UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1 to Quarterly Report Pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
Commission File Number 0-21304
RIDGEWOOD ELECTRIC POWER TRUST II
(Exact name of registrant as specified in its charter.)
Delaware, U.S.A. 22-3206429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
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 [ ]
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operation
Dollar amounts in this discussion are rounded to the
nearest $1,000.
Introduction
The Trust carries its investment in the Projects it owns
at fair value and does not consolidate its financial
statements with the financial statements of the Projects.
Revenue is recorded by the Trust as cash distributions are
received from the Projects. Trust revenues may fluctuate
from period to period depending on the operating cash flow
generated by the Projects and the amount of cash retained to
fund capital expenditures.
The Berkshire Project receives revenue in the form of tipping
fees for waste delivered to the facility and from steam sold
under a long-term contract which expires in 2004. Tipping
fees are based on spot market prices which may fluctuate from
time to time. The Project's steam customer is not obligated to
extend the contract beyond the year 2004.
The Columbia Project receives revenue in the form of tipping
fees for waste delivered to the facility by local waste
haulers and transferred to long haul trucks for delivery
to distant landfills. The Project's profit margins have
been reduced due to competition from national waste
management companies operating in the same region.
Results of Operations
<TABLE>
<CAPTION>
Nine Months Ended September 30, Quarter Ended September
30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Monterey $ 389,000 $ 548,000 $ 132,000 $ 140,000
Berkshire 176,000 272,000 --- 88,000
Columbia 100,000 265,000 --- 48,000
San Diego --- 2,603,000 --- ---
Sunkist 77,000 122,000 75,000 70,000
Project development --- 73,000 --- ---
Interest income 151,000 78,000 47,000 31,000
Total $ 893,000 $ 3,961,000 $ 254,000 $ 377,000
</TABLE>
Total revenues decreased $3,068,000 (77%) to $893,000
for the first nine months of 1998 from $3,961,000 in the
first nine months of 1997 primarily because of the
$2,594,000 gain on the sale of the San Diego project
recorded in 1997. Distributions from the Monterey,
Columbia and Sunkist Projects also declined by $159,000,
$165,000 and $45,000, respectively from their 1997 levels.
The decline from the Monterey Project was attributable to
increased maintenance costs from a periodic overhaul of
its engines and reduced revenues because of the scheduled
shutdown. The lower distributions from the Columbia Project
in the nine months ended September 30, 1998 resulted from
the timing of distributions as well as lower profit margins
caused by increased competition from other waste management
companies operating in the region. The Trust expects this
competitive pressure to continue. The Sunkist Project,
which provides irrigation pumping to Southern California
farmers, suffered from the extraordinary rainfall that
occurred in the first half of 1998. The increase in interest
income from the 1997 period to the 1998 period reflects
amounts received in 1998 on the note received as part of
the sale price of the San Diego Project.
Distributions from the Berkshire Project, after continuing
at approximately the 1997 levels for the first six months
of 1998, ceased in the third quarter of 1998. In the third
quarter of 1998, the manager of Berkshire informed the Trust
that significant and undisclosed cost overruns in the
construction of an ash handling system for the Berkshire
Project had depleted the Project's funds, including reserve
funds for closure of a landfill and other reserves. The
project manager believed that Berkshire could not continue
operations without significant capital injections from its
two limited partners, one of whom is the Trust. The project
manager further advised the Trust that even if the Project
were to continue operations with additional contributed
capital, in that event distributions from Berkshire to the
Trust would cease for an indefinite period.
The Trust requested detailed additional information and a
revised operating plan from the project manager. In the
Trust's opinion, the project manager has not yet adequately
responded to these requests. The Trust also has conducted
on-site reviews by its financial and engineering personnel.
In early November 1998, the manager's parent company installed
a new financial team for the Project and offered to contribute
additional capital to the Project on the condition that the
Trust subordinate its rights to distributions from the Project.
The Trust is considering the offer and expects that
negotiations will begin shortly.
The Trust is continuing its own financial and engineering
review of the project and is reviewing the short-term and
long-term viability of the Berkshire project. After
considering the information provided and to be provided by
the project manager, its own review of the project and the
results, if any, of the negotiations, the Trust will
determine the extent to which it should reduce the carrying
value of its investment. The Trust is also considering
legal remedies against the project manager and its affiliates.
The changes in total revenues in the third quarter of 1998
as compared to the third quarter of 1997 were caused by the
same factors.
Expenses
For the nine months ended September 30, 1998, total expenses
decreased $245,000 (39%) to $376,000 from $621,000 in the
same period in 1997, reflecting a $281,000 write-off of
certain electric power equipment recorded in the 1997 period.
Expenses for the quarter ended September 30, 1998 were
consistent with the same period in 1997.
Liquidity and Capital Resources
During the first nine months of 1998, the Trust's operating
activities generated $765,000 of cash compared to $4,491,000
of cash during the same period in 1997. The change is
primarily attributable to the $3,242,000 of cash received
on the sale of the San Diego Project in the second quarter
of 1997. Cash distributions to shareholders decreased to
$1,141,000 in the first nine months of 1998 from $1,591,000
in the same period in 1997 due to decreases in the monthly
cash distribution rate in 1998.
In 1997, the Trust and Fleet Bank, N.A. (the "Bank") entered
into a revolving line of credit agreement, whereby the Bank
provides a three year committed line of credit facility of
$750,000. Outstanding borrowings bear interest at the Bank's
prime rate or, at the Trust's choice, at LIBOR plus 2.5%.
The credit agreement requires the Trust to maintain a ratio
of total debt to tangible net worth of no more than 1 to 1
and a minimum debt service coverage ratio of 2 to 1. The
credit facility was obtained in order to allow the Trust to
operate using a minimum amount of cash, maximize the amount
invested in Projects and maximize cash distributions to
shareholders. The Trust borrowed $200,000 in August 1998
and an additional $100,000 in October 1998 to allow more
consistent distributions to investors when revenues are
sporadic. The Trust anticipates that cash flows from
operations will be sufficient to repay these borrowings
by July 1999.
Obligations of the Trust are generally limited to payment
of the management fee to the Managing Shareholder, payments
for certain accounting and legal services to third persons
and distributions to shareholders of available operating
cash flow generated by the Trust's investments. The
Trust's policy is to distribute as much cash as is prudent
to shareholders. Accordingly, the Trust has not found
it necessary to retain a significant amount of working
capital. The need to retain working capital is further
reduced by the availability of the line of credit facility.
Year 2000 Remediation
The Managing Shareholder and its affiliates began year 2000
review and planning in early 1997. After initial remediation was
completed, a more intensive review discovered additional issues
and the Managing Shareholder began a formal remediation program
in late 1997. The Managing Shareholder has assessed problems,
has a written plan for remediation and is implementing the plan.
The accounting, network and financial packages for the
Ridgewood companies are basically off-the-shelf packages that
will be remediated, where necessary, by obtaining patches or
updated versions. The Managing Shareholder expects that updating
will be complete before the end of the first quarter of 1999 with ample time
for implementation, testing and custom changes to some modifications
made by Ridgewood to those programs. To a large extent, these software
packages would have been upgraded within a three to five year time frame,
even absent the Year 2000 problem. The Managing Shareholder estimates that
the Trust's allocable portion of the cost of upgrades that were accelerated
because of the Year 2000 problem is approximately $300.
The Managing Shareholder has identified two major systems affecting the
Trust that rely on custom-written software, the subscription/investor
relations and investor distribution systems, which maintain individual
investor records and effect disbursement of distributions to Investors. In
late 1998, the Managing Shareholder's outside computer consultant reviewed
the remediation completed for those systems and advised the Managing
Shareholder that material additional work was required for these systems to
work efficiently after 1999. The Managing Shareholder accordingly employed a
new specialist for Year 2000 remediation of those systems and other software
and for information systems support generally. The Managing Shareholder's
plan calls for completion of changes to the distribution system and testing
of that system by the end of the first quarter of 1999 and the Managing
Shareholder believes that this effort is ahead of schedule. The plan also
targets completion by the end of the second quarter of 1999 of minor changes
to the elements of the subscription/investor relations system that will allow
it to handle individual investors' records, and of all testing of those
modifications. Elements of that system used to generate internal sales
reports and other internal reports (but which do not affect investors'
records) will require major remediation. Remediation of the internal report
generating programs is expected to be completed by the end of the third
quarter of 1999 with testing and any additional modifications to be completed
no later than the end of 1999.
The Managing Shareholder is confident that all software systems
necessary to maintain investor records will be remediated and tested well
before the end of 1999. If the systems used to generate internal reports
from the subscription/investor relations system are not remediated by the end
of 1999, the Managing Shareholder is developing a contingency plan to use the
existing systems together with manual entry of data and checking of results
until remediation is complete. The Managing Shareholder has done this in the
past when system problems have occurred and it thus believes that there will
be no material or noticeable effect on the accuracy of its records or
generation of internal reports, although it may experience delays in
generating internal reports of a few days.
Some systems are being remediated using the "sliding window" technique,
in which two digit years less than a threshold number are assumed to be in
the 2000's and higher two digit numbers are assumed to be in the 1900's.
Although this will allow compliance for several years beyond the year
2000, eventually those systems will have to be rewritten again or
replaced. The Managing Shareholder expects that the ordinary course of
system upgrading will eventually cure this problem.
The Trust's share of the incremental cost for Year 2000 remediation of
this custom written software and related items for 1998 and prior years is
estimated at no more than $5,000 and is estimated to be not more than
approximately $4,500 for 1999.
Each of the Trust's facilities is being reviewed during the first
quarter of 1999 by an outside consultant or by personnel of Ridgewood Power
Management Corporation to determine if its electronic control systems contain
software affected by the Year 2000 problem or contain embedded components
that contain Year 2000 flaws. The Trust owns one small electric generating
facility and a number of pumping equipment sets, and interests in two waste
disposal facilities. These assets rely on mechanical and analog systems,
many of which are not expected to be vulnerable to Year 2000 problems. The
facilities use personal computers running packaged software for routine
recordkeeping and data logging, which have been upgraded as described above.
To date the Trust has discovered no other systems having a material impact on
output, environmental compliance, recordkeeping or any other material impact
that have Year 2000 concerns. The Trust's share of the estimated costs of
the consultant's review and of any minor upgrades or rehabilitation is
estimated at less than $25,000.
The Managing Shareholder and its affiliates do not
significantly rely on computer input from suppliers and customers
and thus are not directly affected by other companies' year 2000
compliance. However, if customers' payment systems or suppliers'
systems were adversely affected by year 2000 problems, the Trust
could be affected. For example, if the utility that purchases the Trust's
electricity output were unable to accept electricity because of system
malfunctions or transmission failures caused by Year 2000 non-compliance by
them or other persons, the Trust would lose revenues that could not be
recouped at a later date. Similarly, if utility payment systems were to
malfunction, the Trust's revenues might be delayed. Based on published
reports the Trust believes that it is now very unlikely that utilities will
fail to accept electricity for more than a very short time because of
malfunctions caused by the Year 2000 problem. Although the Trust also
believes that utility payment problems are unlikely and, if they occur, will
not exceed a month or two, there can be no assurance that payments to the
Trust will not be interrupted. The Trust has established a line of credit,
described above at "Liquidity and Capital Resources," to cover this
contingency and others. The Trust's non-utility customers are being
contacted during the first quarter of 1999. The Trust anticipates that the
customers will advise it that they do not anticipate that their own Year 2000
problems, if any, will interfere with taking or paying for the Trust's
outputs of electricity or heat, but that they will decline to give any
assurance that they will be able to do so if third persons fail to meet their
obligations to those non-utility customers.
The Trust's main supply contingency is the availability of natural gas
from pipelines for fueling the Monterey electric generating plant and the
irrigation pumping sets. Accordingly the Trust is exposed to a possible
interruption of gas supply if year 2000 problems interfere with pipeline
service. There is no reasonably available alternate source of gas and
accordingly an interruption of supply would necessarily close the plant or
halt the pumping sets. The Berkshire and Columbia facilities burn or process
municipal trash, the supply of which is unlikely to be affected by year 2000
problems. Availability of other supplies such as spare parts and consumables
may be affected by year 2000 problems; the Trust purchases these items from
many different sources, no single one or group of which could have a material
effect on the Trust if it or they were not Year 2000 compliant.
Because the Trust and the Managing Shareholder are extremely small
relative to the size of their material customers and suppliers and are paid
or supplied using the same systems as larger companies, requests for written
assurances of compliance from those customers or suppliers are not cost-
effective. Instead, the Managing Shareholder is monitoring industry trends
and compliance and is working to assure the Trust's continued operations.
Similarly, as described above, in most cases there are no cost-effective
contingency measures that can be taken against the major risks to the Trust
that utilities will fail to take or fail to pay for the Trust's electricity
output or that natural gas pipelines will fail to deliver gas as the result
of Year 2000 problems. The Trust believes that in the event that any embedded
components or other systems are found to have Year 2000 problems at its
power plants it will be able to remediate them promptly and before the end
of 1999. It is preparing contingency plans to operate the plants with manual
or analog control systems if Year 2000 problems cannot be remediated. Because
the plants are small and use simple technologies that are not dependent on
computers or date-sensitive electronics, the Trust believes that it is
unlikely that any of its facilities would be unable to operate because of
Year 2000 problems at the facility.
Based on its internal evaluations and the risks and contexts
identified by the Commission in its rules and interpretations, the Trust
believes that Year 2000 issues relating to its assets and remediation
program will not have a material effect on its facilities, financial position
or operations, and that the costs of addressing the Year 2000 issues will not
have a material effect on its future consolidated operating results,
financial condition or cash flows. However, this belief is based upon
current information, and there can be no assurance that unanticipated
problems will not occur or be discovered that would result in material
adverse effects on the Trust.
The Trust is unable to predict reliably what, if anything, will happen
after December 31, 1999 with regard to Year 2000 problems caused by the
inability of other businesses and government agencies to complete Year 2000
remediation. The Trust knows of no specific problems identified by customers
or suppliers that would have a material adverse effect on the Trust.
The reasonable worst case scenario anticipated by the Trust is that the
Monterey, Berkshire and Columbia facilities will be able to operate on and
after January 1, 2000 but that there may be some short-term inability of
their customers to pay promptly. In that event, the Trust's revenues could be
materially reduced for a temporary period and it might have to draw upon its
credit line to fund operating expenses until the utility makes up any payment
arrears. In addition, the Monterey and Pump Services facilities rely on
natural gas pipelines for fuel. If the pipelines do not function properly
because of year 2000 problems, these facilities would have to reduce or
cease operations. In 1998, the Monterey and Pump Services facilities
contributed approximately 58% of the Trust's revenues.
RIDGEWOOD ELECTRIC POWER TRUST II
SIGNATURES
Pursuant to the requirement of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
RIDGEWOOD ELECTRIC POWER TRUST II Registrant
March 8, 1999 By /s/ Martin V. Quinn
Date Martin V. Quinn
Senior Vice President and
Chief Financial Officer
(signing on behalf of the
Registrant and as principal
financial officer)
