SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-24240
RIDGEWOOD ELECTRIC POWER TRUST I
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-3105824
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
c/o Ridgewood Power Corporation, 947 Linwood Avenue, Ridgewood,
New Jersey 07450-2939
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (201) 447-9000
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest
(Title of Class)
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 X No ___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.[
]
There is no market for the Shares. The aggregate capital
contributions made for the Registrant's voting Shares held by non-
affiliates of the Registrant at March 21, 1997 was $10,550,000.
PART I
Item 1. Business.
Forward-looking statement advisory
This Annual Report on Form 10-K, as with some other
statements made by the Trust from time to time, has forward-
looking statements. These statements discuss business
trends and other matters relating to the Trust's future
results and the business climate and are found, among
other places, at Items 1(c)(2)(iv), 1(c)(3), 1(c)(4), 1(c)(6)(ii)
and 7. In order to make these statements, the Trust has had to
make assumptions as to the future. It has also had to
make estimates in some cases about events that have
already happened, and to rely on data that may be found
to be inaccurate at a later time. Because these
forward-looking statements are based on assumptions,
estimates and changeable data, and because any attempt to
predict the future is subject to other errors, what happens
to the Trust in the future may be materially different from
the Trust's statements here.
The Trust therefore warns readers of this document that they
should not rely on these forward-looking statements without
considering all of the things that could make them
inaccurate. The Trust's other filings with the Securities
and Exchange Commission and its Confidential Memorandum
discuss many (but not all) of the risks and uncertainties
that might affect these forward-looking statements.
Some of these are changes in political and economic
conditions, federal or state regulatory structures,
government taxation, spending and budgetary policies,
government mandates, demand for electricity and thermal
energy, the ability of customers to pay for energy received,
supplies of fuel and prices of fuels, operational status of
plant, mechanical breakdowns, availability of labor and the
willingness of electric utilities to perform existing power
purchase agreements in good faith. Some of the cautionary
factors that readers should consider are described below at
Item 1(c)(4) - Trends in the Electric Utility and
Independent Power Industries.
By making these statements now, the Trust is not making any
commitment to revise these forward-looking statements to
reflect events that happen after the date of this document
or to reflect unanticipated future events.
(a) General Development of Business.
Ridgewood Electric Power Trust I (the "Trust") was organized as
a
Delaware business trust on May 9, 1994, for the purpose of acquiring
all of the assets and carrying on the business of Ridgewood Energy
Electric Power, L.P. (the "Partnership"), a Delaware limited
partnership which was organized in March 1991, to participate in the
development, construction and operation of independent power
generating facilities ("Projects"). On June 15, 1994, with the
approval of the partners, the Partnership was combined into the
Trust,
which assumed all of the Partnership's assets and liabilities.
The predecessor Partnership raised $10.5 million in a single
private offering conducted in 1991 and early 1992. Substantially
all of those funds were applied prior to 1995 to the purchase of
interests in the three Projects described below, to funding
terminated activities and to defray the fees and expenses of the
offering and the Partnership.
The Trust made an election to be treated as a "business
development company" under the Investment Company Act of 1940, as
amended ( the "1940 Act"). On May 26, 1994 the Trust notified the
Securities and Exchange Commission of such election and registered
its
shares of beneficial interest (the "Investor Shares") under the
Securities Exchange Act of 1934, as amended (the "1934 Act"). On
June
25, 1994 the election and registration became effective. The Trust
currently has 218 holders of record of Investor Shares.
Ridgewood Power Corporation (the "Managing Shareholder"), a
Delaware corporation, is the Managing Shareholder of the Trust and
as
such has direct and exclusive discretion in the management and
control
of the affairs of the Trust (subject to the general supervision and
review of the Independent Trustees and the Managing Shareholder
acting
together as the Board of the Trust for the purposes of the 1940
Act).
Ridgewood Energy Holding Corporation ("Ridgewood Holding"), a
Delaware corporation, is the Corporate Trustee of the Trust. The
Corporate Trustee acts on the instructions of the Managing
Shareholder
and is not authorized to take independent discretionary action on
behalf of the Trust. The Independent Trustees do not have any
management or administrative powers over the Trust or its property
other than as expressly authorized or required by the Declaration of
Trust of the Trust (the "Declaration") or the 1940 Act. See Item
10.
- - Directors and Executive Officers of the Registrant below for a
further description of the management of the Trust.
(b) Financial Information about Industry Segments.
The Trust operates in only one industry segment: investing in
independent power generation.
(c) Narrative Description of Business.
(1) General Description.
The Trust was formed to participate in the development,
construction and operation of independent electric power projects
that
generate electricity for sale to utilities and other users. The
Trust
has invested its funds in three such projects: the Olinda Project,
a
five megawatt capacity electric generating plant fueled by methane
gas
from a local landfill in Brea, Orange County, California; the South
Boston Project (previously designated as the "Lynchburg
Project"), a three megawatt capacity electric generating plant at
South Boston, Virginia that burns waste fuel oil prepared in part by
an on-site waste oil processing facility; and the Stillwater
Project,
a 3.5 megawatt hydroelectric facility located on the Hudson River
north of Albany, New York.
These Projects are Qualifying Facilities, which are generally
exempt from federal and state regulations which apply to investor-
owned electric utilities. As described below, under current law,
utilities are required to purchase electricity generated by
Qualifying
Facilities under terms generally favorable to the Qualifying
Facilities.
Historically, producers of electric power in the United States
consisted of regulated utilities and of industrial users that
produced
electricity to satisfy their own needs. The independent power
industry in the United States was created by federal legislation
passed in response to the energy crises of the 1970s. The Public
Utility Regulatory Policies Act of 1978, as amended ("PURPA"),
requires utilities to purchase electric power from "Qualifying
Facilities" (as defined in PURPA), including "cogeneration
facilities"
and "small power producers," and also exempts these Qualifying
Facilities from most utility regulatory requirements. Under PURPA,
Projects that are Qualifying Facilities are generally not subject to
federal regulation, including the Public Utility Holding Company Act
of 1935, as amended, and state regulation. Furthermore, PURPA
generally requires electric utilities to purchase electricity
produced
by Qualifying Facilities at the utility's avoided cost of producing
electricity (i.e., the incremental costs the utility would otherwise
face to generate electricity itself or purchase electricity from
another source).
The electricity produced by each Project is sold to the local
electric utility company under long-term purchase contracts ("Power
Contracts"), or is used in part on site to power equipment.
As discussed below, the Trust is a "business development
company"
under the Investment Company Act of 1940. In accounting for its
Projects, it treats each Project as a portfolio investment that is
not
consolidated with the Trust's accounts. Accordingly, the revenues
and
expenses of each Project are not reflected in the Trust's financial
statements and only cash distributions are included, as revenue,
when
received. Accordingly, the recognition of revenue from Projects by
the Trust is dependent upon the timing of distributions from
Projects
by the Managing Shareholder. As discussed below and at Item 5.
Market for Registrant's Common Equity and Related Stockholder
Matters,
distributions from Projects may include both income and capital
components.
(2) The Trust's Investments.
(i) Stillwater Project. In October 1991, the Trust acquired
certain equity rights with respect to a 3.1 megawatt hydroelectric
facility which was then under construction on the Hudson River in
the
village of Stillwater, New York (approximately 30 miles northeast of
Albany) at the site of a pre-existing 800 foot wide masonry dam
structure (the "Stillwater Project"). These equity rights were
purchased by the Trust from Long Lake Energy Corporation for a
purchase price of $750,000. Subsequently, the Trust and affiliates
of
the general contractor and affiliates of the equipment supplier
formed
Stillwater Hydro Partners, L.P. ("SHP") to continue development of
the
Stillwater Project, with the Trust holding a 32.5% partnership
interest in SHP.
The other partners in SHP have provided all of the equity
investment necessary to complete the Stillwater Project. In
addition,
the CIT Group/Capital Equipment Financing Inc. ("CIT") a nationally
recognized project lender which is a joint venture between Chemical
Bank, N.A. and Dai-Ichi Kangyo Bank (a large Japanese bank) provided
a
variable rate construction loan to complete the Stillwater Project.
The Stillwater Project commenced commercial operation in May 1993.
In July 1994, the CIT construction loan was converted to a
fixed
rate 15-year term loan in the principal amount of approximately
$8,050,000. In addition to the fixed interest payments, CIT is also
entitled to receive, as additional interest, 22.5% of the available
cash flow of the Stillwater Project. The term loan is payable only
by
SHP, and is non-recourse to the Trust.
In May 1994, the Trust exercised its rights to exchange its
32.5%
partnership interest in SHP for a fixed preferred partnership
distribution of $1 million, plus a compound annual return of 12%
thereon until paid in full. A writedown of $162,000 was taken in
1993. Over the nine year schedule of annual payments, the Trust
expects to receive total payments of approximately $1,720,000, of
which approximately $126,000 has already been received. SHP is
required to apply substantially all of SHP's available cash flow
after
funding of debt service (up to a maximum amount each year) to
satisfy
the payment obligation to the Trust, with any shortfalls to be
carried
forward with interest into subsequent years.
In November 1994, the amount of the term loan was increased by
CIT to approximately $8,995,000, reflecting the receipt by SHP of
certain amendments to its licenses and permits to enable the
Stillwater Project to capture additional water flow across the dam
and
thereby increase its capacity to 3.5 megawatts, which might increase
revenue from the sale of electricity. The projections furnished by
SHP to CIT in connection with such increase indicated sufficient
annual cash flow to permit SHP to meet its payment obligations to
the
Trust as described above.
However, the ultimate ability of SHP to meet its debt service
payment and payment obligations to the Trust is dependent on the
actual operating performance of the Stillwater Project, which, in
turn, is largely dependent upon water levels in the Hudson River.
In 1995, the Hudson River basin experienced a severe drought,
resulting in Hudson River water levels which were substantially
below normal. Although increased precipitation in late 1995 and
early 1996 brought flow levels back toward the norm, high water
flows damaged portions of the facility, including the recently
installed modifications for capturing additional water flow.
Although there is insurance coverage for the damage, necessary
delays in repairing the facility and regulatory limitations on
construction scheduling will cause electricity output to be reduced
into 1997.
As a result, all available cash flow from the Stillwater
Project is being applied to meet debt service requirements. Until
water flows return to expected levels, repairs are completed and the
current arrears in debt servicing are made up, it appears likely
that most, if not all, of the payments due to the Trust will be
deferred and carried forward, with interest, into subsequent years.
The Trust does not expect to receive a distribution from the
Project in 1997.
Electricity generated by the Stillwater Project is sold to
Niagara Mohawk Power Corporation under a long-term Power Contract
with a remaining term of 31 years. Niagara Mohawk has argued before
the New York Public Service Commission, the state agency that
regulates the electric utility industry, and the Federal Energy
Regulatory Commission ("FERC") that rates it pays to purchase
electricity under long-term Qualifying Facility contracts are
uneconomic and that it should be allowed to abrogate those
contracts. In April 1995 FERC rejected Niagara Mohawk's application
and the New York State Public Service Commission has also refused
the requested relief.
March 11, 1997 the New York Times reported that Niagara Mohawk
had agreed with independent power producers to buy out the Power
Contracts with independent power producers that were above current
market levels. The estimated cost is $4 billion (to be paid 10% in
cash and 90% in Niagara Mohawk securities) and is subject to
approvals
from shareholders and the New York Public Service Commission and
Niagara Mohawk's ability to raise the necessary funds. The Trust
has not yet been advised of any proposal from Niagara Mohawk for a
buy-out of the Stillwater Project's Power Contract.
(ii) South Boston Project. The Trust made an initial $2.8
million equity investment in a 3 megawatt electrical generating
facility that was constructed in an industrial park at South Boston,
Virginia (the "South Boston Project"). The facility uses waste oil
as
its primary fuel source for three refurbished reciprocating diesel
engine generators. The Trust's investment covered all development
and
construction costs of the facility.
Construction of the facility began in January 1993. The
facility
began commercial operations in June 1993, but did not operate at
full
capacity until December 1993 because of start-up testing, debugging
and maintenance.
To improve the economic performance of the Project, the Trust
built a new fuel processing facility adjacent to the generating
facility that uses the heat absorbed in the generators' coolant so
that the waste oil can be processed on-site rather than purchased
from
off-site processors. The construction cost of the fuel processing
facility was approximately $800,000, thereby raising the total
projected investment in the Project to approximately $3.5 million.
In
1995, the Managing Shareholder advanced $570,000 to the Trust to
help
finance the construction costs.
In December 1994 an equipment failure caused significant damage
to one of the three diesel engines and its turbocharger. Because of
inability to find a working replacement turbocharger, the unit was
not put back into service until July 1995 at a repair cost of
approximately $54,000. In May 1995, another engine failed,
requiring a replacement of the engine which was completed in
December 1995 at a cost of approximately $228,000. The Trust
successfully claimed against its insurer for substantially all of
the replacement and repair costs and also received payment under its
business interruption insurance policy for a portion of the lost
electricity sales. Further, the Trust purchased a backup .5
megawatt engine generator set in May 1995 to mitigate losses and
provide relief for maintenance and other outages.
During 1996, work continued on the waste oil plant, which was
financed by additional advances of approximately $260,000 from the
Managing Shareholder. Because of the need to apply cash flow to
completing the waste oil plant and because of the prolonged period
necessary to train personnel, determine proper operating parameters
and bring the plant into operation, distributions from the Project
to
the Trust in 1996 increased 27.5% (to $208,000) from the depressed
l995 level of $163,000, but remained below the 1994 level of
$623,000.
In July 1995, Virginia Electric and Power Company ("VEPCO") the
utility which purchases electricity from the South Boston Project
under a long-term Power Contract, purported to cancel the Power
Contract for alleged defaults by the project. After negotiations
with VEPCO proved unsuccessful, the Trust sued VEPCO in the
federal district court for the Eastern District of Virginia to
compel VEPCO to continue to honor the terms of the Power Contract.
On September 15, 1995, the judge hearing the case entered an order
in favor of the South Boston Project compelling VEPCO to continue
honoring the Power Contract and VEPCO to date has paid in full all
amounts currently due. VEPCO appealed the decision to the United
States Court of Appeals for the Fourth Circuit, which considered the
appeal in August and September 1996 and which remanded the case in
September 1996 to the district court for fact-finding on
jurisdictional issues. The parties began settlement discussions at
the time of the remand.
On January 17, 1997, VEPCO settled the pending lawsuit by
paying $3,750,000 in cash to the partnership owning the South Boston
Project and by waiving substantial capacity payments that might have
been due to VEPCO in the event of an early termination of the Power
Contract. The Project partnership surrendered the Power Contract to
VEPCO and agreed to the entry of an order dismissing its lawsuit
against VEPCO. The settlement permits the partnership to continue
operating the generating station and the associated waste oil
treatment plant, but it may not sell electricity to VEPCO except at
VEPCO's request, and the partnership may only sell electricity to
investor-owned electric utilities for resale or use outside VEPCO's
service area. In addition, the facility may be operated for non-
generating purposes such as waste oil treatment and electricity may
be generated for the facility's needs. VEPCO may cut the
interconnection of the facility with its lines and reconnection is
permitted only for electricity sales in compliance with the
settlement agreement. The partnership may remove and sell
equipment.
These restrictions apply to any person that purchases or
otherwise obtains the South Boston facility from the partnership or
the Trust. Because under these restrictions it is currently
uneconomic to operate the South Boston facility, the Trust has shut
down the facility.
The net proceeds from the settlement and the return of security
for a letter of credit are approximately $2.8 million. The Trust
has entered into a letter of intent to purchase the general
partner's and residual interests in the Olinda Project, described
below, and has committed substantially all of the net proceeds from
the settlement to that purchase. The Trust is considering its
alternatives for the South Boston generating and waste oil treatment
plants which include, without limitation, sale or disposition of the
plants, operating the waste oil facility, or keeping the plants in
shutdown status until more favorable market conditions occur. Sale
or disposition of the plants is likely to have beneficial tax
effects to Investors if the transactions can be properly structured.
The Trust currently expects that it will decide the future of the
South Boston Project before the end of 1997.
(iii) Olinda Project. In October 1994, the Trust purchased
for
$3.1 million an equity interest in Brea Power Partners, L.P., a
partnership which owns and operates a 5 megawatt landfill gas-fired
electric generating plant known as Olinda and located in Brea,
California (the "Olinda Project"). Under the structure of the
investment, the Trust receives a priority cash distribution
(generally, 98% of available cash flow) until such time as the Trust
receives a return of its entire investment, together with a compound
annual return of 15%. In addition, the Trust retains a 5% interest
in
the Olinda Project's profits and capital after the priority
distributions to the Trust have been made.
The Olinda Project sells electricity under a long term Power
Contract to Southern California Edison Co. which may be terminated
by the purchaser no earlier than 2005 on five years' advance notice.
The landfill gas is produced from a landfill owned by the County of
Orange, California, under a gas lease agreement with the operator of
the Project, that expires no earlier than 2005, for resale by the
operator to the Project at a formula price.
Distributions from the Olinda Project to the Trust in 1996
totalled $797,000, down 7.4% from the 1995 level of $860,000.
Because the Trust's investment base in the Olinda Project decreases
annually, its rights to a preferred distribution correspondingly
decrease. Because substantially all of the Trust's rights to
distributions from its current interest in the Olinda Project will
terminate in 2005, the Trust is treating distribnution amounts in
excess of the 15% annual return target as returns of capital.
Accordingly, $398,000 of the 1996 distributions and $441,000 of the
1995 distributions were treated as returns of capital to the Trust.
In November 1996 Air Products Corp. sold all of the interest in
the Olinda Project that the Trust did not own (the general partner's
and residual limited partner's interests) to an affiliate of
Duquesne Light Co., which is the investor-owned electric utility
serving Pittsburgh, Pennsylvania. In March 1997 the Trust and
Duquesne Light entered into a letter of intent for the Trust to
purchase those interests for $3,000,000. Duquesne Light continues
to own the landfill gas collection and cleaning systems at the site
and will continue to sell gas to the Project under the existing
formula price, except that the base amount will be increased by
$150,000, and the existing right of the Project to extend the gas
supply agreement beyond its 2004 termination date will be cancelled.
The management agreement with an affiliate of Duquesne Light will
be terminated.
Additional information regarding the Projects is found in the
Notes to the [Consolidated] Financial Statements.
(iv) Glendale Project. On April 12, 1997, the Trust advised
its Investors that it was negotiating the acquisition of a landfill
gas cleaning and compression station located at a landfill in Los
Angeles County, California and the six-mile pipeline
linking the station to the Glendale, California municipal electric
generating plant. The seller would retain title to the landfill gas
gathering system and would continue to sell gas to the project,
which, after processing and transportation, would resell the gas to
the municipal utility under an existing sales contract with a 20
year remaining term. The estimated purchase price is $12 million.
The tax credits granted for landfill gas production would remain
with the seller. The Trust believes that the purchase negotiations
will be protracted, that there is no assurance the transaction will
close and that it is possible that the terms of any purchase will be
materially different from those described here.
(v) Terminated Activities. The Trust also was a partner in
two project development and acquisition partnerships that were
unsuccessful in consummating any transactions. The Trust terminated
participation in both in late 1994 and wrote off a total of $815,000
at that time.
(3) Project Operation
The success of a Project is dependent on the ability of the
Project to perform efficiently under its Power Contract and is also
dependent upon obtaining a necessary fuel supply at reasonable
prices
(or obtaining rights or licenses in the case of hydropower or
geothermal resources). The Stillwater Project has the necessary
permits to use hydroelectric resources and thus may use those
resources to the extent available. Use of those resources is
limited seasonally by the New York State Department of Environmental
Conservation to protect fish spawning populations and river quality
and is subject to unpredictable local drought and flood conditions.
The Olinda Project has a long-term gas supply agreement providing
for 100% of its requirements (subject to actual availability of
landfill gas) at a fixed price escalated by 3.7% annually through
the term. The South Boston Project had a mixture of long-term and
short-term fuel supply contracts and was subject to the availability
and pricing of waste oil from time to time. The price of waste oil
is affected by the pricing of oil and other hydrocarbons, which have
fluctuated significantly in the last decade and which may continue
to do so, although the fluctuations in waste oil prices tend to be
less volatile than the variations in primary production.
The major costs of a facility while in operation will be debt
service (if applicable), fuel, taxes, maintenance and operating
labor.
The ability to reduce operating interruptions and to have a
Project's capacity available at times of peak demand are critical to
the profitability of a Project. Accordingly, skilled management is
a major factor in the Trust's business. The Stillwater Project is
managed by its remaining equity partners and the Olinda Project is
managed under contract by the general partner of the limited
partnership owning the Project. The Trust monitors their
performance using its own personnel and outside consultants.
The South Boston Project was originally managed by Blackhawk
Management Group, Incorporated, whose sole owner and employee had
been the original developer of the South Boston Project. The Trust
dismissed the manager in June 1994. See Item 3 - Legal Proceedings
for information concerning litigation arising from the dismissal.
Since that time, the Trust has owned (through a subsidiary) and
managed the Project itself. The costs of operating this Project
have been wholly borne by the Trust as operating expenses and have
not been borne by the Managing Shareholder. Based on this
experience and its experience managing other similar investment
programs, the Managing Shareholder believes that contracting with
third persons for the management of operating Projects in many cases
is not in the best interests of the Trust because of the
fragmentation of responsibility, the need for extensive oversight of
the managers, the loss in some cases of economies of scale, the
difficulty in some areas of obtaining qualified managers and the
generally high costs of management contracts. Further, the use of
third persons to manage Projects deprives the Trust and other
programs of management experience and hands-on knowledge that
otherwise would be acquired by the Managing Shareholder or
Affiliates.
The Managing Shareholder accordingly has organized Ridgewood
Power Management Corporation ("RPMC") to provide operating
management for facilities operated by its investment programs, and
has assigned day-to-day management of the South Boston Project to
RPMC.
Like the Managing Shareholder, RPMC is wholly owned by Robert
E. Swanson. It entered into an "Operation Agreement," effective
January 1, 1996, under which RPMC has provided the management,
purchasing, engineering, planning and administrative services for
the Lynchburg Project that were previously furnished by employees of
the Trust or by unaffiliated professionals and consultants and that
were borne by the Trust as Project operating expenses, as well as
billing, payment and other Project-level accounting and service
costs. These services are charged to the Trust at RPMC's cost.
RPMC has shut down operations at the South Boston Project and is
supervising it in its inactive state, pending a decision on its
future status. See Item 10 - Directors and Executive Officers of
the Registrant and Item 13 - Certain Relationships and Related Party
Transactions for further information regarding the Operation
Agreement and RPMC and for the cost reimbursements received by RPMC.
Electricity produced by a Project is typically delivered to the
electric utility purchaser through transmission lines and equipment
that are built to interconnect with the utility's existing power
grid.
The overall demand for electrical energy is somewhat seasonal,
with demand usually peaking in the summertime as a result of the
increased use of air conditioning. In addition, for the Stillwater
Project, there are seasonal fluctuations in the amount of power
generated based on fluctuating water flows in the river.
Generally, revenues from the sales of electric energy from a
Project will represent the most significant portion of the
facility's
total revenue. However, to maintain their status as Qualifying
Facilities under PURPA, it is imperative that the South Boston and
Olinda Projects continue to satisfy PURPA requirements as to fuel
use.
To do so, the South Boston Project must burn at least a specified
amount of waste oil or other waste products. The availability of
waste oil that meets the specifications needed for use in the South
Boston Project fluctuates and its price varies accordingly.
Therefore, it is possible that the South Boston Project could have
difficulty obtaining sufficient waste oil fuel at an economic price.
In such an event, it might be possible to convert the Project to a
cogeneration facility if a user of the Project's heat could be
obtained.
The technology involved in conventional power plant
construction
and operations as well as electric and heat energy transfers and
sales
is widely known throughout the world. There are usually a variety
of
vendors seeking to supply the necessary equipment for any Project.
So
far as the Trust is aware, there are no limitations or restrictions
on
the availability of any of the components which would be necessary
to
complete construction and commence operations of any Project.
Generally, working capital requirements are not a significant item
in
the independent power industry. The cost of maintaining adequate
supplies of fuel is usually the most significant factor in
determining
working capital needs.
Most Projects require a variety of permits, including zoning
and
environmental permits. Such permits must usually be kept in force
in
order for a Project to continue its operations. Compliance with
environmental laws is a material factor in the independent power
industry. The Trust believes that capital expenditures for and
other
costs of environmental protection have not materially disadvantaged
its activities relative to other competitors and will not do so in
the
future. Although the capital costs and other expenses of
environmental protection may constitute a significant portion of the
costs of a Project, the Trust believes that those costs as imposed
by
current laws and regulations have been in part offset by lower
acquisition prices for its investments and that it structured its
investment program so as to minimize material adverse effects. If
future environmental standards require that a Project spend
increased
amounts for compliance, such increased expenditures could have an
adverse effect on the Trust to the extent it is a holder of such
Project's equity securities. See Item 1(c)(6) -- Business-Narrative
Description of Business -- Regulatory Matters.
(4) Trends in the Electric Utility and Independent Power
Industries.
As a consequence of federal and state moves to deregulate large
areas of the electric power industry and the existence, spurred by
PURPA, of private competitors to electric utilities in the market
for
generating electricity, a number of interrelated trends are
occurring.
In accordance with industry usage, sales of electricity by
generators
to utilities or other marketers of electricity are referred to as
"wholesale" transactions and sales by generators, utilities or
others
to end users of electricity are referred to as "retail"
transactions.
Continued Deregulation of the Generating Market.
The Comprehensive Energy Policy Act of 1992 (the "1992 Energy
Act") encourages electric utilities to expand their wholesale
generating capacity by removing some, but not all, of the
limitations on their ownership of new generating facilities that
qualify as "exempt wholesale generators" and on their ability to
participate in Independent Power Projects. See Item 1(c)(6)(ii) --
Energy Regulation -- the 1992 Energy Act. Many state electric
utility regulators are considering plans to further encourage
investment in wholesale generators and to facilitate utility
decisions to spin off or divest generating capacity from the
transmission or distribution businesses of the utilities. As a
result, Independent Power Projects in the future will face
competition not only from other Independent Power Projects seeking
to sell electricity on a wholesale basis but also from exempt
wholesale generators, electric utilities with excess capacity and
independent generators spun off or otherwise separated from their
parent utilities. Large-scale Projects that can sell large amounts
of electricity or that have excellent reliability records or
favorable locations may have competitive advantages over small-scale
Projects (such as the Trust's), Projects that cannot commit to
deliver power on a firm commitment basis or Projects that are
located in electricity surplus areas with insufficient transmission
capacity.
Wholesale-level Access to Transmission Capacity.
Without access to transmission capacity, an Independent Power
Project or other wholesale generator can only sell to the local
electric utility or to a facility on which it is located (or, in
some states, which adjoins its location). The most important
changes occurring in the electric power industry are the efforts of
FERC to compel utilities and power pools to provide nationwide
access to transmission facilities to all wholesale power generators.
When combined with the increased competition in the generating
area, this is likely to create an electricity supply market that may
profoundly change the operations of electric utilities, consumers
and Independent Power Projects.
The 1992 Energy Act empowered FERC to require electric
utilities and power pools to transmit electric power generated by
other wholesale generators to wholesale customers. This process is
referred to as "wheeling" the electric power. Essentially, the
generator contributes power to a utility or power pool and is
credited with that contribution, and the utility or power pool
serving the wholesale customer makes available that amount of
electric power to the customer and debits the generator. Wheeling
is effected between power pools on a similar basis.
FERC initially dealt with wheeling requests on a case-by-case
basis as constrained by provisions of the 1992 Energy Act that
require all costs of the transmitting utility to be recovered in the
transmission charge and that prohibit wholesale competitors from
wheeling power to customers of an electric utility under generating
contracts or tariffs. On April 24, 1996 the Federal Energy
Regulatory Commission adopted Order 888, which requires electric
utilities and power pools to provide wholesale transmission
facilities and information to all power producers on the same terms,
and endorses the recovery by utilities of uneconomic capital costs
from wholesale customers who change suppliers. The utilities would
also be required to furnish ancillary services, such as scheduling,
load dispatch, and system protection, as needed. These rights,
however, would apply only to sales of new electric power over and
above existing utility supply arrangements. Initial trade estimates
are that up to 6% of the entire U.S. market for wholesale power
would be available to Independent Power Projects and other wholesale
generators under the proposal.
Numerous regulatory issues must be addressed under this
proposal of which one of the most contentious is the treatment of
utility so-called "stranded costs." Utilities that own generating
plants with relatively high costs of production would be under
severe competitive and regulatory pressure to purchase cheaper
wholesale electricity, but in that event the utilities would not
receive sufficient revenue to meet debt service requirements or
other capital costs (the stranded costs) relating to the high-cost
plants. This might significantly impair utility cash flows and some
utilities might be at risk of insolvency in that event. The FERC
order would require some mitigation efforts on the utility's part,
but primarily would require wholesale customers who acquire
electricity from a new supplier to compensate their former utility
supplier for revenue lost. This might require a customer who changes
suppliers to pay a substantial additional fee to the prior utility
supplier, thus inhibiting changes of supplier.
The order takes no action to modify existing power purchase
contracts. The order intends to create a competitive national
market in electricity generation and thus may create additional
pressure on electric utilities to seek changes to long-term power
purchase contracts, as described further below. The Trust has
developed its business plan in anticipation of the order and will
pursue its investment program to take advantage of opportunities as
they arise in the changing industry. The Trust is unable to predict
the consequences of the order on its eventual operations or on the
independent power industry.
State public utility regulatory agencies must also review and
approve certain aspects of wholesale power deregulation, and those
agencies are currently holding proceedings and making
determinations.
In addition to the FERC order or other Congressional or
regulatory actions that may result in freer access to transmission
capacity, agreements with Canada, and to a lesser extent with
Mexico, are leading toward access for those countries' generators to
U.S. markets. In particular, certain Canadian suppliers, such as
HydroQuebec (the Quebec provincial utility) are already offering
substantial amounts of electricity in the U.S., and more may be
offered if sufficient transmission capacity can be approved and
built. These agreements may also afford access to those countries'
markets in the future for Independent Power Projects. As a result,
there is the possibility that a North American wholesale market will
develop for electricity, with additional competitive pressures on
U.S. generators.
Conservation Initiatives.
In recent years many state regulators, at the urging of
citizen's groups and as contemplated by the 1992 Energy Act, have
required electric utilities to engage in least cost utility
planning, demand side management and other conservation programs.
These programs have the common effect of encouraging utilities to
look to conservation of electricity and the more efficient use of
existing capacity as means of meeting new demand, as well as to
purchases from Independent Power Projects or wholesale generators
and to building more generation capacity. There are also reports
that utilities are reducing their reserve capacity levels to
minimums and are more aggressively controlling dispatch of power as
a means of minimizing new power purchases.
Proposals to Modify PURPA and Existing Power Contracts.
The independent power industry remains a creature of PURPA in
most respects. The prospects of increased competition to supply
electricity, availability of wheeling of wholesale power, supply
alternatives through the conservation initiative described above and
reduced rates of increase in electricity demand have caused many
electric utilities to advocate repeal or modification of PURPA and
changes to existing long-term Power Contracts with Independent Power
Projects. These utilities have alleged that PURPA requires them to
purchase electricity at higher prices than they could acquire new
capacity themselves and that existing Power Contracts, signed when
utilities anticipated much higher fuel and capital costs and higher
demand, provide for prices substantially above current wholesale
prices. The independent power industry has pointed out that PURPA
does not require utilities to purchase new supplies from Independent
Power Projects at rates above alternative sources' prices (although
a few state regulators have imposed such requirements from time to
time) and that existing long-term Power Contracts were generally
entered into on the basis of good faith estimates by the utilities
of future conditions with the expectation that sponsors would rely
upon them. As mentioned above, Niagara Mohawk Power Company, the
utility to which the Stillwater Project sells its output, has
attempted unsuccessfully to do so. In March 1997, as discussed
above, Niagara Mohawk proposed a $4 billion buyout of many of its
long-term Power Contracts rather than continue to try to invalidate
them.
To date, FERC has rejected proposals to modify existing Power
Contracts (except for contracts entered into under state regulations
mandating payment of prices greater than utility avoided costs at
the time the contracts were executed), and FERC's rulemaking
proposals are expressly based on the principle that existing Power
Contracts that comply with current law should not be modified by
FERC. Although proposals have been introduced in Congress to amend
or repeal PURPA, no such proposal has yet been reported to the
floor. However, there can be no assurance that FERC or the Congress
will not take action to reduce or eliminate the benefits or PURPA
for Independent Power Projects or that they would not take action
purporting to change or cancel existing Power Contracts or that they
would not take action making compliance with those contracts
economically or practically infeasible. If any such action were to
be taken, the value of existing Independent Power Projects might be
significantly impaired or even eliminated. If such action were to
be proposed with any significant prospect of adoption, the
consequent uncertainty might have similar effects.
In a related phenomenon, some electric utilities that are
parties to long-term Power Contracts with rates substantially above
current replacement costs have entered into buy-out arrangements
with the owners of those Independent Power Projects. Under these
agreements, the Power Contracts are terminated in exchange for a
payment by the utility to the Project. Typically, these
arrangements have been limited to Independent Power Projects with
high costs of production or other factors that have impaired their
profitability, even with a firm Power Contract. The settlement with
VEPCO for the South Boston Project was accepted to end a
debilitating litigation. The Trust does not anticipate that it will
solicit or receive a buy-out arrangement for its remaining two
Projects, but it will consider potential arrangements if conditions
warrant.
Retail-level Competition
An even more radical prospect for the electric power industry
is retail-level competition, in which generators would be allowed to
sell directly to customers by using (and paying a fee for) the local
utility's distribution facilities. Retail-level competition
presupposes the ability to wheel power in the appropriate amounts at
economic costs from the generating Project to the electric
utility whose wires link to the retail customer (typically a large
industrial, commercial or governmental unit) and the ability to use
the local utility's facilities to deliver the electricity to the
customer. In addition to the business and regulatory issues arising
from wholesale wheeling, retail-level competition raises fundamental
concerns as to the ability of utilities to recover stranded costs at
the generating and distribution levels, the possibility that smaller
customers will have less ability to demand pricing concessions,
incentives for governmental agencies to act as intermediaries for
consumers and the functions of state-level regulatory agencies in a
price-competitive environment which may be inconsistent with their
traditional price-setting and service-prescribing roles.
Many states are experimenting with retail wheeling, and many
larger states, including New York, among others, are implementing
large scale movements toward various forms of retail deregulation.
It appears that most states will do so by the year 2000. These
proposals are currently the subject of intensive debate and
restructuring, and any such proposal is likely to undergo judicial
review. Regulators and industry participants currently have extreme
uncertainty as to whether and how far retail-level competition will
be authorized, the treatment of stranded costs, the extent to which
FERC's actions in the wholesale market will practically compel
retail-level competition and the effects of any change. As of the
date of this Annual Report, however, no state authority has proposed
or implemented any plan that would abrogate or impair existing long-
term Power Contracts with Independent Power Projects. Instead, to
the extent that long-term Power Contracts have rates above current
avoided costs, the excess is being treated by most states as a form
of stranded cost. Many states are providing that all or most of the
stranded costs will be borne by ratepayers rather than Independent
Power Projects or utilities. Typically, the state will require
customers who change electricity suppliers to make payments to a
fund used to reimburse utilities in part for the burden of stranded
costs. Although this may lessen pressures on utilities to contest
long-term Power Contracts, it may deter retail customers from
switching to independent power suppliers.
Initial Effects of Trends
Although, as mentioned above, it is impractical to predict all
the consequences of the rapidly evolving trends in the electric
power industry, certain patterns are beginning to emerge. First, as
noted before, investment in new Independent Power Projects and in
new utility generating capacity in the United States has
substantially decelerated since 1993, as the larger participants in
the development process (including developers, utilities, lenders
and equipment suppliers) reassess their positions. Indeed, many of
the largest participants have announced their intentions to
concentrate their resources in developing countries in Europe and
Asia. Similarly, lenders are more reluctant currently to extend
large amounts of non-recourse financing for development of Projects
and are insisting on larger equity investments by owners of
Projects.
In response to the current perceived slowing of electricity
demand growth, the prospect of wholesale competition and the
relatively higher prices currently payable under some long-term
Power Contracts, many electric utilities have refrained from
entering into new, long-term Power Contracts with Independent Power
Projects and have instead proposed to purchase electricity from
Qualifying Facilities or other generators under short-term
contracts. Competitive bidding by utilities, governmental units and
in states where permitted, large industrial and commercial users for
electricity supplies is becoming common. In 1995 and 1996, these
competitive solicitations typically attracted large numbers of bids
at prices substantially below prior utility prices. Although these
solicitations cover a minuscule part of the wholesale market, they
indicate that there is currently intense competition to sell new
capacity from Independent Power Projects. Certain state regulators,
in response to these conditions, have proposed or approved auctions
to generating businesses of the rights to supply utilities. The
Trust is currently relying on its existing long-term Power Contracts
so as to minimize exposure to volatile short-term markets. There is
no assurance that it will be able to extend those Power Contracts or
acquire other customers on favorable terms.
As a consequence of these trends and industry participants'
reactions to them, many observers, including utilities, believe that
there are temporary, regional surpluses of electric generating
capacity. For example, in the spring of 1995, the California public
utilities commission projected that the state's three largest
utilities would not need additional generating capacity until 2004,
and that there was a current small surplus of capacity. It should
be noted, however, that the projections also foresaw a rapid
increase of demand for capacity in the ten years following 2004.
Similarly, on a nationwide level a 1997 estimate forecasted that
71,000 Megawatts of capacity is currently provided by fossil-fuel
power plants that are over 30 years old and are approaching the ends
of their expected useful lives, that most nuclear power plants are
facing relicensing proceedings that normally require extensive
reconstruction, and that up to 10% of all U.S. generating capacity
may be up for replacement in the next 15 years. Accordingly, one of
the most important and difficult questions for determination is
whether the current reluctance to finance and build additional
generating capacity will lead to capacity shortages on a regional or
national basis in the next ten years. Further, as the supply market
becomes more fragmented and short-term, regulators and customers are
beginning to raise concerns as to the dependability of supply.
Another consequence of the current industry reluctance to
commit to long-term increases in capacity and the perceived
existence of regional surplus capacity is a short-term orientation
on the part of many industry participants. Recently, many
companies, including affiliates of fuel suppliers and utilities,
have applied to FERC to act as electric power marketers, because
they anticipate that if wholesale wheeling becomes significant there
will be strong demand for brokers or market makers in electric
power. It is uncertain whether power marketers will become
significant factors in the electric power market. A related
development is the creation of derivative contracts for hedging of
and speculation in electricity supplies. A few developers and
utilities are also considering the construction of "merchant power
plants," which would be built without firm Power Contracts in hopes
of marketing their output on the anticipated short-term, competitive
wholesale or retail markets.
With these conditions in mind, many observers see two primary
strategies for Independent Power Projects to succeed in the United
States: first, Projects that have existing, firm, long-term Power
Contracts may do well so long as regulatory or legislative actions
do not abrogate the contracts. Second, Projects that are low-cost
producers of electricity, either from efficiencies or good
management or as the result of successful cogeneration technologies,
will have advantages in the competitive market. The Trust intends
to focus on both possibilities and to maintain a focus on medium-to-
long-term results.
Finally, there have been industry-wide moves toward
consolidation of participants and divestiture of Projects. A number
of utilities and equipment suppliers have proposed or entered into
joint ventures to reduce risks and mobilize additional capital for
the more competitive environment, while many electric utilities are
in the process of combining, either as a means of reducing costs and
capturing efficiencies, or as a means of increasing size as an
organizational survival tactic. A number of large natural gas
utilities have also acquired or are considering acquiring electric
utilities. Industry observers have attributed this to the more
entrepreneurial character of the gas industry, which has already
been deregulated, and to the fact that natural gas is currently a
preferred fuel for generating plants, which may encourage the
combination of the fuel suppliers with fuel users to assure supply
and reduce uncertainties. These consolidations and acquisitions
tend to create additional competitive pressures in the electric
power industry; however, this trend is also encouraging the
divestiture of smaller Projects or Projects that are deemed less
central to the operations of large, consolidated businesses.
(5) Competition
There are a large number of participants in the independent
power industry. Several large corporations specialize in
developing, building and operating Independent Power Projects.
Equipment manufacturers, including many of the largest corporations
in the world, provide equipment and planning services and provide
capital through finance affiliates. Many regulated utilities are
preparing for a competitive market, and in a significant number of
them already have organized subsidiaries or affiliates to
participate in unregulated activities such as planning, development,
construction and operating services or in owning exempt wholesale
generators or up to 50% of Independent Power Projects. In addition,
there are many smaller firms whose businesses are conducted
primarily
on a regional or local basis. Many of these companies focus on
limited segments of the cogeneration and independent power industry
and do not provide a wide range of products and services. There is
significant competition among non-utility producers, subsidiaries of
utilities and utilities themselves in developing and operating
energy-producing projects and in marketing the power produced by
such
projects.
The Trust is unable to accurately estimate the number of
competitors but believes that there are many competitors at all
levels
and in all sectors of the industry. Many of those competitors,
especially affiliates of utilities and equipment manufacturers, may
be
far better capitalized than the Trust.
Competition in the energy market is generally not a factor in
the
current operations of the Trust since the Projects which it is
currently operating have entered into long-term agreements to sell
their output at specified prices. However, a particular Project
could
be subject to future competition to market its electricity output if
its Power Contract expires or is terminated because of a default or
failure to pay by the purchasing utility or other purchaser due to
bankruptcy or insolvency of the purchaser or because of the failure
of
a Project to comply with the terms of the Power Contract; regulatory
changes, or other reasons. It is impossible at this time to
estimate
the level of marketing competition that the Trust would face in any
such event.
6. Regulatory Matters.
Projects are subject to energy and environmental laws and
regulations at the federal, state and local levels in connection
with
development, ownership, operation, geographical location, zoning and
land use of a Project and emissions and other substances produced by
a
Project. These energy and environmental laws and regulations
generally require that a wide variety of permits and other approvals
be obtained before the commencement of construction or operation of
an
energy-producing facility and that the facility then operate in
compliance with such permits and approvals. Since the Trust
operates
as a "business development company" under the 1940 Act, it is also
subject to provisions of that act pertaining to such companies.
(i) Energy Regulation.
(A) PURPA. The enactment in 1978 of PURPA and the adoption of
regulations thereunder by FERC provided incentives for the
development
of cogeneration facilities and small power production facilities
meeting certain criteria. Qualifying Facilities under PURPA are
generally exempt from the provisions of the Public Utility Holding
Company Act of 1935, as amended (the "Holding Company Act"), the
Federal Power Act, as amended (the "FPA"), and, except under certain
limited circumstances, state laws regarding rate or financial
regulation. In order to be a Qualifying Facility, a cogeneration
facility must (a) produce not only electricity but also a certain
quantity of heat energy (such as steam) which is used for a purpose
other than power generation, (b) meet certain energy efficiency
standards when natural gas or oil is used as a fuel source and (c)
not
be controlled or more than 50% owned by an electric utility or
electric utility holding company. Other types of Independent Power
Projects, known as "small power production facilities," can be
Qualifying Facilities if they meet regulations respecting maximum
size
(in certain cases), primary energy source and utility ownership.
Recent federal legislation has eliminated the maximum size
requirement
for solar, wind, waste and geothermal small power production
facilities (but not for hydroelectric or biomass) for a fixed period
of time.
In addition, PURPA requires electric utilities to purchase
electricity generated by Qualifying Facilities at a price equal to
the
purchasing utility's full "avoided cost" and to sell back-up power
to
Qualifying Facilities on a non-discriminatory basis. Avoided costs
are defined by PURPA as the "incremental costs to the electric
utility
of electric energy or capacity or both which, but for the purchase
from the Qualifying Facility or Qualifying Facilities, such utility
would generate itself or purchase from another source." While
public
utilities are not required by PURPA to enter into long-term Power
Contracts to meet their obligations to purchase from Qualifying
Facilities, PURPA helped to create a regulatory environment in which
it was more common for such contracts to be negotiated until recent
years.
The exemptions from extensive federal and state regulation
afforded by PURPA to Qualifying Facilities are important to the
Trust
and its competitors. The Trust believes that each of its Projects
is
a Qualifying Facility. If a Project loses its Qualifying Facility
status, the utility can reclaim payments it made for the Project's
non-qualifying output to the extent those payments are in excess of
current avoided costs (which are generally substantially below the
Power Contract rates) or the Project's Power Contract can be
terminated by the electric utility.
(B) The 1992 Energy Act. The Comprehensive Energy Policy Act
of
1992 (the "1992 Energy Act") empowered FERC to require electric
utilities to make available their transmission facilities to and
wheel
power for Independent Power Projects under certain conditions and
created an
exemption for electric utilities, electric utility holding companies
and other independent power producers from certain restrictions
imposed by the Holding Company Act. Although the Trust believes
that
the exemptive provisions of the 1992 Energy Act will not materially
and adversely affect its business plan, the act may result in
increased competition in the sale of electricity by Independent
Power
Projects.
The 1992 Energy Act created the "exempt wholesale generator"
category for entities certified by FERC as being exclusively engaged
in owning and operating electric generation facilities producing
electricity for resale. Exempt wholesale generators remain subject
to FERC regulation in all areas, including rates, as well as state
utility regulation, but electric utilities that otherwise would be
precluded by the Holding Company Act from owning interests in exempt
wholesale generators may do so. Exempt wholesale generators,
however, may not sell electricity to affiliated electric utilities
without express state approval that addresses issues of fairness to
consumers and utilities and of reliability.
(C) The Federal Power Act. The FPA grants FERC exclusive
rate-making jurisdiction over wholesale sales of electricity in
interstate commerce. The FPA provides FERC with ongoing as well as
initial jurisdiction, enabling FERC to revoke or modify previously
approved rates. Such rates may be based on a cost-of-service
approach
or determined through competitive bidding or negotiation. While
Qualifying Facilities under PURPA, such as the Trust's Projects, are
exempt from the rate-making and certain other provisions of the FPA,
non-Qualifying Facilities are subject to the FPA and to FERC
rate-making jurisdiction.
Companies whose facilities are subject to regulation by FERC
under the FPA because they do not meet the requirements of PURPA may
be limited in negotiations with power purchasers. However, since
such
projects would not be bound by PURPA's heat energy use requirement
for
cogeneration facilities, they may have greater latitude in site
selection and facility size. If any Projects in which the Trust
participates became non-Qualifying Facilities, they would have to
comply with the FPA.
(D) State Regulation. State public utility regulatory
commissions have broad jurisdiction over Independent Power Projects
which are not Qualifying Facilities under PURPA, and which are
considered public utilities in many states. In states where the
wholesale or retail electricity market remains regulated, Projects
that are not Qualifying Facilities may be subject to state
requirements to obtain certificates of public convenience and
necessity to construct a facility and organizational, accounting,
financial and other corporate matters could be regulated on an
ongoing
basis. Although FERC generally has exclusive jurisdiction over the
rates charged by a non-Qualifying Facility to its wholesale
customers,
state public utility regulatory commissions have the practical
ability
to influence the establishment of such rates by asserting
jurisdiction
over the purchasing utility's ability to pass through the resulting
cost of purchased power to its retail customers. In addition,
states
may assert jurisdiction over the siting and construction of
non-Qualifying Facilities and, among other things, issuance of
securities, related party transactions and sale and transfer of
assets. The actual scope of jurisdiction over non-Qualifying
Facilities by state public utility regulatory commissions varies
from
state to state. States also have authority to regulate certain
environmental, health and siting aspects of Qualifying Facilities.
State regulation of rates, classes of service and entry into the
industry is likely to end as deregulation is implemented.
(ii) Environmental Regulation.
The construction and operation of Independent Power Projects
and
the exploitation of natural resource properties are subject to
extensive federal, state and local laws and regulations adopted for
the protection of human health and the environment and to regulate
land use. The laws and regulations applicable to the Trust and
Projects in which it invests primarily involve the discharge of
emissions into the water and air and the disposal of waste, but can
also include wetlands preservation and noise regulation. These laws
and regulations in many cases require a lengthy and complex process
of
renewing or obtaining licenses, permits and approvals from federal,
state and local agencies. Obtaining necessary approvals regarding
the
discharge of emissions into the air is critical to a Project and can
be time-consuming and difficult. Each Project requires technology
and
facilities which comply with federal, state and local requirements,
which sometimes result in extensive negotiations with regulatory
agencies. Meeting the requirements of each jurisdiction with
authority over a Project may require extensive modifications to
existing Projects.
The Clean Air Act Amendments of 1990 contain provisions which
regulate the amount of sulfur dioxide and oxides of nitrogen which
may
be emitted by a Project. These emissions may be a cause of "acid
rain." Qualifying Facilities are currently exempt from the acid
rain
control program of the Clean Air Act Amendments. However, non-
Qualifying Facility Projects will require "allowances" to emit
sulfur
dioxide after the year 2000. Under the Amendments, these allowances
may be purchased from utility companies then entitled to emit sulfur
dioxide or from the Environmental Protection Agency ("EPA").
Further,
an Independent Power Project subject to the requirements has a
priority over utilities in obtaining allowances directly from the
EPA
if (a) it is a new facility or unit used to generate electricity;
(b)
80% or more of its output is sold at wholesale; (c) it does not
generate electricity sold to affiliates (as determined under the
Holding Company Act) of the owner or operator (unless the affiliate
cannot provide allowances in certain cases) and (d) it is non-
recourse
project-financed.
The market price of an allowance cannot be predicted with
certainty at this time and there is no assurance that a broad market
for those allowances will develop or continue, although efforts have
been made by certain commodities exchanges to create a market.
Projects fueled by natural gas are not expected to be materially
burdened by the acid rain provisions of the Clean Air Act
Amendments.
The Clean Air Act Amendments empower states to impose annual
operating permit fees of at least $25 per ton of regulated
pollutants emitted up to $100,000 per pollutant. To date, no state
in which the Trust operates has done so. If a state were to do so,
such fees might have a material effect on the Trust's costs of
generation, in light of the relatively small size of the Trust's
facilities as opposed to large utility generation plants that might
benefit from the cap on fees.
Based on current trends, the Managing Shareholder expects that
environmental and land use regulation will become more stringent.
The
Trust and the Managing Shareholder have not developed expertise and
experience in obtaining necessary licenses, permits and approvals,
which will be the responsibility of each Project's managers and
Project Sponsors. The Trust will rely upon qualified environmental
consultants and environmental counsel retained by it or by Project
Sponsors to assist in evaluating the status of Projects regarding
such
matters.
(iii) The 1940 Act.
Since its Shares are registered under the 1934 Act, the Trust
is
required to file with the Commission certain periodic reports (such
as
Forms 10-K (annual report), 10-Q (quarterly report) and 8-K (current
reports of significant events) and to be subject to the proxy rules
and other regulatory requirements of that act that are applicable to
the Trust. The Trust has no intention to and will not permit the
creation of any form of a trading market in the Shares in connection
with this registration.
On May 26, 1994, the Trust notified the Securities and Exchange
Commission (the "Commission") of its election to be a "business
development company" and registered its Shares under the 1934 Act.
On
June 25, 1994, the election and registration became effective. As a
"business development company," the Trust is a closed-end
company (defined by the 1940 Act as a company that does not offer
for
sale or have outstanding any redeemable security) that is regulated
under the 1940 Act only as a business development company. The act
contains prohibitions and restrictions on transactions between
business development companies and their affiliates as defined in
that
act, and requires that a majority of the board of the company be
persons other than "interested persons" as defined in the act. The
board of the Trust is comprised of Ridgewood Power and two
individuals, John C. Belknap and Dr. Richard D. Propper, who also
serve as independent trustees of Ridgewood Electric Power Trust IV,
a
business development company sponsored by the Managing Shareholder,
but who are not otherwise affiliated with the Trust, Ridgewood Power
or any of their affiliates. See Item 10 -- Directors and Executive
Officers below.
Under the 1940 Act, Commission approval is required for certain
transactions involving certain closely affiliated persons of
business
development companies, including many transactions with the Managing
Shareholder and the other investment programs sponsored by the
Managing Shareholder. There can be no assurance that such approval,
if required, would be obtained. In addition, a business development
company may not change the nature of its business so as to cease to
be, or to withdraw its election as, a business development company
unless authorized to do so by at least a majority vote of its
outstanding voting securities.
The 1940 Act restricts the kind of investments a business
development company may make. A business development company may
not
acquire any asset other than a "Qualifying Asset" unless, at the
time
the acquisition is made, Qualifying Assets comprise at least 70% of
the company's total assets by value. The principal categories of
Qualifying Assets that are relevant to the Trust's activities are:
(A) Securities issued by "eligible portfolio companies" that
are
purchased by the Trust from the issuer in a transaction not
involving
any public offering (i.e., private placements of securities). An
"eligible portfolio company" (1) must be organized under the laws of
the United States or a state and have its principal place of
business
in the United States; (2) may not be an investment company other
than
a small business investment company licensed by the Small Business
Administration and wholly-owned by the Trust and (3) may not have
issued any class of securities that may be used to obtain margin
credit from a broker or dealer in securities. The last requirement
essentially excludes all issuers that have securities listed on an
exchange or quoted on the National Association of Securities
Dealers,
Inc.'s national market system, along with other companies designated
by the Federal Reserve Board. Except for temporary investments of
the
Trust's available funds, substantially all of the Trust's
investments
are expected to be Qualifying Assets under this provision. See Item
1(b) -- Business -- The Trust's Investments.
(B) Securities received in exchange for or distributed on or
with respect to securities described in paragraph (A) above, or on
the
exercise of options, warrants or rights relating to those
securities.
(C) Cash, cash items, U.S. Government securities or high
quality
debt securities maturing not more than one year after the date of
investment.
A business development company must make available "significant
managerial assistance" to the issuers of Qualifying Assets described
in paragraphs (A) and (B) above, which may include without
limitation
arrangements by which the business development company (through its
directors, officers or employees) offers to provide (and, if
accepted,
provides) significant guidance and counsel concerning the issuer's
management, operation or business objectives and policies.
A business development company also must be organized under the
laws of the United States or a state, have its principal place of
business in the United States and have as its purpose the making of
investments in Qualifying Assets described in paragraph (A) above.
The Managing Shareholder believes that it may no longer be
necessary for the Trust to continue its status as a business
development company, because of the Managing Shareholder's active
involvement in operating Projects through the Trust and other
investment programs. Although the Managing Shareholder believes it
would be beneficial to the Trust to end the election and reduce
costs of legal compliance that do not contribute to income, the
process of withdrawing the business development company election
requires a proxy solicitation and a special vote of investors, which
is also costly. Accordingly, the Managing Shareholder does not
intend at this time to request the Investors' consent to withdrawing
the business development company election. Any change in the
Trust's status will be effected only with the Investors' consent.
As required by the business development company election, the
Trust`s Shares are currently registered under the 1934 Act, which
requires the Trust to make periodic reports to the Securities and
Exchange Commission, to comply with proxy solicitation and insider
trading restrictions and to take other actions required of most
publicly traded companies. The Trust currently has 218 Investors of
record, which is less than the minimum number (300) that would
require the Trust to maintain registration. The Trust has taken no
action as of the date of this Annual Report to consider whether
deregistration would be appropriate.
(iv) Potential Legislation and Regulation.
All federal, state and local laws and regulations, including
but
not limited to PURPA, the Holding Company Act, the 1992 Energy Act
and
the FPA, are subject to amendment or repeal. Future legislation and
regulation is uncertain, and could have material effects on the
Trust.
(d) Financial Information about Foreign and Domestic Operations
and Export Sales.
The Trust has invested in Projects located in California and
Virginia and has no foreign operations.
(e) Employees.
The employees of the South Boston Project have been transferred
to RPMC and accordingly the Trust has no employees. The persons
described below at Item 10 -- Directors and Executive Officers of
the
Registrant serve as executive officers of the Trust and have the
duties and powers usually applicable to similar officers of a
Delaware
corporation in carrying out the Trust business.
Item 2. Properties.
Pursuant to the Management Agreement between the Trust and the
Managing Shareholder (described at Item 10(c) -- Directors and
Executive Officers -- Management Agreement), the Managing
Shareholder
provides the Trust with office space at the Managing Shareholder's
principal office at The Ridgewood Commons, 947 Linwood Avenue,
Ridgewood, New Jersey 07450.
The following table shows the material properties (relating to
Projects) owned or leased by the Trust's subsidiaries or
partnerships
in which the Trust has an interest. All of the Projects are
described
in further detail at Item 1(c)(2).
Approximate
Square
Ownership Ground Approximate Footage of Description
Interests Lease Acreage Project (Actual of
Project Location in Land Expiration of Land or Projected) Project
South South Owned -- 3 5,400 Waste oil-
Boston Boston, to
Virginia electricity
Olinda Olinda, Leased 2004 2 6,000 Landfill
California gas-fired
power
facility
Still- Stillwater, Leased 2029 .75 N/A Hydro-
water New York and electric
Licensed plant
Item 3. Legal Proceedings.
The litigation between the Trust's subsidiary and VEPCO with
respect to the South Boston Project's long-term Power Contract, and
the January 1997 settlement of that litigation, are described at
Item 1(c)(2)(ii) -Business - The Trust's Investments - South Boston
Project.
In December 1993, a subsidiary of the Trust engaged Blackhawk
Management Group, Incorporated, a North Carolina corporation whose
sole owner and employee was the original developer of the South
Boston Project, to manage that Project under contract. On June 9,
1994, the subsidiary terminated the management contract for material
breach and inequitable conduct by Blackhawk, which then sued in the
Circuit Court of Halifax County, Virginia one year later on June 8,
1995. The action claimed breach of contract by the Trust's
subsidiary and claimed compensatory damages of $3 million and
punitive damages of $1 million. The subsidiary has removed the
action to the United States District Court for the Western District
of Virginia, Danville Division. The Trust believes that the lawsuit
is without merit, that the Trust's subsidiary has meritorious
defenses to all claims, and that the claims for damages were clearly
inflated. The action is in discovery and is pending trial. The
Trust does not anticipate any material recovery by the plaintiff.
From time to time, the Trust and its subsidiaries are engaged
in ordinary legal proceedings incident to the normal course of their
businesses which primarily involve claims for damages, or other
immaterial actions.
Item 4. Submission of Matters to a Vote of Security Holders.
The Trust did not submit any matters to a vote of the Investors
during the fourth quarter of 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder
Matters.
(a) Market Information.
The Trust has 105.5 Investor Shares of beneficial interest in
the
Trust resulting from the merger with the Partnership which was
effective on June 15, 1994. There is currently no established
public
trading market for the Investor Shares and the Trust does not intend
to allow a public trading market to develop. As of the date of this
Form 10-K, all such Investor Shares have been issued and are
outstanding. There are no outstanding options or warrants to
purchase
or securities convertible into Investor Shares and the Trust has no
intention to make any public offering of Investor Shares.
Investor Shares are restricted as to transferability under the
Declaration. In addition, under federal laws regulating securities
the Investor Shares have restrictions on transferability when they
are
held by persons in a control relationship with the Trust. Investors
wishing to transfer Shares should also consider the applicability of
state securities laws. The Investor Shares have not been and are
not
expected to be registered under the Securities Act of 1933, as
amended
(the "1933 Act"), or under any other similar law of any state
(except
for certain registrations that do not permit free resale) in
reliance
upon what the Trust believes to be exemptions from the registration
requirements contained therein. Because the Investor Shares have
not
been registered, they are "restricted securities" as defined in Rule
144 under the 1933 Act.
(b) Holders.
As of the date of this Form 10-K, there are 218 record holders
of
Investor Shares.
(c) Dividends.
The Trust made distributions as follows for the years 1994
through 1996:
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1995 1994
Total distributions
to Investors $800,512 $846,636 $736,289
Distributions per
Investor Share 7,588 8,025 6,979
Total distributions
to Managing Shareholder 8,086 8,151 7,443
While the Trust expects to make monthly distributions, the
Trust's ability to make future distributions to the Investors and
their timing will depend on the net cash flow of the Trust and
retention of reasonable reserves as determined by the Trust to cover
its anticipated expenses.
Subject to the other factors described in this Annual Report on
Form 10-K, the Trust's goal is to provide Investors with annual
distributions of net cash flow, as defined in the Declaration of
Trust, of 15% of their Capital Contributions to the Trust. Because
the Trust's objective is to distribute net cash flow, a substantial
portion of many distributions will include cash flow that represents
depreciation and amortization charges against assets at the Project
level. Nevertheless, because the Projects are not consolidated with
the Trust for accounting purposes, all funds received from Projects
are considered to be revenue to the Trust for accounting purposes.
Distributions may also include cash released from operating or debt
service reserves, Trust-level depreciation or amortization, or in
the case of the Olinda Project, amounts treated as a return of
capital. For purposes of generally accepted accounting principles,
amounts of distributions in excess of accounting income may be
considered to be capital in nature. Investors should be aware that
the Trust is organized to return net cash flow rather than
accounting income to Investors.
Item 6. Selected Financial Data.
The following data is qualified in its entirety by the
financial
statements presented elsewhere in this Annual Report on Form 10-K.
Selected As of and As of and As of and As of and
Financial for the year for the year for the year for the year
Data ended ended ended ended
December 31, December 31, December 31, December 31,
1996 1995 1994 1993
Total Fund
Information:
Net operating
revenues $609,537 $552,769 $1,014,963 $100,227
Net income (loss) 496,802 $ 418,417 ($46,821) ($367,179)
Net assets
(shareholders'
equity) 6,604,641 $6,916,437 $7,352,807 $8,143,360
Investments in
power generation
limited
partnerships
and loan to
project 7,177,875 $7,207,846 $7,159,755 $4,643,752
Total assets $7,505,197 $7,531,306 $7,469,945 $8,184,663
Per Investor Share
Revenues $5,778 $5,240 $9,621 $941
Expenses 1,069 $1,273 $(10,064) $(4,386)
Net income (loss) 4,709 $3,966 $(443) $(3,446)
Net asset value $62,832 $65,559 $69,695 $77,188
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.
The following discussion and analysis should be read in
conjunction with the Trust's financial statements and the notes
thereto presented elsewhere herein. The Trust's financial statements
are prepared under generally accepted accounting principles
applicable to business development companies. Accordingly, Project
revenues and expenses are not consolidated with those of the Trust
and do not appear in the Trust's financial statements. Dollar
amounts in this discussion are generally rounded to the nearest
$1,000.
Income of the Trust from Projects was as follows:
Project 1996 1995 1994
Olinda* 399,000 $419,000 $118,000
South Boston 208,000 163,000 623,000
Stillwater 0 0 127,000
* An additional $398,000 of distributions in 1996 and $441,000 in 1995 from the
Olinda Project were treated for accounting purposes as a return of capital.
Results of Operations
12 months ended December 31, 1996 versus 12 months ended
December
31, 1995.
Net income for calendar 1996 was $497,000, a $79,000 (18.7%)
increase from the 1995 level. The improvement was caused primarily
by
a $45,000 increase in distributions from the South Boston Project
and
the waiver by the Managing Shareholder of a portion of its
management
fees in 1996.
Total revenue for 1996 increased by $57,000 (10.3%), reflecting
increases in distributions from the South Boston Project as demands
on
cash flow for the construction and start-up of the waste oil plant
ended. Revenue from the Olinda Project decreased by $20,000,
reflecting the decline in the investment base used to calculate the
Trust's preferred return from the Olinda Project.
Expenses for 1996 were $21,000 (16.1%) less than in 1995
($113,000 vs. $134,000), primarily as the result of a decision by
the
Managing Shareholder in April 1996 to waive a portion of its annual
management fee of 1% of net assets, which reduced that fee by
$37,000
from 1995 to 1996. During 1996 the Managing Shareholder funded the
legal costs of the VEPCO litigation involving the South Boston
Project, which are not included in the Trust's expenses for 1996.
It is impossible to predict future revenues from the Stillwater
Project; however, it is unlikely that distributions to the Trust
will resume from that Project in 1997.
12 months ended December 31, 1995 versus 12 months ended
December 31, 1994.
Net income for calendar 1995 was $418,000, as compared to a net
loss of $47,000 for 1994. The improvement primarily reflected the
absence in 1995 of the $815,000 of writedowns taken in 1994 on
terminated investments in project development organizations and
lower accounting and legal fees as discussed below.
Total revenue decreased by 45.1% from 1994 to 1995, as the
result of the suspension of payments from the Stillwater Project and
the revenue losses from the outages at the South Boston Project,
both of which are discussed at Item 1(c)(2) - The Trust's
Investments. The loss of $127,000 in distributions from the
Stillwater Project and the decline in South Boston Project
distributions from $623,000 in 1994 to $163,000 in 1995 was
partially offset by receipt of a full year's distributions from the
Olinda Project, ($859,000 in 1995 versus $118,000 for less than
three months of 1994). Because the Trust completed its investment
program in 1994, there was no interest or dividend income in 1995
from funds awaiting investment.
As noted, expenses other than writedowns also decreased by
45.6%, primarily because of a 74.9% decrease in legal and accounting
expenses. The decrease reflects the conclusion of the Trust's
investing activities and lesser legal expenses for securities law
compliance after the conclusion of the conversion of the prior
Partnership to the Trust in 1994.
Additional trends affecting the independent power industry
generally are described at Item 1 - Business.
Liquidity and Capital Resources.
The settlement of the VEPCO litigation affecting the South
Boston Project and return of a deposit resulted in proceeds of
approximately $3,850,000 to the Trust. After repayment of advances
from the Managing Shareholder and payment of other costs,
approximately $2,800,000 of net proceeds are available to the
Trust. As discussed above in connection with the the South Boston
and Olinda Projects, all of this amount has been committed toward
the $3 million purchase price of the remainder of the Olinda
Project. The Trust expects that the balance of the purchase price
and the acquisition-related costs will be funded from a term loan
from a bank, which is being negotiated.
Capital improvements or repairs to the Stillwater Project are
to be funded by its equity partners, excluding the Trust, from
proceeds of insurance or possibly from revenues. The Trust has been
advised by the equity partners that they believe that adequate funds
will be available for the necessary repairs, but the Trust might
consider providing capital funds to the Project if in so doing it
could obtain rights that would give it an acceptable return on its
entire investment. The Trust does not anticipate any material needs
for capital with respect to its limited partnership interest in the
Olinda Project in 1997.
The Trust anticipates that its cash flow during 1997 will be
adequate to fund its obligations. In the event that there is an
unanticipated need for working capital or for repairs or replacement
of equipment, the Managing Shareholder has also obtained a credit
line of $500,000 from a bank, which it intends to make available for
those purposes to the Trust or other programs the Managing
Shareholder is sponsoring. The Managing Shareholder will not impose
charges for use of that line in excess of those charged to it by the
bank.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Report of Independent Accountants F-2
Statement of Operations for the three years ended
December 31, 1996 F-3
Balance Sheet at December 31, 1996 and 1995 F-4
Statement of Changes in Shareholders' Equity
for the three years ended December 31, 1996 F-5
Statement of Cash Flows for the three years
ended December 31, 1996 F-6
Notes to Financial Statements F-7 to F-11
All schedules are omitted because they are not applicable or
the
required information is shown in the financial statements or notes
thereto.
The financial statements are presented in accordance with
generally accepted accounting principles and Securities and Exchange
Commission positions applicable to business investment companies,
which require the Trust's investments in Projects to be presented on
the cash method, rather than on the equity method.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Neither the Trust nor the Managing Shareholder has had an
independent accountant resign or decline to continue providing
services since their respective inceptions and neither has dismissed
an independent accountant during that period. During that period of
time no new independent accountant has been engaged by the Trust or
the Managing Shareholder, and the Managing Shareholder's current
accountants, Price Waterhouse LLP, have been engaged by the Trust.
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) General.
As Managing Shareholder of the Trust, Ridgewood Power
Corporation
has direct and exclusive discretion in management and control of the
affairs of the Trust (subject to the general supervision and review
of
the Independent Trustees and the Managing Shareholder acting
together
as the Board of the Trust). The Managing Shareholder will be
entitled
to resign as Managing Shareholder of the Trust only (i) with cause
(which cause does not include the fact or determination that
continued
service would be unprofitable to the Managing Shareholder) or (ii)
without cause with the consent of a majority in interest of the
Investors. It may be removed from its capacity as Managing
Shareholder as provided in the Declaration.
Ridgewood Energy Holding Corporation ("Ridgewood Holding"), a
Delaware corporation incorporated in April 1992, is the Corporate
Trustee of the Trust.
(b) Managing Shareholder.
The Managing Shareholder was incorporated in February 1991 as a
Delaware corporation for the primary purpose of acting as a managing
shareholder of business trusts and as a managing general partner of
limited partnerships which are organized to participate in the
development, construction and ownership of Independent Power
Projects.
The Managing Shareholder has also organized Ridgewood Electric
Power Trust II ("Ridgewood Power II"), Ridgewood Electric Power
Trust
III ("Ridgewood Power III"), Ridgewood Electric Power Trust IV
("Ridgewood Power IV") and Ridgewood Electric Power Trust V
("Ridgewood Power V") as Delaware business trusts to participate in
the independent power industry, and is in the process of organizing
an
additional similar business trust. The business objectives of the
four other trusts are similar to those of the Trust.
The Managing Shareholder is an affiliate of Ridgewood Energy
Corporation ("Ridgewood Energy") which has organized and operated 46
limited partnership funds and one business trust over the last 13
years (of which 25 have terminated) and which had total capital
contributions in excess of $190 million. The programs operated by
Ridgewood Energy have invested in oil and natural gas drilling and
completion and other related activities.
Robert E. Swanson has been the President, sole director and
sole
stockholder of the Managing Shareholder since its inception in
February 1991. Set forth below is certain information concerning
Mr.
Swanson and the other executive officers of the Managing
Shareholder.
Robert E. Swanson, age 50, has also served as President of the
Trust since its inception in June 1992 and as President of RPMC,
Ridgewood Power II, Ridgewood Power III, Ridgewood Power IV and
Ridgewood Power V since their inceptions. Mr. Swanson has been
President, registered principal, sole director and sole stockholder
of
Ridgewood Securities Corporation, the Placement Agent for the
private
placement offerings of the Trust and the other four trusts, since
its
inception in September 1983. In addition, he has been President,
sole
director and sole stockholder of Ridgewood Energy since its
inception
in October 1982. Prior to forming Ridgewood Energy in 1982, Mr.
Swanson was a tax partner at the former New York and Los Angeles law
firm of Fulop & Hardee and an officer in the Trust and Investment
Division of Morgan Guaranty Trust Company. His specialty is in
personal tax and financial planning, including income, estate and
gift
tax. Mr. Swanson is a member of the New York State and New Jersey
bars, the Association of the Bar of the City of New York and the New
York State Bar Association. He is a graduate of Amherst College and
Fordham University Law School.
Robert L. Gold, age 38, has also served as Executive Vice
President of the Managing Shareholder, the Trust, RPMC, Ridgewood
Power II, Ridgewood Power III, Ridgewood Power IV and Ridgewood
Power
V since their respective inceptions, with primary responsibility for
marketing and acquisitions. He has served as Vice President and
General Counsel of Ridgewood Securities Corporation since he joined
the firm in December 1987. Mr. Gold has also served as Executive
Vice
President of Ridgewood Energy since October 1990. He served as Vice
President of Ridgewood Energy from December 1987 through September
1990. For the two years prior to joining Ridgewood Energy and
Ridgewood Securities Corporation, Mr. Gold was a corporate attorney
in
the law firm of Cleary, Gottlieb, Steen & Hamilton in New York City
where his experience included mortgage finance, mergers and
acquisitions, public offerings, tender offers, and other business
legal matters. Mr. Gold is a member of the New York State bar. He
is
a graduate of Colgate University and New York University School of
Law.
Thomas R. Brown, age 42, joined the Managing Shareholder in
November 1994 as Senior Vice President and holds the same position
with RPMC, the Trust and each of the other trusts sponsored by the
Managing Shareholder. He became Chief Operating Officer of the
Managing Shareholder, RPMC and the five trusts in October 1996. Mr.
Brown has over 19 years' experience in the development and operation
of power and industrial projects. From 1992 until joining Ridgewood
Power he was employed by Tampella Services, Inc., an affiliate of
Tampella, Inc., one of the world's largest manufacturers of boilers
and related equipment for the power industry. Mr. Brown was Project
Manager for Tampella's Piney Creek project, a $100 million
bituminous
waste coal fired circulating fluidized bed power plant. Between
1990
and 1992 Mr. Brown was Deputy Project Manager at Inter-Power of
Pennsylvania, where he successfully developed a 106 megawatt coal
fired facility. Between 1982 and 1990 Mr. Brown was employed by
Pennsylvania Electric Company, an integrated utility, as a Senior
Thermal Performance Engineer. Prior to that, Mr. Brown was an
Engineer with Bethlehem Steel Corporation. He has an Bachelor of
Science degree in Mechanical Engineering from Pennsylvania State
University and an MBA in Finance from the University of
Pennsylvania.
Mr. Brown satisfied all requirements to earn the Professional
Engineer designation in 1985.
Martin V. Quinn, age 48, assumed the duties of Chief Financial
Officer of the Managing Shareholder, the Trust, the other four
trusts organized by the Managing Shareholder and RPMC in November
1996. Under a consulting arrangement which concluded on March 31,
1997, Mr. Quinn devoted a
majority of his time to the business of the Managing Shareholder and
RPMC while continuing his other activities. On April 1, 1997 he
became a full-time officer of the Managing Shareholder and RPMC.
Mr. Quinn has 27 years of experience in financial management
and corporate mergers and acquisitions, gained with major, publicly-
traded companies and an international accounting firm. He formerly
served as Vice President of Finance and Chief Financial Officer of
NORSTAR Energy, an energy services company, from February 1994 until
June 1996. From 1991 to March 1993, Mr. Quinn was employed by
Brown-Forman Corporation, a diversified consumer products company
and distiller, where he was Vice President-Corporate Development.
From 1981 to 1991, Mr. Quinn held various officer-level positions
with NERCO, Inc., a mining and natural resource company, including
Vice President- Controller and Chief Accounting Officer for his last
six years and Vice President-Corporate Development. Mr. Quinn's
professional qualifications include his certified public accountant
qualification in New York State, membership in the American
Institute of Certified Public Accountants, six years of experience
with the international accounting firm of Price Waterhouse, and a
Bachelor of Science degree in Accounting and Finance from the
University of Scranton (1969).
Mary Lou Olin, age 44, has also served as Vice President of the
Managing Shareholder, RPMC, the Trust, Ridgewood Power II, Ridgewood
Power III and Ridgewood Power IV since their respective inceptions.
She has also served as Vice President of Ridgewood Energy since
October 1984, when she joined the firm. Her primary areas of
responsibility are investor relations, communications and
administration. Prior to her employment at Ridgewood Energy, Ms.
Olin
was a Regional Administrator at McGraw-Hill Training Systems where
she
was employed for two years. Prior to that, she was employed by RCA
Corporation. Ms. Olin has a Bachelor of Arts degree from Queens
College.
Donald C. Stewart, age 52, serves as an advisor and consultant
to
the Trust and is expected to be actively involved in reviewing the
Trust's acquisitions, as well as providing certain advice on
operations. Mr. Stewart has 25 years of expertise in the field of
independent power generation, fuel procurement, engineering and
finance. Mr. Stewart spent the first ten years of his business
career
as a certified public accountant with a major international firm.
He
has been the Chairman of Vermont Gas Systems, a regulated public
utility, President of Consolidated Power Company, a developer of
large
scale cogeneration projects and President of Hercules Engines, Inc.,
a
manufacturer of industrial engines and electrical generation
equipment. Mr. Stewart has a Bachelor of Science degree from Lehigh
University.
Douglas R. Wilson, age 36, joined Mr. Stewart in October 1996
to provide financial advisory services for evaluating, structuring
and overseeing the Trust's investments. He has over 13 years of
capital markets experience, including specialization in complex
lease and project financings and in energy-related businesses. From
January 1993 until October 1996, he was associated with BTM Capital
Corporation, the structured finance unit of the Bank of Tokyo-
Mitsubishi. Before that he earned a Master's degree in Business
Administration from the Wharton School of the University of
Pennsylvania from September 1990 through May 1992. He has a
Bachelor of Business Administration degree from the University of
Texas.
(c) Management Agreement.
The Trust has entered into a Management Agreement with the
Managing Shareholder, its Managing Shareholder, detailing how the
Managing Shareholder will render management, administrative and
investment advisory services to the Trust. Specifically, the
Managing
Shareholder will perform (or arrange for the performance of) the
management and administrative services required for the operation of
the Trust. Among other services, it will administer the accounts
and
handle relations with the Investors, provide the Trust with office
space, equipment and facilities and other services necessary for its
operation and conduct the Trust's relations with custodians,
depositories, accountants, attorneys, brokers and dealers, corporate
fiduciaries, insurers, banks and others, as required. The Managing
Shareholder will also be responsible for making investment and
divestment decisions, subject to the provisions of the Declaration.
The Managing Shareholder will be obligated to pay the compensation
of
the personnel and all administrative and service expenses necessary
to
perform the foregoing obligations. The Trust will pay all other
expenses of the Trust, including transaction expenses, valuation
costs, expenses of preparing and printing periodic reports for
Investors and the Commission, postage for Trust mailings, Commission
fees, interest, taxes, legal, accounting and consulting fees,
litigation expenses and other expenses properly payable by the
Trust.
The Trust will reimburse the Managing Shareholder for all such Trust
expenses paid by it.
As compensation for the Managing Shareholder's performance
under
the Management Agreement, the Trust is obligated to pay the Managing
Shareholder an annual management fee described below at Item 13 --
Certain Relationships and Related Transactions.
The Board of the Trust (including both initial Independent
Trustees) have approved the initial Management Agreement and its
renewals. Each Investor consented to the terms and conditions of
the
initial Management Agreement by subscribing to acquire Investor
Shares
in the Trust. The Management Agreement will remain in effect until
January 4, 1998 and year to year thereafter as long as it is
approved
at least annually by (i) either the Board of the Trust or a majority
in interest of the Investors and (ii) a majority of the Independent
Trustees. The agreement is subject to termination at any time on 60
days' prior notice by the Board, a majority in interest of the
Investors or the Managing Shareholder. The agreement is subject to
amendment by the parties with the approval of (i) either the Board
or
a majority in interest of the Investors and (ii) a majority of the
Independent Trustees.
(d) Executive Officers of the Trust.
Pursuant to the Declaration, the Managing Shareholder has
appointed officers of the Trust to act on behalf of the Trust and
sign
documents on behalf of the Trust as authorized by the Managing
Shareholder. Mr. Swanson has been named the President of the Trust
and the other principal officers of the Trust are identical to those
of the Managing Shareholder. The officers have the duties and
powers
usually applicable to similar officers of a Delaware business
corporation in carrying out Trust business. Officers act under the
supervision and control of the Managing Shareholder, which is
entitled
to remove any officer at any time. Unless otherwise specified by
the
Managing Shareholder, the President of the Trust has full power to
act
on behalf of the Trust. The Managing Shareholder expects that
most
actions taken in the name of the Trust will be taken by Mr. Swanson
and the other principal officers in their capacities as officers of
the Trust under the direction of the Managing Shareholder rather
than
as officers of the Managing Shareholder.
(e) The Trustees.
The 1940 Act requires the Independent Trustees to be
individuals
who are not "interested persons" of the Trust as defined under the
1940 Act (generally, persons who are not affiliated with the Trust
or
with affiliates of the Trust). There must always be at least two
Independent Trustees; a larger number may be specified by the Board
from time to time. Each Independent Trustee has an indefinite term.
Vacancies in the authorized number of Independent Trustees will be
filled by vote of the remaining Board members so long as there is at
least one Independent Trustee; otherwise, the Managing Shareholder
must call a special meeting of Investors to elect Independent
Trustees. Vacancies must be filled within 90 days. An Independent
Trustee may resign effective on the designation of a successor and
may
be removed for cause by at least two-thirds of the remaining Board
members or with or without cause by action of the holders of at
least
two-thirds of Shares held by Investors. Under the Declaration, the
Independent Trustees are authorized to act only where their consent
is
required under the 1940 Act and to exercise a general power to
review
and oversee the Managing Shareholder's other actions. They are
under
a fiduciary duty similar to that of corporation directors to act in
the Trust's best interest and are entitled to compel action by the
Managing Shareholder to carry out that duty, if necessary, but
ordinarily they have no duty to manage or direct the management of
the
Trust outside their enumerated responsibilities.
The Independent Trustees of the Trust are John C. Belknap and
Dr.
Richard D. Propper. Mr. Belknap and Dr. Propper also serve as
independent trustees for Ridgewood Power IV. Set forth below is
certain information concerning these individuals, who are not
otherwise affiliated with the Trust, the Managing Shareholder or
their
directors, officers or agents.
John C. Belknap, age 50, joined OfficeMax Inc. in December 1995
as Executive Vice President and Chief Financial Officer. From
February 1994 to February 1995, Mr. Belknap was Executive Vice
President and Chief Financial Officer of Zale Corporation, a 1,200
store jewelry retain chain. From January 1990 to January 1994 and
from February 1995 to December 1995, Mr. Belknap was an independent
financial consultant. From January 1989 through May 1993 he aso
served as a director of and consultant to Finlay Enterprises, Inc.,
an operatior ofleased fine jewelry departments in major department
stores nationwide. Prior to 1989, Mr. Belknap served as Chief
Financial Officer of Seligman & Latz, Kay Corporation and its
subsidiary, Kay Jewelers, Inc.
From January 1990 until February 1994, Mr. Belknap consulted in
a
variety of strategic corporate transactions, including mergers and
acquisitions, divestitures and refinancing. One such transaction
involved the recapitalization and change of control of Finlay in May
1993. From 1979 to 1985, Mr. Belknap served as Chief Financial
Officer of Kay Corporation ("Kay"), the parent of Kay Jewelers, Inc.
("KJI"), a national chain of jewelry stores and leased jewelry
departments in major department stores. He served as Chief
Financial
Officer of KJI from 1974 to 1979 and as its Assistant Controller
from
1973 to 1974. Between 1970 and 1973, Mr. Belknap was a senior
auditor
at Arthur Young & Company (now Ernst & Young), a national accounting
firm. Mr. Belknap earned BA and MBA degrees from Cornell
University.
Dr. Richard D. Propper, age 48, graduated from McGill
University
in 1969 and received his medical degree from Stanford University in
1972. He completed his internship and residency in Pediatrics in
1974, and then attended Harvard University for post doctoral
training
in hematology/oncology. Upon the completion of such training, he
joined the staff of the Harvard Medical School where he served as an
assistant professor until 1983. In 1983, Dr. Propper left academic
medicine to found Montgomery Medical Ventures, one of the largest
medical technology venture capital firms in the United States. He
served as managing general partner of Montgomery Medical Ventures
until 1993.
Dr. Propper is currently a consultant to a variety of companies
for medical matters, including international opportunities in
medicine. In June 1996 Dr. Propper agreed to an order of the
Commission that required him to make filings under Sections 13(d)
and (g) and 16 of the 1934 Act and that imposed a civil penalty of
$15,000. In entering into that agreement, Dr. Propper did not admit
or deny any of the alleged failures to file recited in that order.
The Corporate Trustee of the Trust is Ridgewood Holding. Legal
title to Trust Property will be in the name of the Trust if possible
or Ridgewood Holding as trustee. Ridgewood Holding is also a
trustee
of Ridgewood Power II, Ridgewood Power III and Ridgewood Power IV
and
of an oil and gas business trust sponsored by Ridgewood Energy and
is
expected to be a trustee of other similar entities that may be
organized by the Managing Shareholder and Ridgewood Energy. The
President and sole stockholder of Ridgewood Holding is Robert E.
Swanson; its other executive officers are identical to those of the
Managing Shareholder. See -Managing Shareholder. The principal
office of Ridgewood Holding is at 1105 North Market Street, Suite
1300, Wilmington, Delaware 19899.
The Trustees are not liable to persons other than Shareholders
for the obligations of the Trust.
The Trust has relied and will continue to rely on the Managing
Shareholder and engineering, legal, investment banking and other
professional consultants (as needed) and to monitor and report to
the
Trust concerning the operations of Projects in which it invests, to
review proposals for additional development or financing, and to
represent the Trust's interests. The Trust will rely on such
persons
to review proposals to sell its interests in Projects in the future.
(f) Section 16(a) Beneficial Ownership Reporting Compliance
Mr. Brown and Mr. Quinn did not file on a timely basis as
required by section 16(a) of the 1934 Act Forms 3 reporting their
status as officers or directors of the Trust and their beneficial
ownership. Each person made one late filing of Form 3 in December
1996. The number of transactions that were not reported on a timely
basis by each of these persons was zero.
(g) RPMC.
As discussed above at Item 1 - Business, RPMC assumed day-to-
day management responsibility for the South Boston Project,
effective January 1, 1996. Like the Managing Shareholder, RPMC is
wholly owned by Robert E. Swanson. It entered into an "Operation
Agreement" with the Trust's subsidiary that owns the Project,
effective January 1, 1996, under which RPMC, under the supervision
of the Managing Shareholder, will provide the management,
purchasing, engineering, planning and administrative services for
the South Boston Project that were previously furnished by employees
of the Trust or by unaffiliated professionals or consultants and
funded as operating expenses, as well as billing, payment and other
Project-level costs. To the extent that those services were provided
by the Managing Shareholder and related directly to the operation of
the Project, RPMC will charge the Trust at its cost for these
services and for the Trust's allocable amount of certain overhead
items. RPMC will share space and facilities with the Managing
Shareholder and its affiliates. To the extent that common expenses
can be reasonably allocated to RPMC, the Managing Shareholder may,
but is not required to, charge RPMC at cost for the allocated
amounts and such allocated amounts will be borne by the Trust and
other programs. Common expenses that are not so allocated will be
borne by the Managing Shareholder.
Initially, the Managing Shareholder does not anticipate
charging RPMC for the full amount of rent, utility supplies and
office expenses allocable to RPMC. As a result, both initially and
on an ongoing basis the Managing Shareholder believes that RPMC's
charges for its services to the Trust are likely to be materially
less than its economic costs and the costs of engaging comparable
third persons as managers. RPMC will not receive any compensation
in excess of its costs.
Allocations of costs will be made either on the basis of
identifiable direct costs, time records or in proportion to each
program's investments in Projects managed by RPMC; and allocations
will be made in a manner consistent with generally accepted
accounting principles.
RPMC will not provide any services related to the
administration of the Trust, such as investment, accounting, tax,
investor communication or regulatory services, nor will it
participate in identifying, acquiring or disposing of Projects.
RPMC will not have the power to act in the Trust's name or to bind
the Trust, which will be exercised by the Managing Shareholder or
the Trust's officers.
The Operation Agreement does not have a fixed term and is
terminable by RPMC, by the Managing Shareholder or by vote of a
majority in interest of Investors, on 60 days' prior notice. The
Operation Agreement may be amended by agreement of the Managing
Shareholder and RPMC; however, no amendment that materially
increases the obligations of the Trust or that materially decreases
the obligations of RPMC shall become effective until at least 45
days after notice of the amendment, together with the text thereof,
has been given to all Investors.
The officers of RPMC are Mr. Swanson (President), Mr. Gold
(Executive Vice President), Mr. Brown (Senior Vice President and
Chief Operating Officer), Mr. Quinn (Senior Vice President and Chief
Financial Officer), Ms. Olin (Vice President), Joseph A. Heyison,
General Counsel, and Douglas V. Liebschner, Vice President -
Operations. Mr. Heyison, age 42, joined RPMC in January 1996. He
was previously of counsel to the law firm of De Forest & Duer,
concentrating in corporate finance, banking, environmental law and
securities. He is a member of the bars of New Jersey, New York and
Ohio and was graduated from the University of Pennsylvania Law
School in 1979.
Douglas V. Liebschner, age 50, joined RPMC in June 1996 as Vice
President of Operations. He has over 27 years of experience in the
operation and maintenance of power plants. From 1992 until joining
RPMC, he was employed by Tampella Services, Inc., an affiliate of
Tampella, Inc., one of the world's largest manufacturers of boilers
and related equipment for the power industry. Mr. Liebschner was
Operations Supervisor for Tampella's Piney Creek project, a $100
million bituminous waste coal fired circulating fluidized bed (CFB)
power plant. Between 1989 and 1992, he supervised operations of a
waste to energy plant in Poughkeepsie, N.Y. and an anthracite waste
coal burning CFB in Frackville, Pa. From 1969 to 1989, Mr.
Liebschner served in the U.S. Navy, retiring with the rank of
Lieutenant Commander. While in the Navy, he served mainly in
billets dealing with the operation, maintenance and repair of ship
propulsion plants, twice serving as Chief Engineer on board U.S.
Navy combatant ships. He has a Bachelor of Science degree from the
U.S. Naval Academy, Annapolis, Md.
Item 11. Executive Compensation.
Through 1995, the executive officers of the Trust and the
Managing Shareholder were compensated by Ridgewood Energy. The
Trust was not charged for their compensation; the Managing
Shareholder remitted a portion of the fees paid to it by the Trust
to reimburse Ridgewood Energy for employment costs incurred on
Ridgewood Power's business. In 1996 and future years, the Managing
Shareholder will compensate these persons without additional
payments by the Trust and will be reimbursed by Ridgewood Energy for
costs related to Ridgewood Energy's business. The Trust will
reimburse RPMC at cost for services provided by RPMC's employees.
Information as to the fees payable to the Managing Shareholder and
certain affiliates is contained at Item 13 - Certain Relationships
and
Related Transactions.
As compensation for services rendered to the Trust, pursuant to
the Declaration, each Independent Trustee is entitled to be paid by
the Trust the sum of $5,000 annually and to be reimbursed for all
reasonable out-of-pocket expenses relating to attendance at Board
meetings or otherwise performing his duties to the Trust.
Accordingly
in January 1995 and following years the Trust paid each Independent
Trustee $5,000 for his services. The Board of the
Trust is entitled to review the compensation payable to the
Independent Trustees annually and increase or decrease it as the
Board
sees reasonable. The Trust is not entitled to pay the Independent
Trustees compensation for consulting services rendered to the Trust
outside the scope of their duties to the Trust without prior Board
approval.
Ridgewood Holding, the Corporate Trustee of the Trust, is not
entitled to compensation for serving in such capacity, but is
entitled
to be reimbursed for Trust expenses incurred by it which are
properly
reimbursable under the Declaration.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The Trust sold 105.5 Investor Shares (approximately $10.5
million
of gross proceeds) of beneficial interest in the Trust pursuant to a
private placement offering under Rule 506 of Regulation D under the
Securities Act. The offering closed on March 31, 1992. Further
details concerning the offering are set forth above at Item 1--
Business. No person beneficially owns 5% or more of the Investor
Shares.
Ridgewood Power, the Managing Shareholder of the Trust,
purchased
for cash in the offering 1 Investor Share, equal to .9 of 1% of the
outstanding Investor Shares, and Mr. Swanson purchased an additional
2.1 Investor Shares. By virtue of its purchase of that Investor
Share, Ridgewood Power is entitled to the same ratable interest in
the
Trust as all other purchasers of Investor Shares. No other Trustees
or executive officers of the Trust acquired Investor Shares in the
Trust's offering.
Ridgewood Power was issued one Management Share in the Trust
representing the beneficial interests and management rights of
Ridgewood Power in its capacity as the Managing Shareholder
(excluding
its interest in the Trust attributable to Investor Shares it
acquired
in the offering). The management rights of Ridgewood Power are
described in further detail above at Item 1 - Business and in Item
10
- - Directors and Executive Officers of the Registrant. Its
beneficial
interest in cash distributions of the Trust and its allocable share
of
the Trust's net profits and net losses and other items attributable
to
the Management Share are described in further detail below at Item
13.
Certain Relationships and Related Transactions.
Item 13. Certain Relationships and Related Transactions.
The Declaration provides that cash flow of the Trust, less
reasonable reserves which the Trust deems necessary to cover
anticipated Trust expenses, is to be distributed to the Investors
and
the Managing Shareholder (collectively, the "Shareholders"), from
time
to time as the Trust deems appropriate. Prior to Payout (the point
at
which Investors have received cumulative distributions equal to the
amount of their capital contributions), each year all distributions
from the Trust, other than distributions of the revenues from
dispositions of Trust Property, are to be allocated 99% to the
Investors and 1% to the Managing Shareholder until Investors have
received annual distributions equal to 15% of their Capital
Contributions (a "15% Priority Distribution") and thereafter any
remaining distributions will be allocated 80% to the Investors and
20%
to the Managing Shareholder. Revenues from dispositions of Trust
Property are to be distributed 99% to Investors and 1% to the
Managing
Shareholder until Payout. In all cases, after Payout, Investors are
to be allocated 80% of all distributions and the Managing
Shareholder
20%.
For any fiscal period, the Trust's net profits, if any, other
than those derived from dispositions of Trust Property, are
allocated
99% to the Investors and 1% to the Managing Shareholder until the
profits so allocated offset (1) the aggregate 15% Priority
Distribution to all Investors and (2) any net losses from prior
periods that had been allocated to the Shareholders. Any remaining
net profits, other than those derived from dispositions of Trust
Property, are allocated 80% to the Investors and 20% to the Managing
Shareholder. If the Trust realizes net losses for the period, the
losses are allocated 80% to the Investors and 20% to the Managing
Shareholder until the losses so allocated offset any net profits
from
prior periods allocated to the Shareholders. Any remaining net
losses
are allocated 99% to the Investors and 1% to the Managing
Shareholder.
Revenues from dispositions of Trust Property are allocated in the
same manner as distributions from such dispositions. Amounts
allocated to the Investors are apportioned among them in proportion
to
their capital contributions.
On liquidation of the Trust, the remaining assets of the Trust
after discharge of its obligations, including any loans owed by the
Trust to the Shareholders, will be distributed, first, 99% to the
Investors and the remaining 1% to the Managing Shareholder, until
Payout, and any remainder will be distributed to the Shareholders in
proportion to their capital accounts.
In 1996, 1995 and 1994, the Trust made distributions to the
Managing Shareholder (which is a member of the Board of the Trust)
as
stated at Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters. In addition, the Trust paid fees to the
Managing
Shareholder and its affiliates as follows:
Fee Paid to 1996 1995 1994
Management fee Managing
Shareholder $49,255 $86,510 $96,000
Cost
reimbursements* RPMC 1,098,910 0
* Prior to 1996, these costs were either paid by the Trust or by the Project
directly. These include all payroll, fuel and other expenses of operating the
South Boston Project and an allocable portion of RPMC overhead.
The management fee, payable monthly under the Management
Agreement at the annual rate of 1% of the Trust's net asset value
(until June 1994, of the Trust's total capital contributions),
began on the closing of the offering and compensates the Managing
Shareholder for certain management, administrative and advisory
services for the Trust. In addition to the foregoing, the Trust
reimbursed the Managing Shareholder at cost for expenses and fees of
unaffiliated persons engaged by the Managing Shareholder for Trust
business and for payroll and other costs of operation of the Trust's
Projects. The reimbursements to RPMC, which do not exceed its actual
costs, are described at Item 10(f) - Directors and Executive
Officers
of the Registrant -- RPMC.
In addition to the foregoing, the Trust reimbursed the Managing
Shareholder at cost for expenses and fees of unaffiliated persons
engaged by the Managing Shareholder for Trust business and in years
before 1996 for payroll and other costs of operation of the South
Boston Project. In 1996, these reimbursements were paid to RPMC.
The
reimbursements to RPMC, which do not exceed its actual costs, are
described at Item 10(f) - Directors and Executive Officers of the
Registrant -- RPMC.
Other information in response to this item is reported in
response to Item 11 -- Executive Compensation, which information is
incorporated by reference into this Item 13.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form
8-K.
(a) Financial Statements.
See the Index to Financial Statements in Item 8 hereof.
(b) Reports on Form 8-K.
No Forms 8-K were filed with the Commission by the Registrant
during the quarter ending December 31, 1996.
(c) Exhibits.
3A. Certificate of Trust of the Registrant is incorporated by
reference to Exhibit 3A of Registrant's Registration
Statement which was filed with the Commission on May 26,
1994.
3B. Declaration of Trust of Registrant is incorporated by
reference to Exhibit 3B of Registrant's Registration
Statement which was filed with the Commission on May 26,
1994.
3C. Agreement of Limited Partnership of Ridgewood Energy
Electric Power, L.P. dated as of March 6, 1991 is
incorporated by reference to Exhibit 3C of Registrant's
Registration Statement which was filed with the Commission
on May 26, 1994.
10A. Management Agreement between the Registrant and Ridgewood
Power Corporation is incorporated by reference to Exhibit
10A of Registrant's Registration Statement which was
filed
with the Commission on May 26, 1994.
10B. Stillwater Hydro Partners L.P. Amended and Restated
Agreement of Limited Partnership dated as of July 29,
1991
and letter of amendment thereof dated as of May 16, 1994
is
incorporated by reference to Exhibit 10B of Registrant's
Registration Statement which was filed with the
Commission
on May 26, 1994.
10C. Power Purchase Agreement dated as of September 19, 1989
between Stillwater Hydro Partners L.P. and Niagara Mohawk
Power Corporation and amendment thereof dated as of
August
28, 1990 is incorporated by reference to Exhibit 10C.
10D. RW Power Partners L.P. Agreement and Restated Agreement
of
Limited Partnership dated as of October 1, 1992 among
Ridgewood Energy Electric Power, L.P., Ridgewood Power
Corporation and WE GEN, Inc. is incorporated by reference
to Exhibit 10D of Registrant's Registration Statement
which
was filed with the Commission on May 26, 1994.
10E. Agreement for the Sale of Electric Output to Virginia
Electric and Power Company ("VEPCO") dated February 20,
1992 between VEPCO and WE GEN Inc. is incorporated by
reference to Exhibit 10E of Registrant's Registration
Statement which was filed with the Commission on May 26,
1994.
10F. Assignment and Consent to Assignment dated as of October
16, 1992 among VEPCO, WE GEN Inc. and RW Power Partners
L.P. is incorporated by referent to Exhibit 10F of
Registrant's Registration Statement which was filed with
the Commission on May 26, 1994.
10G. Agreement of Limited Partnership of Brea Power Partners,
L.P. dated as of October 12, 1994 by and between Brea
Power
(I), Inc., GSF Energy Inc. and Ridgewood Electric Power
Trust I is incorporated by reference to Registrant's Form
8-K filed with the Commission on October 27, 1994.
10H. Agreement, dated as of January 16, 1997, by and between
RW Power Partners, L.P. and Virginia Electric Power
Company. Page 83
21. Subsidiaries of the Registrant, is incorporated by
reference to Exhibit 21 of Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995.
24. Powers of Attorney Page 89
27. Financial Data Schedule Page 90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Signature Title Date
RIDGEWOOD ELECTRIC POWER TRUST I
(Registrant)
By: /s/Robert E. Swanson President and Chief April 14, 1997
Robert E. Swanson Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
By: /s/Robert E. Swanson President and Chief April 14, 1997
Robert E. Swanson Executive Officer
By: /s/Martin V. Quinn Senior Vice President and
Martin V. Quinn Chief Financial Officer April 15, 1997
By: /s/Kathleen P. McSherry Controller April 15, 1997
Kathleen P. McSherry
RIDGEWOOD POWER CORPORATION Managing Shareholder
By: /s/Robert E. Swanson President April 14, 1997
Robert E. Swanson
/s/Robert E. Swanson * Independent Trustee April 14, 1997
John C. Belknap
/s/ Independent Trustee April __, 1997
Dr. Richard D. Propper
* As attorney-in-fact for the Independent Trustee
Ridgewood Electric Power Trust I
(formerly Ridgewood Energy Electric Power, L.P.)
Financial Statements
December 31, 1996, 1995 and 1994
-F1-
1177 Avenue of the Americas Telephone 212 596 7000
New York, NY 10036 Facsimile 212 596 8910
[Letterhead of Price Waterhouse LLP]
Report of Independent Accountants
March 24, 1997
To the Shareholders and Trustees of
Ridgewood Electric Power Trust I (formerly
Ridgewood Energy Electric Power, L.P.)
In our opinion, the accompanying balance sheet and the related
statements of operations, changes in shareholders' equity (partners'
capital through June 14, 1994) and of cash flows present fairly, in
all material respects, the financial position of Ridgewood Electric
Power Trust I (formerly Ridgewood Energy Electric Power, L.P.) at
December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of
the Trust's management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
As explained in Note 3, the financial statements include
investments, valued at $6,810,208 and $7,207,846 (103% and 104% of
shareholders' equity, respectively) as of December 31, 1996 and
1995, respectively, whose values have been estimated by management
in the absence of readily ascertainable market values. We have
reviewed the procedures used by management in arriving at their
estimate of value and have inspected underlying documentation, and,
in the circumstances, we believe the procedures are reasonable and
the documentation appropriate. However, because of the inherent
uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready
market for the investments existed, and the differences could be
material to the financial statements.
/s/ Price Waterhouse LLP
-F2-
Ridgewood Electric Power Trust I
(formerly Ridgewood Energy Electric Power, L.P.)
Statement of Operations
Year Ended December 31,
1996 1995 1994
Revenue:
Income from power
generating projects $ 606,863 $ 552,769 $ 936,336
Interest and dividend
income 2,674 --- 78,627
Total revenues 609,537 552,769 1,014,963
Expenses:
Accounting and legal
fees 47,500 34,092 135,780
Management fee 49,255 86,510 96,000
Trustee fees 10,000 10,000 10,000
Writedown of limited
partnership investments --- --- 814,669
Miscellaneous 5,980 3,750 5,335
112,735 134,352 1,061,784
Net income (loss) $ 496,802 $ 418,417 $ (46,821)
Allocation to:
Shareholders $ 491,834 $ 414,233 $ (46,353)
Managing shareholder 4,968 4,184 (468)
$ 496,802 $ 418,417 $ (46,821)
See accompanying notes to financial statements.
-F3-
Ridgewood Electric Power Trust I
(formerly Ridgewood Energy Electric Power, L.P.)
Balance Sheet
Year Ended December 31,
1996 1995
Assets:
Investments in project development
and power generation limited
partnerships $ 6,810,208 $ 7,207,846
Cash and cash equivalents 327,322 5,643
Advances to RW Power Partners, L.P. 367,667 317,817
Total assets $ 7,505,197 $ 7,531,306
Liabilities and Shareholders' Equity:
Accounts payable and accrued expenses $ 71,149 $ 44,812
Due to affiliates 829,407 570,057
900,556 614,869
Shareholders' equity
Shareholders' equity
(105.5 shares issued
and outstanding) 6,628,753 6,937,431
Managing shareholder's
accumulated deficit (24,112) (20,994)
Total shareholders' equity 6,604,641 6,916,437
Total liabilities and
shareholders' equity $ 7,505,197 $ 7,531,306
See accompanying notes to financial statements.
-F4-
Ridgewood Electric Power Trust I
(formerly Ridgewood Energy Electric Power, L.P.)
Statement of Changes in Shareholders' Equity
(Partners' Capital through June 14, 1994)
Managing
Shareholders Shareholder Total
Partners' capital,
December 31, 1993 $ 8,152,476 $ (9,116) $ 8,143,360
Cash distributions (736,289) (7,443) (743,732)
Net loss for the year (46,353) (468) (46,821)
Shareholders' equity,
December 31, 1994 7,369,834 (17,027) 7,352,807
Cash distributions (846,636) (8,151) (854,787)
Net income for the year 414,233 4,184 418,417
Shareholders' equity,
December 31, 1995 6,937,431 (20,994) 6,916,437
Cash distributions (800,512) (8,086) (808,598)
Net income for the year 491,834 4,968 496,802
Shareholders' equity,
December 31, 1996 $ 6,628,753 $ (24,112) $ 6,604,641
See accompanying notes to financial statements.
-F5-
Ridgewood Electric Power Trust I
(formerly Ridgewood Energy Electric Power, L.P.)
Statement of Cash Flows
Year Ended December 31,
1996 1995 1994
Cash flows from operating activities:
Net income (loss) $ 496,802 $ 418,417 $ (46,821)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Writedown of limited
partnership investments --- --- 814,669
Purchase of investments in
electric power limited
partnerships --- (489,007) (3,330,672)
Return of investment in
electric power limited
partnerships 397,638 440,916 ---
Changes in assets and
liabilities:
Decrease in due diligence
costs relating to potential
power project investments --- --- 4,374
Increase in due from
affiliates (49,850) (317,817) ---
Decrease (increase)
in other assets --- 70,000 (70,000)
Increase (decrease)
in accounts payable and
accrued expenses 26,337 (72,326) 75,835
Increase in due to
affiliates 259,350 570,057 ---
Total adjustments 633,475 201,823 (2,505,794)
Net cash provided by
(used in) operating
activities 1,130,277 620,240 (2,552,615)
Cash flows used in financing
activities:
Cash distributions to
shareholders (partners
through June 14, 1994) (808,598) (854,787) (743,732)
Net cash used in
financing activities (808,598) (854,787) (743,732)
Net increase (decrease)
in cash and cash
equivalents 321,679 (234,547) (3,296,347)
Cash and cash equivalents,
beginning of year 5,643 240,190 3,536,537
Cash and cash equivalents,
end of year $ 327,322 $ 5,643 $ 240,190
See accompanying notes to financial statements.
-F6-
Ridgewood Electric Power Trust I
(formerly Ridgewood Energy Electric Power, L.P.)
Notes to Financial Statements
1. Organization and Purpose
Nature of business
Ridgewood Energy Electric Power, L.P. (the "Partnership") was
formed as a Delaware limited partnership on March 6, 1991, by
Ridgewood Power Corporation acting as the general partner. On April
30, 1991, Beale Lynch Power Partners Inc. was admitted as co-general
partner of the Partnership. The Partnership began offering limited
partnership units in the Partnership on May 1, 1991. The
Partnership commenced operations on September 16, 1991 and
discontinued its offering of units on March 31, 1992.
On June 15, 1994, with the approval of the partners, the
Partnership merged all of its assets and liabilities into a newly
formed trust, called Ridgewood Electric Power Trust I (the "Trust").
Effective July 25, 1994, the Trust elected to be treated as a
"Business Development Company" ("BDC") under the Investment Company
Act of 1940 and registered its shares under the Securities Act of
1934. In connection with this transaction, the Trust issued 105.5
shares in exchange for outstanding Partnership units. Ridgewood
Power Corporation is the sole managing shareholder.
The Trust has been organized to invest in independent power
generation facilities and in the development of these facilities.
These independent power generation facilities include small power
production facilities which produce electricity from waste oil,
landfill gas and water. The power plants sell electricity to
utilities under long-term contracts.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles 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 the estimates.
Investments in project development and power generation limited
partnerships
The Trust holds partnership interests in power generating
limited partnerships, which are stated at fair value. Due to the
non-liquid nature of the investments, the fair values of the
investments are assumed to equal cost, unless current available
information provides a basis for adjusting the carrying value of the
investments.
Revenue recognition
Income from investments is recorded when received. Interest
and dividend income are recorded as earned.
Offering costs
Costs associated with offering Trust shares (selling
commissions, distribution and offering costs) are reflected as a
reduction of the shareholders' capital contributions.
-F7-
Ridgewood Electric Power Trust I
(formerly Ridgewood Energy Electric Power, L.P.)
Notes to Financial Statements
Cash and Cash Equivalents
The Trust considers all highly liquid investments with
maturities when purchased of three months or less as cash and cash
equivalents.
Due diligence costs relating to potential power project
investments
Costs relating to the due diligence performed on potential
power project investments are initially deferred, until such time as
the Trust determines whether or not it will make an investment in
the respective project. Costs relating to completed projects are
capitalized and costs relating to rejected projects are expensed at
the time of rejection.
Income Taxes
No provision is made for income taxes in the accompanying
financial statements as the income or losses of the Trust are passed
through and included in the tax returns of the individual
shareholders of the Trusts.
Reclassification
Certain items in previously issued financial statements have
been reclassified for comparative purposes.
3. Investments in Project Development and Power Generation Limited
Partnerships
The Trust had the following investments in power generation
limited partnerships:
Fair values as of December 31,
1996 1995
Power generation limited partnerships:
Stillwater Hydro Partners, L.P. $ 1,000,000 $ 1,000,000
RW Power Partners, L.P. 3,527,923 3,527,923
Brea Power Partners, L.P. 2,282,285 2,679,923
$ 6,810,208 $ 7,207,846
Investments in power generation limited partnerships
Stillwater Hydro Partners, L.P.
On October 31, 1991, the Trust acquired a 32.5% general
partner's interest in a limited partnership whose sole business is
the construction, ownership and operation of a 3.5 megawatt
hydroelectric facility, located on the Hudson River in Stillwater,
New York. At the time of the investment, the project was under
construction and commenced operations in May 1993.
A distribution of $126,707 was received by the Trust in 1994.
On May 16, 1994 the Trust, as stipulated in the limited partnership
agreement, elected to exchange its general partner interest for a
limited partnership interest and a priority distribution of
available cash flow from the project in the aggregate amount of
$1,000,000. Such distribution is payable from available cash flows
in nine annual installments together with interest at 12% per year,
which were scheduled to begin in May 1995.
-F8-
Ridgewood Electric Power Trust I
(formerly Ridgewood Energy Electric Power, L.P.)
Notes to Financial Statements
The ultimate ability of the project to meet its payment
obligations to the Trust is dependent on the actual operating
performance of the Stillwater Project, which, in turn, is largely
dependent upon water levels in the Hudson River. In 1995, the
Hudson River basin experienced a severe drought, resulting in Hudson
River water levels substantially below normal. As a result of the
low water levels, the operating results of the project were
insufficient to meet its debt payments, and accordingly, no
distributions were made to the Trust in 1995. Although increased
precipitation in late 1995 and early 1996 brought flow levels back
toward the norm, high water flows damaged portions of the facility,
including the recently installed modifications for capturing
additional water flow.
As a result, all available cash flow from the Stillwater
Project is being applied to meet debt service requirements. Until
water flows return to expected levels, repairs are completed and the
current arrears in debt servicing are made up, it appears likely
that most, if not all, of the payments due to the Trust will be
deferred and carried forward, with interest, into subsequent years.
Electricity generated by the Stillwater Project is sold to
Niagara Mohawk Power Corporation under a long-term Power Contract
with a remaining term of 31 years. Niagara Mohawk has argued before
the New York Public Service Commission, the state agency that
regulates the electric utility industry, and the Federal Energy
Regulatory Commission ("FERC") that rates it pays to purchase
electricity under long-term Qualifying Facility contracts are
uneconomic and that it should be allowed to abrogate those
contracts. In April 1995, FERC rejected Niagara Mohawk's
application and the New York State Public Service Commission has
also refused the requested relief. There can be no assurance,
however, that Niagara Mohawk would not succeed in any future efforts
to abrogate Qualifying Facility contracts.
RW Power Partners, L.P. (known as the Lynchburg project)
In October 1992, the Trust entered into a limited partnership
agreement to provide construction funding of a 3 megawatt project
using waste oil as its primary fuel source. Construction of the
project commenced in January 1993, and commercial operations began
in June 1993. Construction of a waste oil processing facility began
in 1994, and was completed in 1996. The total cost of the waste
oil processing facility was approximately $832,000. As of December
31, 1996 and 1995, the Trust funded $3,527,923 of the total cost of
the original project and the waste oil facility, a portion of which
was funded by the managing shareholder. The Trust received
distributions of $208,000, $163,188 and $622,965 from the limited
partnership for the periods ended December 31, 1996, 1995 and 1994,
respectively. The Trust's investment in and advances to the limited
partnership amounted to $3,895,590 and $3,845,740 at December 31,
1996, and 1995, respectively.
As a result of the settlement of a lawsuit with Virginia
Electric Power Company on January 17, 1997, the operation of the
Lynchburg facility has been suspended. See Note 6 - Subsequent
Events for additional details.
In exchange for its investment, the Trust has the right to
receive annually the greater of either 70% of net profits from the
limited partnership or a preferred minimum return of 22.5% on its
total investment. In the event that in any given year all net
profits from the limited partnership do not cover the amount of the
preferred minimum return, the amount of such shortfall will be
payable on a priority basis out of any net profits in subsequent
years.
-F9-
Ridgewood Electric Power Trust I
(formerly Ridgewood Energy Electric Power, L.P.)
Notes to Financial Statements
Brea Power Partners, L.P. (known as the Olinda project)
In October 1994, the Trust made a $3,103,479 limited partner
investment in a limited partnership ("Brea Partnership"), which
acquired a 5 megawatt gas-fired electric generating facility and
related landfill gas processing facility. The facility has been in
continuous operation for nine years and is located in Olinda,
California.
In exchange for its investment, the Trust is entitled to
receive, in any year, the lesser of the preference amount (as
defined in the Partnership Agreement) or 98% of the annual
distribution, plus 25% of the excess of the annual distribution over
the preference amount of the Brea Partnership until the Trust has
received a cumulative 15% return on its original investment. After
such time, the amount the Trust would be entitled to would decrease
to 5% of net cash flows.
The Trust received distributions from Brea Partnership of
$796,501, $859,801 and $117,600 for the years ended December 31,
1996, 1995 and, 1994, respectively. Of the cash distributions,
$397,638 and $440,916 has been treated as a return of investment
capital during 1996 and 1995, respectively. The Trust's investment
balance for Olinda at December 31, 1996 and 1995 amounted to
$2,282,285 and $2,679,923, respectively.
Investments in project development limited partnerships
The Trust made investments in several limited partnerships with
other major participants in the power industry to provide access to
investments in larger projects in which these participants would
take the leading role in the acquisition or development of such
projects. In 1994, the Trust wrote-off its investment in these
limited partnerships of $814,669.
4. Transactions With Managing Shareholder and Affiliates
Prior to the BDC election, the Partnership also paid to the
general partners a distribution and offering fee in an amount up to
2.5% of each capital contribution made to the Partnership. This fee
was intended to cover legal, accounting, consulting, filing,
printing, distribution, selling, and closing costs for the offering
of the Partnership. These fees were recorded as a reduction in the
partners' capital contributions.
Prior to the BDC election in July 1994, the Partnership paid to
the general partners a management fee not to exceed 4.5% of each
capital contribution made to the Partnership. The fee was payable
to the general partners for their services in investigating and
evaluating investment opportunities and effecting transactions for
investing the capital of the Partnership.
Prior to the BDC election, the Partnership paid to the general
partners an annual administrative and overhead fee equal to 1% of
the aggregate capital contributions of the Partnership. During
1994, the Partnership paid administrative and overhead fees to the
general partners of $52,750.
On June 15, 1994, the Trust entered into a management agreement
with the managing shareholder, under which the managing shareholder
renders certain management, administrative and advisory services and
provides office space and other facilities to the Trust. As
compensation to the managing shareholder, the Trust pays the
managing
-F10-
Ridgewood Electric Power Trust I
(formerly Ridgewood Energy Electric Power, L.P.)
Notes to Financial Statements
shareholder an annual management fee equal to 1.0% of the net assets
of the Trust payable monthly. In 1996, management fees of $43,255
were waived by the managing shareholder. During 1996, 1995 and
1994, the Trust paid management fees to the managing shareholder of
$49,255, $86,510 and $96,000, respectively.
Under the Declaration of Trust, the managing shareholder is
entitled to receive each year 1% of all distributions made by the
Trust (other than those derived from the disposition of Trust
property) until the shareholders have been distributed in that year
an amount equal to 15% of their equity contribution. Thereafter,
the managing shareholder is entitled to receive 20% of the
distributions for the remainder of the year. The managing
shareholder is entitled to receive 1% of the proceeds from
dispositions of Trust properties until the shareholders have
received cumulative distributions equal to their original investment
("Payout"). In all cases, after Payout the managing shareholder is
entitled to receive 20% of all remaining distributions of the Trust.
During 1996, 1995, and 1994, the Trust made distributions to the
managing shareholder of $8,086, $8,151, and $7,443, respectively.
At December 31, 1996 and 1995, the managing shareholder and
affiliates owned, in the aggregate, 3.0 units of the Trust and made
capital contributions of $273,000.
In connection with the construction of the waste oil facility
at the Lynchburg Project, the managing shareholder advanced $570,000
in 1995 and $260,000 in 1996 to the Trust to fund a portion of the
Trust's investment in the waste oil facility. No interest was
charged on the advances. When the Trust received the settlement
proceeds described in Note 6- Subesquent Events in January 1997, all
of these advances were repaid to the managing shareholder without
interest.
In 1996, under an Operating Agreement with the Trust, Ridgewood
Power Management Corporation ("Ridgewood Management"), an entity
related to the managing shareholder through common ownership,
provides management, purchasing, engineering, planning and
administrative services to the Lynchburg Project. Ridgewood
Management charges the project at its cost for these services and
for the allocable amount of certain overhead items. Allocations of
costs are on the basis of identifiable direct costs, time records or
in proportion to amounts invested in projects managed by Ridgewood
Management. During the year ended December 31, 1996, Ridgewood
Management charged the Lynchburg Project $33,948 for overhead items
allocated in proportion to the amount invested in projects managed,
and charged the Lynchburg Project for all of the remaining direct
operating and non-operating expenses incurred during the period.
5. Contingencies
In December 1993, a subsidiary of the Trust engaged Blackhawk
Management Group, Incorporated ("Blackhawk"),a North Carolina
corporation whose sole owner and employee was the original developer
of the Lynchburg Project, to manage that Project under contract. On
June 9, 1994, the subsidiary terminated the management contract for
material breach and inequitable conduct by Blackhawk, which then
sued in the Circuit Court of Halifax County, Virginia on June 8,
1995. The action claimed breach of contract by the Trust's
subsidiary and claimed compensatory damages of $3 million and
punitive damages of $1 million. The subsidiary has removed the
action to the United States District Court for the Western District
of Virginia, Danville Division. The Trust believes that the lawsuit
is without merit, that the Trust's subsidiary has meritorious
defenses to all claims, and that the claims for damages were
-F11-
Ridgewood Electric Power Trust I
(formerly Ridgewood Energy Electric Power, L.P.)
Notes to Financial Statements
clearly inflated. The action is in discovery and is pending trial.
The Trust does not anticipate any material recovery by the
plaintiff.
From time to time, the Trust and its subsidiaries are engaged
in legal proceedings incident to the normal course of their
businesses. The Trust believes that the outcome of these
proceedings will not have a material impact on the Trusts' financial
position or results of operations.
6. Subsequent Events
On January 17, 1997, the Trust settled the pending lawsuit
between its subsidiary, RW Power Partners, L.P. ("RWPP"), and
Virginia Electric Power Company ("VEPCO"). RWPP had sued VEPCO when
VEPCO attempted to cancel the power purchase contract under which
VEPCO was required to purchase electricity generated by RWPP at the
Lynchburg project.
Under the settlement, VEPCO paid RWPP $3,750,000 in cash and
waived a claim of $1,800,000 for prepaid capacity payments. RWPP
surrendered the power purchase contract to VEPCO and agreed to the
entry of an order dismissing its lawsuit against VEPCO. The
settlement permits RWPP to continue operating the generating station
and the associated waste oil treatment plant, but RWPP may not sell
electricity to VEPCO, except at VEPCO's request, and RWPP may only
sell electricity to investor-owned electric utilities for resale or
use outside VEPCO's service area.
In addition, the facility may be operated for non-generating
purposes such as waste oil treatment and electricity may be
generated for the facility's needs. VEPCO may cut the
interconnection of the facility with its lines and reconnection is
permitted only for electricity sales in compliance with the
settlement agreement. RWPP may remove and sell equipment. These
restrictions apply to any future owner of the Lynchburg facility.
As a result of the operating restrictions and cancellation of
the power purchase contract included in the VEPCO settlement, the
operation of the Lynchburg Project facilities was suspended in
January 1997. Management of the Trust is considering alternatives
for the facilities, which include a possible sale or disposition of
the facilities. Management of the Trust estimates that a sale of
its partnership interest in RWPP would result in recovery of its
investment and advances of $3,895,591.
-F12-