Washington, D.C. 20549
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. (Check one):
As of November 30, 2007, there were 235.3775 Investor Shares outstanding.
RIDGEWOOD ELECTRIC POWER TRUST II |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited, dollar amounts in thousands) |
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules. These condensed consolidated financial statements should be read in conjunction with the Ridgewood Electric Power Trust II (the “Trust”) Annual Report on Form 10-K for the year ended December 31, 2005 filed with the SEC on December 14, 2007 (the “2005 Form 10-K”). No significant changes have been made to the Trust’s accounting policies and estimates disclosed in the 2005 Form 10-K.
In the opinion of management, the condensed consolidated financial statements as of September 30, 2006, and for the nine and three-month periods ended September 30, 2006 and 2005, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The results of operations for the nine and three months ended September 30, 2006 and 2005 are not necessarily indicative of the results to be expected for the full year or any other period.
2. DESCRIPTION OF BUSINESS
The Trust is a Delaware trust formed on November 20, 1992 to primarily make investments in projects and businesses in the energy and infrastructure sectors. Ridgewood Renewable Power LLC (“RRP” or the “Managing Shareholder”), a New Jersey limited liability company, is the Managing Shareholder. As the Managing Shareholder, RRP has direct and exclusive control over the management and operations of the Trust.
As of September 30, 2006, the Trust had one non-operating investment, located in California and 100% owned by the Trust (“Monterey”). The investment is a 5.5 megawatt (“MW”) cogeneration project which suspended operations in January 2006 due to a contract dispute with its customer. Since the closing of the Monterey facility in January 2006, the Trust has not had any operating revenues, though it continued to have contractual obligations through August 2006 related to its gas purchase agreement with Coral Energy Services, Inc. During the first quarter of 2006, the Trust recorded an asset impairment of Monterey’s net book value of its plant, equipment and intangibles. The Monterey project remains closed as of the date of this filing.
The other operating investment of the Trust was a collection of irrigation service engines with a production capacity of 2MW (the “Pumping Project”), which was sold in January 2006 for $1. The sale of the Pumping Project did not impact the Trust’s results of operations in 2006, as the assets were previously fully impaired. Additionally, at September 30, 2006, the Trust had a long-term note receivable, which was paid in full on October 31, 2007. Upon the repayment of the Trust’s long term receivable in October 2007, the Trust no longer had any cash producing assets and may not in the future, subject to the resolution of litigation relating to the Monterey facility.
3. RECENT ACCOUNTING PRONOUNCEMENTS
FIN 48
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation of Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes (“SFAS 109”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for the Trust beginning January 1, 2007. The Trust does not believe that the adoption of FIN 48 will have a material impact on its consolidated financial statements.
RIDGEWOOD ELECTRIC POWER TRUST II |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited, dollar amounts in thousands) |
SFAS 157
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"), to define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles (GAAP) and expand disclosures about fair value measurements. SFAS 157 requires quantitative disclosures using a tabular format in all periods (interim and annual) and qualitative disclosures about the valuation techniques used to measure fair value in all annual periods. SFAS 157 will be effective for the Trust beginning January 1, 2008. The Trust is currently evaluating the impact of adopting SFAS 157.
SAB 108
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB 108 is effective for fiscal years ending on or after November 15, 2006. The adoption of this standard did not have a material impact on the Trust's condensed consolidated financial statements.
4. NOTES RECEIVABLE
In September 2002, the Trust sold its interests in Pittsfield Investors Limited Partnership and B-3 Limited Partnership to Energy Associates Corporation for $1.2 million in cash and $5 million of promissory notes. The notes bore interest at a rate of 10% per annum, and were to be repaid over a 17-year term. The recovery of interest and principal under the promissory notes issued in connection with the sale of the Trust’s interest were dependent upon the operations of the partnership investment transferred.
Consequently, the Trust deferred its gain on the sale of its ownership interest until the carrying value of the investment was fully recovered. The cash proceeds received for the interest and principal were recorded as a reduction of its investment in partnership transferred under contractual agreement through June 30, 2005. Subsequent payments were recorded as a component of other income as collected. The note payments remained current until the notes were paid in full on October 31, 2007.
5. IMPAIRMENT
On January 9, 2006, Monterey suspended its operations indefinitely. As a result, the Trust recorded full impairments relating to its plant and equipment and intangibles of $1,132 and $1,698, respectively.
6. GAS CONTRACT
In August 2001, Monterey entered into an agreement to purchase natural gas, at fixed prices, over a five-year term in connection with entering into an amendment fixing the sales price of electric power sales contracts for a similar term. The contract was entered into in order to minimize the impact of fluctuating energy prices. The Trust has determined that the contract is a derivative as defined under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. The Trust has designated the derivative as a non-hedge instrument. Accordingly, the value of the contract based on the differences between contract prices and market value prices is recognized as an asset or a liability in the balance sheet. Changes in the carrying value of the contract is reflected as a component of cost of revenues in the consolidated statements of operations. As of September 2006, the Trust has completed its contractual agreement to resell the purchased gas back to Monterey’s gas supplier and therefore, it no longer records any value on the balance sheets associated with this contract.
RIDGEWOOD ELECTRIC POWER TRUST II |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited, dollar amounts in thousands) |
7. COMMITMENTS AND CONTINGENCIES
Monterey has a non-cancelable operating lease which expires in May 2021. Future minimum lease payments as of December 31, 2006 are approximately $12 per annum along with the delivery of by-product steam. In connection with the lease, Monterey has not delivered by-product steam since it was shut down in January 2006. As a result, Monterey may be subject to penalties from the lessor. The Trust considers the likelihood of any successful claim in this matter to be remote.
For the first 15 years of operation, Pacific Gas and Electric Company (“PG&E”) “dispatched” Monterey to produce and deliver electricity up to its contract capacity on a 13 hour per day, five day per week basis (“13x5”). However, on December 1, 2005, PG&E dispatched Monterey on a 24 hour per day, seven day per week basis (“24x7”) for an indefinite period, effective January 1, 2006. Monterey advised PG&E that its 24x7 dispatch order was a breach of the parties’ power purchase agreement. Management of Monterey was also concerned that if the facility continued to produce and supply power consistent with the parties’ prior course of performance, PG&E would refuse to pay. Accordingly, Monterey demanded that PG&E provide adequate assurances that it would continue to pay Monterey for its capacity and its electricity produced and delivered in accordance with the parties’ longstanding 13x5 operations. PG&E did not provide such assurances. In the absence of such assurances, Monterey suspended operations on or about January 9, 2006. Monterey filed a Complaint against PG&E in the San Francisco Superior Court on May 16, 2006 (the “Monterey Complaint”). The Monterey Complaint seeks damages for breach of contract, damages for PG&E’s breach of the implied covenant of good faith and fair dealing, and a claim for declaratory relief against PG&E, seeking a judicial determination that PG&E’s conduct materially breached the parties’ agreement and justified Monterey’s suspension of performance. Monterey is seeking damages against PG&E estimated at approximately $5,000. A Jury Trial with regard to this matter is currently set for February 8, 2008.
On May 14, 2007, PG&E filed a Complaint in San Francisco Superior Court against Monterey (the “PG&E Complaint”). The PG&E Complaint arises out of the same transactions and occurrences that gave rise to the Monterey Complaint against PG&E. PG&E asserted claims for compensatory damages for breach of contract and breach of the implied covenant of good faith and fair dealing as well as “restitution” of capacity payments made to Monterey on a theory of unjust enrichment, and declaratory relief for repayment of capacity payments made to the Monterey. PG&E is seeking restitution damages against Monterey estimated at approximately $4,800.
The claims made by PG&E have been made solely against Monterey and do not involve any claims against the Trust. Both of the above litigation matters are currently in discovery. Monterey intends to vigorously prosecute its claims and defend against PG&E’s claims and believes it will ultimately prevail.
On August 16, 2006, the Managing Shareholder of the Trust and affiliates of the Trust, filed lawsuits against the former independent registered public accounting firm for the Trust, Perelson Weiner, LLP (“Perelson Weiner”), in New Jersey Superior Court. The suits alleged professional malpractice and breach of contract in connection with audit and accounting services performed by Perelson Weiner. On October 20, 2006, Perelson Weiner filed a counterclaim against the Trust, and its affiliates alleging breach of contract due to unpaid invoices. Discovery is ongoing and no trial date has been set. The costs and expenses of the litigation are being paid for by the Managing Shareholder and affiliated management companies and not the underlying investment funds, including the Trust.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion and analysis of the operating results and financial condition at September 30, 2006 is intended to help readers analyze the accompanying financial statements, notes and other supplemental information contained in this document. Results of operations for the nine and three-month periods ended September 30, 2006 are not necessarily indicative of results to be attained for any other period. This discussion and analysis should be read in conjunction with the accompanying financial statements, notes and other supplemental information included elsewhere in this report and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Trust’s 2005 Form 10-K.
Forward-Looking Statements
Certain statements discussed in this item and elsewhere in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the Trust’s plans, objectives and expectations for future events and include statements about the Trust’s expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. These statements are based upon management’s opinions and estimates as of the date they are made. Although management believes that the expectations reflected in these forward-looking statements are reasonable, such forward-looking statements are subject to known and unknown risks and uncertainties that may be beyond the Trust’s control, which could cause actual results, performance and achievements to differ materially from the results, performance and achievements projected, expected, expressed or implied by the forward-looking statements. Examples of events that could cause actual results to differ materially from historical results or those anticipated include the outcome of litigation described in Item 3. "Legal Proceedings” of the Trust’s 2005 Form 10-K, changes in political and economic conditions, federal or state regulatory structures, government mandates, the ability of customers to pay for energy received, supplies and prices of fuels, operational status of generating plants, mechanical breakdowns, volatility in the price for electric energy, natural gas, or renewable energy. Additional information concerning the factors that could cause actual results to differ materially from those in the forward-looking statements is contained in Part I, Item 1A. “Risk Factors” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of the 2005 Form 10-K. The Trust undertakes no obligation to publicly revise any forward-looking statements or cautionary factors, except as required by law.
Critical Accounting Policies and Estimates
The following discussion and analysis of the Trust’s financial condition and operating results is based on its financial statements. The preparation of this Quarterly Report on Form 10-Q requires the Trust to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Trust’s financial statements, and the reported amount of revenue and expenses during the reporting period. Actual results may differ from those estimates and assumptions. No material changes have been made to the Trust’s critical accounting policies and estimates disclosed in its 2005 Form 10-K.
Results of Operations and Changes in Financial Condition
Nine months ended September 30, 2006 compared to the nine months ended September 30, 2005
Total revenues decreased $2 million, or 95.7%, to $0.1 million in the first nine months of 2006 as compared to $2.1 million for the same period in 2005. This decrease was due to the closing of Monterey’s operations and sale of the Pumping Project in January 2006. Revenues for the first nine months of 2006 are Monterey’s revenues prior to suspension of its operations.
Cost of revenues decreased approximately $0.4 million, or 25.6%, to $0.9 million in the first nine months of 2006, as compared to $1.3 million for the same period in 2005. This increase was primarily attributable to reduced revenues offset by a decrease in natural gas prices during the first quarter of 2006, which has the effect of increasing cost of revenues due to recording declines in market value of the Trust’s gas forward contract.
Gross loss was $0.8 million for the first nine months of 2006 as compared to gross profit of $0.9 million for the same period in 2005. This decrease of $1.7 million was primarily due to decreased revenue and from declines in natural gas prices.
During the first quarter of 2006, the Trust recorded a $2.8 million impairment of plant and equipment and its intangible assets, as a result of closing the Monterey operations.
The Trust recorded a gain on sale of investments of $0.5 million from collection of its notes receivable during the first nine months of 2006. Cash receipts from the notes receivable for a portion of 2005 reduced the carrying value of the notes with no gain recognized for that portion.
Total assets of $0.6 million at September 30, 2006 decreased $3.8 million from $4.4 million at December 31, 2005. This decrease was primarily due to the shutdown and impairment of Monterey and purchases under the gas forward contract. Total liabilities decreased $0.4 million from $0.5 million at December 31, 2005 to $0.1 million at September 30, 2006, primarily due to affiliated repayments of $0.3 million and reduced accruals of $0.1 million.
Three months ended September 30, 2006 compared to the three months ended September 30, 2005
Total revenues decreased $0.8 million from the third quarter of 2005, from $0.8 million for the three months ended September 30, 2005. There were no revenues in the third quarter of 2006 due to the closing of Monterey’s operations and sale of the Pumping Project in January 2006.
Gross loss of $63,000 for the third quarter of 2006 as compared to gross profit of $0.7 million for the same period in 2005 was primarily due to a decline in revenues.
.
Liquidity and Capital Resources
Nine months ended September 30, 2006 compared to the nine months ended September 30, 2005
At September 30, 2006, the Trust had cash and cash equivalents of $0.3 million as compared to $0.2 million at December 31, 2005. The increase of $0.1 million was the result of cash provided by operating activities.
Cash provided by investing activities for the nine months ended September 30, 2005 was $0.4 million attributable to payments received from notes receivable. For the 2006 period, these cash receipts were classified as an operating activity.
There was no cash used in financing activities for the first nine months of 2006 and $1 million was used for the first nine months of 2005. The 2005 amount represents amounts distributed to shareholders.
Future Liquidity and Capital Resource Requirements
The Trust expects cash flows from operating activities to be significantly less in the future periods than in the previous periods since the operation of Monterey has ceased.
Off-Balance Sheet Arrangements and Contractual Obligations and Commitments
During the quarter, the Trust completed its obligations under its gas supply contract. The associated letter of credit expired upon completion of these obligations. There have been no other changes from the disclosures in the Trust's 2005 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosure required by this Item is omitted pursuant to Item 305(e) of Regulation S-K.
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Trust’s Chief Executive Officer and Chief Financial Officer evaluate the effectiveness of the Trust’s disclosure controls and procedures. A system of disclosure controls and procedures is designed to ensure thatinformation required to be disclosed by a registrant in reports filed with the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms. This includes disclosure controls and procedures designed to ensure that information required to be disclosed by a registrant is accumulated and communicated to senior management so as to allow timely decisions regarding required disclosure. A review of these controls and procedures was done by the Trust as of September 30, 2006, which revealed that the following material weaknesses previously identified continue to exist:
| (i) | a lack of sufficient personnel with relevant experience to develop, administer and monitor disclosure controls and procedures to enable the Trust to comply efficiently, or on a timely basis, with its financial reporting obligations, |
| (ii) | inadequate disclosure controls and procedures, including inadequate record retention and review policies that would enable the Trust to meet its financial reporting and disclosure obligations in an efficient and timely manner. |
As a result of these weaknesses, the Trust has not timely met its reporting obligations under the Exchange Act.
During the quarter ended September 30, 2006, the Trust engaged a national accounting firm to supply accounting personnel to assist while personnel hiring is underway. The work performed by the firm is under the direct supervision of the Trust’s Chief Financial Officer and Controller. Except as noted above, the Trust’s Chief Executive Officer and Chief Financial Officer have concluded that there was no change in the Trust’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2006 that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting.
Since the review, the Trust has implemented the following changes in internal control over financial reporting:
| · | Increased the number of degreed accountants. Additional staff expansion is underway. |
| · | In May 2007, the Trust appointed a new Chief Financial Officer who is a Certified Public Accountant with approximately 29 years of professional accounting experience, including prior experiences as a financial officer of publicly traded companies. |
The Trust believes that the completion of the expansion of the accounting and financial reporting staff and implementation of recommended procedures will mitigate the above weaknesses. However, due to the Trust’s delinquencies in meeting its filing deadlines under the Exchange Act, the Trust expects these deficiencies to continue to be material weaknesses at least until such time as the Trust is no longer delinquent in its Exchange Act filings.
The Trust’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Trust’s disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Exchange Act and concluded that, as of the end of the period covered by this report, because of the material weaknesses noted above, the Trust’s disclosure controls and procedures were not effective.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to the legal proceedings disclosed in the 2005 Form 10-K.
ITEM 1A. RISK FACTORS
For information regarding factors that could affect the Trust’s results of operations, financial condition and liquidity, see the risk factors discussed under “Risk Factors” in Item 1A of the 2005 Form 10-K. There have been no material changes from the risk factors previously disclosed in such Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| 31.1 | * | Certification of Randall D. Holmes, Chief Executive Officer of the Registrant, pursuant to Securities Exchange Act Rule 13a-14(a). |
| | | |
| 31.2 | * | Certification of Jeffrey H. Strasberg, Chief Financial Officer of the Registrant, pursuant to Securities Exchange Act Rule 13a-14(a). |
| | | |
| 32 | * | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by Randall D. Holmes, Chief Executive Officer of the Registrant, and Jeffrey H. Strasberg, Chief Financial Officer of the Registrant. |
_____________________
* Filed herewith.
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.
| | RIDGEWOOD ELECTRIC POWER TRUST II |
| | | |
| | | |
| Date: December 20, 2007 | By: | /s/ Randall D. Holmes |
| | | Randall D. Holmes |
| | | Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
| Date: December 20, 2007 | By: | /s/ Jeffrey H. Strasberg |
| | | Jeffrey H. Strasberg |
| | | Executive Vice President and Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |
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