During the period commencing in the
early 1990's and ending on December 31, 2005, the Partnership
permitted ZWP Series 85-A to sell to SCE under the 85-B Power
12
Agreement up to approximately one (1) MW of electricity at any one
time from eleven (11) of ZWP Series 85-A's wind turbines. This
arrangement is acknowledged and memorialized in the Reservation of
Rights Acknowledgement dated as of February 1, 2006 between the
Partnership and ZWP Series 85-A (the "85-A/85-B Reservation of Rights
Acknowledgement").
The 85-A Power Agreement was amended in September of 1985 to increase
the generating capacity to 17 megawatts. In August 1989, the 85-A
Power Agreement was further amended to correctly identify the location
of ZWP Series 85-A's windsystem site and to limit the size of the
windsystem, based on the aggregate name-plate capacity of the
turbines, that ZWP Series 85-A could install at its windsystem site.
Pursuant to that certain Power Agreement Co-Ownership Agreement dated
as of August 30, 1990 between ZWP Series 85-A and ZSI (the "85-A PPA
Co-Ownership Agreement"), ZWP Series 85-A granted ZSI the right to
sell to SCE under the 85-A Power Agreement up to one (1) megawatt
("MW") of electricity (the "ZSI Contract Right"). In August 1991, the
85-A Power Agreement was amended to add ZSI as an additional seller
under the agreement. In June 1992, ZSI assigned to ZWHC the ZSI
Contract Right, and in April 2004, in connection with the sale of all
of ZWHC's wind power project assets to Caithness 251 Wind, LLC
("Caithness"), an unaffiliated third party, ZWHC assigned to Caithness
the ZSI Contract Right. To the Partnership's knowledge, Caithness
continues to hold the ZSI Contract Right.
During the period commencing in the early 1990's and ending on
December 31, 2005, ZWP Series 85-A permitted the Partnership to sell
to SCE under the 85-A Power Agreement up to approximately 1.35 MWs of
electricity at any one time from fifteen (15) of the Partnership's
wind turbines. This arrangement is acknowledged and memorialized in
the 85-A/85-B Reservation of Rights Acknowledgement.
Under the Power Agreements, SCE is required to purchase all of the
electric output from the sellers under the Power Agreements, provided
that the aggregate name-plate capacity of the wind turbines selling
under the 85-A Power Agreement and the 85-B Power Agreement may not
exceed 17 MWs and 22.5 MWs, respectively. Under the Power Agreements,
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. SCE paid a fixed rate for energy delivered under
the 85-A Power Agreement through November 1995, and paid a fixed rate
for energy delivered under the 85-B Power Agreement through November
1996. See "1996 SCE Payments" below. Beginning in December 1995 under
the 85-A Power Agreement, and beginning in December 1996 under the
85-B Power Agreement, and in each case through May 2002, the energy
rates paid by SCE for energy delivered under each of the Power
Agreements were based on forecasts of the short run avoided cost of
energy for SCE. During 2001, in connection with the settlement of
certain litigation against SCE, SCE renegotiated the energy component
of the price paid for energy under the Power Agreements. As a result,
the energy component is based on a fixed schedule with an average
estimated price of $.0537 per kilowatt hour ("kWh") from May 2002
through April of 2007. In January of 2003, the 85-B Power Agreement
was further modified to provide that the annual as-available capacity
rate for electricity delivered to SCE from December 2002 through the
end of the term of the 85-B Power Agreement is $124 per kilowatt of
installed capacity per year. In January of 2003, the 85-A Power
Agreement also was further modified to provide that the annual
as-available capacity rate for electricity delivered to SCE from
13
December 2002 through the end of the term of the 85-A Power Agreement
is $106 per kilowatt of installed capacity per year.
The amount of electricity produced by the Turbines depends upon wind
speed, which is subject to significant seasonal variations in the
Tehachapi area. Wind speed is generally highest during the summer
months and lowest during the winter months. These seasonal variations
result in significant variations from month to month in the net power
production realized by the Turbines, and therefore result in monthly
variations in the amount of electricity sold to SCE.
(2) 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 SCE, (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. Costs incurred in respect to the power transfer
facilities owned by EWS are allocated between the Partnership and ZWP
Series 85-A.
As compensation for its services under the Management Agreement, EWS
receives a management fee of 3% 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. See Note 5 below. The term
of the Management Agreement expires on September 30, 2006. See Note 7
for additional information.
(3) The Partnership uses a portion of the Operating Site (the "Easement
Site") pursuant to the Amended and Restated Series B Wind Park
Easement Agreement dated as of March 24, 1986 (the "Wind Park Easement
Agreement"). See Note 7 for additional information. The term of the
Wind Park Easement Agreement ends on September 30, 2006; provided,
however, that certain provisions of the Wind Park Easement Agreement
relating to the removal, abandonment or sale of the Turbines continue
beyond the end of the term of the Wind Park Easement Agreement. There
are 226 of the Turbines located on the Easement Site. Under the Wind
Park Easement Agreement, ZWHC charges the Partnership rental fees in
an amount equal to 1% of Gross Operating Proceeds.
At the termination of the Wind Park Easement Agreement, the
Partnership is required to remove from the Easement Site, within
ninety (90) days of the termination date, the Turbines and the
Partnership's substation, unless the Partnership elects to (i) abandon
the Turbines, related equipment and substation or (ii) sell the
14
Turbines. If the Partnership elects to abandon the Turbines, the
related equipment and the substation, then all right, title and
interest in such equipment shall transfer to ZWHC without the payment
of any compensation to the Partnership. However, if the Turbines,
related equipment and substation are abandoned, neither ZWHC nor any
affiliate shall have the right to operate the Turbines, related
equipment and substation unless ZWHC (or its affiliate) pays to the
Partnership the appraised fair market value (as defined in the Wind
Park Easement Agreement) of the Turbines, related equipment and
substation. If the Partnership elects to sell the Turbines at any
time, the Partnership must first offer the Turbines to ZWHC on the
same terms and conditions. It is anticipated that ZWHC will waive its
right of first offer in connection with the closing of the
Partnership's proposed asset sale transaction. See Note 7 for
additional information. In the event that the Partnership elects to
sell the Turbines, related equipment and the substation, and does not
complete such sale within eleven (11) months of the termination date
of the Wind Park Easement Agreement, then the Partnership must
immediately remove the Turbines and the substation. Failure to remove
such equipment will result in the abandonment of such equipment to
ZWHC.
The Partnership also uses a portion of the Operating Site (the "Lease
Site") pursuant to a Sublease dated as of August 30, 1990 between EWS
(as successor to ZSI) and the Partnership (the "Sublease"). See Note 7
for additional information. There are 14 of the Turbines located on
the Lease Site. Under the Sublease, EWS charges the Partnership rent
in an amount equal to: (i) the Partnership's pro rata share of the sum
of: (A) adjusted minimum rent, as escalated for inflation, (B) taxes
and/or assessments and utility charges - other than taxes and/or
assessments and utility charges directly assessed against or related
to the Partnership's property or operations within the subleased
property and (C) all other costs or charges imposed or resulting in
connection with the general maintenance and upkeep of the leased
property; (ii) rent payments due under section 4.2 of the Sublease (5%
of Gross Operating Proceeds (as defined in the Sublease)), if greater
than the minimum rent and (iii) property taxes and/or assessments and
utility charges directly assessed against or related to the
Partnership's property or operations at the Lease Site. The
Partnership's pro rata share for calculating rent due under (i) above
is determined by the ratio of the rated capacity of the Turbines owned
by the Partnership on the Lease Site to the rated capacity of all
turbines on the Lease Site.
The term of the Sublease ends on September 30, 2006. See Note 7 for
additional information. At the end of the term of the Sublease, the
Partnership may remove, within eleven (11) months of such termination,
the Turbines and related equipment from the Lease Site. If the
Partnership fails to remove any of such equipment from the Lease Site
within such period, then such equipment shall be deemed abandoned to
EWS.
1996 SCE Payments
The Partnership's Windsystem and ZWP Series 85-A's windsystem each commenced
operations in December 1985. Each of the 85-A Power Agreement and the 85-B Power
Agreement provides that SCE is responsible for the installation and maintenance
of metering equipment, and preparing and paying invoices for power delivered by
each of ZWP Series 85-A and the Partnership. During the first twelve months of
operation, SCE used a single meter to measure the energy delivered from both
wind power projects. As a result, during 1986 SCE provided invoices and payments
to ZWP Series 85-A under the 85-A Power Agreement for the power generated by
15
both ZWP Series 85-A's windsystem and the Partnership's Windsystem. Following
the installation by SCE of remote metering equipment at each windsystem site in
late 1986, SCE provided separate invoices and payments to each of ZWP Series
85-A and the Partnership for deliveries of power under the 85-A Power Agreement
and 85-B Power Agreement, respectively. Each of the 85-A Power Agreement and the
85-B Power Agreement provides for the payment of a scheduled fixed rate for
energy delivered under the contract during the first 10-year period following
the commencement of operation of the applicable windsystem and the payment of an
avoided cost variable rate thereafter. SCE stopped paying the 10-year fixed rate
under the 85-A Power Agreement at the end of 1995. SCE stopped paying the
10-year fixed rate under the 85-B Power Agreement at the end of 1996. The
difference between the fixed rate received by both the Partnership and ZWP
Series 85-A under the 85-B Power Agreement during 1996 and the avoided cost
variable rates that year was approximately $4.1 million in the aggregate (the
"Energy Price Differential").
Although the 85-B Power Agreement appears to provide that the 10-year fixed rate
period was initiated in December 1985, it appears that SCE paid for energy
delivered under the 85-B Power Agreement during 1996 under the belief that the
10-year fixed rate period was initiated on or around December 1986 (at the time
of SCE's installation of the remote metering equipment). This would have
resulted in a 10-year fixed rate period that ended in December 1996, as opposed
to December 1995 (10 years from when the Windsystem began operations). In 1996,
the Partnership informed the Limited Partners that it was reviewing the payments
received from SCE in 1996 for energy delivered under the 85-B Power Agreement in
the context of the Partnership's contractual rights, and due to the apparent
uncertainty concerning this issue, the Partnership recognized the difference
between the cash received by the Partnership applicable to the Windsystem under
the fixed rate of the 85-B Power Agreement and the avoided cost variable rates
during the year ended December 31, 1996 (approximately $3.9 million) as deferred
revenue (the "Deferred Energy Revenue"), segregated this amount from its
operating cash account, and did not recognize such cash as income.
In 2001, two events occurred which appear to have been relevant to the
Partnership's treatment of the Deferred Energy Revenue. First, the Partnership
appears to have determined that prior to September 2001 the applicable statute
of limitations expired with respect to any potential claim by SCE for repayment
of any portion of the energy payments received by the Partnership in 1996.
Second, in connection with the settlement of certain disputes between SCE and
the Partnership relating to SCE's failure to pay for energy deliveries between
November 1999 and March 2000, SCE and the Partnership entered into an agreement
that provided for the mutual release of certain claims that each party may have
had against the other party arising out of the 85-B Power Agreement that arose
prior to the execution of the settlement agreement. In September 2001, the
Partnership paid the cash representing the Deferred Energy Revenue, plus accrued
interest (approximately $4.2 million in aggregate), to EWS in payment of
principal and interest owing under the Purchase Notes. In turn, these funds were
paid to Enron for repayment of certain indebtedness. Additionally, the Deferred
Energy Revenue, plus accrued interest, was included as ordinary income in the
Partnership's 2001 U.S. Return of Partnership Income. In the accompanying
financial statements, the Deferred Energy Revenue, plus accrued interest,
remains deferred in accordance with accounting principles generally accepted in
the United States.
Notwithstanding the foregoing, Enron contacted SCE in November 2005 regarding
SCE's understanding of the contract payment provisions in view of these
circumstances. In connection with discussions with SCE, it was further
discovered that from January 1996 through June 2006 SCE made capacity
payments under the 85-B Power Agreement in the amount of approximately $628,000
in excess of the amounts required to be paid under the 85-B Power Agreement.
Of this amount, approximately $589,000 was retained by the Partnership (the
16
"Excess Capacity Revenue"). EWS and SCE entered into a Settlement Agreement and
Release of Claims dated as of August 11, 2006 (the "SCE Settlement Agreement"),
pursuant to which, in consideration for the payment by EWS of amounts overpaid
by SCE under the 85-B Power Agreement, plus applicable interest, as agreed
between the parties, SCE has agreed to release EWS, the Partnership and ZWP
Series 85-A, among others, from liability associated with such overpayments. The
SCE Settlement Agreement is subject to approval by, and will not be effective
until approved by, the United States Bankruptcy Court for the Southern District
of New York (the "Court"). A motion and proposed order approving the SCE
Settlement Agreement was filed with the Court on August 11, 2006, and is
pending.
There is no assurance that SCE will not assert some claim against the
Partnership related to this matter, and there is no assurance that regulators or
other governmental authorities will not make certain assertions related to this
matter, including that a violation of law has occurred, or take some type of
action against the Partnership or others associated with these events.
Accordingly, the Deferred Energy Revenue, plus accrued interest, remains
deferred in the accompanying financial statements, and the Excess Capacity
Revenue is classified as deferred revenue in the accompanying financial
statements. At this time, the Partnership is unable to determine whether, and to
what extent, the Partnership has financial exposure related to any such
potential claims, assertions or actions, and the Partnership reserves all of its
rights and defenses associated therewith. Therefore, the Partnership is unable
to predict the ultimate outcome this matter may have on the Partnership's
financial position, results of operations or cash flows.
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. However, the
Partnership currently expects that if the asset sale transaction is completed, a
portion of the proceeds from the asset sale transaction received by the
Partnership will be distributed to the Limited Partners.
NOTE 3 - GOING CONCERN
As discussed in Note 2, the term of the Partnership ended on December 31, 2005.
The Partnership dissolved effective on the day on which the term of the
Partnership ended. The Partnership has entered into an agreement for the sale of
substantially all of its assets. Upon the sale of the assets of the Partnership,
the General Partner will apply and distribute the proceeds thereof as
contemplated by the Partnership Agreement, and plans to cause the cancellation
of the Partnership's Certificate of Limited Partnership with the Secretary of
State of the State of California. The Partnership will then terminate and the
General Partner plans to file with the Commission a Form 15 to terminate
registration of the Units under the Exchange Act.
NOTE 4 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's accounting records are maintained on the basis used for
federal income tax reporting purposes. For purposes of filing with the
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
17
tax returns of the individual partners. The tax returns of the Partnership are
subject to examination by federal and state taxing authorities. If such
examinations result in adjustments to distributive shares of taxable income or
loss, the tax liability of the partners could be adjusted accordingly.
The tax attributes of the Partnership's net assets flow directly to each
individual partner. Individual partners will have different investment bases
depending upon the timing and prices of acquisition of Partnership Units.
Further, each partner's tax accounting, which is partially dependent upon their
individual tax position, may differ from the accounting followed in the
financial statements. Accordingly, there could be significant differences
between each individual partner's tax basis and their proportionate share of the
net assets reported in the financial statements. Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", requires
disclosure by a publicly held partnership of the aggregate difference in the
basis of its net assets for financial and tax reporting purposes. However, the
Partnership does not have access to information about each individual partner's
tax attributes in the Partnership, and the aggregate tax basis cannot be readily
determined. In any event, management does not believe that, in the Partnership's
circumstances, the aggregate difference would be meaningful information.
Cash Equivalents
Cash equivalents are considered to be all highly liquid investments purchased
with an original maturity of three months or less.
Property, Plant and Equipment
The Turbines are recorded at cost. The Turbines were depreciated on the
straight-line method over a twenty-year life. Capitalized improvements were
being depreciated on a straight-line method over a fifteen-year life. The
Turbines and capitalized improvements were fully depreciated as of December 31,
2005. As of April 1, 2006, the Turbines and capitalized improvements were
reclassified from property, plant and equipment to assets held for sale.
Maintenance and repairs are charged to operations as incurred. Replacement of
defective parts or expenditures designed to modify Turbines to improve their
productivity are expensed as incurred.
Earnings Per Limited Partner Unit
Earnings per Limited Partner Unit are calculated based upon the number of
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.
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.
18
Electricity Sales and Significant Customer
Power generated by the Windsystem is recognized as revenue upon delivery of
power to SCE at prices as defined in the Power Agreements. All power produced is
sold to SCE under contracts that are terminable on or after June 21, 2014;
however, the Partnership will lose its rights to sell power under the Power
Agreements on or about September 30, 2006. See Notes 2 and 7 for additional
information. SCE is to deliver payment to the Partnership for energy delivered
no later than 30 days from the end of the monthly billing period. Write-offs and
or allowances for doubtful accounts are recognized on an account-by-account
basis.
NOTE 5 - TRANSACTIONS WITH RELATED PARTIES
The Partnership has amounts payable to ZWHC and EWS. Amounts payable to EWS
include lease fees related to the Partnership's use of a portion of the
Operating Site, management fees, maintenance costs and other miscellaneous
expenses related to Windsystem operations and royalty fees under the 85-B
Reservation of Rights Agreement related to the sale of electricity by the
Partnership under the Power Agreements. Amounts payable to ZWHC include
easement fees related to the Partnership's use of a portion of the Operating
Site.
The Partnership has the following related party transactions and relationships:
(1) The Partnership uses a portion of the Operating Site pursuant to the Wind
Park Easement Agreement (See Note 2 above). The Partnership paid ZWHC
$0.007 million and in easement fees during each of the six months ended
June 30, 2006 and 2005, respectively, pursuant to the Wind Park Easement
Agreement.
(2) The Partnership also uses a portion of the Operating Site pursuant to the
Sublease (See Note 2 above). The Partnership paid EWS $0.007 millionin
sublease fees during each of the six months ended June 30, 2006 and 2005,
respectively, pursuant to the Sublease.
(3) The Partnership has a contract with EWS to operate and maintain the
Turbines and to perform certain management and administrative services
under the Management Agreement (See Note 2 above). The Partnership incurred
expenses of $0.4 million and $0.2 million during each of the six months
ended June 30, 2006 and 2005, respectively, pursuant to the Management
Agreement.
(4) The Partnership entered into the 85-B Reservation of Rights Agreement with
EWS in order to sell to SCE under the Power Agreements all of the electric
power generated by the Turbines after December 31, 2005. In consideration
for the granting by EWS to the Partnership of the right to sell electric
power to SCE under the Power Agreements, the Partnership agreed to pay to
EWS an amount equal to 45% of the Partnership's net operating proceeds
commencing on February 15, 2006. See Note 7 for additional information. The
Partnership incurred expenses of $0.1 million and $0.0 million during the
six months ended June 30, 2006 and 2005, respectively, pursuant to the 85-B
Reservation of Rights Agreement.
19
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Leases Payable
Future annual minimum payments under non-cancelable obligations as of June 30,
2006 are $0.003 million.
NOTE 7 - SUBSEQUENT EVENTS
Management Agreement
EWS and the Partnership entered into a Third Amendment to Windsystem Management
Agreement dated as of July 10, 2006, extending the termination date of the
Management Agreement to September 30, 2006.
Power Agreements
The 85-B Reservation of Rights Agreement was amended as of July 10, 2006 to
extend the termination date from June 30, 2006 to September 30, 2006, unless
terminated earlier by either party upon ten (10) days advance notice. If the
Partnership's proposed asset sale transaction does not close on or before
September 30, 2006, the Partnership expects that it will be able to obtain an
extension of the 85-B Reservation of Rights Agreement through the date of the
closing of the asset sale transaction.
Sublease
The Partnership and EWS entered into an Amendment to Sublease dated as of March
21, 2006, which amended the term of the Sublease to end on June 30, 2006, and
provided the Partnership with an eleven-month period following the end of the
term of the Sublease to remove the Turbines from the subleased property; and
entered into a Second Amendment to Sublease dated as of July 10, 2006, which
extended the termination date of the Sublease to September 30, 2006.
Wind Park Easement Agreement
The Partnership entered into Amendment No. 1 to the Amended and Restated Series
A Wind Park Easement Agreement dated as of July 10, 2006, which extended the
termination date of such agreement to September 30, 2006.
GE Settlement
Pursuant to a Settlement Agreement and Release (the "Settlement Agreement")
executed on July 3, 2006, and effective as of May 1, 2006, among other things,
EWS settled claims by GE for amounts owed for operation and maintenance services
rendered relating to the Windsystem. Pursuant to the Settlement Agreement, EWS
paid to GE the sum of $120,000 related to operation and maintenance services
provided by GE relating to the Windsystem. As of June 30, 2006, the Partnership
had a recorded liability to EWS in the amount of $155,000 related to this
obligation. The settlement payment was made by EWS to GE in July 2006. At that
time, the Partnership recognized a $35,000 reduction in its recorded liabilities
and operation and maintenance expenses.
Purchase and Sale Agreement
Pursuant to the First Amendment to Purchase and Sale Agreement (Tehachapi Pass
Wind Project) dated as of July 5, 2006 among the Sellers and AES Tehachapi and
SeaWest Holdings, Inc., the parties extended the termination date under the
Purchase and Sale Agreement from July 31, 2006 to August 31, 2006.
20
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Going Concern
The following matter raises substantial doubt about the Partnership's ability to
continue as a going concern:
As discussed in Note 2 to the Financial Statements, the term of the Partnership
ended on December 31, 2005. The Partnership dissolved effective on the day on
which the term of the Partnership ended. The Partnership has entered into an
agreement for the sale of substantially all of its assets. Upon the sale of the
assets of the Partnership, the General Partner will 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 was profitable for the first six months of 2006, primarily due
to an excess in revenues from operations in comparison to the costs and expenses
of operations. Cash flows from the Partnership's operations continue to be
sufficient to fund the Partnership's operating expenses. The Partnership
currently expects that if the asset sale transaction is completed, a portion of
the proceeds from the asset sale transaction received by the Partnership will be
distributed to the Limited Partners.
The Partnership's primary source of revenues and liquidity to fund operations of
the Windsystem, administer the Partnership, and make distributions to its
partners is the production and sale of electricity from the Windsystem. The
Partnership's sole customer is SCE. The price paid by SCE for the electricity is
contractually defined under the Power Agreements. See Note 2 to the Financial
Statements for additional information.
As of June 30, 2006, the Partnership had no current or planned commitments for
capital expenditures.
Results of Operations for the Six Months Ended June 30, 2006 Compared to June
30, 2005.
During the six months ended June 30, 2006, the Partnership's electricity revenue
was $0.8 million, and the Windsystem produced 13.1 million kWh of electricity
sold to SCE. This was a decrease of $0.1 million or 14% in revenue and a
decrease of 2.1 million kWh or 14% of electricity produced as compared to the
six months ended June 30, 2005. Interest income increased $0.03 million due to
higher cash balances during the six months ended June 30, 2006 as compared with
the six months ended June 30, 2005.
Costs and expenses during the first six months of 2006 were $0.6 million, a
decrease of $0.9 million or 60% as compared to the first six months of 2005.
Depreciation was $0.0 million in the first six months of 2006 as compared with
$1.0 million in the first six months of 2005. The decrease in depreciation was
due to the Turbines becoming fully depreciated during 2005. Property taxes
remained constant in the first six months of 2006 as compared to the first six
21
months of 2005. Easement and management fees also remained comparable during the
first six months of 2006 as compared to the first six months of 2005. Easement
and management fees are calculated as a percentage of 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. Royalty fees pursuant to the 85-B
Reservation of Rights Agreement, which allows the Partnership to sell electric
power to SCE under the Power Agreements, commenced in 2006 and totaled $0.1
million during the first six months of 2006. Maintenance expenses remained
comparable in the first six months of 2006 as compared to the first six months
of 2005. Insurance costs decreased by $0.03 million in the first six months of
2006 as compared to the first six months of 2005 due to decreased renewal rates.
Other operating costs remained comparable in the first six months of 2006 as
compared to the first six months of 2005.
Overall, the Partnership reported net income of $0.3 million in the first six
months of 2006, a change of $0.8 million from the net loss of $0.5 million for
the first six months of 2005. This increased income was primarily due to
decreased depreciation during the first six months of 2006. During the first six
months of 2006, the total partners' deficit decreased by $0.3 million to $3.3
million. The net income per Unit was $297 for the first six months of 2006
compared with a net loss per Unit of ($634) for the first six months of 2005.
Cash flows from operations decreased by $0.09 million in the first six months of
2006 as compared to the first six months of 2005. This decrease was primarily
due to unfavorable changes in working capital during the first six months of
2006 as compared to the first six months of 2005.
Results of Operations for the Three Months Ended June 30, 2006 Compared to June
30, 2005.
During the three months ended June 30, 2006, the Partnership's electricity
revenue was $0.5 million, and the Windsystem produced 6.8 million kWh of
electricity sold to SCE. This was a decrease of $0.2 million or 28% in revenue
and a decrease of 3.1 million kWh or 31% of electricity produced as compared to
the three months ended June 30, 2005. Interest income increased $0.02 million
due to higher cash balances during the six months ended June 30, 2006 as
compared with the six months ended June 30, 2005.
Costs and expenses during the second quarter of 2006 were $0.3 million, a
decrease of $0.4 million or 54% as compared to the second quarter of 2005.
Depreciation was $0.0 million in the second quarter of 2006 as compared with
$0.5 million in the second quarter of 2005. The decrease in depreciation was due
to the Turbines becoming fully depreciated during 2005. Property taxes remained
constant in the second quarter of 2006 as compared to the second quarter of
2005. Easement and management fees also remained comparable during the second
quarter of 2006 as compared to the second quarter of 2005. Royalty fees
pursuant to the 85-B Reservation of Rights Agreement, which allows the
Partnership to sell electric power to SCE under the Power Agreements, commenced
in 2006 and totaled $0.1 million during the second quarter of 2006. Maintenance
expenses remained comparable in the first three months of 2006 as compared to
the first three months of 2005. Insurance costs decreased by $0.03 million in
the second quarter of 2006 as compared to the second quarter of 2005 due to
decreased renewal rates. Other operating costs remained comparable in the second
quarter of 2006 as compared to the second quarter of 2005.
22
Overall, the Partnership reported net income of $0.2 million in the second
quarter of 2006, a change of $0.2 million from the net loss of $0.07 million for
the second quarter of 2005. This increased income was primarily due to decreased
depreciation during the second quarter of 2006.
Contractual Obligations
The Partnership's contractual obligations as of June 30, 2006 are as follows (in
millions):
-------------------------------------- ----------------------
2006*
-------------------------------------- ----------------------
-------------------------------------- ----------------------
Purchase Obligations:
-------------------------------------- ----------------------
Maintenance fees $0.095
-------------------------------------- ----------------------
-------------------------------------- ----------------------
Demobilization Fee $0.024
-------------------------------------- ----------------------
*The term of the Partnership ended on December 31, 2005; however, the
Partnership is operating in liquidation and obtained the right to sell power
under the Power Agreements, and extended the term of the Management Agreement,
through September 30, 2006.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's management with the participation of the General Partners'
Chief Executive Officer and Chief Financial Officer has evaluated the disclosure
requirements of Item 305 of Regulation S-K "Quantitative and Qualitative
Disclosures about Market Risk," and has concluded that the Partnership currently
has no market risk sensitive instruments for which this disclosure is required.
Item 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act. This term means controls and other procedures of
a company that are designed to ensure that information required to be disclosed
by the company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company's
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
The Partnership's management, with the participation of the General Partner's
Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Partnership's disclosure controls and procedures as of June
30, 2006. Based on these evaluations, the General Partner's Chief Executive
Officer and Chief Financial Officer concluded that the Partnership's disclosure
controls and procedures were effective as of June 30, 2006.
23
(b) Internal Control Over Financial Reporting
During the three months ended June 30, 2006, the Partnership made no change in
its internal control over financial reporting (as such term is defined in Rules
13a - 15(f) and 15d - 15(f) under the Exchange Act) that materially affected, or
is reasonably likely to materially affect, its internal control over financial
reporting.
24
PART II - OTHER INFORMATION
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 5. OTHER INFORMATION
This report contains statements that are forward-looking within the meaning of
Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Exchange
Act. Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and that actual results could differ materially
as a result of known and unknown risks and uncertainties, including general
economic conditions, future trends, and other risks, uncertainties and factors
disclosed in this operating report.
Item 6. EXHIBITS
(a) Exhibits
10.1 First Amendment to Purchase and Sale Agreement (Tehachapi Pass Wind
Project) dated as of July 5, 2006 by and among Enron Wind Systems LLC,
ZWHC LLC, Zond Windsystem Partners Ltd. Series 85-A, Zond Windsystem
Partners Ltd. Series 85-B, AES Tehachapi Wind, LLC and SeaWest
Holdings, Inc.
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
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zond Windsystem Partners, Ltd. Series 85-B, a
California Limited Partnership
Date: August 14, 2006
By: Zond Windsystems Management IV LLC,
General Partner
By: /s/ Jesse E. Neyman
-----------------------------------------
Jesse E. Neyman
Chief Executive Officer of Zond Windsystems
Management IV LLC, the General Partner of
Zond Windsystem Partners, Ltd. Series 85-B, a
California Limited Partnership
By: /s/ Johnna D. Kokenge
-----------------------------------------
Johnna D. Kokenge
Chief Financial Officer of Zond Windsystems
Management IV LLC, the General Partner of
Zond Windsystem Partners, Ltd. Series 85-B, a
California Limited Partnership
26
Exhibit Index
-------------
Number Description
10.1 First Amendment to Purchase and Sale Agreement (Tehachapi Pass Wind
Project) dated as of July 5, 2006 by and among Enron Wind Systems LLC,
ZWHC LLC, Zond Windsystem Partners Ltd. Series 85-A, Zond Windsystem
Partners Ltd. Series 85-B, AES Tehachapi Wind, LLC and SeaWest
Holdings, Inc.
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
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