SECURITIES AND EXCHANGE COMMISSION
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO
SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
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/ / Preliminary proxy statement
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/x / Soliciting Material Pursuant to Rule 14a-12
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THE RIDGEWOOD POWER GROWTH FUND
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RIDGEWOOD POWER LLC
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Robert E. Swanson, President
TO: Ridgewood Power Shareholders February 6, 2002
RE: Where We Are
Proxy Solicitation Approved
Timing of Resumption of Dividends
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This letter is longer than I had hoped, and is going out two weeks later than I
had planned. Over the past three weeks I kept adding to the letter. Discussing
one subject prompted the inclusion of another subject in order to give context.
This letter started with a discussion of the timing of a possible merger of the
Ridgewood Power entities. Because that discussion must be approved by our
securities lawyers and any letter on that subject must be filed with the SEC, we
finally took that portion out of this letter. We will send that discussion as a
separate letter in a few weeks.
WHERE THE RIDGEWOOD COMBINED ENTITIES STAND TODAY
We sent a letter on December 14, 2001 entitled "Ridgewood Power has no Enron or
Calpine Problem". Because we were in the middle of a Proxy Solicitation, I did
not want to get too specific in that letter, but merely wanted to clarify the
issue for any Ridgewood Shareholder that was concerned.
Because the news from Enron keeps getting more distressing each week, I wanted
to provide more specific details about the economic health and viability of the
combined Ridgewood Power entities before discussing the other important subjects
in this letter. We continue to receive questions about the finances of the
combined enterprise. Therefore, this letter will provide numbers about the
enterprise as a whole, in addition to discussing matters affecting dividend
payments from individual Funds.
As I said in December, key differences between the Ridgewood Power companies on
the one hand and companies like Enron, Calpine, and Mirant on the other are (i)
we have comparatively little debt, (ii) we have no energy trading or energy
hedging operation and (iii) Ridgewood plants run at relatively high operating
margins. Having relatively high operating margins in "normal" times, combined
with a low debt load has allowed the Ridgewood entities to survive 2001, an
extremely difficult time.
The year 2001 was a difficult time for most independent power producers,
including Ridgewood Power. (I) The California energy crisis resulted in both
Pacific Gas & Electric and Southern California Edison not paying for electricity
for a portion of the year (including the bankruptcy filing of PG&E). (II) We had
drought conditions in much of the nation, dramatically reducing cash flow from
our hydro plants which are located in California, Nevada, Virginia, New York,
and Maine. (III) We suffered a negative cash flow on our two largest power
plants, Penobscot and Eastport, the waste wood chip burning plants in Maine.
(IV) Our Egypt operation which was going very well prior to September 11, was
hurt significantly in the fourth quarter by a dramatic decline in tourism
throughout the world.
The table shows preliminary results for 2001, plus estimates for 2002 and 2003.
Despite all the negative factors, we got through 2001 with a small positive
operating cash flow. For 2002 we show a Low Case and a High Case because we want
to show alternative assumptions. We expect that actual results will come
somewhere in between. It should be pointed out that we could do worse than the
Low Case, or better than the High Case. These are our internal working numbers
that we believe are realistic and that we use for internal budgeting and
planning.
As you can see in the table below, the Low Case for 2002 has gross revenues of
$50,600,000 and the High Case has gross revenues of $65,700,000. Before debt
service, the combined entities have a net operating positive cash flow of
$12,900,000 in the Low Case and $17,900,000 in the High Case. Both are dramatic
improvements in comparison to $5,900,000 (before debt service) in 2001.
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CASH FLOWS FOR ALL RIDGEWOOD POWER COMPANIES 1
Preliminary Estimated
Unaudited 2 Estimated 2002 3 2003 3
2001 Low Case High Case Mid Case
Gross revenue $44,900,000 $50,600,000 $65,700,000 $80,100,000
Expenses -39,000,000 -37,700,000 -47,800,000 -54,000,000
Net Operating Cash
Flow 5,900,000 12,900,000 17,900,000 26,100,000
Interest on debt -1,900,000 -2,900,000 -2,900,000 -3,400,000
Net after interest 4,000,000 10,000,000 15,000,000 22,700,000
Debt principal -2,900,000 -4,000,000 -4,000,000 -5,500,000
Net cash flow
after interest
and principal $ 1,100,000 $ 6,000,000 $11,000,000 $17,200,000
1 Assumes no new capital invested, and a portion of the current cash flow is
reinvested to expand certain projects.
2 Excludes non-recurring expenses associated with the proxy solicitation and
issues related to a possible merger.
3 Estimates for 2002 show both a Low Case and High Case which are included
because they represent what Ridgewood Power believes are relatively predictable
estimations. For 2003, Ridgewood Power works from a "Mid Case" model with the
expectation that numbers will vary up or down.
Many other (but not all) key assumptions are explained in the text of this
letter. Actual performance may vary materially from these estimates, which are
subject to change. See "Notice Regarding Forwarding-Looking Statements."
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The 2002 Low Case: The entities for 2002 show for the Low Case an increase in
gross revenue (compared to 2001) of $5,700,000. The two key contributors to the
increase are that (i) our California power plants are now running and being paid
on a current basis, which we assume will continue, and (ii) we assume that the
hydros have normal (25-year historic average) water flows this year as opposed
to sub-normal conditions. (With no fuel cost on the hydros, each $1.00 increase
in revenue (more rain) goes to the bottom line.) The 2002 Low Case assumes that
Egypt continues to operate at current very reduced levels all year, and that the
Penobscot and Eastport Plants do not enjoy positive developments which we think
are possible by mid-year. We also assume that our other plants operate at or
close to 2001 levels.
The 2002 High Case: We add to the Low Case the assumption that Egypt starts
improving by summer, and that Penobscot and Eastport also begin to benefit from
the "Green Power" initiatives discussed below. (There are many other factors,
each of which is smaller, that collectively have a material impact.)
The combined Ridgewood entities were able to get through a convergence of
problems in 2001 because, in more normal times, we have relatively predictable
gross revenue, high operating margins, and relatively little debt. Our business
is quite conservatively structured. In extremely difficult times like 2001, we
still get by.
NO PRICE INCREASE ASSUMED FOR WHOLESALE ELECTRIC PRICES
It is important to note that the dramatic revenue increases in 2002 and 2003 do
not depend on any wholesale price increases for electricity. The vast majority
of our power plants have favorable long-term power contracts which means that
these power plants are not affected by price swings for electricity. The notable
exception where we do not have long-term contracts pertains to the Penobscot and
Eastport plants (Trusts IV and V). They do not have long-term contracts and are
currently adversely affected by the low electricity prices in New England. Our
model assumes continued low wholesale electricity prices through 2003. We have
assumed for Penobscot and Eastport the benefit of a price support for
electricity made from renewable energy (we burn waste wood chips). That subsidy
is scheduled to go into effect January 1, 2003, and, depending on the issuance
of regulations, may benefit these plants in mid-2002. (Other environmentally
beneficial generating assets such as hydro electric, landfill methane, and
natural gas "QF's", already enjoy price supports).
THE BASIS FOR THE INCREASE IN 2003
In addition to the benefit to Penobscot and Eastport, dramatic improvements in
2003 result from additions to generating capacity at our landfill methane power
plants in Olinda, California, Providence, and the United Kingdom. In all three
cases the development rights were lined up during 2001. In October 2001, the
Ridgewood/U.K. investment (Trust V and The Growth Fund) acquired the English
development company with which we had been working for three years. (Ridgewood
owns 76% and controls the merged entity.) Therefore, in the U.K. we own a
portfolio of development projects and a development company. At Olinda and
Providence we acquired the rights to expand both projects of which we own 100%.
Both Olinda and Providence provide for two stages of expansion. The first stage
is a smaller expansion and has been assumed into the 2003 numbers.
In the post-Enron era, there may or may not be any real accounting reforms, but
it is possible that there will be an appreciation for solid cash flow in a
transparent financial structure. Improvements for 2002 over last year are not
based on excessive optimism, but are merely based on the assumption that we will
avoid drought, pestilence, and a new California plague. After such a difficult
2001, 2002 is a rebuilding year. A year and a half ago, we would have expected
to be in better shape today. We have excellent core assets, and this year we
expect to start catching up. We see 2003 as where we expected to be this year,
before the set backs of 2001.
CASH FLOW INCREASE IN 2003 PREDOMINATELY IN TRUST V, THE GROWTH FUND AND
RIDGEWOOD/EGYPT
The last section of this letter discusses the resumption of dividends, which
depend on cash flow. The more recently formed Ridgewood Power Trusts are
expected to enjoy proportionately larger cash flow increases in 2003. The
largest expected cash flow increases in 2003 and beyond are expected to come
from:
Project Owned by
Ridgewood/Egypt Trust V, The Growth Fund, Ridgewood/Egypt Fund
Ridgewood/UK Trust V, The Growth Fund
Providence Trust III, Trust IV
Penobscot and Eastport Trust IV, Trust V
Olinda Trust I
Trust I has such a large cash flow from Olinda that it can pay dividends and
expand Olinda. Other Funds which expect dramatic increases in cash flow are
required to reinvest cash this year. Those Funds should be in a substantially
better cash position in 2003.
OVERWHELMING APPROVAL OF PROXY SOLICITATION
We want to thank Shareholders of Power Trusts I through V and The Growth Fund
for their overwhelming approval of the Proxy Solicitation dated November 5,
2001. On average, votes of Approval to Disapproval ran 26-to-1. The votes were
remarkably consistent among the various Ridgewood Power Trusts. The lowest
approval ratio was 95.3% to 4.7%. The highest approval ratio was 97.6% to 2.4%.
The level of response from Shareholders of the various Trusts was also
remarkably consistent. On average we received completed proxies from 71% of the
shares eligible to vote.
We thank you for your overwhelming approval of the management proposals in the
Proxy Solicitations. Even those simple changes took five months including
drafting the proxy, filing and review by the SEC, printing and distribution, and
the Shareholder voting period. With that five-month process behind us, any
subsequent major transaction will be that much further along.
PROXY APPROVAL ALLOWS CONSISTENT ACCOUNTING FOR ALL TRUSTS
When we started the Proxy Solicitation process last summer, no one was
anticipating Enron. However, the Proxy materials pointed out that Ridgewood
Power Trusts I, II, and III were required to account differently for assets than
the other Power Trusts. The first three Trusts were regulated by the 1940
Securities Act which has different rules than apply to the other Power Trusts.
Our SEC filings of our 10-K's and 10-Q's were required to account differently
for similar assets owned by various Power Trusts. Even before Enron, it was
highly desirable to eliminate confusing accounting. Now all our SEC filing will
employ the same rules. Every step towards simplicity and clarity is an advance.
PARTIAL RESUMPTION OF QUARTERLY DIVIDENDS
Where available operating revenue permits we are going to resume quarterly
dividends. At the present time our plan is to commence quarterly dividends at
annualized rates as follows:
Annualized Dividend Rate 1st Quarterly Payment
Power Trust I 8% April 15
Power Trust II 4% April 15
Power Trust III 4% July 15
Power Trust IV 4% October 15
Power Trust V, The Growth Fund, and the Ridgewood/Egypt Fund cannot commit to a
firm date to commence quarterly dividends, although there is a possibility that
one or more of those Funds could commence dividends in October. We are trying to
strike a balance between paying a current cash dividend and simultaneously
trying to improve assets and long-term profitability. Sustainable profitability
and growth are more valuable to a Shareholder than receiving an extra few
percent this year in current dividends. Trying to strike a balance leaves
virtually everyone, including ourselves, somewhat dissatisfied.
The fact that we are paying dividends from one Trust and not from another Trust
does not necessarily predict long-term relative values. For example, Trust V and
The Growth Fund jointly own the Ridgewood/U.K. project which owns landfill
methane power plants in England, Scotland, and Spain. Those power plants operate
profitably with a high degree of predictability. Last summer we negotiated to
acquire the development company (Combined Landfill Properties, Ltd.) in a
transaction which provides the Ridgewood/U.K. investment with a substantial
supply of new power plants to provide growth for our asset, plus we now receive
the benefit of the developer's profit. Our Ridgewood/U.K. entity owns 76% of the
newly merged entity (which closed in October) and the owners and employees of
the development company own 24%. We are plowing the U.K. cash flow back into the
development of new projects. Although that cash is not currently available for
dividends, there are substantial earnings plus a clear path to earnings growth,
a combination with superior long-term prospects.
Another example is the Ridgewood/Egypt investment which was doing extremely well
prior to September 11 but has been hurt by the worldwide slump in tourism. Hotel
occupancy on the Red Sea has been slowly improving since October and November.
Summer is the busy season, and we will know more by July. Even in these
conditions, Ridgewood/Egypt is cash flow positive, but would not receive a high
valuation today.
CONCLUSION
The combined Ridgewood Power entities are strong and are expected to have
dramatically increased revenue and cash flow based on identifiable improvements
and projects that are in the works and on other events not dependent on
wholesale power price increases. Although 2001 was difficult and set us back a
year, we believe that we are on track for revenue growth and cash flow growth.
We plan over the next several months to provide detailed reports on many of the
investments briefly referred to in this letter. This letter could not explain
our assumptions for 2002 and 2003 without referring to them. At the same time,
space in this letter did not allow for a more detailed explanation.
We have a dedicated and skilled team managing these assets and running our power
plants. We have realistic expectations of improved operating results.
/s/ Robert E. Swanson
Postscript: History Will Repeat Itself: The February 5, 2002 New York Times
carried a front-page story entitled "Electricity Crisis Eases In New York". The
tragedy of September 11 reduced electric demand in New York due to destroyed
office space and other job losses. Consequently there is a short-term surplus of
electricity, and prices are currently low. The Times reports that almost
two-thirds of the announced new power projects for New York are unlikely to be
built. Nationally, they estimate that at least half of previously announced
projects are expected to not be built.
We think that the U.S. will continue on a boom-bust cycle for electricity.
Demand swings are short-term, often in cycles of a couple of years. Building new
power plants is a very long-term process. It takes many years to (i) plan, (ii)
permit, (iii) finance, and (iv) construct major new power plants. After Enron,
Calpine, Global Crossing, etc. it will be years before there is knee jerk
financing of billion dollar fixed assets which sell spot-market commodities.
(Yes, Global Crossing is similar: multi-billion dollar fixed assets selling
spot-market bandwidth.)
The New York Times also reported that there is little chance of a power shortage
this year. There will be electric power shortages when (i) economic recovery
combines with (ii) a hot summer.
Because of our long-term contracts, most Ridgewood Power assets are not affected
by these price swings. Penobscot, Eastport, and the expansions of Olinda and
Providence could benefit substantially. The U.S. economy will be hurt by power
shortages.
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NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This letter contains forward-looking statements. These statements discuss
business trends and other matters relating to the Ridgewood Power companies'
future results, the electricity industry, the securities markets and the
business climate. In order to make these statements the companies and Ridgewood
Power have had to make assumptions as to the future and to accept information
and assumptions from other companies. The companies and Ridgewood Power have
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 any or all of the companies in the
future may be materially different from the statements here.
The Ridgewood Power companies and Ridgewood Power therefore warn 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. This memorandum
discusses many (but not all) of these risks and uncertainties that might affect
these forward-looking statements. By making these statements now, we are 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.
Each Trust's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q
contains more information concerning your Trust's business and risks of your
investment.