Ridgewood UK, LLC
Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Report of Independent Registered Public Accounting Firm
Members
Ridgewood UK, LLC
We have audited the accompanying consolidated balance sheets of Ridgewood UK,
LLC ("Company") as of December 31, 2004 and 2003 and the related consolidated
statements of operations, changes in members' equity, comprehensive loss and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2004 and 2003 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Ridgewood UK, LLC as of December 31, 2004 and 2003, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Perelson Weiner LLP
New York, New York
October 31, 2005
Report of Independent Registered Public Accounting Firm
To the Members of
Ridgewood UK, LLC
In our opinion, the accompanying consolidated statements of operations,
comprehensive loss, changes in members' equity and of cash flows for the year
ended December 31, 2002 present fairly, in all material respects, the results of
operations and cash flows of Ridgewood UK, LLC (the "Company") for the year
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Florham Park, NJ
May 29, 2003
Ridgewood UK, LLC
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31,
---------------------------------
2004 2003
------------- -------------
Assets:
Cash and cash equivalents $ 23,453,588 $ 33,283,249
Trade receivables 4,974,322 3,419,671
Other current assets 2,363,066 2,426,665
------------- -------------
Total current assets 30,790,976 39,129,585
------------- -------------
Plant and equipment 53,792,387 36,011,951
Construction in progress 10,101,164 6,576,893
------------- -------------
63,893,551 42,588,844
Accumulated depreciation (11,555,595) (7,248,466)
------------- -------------
52,337,956 35,340,378
------------- -------------
Electric power sales contracts and other intangibles 26,077,459 24,165,360
Accumulated amortization (8,604,643) (6,366,794)
------------- -------------
17,472,816 17,798,566
------------- -------------
Other non-current assets 674,715 760,058
------------- -------------
Total assets $ 101,276,463 $ 93,028,587
============= =============
Liabilities and Members' Equity:
Liabilities:
Accounts payable $ 1,997,220 $ 3,676,900
Accrued expenses 3,898,427 4,029,517
Current portion of long-term debt 1,892,775 1,562,972
Current portion of capital lease obligations (principally affiliates) 1,829,552 772,554
Current portion of construction advances - affiliates 341,933 338,004
Due to affiliates 661,392 1,912,998
Other current liabilities 48,676 14,287
------------- -------------
Total current liabilities 10,669,975 12,307,232
Long-term debt, less current portion 21,065,111 21,193,090
Capital lease obligations, less current portion (principally affiliates) 23,653,518 10,198,319
Construction advances, less current portion - affiliates 35,685,487 34,178,955
Deferred income taxes 994,072 753,979
Minority interest 1,423,814 2,030,568
Commitments and contingencies
Members' equity 7,784,486 12,366,444
------------- -------------
Total liabilities and members' equity $ 101,276,463 $ 93,028,587
------------- -------------
See accompanying notes to the consolidated financial statements.
Ridgewood UK, LLC
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
For the Year Ended December 31,
--------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Power generation revenue $ 22,776,328 $ 13,713,905 $ 9,120,088
Cost of revenue, including depreciation and amortization
of $5,161,765, $3,547,985 and $2,978,809 in 2004,
2003 and 2002, respectively 20,484,901 13,633,056 9,991,516
------------ ------------ ------------
Gross profit (loss) 2,291,427 80,849 (871,428)
------------ ------------ ------------
Other operating expenses:
General and administrative expenses 528,422 545,567 451,224
Write down of investments in power generation
projects -- -- 854,367
------------ ------------ ------------
Total other operating expenses 528,422 545,567 1,305,591
------------ ------------ ------------
Income (loss) from operations 1,763,004 (464,718) (2,177,019)
------------ ------------ ------------
Other (expense) income:
Interest income 348,787 184,878 82,280
Interest expense (4,007,812) (2,493,943) (1,765,644)
Equity income in Spanish landfill projects -- -- 94,781
------------ ------------ ------------
Total other expense, net (3,659,025) (2,309,065) (1,588,583)
------------ ------------ ------------
Loss before income taxes and minority interest (1,896,020) (2,773,783) (3,765,602)
Income tax expense (benefit) 168,670 (347,639) (168,847)
------------ ------------ ------------
Net loss before minority interest (2,064,690) (2,426,144) (3,596,755)
Minority interest in loss of CLP Holdings, Ltd 222,034 335,996 779,603
------------ ------------ ------------
Net loss $ (1,842,656) $ (2,090,148) $ (2,817,152)
------------ ------------ ------------
See accompanying notes to the consolidated financial statements.
Ridgewood UK, LLC
Consolidated Statements of Changes in Members' Equity
- --------------------------------------------------------------------------------
Members' equity, December 31, 2001 $ 18,345,822
------------
Net loss (2,817,152)
Contributions 4,491
Foreign currency translation adjustment 1,749,377
------------
Members' equity, December 31, 2002 17,282,538
Net loss (2,090,148)
Distributions (4,269,459)
Foreign currency translation adjustment 1,443,513
------------
Members' equity, December 31, 2003 12,366,444
Net loss (1,842,656)
Distributions (3,507,583)
Foreign currency translation adjustment 768,281
------------
Members' equity, December 31, 2004 $ 7,784,486
============
Ridgewood UK, LLC
Consolidated Statements of Comprehensive Loss
- --------------------------------------------------------------------------------
For the Year Ended December 31,
-------------------------------------------
2004 2003 2002
----------- ----------- -----------
Net loss $(1,842,656) $(2,090,148) $(2,817,152)
Foreign currency translation adjustment 768,281 1,443,513 1,749,377
----------- ----------- -----------
Comprehensive loss $(1,074,375) $ (646,635) $(1,067,775)
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
Ridgewood UK, LLC
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
For the Year Ended December 31,
----------------------------------------------
2004 2003 2002
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (1,842,656) $ (2,090,148) $ (2,817,152)
Adjustments to reconcile net loss to cash flows provided
by (used in) operating activities, net of businesses acquired:
Depreciation and amortization 5,161,765 3,547,985 2,978,809
Stock compensation expense -- -- 309,217
Minority interest in CLPE Holdings, Ltd (222,034) (335,996) (779,603)
Write-down of investments in power generation
projects -- -- 854,367
Equity in earnings in Spanish landfill projects -- -- (94,781)
Changes in assets and liabilities, net
of businesses acquired
(Increase) decrease in trade receivables (1,208,039) 541,293 (835,800)
Decrease (increase) in other current assets 252,735 (1,873,881) (108,086)
Decrease (increase) in other non-current assets 141,396 -- --
(Decrease) increase in accounts payable (1,889,150) 2,404,942 (220,624)
(Decrease) increase in accrued expenses (443,911) 2,109,604 53,071
Increase in other current liabilities 32,667 13,138 --
Increase (decrease) in deferred income taxes 168,672 (242,699) (259,482)
(Decrease) increase in other non-current liabilities -- (79,208) 72,826
------------ ------------ ------------
Total adjustments 1,994,101 6,085,179 1,969,914
------------ ------------ ------------
Net cash provided by (used in) operating activities 151,445 3,995,031 (847,238)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (16,149,728) (13,112,768) (3,358,550)
Investment in Spanish landfill projects -- -- (395,887)
------------ ------------ ------------
Net cash used in investing activities (16,149,728) (13,112,768) (3,754,437)
------------ ------------ ------------
Cash flows from financing activities:
Construction advances - affiliates 12,100,122 41,473,868 --
Capital lease obligations (principally affiliates) (1,188,817) (201,809) --
Borrowings from bank -- -- 5,504,004
Repayments of bank debt (1,610,669) (1,140,205) (866,895)
Short term advances from affiliates 41,861 155,387 192,103
Distributions to minority interest (633,811) (505,390)
Distributions to members (4,650,102) (3,126,940) --
------------ ------------ ------------
Net cash provided by financing activities 4,058,582 36,654,911 4,829,212
------------ ------------ ------------
Effect of exchange rate on cash and cash equivalents 2,110,040 2,820,777 270,873
Net (decrease) increase in cash and cash equivalents (9,829,660) 30,357,951 498,410
Cash and cash equivalents at beginning of the period 33,283,249 2,925,298 2,426,888
------------ ------------ ------------
Cash and cash equivalents at end of period $ 23,453,588 $ 33,283,249 $ 2,925,298
------------ ------------ ------------
See accompanying notes to the consolidated financial statements.
Ridgewood UK, LLC
Notes to Consolidated Financial Statements Page 1
- --------------------------------------------------------------------------------
1. Organization and Business Activity
On May 26, 1999, Ridgewood UK, LLC was formed as a Delaware limited liability
company (the "Company"). On June 30, 1999, Ridgewood Electric Power Trust V
("Trust V") contributed $16,667,567 to the Company; in turn the Company's then
wholly owned subsidiary, Ridgewood UK Ltd. ("UK Ltd."), purchased six landfill
gas power plants located in the United Kingdom. During 2001, The Ridgewood Power
Growth Fund (the "Growth Fund") contributed $5,817,006 to the Company in return
for an approximate equity share of 30%. Approximately $3,400,000 of the
contributed funds, along with bank financing, was used to acquire four landfill
gas power plants in the United Kingdom with a capacity of 10.6 megawatts
("MWs"). Approximately $2,100,000 of the total purchase price of the acquired
plants was assigned to the electric power sales contracts acquired and is being
amortized over the life of the contracts (15 years).
On October 16, 2001, UK Ltd., through the issuance of approximately 24% of its
shares and $2,000,000 cash under the terms of a merger agreement (the "UK
Merger"), acquired certain of the assets and liabilities of CLP Services, Ltd.,
CLP Development, Ltd and CLP Envirogas, Ltd. (collectively the "Management and
Development Companies") and the equity and debt of new landfill projects. The
Management and Development Companies previously developed the various landfill
gas projects that were sold to UK Ltd. pursuant to the UK Merger. As a result of
the acquisition, which totaled seven plants, UK Ltd. provides its own operation,
management and development services. UK Ltd. was renamed CLPE Holdings Ltd.
("CLP") in 2001. In return for the stock issuance and $2,000,000 cash, CLP
received plant and equipment valued at approximately $4,201,000, a 50% equity
interest in landfill projects valued at approximately $744,000, cash of $454,000
and other assets with an approximate value of $1,000,000. CLP also assumed
liabilities of approximately $3,058,000. CLP assigned the electric power sales
contracts and other intangibles acquired a value of $6,781,000, which is being
amortized over the 15 year life of the underlying power sales contracts.
Since 2001, the members of the Company are Trust V and the Growth Fund
(collectively, the "Trusts"), both Delaware business trusts. Trust V, which owns
70% of the Company, is managed by Ridgewood Renewable Power LLC ("Ridgewood
Power"), its managing shareholder. The Growth Fund, which owns 30% of the
Company, is managed by Ridgewood Power and Ridgewood Power VI LLC, its managing
shareholders.
As of December 31, 2004, CLP owned twenty eight landfill methane gas-fired
electric generating projects in the United Kingdom with an installed capacity of
approximately 42.2 MWs. Seventeen of the projects representing approximately
26.5 MWs sells electricity under a 15 year contract to the Non Fossil Purchasing
Agency ("NFPA"), a non-profit organization that purchases electricity generated
by renewable sources on behalf of all British utilities. The remaining eleven
projects representing approximately 15.7 MWs are subject to PowerBank leases
(see note 4) and sell this output under one year contracts. As of October 31,
2005, CLP owned thirty one landfill methane gas-fired electric generating
projects in the United Kingdom with an installed capacity of approximately 48.7
MWs.
Certain minority shareholders of CLP attempted to renovate certain older
projects in the United Kingdom. Under the terms of the UK Merger agreement, if
they were successful in renovating these projects and the projects met certain
performance tests, CLP would be obligated to acquire the renovated projects in
exchange for the issuance of additional shares in CLP. The number of shares to
be issued was dependent on the projected financial performance of the renovated
projects. If CLP issued the maximum number of shares to acquire the renovated
projects, the Company's ownership of CLP would have fallen from 76.3% to 63.5%.
In the fourth quarter of 2002, CLP decided not to continue the development of
two projects it received as part of the 2001 UK Merger and recorded a writedown
of $854,367 to adjust the carrying value of the projects to zero. The writedown
has been presented as a separate line item under other operating expenses in the
Consolidated Statements of Operations.
As part of the UK Merger, the Company also acquired a 50% ownership in CLP
Organogas SL ("Organogas"), a 2 MWs plant located in Seville, Spain, as well as
a 50% interest in CLP Envirogas, SL,
Ridgewood UK, LLC
Notes to Consolidated Financial Statements Page 2
- --------------------------------------------------------------------------------
("Envirogas"), a management and development service company also located in
Seville, Spain (collectively, the "Spanish Landfill Projects"). Under the terms
of an agreement with one of its minority shareholders, effective January 1, 2003
the Company transferred its 50% interest in the Spanish Landfill Projects in
return for a portion of the minority shareholder's interest in CLP. As a result
of the transaction, the Company increased its ownership in CLP from 76% to 88%.
Beginning in 2002, the Company began to identify and develop sites in order to
take advantage of the United Kingdom's Renewable Obligation incentive program
("RO"). The RO program requires electricity suppliers serving electric users in
the U.K. to obtain renewable obligation certificates ("ROC") to demonstrate that
a portion of their electricity supply portfolio was produced by qualified
producers. Registered producers generate electricity from qualified renewable
sources. Accordingly, the Company agreed to borrow funds from Ridgewood
Renewable PowerBank LLC, an affiliated entity, to finance the Company's
expansion in 2002. In 2003 and 2004, the Company borrowed funds from Ridgewood
Renewable PowerBank II LLC, Ridgewood Renewable PowerBank III LLC and Ridgewood
Renewable PowerBank IV LLC, all affiliates of the Company (as they have a common
managing shareholder), to further finance expansion. As of December 31, 2004,
the Company received advances totaling $53,770,169 from the four respective
PowerBank Funds with the expectation to develop twenty nine projects with an
operating capacity of 37.6 MWs. As of October 31, 2005, the Company had
commissioned sixteen projects with a capacity of 21.3 MWs.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All material intercompany transactions have been
eliminated.
The Company used the equity method of accounting for its investments in
Organogas and Envirogas as the Company had the ability to exercise significant
influence over their operating and financial policies. The Company's equity
share of the operating results of Organogas and Envirogas were included in the
consolidated statements of operations until they were disposed in 2003.
Use of Estimates
The preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including provision for bad debts, carrying value of investments,
amortization and depreciation of plant and equipment and electric power sales
contracts, and recordable liabilities for litigation, contingencies and
deferrals. The Company bases its estimates on historical experience, current and
expected conditions and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
New Accounting Standards and Disclosures
SFAS 143
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 143,
Accounting for Asset Retirement Obligations, on the accounting for obligations
associated with the retirement of long-lived assets. SFAS 143 requires a
liability to be recognized in the financial statements for retirement
obligations meeting specific criteria. Measurement of the initial obligation is
to approximate fair value, with an equivalent amount recorded as an increase in
the value of the capitalized asset. The asset will be depreciated in accordance
with normal depreciation policy and the liability will be adjusted for the time
value of money, with a charge to the income statement, until the obligation is
settled. SFAS 143 is effective for fiscal years beginning after June 15, 2002.
The Company adopted SFAS 143 effective January 1, 2003, with no material impact
on the financial statements.
Ridgewood UK, LLC
Notes to Consolidated Financial Statements Page 3
- --------------------------------------------------------------------------------
SFAS 145
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 eliminates extraordinary accounting treatment for reporting gain or
loss on debt extinguishment, and amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The Company adopted SFAS
145 effective January 1, 2003, with no material impact on the financial
statements.
SFAS 146
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 requires recording costs associated
with exit or disposal activities at their fair values when a liability has been
incurred. The Company adopted SFAS 146 effective January 1, 2003, with no
material impact on the financial statements.
FIN 45
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others. FIN 45 elaborates on the
disclosures to be made by the guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002,
while the provisions of the disclosure requirements are effective for financial
statements of interim or annual reports ending after December 15, 2002. The
Company adopted FIN 45 during the fourth quarter of 2002 with no material impact
to the consolidated financial statements.
FIN 46R
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46") which changes the criteria by which one
company includes another entity in its consolidated financial statements. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after December 31, 2003, and apply in the
first fiscal period ending after March 15, 2004, for variable interest entities
created prior to January 1, 2004. The Company adopted the disclosure provisions
of FIN 46 effective December 31, 2003, with no material impact to the
consolidated financial statements. In December 2003, the FASB issued a revision
to FIN 46 ("FIN 46R") to clarify some of the provisions and to exempt certain
entities from its requirements. The Company implemented the full provisions of
FIN 46R effective January 1, 2004, with no material impact on the consolidated
financial statements.
SFAS 149
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
149 is generally effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The Company
adopted SFAS 149 effective July 1, 2003, with no material impact on the
financial statements.
SFAS 150
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for classifying and measuring certain financial
instruments with characteristics of both liabilities and equity. The Company
adopted SFAS 150 effective July 1, 2003, with no material impact on the
financial statements.
SFAS 153
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets--an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29,
Accounting for Nonmonetary
Ridgewood UK, LLC
Notes to Consolidated Financial Statements Page 4
- --------------------------------------------------------------------------------
Transactions, is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. The guidance
in that Opinion, however, included certain exceptions to that principle. This
Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. The
Company adopted SFAS 153 effective June 15, 2005, with no material impact on the
financial statements.
Significant Accounting Policies
Cash and cash equivalents
The Company considers all highly liquid investments with maturities when
purchased of three months or less, as cash and cash equivalents. Cash balances
with banks as of December 31, 2004 and 2003 exceeds insured limits by
approximately $23,406,000 and $33,239,000, respectively.
Trade receivables
Trade receivables are recorded at invoice price and do not bear interest. No
allowance for bad debt expense was provided based upon historical write-off
experience, evaluation of customer credit condition and the general economic
status of the customers.
Revenue recognition
Power generation revenue is recorded in the month of delivery, based on the
estimated volumes sold to customers at rates stipulated in the power sales
contract. Adjustments are made to reflect actual volumes delivered when the
actual volumetric information subsequently becomes available. Billings to
customers for power generation generally occur during the month following
delivery. Final billings typically do not vary significantly from estimates.
Foreign currency translation
The British Pound Sterling is the functional currency of the Company's operating
subsidiaries. The consolidated financial statements of the Company's non-United
States subsidiaries are translated into United States dollars using current
rates of exchange, with gains or losses included in the foreign currency
translation adjustment account in the members' equity section of the
consolidated balance sheets. The cumulative foreign currency translation
adjustment, which represents total accumulated other comprehensive income,
included in shareholders' equity at December 31, 2004 and 2003 amounts to a gain
of $2,224,109 and $1,455,828, respectively.
Impairment of Long-Lived Assets and Intangibles
The Company evaluates long-lived assets, such as property, plant and equipment
and specifically identifiable intangibles, when events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable. The determination of whether an impairment has occurred is made
annually by comparing the carrying value of an asset to the estimated future
undiscounted cash flows attributable to that asset. If an impairment has
occurred, the impairment loss recognized is the amount by which the carrying
value exceeds the estimated fair value of the asset.
Plant and equipment
Plant and equipment, consisting of land, power generation facilities, equipment
and construction in-progress are stated at cost. Renewals and betterments that
increase the useful lives of the assets are capitalized. Repair and maintenance
expenditures are expensed as incurred.
Depreciation is recorded using the straight-line method over the estimated
useful life of the assets, which ranges from 3 to 20 years with a weighted
average of 15 and 16 years at December 31, 2004 and 2003, respectively. During
the years ended December 31, 2004, 2003 and 2002, the Company recorded
depreciation expense of $3,525,107, $2,082,884 and $1,555,489, respectively.
Ridgewood UK, LLC
Notes to Consolidated Financial Statements Page 5
- --------------------------------------------------------------------------------
Electric power sales contracts and other intangibles
A portion of the purchase price of the landfill gas power plants was assigned to
the electric power sales contracts and is being amortized over the 15 year life
of the contracts on a straight-line basis. During the years ended December 31,
2004, 2003, and 2002, the Company recorded amortization expense of $1,636,658,
$1,465,101 and $1,423,320, respectively. The Company expects to record
amortization expense during the next five years as follows:
Year Ended
December 31, Amortization
------------ ------------
2005 $1,636,658
2006 1,636,658
2007 1,636,658
2008 1,636,658
2009 1,636,658
Supplemental cash flow information
Total interest paid during the years ended December 31, 2004, 2003 and 2002 was
$4,007,812, $2,493,943 and $1,765,644, respectively.
During the years ended December 31, 2004 and 2003, construction advances of
$14,083,446 and $10,582,075, respectively, were converted to capital leases.
Equipment acquired under non-affiliated capital leases during the years ended
December 31, 2004 and 2003 amounted to $727,610 and $559,355, respectively.
Effective January 1, 2003, the Company transferred its 50% interest in the
Spanish Landfill Projects, carried at $1,370,564 immediately prior to the
transaction, in return for a portion of the minority shareholder's interest in
CLP.
For the year ended December 31, 2003, the Company declared distributions to its
members of $4,269,459, of which $3,126,940 was paid; the remaining $1,142,519
was paid in January 2004.
Stock-Based Compensation
The Company applied SFAS No. 123, Accounting for Stock-Based Compensation, in
accounting for its stock option grants. Accordingly, compensation expense is
recognized for fixed stock options as if the fair values of all stock options as
of the grant date were recognized as expense over the vesting period in
accordance with SFAS No. 123. The outstanding stock option grants vest over a
three year period and have an exercise life of ten years from the date of grant.
For the year ended December 31, 2002, the Company had approximately 1,450,000 of
vested outstanding stock options and recorded compensation expense of $309,217.
In 2003, the Company cancelled the plan. Accordingly, no outstanding options
exist at December 31, 2004 and 2003.
Income taxes
The company uses the liability method in accounting for income taxes. Deferred
income tax reflects, where required, the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for tax purposes. No provision is made for United
States income taxes in the accompanying consolidated financial statements as the
United States income or loss of the Company is passed through and included in
the tax returns of the members.
Reclassification
Certain items in previously issued financial statements have been reclassified
for comparative purposes. This had no effect on income or loss.
Ridgewood UK, LLC
Notes to Consolidated Financial Statements Page 6
- --------------------------------------------------------------------------------
3. Long-Term Debt
Following is a summary of long-term debt at December 31, 2004 and 2003:
2004 2003
------------ ------------
Total long-term debt $ 22,957,886 $ 22,756,062
Less - Current portion (1,892,775) (1,562,972)
------------ ------------
Total long-term portion $ 21,065,111 $ 21,193,090
============ ============
In 2001, the Company renegotiated the terms of its long-term debt with its bank
("bank loan"). The renegotiated bank loans are repayable in semi annual
installments each March 31st and September 30th through 2014. The installments
vary in amount and include interest. At December 31, 2004, the outstanding debt
bears interest at the following rates: $9,419,280 at 7.08%, $9,264,397 at 7.73%
and $4,274,210 at LIBOR plus 1.31% (5.93% at December 31, 2004). At December 31,
2003, the outstanding debt bears interest at the following rates: $9,698,121 at
7.08%, $9,182,979 at 7.73%, and $3,874,962 at LIBOR plus 1.4% (5.48% at December
31, 2003). The notes to the bank loan are collateralized by substantially all of
the assets of the projects and the underlying credit agreement requires certain
of the Company's subsidiaries to maintain a debt service coverage ratio of 1.35
to 1 (as defined) as well as certain other ratios. At October 31, 2005, the UK
Projects outstanding debt was current and in good standing with its bank.
Scheduled principal repayments of long-term debt are as follows:
Year Ended
December 31, Payment
------------ -------
2005 $ 1,892,775
2006 2,103,156
2007 2,261,900
2008 2,294,536
2009 2,480,536
Thereafter 11,924,984
------------
Total $ 22,957,887
============
The Company has substantially reduced its interest rate variability to the bank
loan by entering into near term forward notional swap agreements with its bank.
Each year the Company can reset and fix the interest rate it is charged on the
long term portion of its bank loan or be charged the Company's prevailing
available interest rate, approximately LIBOR plus 1.4%. On March 31, 2005, the
Company reset the interest rate to 5.88% on the long term portion with the fixed
rate expiring on March 31, 2006.
At December 31, 2004 and 2003, cash and cash equivalents include restricted
balances of $3,228,453 and $2,649,442, respectively, which is equivalent to six
months of principal and interest payments on the bank loan.
4. Capital Lease Obligations and Construction Advances
Commencing in 2002, the Company began to develop and construct expansion of
certain existing facilities in order to take advantage of the RO programs (Note
1). As the Company required financing to maintain its expansion, it was decided
to raise the necessary financing from affiliates. Accordingly, Ridgewood Power
formed Ridgewood Renewable PowerBank LLC ("PB I") and began offering shares in
the fourth quarter of 2002. During the second quarter of 2003, Ridgewood Power
formed Ridgewood Renewable PowerBank II LLC ("PB II"); in the third quarter of
2003, Ridgewood Power formed Ridgewood Renewable PowerBank III LLC ("PBIII") and
during the third quarter of 2004, Ridgewood Power formed Ridgewood Renewable
PowerBank IV LLC ("PB IV"). Shortly after the formation of PBI, PBII, PBIII and
PBIV (collectively, the "PowerBank Funds"), all affiliates of the Company, the
offering period began for each respective PowerBank Fund. The proceeds raised by
PowerBank Funds,
Ridgewood UK, LLC
Notes to Consolidated Financial Statements Page 7
- --------------------------------------------------------------------------------
less the offering costs incurred by the PowerBank Funds, were initially provided
to the Company in the form of construction advances at the rate of approximately
(pound)850,000 per MWs.
As of December 31, 2004, the Company received construction advances of
$53,770,169 from the PowerBank Funds with the expectation to develop twenty nine
projects with an operating capacity of 37.6 MWs. The following table reflects
the construction advances and anticipated development per PowerBank Fund as of
October 31, 2005.
Offering Net Funds Anticipated Anticipated
Period Available For No. of Projects Capacity
Fund Ended (Closed) Construction * to be Developed (MW)
- --------------------------------------------------------------------------------
PBI Apr 2003 $ 9,478,645 5 7
PBII Jun 2003 16,227,833 10 11.6
PBIII Mar 2004 18,880,696 11 13
PBIV Nov 2004 9,182,995 3 6
- --------------------------------------------------------------------------------
Total $ 53,770,169 29 37.6
- --------------------------------------------------------------------------------
* In original $US, not impacted by currency translation
During the construction phase, the Company will pay construction period interest
at a rate of 10% on the construction period advances to the PowerBank Funds for
each respective project. Upon completion of construction and commencement of
operations of a project ("commissioning"), construction period interest charges
will cease, each respective facility site will be sold to the respective
PowerBank Fund at a predetermined price ((pound)850,000 per MWs), and said
project will be leased back to the Company subject to a 10 year minimum lease
pursuant to sale-lease back agreements. Accordingly, the outstanding
construction advances will convert to capital leases, determined on a project by
project basis. The minimum term of the respective capital leases will run for 10
years and are payable in quarterly installments at a rate of 12% with no
guaranteed residuals. For the years ended December 31, 2004, 2003 and 2002, the
PowerBank Funds charged the Company construction period interest of $3,459,012,
$1,236,900 and $0, respectively. The Company capitalized all of the construction
period interest charges incurred during construction less interest income earned
of $455,167, $379,306 and $0 for 2004, 2003 and 2002, respectively, and have
included the net in the basis of the assets constructed. Interest on the
PowerBank capital leases charged to the Company, and reflected within interest
expense on the accompanying consolidated statements of operations, was
$2,058,306, $581,220 and $0 in 2004, 2003 and 2002, respectively.
As of December 31, 2004 and 2003, the Company's capital lease obligations and
construction advances outstanding with the respective PowerBank Funds are as
follows:
2004 2003
---------------------------------------------------- ------------------------------------------------------
No. of Projects Capital Lease Construction No. of Projects Capital Lease Construction
Fund Commissioned Obligation Advances Commissioned Obligation Advances
- ----------------------------------------------------------------------------------------------------------------------------
PBI 5 $ 10,500,476 $ -- 5 $ 10,305,811 $ --
PBII 6 13,717,295 4,912,830 -- -- 17,536,010
PBIII -- -- 21,288,930 -- -- 16,980,949
PBIV -- -- 9,825,660 -- -- --
- -------------------------------------------------------------- ------------------------------------------------------
Total 11 $ 24,217,771 $ 36,027,420 5 $ 10,305,811 $ 34,516,959
- -------------------------------------------------------------- ------------------------------------------------------
Through October 31, 2005, the Company commissioned an additional five projects
and converted $8,540,766 from construction advances to capital lease
obligations.
Ridgewood UK, LLC
Notes to Consolidated Financial Statements Page 8
- --------------------------------------------------------------------------------
In addition to the PowerBank capital lease arrangements previously disclosed,
the Company also leases vehicles and equipment under various lease agreements
which vary in terms and rates ranging from 7.4% to 8.9%. At December 31, 2004
and 2003, the capital lease obligation for these assets was $1,265,299 and
$665,062, respectively.
Following is a summary of all capital lease obligations at December 31, 2004 and
2003:
2004 2003
----------- -----------
Gross payments $41,646,201 $18,221,900
Less - imputed interest 16,163,131 7,251,027
----------- -----------
Total capital lease obligation 25,483,060 10,970,873
Less - current maturity 1,829,552 772,554
----------- -----------
Capital lease obligation- long-term portion $23,653,518 $10,198,319
----------- -----------
At December 31, 2004, remaining scheduled repayments of capital lease obligation
principal are as follows:
Year Ended
December 31, Repayment
- ------------ ---------
2005 $ 1,829,552
2006 1,976,045
2007 2,175,496
2008 2,429,685
2009 2,740,147
Thereafter 14,332,141
-----------
Total $25,483,070
-----------
Included in plant and equipment are assets under capital lease obligation with a
cost of $23,244,429 and $8,428,312 at December 31, 2004 and 2003, respectively.
At December 31, 2004 and 2003, accumulated depreciation on capital lease
obligation amounted to $2,071,095and $391,270, respectively.
5. Purchase Commitments
At December 31, 2004, the Company had committed to purchase fifteen engines,
with an approximate cost of $5,100,000, and had contracted various development
costs, with an approximate cost of $1,400,000. The Company anticipates that its
purchase commitments will be fulfilled over the next two years. The engines and
development costs acquired are to be used in the Company's continued expansion
under the RO program. Upon completion of the respective facilities, such
facilities will be sold and leased back to the Company pursuant to the terms
described in Note 4.
6. Electric Power Sales Contract
The Company is committed to sell all of the output from seventeen of its
projects, representing 26.5 MWs, to the NFPA, a non-profit organization that
purchases electricity generated by renewable sources (such as landfill gas power
plants) on behalf of all British utilities in order to meet British
environmental protection goals. The electricity prices are adjusted annually by
a factor equal to the percentage increase in the United Kingdom Retail Price
Index. The output of the Company's remaining eleven projects, representing 15.7
MWs and subject to PowerBank financing, is sold under one year contracts. The
pricing and terms of these contracts are subject to change and reflect market
conditions at the time they are entered into.
7. Investments
The Company owned 50% interests in the Spanish Landfill Projects located in
Seville, Spain, which was obtained as part of the UK Merger. The Company
accounted for its ownership in the Spanish Landfill Projects under the equity
method of accounting. Effective January 1, 2003, the Company entered into an
Ridgewood UK, LLC
Notes to Consolidated Financial Statements Page 9
- --------------------------------------------------------------------------------
agreement with one of its minority shareholders. Under the terms of the
agreement, the Company transferred its 50% interest in the Spanish Landfill
Projects in return for a portion of the minority shareholder's interest in the
Company. This exchange resulted in a reduction to the minority interest
liability that was approximately $1.2 million greater than the recorded value of
the investments. Since the investments were only held for slightly more than one
year, the company recognized proportional corresponding reductions to the plant
and equipment and electric power sales contract acquired in the UK Merger. As a
result of the transaction, the Company increased its ownership in UK Ltd. from
76% to 88%.
8. Fair Value of Financial Instruments
At December 31, 2004 and 2003, the carrying value of the Company's cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses,
construction advances, long-term debt and capital lease obligations approximates
their fair value. The majority of the capital lease obligations and all of the
construction advances relate to the sales-lease back agreements between the
Company and its affiliated PowerBank Funds.
9. Transactions with Affiliates
From time to time, the Company records short-term payables and receivables from
other affiliates in the ordinary course of business. The amounts payable and
receivable with the other affiliates do not bear interest. At December 31, 2004
and 2003, the Company had outstanding payables with the following affiliates:
2004 2003
---------- ----------
Trust V $ 399,042 $1,166,214
Growth Fund 262,350 595,837
Other -- 150,947
---------- ----------
Total $ 661,392 $1,912,998
========== ==========
10. Income Taxes
For the year ended December 31, 2004, the Company recorded an income tax
provision for UK income taxes of $168,670 on U.K. losses before income taxes and
minority interest of $1,761,311. The Company recorded an income tax benefit of
$347,639 and $168,847 for the years ended December 31, 2003 and 2002,
respectively, on U.K. losses before income taxes and minority interest of
$2,773,783 and $3,765,602, respectively. The income tax benefit/provision
recorded is 30%, the statutory corporate tax rate of the U.K. At December 31,
2004 and 2003, the Company had a deferred net tax liability of $994,072 and
$753,979, respectively. The significant component of the Company's deferred
income tax liability is principally attributable to the taxable temporary
difference arising from accelerated depreciation for tax purposes and straight
line depreciation for book purposes on its plant and equipment.
At December 31, 2004, the Company had approximately $980,000 in net operating
losses available for an unlimited carry-forward period, which results in a
deferred tax asset in the amount of $295,000. The Company's net operating losses
may be somewhat limited in their utilization due to the tax structure in the
United Kingdom. Accordingly, the Company has determined, based upon the weight
of available evidence, that it is more likely than not that all of the deferred
tax assets resulting from the foreign operating losses will not be realized and
recorded a valuation allowance for $295,000. In 2004 and 2003, the net operating
losses utilized were approximately $232,000 and $0, respectively.
The following is a reconciliation of the income tax expense (benefit) computed
using the statutory foreign income tax rate to the actual income tax expense
(benefit) and its effective income tax rate.
Ridgewood UK, LLC
Notes to Consolidated Financial Statements Page 10
- --------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------------------------------------------------------
2004 2003 2002
-------------------------- ------------------------ --------------------------
Percent of Percent of Percent of
pretax pretax pretax
Amount income Amount income Amount income
-------------------------- ------------------------ --------------------------
Income tax benefit at
foreign statutory rate (528,393) -30.0% (809,750) -30.0% (1,129,681) -30.0%
Amortization of
foreign intangibles 482,018 27.4% 408,885 15.1% 524,529 13.9%
Other 215,045 12.2% 53,226 2.0% 436,305 11.6%
-------------------------- ------------------------ --------------------------
Income tax expense
(benefit) 168,670 9.6% (347,639) -12.9% (168,847) -4.5%
-------------------------- ------------------------ --------------------------
Components of the Company's Income tax expense (benefit) are as follows:
-------------------------------------
2004 2003 2002
-------------------------------------
Income tax expense (benefit):
Current tax $ -- $(106,637) $ --
Deferred tax 168,670 (241,002) (168,847)
-------------------------------------
$ 168,670 $(347,639) $(168,847)
=====================================