As filed with the Securities and Exchange Commission on September 28, 2004
Registration No. 333-117527
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT
NO. 1
TO
FORM
S-1
REGISTRATION STATEMENT
UNDER
THE
SECURITIES ACT OF
1933
ORMAT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of Incorporation of Organization) |
4911
(Primary Standard Industrial Classification Code Number) |
88-0326081
(I.R.S. Employer Identification Number) |
||||||||
980
Greg Street, Sparks, Nevada 89431
(775)
356-9029
(Address, including zip
code, and telephone number including
area code, of
registrant's principal executive
offices)
Connie
Stechman
Ormat Technologies, Inc.
980 Greg Street, Sparks,
Nevada 89431
(775) 356-9029
(Name, address, including zip code, and telephone number including area code, of agent for service)
Copies to:
Philip
L. Colbran, Esq.
J. Allen Miller, Esq. Chadbourne & Parke LLP 30 Rockefeller Plaza New York, New York 10112 (212) 408-5100 |
Noam Ayali, Esq.
Chadbourne & Parke LLP 1200 New Hampshire Avenue, N.W. Washington, District of Columbia 20036 (202) 974-5600 |
Joshua G. Kiernan,
Esq.
Arthur A. Scavone, Esq. White & Case LLP 1155 Avenue of the Americas New York, New York 10036 (212) 819-8200 |
||||||||
Approximate
date of commencement of proposed sale to the public:
As soon as
practicable after this registration statement becomes
effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act") check the following box.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting offers to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion, dated September 28, 2004
PROSPECTUS
Shares
Common Stock
This is the initial public offering of shares of common stock of Ormat Technologies, Inc. We are offering shares of our common stock in this initial public offering. No public market currently exists for our common stock.
We intend to list our common stock on the New York Stock Exchange under the symbol "ORA." We anticipate that the initial public offering price will be between $ and $ per share.
Investing in our common stock involves risks. See "Risk Factors" beginning on page 14.
Per Share | Total | |||||||||
Public offering price | $ | |||||||||
Underwriting discount | $ | |||||||||
Proceeds to Ormat Technologies, Inc. (before expenses). | $ | |||||||||
We have granted the underwriters a 30-day option to purchase up to additional shares of common stock at the public offering price less the underwriting discount to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on or about , 2004.
L EHMAN B ROTHERS D EUTSCHE B ANK S ECURITIES
Sole Book - Running Manager Joint Lead Manager
RBC C APITAL M ARKETS W ELLS F ARGO S ECURITIES
, 2004
TABLE OF CONTENTS
Page | ||||||
Prospectus Summary | 1 | |||||
Risk Factors | 14 | |||||
Special Note Regarding Forward-Looking Statements | 31 | |||||
Use of Proceeds | 32 | |||||
Dividend Policy | 33 | |||||
Capitalization | 34 | |||||
Dilution | 35 | |||||
Selected Consolidated Financial and Other Data | 36 | |||||
Unaudited Pro Forma Condensed Combined Financial Data | 38 | |||||
Management's Discussion and Analysis of Financial Condition and Results of Operations | 43 | |||||
Business | 72 | |||||
Management | 102 | |||||
Certain Relationships and Related Transactions | 111 | |||||
Description of Certain Material Agreements | 115 | |||||
Principal Stockholders | 129 | |||||
Description of Capital Stock | 131 | |||||
Shares Eligible for Future Sale | 134 | |||||
United States Federal Income Tax Consequences to Non-U.S. Holders | 136 | |||||
Underwriting | 139 | |||||
Validity of Common Stock | 143 | |||||
Expert | 144 | |||||
Where You Can Find More Information | 145 | |||||
Index To Financial Statements | F-1 | |||||
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. This prospectus is not an offer to sell or a solicitation of an offer to buy shares of our common stock in any jurisdiction where such offer or any sale of shares of our common stock would be unlawful. The information in this prospectus is complete and accurate only as of the date on the front cover regardless of the time of delivery of this prospectus or of any sale of shares of our common stock.
We use market data and industry forecasts and projections throughout this prospectus, which we have obtained from market research, publicly available information and industry publications and surveys. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers' experience in the industry and there is no assurance that any of the projected amounts will be achieved. Similarly, we believe that the surveys and market research others have performed are reliable, but we have not independently verified this information.
Until , 2004 (25 days after the commencement of this offering), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.
PROSPECTUS SUMMARY
This summary highlights the material information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you. We urge you to read this entire prospectus carefully, including the more detailed information about us and about the shares of our common stock being sold in this offering and our consolidated financial statements and related notes appearing elsewhere in this prospectus, the "Risk Factors" section, and the documents to which we refer, before making an investment decision. Unless the context otherwise requires, all references in this prospectus to "Ormat," "the Company," "we," "us," "our company" or "our" refer to Ormat Technologies, Inc. and its consolidated subsidiaries. As used in this prospectus, "pro forma" information is information presented giving effect to the acquisition of the Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth project that was consummated on December 18, 2003 and the acquisition of the Puna project that was consummated on June 3, 2004, as if such acquisitions were consummated on January 1, 2003, but not including the acquisitions of the Steamboat 2/3 project and the Steamboat Hills project that were consummated on February 13 and May 20, 2004, respectively.
The Company
We are a leading vertically integrated company engaged in the geothermal and recovered energy power business. We design, develop, build, own and operate clean, environmentally friendly geothermal power plants, and we also design, develop and build, and plan to own and operate, recovered energy-based power plants, in each case using equipment that we design and manufacture. We conduct our business activities in two business segments. We develop, build, own and operate geothermal power plants in the United States and other countries around the world and sell the electricity they generate. In addition, we design, manufacture and sell equipment for geothermal and recovered energy-based electricity generation and other power generating units and provide services relating to the engineering, procurement, construction, operation and maintenance of geothermal and recovered energy power plants.
All of the projects that we currently own or operate produce electricity from geothermal energy sources. Geothermal energy is a clean, renewable and generally sustainable form of energy derived from the natural heat of the earth. Unlike electricity produced by burning fossil fuels, electricity produced from geothermal energy sources is produced without emissions of certain pollutants such as nitrogen oxide, and with far lower emissions of other pollutants such as carbon dioxide. Therefore, electricity produced from geothermal energy sources contributes significantly less to local and regional incidences of acid rain and global warming than energy produced by burning fossil fuels. Geothermal energy is also an attractive alternative to other sources of energy as part of a national diversification strategy to avoid dependence on any one energy source or politically sensitive supply sources.
In addition to our geothermal energy power generation business, we have developed and continue to develop products that produce electricity from recovered energy or so-called "waste heat." Recovered energy or waste heat represents residual heat that is generated as a by-product of gas turbine-driven compressor stations and in a variety of industrial processes, such as cement manufacturing, and is not otherwise used for any purpose. Such residual heat, that would otherwise be wasted, is captured in the recovery process and is used by recovered energy power plants to generate electricity without burning additional fuel and without emissions.
Our Power Generation Business
We are the fastest growing geothermal power generation company in the United States measured by growth in generating capacity. We increased our net ownership interest in generating capacity by 171 MW between December 31, 2002 and June 30, 2004, of which 155 MW was attributable to our acquisition of geothermal power plants from third parties and 16 MW was attributable to increased generating capacity of our existing geothermal power plants resulting from plant technology upgrades and improvements to our geothermal reservoir operations. We also own and operate or control and
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operate geothermal projects in Guatemala, Kenya, Nicaragua and the Philippines and continue to pursue opportunities to acquire and develop similar projects elsewhere in the world, including in the United States. Most of our projects are located in regions where there is, or is expected to be, demand for additional generating capacity.
In 2003, pro forma revenues from the sale of electricity by our domestic projects were $128.7 million, constituting approximately 79.1% of our total pro forma revenues from the sale of electricity, and pro forma revenues from the sale of electricity by our foreign projects were $33.9 million, constituting approximately 20.9% of our total pro forma revenues from the sale of electricity. In 2003, our actual revenues from the sale of electricity by our domestic projects were $43.8 million and by our foreign projects were $34.0 million, respectively. Pro forma revenues from the sale of electricity constituted approximately 79.6% of our total pro forma revenues in 2003. As noted previously, such pro forma revenues do not include revenues generated from the Steamboat 2/3 project and Steamboat Hills project, two additional domestic projects that were acquired this year.
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Our Projects. The table below summarizes key information relating to our projects that are currently in operation, under construction and/or subject to enhancement.
Project | Location |
Generating
Capacity in MW (1) |
Power Purchaser | |||||||||||||||
Projects in Operation | ||||||||||||||||||
Domestic | ||||||||||||||||||
Ormesa | East Mesa, California | 52 | Southern California Edison Company | |||||||||||||||
Heber 1 | Heber, California | 38 | Southern California Edison Company | |||||||||||||||
Heber 2 | Heber, California | 38 | Southern California Edison Company | |||||||||||||||
Steamboat (2) | Steamboat, Nevada | 34 | Sierra Pacific Power Company | |||||||||||||||
Mammoth | Mammoth Lakes, California | 26 | Southern California Edison Company | |||||||||||||||
Puna | Puna, Hawaii | 25 | Hawaii Electric Light Company | |||||||||||||||
Brady | Churchill County, Nevada | 20 | Sierra Pacific Power Company | |||||||||||||||
Steamboat Hills | Steamboat Hills, Nevada | 7 | Sierra Pacific Power Company | |||||||||||||||
Foreign | ||||||||||||||||||
Leyte | Philippines | 49 | PNOC - Energy Development Corporation | |||||||||||||||
Momotombo | Nicaragua | 28 | DISNORTE/DISSUR | |||||||||||||||
Zunil | Guatemala | 24 | Instituto Nacional de Electrification | |||||||||||||||
Olkaria III | Kenya | 13 | Kenya Power & Lighting Co. Ltd. | |||||||||||||||
Total Projects in Operation: | 354 | |||||||||||||||||
Projects under Construction | ||||||||||||||||||
Desert Peak 2 | Churchill County, Nevada | 15 | Nevada Power Company | |||||||||||||||
Galena | Steamboat Hills, Nevada | 13 | (3) | Sierra Pacific Power Company | ||||||||||||||
Amatitlan | Guatemala | 20 | Instituto Nacional de Electrification | |||||||||||||||
Projects under Enhancement | ||||||||||||||||||
Heber 1/2 Enhancement (4) | Heber, California | 18 | (6) | |||||||||||||||
Puna Enhancement (5) | Puna, Hawaii | 9 | (7) | |||||||||||||||
Steamboat Hills Enhancement (5) | Steamboat Hills, Nevada | 7 | ||||||||||||||||
Mammoth Enhancement (5) | Mammoth Lakes, California | 4 | ||||||||||||||||
Total Projects under Construction or Enhancement: | 86 | |||||||||||||||||
(1) | References to generating capacity in this table and throughout the prospectus refer to the net amount of electrical energy available for sale to the power purchaser, in the case of all of our existing domestic projects and the Momotombo and Olkaria III projects (two of our foreign projects), and to the generating capacity that is subject to the "take or pay" power purchase agreements in the case of the Leyte and Zunil projects (another two of our foreign projects). In the case of projects under construction or enhancement, references to generating capacity refer to the net amount of electrical energy that we expect will be available for sale to the relevant power purchasers. This column represents the net generating capacity of the project, not our net ownership in such generating capacity. Such net generating capacity is based on either (i) operational data for the previous 12 months or (ii) with respect to the Ormesa and Puna projects, for which current operational data for the previous 12 months is not available but is available for a shorter period, such available data on an annualized basis. |
(2) | This reference includes the Steamboat 1/1A project and the Steamboat 2/3 project. |
(3) | Incremental to the Steamboat complex. |
(4) | We are currently in discussions with Southern California Edison Company, the power purchaser for this project, regarding these proposed enhancements. |
(5) | These enhancements are in their early engineering stage. |
(6) | The enhancement will result in an additional 8 MW that can be sold under the existing power purchase agreement and another 10 MW that, subject to the negotiation of offtake arrangements, will be sold either to the existing power purchaser or a different power purchaser. |
(7) | The enhancement will result in an additional 3 MW that can be sold under the existing power purchase agreement and another 6 MW that, subject to the negotiation of offtake arrangements, will be sold to the existing power purchaser. |
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All of the revenues that we derive from the sale of electricity are from fully-contracted payments under long-term power purchase agreements. In the United States, the power purchasers under such agreements are all investor-owned electric utilities. More than 70% of our total pro forma revenues for 2003 from the sale of electricity by our domestic projects were derived from power purchasers that currently have investment grade credit rating. The purchasers of electricity from our foreign projects are either state-owned entities or recently privatized state-owned entities. We have obtained political risk insurance from the Multilateral Investment Guarantee Agency of the World Bank group for all of our foreign projects (other than the Leyte project) in order to cover a portion of any loss that we may suffer upon the occurrence of certain political events covered by such insurance.
Development, Construction, and Acquisition. We have experienced significant growth in recent years, principally through the acquisition of geothermal power plants from third parties and the expansion and enhancement of our existing projects. In December 2003, we acquired the Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth project, in February 2004, we acquired the Steamboat 2/3 project, in May 2004, we acquired the Steamboat Hills project and in June 2004, we acquired the Puna project. In total, we have increased our net ownership interest in generating capacity from 94 MW as of December 31, 2001 to 312 MW as of June 30, 2004. We currently expect to continue growing our power generation business through:
• | the development and construction of new geothermal and recovered energy-based power plants; |
• | the expansion and enhancement of our existing projects; and |
• | the acquisition of additional geothermal and other renewable assets from third parties. |
As part of these efforts, we regularly monitor requests for proposals from, and submit bids to, investor-owned electric utilities in the United States to provide additional generating capacity, primarily in the western United States where geothermal resources are generally concentrated. We also respond to international tenders issued by foreign state-owned electric utilities for the development, construction and operation of new geothermal power plants. In addition, we apply our technological expertise to upgrade the facilities of our existing geothermal power plants and to continuously monitor and manage our existing geothermal resources in order to increase the efficiency and generating capacity of such facilities.
We are currently in varying stages of development or construction of new projects and enhancement of existing projects. Based on our current development and construction schedule, which is subject to change at any time and which we may not achieve, we expect to have approximately 66 additional MW in generating capacity in the United States by the end of 2006 and approximately 20 additional MW in Guatemala by June 2006. We are also currently in discussions with the Kenyan government and Kenya Power & Lighting Co. Ltd. regarding, among other things, the construction of Phase II of the Olkaria III project in Kenya which, if completed, would add approximately 35 MW in generating capacity to the current Olkaria III project. We are also in the early development stage of two new projects in El Salvador and a project in China. We intend to pursue these opportunities to the extent they continue to meet our investment criteria and business strategy.
Our Products Business
We design, manufacture and sell the following products for electricity generation and provide the following services:
Power Units for Geothermal Power Plants. We design, manufacture and sell power units for geothermal electricity generation, which we refer to as Ormat Energy Converters or OECs. Our customers include contractors and geothermal plant owners and operators.
Power Units for Recovered Energy-Based Power Generation. We design, manufacture and sell power units used to generate electricity from recovered energy or so-called "waste heat" that is
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generated as a residual by-product of gas turbine-driven compressor stations and a variety of industrial processes, such as cement manufacturing, and is not otherwise used for any purpose. Our existing and target customers include interstate natural gas pipeline owners and operators, gas processing plant owners and operators, cement plant owners and operators, and other companies engaged in other energy-intensive industrial processes.
Remote Power Units and other Generators. We design, manufacture and sell fossil fuel powered turbo-generators with a capacity ranging between 200 watts and 5,000 watts, which operate unattended in extreme climate conditions, whether hot or cold. Our customers include contractors installing gas pipelines in remote areas. In addition, we design, manufacture and sell generators for various other uses, including heavy duty direct current generators.
Engineering, Procurement and Construction of Power Plants. We engineer, procure and construct (EPC), as an EPC contractor, geothermal and recovered energy power plants on a turnkey basis, using power units we design and manufacture. Our customers are geothermal power plant owners as well as the same customers described above that we target for the sale of our power units for recovered energy-based power generation. Unlike many other companies that provide EPC services, we have an advantage in that we are using our own manufactured equipment and thus have better control over the timing and delivery of required equipment and its costs.
Operation and Maintenance of Power Plants. We provide operation and maintenance services for geothermal power plants owned by us and by third parties.
In 2003, our actual revenues from our products business were $41.7 million, constituting approximately 20.4% of our total pro forma revenues and approximately 34.9% of our actual revenues.
Market Opportunity
The geothermal energy industry in the United States experienced significant growth in the 1970s and 1980s, followed by a period during which only minimal growth and development occurred in the United States. Since 2001, there has been renewed interest in geothermal energy in the United States as production costs for electricity generated from geothermal resources have become more competitive relative to fossil fuel-based electricity generation, due to the increasing cost of natural gas, and as legislative and regulatory incentives, such as state renewable portfolio standards, have become more prevalent.
Electricity generation from geothermal resources in the United States currently constitutes a $1.5 billion-a-year industry (in terms of revenues) and accounts for 19% of all non-hydropower renewable energy-based electricity generation in the United States. A recent forecast of the U.S. Department of Energy projects the addition of geothermal installations with generating capacity totaling 6,840 MW by 2025, based on the assumption that natural gas prices will remain relatively stable at current levels.
Much of this growth potential stems from growing global concerns about the environment. Power plants that use fossil fuels generate higher levels of air pollution and their emissions have been linked to acid rain and global warming. In response to an increasing demand for "green" energy, many countries have adopted legislation requiring, and providing incentives for, electric utilities to sell electricity generated from renewable energy sources. In the United States, Arizona, California, Connecticut, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, Pennsylvania, Rhode Island, Texas, and Wisconsin have all adopted renewable portfolio standards, renewable portfolio goals, or other similar laws requiring or encouraging electric utilities in such states to generate or buy a certain percentage of their electricity from renewable energy sources or recovered heat sources. Eleven of these seventeen states (including California, Nevada and Hawaii, where we have been the most active in our geothermal energy development and in which all of our U.S. projects are located) define geothermal resources as "renewables." Several other states are also considering the adoption of renewable portfolio standards, renewable portfolio goals or similar legislation. In addition, in some states an entity generating electricity from renewable resources, such
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as geothermal energy, is awarded renewable energy credits, which we refer to as RECs, that can be sold for cash. We believe that these legislative measures and initiatives present a significant market opportunity for us.
Outside of the United States, the majority of power generating capacity has historically been owned and controlled by governments. These foreign governments have taken a variety of approaches to encourage the development of competitive power markets, including awarding long-term contracts for energy and capacity to independent power generators and creating competitive wholesale markets for selling and trading energy, capacity and related products. Different countries have also adopted active governmental programs designed to encourage clean renewable energy power generation. We believe that these developments and governmental plans will create opportunities for us to acquire and develop geothermal power generation facilities internationally as well as create additional opportunities for us to sell our remote power units and other products.
In addition to our geothermal power generation activities, we have also identified recovered energy power generation as a significant market opportunity for us in the United States and internationally. We are initially targeting the North American market, where we expect that recovered energy-based power generation will be derived principally from compressor stations along interstate pipelines, from midstream gas processing facilities, and from processing industries in general. Several states, as well as the federal government, have recognized the environmental benefits of recovered energy-based power generation. We believe that the European market has similar potential and we expect to leverage our early success in North America in order to expand into such market and other markets worldwide. In North America alone, we estimate the potential total market for recovered energy-based generation to be approximately 1000 MW.
Competitive Strengths
Competitive Assets. Our assets are competitive for the following reasons:
• | Contracted Generation . All of the electricity generated by our geothermal power plants is currently sold pursuant to long-term power purchase agreements, providing generally predictable cash flows. |
• | Baseload Generation . All of our geothermal power plants supply a part of the baseload capacity of the electric system in their respective markets, meaning that they operate to serve all or a part of the minimum power requirements of the electric system in such market on an around-the-clock basis. Because our projects supply a part of the baseload needs of the respective electric system and are only marginally weather dependent, we have a competitive advantage over other renewable energy sources, such as wind power, solar power, or hydro-electric power (to the extent dependent on rainfall), which compete with us to meet electric utilities' renewable portfolio requirements but which cannot serve baseload capacity because of the weather dependence and thus intermittent nature of these other renewable energy sources. |
• | Competitive Pricing . The electricity generated by geothermal power plants is generally price competitive as compared to electricity generated from fossil fuels or other renewable sources under existing economic conditions and existing tax and regulatory regimes. |
Growing Legislative Demand for Environmentally-Friendly Renewable Resource Assets. All of our existing projects produce electricity from geothermal energy sources which, unlike burning fossil fuels, produce electricity without emissions of certain pollutants such as nitrogen oxide, and with far lower emissions of other pollutants such as carbon dioxide. Such clean and renewable characteristics of geothermal energy give us a competitive advantage over fossil fuel-based electricity generation as countries increasingly seek to balance environmental concerns with demands for reliable sources of electricity.
High Efficiency from Vertical Integration. Unlike any of our competitors in the geothermal industry, we are a fully-integrated geothermal equipment, services and power provider. We design,
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develop and manufacture most of the equipment we use in our geothermal power plants which allows us to operate and maintain our projects efficiently and to respond to operational issues in a timely and cost-efficient manner.
Highly Experienced Management Team. The key members of our highly qualified senior management team have worked in the power industry for most of their careers and average over 20 years of industry experience.
Technological Innovation. Our ability to draw upon internal resources from various disciplines related to the geothermal power sector, such as geological expertise relating to reservoir management and equipment engineering relating to power units, allows us to be innovative in creating new technologies and technological solutions.
No Exposure to Fuel Price Risk. A geothermal power plant does not need to purchase fuel (such as coal, natural gas, or fuel oil) in order to generate electricity. Thus, once the drilling of geothermal wells is complete, the plant is not exposed to fuel price or fuel delivery risk.
Business Strategy
Our strategy is to continue building a geographically balanced portfolio of geothermal and recovered energy assets, and to continue to be a leading manufacturer and provider of products and services related to renewable energy. We intend to implement this strategy through:
• | developing and constructing new projects; |
• | increasing output from our existing projects; |
• | acquiring additional geothermal and other renewable assets; |
• | investing in research and development of renewable energy technologies; |
• | developing recovered energy projects; and |
• | entering into long-term contracts with energy purchasers that will provide stable cash flows. |
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History
Ormat Industries is our parent company. Ormat Industries is an international power systems company whose predecessor, Ormat Turbines Ltd., was founded in 1965 by Lucien and Yehudit Bronicki for the principal purpose of developing equipment for the production of clean, renewable energy. Lucien and Yehudit Bronicki continue to be Ormat Industries' controlling shareholders. Ormat Industries and its subsidiaries have developed geothermal power plants, remote power units, industrial recovered energy systems and solar energy plants worldwide. At December 31, 2003, Ormat Industries and its subsidiaries had more than 600 employees worldwide, and had revenues of approximately $119.8 million. Ormat Industries is listed on the Tel Aviv Stock Exchange under the symbol "ORMT." Ormat Industries and its subsidiaries have supplied, developed, constructed or rehabilitated gross installed capacity of approximately 700 MW of geothermal power plants (or over 700 MW including recovered energy power plants) in 22 countries, constituting approximately 9% of geothermal installed capacity worldwide.
We were formed by Ormat Industries in 1994 for the purpose of investing and holding ownership interests in power projects, as well as constructing and operating power plants owned by us and by third parties. We have served as the holding company for all of Ormat Industries' geothermal power projects. In December 2003, we acquired the Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth project, in February 2004, we acquired the Steamboat 2/3 project, in May 2004, we acquired the Steamboat Hills project and in June 2004, we acquired the Puna project. On February 13, 2004, Ormat Funding, our wholly owned subsidiary, completed an offering of senior secured notes that raised gross proceeds of $190 million. Pursuant to the terms of such offering, Ormat Funding is required to exchange the senior secured notes it issued thereunder for senior secured notes registered under the Securities Act of 1933, as amended, no later than January 2005. Effective as of July 1, 2004, Ormat Industries sold to us its business relating to the manufacturing and sale of energy-related equipment and services, which is based in Israel. Following this sale, we now hold all of Ormat Industries' power generation products business, and had, as of July 1, 2004, 676 employees. Upon completion of this offering, Ormat Industries will own % of our outstanding common stock.
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Corporate Structure
A summary chart of our corporate structure showing our main subsidiaries and assets following the completion of this offering is depicted below.
9
The Offering
Issuer | Ormat Technologies, Inc. | |
Common stock offered by Ormat Technologies, Inc. | shares | |
Underwriters' option to purchase additional shares | shares | |
Common stock outstanding after giving effect to this offering | shares | |
Use of proceeds | We estimate that the net proceeds we will receive from this offering will be approximately $ million, or approximately $ million if the underwriters exercise their over-allotment option in full, in each case after deducting the underwriting discounts and commissions and estimated expenses of this offering payable by us. We expect to use the net proceeds from this offering to fund working capital and for general corporate purposes, which may include making investments or acquisitions. We have no present understanding or agreement relating to any specific acquisition. Accordingly, management will have significant flexibility in applying the net proceeds of the offering. Pending the use of such proceeds as described above, we intend to invest such proceeds in interest-bearing instruments. See "Use of Proceeds." | |
Proposed New York Stock Exchange symbol | ORA | |
Except as otherwise indicated, all common stock information in this prospectus is based on the number of shares of common stock outstanding on and:
• | assumes an initial public offering price of $ per share; |
• | excludes shares of common stock subject to outstanding stock options with a weighted average exercise price of $ per share; |
• | excludes shares of common stock available for future grant or issuance under our 2004 Incentive Compensation Plan; and |
• | excludes the shares of common stock subject to the option granted to the underwriters to purchase additional shares of common stock in this offering to cover over-allotments. |
Dividend Policy | We have adopted a dividend policy pursuant to which we currently expect, commencing with the first full fiscal quarter following the consummation of this offering, to distribute at least 20% of our annual profits available for distribution by way of quarterly dividends. Notwithstanding this policy, dividends will be paid only when, as and if determined by our board of directors out of funds legally available therefor. Our board of directors may, from time to time, examine our dividend policy and may, in their absolute discretion, change such policy. | |
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Risk Factors
Investing in our common stock involves a number of material risks. For a discussion of certain risk factors that should be considered in connection with your investment in our common stock, see "Risk Factors" beginning on page 14.
Corporate Information
Our principal executive offices are located at 980 Greg Street, Sparks, Nevada 89431. Our telephone number is (775) 356-9029. The majority of our senior management and all of our production and manufacturing facilities are located in Yavne, Israel.
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Summary Historical and Unaudited Pro Forma Condensed Consolidated Financial Data
The following table sets forth our summary historical and unaudited pro forma condensed consolidated financial data for the periods ended and at the dates indicated in such table. We have derived the historical consolidated financial data as of and for the periods ended December 31, 2001, 2002 and 2003 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the historical consolidated financial data as of and for the six months ended June 30, 2003 and June 30, 2004 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. In the opinion of our management, our unaudited historical condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our financial position, results of operations and cash flows. The results of operations for the six-month periods ended June 30, 2003 and June 30, 2004 are not necessarily indicative of the operating results to be expected for the full fiscal years encompassing such periods. The pro forma data for the fiscal year ended December 31, 2003 is derived from the unaudited pro forma condensed financial statements included elsewhere in this prospectus and gives effect to the acquisition of the Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth project that was consummated on December 18, 2003 and the acquisition of the Puna project that was consummated on June 3, 2004, as if such acquisitions were consummated on January 1, 2003, but not including the acquisitions of the Steamboat 1/1A project, Steamboat 2/3 project and the Steamboat Hills project that were consummated on June 30, 2003, February 13, 2004 and May 20, 2004, respectively. The pro forma data also gives effect to (i) Ormat Funding's issuance of 8¼% senior secured notes in the amount of $190 million, which offering was completed on February 13, 2004, and (ii) OrCal Geothermal's loan agreement with Beal Bank in the amount of $154.5 million in connection with the acquisition of the Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth projects.
The information set forth below should be read in conjunction with "Unaudited Pro Forma Condensed Financial Data", "Selected Historical Financial Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the financial statements relating to the Heber 1, Heber 2, Mammoth and Puna projects included elsewhere in this prospectus.
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Summary Historical and Unaudited Pro Forma Condensed Consolidated Financial Data
Year Ended December 31, |
Six
Months
Ended June 30, |
|||||||||||||||||||||||||||||
Pro Forma | ||||||||||||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2003 | 2004 | |||||||||||||||||||||||||
(in
thousands,
except per share data) |
(in
thousands,
except per share data) |
|||||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||
Electricity Segment | $ | 33,956 | $ | 65,491 | $ | 77,752 | $ | 162,620 | $ | 35,651 | $ | 70,215 | ||||||||||||||||||
Products Segment | 13,959 | 20,138 | 41,688 | 41,688 | 16,022 | 29,491 | ||||||||||||||||||||||||
47,915 | 85,629 | 119,440 | 204,308 | 51,673 | 99,706 | |||||||||||||||||||||||||
Cost of Revenues: | ||||||||||||||||||||||||||||||
Electricity Segment | 12,536 | 33,482 | 46,726 | 98,901 | 21,762 | 40,612 | ||||||||||||||||||||||||
Products Segment | 17,454 | 17,293 | 29,494 | 29,494 | 10,709 | 23,122 | ||||||||||||||||||||||||
29,990 | 50,775 | 76,220 | 128,395 | 32,471 | 63,734 | |||||||||||||||||||||||||
Gross margin | 17,925 | 34,854 | 43,220 | 75,913 | 19,202 | 35,972 | ||||||||||||||||||||||||
Operating income | 4,217 | 20,227 | 25,490 | 56,549 | 11,612 | 25,605 | ||||||||||||||||||||||||
Interest expense | (4,333 | ) | (6,179 | ) | (8,120 | ) | (40,363 | ) | (3,835 | ) | (19,475 | ) | ||||||||||||||||||
Income (loss) from continuing operations | (1,732 | ) | 8,514 | 15,659 | 33,500 | 5,819 | 6,279 | |||||||||||||||||||||||
Discontinued operations | (4,681 | ) | (9,558 | ) | — | — | — | — | ||||||||||||||||||||||
Net income (loss) | $ | (6,413 | ) | $ | (1,044 | ) | $ | 15,454 | $ | 33,500 | $ | 5,614 | $ | 6,279 | ||||||||||||||||
Basic and diluted income (loss) per share | $ | (0.21 | ) | $ | (0.03 | ) | $ | 0.50 | $ | 1.09 | $ | 0.18 | $ | 0.20 | ||||||||||||||||
Income
(loss) from
continuing operations |
$ | (0.06 | ) | $ | 0.28 | $ | 0.51 | $ | 1.09 | $ | 0.19 | $ | 0.20 | |||||||||||||||||
Loss from discontinued operations | (0.15 | ) | (0.31 | ) | — | — | — | — | ||||||||||||||||||||||
Net income (loss) | (0.21 | ) | (0.03 | ) | 0.50 | 1.09 | 0.18 | 0.20 | ||||||||||||||||||||||
Weighted average number of shares outstanding | 30,769,230 | 30,769,230 | 30,769,230 | 30,769,230 | 30,769,230 | 30,786,136 | ||||||||||||||||||||||||
June 30, 2004 | ||||||||||||||
(Unaudited) | ||||||||||||||
Balance Sheet Data: | ||||||||||||||
Cash and cash equivalents | $ | 21,170 | ||||||||||||
Working capital | 11,124 | |||||||||||||
Property, plant and equipment, net | 472,217 | |||||||||||||
Total assets | 778,183 | |||||||||||||
Long-term debt | 442,300 | |||||||||||||
Notes payable to Parent | 193,852 | |||||||||||||
Stockholder's equity | 63,232 | |||||||||||||
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RISK FACTORS
You should carefully consider the risks described below together with the other information included in this Prospectus before deciding to invest in our common stock. Our business, financial condition, or results of operations could be adversely affected by any of these risks. If any of these risks occur, the value of our common stock could decline and you might lose all or part of your investment.
Risks Relating to Our Business and Industry
Our financial performance depends on the successful operation of our geothermal power plants, which is subject to various operational risks.
We depend upon the successful operation of our subsidiaries' geothermal power plants. In connection with such operations, we derived approximately 70.4% of our total revenues for the six months ended June 30, 2004 from the sale of electricity. The cost of operation and maintenance and the operating performance of geothermal power plants may be adversely affected by a variety of factors, including some which are discussed elsewhere in these risk factors and the following:
• | regular and unexpected maintenance and replacement expenditures; |
• | shutdowns due to the breakdown or failure of our equipment or the equipment of the transmission serving utility; |
• | labor disputes; |
• | the presence of hazardous materials on our project sites; and |
• | catastrophic events such as fires, explosions, earthquakes, floods, releases of hazardous materials, severe storms or similar occurrences affecting our projects or any of the power purchasers or other third parties providing services to our projects. |
Any of these events could significantly increase the expenses incurred by our projects or reduce the overall generating capacity of our projects and could significantly reduce or entirely eliminate the revenues generated by one or more of our projects, which in turn would reduce our net income and could materially and adversely affect our business, financial condition, future results and cash flow.
Our exploration, development, and operation of geothermal energy resources is subject to geological risks and uncertainties, which may result in decreased performance or increased costs for our projects.
Our business involves the exploration, development and operation of geothermal energy resources. These activities are subject to uncertainties, which vary among different geothermal reservoirs and are in some respects similar to those typically associated with oil and gas exploration, development and exploitation, such as dry holes, uncontrolled releases and pressure and temperature decline, all of which can increase our operating costs and capital expenditures or reduce the efficiency of our power plants. Prior to our acquisition of the Steamboat Hills project, one of the wells related to the project experienced an uncontrolled release. In addition, the high temperature and high pressure in the Puna project's geothermal energy resource requires special reservoir management and monitoring. Further, since the commencement of their operations, several of our projects have experienced geothermal resource cooling in the normal course of operations. The temperature of the geothermal resource at our Heber 1 project has declined since the project commenced operations and, as a result, the project currently operates at a level that is close to the minimum performance requirements set forth in the project's power purchase agreement. Because geothermal reservoirs are complex geological structures, we can only estimate their geographic area and sustainable output. The viability of geothermal projects depends on different factors directly related to the geothermal resource, such as the heat content (the relevant composition of temperature and pressure) of the geothermal reservoir, the useful life (commercially exploitable life) of the reservoir and operational factors relating to the extraction of geothermal fluids. Our geothermal energy projects may suffer an unexpected decline in the capacity of their respective geothermal wells and are exposed to a risk of geothermal reservoirs not being sufficient for sustained generation of the electrical power capacity
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desired over time. In addition, we may fail to find commercially viable geothermal resources in the expected quantities and temperatures, which would adversely affect our development of geothermal power projects.
Additionally, geothermally active areas, such as the areas in which our projects are located, are subject to frequent low-level seismic disturbances. Serious seismic disturbances are possible and could result in damage to our projects or equipment or degrade the quality of our geothermal resources to such an extent that we could not perform under the power purchase agreement for the affected project, which in turn could reduce our net income and materially and adversely affect our business, financial condition, future results and cash flow. If we suffer a serious seismic disturbance, our business interruption and property damage insurance may not be adequate to cover all losses sustained as a result thereof. In addition, insurance coverage may not continue to be available in the future in amounts adequate to insure against such seismic disturbances.
Our business development activities may not be successful and our projects under construction may not commence operation as scheduled despite the expenditure of significant amounts of capital.
We are currently in the process of developing and constructing a number of new power plants. Our success in developing a particular project is contingent upon, among other things, negotiation of satisfactory engineering and construction agreements and power purchase agreements, receipt of required governmental permits, obtaining adequate financing, and the timely implementation and satisfactory completion of construction. We may be unsuccessful in accomplishing any of these matters or doing so on a timely basis. Although we may attempt to minimize the financial risks attributable to the development of a project by securing a favorable power purchase agreement, obtaining all required governmental permits and approvals and arranging adequate financing prior to the commencement of construction, the development of a power project may require us to incur significant expenses for preliminary engineering, permitting and legal and other expenses before we can determine whether a project is feasible, economically attractive or capable of being financed.
Currently, we have power plants under development or construction in the United States, Kenya, Guatemala, China and El Salvador, and we intend to pursue the expansion of some of our existing plants and the development of other new plants. Our completion of these facilities is subject to substantial risks, including:
• | unanticipated cost increases; |
• | shortages and inconsistent qualities of equipment, material and labor; |
• | work stoppages; |
• | inability to obtain permits and other regulatory matters; |
• | failure by key contractors and vendors to timely and properly perform; |
• | adverse environmental and geological conditions (including inclement weather conditions); and |
• | our attention to other projects, |
any one of which could give rise to delays, cost overruns, the termination of the plant expansion, construction or development or the loss (total or partial) of our interest in the project under development, construction or expansion.
We may be unable to obtain the financing we need to pursue our growth strategy and any future financing we receive may be less favorable to us than our current financing arrangements, either of which may adversely affect our ability to expand our operations.
Our geothermal power plants generally have been financed using leveraged financing structures, consisting of non-recourse or limited recourse debt obligations. As of June 30, 2004, we had approximately $636.2 million of total consolidated indebtedness (including indebtedness to our parent
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company in the amount of $193.9 million), of which approximately 59.2% represented non-recourse debt and limited recourse debt held by our subsidiaries. Each of our projects under development or construction and those projects and businesses we may seek to acquire or construct will require substantial capital investment. Our continued access to capital with acceptable terms is necessary for the success of our growth strategy. Our attempts to obtain future financings may not be successful or on favorable terms.
Market conditions and other factors may not permit future project and acquisition financings on terms similar to those our subsidiaries have previously received. Our ability to arrange for financing on a substantially non-recourse or limited recourse basis and the costs of such capital are dependent on numerous factors, including general economic and capital market conditions, credit availability from banks, investor confidence, the continued success of current projects, the credit quality of the projects being financed, the political situation in the country where the project is located and the continued existence of tax and securities laws which are conducive to raising capital. If we are not able to obtain financing for our projects on a substantially non-recourse or limited recourse basis, we may have to finance them using recourse capital such as direct equity investments, parent company loans or the incurrence of additional debt by us.
Also, in the absence of favorable financing options, we may decide not to build new plants or acquire facilities from third parties. Any of these alternatives could have a material adverse effect on our growth prospects.
Our foreign projects expose us to risks related to the application of foreign laws, taxes, economic conditions, labor supply and relations, political conditions and policies of foreign governments, any of which risks may delay or reduce our ability to profit from such projects.
We have substantial operations outside of the United States that generated revenues in the amount of $42.7 million for the six-month period ended June 30, 2004, which represented 42.8% of our total revenues for such six-month period. Our pro forma revenues from the sale of electricity by our foreign projects constituted approximately 20.9% of our total pro forma revenues from the sale of electricity in 2003. Our foreign operations are subject to regulation by various foreign governments and regulatory authorities and are subject to the application of foreign laws. Such foreign laws or regulations may not provide for the same type of legal certainty and rights, in connection with our contractual relationships in such countries, as are afforded to our projects in the United States, which may adversely affect our ability to receive revenues or enforce our rights in connection with our foreign operations. In addition, the laws and regulations of some countries may limit our ability to hold a majority interest in some of the projects that we may develop or acquire, thus limiting our ability to control the development, construction and operation of such projects. Our foreign operations are also subject to significant political, economic and financial risks, which vary by country, and include:
• | changes in government policies or personnel; |
• | changes in general economic conditions; |
• | restrictions on currency transfer or convertibility; |
• | changes in labor relations; |
• | political instability and civil unrest; |
• | changes in the local electricity market; |
• | breach or repudiation of important contractual undertakings by governmental entities; and |
• | expropriation and confiscation of assets and facilities. |
In particular, the Philippines is in the midst of an ongoing privatization of the electric industry, and in Guatemala the electricity sector was partially privatized and it is currently unclear whether further privatization will occur in the future. Such developments may affect our existing Leyte and Zunil projects and the Amatitlan project currently under construction if, for example, they result in
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changes to the prevailing tariff regime or in the identity and creditworthiness of our power purchasers. In Nicaragua, there is potential labor unrest and strengthening of labor unions, which may adversely affect our Momotombo project. In Kenya, the new government elected in 2002 is making an effort to deliver on campaign promises to reduce the price of electricity and is applying pressure on independent power producers, such as our Olkaria III project, to lower their tariffs. In addition, Kenya's new government is considering a further restructuring and privatization of the electricity industry and may divide Kenya Power & Lighting Co. Ltd., the power purchaser for our Olkaria III project, into separate entities and then privatize one or more of such resulting entities. A material tariff reduction or any break-up and potential privatization of Kenya Power & Lighting Co. Ltd. may adversely affect our Olkaria III project. We have recently held discussions with the Kenyan government and Kenya Power & Lighting Co. Ltd. regarding, among other things, the construction of Phase II of the Olkaria III project in Kenya and the provision of certain collateral and government support. We must notify Kenya Power & Lighting Co. Ltd., by April 17, 2005, whether we will proceed to construct Phase II of the Olkaria III project and, if we notify Kenya Power & Lighting Co. Ltd. that we will not proceed with such construction, then the portion of the current power purchase agreement applicable to Phase II of the Olkaria III project will be terminated (but the current portion applicable to Phase I will be unaffected). If we fail to provide such notification we will be required to construct Phase II and reach commercial operations by May 31, 2007 in order to avoid the application of financial penalties, or at the latest by April 17, 2008 in order to avoid termination of the entire power purchase agreement. In addition, if we do not proceed with the construction of Phase II, we may lose some or all of our investment relating to Phase II, which is approximately $22.2 million.
Although we generally obtain political risk insurance in connection with our foreign projects, such political risk insurance does not mitigate all of the above-mentioned risks. In addition, insurance proceeds received pursuant to our political risk insurance policies, where applicable, may not be adequate to cover all losses sustained as a result of any covered risks and may at times be pledged in favor of the lenders to a project as collateral. Also, insurance may not be available in the future with the scope of coverage and in amounts of coverage adequate to insure against such risks and disturbances.
Our foreign projects and foreign manufacturing operations expose us to risks related to fluctuations in currency rates, which may reduce our profits from such projects and operations.
Risks attributable to fluctuations in currency exchange rates can arise when any of our foreign subsidiaries borrow funds or incur operating or other expenses in one type of currency but receive revenues in another. In such cases, an adverse change in exchange rates can reduce such subsidiary's ability to meet its debt service obligations, reduce the amount of cash and income we receive from such foreign subsidiary or increase such subsidiary's overall expenses. In addition, the imposition by foreign governments of restrictions on the transfer of foreign currency abroad or restrictions on the conversion of local currency into foreign currency would have an adverse effect on the operations of our foreign projects and foreign manufacturing operations and may limit or diminish the amount of cash and income that we receive from such foreign projects and operations.
A significant portion of our net revenue is attributed to payments made by power purchasers under power purchase agreements. The failure of any such power purchaser to perform its obligations under the relevant power purchase agreement or the loss of a power purchase agreement due to a default would reduce our net income and could materially and adversely affect our business, financial condition, future results and cash flow.
A significant portion of our net revenue is attributed to revenues derived from power purchasers under the relevant power purchase agreements. Southern California Edison Company, Hawaii Electric Light Company, PNOC-Energy Development Corporation and Sierra Pacific Power Company have accounted for 48.3%, 9.2%, 6.2% and 5.6% of our pro forma revenues, respectively, for the fiscal year ended December 31, 2003. Neither we nor any of our affiliates make any representations as to the financial condition or creditworthiness of any purchaser under a power purchase agreement and nothing in this prospectus should be construed as such a representation.
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There is a risk that any one or more of the power purchasers may not fulfill their respective payment obligations under their power purchase agreements. For example, as a result of the energy crisis in California, Southern California Edison Company withheld payments it owed under various of its power purchase agreements with a number of power generators (such as the Ormesa, Heber 1, Heber 2, and Mammoth projects) payable for certain energy delivered between November 2000 and March 2001 under such power purchase agreements until March 2002. In the case of our Ormesa project (which we acquired in April 2002), the payment withheld by Southern California Edison Company totaled $21.2 million. If any of the power purchasers fails to meet its payment obligations under its power purchase agreements, it could materially and adversely affect our business, financial condition, future results and cash flow.
In connection with the power purchase agreements for the Ormesa project, Southern California Edison Company has expressed its intent not to pay the contract rate for the power supplied by the GEM 2 and GEM 3 plants to the Ormesa project for auxiliary purposes. We have commenced discussions with Southern California Edison Company to resolve the dispute. In the interim period, Southern California Edison Company has tentatively agreed to pay a lower fixed price for such power. We cannot evaluate the potential long-term financial impact of a failure to reach a resolution with Southern California Edison Company, among other things because the current contract rates will fluctuate as of May 2007, however, financial loss at the reduced price paid by Southern California Edison Company for our fiscal year ended December 31, 2005 may be in the range of $1 million.
Seasonal variations may cause significant fluctuations in our cash flows, which may cause the market price of our common stock to fall in certain periods.
Our results of operations are subject to seasonal variations. This is primarily because some of our domestic projects receive higher capacity payments under the relevant power purchase agreements during the summer months and due to the generally higher short run avoided costs in effect during the summer months. Some of our other projects may experience reduced generation during warm periods due to the lower heat differential between the geothermal fluid and the ambient surroundings. Such seasonal variations could materially and adversely affect our business, financial condition, future results and cash flow. If our operating results fall below the public's or analysts' expectations in some future period or periods, the market price of our common stock will likely fall in such period or periods.
Pursuant to the terms of some of our power purchase agreements with investor-owned electric utilities in states that have renewable portfolio standards, the failure to supply the contracted capacity thereunder may result in the imposition of penalties.
Pursuant to the terms of the Galena, Desert Peak 2 and Desert Peak 3 power purchase agreements that we have entered into and under which we will sell electricity from the Galena, Desert Peak 2 and Desert Peak 3 projects that are currently under development and construction, we may be required to make payments to the relevant power purchaser in an amount equal to such purchaser's replacement costs for renewable energy relating to any shortfall amount of renewable energy that we do not provide as required under the power purchase agreement and which such power purchaser is forced to obtain from an alternate source. In addition, we may be required to make payments to the relevant power purchaser in an amount equal to its replacement costs relating to any renewable energy credits we do not provide as required under the relevant power purchase agreement. We may also be required to pay liquidated damages if certain minimum performance requirements are not met under certain of our power purchase agreements, all of which could materially and adversely affect our business, financial condition, future results and cash flow. The minimum performance requirements are described in "Description of Certain Material Agreements—Project-related Agreements." With respect to certain of our power purchase agreements, we may also be required to pay liquidated damages to our power purchaser if the relevant project does not maintain availability of at least 85% during applicable peak periods. The maximum aggregate amount of such liquidated damages for the Steamboat 2 and Steamboat 3 power purchase agreements would be approximately $1.5 million for each project. The Puna project was not in compliance with the minimum performance
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requirements of its power purchase agreement at the time we acquired such project and is currently not in compliance with such requirements. Such non-compliance has resulted in the imposition of sanctions that have reduced, and as long as such non-compliance continues to exist, will continue to reduce, the aggregate amount of revenues payable to us from the power purchaser by approximately $6,000 per month. Further, the temperature of the geothermal resource at our Heber 1 project has declined from the date on which the project commenced operations and, as a result, the project currently operates at a level that is close to the minimum performance requirements set forth in the project's power purchase agreement. If we fail to upgrade the project's facilities and the project's performance deteriorates below the minimum capacity requirements, we will be obligated to pay a one-time penalty to the power purchaser of approximately $500,000 per each MW of reduced capacity.
The short run avoided costs for our power purchasers may decline, which would reduce our project revenues and could materially and adversely affect our business, financial condition, future results and cash flow.
Under the power purchase agreements for our projects in California, the price that Southern California Edison Company pays for energy is based upon its short run avoided costs, which are the incremental costs that it would have incurred had it generated the relevant electrical energy itself or purchased such energy from others. Under settlement agreements between Southern California Edison Company and a number of Qualifying Facility power generators in California, including our subsidiaries, the energy price component payable by Southern California Edison Company has been fixed through April 2007, and thereafter will be based on Southern California Edison Company's short run avoided costs, as determined by the California Public Utilities Commission, which we refer to as CPUC. These short run avoided costs are made available by Southern California Edison Company to the public and may vary substantially on a monthly basis, based primarily on gas prices and other factors. The levels of short run avoided cost prices paid by Southern California Edison Company may decline following the expiration date of the settlement agreements, which in turn would reduce our project revenues derived from Southern California Edison Company under our power purchase agreements with it and could materially and adversely affect our business, financial condition, future results and cash flow.
In addition, under certain of the power purchase agreements for our projects in Nevada, the price that Sierra Pacific Power Company pays for energy and capacity is based upon its short run avoided costs. These short run avoided costs, and in turn the rates payable by Sierra Pacific Power Company, may decline, which in turn would reduce the aggregate amount of project revenues recovered by our Nevada projects pursuant to the relevant power purchase agreements. Such a decrease in project revenues could adversely affect our business, financial condition, future results and cash flow.
In response to an order issued by a California State Court of Appeal, the CPUC has commenced an administrative proceeding in order to address short run avoided cost pricing for Qualifying Facilities for the period spanning from December 2000 to March 2001. The court directed the CPUC to modify short run avoided cost pricing on a retroactive basis to the extent that the CPUC determined that short run avoided cost prices were not sufficiently "accurate" or "correct." If the short run avoided cost prices charged during the period in question were determined by the CPUC not to be "accurate" or "correct," retroactive price adjustments could be required for any of our Qualifying Facilities in California whose payments are tied to short run avoided cost pricing, including the Heber 1, Mammoth and Ormesa projects. Currently, it is not possible to predict the outcome of such proceeding, however, any retroactive price adjustment required to be made in relation to any of our projects may require such projects to make refund payments or charge less for future sales, which could materially and adversely affect our business, financial condition, future results and cash flow.
If any of our domestic projects loses its Qualifying Facility status under PURPA, or if amendments to PURPA are enacted that substantially reduce the benefits currently afforded to our Qualifying Facilities, our domestic operations could be adversely affected.
The operations of most of our domestic projects are subject to, and benefit from, the Public Utility Regulatory Policies Act of 1978, as amended, which we refer to as PURPA, are subject to
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limited provisions of the Federal Power Act, which we refer to as FPA, and are potentially subject to the provisions of various other energy laws and regulations, including the Public Utility Holding Company Act of 1935, as amended, which we refer to as PUHCA, other provisions of the FPA and certain state and local laws and regulations regarding rates and financial and organizational requirements for electric utilities.
Qualifying Facility status under PURPA exempts our projects from PUHCA, most of the provisions of the FPA, and certain state laws concerning rates and the financial and organizational regulation of electric utilities. If any of our domestic projects in which we have an interest loses its Qualifying Facility status and no regulatory exemptions apply, or if amendments to PURPA are enacted that substantially reduce the benefits currently afforded Qualifying Facilities, our operations could be adversely affected.
In the event that one of our domestic projects loses its Qualifying Facility status, such project and we would become subject to PUHCA and such project would become subject to the full scope of the FPA and applicable state regulations unless an exemption or waiver applies, such as "exempt wholesale generator" ("EWG", as defined under PUHCA) status or "utility geothermal small power production facility" (as defined under PURPA regulations) status, for such project. The application of PUHCA and such other regulations to our projects would require our operations to comply with an increasingly complex regulatory regime that may be costly and greatly reduce our operational flexibility. In the unlikely event that none of the PUHCA exemptions or waivers are available, we could become a public utility holding company under PUHCA, which could be deemed to occur prospectively or retroactively to the date that any of our projects lost its Qualifying Facility status. In addition, our other domestic projects could lose Qualifying Facility status because our interests in such projects could be considered to be electric utility holding company interests for purposes of the 50% limit on ownership of Qualifying Facilities by electric utilities or electric utility holding companies. As a result of such loss of Qualifying Facility status, and in the absence of an applicable exemption or waiver, the Federal Energy Regulatory Commission, which we refer to as FERC, or relevant state regulators, whichever has jurisdiction, may order partial refunds of past amounts paid by the relevant power purchaser or order a reduction of the rate pursuant to the power purchase agreement prospectively, or both, and thus could cause the loss of some or all of our revenues payable pursuant to the related power purchase agreement, result in significant liability for refunds of past amounts paid, or otherwise impair the value of our projects.
A loss of Qualifying Facility status also could permit the power purchaser, pursuant to the terms of the particular power purchase agreement, to cease taking and paying for electricity from the relevant project or, consistent with FERC precedent, to seek refunds of past amounts paid. This could cause the loss of some or all of our revenues payable pursuant to the related power purchase agreement, result in significant liability for refunds of past amounts paid, or otherwise impair the value of our project. If a power purchaser were to cease taking and paying for electricity or seek to obtain refunds of past amounts paid, there can be no assurance that the costs incurred in connection with the project could be recovered through sales to other purchasers or that we would have sufficient funds to make such payments. In addition, the loss of Qualifying Facility status would be an event of default under the financing arrangements currently in place for some of our projects, which would enable the lenders to exercise their remedies and enforce the liens on the relevant project.
The United States Congress is considering proposed legislation that would amend PURPA by limiting the mandatory purchase obligations of power purchasers under new power purchase agreements. The enactment of such legislation could adversely affect our new projects or enhancements of existing projects that do not have a current power purchase agreement.
An adverse FERC ruling related to the use by a project of power generated from another Qualifying Facility for auxiliary purposes may adversely affect our operations and financial results.
According to a recent FERC decision, a geothermal Qualifying Facility that obtains electricity for the operation of its reinjection pumps from an electric utility must reduce its net capacity available for sale by an equivalent amount. However, if the electricity for reinjection pumping is provided by
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Qualifying Facilities that are cogeneration or small power production facilities, no reduction in net capacity is required. Two of our projects obtain electricity from an electric utility for the operation of their reinjection pumps. In the past, these projects did not reduce their net capacity available for sale by an equivalent amount. The application of FERC's recent ruling to such projects could have an adverse effect on their revenues received from power sales and their operations and financial condition.
Our financial performance is significantly dependent on the successful operation of our projects, which is subject to changes in the legal and regulatory environment affecting our projects.
All of our projects are subject to extensive regulation and, therefore, changes in applicable laws or regulations, or interpretations of those laws and regulations, could result in increased compliance costs, the need for additional capital expenditures or the reduction of certain benefits currently available to our projects. The structure of federal and state energy regulation is currently, and may continue to be, subject to challenges, modifications, the imposition of additional regulatory requirements, and restructuring proposals. We and our power purchasers may not be able to obtain all regulatory approvals that may be required in the future, or any necessary modifications to existing regulatory approvals, or maintain all required regulatory approvals. In addition, the cost of operation and maintenance and the operating performance of geothermal power plants may be adversely affected by changes in certain laws and regulations, including tax laws.
The federal government also encourages production of electricity from geothermal resources through certain tax subsidies. We are permitted to claim in our consolidated federal tax returns approximately 10% of the construction cost of each new geothermal power plant as a credit against our consolidated federal income taxes. We are also permitted to deduct, as a depreciation expense on our consolidated federal tax returns, up to 95% of the cost of the power plant over five years on an accelerated basis, which results in more of the cost being deducted in the first few years than during the remainder of the depreciation period. In addition, we have the ability to obtain value from these tax incentives through lease financing transactions even when we are not in a position to use them directly. Any reduction in such tax incentives or any restrictions on such lease financing transactions would materially and adversely affect our business, financial condition, future results and cash flow.
Any such changes could significantly increase the regulatory-related compliance and other expenses incurred by the projects and could significantly reduce or entirely eliminate the revenues generated by one or more of the projects, which in turn would reduce our net income and could materially and adversely affect our business, financial condition, future results and cash flow.
The costs of compliance with environmental laws, which currently are significant, may increase in the future and could materially and adversely affect our business, financial condition, future results and cash flow and any non-compliance with such laws or regulations may result in the imposition of liabilities which could materially and adversely affect our business, financial condition, future results and cash flow.
Our projects are required to comply with numerous domestic and foreign federal, regional, state and local statutory and regulatory environmental standards and to maintain numerous environmental permits and governmental approvals required for construction and/or operation. Some of the environmental permits and governmental approvals that have been issued to the projects contain conditions and restrictions, including restrictions or limits on emissions and discharges of pollutants and contaminants, or may have limited terms. If we fail to satisfy these conditions or comply with these restrictions, or with any statutory or regulatory environmental standards, we may become subject to regulatory enforcement action and the operation of the projects could be adversely affected or be subject to fines, penalties or additional costs. In addition, we may not be able to renew, maintain or obtain all environmental permits and governmental approvals required for the continued operation or further development of the projects, as a result of which the operation of the projects may be limited or suspended. Environmental laws, ordinances and regulations affecting us can be subject to change and such change could result in increased compliance costs, the need for additional capital expenditures, or otherwise adversely affect us.
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We could be exposed to significant liability for violations of hazardous substances laws because of the use or presence of such substances at our projects.
Our projects are subject to numerous domestic and foreign federal, regional, state and local statutory and regulatory standards relating to the use, storage and disposal of hazardous substances. We use isobutane, isopentane, industrial lubricants and other substances at our projects which are or could become classified as hazardous substances. If any hazardous substances are found to have been released into the environment at or by the projects, we could become liable for the investigation and removal of those substances, regardless of their source and time of release. If we fail to comply with these laws, ordinances or regulations (or any change thereto), we could be subject to civil or criminal liability, the imposition of liens or fines, and large expenditures to bring the projects into compliance. Furthermore, in the United States, we can be held liable for the cleanup of releases of hazardous substances at other locations where we arranged for disposal of those substances, even if we did not cause the release at that location. The cost of any remediation activities in connection with a spill or other release of such substances could be significant.
We believe that at one time there may have been a gas station located on the Mammoth project site, but because of significant surface disturbance and construction since that time further physical evaluation of the former gas station site has been impractical. There may be soil or groundwater contamination and related liability exposure of which we are unaware related to this site which may be significant and may adversely and materially affect our operations and revenues.
We may not be able to successfully integrate companies that we have acquired or which we may acquire in the future, which could materially and adversely affect our business, financial condition, future results and cash flow.
We recently acquired our Heber 1, Heber 2, Mammoth, Steamboat 2/3, Steamboat Hills and Puna projects. Our strategy is to continue to expand in the future, including through acquisitions. Integrating acquisitions is often costly, and we may not be able to successfully integrate our acquired companies with our existing operations without substantial costs, delays or other adverse operational or financial consequences. Integrating our acquired companies involves a number of risks that could materially and adversely affect our business, including:
• | failure of the acquired companies to achieve the results we expect; |
• | inability to retain key personnel of the acquired companies; |
• | risks associated with unanticipated events or liabilities; and |
• | the difficulty of establishing and maintaining uniform standards, controls, procedures and policies, including accounting controls and procedures. |
If any of our acquired companies suffers customer dissatisfaction or performance problems, the same could adversely affect the reputation of our group of companies and could materially and adversely affect our business, financial condition, future results and cash flow.
The power generation industry is characterized by intense competition, and we encounter competition from electric utilities, other power producers, and power marketers that could materially and adversely affect our business, financial condition, future results and cash flow.
The power generation industry is characterized by intense competition from electric utilities, other power producers and power marketers. In recent years, there has been increasing competition in the sale of electricity, in part due to excess capacity in a number of U.S. markets and an emphasis on short-term or "spot" markets, and competition has contributed to a reduction in electricity prices. For the most part, we expect that power purchasers interested in long-term arrangements with a capacity price component will engage in "competitive bid" solicitations to satisfy new capacity demands. This competition could adversely affect our ability to obtain power purchase agreements and the price paid for electricity by the relevant power purchasers. There is also increasing competition between electric utilities, particularly in California where the CPUC has launched an initiative designed to give all
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electricity consumers the ability to choose between competing suppliers of electricity. This competition has put pressure on electric utilities to lower their costs, including the cost of purchased electricity, and increasing competition in the future will put further pressure on power purchasers to reduce the prices at which they purchase electricity from us.
The existence of a prolonged force majeure event or a forced outage affecting a project could reduce our net income and materially and adversely affect our business, financial condition, future results and cash flow.
If a project experiences a force majeure event, our subsidiary owning that project would be excused from its obligations under the relevant power purchase agreement. However, the relevant power purchaser may not be required to make any capacity and/or energy payments with respect to the affected project or plant so long as the force majeure event continues and, pursuant to certain of our power purchase agreements, will have the right to prematurely terminate the power purchase agreement. Additionally, to the extent that a forced outage has occurred, the relevant power purchaser may not be required to make any capacity and/or energy payments to the affected project, and if as a result the project fails to attain certain performance requirements under certain of our power purchase agreements, the purchaser may have the right to permanently reduce the contract capacity (and, correspondingly, the amount of capacity payments due pursuant to such agreements in the future), seek refunds of certain past capacity payments, and/or prematurely terminate the power purchase agreement. As a consequence, we may not receive any net revenues from the affected project or plant other than the proceeds from any business interruption insurance that applies to the force majeure event or forced outage after the relevant waiting period and may incur significant liabilities in respect of past amounts required to be refunded. Accordingly, our business, financial condition, future results and cash flows could be materially and adversely affected.
The existence of a force majeure event or a forced outage affecting the transmission system of the Imperial Irrigation District could reduce our net income and materially and adversely affect our business, financial condition, future results and cash flow.
If the transmission system of the Imperial Irrigation District experiences a force majeure event or a forced outage which prevents it from transmitting the electricity from the Heber 1 and Heber 2 projects or the Ormesa project to the relevant power purchaser, the relevant power purchaser would not be required to make energy payments for such non-delivered electricity and may not be required to make any capacity payments with respect to the affected project so long as such force majeure event or forced outage continues. Our pro forma revenues in 2003 from the projects utilizing the Imperial Irrigation District transmission system were approximately $98.6 million. The impact of such force majeure would depend on the duration thereof, with longer outages resulting in greater revenue loss.
Some of our leases will terminate if we do not extract geothermal resources in "commercial quantities," thus requiring us to enter into new leases or secure rights to alternate geothermal resources, none of which may be available on terms as favorable to us as any such terminated lease, if at all.
Most of our geothermal resource leases are for a fixed primary term, and then continue for so long as geothermal resources are extracted in "commercial quantities" or pursuant to other terms of extension. The land covered by some of our leases is undeveloped and has not yet produced geothermal resources in "commercial quantities." Leases that cover land which remains undeveloped and does not produce, or does not continue to produce, geothermal resources in commercial quantities and leases that we allow to expire, will terminate. In the event that a lease is terminated and we determine that we will need that lease once the applicable project is operating, we would need to enter into one or more new leases with the owner(s) of the premises that are the subject of the terminated lease(s) in order to develop geothermal resources from or inject geothermal resources into such premises or secure rights to alternate geothermal resources or lands suitable for injection, all of which may not be possible or could result in increased cost to us, which could materially and adversely affect our business, financial condition, future results and cash flow.
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Our Bureau of Land Management leases may be terminated if we fail to comply with any of the provisions of the Geothermal Steam Act of 1970 or if we fail to comply with the terms or stipulations of such leases, which may materially and adversely affect our business and operations.
Pursuant to the terms of our Bureau of Land Management (which we refer to as BLM) leases, we are required to conduct our operations on BLM-leased land in a workmanlike manner and in accordance with all applicable laws and BLM directives and to take all mitigating actions required by the BLM to protect the surface of and the environment surrounding the relevant land. Additionally, certain BLM leases contain additional requirements, some of which relate to the mitigation or avoidance of disturbance of any antiquities, cultural values or threatened or endangered plants or animals, the payment of royalties for timber and the imposition of certain restrictions on residential development on the leased land. In the event of a default under any BLM lease, or the failure to comply with such requirements, or any non-compliance with any of the provisions of the Geothermal Steam Act of 1970 or regulations issued thereunder, the BLM may, 30 days after notice of default is provided to our relevant project subsidiary, suspend operations until the requested action is taken or terminate the lease, either of which could materially and adversely affect our business, financial condition, future results and cash flows.
Some of our leases (or subleases) could terminate if the lessor (or sublessor) under any such lease (or sublease) defaults on any debt secured by the relevant property, thus terminating our rights to access the underlying geothermal resources at that location.
The fee interest in the land which is the subject of each of our leases (or subleases) may currently be or may become subject to encumbrances securing loans from third party lenders to the lessor (or sublessor). Our rights as lessee (or sublessee) under such leases (or subleases) are or may be subject and subordinate to the rights of any such lender. Accordingly, a default by the lessor (or sublessor) under any such loan could result in a foreclosure on the underlying fee interest in the property and thereby terminate our leasehold interest and result in the shutdown of the project located on the relevant property and/or terminate our right of access to the underlying geothermal resources required for our operations.
In addition, a default by a sublessor under its lease with the owner of the property that is the subject of our sublease could result in the termination of such lease and thereby terminate our sublease interest and our right to access the underlying geothermal resources required for our operations.
We depend on key personnel for the success of our business.
Our success is largely dependent on the skills, experience and efforts of our senior management team and other key personnel. In particular, our success depends on the continued efforts of Lucien Bronicki, Yehudit Bronicki, Hezy Ram, Nadav Amir and other key employees. The loss of the services of any key employee could materially harm our business, financial condition, future results and cash flow. Although to date we have been successful in retaining the services of senior management by entering into employment agreements with such members of senior management, such members of our senior management may terminate their employment agreements without cause and with notice periods ranging from 120 to 180 days. We may also not be able to locate or employ on acceptable terms qualified replacements for our senior management or key employees if their services were no longer available.
Our projects have generally been financed through a combination of parent company loans and limited- or non-recourse project finance debt. If our project subsidiaries default on their obligations under such limited- or non-recourse debt, we may be required to make certain payments to the relevant debt holders and if the collateral supporting such leveraged financing structures is foreclosed upon, we may lose certain of our projects.
Our projects have generally been financed using a combination of parent company loans and limited- or non-recourse project finance debt. Non-recourse project finance debt refers to debt that is
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repaid solely from the project's revenues and is secured by the project's physical assets, major contracts, cash accounts and, in many cases, our ownership interest in the project subsidiary. Limited- recourse project finance debt refers to our additional agreement, as part of the financing of a project, to provide limited financial support for the project subsidiary in the form of limited guarantees, indemnities, capital contributions and agreements to pay certain debt service deficiencies. If our project subsidiaries default on their obligations under the relevant debt documents, creditors of a limited-recourse project financing will have direct recourse to us, to the extent of our limited-recourse obligations, which may require us to use distributions received by us from other projects, as well as other sources of cash available to us, in order to satisfy such obligations. In addition, if our project subsidiaries default on their obligations under the relevant debt documents and the creditors foreclose on the relevant collateral, we may lose our ownership interest in the relevant project subsidiary or our project subsidiary owning the project would only retain an interest in the physical assets, if any, remaining after all debts and obligations were paid in full.
Changes in costs and technology may significantly impact our business by making our power plants and products less competitive.
A basic premise of our business model is that generating baseload power at central geothermal power plants achieves economies of scale and produces electricity at a competitive price. However, traditional coal-fired systems and gas-fired systems may under certain economic conditions produce electricity at lower average prices than our geothermal plants. In addition, there are other technologies that can produce electricity, most notably fossil fuel power systems, hydroelectric systems, fuel cells, microturbines, windmills and photovoltaic (solar) cells. Some of these alternative technologies currently produce electricity at a higher average price than our geothermal plants; however, research and development activities are ongoing to seek improvements in such alternate technologies and their cost of producing electricity is gradually declining. It is possible that advances will further reduce the cost of alternate methods of power generation to a level that is equal to or below that of most geothermal power generation technologies. If this were to happen, the competitive advantage of our projects may be significantly impaired.
Our expectations regarding the market potential for the development of recovered energy-based power generation may not materialize, and as a result we may not derive any significant revenues from this line of business.
We have identified recovered energy-based power generation as a significant market opportunity for us. Demand for our recovered energy-based power generation units may not materialize or grow at the levels that we expect. We currently face competition in this market from manufacturers of conventional steam turbines and may face competition from other related technologies in the future. If this market does not materialize at the levels that we expect, such failure may materially and adversely affect our business, financial condition, future results and cash flow.
Our intellectual property rights may not be adequate to protect our business.
Our intellectual property rights may not be adequate to protect our business. While we occasionally file patent applications, patents may not be issued on the basis of such applications or, if patents are issued, they may not be sufficiently broad to protect our technology. In addition, any patents issued to us or for which we have use rights may be challenged, invalidated or circumvented.
In order to safeguard our unpatented proprietary know-how, trade secrets and technology, we rely primarily upon trade secret protection and non-disclosure provisions in agreements with employees and others having access to confidential information. These measures may not adequately protect us from disclosure or misappropriation of our proprietary information.
Even if we adequately protect our intellectual property rights, litigation may be necessary to enforce these rights, which could result in substantial costs to us and a substantial diversion of management attention. Also, while we have attempted to ensure that our technology and the operation of our business do not infringe other parties' patents and proprietary rights, our competitors
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or other parties may assert that certain aspects of our business or technology may be covered by patents held by them. Infringement or other intellectual property claims, regardless of merit or ultimate outcome, can be expensive and time-consuming and can divert management's attention from our core business.
We are subject to risks associated with a changing economic and political environment, which may adversely affect our financial stability or the financial stability of our counterparties.
The risk of terrorist attacks in the United States or elsewhere continues to remain a potential source of disruption to the nation's economy and financial markets in general. The availability and cost of capital for our business and that of our competitors has been adversely affected by the bankruptcy of Enron Corp. and events related to the California electric market crisis. Additionally, the recent rise in fuel costs may make it more expensive for our customers to operate their businesses. These events could constrain the capital available to our industry and could adversely affect our financial stability and the financial stability of our counterparties in transactions.
Possible fluctuations in the cost of raw materials may materially and adversely affect our business, financial condition, future results and cash flow.
Our manufacturing operations are dependent on the supply of various raw materials, including primarily steel and aluminium, and on the supply of various industrial equipment components that we use. We currently obtain all such materials and equipment at prevailing market prices. We are not dependent on any one supplier and do not have any long-term agreements with any of our suppliers. Future cost increases of such raw materials and equipment, to the extent not otherwise passed along to our customers, could adversely affect our profit margins.
Conditions in Israel, where the majority of our senior management and all of our production and manufacturing facilities are located, may adversely affect our operations and may limit our ability to produce and sell our products or manage our projects.
Operations in Israel accounted for approximately 61.3%, 56.3%, and 51.0% of our operating expenses in fiscal year 2001, fiscal year 2002 and fiscal year 2003, respectively. Political, economic and security conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, and the continued state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since October 2000, there has been a significant increase in violence, primarily in the West Bank and Gaza Strip, and more recently Israel has experienced a significant increase in terrorist incidents within its borders. As a result, negotiations between Israel and representatives of the Palestinian Authority have been sporadic and have failed to result in peace. We could be adversely affected by hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners, or a significant downturn in the economic or financial condition of Israel. In addition, the sale of products manufactured in Israel may be adversely affected in certain countries by restrictive laws, policies or practices directed toward Israel or companies having operations in Israel.
In addition, some of our employees in Israel are subject to being called upon to perform military service in Israel, and their absence may have an adverse effect upon our operations. Generally, unless exempt, male adult citizens of Israel under the age of 41 are obligated to perform up to 36 days of military reserve duty annually. Additionally, all such citizens are subject to being called to active duty at any time under emergency circumstances.
These events and conditions could disrupt our operations in Israel, which could materially harm our business, financial condition, future results and cash flow.
Failure to comply with certain conditions and restrictions associated with tax benefits provided to Ormat Systems by the Government of Israel as an "approved enterprise" may require us to refund such tax benefits and pay future taxes in Israel at higher rates.
Our subsidiary, Ormat Systems, has received "approved enterprise" status under Israel's Law for Encouragement of Capital Investments, 1959, with respect to two of its investment programs. As an
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approved enterprise, our subsidiary is exempt from Israeli income taxes with respect to revenues derived from the approved investment program for a period of two years commencing on the year it first generates profits from the approved investment program, and thereafter such revenues are subject to reduced Israeli income tax rates of 25% for an additional five years. These benefits are subject to certain conditions set forth in the certificate of approval from Israel's Investment Center, which include, among other things, a requirement that Ormat Systems comply with Israeli intellectual property law, that all transactions between Ormat Systems and our affiliates be at arms length, and that there will be no change in control of, on a cumulative basis, more than 49% of Ormat Systems' capital stock (including by way of a public or private offering) without the prior written approval of the Investment Center. If Ormat Systems does not comply with these conditions, in whole or in part, it would be required to refund the amount of tax benefits (as adjusted by the Israeli consumer price index and for accrued interest) and would no longer benefit from the reduced Israeli tax rates, which could have an adverse effect on our financial condition, future results and cash flow. If Ormat Systems distributes dividends out of revenues derived during the tax exemption period from the approved investment program, it will be subject, in the year in which such dividend is paid, to Israeli income tax on the distributed dividend.
If our parent defaults on its lease agreement with the Israel Land Administration, or is involved in a bankruptcy or similar proceeding, our rights and remedies under certain agreements pursuant to which we acquired our products business and pursuant to which we sublease our land and manufacturing facilities from our parent may be adversely affected.
We acquired our business relating to the manufacture and sale of products for electricity generation and related services from our parent, Ormat Industries. In connection with that acquisition, we entered into a sublease with Ormat Industries for the lease of the land and facilities where our manufacturing and production operations are conducted and where our Israeli offices are located. Under the terms of our parent's lease agreement with the Israel Land Administration, any sublease for a period of more than five years may require the prior approval of the Israel Land Administration. As a result, the initial term of our sublease with Ormat Industries is for a period of four years and eleven months, extendable to twenty-five years (which includes the initial term) should our parent obtain the approval of the Israel Land Administration, to the extent necessary. If such an approval is required and our parent fails to obtain the Israel Land Administration's approval, our sublease will terminate on June 1, 2009, at which time we will have to renegotiate the terms of a new sublease. We may not be successful in reaching an agreement with our parent as to the terms of a new sublease or in obtaining such sublease on favorable terms, both of which would adversely affect our manufacturing activities and our financial position. Additionally, if our parent were to breach its obligations to the Israel Land Administration under its lease agreement, the Israel Land Administration could terminate the lease agreement and, consequently, our sublease would terminate as well.
As part of the acquisition described in the preceding paragraph, we also entered into a patent license agreement with Ormat Industries, pursuant to which we were granted an exclusive license for certain patents and trademarks relating to certain technologies that are used in our business. If a bankruptcy case were commenced by or against our parent, it is possible that performance of all or part of the agreements entered into in connection with such acquisition (including the lease of land and facilities described above) could be stayed by the bankruptcy court in Israel or rejected by a liquidator appointed pursuant to the Bankruptcy Ordinance in Israel and thus not be enforceable. Any of these events could have a material and adverse effect on our business, financial condition, future results and cash flow.
We are a holding company and our revenues depend substantially on the performance of our subsidiaries and the projects they operate, most of which are subject to restrictions and taxation on dividends and distributions.
We are a holding company whose primary assets are our ownership of the equity interests in our subsidiaries. We conduct no other business and, as a result, we depend entirely upon our subsidiaries' earnings and cash flow.
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The agreements pursuant to which most of our subsidiaries have incurred debt restrict the ability of these subsidiaries to pay dividends, make distributions or otherwise transfer funds to us prior to the satisfaction of other obligations, including the payment of operating expenses, debt service and replenishment or maintenance of cash reserves. In the case of some of our projects, such as the Mammoth project, there may be certain additional restrictions on dividend distributions pursuant to our agreements with our partners. Further, if we elect to receive distributions of earnings from our foreign operations, we may incur United States taxes on account of such distributions, net of any available foreign tax credits. In all of the foreign countries where our existing projects are located, dividend payments to us are also subject to withholding taxes. Each of the events described above may reduce or eliminate the aggregate amount of revenues we can receive from our subsidiaries.
Risks Relating to this Offering
Our controlling stockholders may take actions that conflict with your interests.
Immediately following this offering, % of our common stock will be held by Ormat Industries, Ltd. ( % if the underwriters exercise their over-allotment option in full), which is controlled by Bronicki Investments Ltd. Bronicki Investments Ltd. is a privately held Israeli company and is controlled by Lucien and Yehudit Bronicki. Because of these holdings, our parent company and its controlling stockholders will be able to exercise control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions, and they will have significant control over our management and policies. The directors elected by these stockholders will be able to significantly influence decisions affecting our capital structure. This control may have the effect of delaying or preventing changes in control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in their best interest. For example, our controlling stockholders will be able to control the sale or other disposition of our products business to another entity or the transfer of such business outside of the State of Israel, as such action requires the affirmative vote of at least 75% of our outstanding shares.
Some of our directors that also hold positions with our parent may have conflicts of interest with respect to matters involving both companies.
Two of our three directors are directors and/or officers of Ormat Industries. These directors will have fiduciary duties to both companies and may have conflicts of interest on matters affecting both us and our parent and in some circumstances may have interests adverse to our interests. Our Chairman, Director and Chief Technology Officer, Mr. Bronicki, will continue to be Chairman of our parent following the offering. In addition, our Chief Executive Officer and Director, Mrs. Bronicki, will continue to be the Chief Executive Officer of our parent following the offering.
There has been no prior market for our common stock and an active trading market may not develop.
Prior to this offering, there has been no public market for our common stock. An active trading market may not develop following the closing of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares of common stock at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value and increase the volatility of your shares of common stock. An inactive market may also impair our ability to raise capital by selling shares of common stock and may impair our ability to acquire other companies or technologies by using our shares of common stock as consideration.
The price of our common stock may fluctuate substantially and your investment may decline in value.
The initial public offering price for the shares of our common stock sold in this offering will be determined by negotiation between the representative of the underwriters and us. This price may not reflect the market price of our common stock following this offering. In addition, the market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:
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• | actual or anticipated fluctuations in our results of operations including as a result of seasonal variations in our electricity-based revenues; |
• | variance in our financial performance from the expectations of market analysts; |
• | conditions and trends in the end markets we serve and changes in the estimation of the size and growth rate of these markets; |
• | announcements of significant contracts by us or our competitors; |
• | changes in our pricing policies or the pricing policies of our competitors; |
• | loss of one or more of our significant customers; |
• | legislation; |
• | changes in market valuation or earnings of our competitors; |
• | the trading volume of our common stock; and |
• | general economic conditions. |
In addition, the stock market in general, and the New York Stock Exchange and the market for energy companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management's attention and resources, which could materially harm our business, financial condition, future results and cash flow.
Our management team may invest or spend the proceeds of this offering in ways with which you may not agree or in ways that may not yield a positive return.
Presently, anticipated uses of the proceeds to us of this offering include funding business growth and expansion, providing additional working capital, and for other general corporate purposes. We cannot specify with certainty how we will use the net proceeds of this offering. Accordingly, our management will have considerable discretion in the application of these proceeds, and you will not have the opportunity to assess whether these proceeds are being used appropriately. These proceeds may be used for corporate purposes that do not increase our operating results or market value. Until the net proceeds are used, they may be placed in investments that do not produce income or that lose value.
Future sales of our common stock may depress our share price.
After this offering, we will have shares of common stock outstanding. The shares sold in this offering (or shares if the underwriters' over-allotment option is exercised in full) will be freely tradable without restriction or further registration under federal securities laws unless purchased by our affiliates. The remaining shares of common stock outstanding after this offering are subject to lock-up agreements, will be available for sale in the public market beginning 180 days after the date of this prospectus, and will be subject to certain volume limitations under Rule 144 of the Securities Act of 1933, as amended. Lehman Brothers Inc. may waive the lock-up provisions in its sole discretion.
Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales may occur, could cause the market price of our common stock to decline. At or prior to the closing of this offering, we will enter into a registration rights agreement with Ormat Industries. See "Certain Relationships and Related Transactions" for more information.
This offering will cause substantial dilution in the net tangible book value of your shares of common stock.
The initial public offering price of our common stock is considerably more than the net tangible book value per share of our outstanding common stock. Accordingly, investors purchasing shares of
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common stock in this offering will contribute % of the total amount invested to fund our company, but will own only % of the shares of common stock outstanding after this offering. To the extent outstanding stock options are exercised, there will be further dilution to new investors. See "Dilution" for more information.
Provisions in our charter documents and Delaware law may delay or prevent acquisition of us, which could adversely affect the value of our common stock.
Our restated certificate of incorporation and our bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. These provisions do not permit actions by our stockholders by written consent. In addition, these provisions include procedural requirements relating to stockholder meetings and stockholder proposals that could make stockholder actions more difficult. Our board of directors will be classified into three classes of directors serving staggered, three-year terms and may be removed only for cause. Any vacancy on the board of directors may be filled only by the vote of the majority of directors then in office. Our board of directors has the right to issue preferred stock without stockholder approval, which could be used to institute a "poison pill" that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. Although we believe these provisions provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements made in this prospectus are forward-looking statements. These forward looking statements are based upon our current expectations and projections about future events. When used in this prospectus, the words "believe", "anticipate", "intend", "estimate", "expect", "should", "may" and similar expressions, or the negative of such words and expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking statements in this prospectus are primarily located in the material set forth under the headings "Prospectus Summary", "Risk Factors", "Capitalization", "Management's Discussion and Analysis of Financial Condition and Results of Operations", and "Business", but are found in other locations as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management's current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this prospectus completely and with the understanding that actual future results may be materially different from what we expect. We will not update forward-looking statements even though our situation may change in the future.
Specific factors that might cause actual results to differ from our expectations or may affect the value of our common stock include, but are not limited to:
• | significant considerations and risks discussed in this prospectus; |
• | operating risks, including equipment failures and the amounts and timing of revenues and expenses; |
• | geothermal resource risk (such as the heat content of the reservoir, useful life and geological formation); |
• | environmental constraints on operations and environmental liabilities arising out of past or present operations; |
• | project delays or cancellations; |
• | financial market conditions and the results of financing efforts; |
• | political, legal, regulatory, governmental, administrative and economic conditions and developments in the United States and other countries in which we operate; |
• | the enforceability of the long-term power purchase agreements for our projects; |
• | contract counterparty risk; |
• | weather and other natural phenomena; |
• | the impact of recent and future federal and state regulatory proceedings and changes, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry and incentives for the production of renewable energy, changes in environmental and other laws and regulations to which our company is subject, as well as changes in the application of existing laws and regulations; |
• | current and future litigation; |
• | our ability to successfully identify, integrate and complete acquisitions; |
• | competition from other similar geothermal energy projects, including any such new geothermal energy projects developed in the future, and from alternative electricity producing technologies; |
• | the effect of and changes in economic conditions in the areas in which we operate; |
• | market or business conditions and fluctuations in demand for energy or capacity in the markets in which we operate; and |
• | the direct or indirect impact on our company's business resulting from terrorist incidents or responses to such incidents, including the effect on the availability of and premiums on insurance. |
31
USE OF PROCEEDS
We estimate that the net proceeds we will receive from this offering will be approximately $ million, or approximately $ million if the underwriters exercise their over-allotment option in full, in each case after deducting the underwriting discounts and commissions and estimated expenses of this offering payable by us. We expect to use the net proceeds from this offering to fund working capital and for general corporate purposes, which may include making investments or acquisitions. We have no present understanding or agreement relating to any specific acquisition. Accordingly, management will have significant flexibility in applying the net proceeds of the offering. Pending the use of such proceeds as described above, we intend to invest such proceeds in interest-bearing instruments.
32
DIVIDEND POLICY
We have adopted a dividend policy pursuant to which we currently expect, commencing with the first full fiscal quarter following the consummation of this offering, to distribute at least 20% of our annual profits available for distribution by way of quarterly dividends. In determining whether there are profits available for distribution, our board of directors will take into account our business plan and current and expected obligations, and no distribution will be made that in the judgment of our board of directors would prevent us from meeting such business plan or obligations.
Notwithstanding this policy, dividends will be paid only when, as and if approved by our board of directors out of funds legally available therefor. The actual amount and timing of dividend payments will depend upon our financial condition, results of operations, business prospects and such other matters as the board may deem relevant from time to time. Even if profits are available for the payment of dividends, the board of directors could determine that such profits should be retained for an extended period of time, used for working capital purposes, expansion or acquisition of businesses or any other appropriate purpose. As a holding company, we are dependent upon the earnings and cash flow of our subsidiaries in order to fund any dividend distributions, and, as a result, we may not be able to pay dividends in accordance with our policy. Our board of directors may, from time to time, examine our dividend policy and may, in its absolute discretion, change such policy.
33
CAPITALIZATION
The following table summarizes our capitalization as of June 30, 2004 on:
• | a historical basis; and |
• | as adjusted to give effect to the completion of this offering, including the application of the estimated net proceeds to us from this offering as described under "Use of Proceeds." |
You should read the following table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of Capital Stock" and our consolidated financial statements and related notes appearing elsewhere in this prospectus.
As of June 30, 2004 | ||||||||||
Actual | As Adjusted | |||||||||
(unaudited) | ||||||||||
(in thousands) | ||||||||||
Cash and cash equivalents | $ | 21,170 | $ | |||||||
Debt: | ||||||||||
Parent company loans | 193,852 | |||||||||
Long-term debt | 442,300 | |||||||||
Total debt | 636,152 | |||||||||
Shareholders' equity: | ||||||||||
Common stock, $0.001 par value; 200,000,000 shares authorized and 32,307,692 shares issued and outstanding, historical; shares authorized and shares issued and outstanding, pro forma consolidated | 33 | |||||||||
Additional paid-in capital | 26,992 | |||||||||
Divisional deficit | (10,293 | ) | ||||||||
Unearned stock-based compensation | (51 | ) | ||||||||
Retained Earnings | 46,551 | |||||||||
Total shareholders' equity | 63,232 | |||||||||
Total capitalization | $ | 699,384 | $ | |||||||
The discussion and tables above exclude shares of our common stock available for future grant or issuance under our stock option plan(s). See "Management—Stock Option Plan."
34
DILUTION
At June 30, 2004, the net tangible book value of our common stock was approximately $13.5 million, or approximately $0.42 per share of our common stock. After giving effect to the sale of shares of our common stock in this offering at an assumed initial public offering price of $ per share, and after deducting estimated underwriting discounts and commissions paid by us and the estimated expenses of this offering, the net tangible book value at June 30, 2004 attributable to common stockholders would have been approximately $ million, or approximately $ per share of our common stock. This represents an immediate increase in net tangible book value of $ per share, and an immediate dilution in net tangible book value of $ per share to new stockholders. The following table illustrates this per share dilution to new stockholders:
Assumed initial public offering price per share | $ | |||||||||
Net tangible book value per share before the offering | $ | |||||||||
Net increase in tangible book value per share attributable to new stockholders | $ | |||||||||
Net tangible book value per share after the offering | $ | |||||||||
Dilution in net tangible book value per share to new stockholders | $ | |||||||||
The table below summarizes, as of , the differences for our existing stockholders and new stockholders in this offering, with respect to the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid before deducting fees and expenses.
Shares Issued | Total Consideration |
Average
Price
Per Share |
||||||||||||||||||||
Number | Percentage | Amount | Percentage | |||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||
Our existing stockholders | ||||||||||||||||||||||
New stockholders in this offering | ||||||||||||||||||||||
Total | ||||||||||||||||||||||
The discussion and tables above exclude shares of our common stock available for future grant or issuance under our stock plan(s). See "Management—Stock Option Plan."
35
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth our selected consolidated financial and other data for the periods ended and at the dates indicated. We have derived the selected consolidated financial and other data as of and for the periods ended December 31, 2001, 2002 and 2003 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the selected consolidated financial data as of and for the periods ended December 31, 1999 and 2000 from our unaudited consolidated financial statements not included in this prospectus. We have derived the selected consolidated financial and other data as of and for the six months ended June 30, 2003 and June 30, 2004 from our unaudited consolidated financial statements included elsewhere in this prospectus. In the opinion of our management, our unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our financial position, results of operations and cash flows. The results of operations for the six months ended June 30, 2003 and June 30, 2004 are not necessarily indicative of the operating results to be expected for the full fiscal years encompassing such periods.
The information set forth below should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements included elsewhere in this prospectus.
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
1999 | 2000 | 2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||
Electricity Segment: | ||||||||||||||||||||||||||||||
Energy and capacity | $ | 15,169 | $ | 20,780 | $ | 33,956 | $ | 65,491 | $ | 77,752 | $ | 35,651 | $ | 48,048 | ||||||||||||||||
Lease | — | — | — | — | — | — | 22,167 | |||||||||||||||||||||||
Total Electricity Segment | 15,169 | 20,780 | 33,956 | 65,491 | 77,752 | 35,651 | 70,215 | |||||||||||||||||||||||
Products Segment | 64,388 | 27,780 | 13,959 | 20,138 | 41,688 | 16,022 | 29,491 | |||||||||||||||||||||||
79,557 | 48,560 | 47,915 | 85,629 | 119,440 | 51,673 | 99,706 | ||||||||||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||||||||||
Electricity Segment: | ||||||||||||||||||||||||||||||
Energy and capacity | 6,847 | 8,556 | 12,536 | 33,482 | 46,726 | 21,762 | 29,440 | |||||||||||||||||||||||
Lease | — | — | — | — | — | — | 11,172 | |||||||||||||||||||||||
Total Electricity Segment | 6,847 | 8,556 | 12,536 | 33,482 | 46,726 | 21,276 | 40,612 | |||||||||||||||||||||||
Products Segment | 40,644 | 22,709 | 17,454 | 17,293 | 29,494 | 10,709 | 23,122 | |||||||||||||||||||||||
47,491 | 31,265 | 29,990 | 50,775 | 76,220 | 32,471 | 63,734 | ||||||||||||||||||||||||
Gross Margin | 32,066 | 17,295 | 17,925 | 34,854 | 43,220 | 19,202 | 35,972 | |||||||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||||||||
Research and development expenses | 3,289 | 2,260 | 1,729 | 1,503 | 1,391 | 871 | 1,202 | |||||||||||||||||||||||
Selling and marketing expenses | 6,593 | 3,624 | 6,535 | 6,051 | 7,087 | 2,666 | 3,946 | |||||||||||||||||||||||
General and administrative expenses | 7,614 | 6,632 | 5,444 | 7,073 | 9,252 | 4,053 | 5,219 | |||||||||||||||||||||||
Operating income | 14,570 | 4,779 | 4,217 | 20,227 | 25,490 | 11,612 | 25,605 | |||||||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||
Interest income | 961 | 1,499 | 1,323 | 609 | 607 | 299 | 431 | |||||||||||||||||||||||
Interest expense | (3,793 | ) | (3,700 | ) | (4,333 | ) | (6,179 | ) | (8,120 | ) | (3,835 | ) | (19,475 | ) | ||||||||||||||||
Foreign currency translation and transaction gain (loss) | (9 | ) | 25 | 305 | (323 | ) | (316 | ) | (151 | ) | (397 | ) | ||||||||||||||||||
Other non-operating income | 223 | 7,884 | 300 | 1,195 | 464 | 278 | 145 | |||||||||||||||||||||||
Income from continuing operations before income taxes, minority interest and equity in income of investees | 11,952 | 10,487 | 1,812 | 15,529 | 18,125 | 8,203 | 6,309 | |||||||||||||||||||||||
Income tax provision | (3,226 | ) | (494 | ) | (3,065 | ) | (6,135 | ) | (2,506 | ) | (2,173 | ) | (1,957 | ) | ||||||||||||||||
Minority interest in earnings of subsidiaries | (277 | ) | (550 | ) | (645 | ) | (1,194 | ) | (519 | ) | (399 | ) | (108 | ) | ||||||||||||||||
Equity in income of investees | 4 | 69 | 166 | 314 | 559 | 188 | 2,035 | |||||||||||||||||||||||
Income (loss) from continuing operations | 8,453 | 9,512 | (1,732 | ) | 8,514 | 15,659 | 5,819 | 6,279 | ||||||||||||||||||||||
Discontinued operations: | ||||||||||||||||||||||||||||||
Loss from operations of discontinued activities in Kazakhstan | (3,374 | ) | (2,911 | ) | (4,681 | ) | (3,114 | ) | — | — | — | |||||||||||||||||||
Loss on sale of Kazakhstan operations | — | — | — | (6,444 | ) | — | — | — | ||||||||||||||||||||||
36
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
1999 | 2000 | 2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||||
Income (loss) before cumulative effect of change in accounting principle | 5,079 | 6,601 | (6,413 | ) | (1,044 | ) | 15,659 | 5,819 | 6,279 | |||||||||||||||||||||
Cumulative effect of change in accounting principle (net of tax benefit of $125) | — | — | — | — | (205 | ) | (205 | ) | — | |||||||||||||||||||||
Net income (loss) | $ | 5,079 | $ | 6,601 | $ | (6,413 | ) | $ | (1,044 | ) | $ | 15,454 | $ | 5,614 | $ | 6,279 | ||||||||||||||
Basic and diluted income (loss) per share: | ||||||||||||||||||||||||||||||
Income (loss) from continuing operations | $ | 0.28 | $ | 0.31 | $ | (0.06 | ) | $ | 0.28 | $ | 0.51 | $ | 0.19 | $ | 0.20 | |||||||||||||||
Loss from discontinued operations | (0.11 | ) | (0.10 | ) | (0.15 | ) | (0.31 | ) | — | — | — | |||||||||||||||||||
Cumulative effect of change in accounting principle | — | — | — | — | (0.01 | ) | (0.01 | ) | — | |||||||||||||||||||||
Net income (loss) | $ | 0.17 | $ | 0.21 | $ | (0.21 | ) | $ | (0.03 | ) | $ | 0.50 | $ | 0.18 | $ | 0.20 | ||||||||||||||
Weighted average number of shares outstanding | 30,769,230 | 30,769,230 | 30,769,230 | 30,769,230 | 30,769,230 | 30,769,230 | 30,786,136 | |||||||||||||||||||||||
Balance Sheet Data (at end of period): | ||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 7,803 | $ | 10,071 | $ | 13,202 | $ | 36,684 | $ | 8,873 | $ | 17,719 | $ | 21,170 | ||||||||||||||||
Working capital (deficit)(1) | (6,037 | ) | (23,392 | ) | (50,459 | ) | (79,853 | ) | 2,677 | (76,975 | ) | 11,124 | ||||||||||||||||||
Property, plant and equipment, net | 60,167 | 90,946 | 132,369 | 152,342 | 344,015 | 160,697 | 472,217 | |||||||||||||||||||||||
Total assets(1) | 139,266 | 167,940 | 226,617 | 287,378 | 543,138 | 275,463 | 778,183 | |||||||||||||||||||||||
Long-term debt | 51,118 | 61,358 | 91,321 | 95,807 | 260,488 | 101,041 | 442,300 | |||||||||||||||||||||||
Notes payable to Parent | — | — | — | — | 177,004 | — | 193,852 | |||||||||||||||||||||||
Stockholder's equity(1) | 21,335 | 29,001 | 22,966 | 27,837 | 36,975 | 35,096 | 63,232 | |||||||||||||||||||||||
(1) As described in Note 20 to the financial statements, the balance sheets as of December 31, 1999, 2000, 2001, 2002 and 2003 have been revised to reclassify certain amounts due to/from our parent, originally reported as an asset/liability, as a component of stockholder's equity. As a result of such revision, the (i) working capital increased (reduced) by $(5,173), $(4,716), $(592), $1,806, and $(4,549); (ii) total assets increased (reduced) by $0, $0, $7,227, $0, and $(4,398); and (iii) stockholder's equity increased (reduced) by $(5,514), $(4,449), $(2,938), $1,806, and $(4,549), as of December 31, 1999, 2000, 2001, 2002, and 2003, respectively.
37
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
Overview
The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2003 and for the six months ended June 30, 2004 are based on our consolidated financial statements and the financial statements of the Puna, Heber 1, Heber 2 and Mammoth projects, which Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth project were acquired on December 18, 2003, and the Puna project was acquired on June 3, 2004 and adjusted to give effect to the acquisitions thereof as if each had occurred on January 1, 2003.
The unaudited pro forma condensed combined financial data gives effect to the acquisitions of the Puna, Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth project, which are accounted for using the purchase method of accounting. Pursuant to such method, the purchase price has been allocated to the principal categories of assets and liabilities based on independent valuations. It should be noted that because the acquisitions of the (i) Steamboat 1/1A project on June 30, 2003, (ii) Steamboat 2/3 project on February 11, 2004, and (iii) Steamboat Hills project on May 20, 2004 are not material under applicable Securities Act rules, such transactions have not been included in the accompanying pro forma balance sheet or results of operations. The historical unaudited combined revenues and combined net income of the Steamboat 1/1A, Steamboat 2/3 and Steamboat Hills projects for the twelve months ended December 31, 2003 amounted to revenues of $19.7 million and combined net income of $1.7 million.
The unaudited pro forma condensed combined financial data also give effect to (i) Ormat Funding's issuance of 8¼% senior secured notes in the amount of $190 million, which offering was completed on February 13, 2004, and (ii) Orcal Geothermal's entering into a loan agreement with Beal Bank amounting to $154.5 million in connection with the acquisition of the Heber 1, Heber 2 and Mammoth projects.
The unaudited pro forma condensed combined financial data presented herein does not necessarily reflect what our actual results of operations would have been had the transactions occurred at the dates indicated, or project our results of operations for any future date or period.
The unaudited pro forma condensed combined financial data should be read in conjunction with our historical consolidated financial statements and the historical financial statements of the Heber 1, Heber 2, Mammoth and Puna projects included elsewhere in this prospectus.
38
Unaudited Pro Forma
Condensed
Combined Statement of Operations
For the
Six Months Ended
June 30, 2004
(in
thousands, except per share data)
Ormat
Technologies Consolidated |
Puna
Project
for the period from January 1, 2004 to June 2, 2004 |
Pro Forma
Adjustments |
Pro
Forma
Combined |
|||||||||||||||
Revenues: | ||||||||||||||||||
Electricity Segment | $ | 70,215 | $ | 9,759 | $ | 79,974 | ||||||||||||
Products Segment | 29,491 | — | 29,491 | |||||||||||||||
99,706 | 9,759 | 109,465 | ||||||||||||||||
Cost of revenues: | ||||||||||||||||||
Electricity Segment | 40,612 | 8,353 | (1,337 | )(a) | 47,941 | |||||||||||||
313 | (b) | |||||||||||||||||
Products Segment | 23,122 | — | 23,122 | |||||||||||||||
63,734 | 8,353 | 71,063 | ||||||||||||||||
Gross margin | 35,972 | 1,406 | 38,402 | |||||||||||||||
Operating expenses: | ||||||||||||||||||
Selling, general and administrative | 10,367 | 842 | 11,209 | |||||||||||||||
Operating income | 25,605 | 564 | 27,193 | |||||||||||||||
Other income (expense): | ||||||||||||||||||
Interest income | 431 | — | 431 | |||||||||||||||
Interest expense | (19,475 | ) | (4,147 | ) | 4,147 | (c) | (23,498 | ) | ||||||||||
(2,098 | )(d) | |||||||||||||||||
(1,925 | )(f) | |||||||||||||||||
Foreign currency translation and transaction loss | (397 | ) | — | (397 | ) | |||||||||||||
Miscellaneous income | 145 | — | 145 | |||||||||||||||
Income before income taxes, minority interest and equity in income of investees | 6,309 | (3,583 | ) | 3,874 | ||||||||||||||
Income tax provision | (1,957 | ) | 1,362 | (459 | )(g) | (1,054 | ) | |||||||||||
Minority interest in earnings of subsidiaries | (108 | ) | — | (108 | ) | |||||||||||||
Equity in income of investees | 2,035 | — | 2,035 | |||||||||||||||
Net income | $ | 6,279 | $ | (2,221 | ) | $ | 4,747 | |||||||||||
Pro forma net income per share — basic and diluted | $ | 0.15 | ||||||||||||||||
Shares used in computing pro forma net income per share — basic and diluted | 30,786,136 | |||||||||||||||||
39
Unaudited Pro Forma
Condensed
Combined Statement of Operations
For the Year Ended
December 31, 2003
(in thousands, except per share
data)
Ormat
Technologies Consolidated |
Heber
Projects
for the period from January 1, 2003 to December 17, 2003 |
Puna
Project |
Pro
Forma
Adjustments |
Pro Forma
Combined |
||||||||||||||||||
Revenues: | ||||||||||||||||||||||
Electricity Segment | $ | 77,752 | $ | 66,131 | $ | 18,737 | $ | 162,620 | ||||||||||||||
Products Segment | 41,688 | — | — | 41,688 | ||||||||||||||||||
119,440 | 66,131 | 18,737 | 204,308 | |||||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||
Electricity Segment | 46,726 | 37,483 | 14,735 | (1,588 | )(a) | 98,901 | ||||||||||||||||
1,545 | (b) | |||||||||||||||||||||
Products Segment | 29,494 | — | — | 29,494 | ||||||||||||||||||
76,220 | 37,483 | 14,735 | 128,395 | |||||||||||||||||||
Gross margin | 43,220 | 28,648 | 4,002 | 75,913 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||
Selling, general and administrative | 17,730 | 29 | 1,605 | 19,364 | ||||||||||||||||||
Operating income | 25,490 | 28,619 | 2,397 | 56,549 | ||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||
Gain on discharge of liabilities subject to compromise | — | 31,460 | — | 31,460 | ||||||||||||||||||
Reorganization costs | — | (4,029 | ) | — | (4,029 | ) | ||||||||||||||||
Interest income | 607 | 99 | — | 706 | ||||||||||||||||||
Interest expense | (8,120 | ) | (1,794 | ) | (3,423 | ) | 5,217 | (c) | (40,363 | ) | ||||||||||||
(16,785 | )(d) | |||||||||||||||||||||
(11,608 | )(e) | |||||||||||||||||||||
(3,850 | )(f) | |||||||||||||||||||||
Foreign currency translation and transaction loss | (316 | ) | — | — | (316 | ) | ||||||||||||||||
Miscellaneous income | 464 | — | — | 464 | ||||||||||||||||||
Income from continuing operations before income taxes, minority interest and equity in income of investees | 18,125 | 54,355 | (1,026 | ) | 44,471 | |||||||||||||||||
Income tax provision | (2,506 | ) | (20,655 | ) | 390 | 10,793 | (g) | (11,978 | ) | |||||||||||||
Minority interest in earnings of subsidiaries | (519 | ) | — | — | (519 | ) | ||||||||||||||||
Equity in income of investees | 559 | — | — | 967 | (h) | 1,526 | ||||||||||||||||
Income before cumulative effect of change in accounting principle | $ | 15,659 | $ | 33,700 | $ | (636 | ) | $ | 33,500 | |||||||||||||
Pro forma income per share — basic and diluted | $ | 1.09 | ||||||||||||||||||||
Shares used in computing pro forma income per share — basic and diluted | 30,769,230 | |||||||||||||||||||||
40
Notes to
Unaudited Pro Forma
Condensed Combined Financial Data
The following adjustments were applied to our historical financial statements and those of the Puna, Heber 1, Heber 2 and Mammoth projects in order to prepare the pro forma condensed combined financial data.
Statements of Operations Footnotes:
The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2003 and for the six months ended June 30, 2004 are based on our consolidated financial statements and the financial statements of the Puna, Heber 1, Heber 2 and Mammoth projects, and adjusted to give effect to the acquisitions as if they had occurred as of January 1, 2003 by: (1) combining our results of operations for the year ended December 31, 2003 and the six months ended June 30, 2004, with (i) the Puna project's operations for the year ended December 31, 2003 and for the period from January 1, 2004 to June 2, 2004, and (ii) the Heber 1 and Heber 2 projects' operations for the period from January 1, 2003 to December 17, 2003, and (2) recording our 50% equity in the income of the Mammoth project for the period from January 1, 2003 to December 17, 2003, with our results for the year ended December 31, 2003.
(a) Represents the recording of the change in depreciation resulting from the (step-down)/step-up in basis of $(80.3) million and $110 million of property, plant and equipment to their respective fair values related to the acquisitions of the Puna, Heber 1, and Heber 2 projects, respectively. Property, plant and equipment are being depreciated using the straight-line method over the estimated service period of 15 to 23 years. The step-down of $80.3 million related to the Puna project represents the difference between the net book value of the Puna project's long-lived assets prior to our purchase and the fair value allocated to the Puna project's power plant based on an independent valuation. Despite the step-down upon our purchase of the Puna project, no impairment charge was recorded as detailed impairment analysis during periods prior to our purchase concluded that the sum of the undiscounted expected future cash flows were more than the carrying amount of the Puna project's long-lived assets.
(b) Represents the recording of the change in amortization resulting from the step-up in basis of $14.4 million and $25.3 million of power purchase agreements to their respective fair values related to the acquisition of the Puna, Heber 1 and Heber 2 projects, respectively, using the straight-line method over the estimated contract periods of 15 to 23 years.
(c) Represents the elimination of interest expense related to (i) the Puna project of $4.1 million (which includes $2.8 million related to the termination of an interest rate swap agreement discussed below) for the six months ended June 30, 2004 and $3.4 million for the year ended December 31, 2003 and (ii) the Heber 1 and Heber 2 projects of $1.8 million for the period from January 1, 2003 to December 17, 2003. The Puna project included $43.3 million of indebtedness which was repaid on June 3, 2004. The average interest rate on approximately 75% of such indebtedness was 8.17% and 3% on approximately 25% of such indebtedness. In addition, an interest rate swap agreement in connection with the Puna project indebtedness was terminated on June 3, 2004. Notes payable in connection with the Heber 1 and Heber 2 projects in the amount of $12.5 million, which notes payable were terminated as part of the acquisition thereof, accrued interest at LIBOR plus 4.75% per annum from January 31, 2002 through July 31, 2003. Such indebtedness was extinguished as of December 17, 2003. Capital leases related to the Heber 1 and Heber 2 projects, which were also terminated as part of the acquisition thereof, in the amount of $19.7 million, accrued interest at 5.34% per annum. Such indebtedness was extinguished as of January 30, 2004.
(d) Represents the recording of interest expense, prior to February 13, 2004, associated with the gross proceeds of $190 million pursuant to the issuance by Ormat Funding of the senior secured notes with an interest rate of 8.25%, in the amount of $1.9 million for the period from January 1, 2004 to February 13, 2004 and $15.7 million for the fiscal year ended December 31, 2003, and the amortization of debt issue costs in the amount of $0.2 million for the period from January 1, 2004 to February 13, 2004 and $1.1 million for the fiscal year ended December 31, 2003.
41
(e) Represents the recording of interest expense associated with the gross proceeds of $154.5 million from Beal Bank with an interest rate of 7.125% in the amount of $11.0 million for the fiscal year ended December 31, 2003, and the amortization of debt issue costs in the amount of $0.6 million for the fiscal year ended December 31, 2003. Such debt was incurred for the acquisition of the Heber 1 and Heber 2 projects.
(f) Represents the recording of interest expense in the amount of $1.1 million for the six months ended June 30, 2004 and $2.3 million for the fiscal year ended December 31, 2003 related to shareholder loans in the amount of $32.8 million bearing an interest rate of 7.5% and interest expense of $0.8 million for the six months ended June 30, 2004 and $1.6 million for the fiscal year ended December 31, 2003, related to short-term loans of $40 million bearing an interest rate of 4%. The shareholder loans and short-term loans were incurred in connection with the acquisition of the Puna project.
(g) Represents the recording of income tax expenses to reflect an effective tax rate of 40% on the pro forma adjustments, which is our expected effective tax rate.
(h) Represents the recording of our 50% equity in the income of the Mammoth project (net of taxes in the amount of $645), increased by the amortization of the equity basis difference, and has been presented as "Equity in income of investee." As the purchase price is less than the underlying net equity of the Mammoth project by $9.5 million, the equity basis will be amortized over the remaining useful life of the property, plant and equipment and the power purchase agreements, which is approximately 12 to 17 years.
Summarized statement of operations information of the Mammoth project for the period from January 1, 2003 to December 17, 2003 is as follows (in thousands):
Revenues | $ | 16,353 | ||||
Gross margin | 4,288 | |||||
Net income | 2,024 | |||||
Company's equity in income of the Mammoth project: | ||||||
50% of the Mammoth project net income | $ | 1,012 | ||||
Plus amortization of the equity basis difference | 600 | |||||
$ | 1,612 | |||||
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MANAGEMENT'S DISCUSSION AND
ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our results of operations, financial condition and liquidity in conjunction with our consolidated financial statements and the related notes. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategies for our business, statements regarding the industry outlook, our expectations regarding the future performance of our business, and the other non-historical statements contained herein are forward-looking statements. See "Special Note Regarding Forward-Looking Statements." You should also review the "Risk Factors" section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described herein or implied by such forward-looking statements. Unless specifically stated otherwise, references to balances and results of operations in this section are to our continuing operations and do not include our discontinued operations discussed below. For a discussion of the effect of our significant acquisitions, please see "Unaudited Pro Forma Condensed Combined Financial Data" included elsewhere in this prospectus, which does not include the acquisition of the Steamboat 2/3 project and Steamboat Hills project.
Overview
We are a leading vertically integrated company engaged in the geothermal and recovered energy power business. We design, develop, build, own and operate clean, environmentally friendly geothermal power plants, and we also design, develop and build, and plan to own and operate, recovered energy-based power plants, in each case, using equipment that we design and manufacture. In addition, we sell the equipment we design and manufacture for geothermal electricity generation, recovered energy-based electricity generation, and other equipment for electricity generation to third parties. Our operations consist of two principal business segments. The first consists of the sale of electricity from our power plants, which we refer to as the Electricity Segment, while the second consists of the design, manufacturing and sale of equipment for electricity generation, the installation thereof and the provision of related operation and maintenance services, which we refer to as the Products Segment.
Our Electricity Segment currently consists of our investment in power plants producing electricity from geothermal resources. It will also include our planned investment in power plants producing electricity from recovered energy resources. Our geothermal power plants include both power plants that we have built and power plants that we have acquired. Our Products Segment consists of the design, manufacture and sale of equipment that generates electricity, principally, from geothermal and recovered energy resources, but also using other fuel sources as well. Our Products Segment also includes, to the extent requested by our customers, the installation of our equipment and other related power plant installations and the provision of operation and maintenance services. For the six months ended June 30, 2004, our Electricity Segment represented approximately 70.4% of our total revenues, while our Products Segment represented approximately 29.6% of our total revenues during such period.
Our Electricity Segment operations are conducted in the United States and throughout the world. We are the fastest growing geothermal power generation company in the United States, measured by growth in generating capacity. We have increased our net ownership interest in generating capacity by 171 MW between December 31, 2002 and June 30, 2004, of which 155 MW was attributable to our acquisition of geothermal power plants from third parties and 16 MW was attributable to increased generating capacity of our existing geothermal power plants resulting from plant technology upgrades and improvements to our geothermal reservoir operations, which include improving methods of heat source supply and delivery. Since January 1, 2001, we have completed various acquisitions of geothermal power plants in the United States with an aggregate acquisition cost, net of cash received, of $502.3 million. We also own (or control) and operate geothermal power plants in Guatemala, Kenya, Nicaragua and the Philippines. In 2003, pro forma revenues from the sale of electricity by our power plants were $162.6 million. Our net ownership in our generating capacity has increased from 93 MW, as of December 31, 2001, to 312 MW, as of June 30, 2004. Such revenues do not include any
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revenues attributable to our Steamboat 2/3 project and Steamboat Hills project that were acquired in 2004, which we estimate (based on, in the case of the Steamboat 2/3 project, $14.0 million of revenues generated by such project in 2003 and, in the case of the Steamboat Hills project, $3.0 million based on the current revenue generation of such project, computed on an annualized basis) to be approximately $17.0 million for the fiscal year ended December 31, 2003.
Our Products Segment operations are also conducted in the United States and throughout the world. For the fiscal year ended December 31, 2003, revenues attributable to our Products Segment were $41.7 million. Such revenues included approximately $5.0 million received from the construction of a recovered energy-based power plant in a gas processing plant in the United States. We expect that an important component of our Products Segment will be the design, manufacturing and sale of recovered energy products, which is a market opportunity we have identified that we expect will allow us (in our Electricity Segment) and potential customers (in our Products Segment) to utilize waste heat for the purpose of producing electricity.
Our Electricity Segment is characterized by relatively predictable revenues generated by our power plants pursuant to long-term power purchase agreements, with terms which are generally up to 20 years. By contrast, revenues attributable to our Products Segment, which are based on the sale of equipment and the provision of various services to our customers are far less predictable and may vary significantly from period to period. Our management assesses the performance of our two segments of operation differently. In the case of our Electricity Segment, when making decisions about potential acquisitions or the development of new projects, our management typically focuses on the internal rate of return of the relevant investment, relevant technical and geological matters and other relevant business considerations. Additionally, as part of our Electricity Segment, our management evaluates our operating projects based on the performance of such projects in terms of revenues and expenses in contrast to projects that are under development, which our management evaluates based on costs attributable to each such project. Our management evaluates the performance of our Products Segment based on the timely delivery of our products, performance quality of our products and costs actually incurred to complete customer orders as compared to the costs originally budgeted for such orders.
Recent Developments
In December 2003, we acquired our Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth project for a total cost of approximately $256.8 million. The acquisition of our Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth project was financed with a combination of parent company loans, project finance debt provided by Beal Bank and short-term loans. We accounted for such acquisition pursuant to the purchase method of accounting in accordance with Statement of Financial Accounting Standards (which we refer to as SFAS) No. 141.
In February 2004, we acquired the Steamboat 2/3 project for a total cost of approximately $82.8 million. The acquisition of the Steamboat 2/3 project was financed with a portion of the proceeds received from the issuance of the 8¼% senior secured notes by Ormat Funding. Such acquisition was accounted for pursuant to the purchase method of accounting in accordance with SFAS No. 141.
At the end of May 2004, we acquired the Steamboat Hills project for a total cost of approximately $20.2 million and in early June 2004, we acquired the Puna project for a total cost of approximately $71.2 million. The acquisition of the Steamboat Hills project was financed with internally generated cash while the acquisition of the Puna project was financed with parent company loans and short-term loans. We accounted for the acquisitions of both of the Puna and Steamboat Hills projects pursuant to the purchase method of accounting in accordance with SFAS No. 141.
As a result of our recent acquisitions, our results of operations for the various periods covered by our financial statements attached hereto may not be comparable with each other or indicative of future results.
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Trends and Uncertainties
The geothermal industry in the United States has historically experienced significant growth followed by a consolidation of owners and operators of geothermal power plants. During the 1990s, growth and development in the geothermal industry occurred primarily in foreign markets and only minimal growth and development occurred in the United States. Since 2001, there has been increased demand for energy generated from geothermal resources in the United States as production costs for electricity generated from geothermal resources have become more competitive relative to fossil fuel generation due to increasing gas prices and as a result of newly enacted legislative and regulatory incentives, such as state renewable portfolio standards. We see the increasing demand for energy generated from geothermal and other renewable resources in the United States and the further introduction of renewable portfolio standards as the most significant trends affecting our industry today and in the immediate future. Our operations and the trends that from time to time impact our operations are subject to market cycles.
Although other trends, factors and uncertainties may impact our operations and financial condition, including many that we do not or cannot foresee, we believe that our results of operations and financial condition for the foreseeable future will be affected by the following trends, factors and uncertainties:
• | We have experienced significant growth through the acquisition and enhancement of geothermal power plants. On a pro forma basis, the Heber 1 and Heber 2 projects and the Puna project accounted for 32.4% and 9.2% of our pro forma revenues, respectively, and 45.9% and 10.8% of our operating profits, respectively, for the fiscal year ended December 31, 2003. As a result of such acquisitions, we expect an increase in our revenues and operating profits for the current fiscal year, as compared to our consolidated revenues and operating profits for the fiscal year ended December 31, 2003. We also expect an increase in our revenues and operating profits for the current fiscal year as a result of the acquisition of the Steamboat 2/3 project and the Steamboat Hills project this year. |
• | In the United States, we expect to continue to benefit from the increasing demand for renewable energy as a result of favorable legislation adopted by 17 states, including California, Nevada and Hawaii (where we have been the most active in our geothermal development and in which all of our U.S. projects are located). In each of these states, relevant legislation currently requires that an increasing percentage of the electricity supplied by electric utility companies operating in such states be derived from renewable energy resources until certain pre-established goals are met. We expect that the additional demand for renewable energy from utilities in such states will create additional opportunities for us to expand existing projects and build new power plants. |
• | Outside of the United States, we expect that a variety of governmental initiatives, including the award of long-term contracts to independent power generators, the creation of competitive wholesale markets for selling and trading energy, capacity and related energy products and the adoption of programs designed to encourage "clean" renewable and sustainable energy sources, will create new opportunities for the development of new projects as well as create additional markets for our remote power units and other products. |
• | We have identified recovered energy-based power generation as a significant market opportunity for us in the United States and throughout the world. We are initially targeting the North American market and, thereafter, we intend to leverage our success in such market in order to expand such operations throughout the world. If our expectations regarding the growth in demand for our recovered energy units are not met, we may not be able to generate the revenues we expect from such operations. |
• | In the short term, we may experience a decline in our revenues attributable to our Products Segment as we currently do not have any new orders to replace large existing contracts. In pursuing new orders, we participate in tenders for projects and proposals for installations and identify and monitor markets which utilize or plan to utilize geothermal energy and in which |
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geothermal resources are available. While a decline in the revenues attributable to our Products Segment may have an adverse impact on our results of operations for the relevant periods, we do not expect that any such decline would have a material adverse effect on our liquidity and capital resources for the relevant periods over the short-term. Over the long-term, we intend to continue to pursue growth in our recovered energy business, which may help to offset any potential adverse impact on our results of operations for the relevant periods. |
• | We expect to continue to generate the majority of our revenues from the sale of electricity from our power plants. All of our current revenues from the sale of electricity are derived from fully-contracted payments under long-term power purchase agreements. |
• | We expect that our financing expenses during the current fiscal year will increase, as compared to our financing expenses for the fiscal year ended December 31, 2003, as we financed the majority of our recent acquisitions with long-term non- and limited-recourse financing. |
• | The viability of the geothermal resources utilized by our power plants depends on various factors such as the heat content of the geothermal reservoir, useful life of the reservoir (the term during which such geothermal reservoir has sufficient extractable fluids for our operations) and operational factors relating to the extraction of the geothermal fluids. Our geothermal power plants may experience an unexpected decline in the capacity of their respective geothermal wells. Such factors, together with the possibility that we may fail to find commercially viable geothermal resources in the future, represent significant uncertainties we face in connection with our operations. |
• | Our foreign operations are subject to significant political, economic and financial risks, which vary by country. Such risks include the ongoing privatization of the electricity industry in the Philippines, the partial privatization of the electricity sector in Guatemala, labor unrest and strengthening of unions in Nicaragua and the political uncertainty currently prevailing in Kenya. Although we maintain political risk insurance as an attempt to mitigate such risks, such insurance does not provide complete coverage with respect to all such risks. |
• | We do not expect the current low interest rate environment to continue in the foreseeable future. Any increases in interest rates that impact our existing financings or future financings could increase the aggregate amount of our interest expenses and thus could have an adverse effect on our results of operations. |
• | We have experienced recent increases in the cost of raw materials required for our equipment manufacturing activities, which we believe have resulted primarily from increased demand in the Chinese market for such raw materials and increases in the cost of transportation of our products. An increase in such costs may have an adverse effect on our financial condition and results of operations. |
Revenues
We generate our revenues primarily from the sale of electricity from our geothermal power plants, the design, manufacturing and sale of equipment for electricity generation and the construction, installation and engineering of power plant equipment.
Revenues attributable to our Electricity Segment are relatively predictable as they are derived from the sale of electricity from our power plants pursuant to long-term power purchase agreements, however, such revenues are subject to seasonal variations, as more fully described below in the section entitled "Seasonality". Our power purchase agreements generally provide for the payment of capacity payments, energy payments, or both. Generally, capacity payments are payments calculated based on the amount of time that our power plants are available to generate electricity. Some of our power purchase agreements provide for bonus payments in the event that we are able to exceed certain target levels and the potential forfeiture of payments if we fail to meet minimum target levels. Energy payments, on the other hand, are payments calculated based on the amount of electrical energy delivered to the relevant power purchaser at a designated delivery point. The rates applicable to such
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payments are either fixed (subject, in certain cases, to certain adjustments) or are based on the relevant power purchaser's short run avoided costs (the incremental costs that the power purchaser avoids by not having to generate such electrical energy itself or purchase it from others). As required by Emerging Issues Task Force No. 01-8, Determining Whether an Arrangement Contains a Lease , we assessed all of our power purchase agreements acquired since July 1, 2003, and concluded that all such agreements related to our Heber 1 and 2, Steamboat 2/3, Steamboat Hills, and Puna projects contained a lease element requiring lease accounting. Accordingly, revenues related to the lease element of the agreements are presented as "lease" revenue, with the remaining revenue related to the production and delivery of the energy presented as "energy and capacity" revenue in our financial statements. As the lease revenue and the energy and capacity revenues are derived from the same arrangement and both fall within our electricity segment, we analyze such revenues, and related costs, on a combined basis for management purposes.
Revenues attributable to our Products Segment are generally unpredictable because larger customer orders for our products are typically a result of our participating in, and winning, tenders issued by potential customers in connection with projects they are developing. Such projects often take a long time to design and develop and are often subject to various contingencies such as the customer's ability to raise the necessary financing for such project. As a result, we are generally unable to predict the timing of such orders for our products and may not be able to replace existing orders that we have completed with new ones. As a result, our revenues from our Products Segment fluctuate (and at times, extensively) from period to period.
The following table sets forth a breakdown of our revenues for the periods indicated:
Revenues | % of revenues for period indicated | |||||||||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, |
Six
months
ended June 30, |
Year ended December 31, |
Six
months
ended June 30, |
|||||||||||||||||||||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | 2001 | 2002 | 2003 | 2003 | 2004 | |||||||||||||||||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||||||||||||
Electricity Segment | $ | 33,956 | $ | 65,491 | $ | 77,752 | $ | 35,651 | $ | 70,215 | 70.9 | % | 76.5 | % | 65.1 | % | 69.0 | % | 70.4 | % | ||||||||||||||||||||||
Products Segment | 13,959 | 20,138 | 41,688 | 16,022 | 29,491 | 29.1 | 23.5 | 34.9 | 31.0 | 29.6 | ||||||||||||||||||||||||||||||||
Total | $ | 47,915 | $ | 85,629 | $ | 119,440 | $ | 51,673 | $ | 99,706 | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||
Geographical breakdown
11.7%, 48.0% and 56.4% of the revenues attributable to our Electricity Segment were generated in the United States in 2001, 2002, and 2003, respectively. For the six months ended June 30, 2004, 80.7% of our revenues attributable to our Electricity Segment were generated in the United States, as compared to 52.2% for the same period in 2003. During the past three fiscal years, the percentage of our total revenues attributable to the sale of electricity in the United States has increased significantly, as compared to the percentage of our total revenues that is attributable to the sale of electricity by our foreign projects that has declined commensurately. Such increase is largely attributable to our recent acquisition of various projects in the United States. The following table sets forth the geographic breakdown of the revenues attributable to our Electricity Segment for the periods indicated:
Year ended December 31, |
Six
Months
ended June 30, |
|||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||
United States | 11.7 | % | 48.0 | % | 56.4 | % | 52.2 | % | 80.7 | % | ||||||||||||
Foreign | 88.3 | % | 52.0 | % | 43.6 | % | 47.8 | % | 19.3 | % | ||||||||||||
Historically, revenues attributable to our Products Segment, after giving effect to the elimination of intercompany balances, have been derived primarily from outside of the United States, which is reflective of the historical demand in the United States described elsewhere in this prospectus. Since 2003, we have begun to generate revenues attributable to our Products Segment in the United States
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as well. However, as a result of the volatility and unpredictability of the revenues attributable to our Products Segment and the impact that a few sales or EPC contracts can have on the geographic distribution of such revenues, the geographical distribution of such revenues may not be indicative of any developing trends or of our future results.
Seasonality
The demand for the electricity generated by our domestic projects and the prices paid for such electricity pursuant to our power purchase agreements are subject to seasonal variations. The demand for electricity from the Heber 1 project and Heber 2 project, the Mammoth project and the Ormesa project is the highest in the summer months of June through September, because the power purchaser for those projects, Southern California Edison Company, delivers more electricity to its California markets during such period in order to meet demand for air conditioning and other energy-intensive cooling systems utilized during such summer months. The demand for electricity from the Steamboat complex and the Brady project is more balanced, consisting of both summer and winter peaks that reflect the greater temperature variation in Nevada. Similarly, the demand for electricity from the Puna project is balanced due to the equatorial temperature in Hawaii (with less pronounced temperature variations during the year). In California, the capacity rates payable pursuant to the applicable power purchase agreement are higher in the summer months and as a result we receive higher revenues during such months. In contrast, there are no significant changes in prices during the year payable pursuant to our power purchase agreement for the Puna project and the Nevada projects. In the winter, due principally to the lower ambient temperature, our power plants produce more energy and as a result we receive higher energy revenues. However, the higher capacity payments payable by the power purchaser in California in the summer months as a result of the increase in demand and in prices has a more significant impact on our revenues than that of the higher energy revenues generally generated in winter due to increased efficiency, and as a result our revenues are generally higher in the summer than in the winter.
Expenses
Electricity Segment
The principal expenses attributable to our operating projects include operation and maintenance expenses such as labor expenses, equipment expenses, cost of parts and chemicals, costs related to third-party services, lease expenses, royalties, startup and auxiliary electricity purchases, property taxes and insurance and, for the California projects, transmission charges, scheduling charges and purchases of sweet water for use in our plant cooling towers. Some of these expenses, such as parts and third- party services, are not incurred on a regular basis, which results in fluctuations in our expenses and our results of operations for individual projects from quarter to quarter.
Our partner in the Mammoth project reimburses us for 50% of the actual costs associated with the operation and maintenance of the project, plus certain general and administrative expenses.
Lease expenses are included as a component of operating expenses and principally consist of payments made to government agencies and private entities as compensation for the use of the relevant geothermal resources and site leases where plants are located.
Royalty payments are payments made as compensation for the right to use certain geothermal resources and are included as a component of operating expenses and are paid as a percentage of the revenues derived from the associated geothermal resources.
Products Segment
The principal expenses attributable to our Products Segment include materials, salaries and related employee benefits, expenses related to subcontracting activities, transportation expenses, and royalties pertaining to government participation in our research and development programs at a rate of 3.5% of the proceeds recovered from the sale of products which were developed pursuant to such research and development programs.
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Some of the principal expenses attributable to our Products Segment, such as a portion of the costs related to labor, utilities and other support services, are fixed and, in order to maintain our current production and construction capability, must be incurred, notwithstanding the revenues attributable to our Products Segment. As a result, the cost of revenues attributable to our Products Segment, expressed as a percentage of total revenues, is often very volatile. To date, our management has made the strategic decision to maintain our production and construction capacity and, therefore, maintain the fixed cost component of the total costs attributable to our Products Segment at the current level. Another reason for such volatility is that in responding to bids for our products, we price our products and services in relation to existing competition and other prevailing market conditions, which may vary substantially from order to order.
Critical Accounting Policies
Our critical accounting policies are more fully described in Note 1 to our audited consolidated financial statements. However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. Such estimates are based on management's historical experience, the terms of existing contracts, management's observance of trends in the geothermal industry, information provided by our customers and information available to management from other outside sources, as appropriate. Such estimates are subject to an inherent degree of uncertainty. Our critical accounting policies include:
• | Revenues . Revenues related to the sale of electricity from our geothermal power plants and capacity payments paid in connection with such sale are recorded based upon output delivered and capacity provided by such power plants at rates specified pursuant to the relevant power purchase agreements. Revenues generated from engineering and operating services and sales of products and parts are recorded once the service is provided or product delivery is made, as applicable. Revenues generated from the construction of geothermal power plant equipment, on behalf of third parties, is recognized on the percentage completion method, which is the relationship between costs actually incurred and total estimated costs to completion. Such cost estimate is made by management in part based on prior operations and in part based on specific project characteristics and designs. If management's estimates utilized with respect to our Products Segment of total estimated costs to completion are inaccurate, then the percentage of completion will also be inaccurate and thus lead management to over- or under-estimate the gross margins for our Products Segment. Selling, general and administrative costs are charged as and when incurred. Provisions for estimated losses relating to contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from the application of penalty provisions in relevant contracts and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. |
• | Impairment of Long-lived Assets and Long-lived Assets to Be Disposed of . Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future net undiscounted cash flows expected to be generated by the relevant asset. The significant assumptions that we use in estimating our undiscounted future cash flows include (i) projected generating capacity of the project and rates to be received under the respective power purchase agreements, and (ii) projected operating expenses of the relevant project. If assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. Our assessment regarding the existence of impairment factors is based on market conditions, operational performance and legal factors relating to our business. Our review of existing |
49
factors and the resulting appropriate carrying value of our long-lived assets are subject to judgement and estimates that management is required to make. We believe that no impairment exists for our long-lived assets, however future estimates as to the recoverability of such assets may change based on revised circumstances. |
• | Obligations Associated with the Retirement of Long-Lived Assets . Effective January 1, 2003, we adopted SFAS No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets . Pursuant to SFAS No. 143, entities are required to record the fair market value of any legal liability related to the retirement of any of its assets in the period in which such liability is incurred. Our liabilities related to the retirement of our assets include our obligation to capping wells upon termination of our operating activities, the dismantling of our geothermal power plants upon cessation of our operations and the performance of certain remedial measures related to the land on which such operations were conducted. When a new liability for an asset retirement obligation is recorded, we capitalize the costs of such liability by increasing the carrying amount of the related long-lived asset. Such liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. At retirement, an entity either settles the obligation for its recorded amount or incurs a gain or a loss with respect thereto, as applicable. We estimate the costs related to such liabilities and if such estimates are incorrect, then the capitalized costs and carrying amount of the related long-lived asset will change and as a result may affect our financial condition. |
• | Derivative Instruments. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted by other related accounting literature, establishes accounting and reporting standards for derivative instruments (including certain derivative instruments embedded in other contracts). SFAS No. 133 requires companies to record derivatives on their balance sheets as either assets or liabilities measured at their fair value unless such instruments are exempted from derivative treatment as a normal purchase and normal sale. All changes in the fair value of derivatives are recognized currently in earnings unless specific hedge criteria are met, which requires a company to formally document, designate and assess the effectiveness of transactions that receive hedge accounting. |
We maintain a risk management strategy that incorporates the use of interest rate swaps and interest rate caps to minimize significant fluctuation in cash flows and/or earnings that is caused by interest rate volatility. Gain or loss on contracts that initially qualify for cash flow hedge accounting is included as a component of other comprehensive income and are subsequently reclassified into earnings when interest on the related debt is paid. Gain or loss on contracts that are not designated to qualify as a cash flow hedge is included as a component of interest expense. |
We were required to adopt and have become subject to the provisions of SFAS No. 133 Derivative Implementation Group ("DIG") Issue No. C15 (DIG Issue No. C15), Normal Purchases and Normal Sales Exception for Certain Option-Type Contracts and Forward Contracts in Electricity , which expands the requirements for the normal purchase and normal sales exception to include electricity contracts entered into by a utility company when certain criteria are met. Also, pursuant to DIG Issue No. C15, contracts that have a price adjustment clause based on an index that is not directly related to the electricity generated, as defined in SFAS No. 133, do not meet the requirements for the normal purchases and normal sales exception. We have power sales agreements that qualify as derivative instruments under DIG Issue No. C15 and do not meet the exception as they have a price adjustment clause based on an index that does not directly relate to the sources of the power used to generate the electricity. Our adoption of the provisions of DIG Issue No. C15 in 2002 did not have a material impact on our consolidated financial position and results of operations. |
In June 2003, the FASB issued DIG Issue No. C20, Scope Exceptions: Interpretation of the Meaning of Not Clearly and Closely Related in Paragraph 10(b) regarding Contracts with a Price Adjustment Feature . DIG Issue No. C20 specified additional circumstances in which a |
50
price adjustment feature in a derivative contract would not be an impediment to qualifying for the normal purchases and normal sales scope exception under SFAS No. 133. DIG Issue No. C20 was effective as of the first day of the fiscal quarter beginning after July 10, 2003, or October 1, 2003 for us. DIG Issue No. C20 requires contracts that did not previously qualify for the normal purchases and normal sales scope exception, and do qualify for the exception under DIG Issue No. C20, to freeze the fair value of the contract as of the date of the initial application, and amortize such fair value over the remaining contract period. Upon our adoption of DIG Issue No. C20, we elected the normal purchase and normal sales scope exception under FAS No. 133 related to our power purchase agreements. Such adoption did not have a material impact on our consolidated financial position and results of operations. |
• | Accounting for Income Taxes . As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax in each of the jurisdictions in which we operate. This process requires us to estimate our actual current tax exposure and make an assessment of temporary differences resulting from differing treatment of items for tax and accounting purposes. Such differences result in deferred tax assets and liabilities which are included on our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that such recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase such allowance in a period, we must include an expense within the tax provision in our statement of operations. Management uses significant judgment in determining our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that we generate taxable income in a particular jurisdiction in which we operate and in which we have net operating loss carry-forwards for which a deferred tax valuation allowance has been established, we may be required to adjust our valuation allowance. |
• | Stock-Based Compensation . We account for stock-based compensation based on the provisions of Accounting Board Opinion No. 25, Accounting for Stock Issued to Employees , which we refer to as APB 25, which states that no compensation expense is required to be recorded for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of common stock on the relevant grant date. In the event that stock options are granted at a price that is lower than the fair market value on the relevant date, the difference between the fair market value of the common stock and the exercise price of the stock options is recorded as unearned compensation. Unearned compensation is amortized to compensation expense over the vesting period applicable to the stock option. We have adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation , as it relates to stock options granted to employees, which requires pro forma net income to be disclosed based on the fair value of the options granted at the date of the relevant grant. |
• | New Accounting Pronouncements |
Consolidation of Variable Interest Entities
In January 2003, the Financial Accounting Statements Board, which we refer to as FASB, issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB 51 , which we refer to as FIN No. 46, as amended by FIN No. 46R in December 2003. Among other things, FIN No. 46R generally deferred the effective date of FIN No. 46 to the quarter ended March 31, 2004. The objectives of FIN No. 46R are to provide guidance on the identification of Variable Interest Entities, which we refer to as VIEs, for which control is achieved through means other than ownership of a majority of the voting interest of an entity, and how to determine which company (if any), as the primary beneficiary, should consolidate such VIE. A variable interest in a VIE, by definition, is an asset, liability, equity, contractual arrangement or other economic interest that absorbs the entity's economic variability.
Effective as of March 31, 2004, we adopted FIN No. 46R. In connection with the adoption of FIN No. 46R, we concluded that Ormat-Leyte Co. Ltd., in which we have an 80% ownership
51
interest, should be deconsolidated. Ormat-Leyte Co. Ltd.'s operating results were accounted for using the consolidated method of accounting for the three-month period ended March 31, 2004 and, effective April 1, 2004, our ownership interest in Ormat-Leyte Co. Ltd. is accounted for using the equity method of accounting.
Derivative Instruments and Hedging Activities
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 and reporting treatment for derivative instruments, including certain derivatives embedded in other contracts, and hedging activities under SFAS No. 133. The amendments set forth in SFAS No. 149 require that contracts with comparable characteristics be accounted for as derivative instruments. SFAS No. 149 clarifies the circumstances under which a contract meets the characteristics of a derivative instrument according to SFAS No. 133 and clarifies when a derivative instrument contains a financing component that warrants special reporting in the statement of cash flows. The requirements of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging arrangements designated after June 30, 2003. We adopted the provisions of SFAS No. 149 effective July 1, 2003, which did not have a material impact on our consolidated results of operations and financial position as of December 31, 2003.
Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity
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 how a company classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that a company classify a financial instrument that is within its scope as a liability because that financial instrument embodies an obligation of the company. The requirements of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, effective the first interim period beginning after June 15, 2003. For financial instruments created prior to the issuance date of SFAS No. 150, a transition is achieved by reporting the cumulative effect of a change in accounting principle. We adopted the provisions of SFAS No. 150 effective July 1, 2003, which did not have a material impact on our consolidated results of operations and financial position as of December 31, 2003.
Determining Whether an Arrangement Contains a Lease
In May 2003, the Emerging Issues Task Force ("EITF") reached consensus in EIFT Issue No. 01-8, Determining Whether an Arrangement Contains a Lease , to clarify the requirements of identifying whether an arrangement contains a lease at its inception. The guidance in the consensus is designed to broaden the scope of arrangements, such as power purchase agreements, accounted for as leases. EITF No. 01-8 requires both parties to an arrangement to determine whether a service contract or similar arrangement is, or includes, a lease within the scope of SFAS No. 13, Accounting for Leases . The consensus is being applied prospectively to arrangements agreed to, modified, or acquired in business combinations on or after July 1, 2003. The adoption of EITF No. 01-8 effective July 1, 2003 did not have a material effect on our financial position or results of operations. Power purchase agreements acquired as part of the projects purchased since July 1, 2003 (Heber 1 and 2, Steamboat 2/3, Steamboat Hills, and Puna projects), contain lease elements within the scope of SFAS 13. Accordingly, for the six months ended June 30, 2004, revenues and costs associated with the lease element of the power purchase agreements that were acquired since July 1, 2003 have been presented as "lease" revenue, with the remaining revenue related to the production and delivery of the energy being presented as "energy and capacity" revenue in our financial statements. Lease revenue related to the Heber 1 and 2 projects from the date we acquired it (December 18, 2003) to December 31, 2003 was not material.
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Obligations Associated with the Retirement of Long-Lived Assets.
For a discussion of SFAS No. 143, please see the discussion set forth above.
Results of Operations
Our historical operating results as a percentage of total revenues are presented below. A comparison of the different periods described below may be of limited value, as a result of the effects that (i) our recent acquisitions and enhancements of acquired projects, (ii) the sale of our investment in Karaganda Holding Company, which we refer to as KHC, in the third quarter of 2002, which owned and operated two coal fired power plants in Kazakhstan, and (iii) volatility in revenues of our Products Segment, in each case, have had on our historical operating results.
Year ended December 31, |
Six
Months ended
June 30, |
|||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||
Statements of Operations Data: | ||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||
Electricity Segment | 70.9 | 76.5 | 65.1 | 69.0 | 70.4 | |||||||||||||||||
Products Segment | 29.1 | 23.5 | 34.9 | 31.0 | 29.6 | |||||||||||||||||
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||
Cost of revenues: | ||||||||||||||||||||||
Electricity Segment | 36.9 | 51.1 | 60.1 | 61.0 | 57.8 | |||||||||||||||||
Products Segment | 125.0 | 85.9 | 70.7 | 66.8 | 78.4 | |||||||||||||||||
62.6 | 59.3 | 63.8 | 62.8 | 63.9 | ||||||||||||||||||
Gross margin: | ||||||||||||||||||||||
Electricity Segment | 63.1 | 48.9 | 39.9 | 39.0 | 42.2 | |||||||||||||||||
Products Segment | (25.0 | ) | 14.1 | 29.3 | 33.2 | 21.6 | ||||||||||||||||
37.4 | 40.7 | 36.2 | 37.2 | 36.1 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||
Research and development | 3.6 | 1.8 | 1.2 | 1.7 | 1.2 | |||||||||||||||||
Selling and marketing | 13.6 | 7.1 | 5.9 | 5.2 | 4.0 | |||||||||||||||||
General and administrative | 11.4 | 8.3 | 7.7 | 7.8 | 5.2 | |||||||||||||||||
Operating income | 8.8 | 23.5 | 21.4 | 22.5 | 25.7 | |||||||||||||||||
Other income (expense): | ||||||||||||||||||||||
Interest income | 2.8 | 0.7 | 0.5 | 0.6 | 0.4 | |||||||||||||||||
Interest expense | (9.1 | ) | (7.2 | ) | (6.8 | ) | (7.4 | ) | (19.5 | ) | ||||||||||||
Foreign currency translation and transaction gain (loss) | 0.6 | (0.4 | ) | (0.3 | ) | (0.3 | ) | (0.4 | ) | |||||||||||||
Miscellaneous income | 0.6 | 1.5 | 0.4 | 0.5 | 0.1 | |||||||||||||||||
Income (loss) from continuing operations before income taxes, minority interest and equity in income of investees | 3.7 | 18.1 | 15.2 | 15.9 | 6.3 | |||||||||||||||||
Income tax provision | (6.4 | ) | (7.2 | ) | (2.1 | ) | (4.2 | ) | (2.4 | ) | ||||||||||||
Minority interest in earnings of subsidiaries | (1.2 | ) | (1.4 | ) | (0.5 | ) | (0.8 | ) | (0.1 | ) | ||||||||||||
Equity of income of investees | 0.3 | 0.4 | 0.5 | 0.4 | 2.5 | |||||||||||||||||
Income (loss) from continuing operations | (3.6 | ) | 9.9 | 13.1 | 11.3 | 6.3 | ||||||||||||||||
Discontinued operations: | ||||||||||||||||||||||
Loss from operations of discontinued activities in Kazakhstan | (9.8 | ) | (3.6 | ) | — | — | — | |||||||||||||||
Loss of sale of Kazakhstan operations | — | (7.5 | ) | — | — | — | ||||||||||||||||
Income (loss) before cumulative effect of change in accounting principle | (13.4 | ) | (1.2 | ) | 13.1 | 11.3 | 6.3 | |||||||||||||||
Cumulative effect of change in accounting principle net of tax benefit | — | — | (0.2 | ) | (0.4 | ) | — | |||||||||||||||
Net income (loss) | (13.4 | ) | (1.2 | ) | 12.9 | 10.9 | 6.3 | |||||||||||||||
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Comparison of the Six Months Ended June 30, 2004 and the Six Months Ended June 30, 2003
Total Revenues
Total revenues for the six months ended June 30, 2004 were $99.7 million, as compared with $51.7 million for the six months ended June 30, 2003, which represented an 92.8% increase in total revenues. Such increase was attributable to additional revenues being generated from the Heber 1 project and the Heber 2 project that were acquired in December of 2003 and the Steamboat 2/3 project that was acquired on February 13, 2004. Such increase in revenues was also due to an additional $13.5 million received from the sale of products during such period.
Electricity Segment
Six
Months ended
June 30, |
||||||||||
2003 | 2004 | |||||||||
(in millions) | ||||||||||
Heber 1 and Heber 2 Project | $ | — | $ | 27.4 | ||||||
Steamboat Project | — | 6.9 | ||||||||
Puna Project | — | 1.8 | ||||||||
Steamboat Hills Project | — | 0.5 | ||||||||
Other Projects | 35.7 | 33.6 | ||||||||
Total | $ | 35.7 | $ | 70.2 | ||||||
Revenues attributable to our Electricity Segment for the six months ended June 30, 2004 were $70.2 million, as compared with $35.7 million for the six months ended June 30, 2003, which represented a 96.6% increase in such revenues. Such period included $27.4 million of revenues generated by the Heber 1 project and Heber 2 project, $6.9 million of revenues generated by the Steamboat 1/1A and Steamboat 2/3 projects, $1.8 million of revenues generated by the Puna project and $0.5 million of revenues generated by Steamboat Hills project, as compared to the same period in 2003, during which we did not record any revenues from such projects. Revenues from other projects decreased due to the deconsolidation of the Leyte project as of April 1, 2004.
Products Segment
Revenues attributable to our Products Segment for the six months ended June 30, 2004 were $29.5 million, as compared with $16.0 million for the six months ended June 30, 2003, which represented an 84.4% increase in such revenues. This increase resulted from added revenues of $13.5 million, principally attributable to two large projects (Mokai and Wairakei) during the six-month period ended June 30, 2004. Such increase reflects the volatility of the revenues generated from our Products Segment.
Total Cost of Revenues
Total cost of revenues for the six months ended June 30, 2004 was $63.7 million, as compared with $32.5 million for the six months ended June 30, 2003, which represented an 96.0% increase in total cost of revenues. As a percentage of total revenues, our total cost of revenues for the six months ended June 30, 2004 and the six months ended June 30, 2003 were 63.9% and 62.8%, respectively.
Electricity Segment
Total cost of revenues attributable to our Electricity Segment for the six months ended June 30, 2004 was $40.6 million, as compared with $21.7 million for the six months ended June 30, 2003, which represented a 87.1% increase in cost of revenues for such segment. The six months ended June 30, 2004 included $17.3 million, $3.7 million $1.1 million and $0.3 million, respectively, of cost of revenues attributable to the Heber 1 project and the Heber 2 project and the Steamboat 1/1A and Steamboat 2/3 projects, as compared to the six months ended June 30, 2003, during which such projects were not
54
included in our results of operations. As a percentage of total electricity revenues, total cost of revenues attributable to our Electricity Segment for the six months ended June 30, 2004 (57.8%) was slightly lower than the percentage for the six months ended June 30, 2003 (61.0%) because as a percentage of revenues, total cost of revenues for our newly acquired projects were slightly lower than the projects in our portfolio prior to such acquisitions.
Products Segment
Total cost of revenues attributable to our Products Segment for the six months ended June 30, 2004 was $23.1 million, as compared with $10.7 million for the six months ended June 30, 2003, which represented a 115.9% increase in cost of revenues related to such segment. Such $12.4 million increase in cost of revenues was attributable to an increase in revenues recognized during the relevant period in 2004, as compared to the relevant period in 2003. As a percentage of total products revenues, our total cost of revenues attributable to our Products Segment for the six months ended June 30, 2004 was 78.4% and for the six months ended June 30, 2003 was 66.8%. The lower percentage of cost of revenues in 2003 resulted from the cancellation of a provision recorded in 2002 for the construction of a project following negotiations with a customer.
Research and Development Expenses
Research and development expenses for the six months ended June 30, 2004 were $1.2 million, as compared with $0.9 million for the six months ended June 30, 2003, which represented a 33.3% increase in research and development expenses. Such increase was in the ordinary course of our operations and does not represent any significant change in our research and development program or our ability to maintain and continue to develop our technologies and operations and reflects fluctuations in the period in which actual expenses were incurred.
Selling and Marketing Expenses
Selling and marketing expenses for the six months ended June 30, 2004 were $3.9 million, as compared with $2.7 million for the six months ended June 30, 2003, which represented a 44.4% increase in selling and marketing expenses. Selling and marketing expenses for the six months ended June 30, 2004 constituted 4.0% of total revenues for such period, as compared with 5.2% for the six months ended June 30, 2003. Such 1.2% decrease is attributable to the fixed cost nature of certain of our selling and marketing expenses as compared to a larger revenue base. The larger revenue base was principally attributable to an increase in the revenues generated by our Electricity Segment. Once a project is in operation and generates electricity, selling and marketing expenses attributable to such project are relatively insignificant.
General and Administrative Expenses
General and administrative expenses for the six months ended June 30, 2004 were $5.2 million, as compared with $4.1 million for the six months ended June 30, 2003, which represented a 26.8% increase in general and administrative expenses. Such increase was principally attributable to an increase in professional services fees related to our business development activities in the United States. General and administrative expenses for the six months ended June 30, 2004 constituted 5.2% of total revenues for such period, as compared with 7.8% for the six months ended June 30, 2003. Such 2.6% decrease is attributable to the fixed cost nature of certain of our general and administrative expenses as compared to a larger revenue base.
Interest Expense
Interest expense for the six months ended June 30, 2004 was $19.5 million, as compared with $3.8 million for the six months ended June 30, 2003, which represented a 413.2% increase in such interest expense. Approximately $5.9 million of such increase was attributable to the interest expenses incurred by certain of our subsidiaries in connection with the Beal Bank financing and approximately
55
$6.3 million of such increase was attributable to the interest expenses incurred in connection with the issuance by Ormat Funding, on February 13, 2004, of $190.0 million of senior secured notes. The remaining $3.5 million increase was attributable to an increase in parent company loans.
Income Taxes
Income taxes for the six months ended June 30, 2004 were $2.0 million, as compared with $2.2 million for the six months ended June 30, 2003, which represented a 9.1% decrease in such income taxes. The effective tax rate for six months ended June 30, 2004 and June 30, 2003 was 31.0% and 26.5%, respectively. The lower effective rate for the six months ended June 30, 2003 was primarily due to the tax holiday in the Philippines that was applicable in 2003, but not in 2004.
Equity in Income of Investees
Our participation in the income generated from our investees for the six months ended June 30, 2004 was $2.0 million (net of tax expense in the amount of $0.5 million), as compared with $0.2 million for the six months ended June 30, 2003, which represented a 900.0% increase. Such increase was principally attributable to the income generated in connection with our 50.0% equity interest in the Mammoth project, which was acquired in December, 2003 and which accounted for $0.7 million of such income for the six months ended June 30, 2004, and from income generated in connection with our 80% equity interest in the Ormat Leyte project which was deconsolidated as of April 1, 2004 (as a result of the application of FIN No. 46) and which accounted for $1.0 million.
Net Income
Net income for the six months ended June 30, 2004 was $6.3 million, as compared with $5.6 million for the six months ended June 30, 2003, which represented an increase of 12.5% in our net income. Net income as a percentage of our total revenues for the six months ended June 30, 2004 was 6.3%, as compared with 10.9% for the six months ended June 30, 2003. Such decrease in percentage was principally attributable to an increase in our financing expenses relating to the financing of the acquisition of the Heber 1 project, Heber 2 project and Steamboat 2/3 project.
Comparison of the Year Ended December 31, 2003 and the Year Ended December 31, 2002
Total Revenues
Total revenues for the year ended December 31, 2003 were $119.4 million, as compared with $85.6 million for the year ended December 31, 2002, which represented a 39.5% increase in our total revenues. Such increase was principally attributable to the receipt of additional revenues generated by the Ormesa project that was acquired on April 15, 2002 and the increase in revenues generated from the sale and installation of equipment to power plants worldwide.
Electricity Segment
Year Ended December 31, | ||||||||||
2002 | 2003 | |||||||||
(in millions) | ||||||||||
Ormesa Project | $ | 21.8 | $ | 30.5 | ||||||
Heber 1 and Heber 2 Projects | — | 2.0 | ||||||||
Steamboat 1/1A Project | — | 1.0 | ||||||||
Leyte Project | 15.6 | 12.6 | ||||||||
Momotombo Project | 9.2 | 11.6 | ||||||||
Other Projects | 18.9 | 20.1 | ||||||||
Total | $ | 65.5 | $ | 77.8 | ||||||
Revenues from the sale of electricity for the year ended December 31, 2003 were $77.8 million, as compared with $65.5 million for the year ended December 31, 2002, which represented a 18.8%
56
increase in such revenues. Such increase was a result of: (i) the acquisition of the Ormesa project in April of 2002, which for the full fiscal year ended December 31, 2003 generated $30.5 million of revenues, as compared to $21.8 million for the eight months of operation in 2002 following its acquisition; (ii) $2.0 million of revenues generated by the Heber 1 project and the Heber 2 project for the 13-day period ended December 31, 2003, as compared with no revenues attributable to such projects in 2002; and (iii) $1.0 million of revenues generated by the Steamboat 1/1A project as compared with no revenues attributable to such project in 2002. The increase in our revenues for the fiscal year ended December 31, 2003, as compared to the fiscal year ended December 31, 2002, would have been higher but for the one-time addition to the revenues received in 2002 in the amount of $2.7 million, as a result of a disputed performance bonus that was resolved and recognized in 2002.
Products Segment
Revenues from our Products Segment for the year ended December 31, 2003 were $41.7 million, as compared with $20.1 million for the year ended December 31, 2002, which represented a 107.5% increase in such revenues. Such increase resulted primarily from $14.0 million of revenues primarily attributable to two large projects (Mokai and Miravalles) and the sale of products, services and parts for the year ended December 31, 2003. Such increase reflects the volatility of the revenues generated from our Products Segment.
Total Cost of Revenues
Total cost of revenues for the year ended December 31, 2003 was $76.2 million, as compared with $50.8 million for the year ended December 31, 2002, which represented a 50.0% increase. As a percentage of total revenues, our total cost of revenues for the year ended December 31, 2003 was 63.8%, as compared to 59.3% for the year ended December 31, 2002. This increase is explained below.
Electricity Segment
Cost of revenues attributable to our Electricity Segment for the year ended December 31, 2003 was $46.7 million, as compared with $33.5 million for the year ended December 31, 2002, which represented a 39.4% increase for such cost of revenues. Such increase was principally attributable to the acquisition of the Ormesa project, as cost of revenues for the year ended December 31, 2003 included expenses of the Ormesa project in the amount of $23.3 million, as compared to $15.7 million for the year ended December 31, 2002. The Ormesa project had higher operating expenses than the other projects we operated at such time due to additional transmission costs relating to the transmission of electricity over the Imperial Irrigation District transmission system and the type of equipment used in the Ormesa project, which is more costly to operate and maintain than the equipment used in our other projects that existed at the time of such acquisition. As a percentage of total electricity revenues, the total cost of revenues attributable to our Electricity Segment was 60.1% for the year ended December 31, 2003 as compared to 51.1% for the year ended December 31, 2002. Such increase, on a percentage basis, was partially attributable to $2.7 million of revenues received as a result of a one-time disputed performance bonus that was resolved and recognized in 2002.
Products Segment
Cost of revenues attributable to our Products Segment for the year ended December 31, 2003 was $29.5 million, as compared with $17.3 million for the year ended December 31, 2002, which represented a 70.5% increase in such cost of revenues. Such $12.2 million increase in cost of revenues was attributable to the generation of additional revenues from the sale of our equipment during the year ended December 31, 2003. As a percentage of our total Products Segment revenues, our cost of revenues attributable to our Products Segment for the year ended December 31, 2003 was 70.7% as compared to 85.9% for the year ended December 31, 2002. Such 15.2% decrease was primarily attributable to a 107.5% increase in our Products Segment revenues as compared to the fixed nature of much of our cost of revenues, such as salaries, depreciation, expenses related to maintaining operations, utilities and property expenses.
57
Research and Development Expenses
Research and development expenses for the year ended December 31, 2003 were $1.4 million, as compared with $1.5 million for the year ended December 31, 2002, which represented a 6.7% decrease in such research and development expenses. Such decrease reflects a fluctuation in the ordinary course of our business and does not represent a significant change in our research and development program or our ability to maintain and continue to develop our technologies and operations.
Selling and Marketing Expenses
Selling and marketing expenses for the year ended December 31, 2003 were $7.1 million, as compared with $6.1 million for the year ended December 31, 2002, which represented a 16.4% increase in such selling and marketing expenses. Selling and marketing expenses for the year ended December 31, 2003 represented 5.9% of our total revenues, as compared to 7.1% for the year ended December 31, 2002. Such 1.2% decrease is a result of the effect of the fixed cost component of our selling and marketing expenses over a larger revenue base. The larger revenue base was principally attributable to an increase in the revenues generated by our Electricity Segment. Once a project is in operation and generates electricity, selling and marketing expenses are relatively insignificant.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2003 were $9.3 million, as compared with $7.1 million for the year ended December 31, 2002, which represented a 31.0% increase in general and administrative expenses. Such increase was attributable to costs related to an increase in our personnel, wages and professional services and other costs related to our business development activities in the United States which were primarily related to the pursuit and consummation of the acquisition of the Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth project. As a percentage of our total revenues, general and administrative expenses were 7.7% of such revenues for the year ended December 31, 2003 and 8.3% of such revenues for the year ended December 31, 2002.
Interest Expense
Interest expense for the year ended December 31, 2003 was $8.1 million, as compared with $6.2 million for the year ended December 31, 2002, which represented an increase of 30.6% in our total interest expense. Such increase resulted from $1.9 million of interest expense incurred in connection with the United Capital project finance loan incurred on December 31, 2002 by our project subsidiary to refinance the Ormesa acquisition, $0.8 million of interest expense incurred in connection with outstanding parent company loans, and $0.4 million of interest expense incurred in connection with the Beal Bank loan incurred on December 18, 2003, in order to finance the acquisition of the Heber 1 project, the Heber 2 project and the Mammoth project. Interest expenses related to certain other bank loans decreased by $1.2 million for the fiscal year ended December 31, 2003 due to a decrease in outstanding corresponding balances.
Income Taxes
Income taxes for the year ended December 31, 2003 were $2.5 million, as compared with $6.1 million for the year ended December 31, 2002, which represented a decrease of 59.0% in such income taxes. The effective tax rate for the years ended December 31, 2003 and 2002 was 13.8% and 39.5%, respectively. For the year ended December 31, 2003, our effective tax rate was reduced by approximately 8.4% as a result of the application of investment tax credits. In addition, our foreign tax rates were substantially lower than our U.S. tax rates due primarily to the tax holiday in the Philippines that applied to us and the reversal of a deferred tax valuation allowance related to the realization of net operating losses in Ormat Systems which decreased our effective tax rate by approximately 5.6%. For the year ended December 31, 2002, our effective tax rate was reduced by approximately 2.5% as a result of the application of investment tax credits and increased by approximately 8.0% related to a deferred tax valuation allowance applied to the net operating losses in Ormat Systems.
58
Equity in Income of Investees
Our participation in the income generated from our investees for the year ended December 31, 2003 was $0.6 million, as compared with $0.3 million for the year ended December 31, 2002, which represented an increase of 100%. Such increase was principally attributable to an increase in our income derived from our 21.0% ownership of the Zunil project, which had lower debt service and therefore higher net income.
Discontinued Operations
Losses from operations of discontinued activities in Kazakhstan and losses from the sale of our Kazakhstan operations were $3.1 million and $6.4 million, respectively for the year ended December 31, 2002. The sale of our Kazakhstan operations (consisting of coal fired power plants and related assets), occurred on September 16, 2002. Such losses were recorded and reflected in our financial statements for the fiscal year ended December 31, 2002.
Net Income
Our income from continuing operations was $15.7 million in the fiscal year ended December 31, 2003, as compared to $8.5 million in fiscal year ended December 31, 2002, representing 13.1% of revenues in 2003 as compared to 9.9% of revenues in 2002. Such increase was attributable to increased revenues in both segments. Net income in 2002 was equal to a loss of $1.0 million as a result of the loss from discontinued operations in Kazakhstan and the loss from the sale of our Kazakhstan assets. Net income in 2003 was $15.5 million.
Comparison of the Year Ended December 31, 2002 and the Year Ended December 31, 2001
Total Revenues
Total revenues for the year ended December 31, 2002 were $85.6 million, as compared with $47.9 million for the year ended December 31, 2001, which represented a 78.7% increase in such total revenues. Such increase in total revenues was principally attributable to the revenues generated by the acquired Ormesa project and Brady project and is also due to an increase in the revenues generated by our Products Segment.
Electricity Segment
Year Ended December 31, | ||||||||||
2001 | 2002 | |||||||||
(in millions) | ||||||||||
Brady Project | $ | 4.0 | $ | 9.6 | ||||||
Ormesa Project | — | 21.8 | ||||||||
Leyte Project | 12.5 | 15.6 | ||||||||
Other Projects | 17.5 | 18.5 | ||||||||
Total | $ | 34.0 | $ | 65.5 | ||||||
Revenues attributable to our Electricity Segment for the year ended December 31, 2002 were $65.5 million, as compared with $34.0 million for the year ended December 31, 2001, which represented a 92.6% increase in such revenues. Such increase in revenues was principally attributable to the acquisition of the Ormesa project, as total revenues for the year ended December 31, 2002 included $21.8 million of revenues generated from the Ormesa project, as compared with the year ended December 31, 2001, during which no revenues from the Ormesa project were recorded. Additionally, the acquisition of the Brady project on June 29, 2001 also contributed additional revenues, as total revenues for the year ended December 31, 2002 included Brady project revenues in the amount of $9.6 million, while the period from June 29, 2001 to December 31, 2001 only included $4.0 million of Brady project revenues. Lastly, our increased revenues were partially attributable to $2.7 million of revenues received as a result of a one-time disputed performance bonus that was resolved and recognized in 2002.
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Products Segment
Revenues from our Products Segment for the year ended December 31, 2002 were $20.1 million, as compared with $14.0 million for the year ended December 31, 2001, which represented a 43.6% increase in such revenues. Such increase resulted from revenues of $7.0 million attributable to the Miravalles power plant during the year ended December 31, 2002, as compared with no revenues from any large project during 2001. Such difference reflects the volatility of the revenues generated from our Products Segment.
Total Cost of Revenues
Total cost of revenues for the year ended December 31, 2002 was $50.8 million, as compared with $30.0 million for the year ended December 31, 2001, which represented a 69.3% increase in total cost of revenues. As a percentage of our total revenues, our total cost of revenues for the year ended December 31, 2002 was 59.3%, as compared with 62.6% for the year ended December 31, 2001.
Electricity Segment
Cost of revenues attributable to our Electricity Segment for the year ended December 31, 2002 was $33.5 million, as compared with cost of revenues of $12.5 million for the year ended December 31, 2001, which represented a 168.0% increase in such cost of revenues. Such increase was principally attributable to the acquisition of the Ormesa project, as cost of revenues for the year ended December 31, 2002 included expenses of the Ormesa project equal to $15.7 million, as compared to operating expenses relating to the Ormesa project during the year ended December 31, 2001. In addition to the acquisition of the Ormesa project, as a result of the acquisition of Brady project, operating expenses for the year ended December 31, 2002 included expenses for the Brady project equal to $5.3 million, as compared to the fiscal year ended December 31, 2001, which included $2.6 million of such expenses. As a percentage of our total Electricity Segment revenues, our cost of revenues attributable to our Electricity Segment was 51.1% for the fiscal year ended December 31, 2002, as compared with 36.9% for the fiscal year ended December 31, 2001. Such increase was primarily attributable to the cost of revenues for the Ormesa project which were substantially higher than the cost of revenues of our other existing projects at the time of such acquisition which are due to additional transmission costs relating to the transmission of electricity over the Imperial Irrigation District transmission system and the type of equipment used in the Ormesa project, which is more costly to operate and maintain than the equipment used in our other projects that existed at the time of such acquisition.
Products Segment
Cost of revenues attributable to our Products Segment for the year ended December 31, 2002 was $17.3 million, as compared with $17.5 million for the year ended December 31, 2001, which represented a 1.1% decrease in such cost of revenues. As a percentage of our total Products Segment revenues, our cost of revenues attributable to our Products Segment for the fiscal year ended December 31, 2002 was 85.9%, as compared with 125.0% for the fiscal year ended December 31, 2001. Such reduction was primarily attributable to a higher volume of product sales which was sufficient to decrease the related fixed costs, such as salaries, depreciation, expenses related to maintaining operations, utilities and property expenses, whereas in 2001, cost of revenues attributable to our Products Segment exceeded revenues generated from our Products Segment.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2002 were $1.5 million, as compared with $1.7 million for the year ended December 31, 2001, which represented a 11.8% decrease in research and development expenses. Such decrease was in ordinary course of our operations and does not represent a significant change in our research and development program or our ability to maintain and continue to develop our technologies and operations.
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Selling and Marketing Expenses
Selling and marketing expenses for the year ended December 31, 2002 were $6.1 million, as compared with $6.5 million for the year ended December 31, 2001, which represented a 6.2% decrease in such selling and marketing expenses. Selling and marketing expenses for the year ended December 31, 2002 represented 7.1% of our total revenues, as compared with 13.6% for the year ended December 31, 2001. Such 6.5% decrease is attributable to the fixed cost nature of certain of our selling and marketing expenses as compared to a larger revenue base. The larger revenue base was principally attributable to an increase in the revenues generated by our Electricity Segment. Once a project is in operation and generates electricity, selling and marketing expenses attributable to such project are relatively insignificant.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2002 were $7.1 million, as compared with $5.4 million for the year ended December 31, 2001, which represented a 31.5% increase in general and administrative expenses. Such increase was principally attributable to an increase in our business development activities in the United States, an increase in personnel and the retainer of professional consultants in connection with the acquisition of the Ormesa project. General and administrative expenses for the year ended December 31, 2002 constituted 8.3% of our total revenues, as compared to 11.3% for the year ended December 31, 2001.
Interest Expense
Interest expense for the year ended December 31, 2002 was $6.2 million, as compared with $4.3 million for the year ended December 31, 2001, which represented a 44.2% increase in our total interest expense. Such increase was primarily attributable to an increase in interest expense and related guarantee fees of $1.9 million relating to short term bank loans.
Income Taxes
Income taxes for the year ended December 31, 2002 were $6.1 million, as compared with $3.1 million for the year ended December 31, 2001, which represented an increase of 96.8% in such income taxes. The effective tax rate for the years ended December 31, 2002 and 2001 was 39.5% and 169.2%. For the year ended December 31, 2002, our effective tax rate was reduced by approximately 2.5% as a result of the application of investment tax credits and increased by approximately 8.0% related to a deferred tax valuation allowance applied to the net operating losses of Ormat Systems. For the year ended December 31, 2001, our effective tax rate was increased by a deferred tax valuation allowance applied to the net operating losses in Ormat Systems.
Equity in Income of Investees
Our participation in the income generated from our investees for the year ended December 31, 2002 was $0.3 million, as compared with $0.2 million for the year ended December 31, 2001, which represented an increase of 50.0%. Such increase was principally attributable to an increase in our income derived from our 21.0% ownership interest of the Zunil project, which had lower debt service and therefore higher net income.
Discontinued Operations
Losses from operations of discontinued activities in Kazakhstan and losses from the sale of our operations in Kazakhstan were $3.1 million and $6.4 million, respectively, for the year ended December 31, 2002. Losses from operations of discontinued activities in Kazakhstan for the year ended December 31, 2001 were $4.7 million.
Net Income (Loss)
Our income from continuing operations was $8.5 million in the fiscal year ended December 31, 2002, as compared to a loss of $1.7 million for the fiscal year ended December 31, 2001. Such increase
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was attributable to increased revenues generated by both segments. Loss from discontinued operations amounted to $3.1 million compared with $4.7 million in 2001. In 2002, we also recorded a loss on the sale of our Kazakhstan assets of $6.4 million. The net income was a loss of $1 million in 2002, compared to a loss of $6.4 million in 2001.
Quarterly Results of Operations
The table below sets forth unaudited consolidated statement of operations data for each of the six consecutive quarters ended June 30, 2004. The unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements included elsewhere in this prospectus and include all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial information. The operating results for any quarter described below are not necessarily indicative of our future results of operations for any fiscal quarter or year.
Three Months ended | ||||||||||||||||||||||||||
March
31,
2003 |
June 30,
2003 |
Sept. 30,
2003 |
Dec. 31,
2003 |
March 31,
2004 |
June
30,
2004 |
|||||||||||||||||||||
(unaudited)
(inthousands,exceptsharedata) |
||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||
Electricity Segment | $ | 17,604 | $ | 18,047 | $ | 21,494 | $ | 20,607 | $ | 33,459 | $ | 36,756 | ||||||||||||||
Products Segment | 7,812 | 8,210 | 10,907 | 14,759 | 14,146 | 15,345 | ||||||||||||||||||||
25,416 | 26,257 | 32,401 | 35,366 | 47,605 | 52,101 | |||||||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||||||
Electricity Segment | 10,148 | 12,017 | 10,837 | 13,724 | 19,390 | 21,222 | ||||||||||||||||||||
Products Segment | 6,317 | 3,493 | 8,684 | 11,000 | 11,328 | 11,794 | ||||||||||||||||||||
16,465 | 15,510 | 19,521 | 24,724 | 30,718 | 33,016 | |||||||||||||||||||||
Gross margin | 8,951 | 10,747 | 12,880 | 10,642 | 16,887 | 19,085 | ||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||
Research and development | 439 | 432 | 325 | 195 | 302 | 900 | ||||||||||||||||||||
Selling and marketing | 1,367 | 1,799 | 2,563 | 1,358 | 1,854 | 2,092 | ||||||||||||||||||||
General and administrative | 2,057 | 2,367 | 1,245 | 3,583 | 2,332 | 2,887 | ||||||||||||||||||||
Operating income | 5,088 | 6,149 | 8,747 | 5,506 | 12,399 | 13,206 | ||||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||
Interest income | 109 | 178 | 229 | 91 | 244 | 187 | ||||||||||||||||||||
Interest expense | (1,720 | ) | (2,115 | ) | (2,277 | ) | (2,008 | ) | (8,523 | ) | (10,952 | ) | ||||||||||||||
Foreign currency translation and transaction loss | (114 | ) | (38 | ) | (65 | ) | (99 | ) | (321 | ) | (76 | ) | ||||||||||||||
Other non-operating income | 133 | 145 | 48 | 138 | (24 | ) | 169 | |||||||||||||||||||
Income from continuing operations before income taxes, minority interest and equity in income of investees | 3,496 | 4,319 | 6,682 | 3,628 | 3,775 | 2,534 | ||||||||||||||||||||
Income tax provision | (1,397 | ) | (776 | ) | (2,134 | ) | 1,801 | (1,717 | ) | (478 | ) | |||||||||||||||
Minority interest in earnings of subsidiaries | 201 | 197 | 162 | (41 | ) | 108 | — | |||||||||||||||||||
Equity in income of investees | 89 | 99 | 106 | 265 | 787 | 1,486 | ||||||||||||||||||||
Income before cumulative effect of change in accounting principle | 1,987 | 3,445 | 4,492 | 5,735 | 2,737 | 3,542 | ||||||||||||||||||||
Cumulative effect of change in accounting principle (net of tax benefit of $124,740) | (205 | ) | — | — | — | — | — | |||||||||||||||||||
Net income | $ | 1,782 | $ | 3,445 | $ | 4,492 | $ | 5,735 | $ | 2,737 | $ | 3.542 | ||||||||||||||
Net income per share—basic and diluted | $ | 0.06 | $ | 0.11 | $ | 0.15 | $ | 0.19 | $ | 0.09 | $ | 0.11 | ||||||||||||||
Weighted average number of shares | 30,769,230 | 30,769,230 | 30,769,230 | 30,769,230 | 30,769,230 | 30,803,042 | ||||||||||||||||||||
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Liquidity and Capital Resources
Since our inception, we have funded our operations through a combination of internally generated cash and parent company loans, supplemented with third party debt.
Our third-party debt is composed of two principal categories. The first consists of project finance debt or acquisition financing that we or our subsidiaries have incurred for the purpose of developing and constructing our projects or for the acquisition of our projects. The second consists of debt incurred by us or our subsidiaries for general corporate purposes. Orcal Geothermal, one of our subsidiaries, has incurred a non-recourse project finance loan from Beal Bank, for the purpose of financing, in part, the acquisition of the Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth project, of which $153.7 million was outstanding as of June 30, 2004, bearing an interest rate of the greater of 7.125% or LIBOR plus 5.125% per annum. On February 13, 2004, Ormat Funding, one of our subsidiaries, issued 8¼% senior secured notes in a capital markets offering subject to Rule 144A and Regulation S of the Securities Act, for the purpose of the refinancing of the acquisition cost of the Brady, Ormesa and Steamboat 1/1A projects, and the financing of the acquisition cost of the Steamboat 2/3 project, of which $189.8 million was outstanding as of June 30, 2004. The Bank Hapoalim project finance debt, of which $18.5 million was outstanding as of June 30, 2004, bearing an interest rate of LIBOR plus 2.375% per annum on tranche one of the loan and LIBOR plus 3.0% per annum on tranche two of the loan, and the Export-Import Bank of the United States project finance debt, of which $16.5 million was outstanding as of June 30, 2004, bearing an interest rate of 6.54% per annum, were each incurred by our relevant subsidiaries to finance the Momotombo project and Leyte project, respectively. All of the agreements described in this section are described in more detail under "Description of Certain Material Agreements — Financing Agreements."
The second category of our third party debt includes the following loans: (i) a $20.0 million credit facility from United Mizrahi Bank, of which $20.0 million was outstanding as of June 30, 2004, bearing an interest rate of LIBOR plus 1.2% per annum, (ii) a $20 million credit facility from Bank Leumi, of which $20.0 million was outstanding as of June 30, 2004, bearing an interest rate of LIBOR plus 1.5% per annum, (iii) a medium term loans from Bank Continental, of which $6.8 million was outstanding as of June 30, 2004, and which we are obligated to repay no later than January 14, 2005 or otherwise refinance with Bank Continental or one of its affiliates, bearing an interest rate of LIBOR plus 1% per annum; (iv) a medium term loan from Bank Hapoalim, of which $4.0 million was outstanding as of June 30, 2004, bearing an interest rate of LIBOR plus 1.7% per annum; (v) a medium term loan from Discount Bank, of which $4.6 million was outstanding as of June 30, 2004, bearing an interest rate of LIBOR plus 1.7% per annum and (vi) a medium term loan from Israel's Industrial Development Bank, of which $5.0 million was outstanding as of June 30, 2004, bearing an interest rate of LIBOR plus 1.8% per annum. Our payment obligation under such credit facilities are all currently guaranteed by our parent.
From time to time, Bank Leumi has issued, as security for certain of our obligations, performance letters of credit in favor of our customers. Our parent is the counterparty with respect to such letters of credit. Pursuant to certain existing agreements described elsewhere in this prospectus, we are required to pay to our parent a guarantee fee with respect to such letters of credit (and other guarantees) and are responsible to reimburse our parent for any draw or payment made under these letters of credit or guarantees. As of June 30, 2004, the outstanding aggregate amount available to be drawn under these letters of credit was $10.5 million.
In connection with the acquisition transaction between Ormat Systems and our parent, we have entered into certain agreements with each of Bank Hapoalim, Bank Leumi, United Mizrahi Bank and Israel's Industry Development Bank. Under these agreements, in exchange for such banks' release of our parent's guarantee and a release of their security interest over the assets our subsidiary, Ormat Systems, acquired from our parent, we and Ormat Systems agreed to certain negative covenants, including, but not limited to, a prohibition on (1) creating any floating charge or any permanent pledge, charge or lien over its assets without obtaining the prior written approval of the lender, (2) guaranteeing the liabilities of any third party without obtaining the prior written approval of the
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lender and (3) selling, assigning, transferring, conveying or disposing of all or substantially all of its assets and, in some cases, compliance with certain financial ratios such as a debt service coverage ratio and a debt to equity ratio. We do not expect that these covenants or ratios, which will apply to us on a consolidated basis, will materially limit our ability to execute our future business plans or our operations. The failure to perform or observe any of the covenants set forth in such agreements, subject to various cure periods, will result in the occurrence of an event of default and would enable the lenders to accelerate all amounts due under each such agreement. In addition, as part of the consideration for the acquisition transaction between Ormat Systems and our parent, we will assume approximately $5.4 million of our parent's outstanding loan with Continental Bank.
We have also entered into an agreement with Bank Hapoalim pursuant to which we have assumed our parent's existing obligations to Bank Hapoalim with respect to approximately $17.2 million of outstanding letters of credit.
Our subsidiary, Ormat Nevada, has also entered into a letter of credit agreement with Hudson United Bank, which is described in further detail under "—Off Balance Sheet Arrangements" below.
We do not expect that any third party debt that we, or any of our subsidiaries, will incur in the future will be guaranteed by our parent.
Most of the loan agreements to which we or our subsidiaries are a party contain cross-default provisions with respect to other material indebtedness owed by us to any third party.
We are currently evaluating different options for the refinancing of the acquisition cost of the Puna project, which may include the issuance by Ormat Funding of an additional tranche of its senior secured notes or the incurrence by our project subsidiary that owns the Puna project of project finance debt, lease financing, or other form of leverage financing. If we are successful in acquiring the remaining 50% ownership of the Mammoth project, we will also be able to finance such acquisition with the issuance by Ormat Funding of an additional tranche of its senior secured notes.
In 2003, one of our lenders granted a waiver with respect to the failure of our parent company for its fiscal year 2001 and 2002 to meet certain financial ratios contained in its guarantee relating to our loan agreement with such lender. We provided no consideration for such waiver. As of June 30, 2004, the balance outstanding pursuant to such loan agreement was $4.0 million.
Other than the non-compliance noted above, our management believes that we are currently in compliance with our covenants with respect to our third-party debt.
We estimate that the net proceeds we will receive from this offering will be approximately $ million, or approximately $ million if the underwriters exercise their over-allotment option in full, in each case, after deducting the underwriting discounts and commissions and estimated expenses of this offering payable by us.
We expect to use the net proceeds of this offering to fund working capital and for general corporate purposes, which may include making other investments or acquisitions. However, we have no present understanding or agreement relating to any specific acquisition. Accordingly, management will have significant flexibility in applying the net proceeds of this offering. Pending the use of such proceeds, we intend to invest such proceeds in interest-bearing instruments. Our management believes that the sources of liquidity described above, including, but not limited to, internally generated cash, existing parent company loans and third party debt, together with the proceeds of this offering, will be sufficient to address our near and short term liquidity and other investment requirements, however, we are not dependent on the proceeds of this offering to fund our continuing operations. In the long term, we may or may not require additional funds to support our working capital requirements or for other purposes and may seek to raise such additional funds through public or private equity financings or from other sources. Such additional financing may not be available at all or, if available, such financing may not be obtainable on terms favorable to us or our shareholders.
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Historical Cash Flows
The following table sets forth the components of our cash flows for the relevant periods indicated:
Year ended December 31, | Six months ended June 30, | |||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||
(in thousands) | (unaudited) | |||||||||||||||||||||
Net cash provided by operating activities | $ | 10,998 | $ | 11,634 | $ | 46,019 | $ | 16,785 | $ | 22,660 | ||||||||||||
Net cash used in investing activities | (62,436 | ) | (60,521 | ) | (285,180 | ) | (16,059 | ) | (233,129 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 54,862 | 72,420 | 211,350 | (19,692 | ) | 222,766 | ||||||||||||||||
Effect of foreign currency translation adjustments | (293 | ) | (51 | ) | — | — | — | |||||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | 3,131 | $ | 23,482 | $ | (27,811 | ) | $ | (18,966 | ) | $ | 12,297 | ||||||||||
For the Six Months Ended June 30, 2004
Net cash provided by operating activities for the six months ended June 30, 2004 was $22.7 million, as compared with $16.8 million for the six months ended June 30, 2003. Such increase was principally attributable to the addition of cash flows from the operating activities of the Heber 1 project, Heber 2 project and Steamboat 2/3 project, whose revenues during the six months ended June 30, 2004 amounted to $10.5, $16.9 and $6.9, respectively.
Net cash used in investing activities for the six months ended June 30, 2004 was $233.1 million, as compared with $16.1 million for the six months ended June 30, 2003. The principal factors that affected the increase in the use of our cash flow for investing activities during such period were the aggregate amount of cash paid for acquisitions, net of cash received, which, for the six months ended June 30, 2004, as a result of the acquisitions of the Steamboat 2/3 project, the Puna project and the Steamboat Hills project, were equal to $82.8 million, $71.2 million and $20.3 million respectively, in addition to the increase in our restricted cash and cash equivalents during such period, which was equal to $50.7 million resulting primarily from the issuance by Ormat Funding of its 8¼% senior secured notes in the amount of $190.0 million. A portion of the proceeds from the issuance of the such senior secured notes was escrowed and reserved for additional investments for the Galena project and for the purpose of repayment of the loan extended by United Capital to fund the acquisition of the Ormesa project.
Net cash provided by financing activities for the six months ended June 30, 2004 was $222.8 million, as compared with $19.7 million used in financing activities for the six months ended June 30, 2003. The principal factors that affected the cash flow provided by financing activities during the six months ended June 30, 2004 were the proceeds from the issuance of the senior secured notes in order to finance the acquisition of the Steamboat 2/3 project and to refinance the acquisition of the Ormesa, Brady, Mammoth and Steamboat 1/A projects, the proceeds from United Mizrahi Bank loan and net proceeds from parent company loans in the amount of $36.8 million.
For the Year Ended December 31, 2003
Net cash provided by operating activities for the year ended December 31, 2003 was $46.0 million, as compared with $11.5 million for the year ended December 31, 2002. Such change was principally attributable to an increase in revenues, in an amount equal to $8.7 million, as a result of the acquisition of the Ormesa project and an increase in revenues, in an amount equal to $21.5 million, generated from our Products Segment.
Net cash used in investing activities for the year ended December 31, 2003 was $285.2 million, as compared with $60.5 million for the year ended December 31, 2002. The principal factors that affected the increase in the use of our cash flow for investing activities during such period included:
• | Cash paid for acquisitions (net of cash received) in the amount of $256.6 million, relating to the acquisition of the Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth project; and |
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• | Capital expenditures spent in connection with the Ormesa project in an amount equal to $17.0 million for the installation of new power units and the modification of the geothermal fluid gathering and electrical systems, in order to increase the capacity, reliability and availability of the Ormesa project. |
Net cash provided by financing activities for the year ended December 31, 2003 was $211.4 million, as compared with $72.5 million for the year ended December 31, 2002. The principal factors that impacted our cash flow provided by financing activities during the year ended December 31, 2003 were the incurrence of a loan by Orcal in an amount of $154.5 million from Beal Bank in December 2003, and the receipt of $126.3 million of proceeds from parent company loans, less a repayment of $55.0 million of short-term debt.
For the Year Ended December 31, 2002
Net cash provided by operating activities for the year ended December 31, 2002 was $11.5 million, as compared with $11.4 million for the year ended December 31, 2001. Such increase was principally attributable to the acquisition of the Ormesa project.
Net cash used in investing activities for the year ended December 31, 2002 was equal to $60.5 million, as compared to $62.4 million for the year ended December 31, 2001. The principal factors that impacted the use of our cash flow from investing activities during such period included:
• | Cash paid for acquisitions (net of cash received) in the amount of $39.7 million, relating to the acquisition of the Ormesa project in 2002, as compared to the cash paid for acquisitions (net of cash received) in the amount of $30.5 million, relating to the acquisition of the Brady project in 2001; and |
• | Capital expenditures incurred in connection with the Brady project and the Momotombo project in the amount of $19.7 million and the Ormesa project in the amount of $1.7 million. |
Net cash provided by financing activities for the year ended December 31, 2002 was $72.5 million, as compared with $54.5 million for the year ended December 31, 2001. The principal factors that impacted our cash flow provided by financing activities were $55.0 million of proceeds received pursuant to short term lines of credit and $18.4 million of proceeds received in connection with the loan made to the Ormesa project.
Capital Expenditures
Our capital expenditures primarily relate to two principal components, the enhancement of our existing power plants and the development of new power plants. In addition, we have budgeted approximately $5.0 million for purposes of the acquisition of machinery and equipment and for an office building for the next two to three years.
Enhancement of existing plants
To the extent not otherwise described below, we expect that the following enhancements of our existing power plants will be funded from internally generated cash or other available corporate resources, which we expect to subsequently refinance with non- or limited-resource debt at the project level.
Galena Re-powering . We have commenced the design and construction phase of the re-powering of the Galena project and expect to complete the project by the end of 2005. The estimated $23.0 million of costs attributable to such enhancement will be funded from proceeds received by Ormat Funding in connection with its issuance of its senior secured notes, which are currently deposited in an escrow account, and will be released in accordance with the progress of the construction phase for such enhancement. We expect that the investment will increase the total output of the Steamboat complex by 13MW.
Mammoth Project Enhancement . Mammoth-Pacific, L.P. plans to commence a $5.0 million enhancement program of the Mammoth project, consisting primarily of drilling activities, which we
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believe will result in an increase in such output of the project of 30,500 MWh per year and is expected to be completed by January of 2006. A substantial portion of the funds required for such enhancement have been earmarked by us and our partners for such enhancement program.
Heber Project Enhancement . In connection with the Heber 1 and Heber 2 projects, we are currently pursuing an enhancement program consisting of geothermal field optimization and the drilling of an additional well at the Heber 2 project and the adding of additional OEC units at the Heber 1 and Heber 2 projects, in order to increase the generating capacity of the Heber 1 and Heber 2 projects by 18 MW, for a total budgeted investment of approximately $28.0 million. Such enhancement program will be funded from cash generated by the Heber 1 and Heber 2 projects and other liquidity sources.
Steamboat Hills Project Enhancement . In connection with the Steamboat Hills project, we plan to add a further OEC unit and perform associated work in order to increase the output of the power plant by 7.5 MW for a total budgeted investment of approximately $10.0 million, which is currently scheduled to be completed in 2006.
Puna Project Enhancement . In connection with the Puna project, an approximately $22.0 million dollar enhancement program is currently planned and is intended to increase the output of the project by 6.5 MW and to improve its reliability. We expect that such enhancement program will be completed in 2007. We are currently exploring various financing options for the refinancing of the acquisition cost of the Puna project.
Construction of new projects
Initially, we intend to fund the construction projects described below from internally generated cash, existing parent company loans and short-term debt. We currently do not contemplate obtaining any new loans from our parent company.
Desert Peak 2 and Desert Peak 3 Projects . In connection with the Desert Peak 2 project, we have already drilled the necessary production wells and expect to begin the manufacturing and construction of the associated power plant shortly, which manufacturing and construction is expected to be completed in 2006. The total construction cost for the construction of the 15 MW power plant is estimated to be between $30.0 million and $35.0 million. The construction of the Desert Peak 3 project is expected to be completed in 2007.
Amatitlan Project . The Amatitlan project, which is in its final engineering stage, is scheduled to be completed in 2006 and the aggregate construction cost related to such project is estimated at approximately $40 million.
Other than the enhancements described above and a possible enhancement to the Ormesa project which is in the early stages of conceptual design, we do not anticipate any other material capital expenditures in the near term for any of our operating projects, other than ordinary maintenance requirements, which we typically fund with internally generated cash.
Exposure To Market Risks
One market risk to which power plants are typically exposed is the volatility of electricity prices. However, our exposure to such market risk is not significant, principally because our long-term power purchase agreements have fixed or escalating rate provisions that limit our exposure to changes in electricity prices. However, beginning in May 2007, the energy payments payable under the power purchase agreements for the Heber 1 project and Heber 2 project, the Ormesa project and the Mammoth project will be determined by reference to the relevant power purchaser's short run avoided costs. In addition, under certain of the power purchase agreements for our projects in Nevada, the price that Sierrra Pacific Power Company pays for energy and capacity is based upon its short run avoided cost. We estimate that energy payments will represent approximately two-thirds of those projects' revenues after 2007 and as a result, expect that there will be some volatility in the revenues received from such projects. 42.9% of our consolidated long-term debt (excluding amounts
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owed to our parent) is currently in the form of fixed rate securities and is therefore not subject to interest rate fluctuation risk. However, 57.1% of our debt is currently in the form of a floating rate which exposes us to changes in interest rates in connection therewith. In order to mitigate such risks, we have acquired an interest rate cap of 6.0% with respect to the LIBOR component of the interest rate applicable to the Beal Bank loan from 2007 to 2011. Ormat Systems has also entered into an interest rate swap transaction relating to the Bank Continental loan in order to mitigate the risk of LIBOR fluctuations in connection with such loan. Pursuant to such swap, Ormat Systems pays a fixed interest rate of 2.26% instead of the three-month LIBOR rate applicable to the loan and receives a variable interest rate of the three-month LIBOR rate on specific transaction dates. Each transaction date occurs every three months for an additional eight periods beginning on August 23, 2004 through May 22, 2006. The LIBOR three-month interest rate is set on each transaction date. The method used in determining the expected cash flows is the Constant Maturity Swaps for future LIBOR rates. The outstanding balance of such loan and notional amount of such swap as of June 30, 2004 was $5.4 million. Giving effect to such financial instruments, as of June 30, 2004, $395.9 million of our debt, including $143.2 owed to our parent, is subject to some floating rate risk. As such, we are exposed to changes in interest rates with respect to our long term obligations. The detrimental effect on our pre-tax earnings of a hypothetical 50 basis point increase in interest rates would be approximately $1.1 million. See "—Liquidity and Capital Resources" for further discussion of our debt instruments.
Another market risk to which we are exposed is primarily related to potential adverse changes in foreign currency exchange rates, in particular the fluctuation of the U.S. dollar versus the new Israeli shekel. Risks attributable to fluctuations in currency exchange rates can arise when any of our foreign subsidiaries borrows funds or incurs operating or other expenses in one type of currency but receives revenues in another. In such cases, an adverse change in exchange rates can reduce such subsidiary's ability to meet its debt service obligations, reduce the amount of cash and income we receive from such foreign subsidiary or increase such subsidiary's overall expenses. Risks attributable to fluctuations in foreign currency exchange rates can arise when the currency-denomination of a particular contract is not the U.S. dollar. All of our power purchase agreements in the international markets are either U.S. dollar-denominated or linked to the U.S. dollar. Our construction contacts from time to time contemplate costs which are incurred in local currencies. The way we often mitigate such risk is to receive part of the proceeds from the sale contract in the currency in which the expenses are incurred. Currently, we have not used any material foreign currency exchange contracts or other derivative instruments to reduce our exposure to this risk. In the future, we may use such foreign currency exchange contracts and other derivative instruments to reduce our foreign currency exposure to the extent we deem such instruments to be the appropriate tool for managing such exposure. We do not believe that our exchange rate exposure has or will have a material adverse effect on our financial condition, results of operations or cash flows.
We currently maintain our surplus cash in short-term, interest-bearing bank deposits and Preferred Auctioned Rate Securities, which we refer to as PARS (deposits of entities with a minimum investment grade rating of AA (by Standard & Poor's Ratings Services)). Upon completion of this offering, pending further application, we may invest a portion of the net proceeds we derive from this offering in interest-bearing investment-grade instruments or bank deposits. We do not expect that a 300 basis point increase or decrease from current interest rates would have a material adverse effect on our financial position, but will have an effect on our results of operations and cash flows.
Effects of Inflation
We do not expect that the low inflation environment of recent years in most of the countries in which we operate will continue. To address rising inflation, some of our contracts include certain mitigating factors against any inflation risk. In connection with the Electricity Segment, inflation may directly impact an expense incurred for the operation of our projects, hence increasing the overall operating cost to us. The negative impact of inflation may be partially offset by price adjustments built into some of our power purchase agreements that could be triggered upon such occurrences. As energy payments pursuant to the power purchase agreements for the Mammoth project (after April 2007), Ormesa project (after April 2007), Heber 1 project, Heber 2 project (after April 2007) and
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Steamboat 1/1A project change our power purchasers' underlying short run avoided cost, to the extent that inflation causes an increase in the short run avoided cost of our power purchaser, higher energy payments could have an offsetting impact to any inflation-driven increase in our expenses. Similarly, the energy payments pursuant to the power purchase agreements for the Brady project, Steamboat 2/3 project, the Steamboat Hills project and the Galena project increase every year through the end of the relevant terms of such agreements, however, such increases are not directly linked to the CPI. Lease payments are generally fixed, while royalty payments are generally determined as a percentage of revenues and therefore are not significantly impacted by inflation.
The recent price increase in the cost of raw materials that we use in our Products Segment has not been due to inflation but rather to a high demand for such raw materials, which we believe mainly to result from demand generated by the Chinese market. This may cause a reduction in the profitability of our Products Segment, as well as an increase in the capital costs of our projects under construction and enhancement.
Overall, we believe that the impact of inflation on our business will not be significant.
Contractual Obligations and Commercial Commitments
The following table sets forth our material contractual obligations as of June 30, 2004, excluding interest (in thousands):
Payment of Principal Due By Period | ||||||||||||||||||||||||||||||
Remaining
Total |
Q3-Q4/2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | ||||||||||||||||||||||||
Long-Term non-recourse & limited recourse debt | $ | 186,709 | $ | 7,428 | $ | 19,141 | $ | 9,456 | $ | 11,386 | $ | 12,931 | $ | 126,367 | ||||||||||||||||
Long-Term recourse debt | 65,806 | 4,745 | 50,490 | 5,771 | 1,700 | 1,700 | 1,400 | |||||||||||||||||||||||
Non-recourse Senior Notes due 2020 | 189,785 | 296 | 6,090 | 9,611 | 8,932 | 7,835 | 157,021 | |||||||||||||||||||||||
Ormat Industries notes payable | 193,852 | — | 22,047 | 31,647 | 31,647 | 31,647 | 76,864 | |||||||||||||||||||||||
Total | $ | 636,152 | $ | 12,469 | $ | 97,768 | $ | 56,485 | $ | 53,665 | $ | 54,113 | $ | 361,652 | ||||||||||||||||
The following table sets forth our interest payments payable in connection with our contractual obligations as of June 30, 2004 (in thousands):
Payment of Interest Due By Period | ||||||||||||||||||||||||||||||
Remaining
Total |
Q3-Q4/2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | ||||||||||||||||||||||||
Long-Term non-recourse & limited recourse debt | $ | 124,912 | $ | 6,356 | $ | 12,354 | $ | 12,548 | $ | 12,151 | $ | 11,322 | $ | 70,181 | ||||||||||||||||
Long-Term recourse debt | 4,398 | 926 | 1,791 | 735 | 543 | 308 | 95 | |||||||||||||||||||||||
Non-recourse Senior Notes due 2020 | 154,468 | 8,381 | 15,725 | 15,144 | 14,354 | 13,629 | 87,235 | |||||||||||||||||||||||
Ormat Industries notes payable | 52,657 | 5,150 | 10,562 | 9,713 | 7,834 | 5,777 | 13,621 | |||||||||||||||||||||||
Total | $ | 336,435 | $ | 20,813 | $ | 40,432 | $ | 38,140 | $ | 34,882 | $ | 31,036 | $ | 171,132 | ||||||||||||||||
Interest on the Senior Notes due in 2020 is fixed at a rate of 8.25%. Interest on the remaining debt is variable (based primarily on changes in LIBOR rates). Accordingly, for purposes of the above calculation of interest payments pertaining to variable rate debt, the methodology used to determine future LIBOR rates was the use of Constant Maturity Swaps.
Off Balance Sheet Arrangements
Letters of Credit
On June 30, 2004, our subsidiary, Ormat Nevada, entered into a Letter of Credit Agreement with Hudson United Bank, pursuant to which Hudson United Bank agreed to issue one or more letters of credit in an aggregate face amount of up to $15.0 million. As of the date hereof, two letters of credit
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have been issued pursuant to this facility. The first was issued in favor of the trustee for the 8¼% senior secured notes, for a face amount of $8.1 million, which will be increased by an additional amount of $2.7 million as of December 31, 2004. The second was issued in favor of Beal Bank, for a face amount of $3.6 million. Such letters of credit have been issued to substitute for current cash balances in respective reserve accounts. We have used the available cash, in the amount of $11.7 million, that has been released from such reserve accounts for working capital and reductions of outstanding bank debt.
On July 15, 2004, we entered into a reimbursement agreement with Ormat Industries, pursuant to which we agreed to reimburse Ormat Industries for any draws made on any standby letter of credit issued by Ormat Industries that is subject to the guarantee fee agreement between us and Ormat Industries and any payments made under any guarantee provided by Ormat Industries subject to such agreement. Interest on any amounts owing pursuant to the reimbursement agreement is paid in U.S. dollars at a rate per annum equal to Ormat Industries' average effective cost of funds plus 0.3%.
Some of our customers require our project subsidiaries to post letters of credit in order to guarantee their respective performance under relevant contracts. We are also required to post letters of credit to secure our obligations under various leases and licenses and may, from time to time, decide to post letters of credit in lieu of cash deposits in reserve accounts under certain financing arrangements. In addition, our subsidiary, Ormat Systems, is required from time to time to post performance letters of credit in favor of our customers with respect to orders of products.
Bank Hapoalim has issued such performance letters of credit in favor of our customers from time to time. Initially, our parent, Ormat Industries, was Bank Hapoalim's counterparty on such letters of credit and we paid our parent a guarantee fee and were responsible to reimburse our parent for any draw under these letters of credit. In connection with the acquisition transaction between Ormat Systems and our parent, we have assumed such letters of credit and are now the direct counterparty of Bank Hapoalim on such letters of credit. As of June 30, 2004, the aggregate amount available to be drawn under these letters of credit was $17.2 million. The amount that can be drawn under some of these letters of credit may be increased from time to time subject to the satisfaction of certain conditions.
As of the date hereof, we have not had a draw presented against any letter of credit issued or provided on our behalf and do not believe that it is likely that any claims will be made under a letter of credit in the foreseeable future.
Prior to 2003, our research and development efforts were partially funded through grants from the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade. We currently have no such grants available or outstanding. Under Israeli law, we are required to pay royalties to the Israeli government based on revenues derived from the sale of products developed with the assistance of such grants. The applicable royalty rate is between 3.0% to 5.0%, and the amount of royalties required to be paid are capped at the amount of the grants received (in U.S. dollars). The outstanding balance of grants provided after January 1, 1999 accrue interest at a rate equal to the 12-month LIBOR, as published on the first day of the calendar year in which the particular grant was approved. Because the royalties are payable only from revenues, if any, derived from the relevant products, we only recognize a royalty expense to the government upon delivery of the product to our customers.
Concentration of Credit Risk
Our credit risk is currently concentrated with a limited number of major customers, Sierra Pacific Power Company, Southern California Edison Company, Hawaii Electric Light Company, PNOC-Energy Development Corporation, The Kenya Power and Lighting Company Limited and two electric distribution companies who are assignees of Empresa Nicaraguense de Electricidad. If any of these electric utilities fails to make payments under its power purchase agreements with us, such failure would have a material adverse impact on our financial condition.
Historically, Southern California Edison Company accounted for 27.1%, 25.5% and 0% of our total revenues for the three years ended December 31, 2003, 2002 and 2001, respectively, and 41.9%
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and 25.3% of our total revenues for the six months ended June 30, 2004 and 2003, respectively. Southern California Edison Company is also the power purchaser and revenue source for our Mammoth project, which we account for separately under the equity method of accounting.
Sierra Pacific Power Company accounted for 9.5%, 11.2% and 8.3% of our total revenues for the three years ended December 31, 2003, 2002 and 2001, respectively, and 12.6% and 10.6% of our total revenues for the six months ended June 30, 2004 and 2003, respectively.
PNOC-Energy Development Corporation accounted for 10.6%, 18.2% and 26.0% of our total revenues for the three years ended December 31, 2003, 2002 and 2001, respectively, and 3.1% and 12.3% of our total revenues for the six months ended June 30, 2004 and 2003, respectively.
The two electric distribution companies who are assignees of Empresa Nicaraguense de Electricidad accounted for 9.7%, 10.8% and 18.6% of our total revenues for the three years ended December 31, 2003, 2002 and 2001, respectively, and 6.1% and 11.6% of our total revenues for the six months ended June 30, 2004 and 2003, respectively.
The Kenya Power & Lighting Co. Ltd. accounted for 8.1%, 10.8% and 18.0% of our total revenues for the years ended December 31, 2003, 2002 and 2001, respectively, and 4.8% and 9.2% of our total revenues for the six months ended June 30, 2004 and 2003, respectively.
Following the acquisition of the Puna project, Hawaii Electric Light Company has become one of our key customers, and we expect that Hawaii Electric Light Company will account for approximately 4.0% of our total revenues in the year 2004.
Government Grants and Tax Benefits
Our subsidiary, Ormat Systems, has received "approved enterprise" status under Israel's Law for Encouragement of Capital Investments, 1959, with respect to two of its investment programs. One such approval was received in 1996 and the other was received in May 2004. As an approved enterprise, our subsidiary is exempt from Israeli income taxes with respect to revenues derived from the approved investment program for a period of two years commencing on the year it first generates profits from the approved investment program, and thereafter such revenues are subject to reduced Israeli income tax rates of 25.0% for an additional five years. These benefits are subject to certain conditions set forth in the certificate of approval from Israel's Investment Center, that include, among other things, a requirement that Ormat Systems comply with Israeli intellectual property law, that all transactions between Ormat Systems and our affiliates be at arms length, and that there will be no change in control of, on a cumulative basis, more than 49% of Ormat Systems' capital stock (including by way of a public offering) without the prior written approval of the Investment Center.
For a discussion of our grants from Israel's Office of the Chief Scientist, see "Off Balance Sheet Arrangements" above.
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BUSINESS
Overview
We are a leading vertically integrated company engaged in the geothermal and recovered energy power business. We design, develop, build, own and operate clean, environmentally friendly geothermal power plants, and we also design, develop and build, and plan to own and operate, recovered energy-based power plants, in each case using equipment that we design and manufacture. We conduct our business activities in two business segments. We develop, build, own and operate geothermal power plants in the United States and other countries around the world and sell the electricity they generate. In addition, we design, manufacture and sell equipment for geothermal and recovered energy-based electricity generation and other power generating units and provide services relating to the engineering, procurement, construction, operation and maintenance of geothermal and recovered energy power plants.
All of the projects that we currently own or operate produce electricity from geothermal energy sources. Geothermal energy is a clean, renewable and generally sustainable form of energy derived from the natural heat of the earth. Unlike electricity produced by burning fossil fuels, electricity produced from geothermal energy sources is produced without emissions of certain pollutants such as nitrogen oxide, and with far lower emissions of other pollutants such as carbon dioxide. Therefore, electricity produced from geothermal energy sources contributes significantly less to local and regional incidences of acid rain and global warming than energy produced by burning fossil fuels. Geothermal energy is also an attractive alternative to other sources of energy as part of a national diversification strategy to avoid dependence on any one energy source or politically sensitive supply sources.
In addition to our geothermal energy power generation business, we have developed and continue to develop products that produce electricity from recovered energy or so-called "waste heat." Recovered energy or waste heat represents residual heat that is generated as a by-product of gas turbine-driven compressor stations and in a variety of industrial processes, such as cement manufacturing, and is not otherwise used for any purpose. Such residual heat, that would otherwise be wasted, is captured in the recovery process and is used by recovered energy power plants to generate electricity without burning additional fuel and without emissions.
Our Power Generation Business
We are the fastest growing geothermal power generation company in the United States measured by growth in generating capacity. We increased our net ownership interest in generating capacity by 171 MW between December 31, 2002 and June 30, 2004, of which 155 MW was attributable to our acquisition of geothermal power plants from third parties and 16 MW was attributable to increased generating capacity of our existing geothermal power plants resulting from plant technology upgrades and improvements to our geothermal reservoir operations, which include improving methods of heat source supply and delivery. We also own and operate or control and operate geothermal projects in Guatemala, Kenya, Nicaragua and the Philippines and continue to pursue opportunities to acquire and develop similar projects elsewhere in the world, including in the United States. Most of our projects are located in regions where there is, or is expected to be, demand for additional generating capacity.
In 2003, pro forma revenues from the sale of electricity by our domestic projects were $128.7 million, constituting approximately 79.1% of our total pro forma revenues from the sale of electricity, and pro forma revenues from the sale of electricity by our foreign projects were $33.9 million, constituting approximately 20.9% of our total pro forma revenues from the sale of electricity. In 2003, our actual revenues from the sale of electricity by our domestic projects were $43.8 million and by our foreign projects were $34.0 million, respectively. Pro forma revenues from the sale of electricity constituted approximately 79.6% of our total pro forma revenues in 2003. As noted previously, such pro forma revenues do not include revenues generated from the Steamboat 2/3 project and Steamboat Hills project, two additional domestic projects that were acquired this year.
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The table below summarizes key information relating to our projects that are currently in operation, under construction and/or subject to enhancement.
Project | Location | Ownership |
Commercial
Operation Date |
Generating
Capacity in MW (1) |
Power Purchaser |
Contract
Expiration |
||||||||||||||||||||
Projects in Operation | ||||||||||||||||||||||||||
Domestic | ||||||||||||||||||||||||||
Ormesa | East Mesa, California | 100 | % | 1986/1987 | 52 | Southern California Edison Company | 2016/2017 | |||||||||||||||||||
Heber 1 | Heber, California | 100 | % | 1985 | 38 | Southern California Edison Company | 2015 | |||||||||||||||||||
Heber 2 | Heber, California | 100 | % | 1993 | 38 | Southern California Edison Company | 2023 | |||||||||||||||||||
Steamboat (2) | Steamboat, Nevada | 100 | % | 1986/1988/1992 | 34 | Sierra Pacific Power Company | 2006/2018/2022 | |||||||||||||||||||
Mammoth (3) | Mammoth Lakes, California | 50 | % | 1984/1990 | 26 | Southern California Edison Company | 2014/2020 | |||||||||||||||||||
Puna | Puna, Hawaii | 100 | % | 1993 | 25 | Hawaii Electric Light Company | 2027 | |||||||||||||||||||
Brady | Churchill County, Nevada | 100 | % | 1985/1992 | 20 | Sierra Pacific Power Company | 2022 | |||||||||||||||||||
Steamboat Hills | Steamboat Hills, Nevada | 100 | % | 1988 | 7 | Sierra Pacific Power Company | 2018 | |||||||||||||||||||
Total Domestic Projects in Operation : | 240 | |||||||||||||||||||||||||
Foreign | ||||||||||||||||||||||||||
Leyte (3) | Philippines | 80 | % | 1997 | 49 | PNOC - Energy Development Corporation | 2007 | |||||||||||||||||||
Momotombo (3) | Nicaragua | 100 | % | mid 1980's | 28 | DISNORTE/DISSUR | 2014 | |||||||||||||||||||
Zunil (3) | Guatemala | 21 | % | 1999 | 24 | Instituto Nacional de Electrification | 2019 | |||||||||||||||||||
Olkaria III | Kenya | 100 | % | 2000 | 13 | Kenya Power & Lighting Co. Ltd. | 2020 (4) | |||||||||||||||||||
Total Foreign Projects in Operation : | 114 | |||||||||||||||||||||||||
Total Projects in Operation : | 354 | |||||||||||||||||||||||||
Projects under Construction | ||||||||||||||||||||||||||
Desert Peak 2 | Churchill County, Nevada | 100 | % | 2006 (5) | 15 | Nevada Power Company | n/a (7) | |||||||||||||||||||
Galena | Steamboat Hills, Nevada | 100 | % | 2005 (5) | 13 | (6) | Sierra Pacific Power Company | n/a (7) | ||||||||||||||||||
Amatitlan | Guatemala | 100 | % | 2006 (5) | 20 | Instituto Nacional de Electrification | n/a (8) | |||||||||||||||||||
Total
Projects under
Construction : |
48 | |||||||||||||||||||||||||
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Project | Location | Ownership |
Commercial
Operation Date |
Generating
Capacity in MW (1) |
Power Purchaser |
Contract
Expiration |
||||||||||||||||||||
Projects under Enhancement | ||||||||||||||||||||||||||
Heber 1 and 2 Enhancement (9) | Heber, California | 100 | % | 18 | (11) | |||||||||||||||||||||
Puna Enhancement (10) | Puna, Hawaii | 100 | % | 9 | (12) | |||||||||||||||||||||
Steamboat Hills Enhancement (10) | Steamboat Hills, Nevada | 100 | % | 7 | ||||||||||||||||||||||
Mammoth Enhancement (10) | Mammoth Lakes, California | 50 | % | 4 | ||||||||||||||||||||||
Total Projects under Enhancement : | 38 | |||||||||||||||||||||||||
Total Projects under Construction or Enhancement : | 86 | |||||||||||||||||||||||||
(2) | This reference includes the Steamboat 1/1A project and the Steamboat 2/3 project. |
(3) | We own and operate all of our projects, except the Momotombo project in Nicaragua, which we do not own but which we control and operate through a concession arrangement with the Nicaraguan government, and the Mammoth project, Leyte project and Zunil project, in which we have a 50%, 80% and 21% ownership, respectively. |
(4) | The power purchase agreement for the Olkaria III project will expire in 2020 or, if Phase II of the project is constructed and completed, 20 years from the completion of such Phase II. Phase II of this project involves a proposed construction of additional facilities that would add approximately 35 MW of generating capacity to this project. |
(5) | Projected. |
(6) | Incremental to the Steamboat complex. |
(7) | The power purchase agreement will expire 20 years from the January 1 immediately following the commercial operation date. |
(8) | The power purchase agreement will expire at the later of 20 years from the commencement of commercial operations and 23 years from the commencement of construction works. |
(9) | We are currently in discussions with Southern California Edison Company, the power purchaser for this project, regarding these proposed enhancements. |
(10) | These enhancements are in their early engineering stage. |
(11) | The enhancement will result in an additional 8 MW that can be sold under the existing power purchase agreement and another 10 MW that, subject to the negotiation of offtake arrangements, will be sold either to the existing power purchaser or a different power purchaser. |
(12) | The enhancement will result in an additional 3 MW that can be sold under the existing power purchase agreement and another 6 MW that, subject to the negotiation of offtake arrangements, will be sold to with the existing power purchaser. |
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All of the revenues that we derive from the sale of electricity are from fully-contracted payments under long-term power purchase agreements. In the United States, the power purchasers under such agreements are all investor-owned electric utilities. More than 70% of our total pro forma revenues in 2003 from the sale of electricity by our domestic projects were derived from power purchasers that currently have investment grade credit rating. The purchasers of electricity from our foreign projects are either state-owned entities or recently privatized state-owned entities. We have obtained political risk insurance from the Multilateral Investment Guarantee Agency of the World Bank group for all of our foreign projects (other than the Leyte project) in order to cover a portion of any loss that we may suffer upon the occurrence of certain political events covered by such insurance.
Development, Construction, and Acquisition. We have experienced significant growth in recent years, principally through the acquisition of geothermal power plants from third parties and the expansion and enhancement of our existing projects. In December 2003, we acquired the Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth project, in February 2004, we acquired the Steamboat 2/3 project, in May 2004, we acquired the Steamboat Hills project and in June 2004, we acquired the Puna project. In total, we have increased our net ownership interest in generating capacity from 94 MW as of December 31, 2001 to 312 MW as of June 30, 2004. We currently expect to continue growing our power generation business through:
• | the development and construction of new geothermal and recovered energy-based power plants; |
• | the expansion and enhancement of our existing projects; and |
• | the acquisition of additional geothermal and other renewable assets from third parties. |
As part of these efforts, we regularly monitor requests for proposals from, and submit bids to, investor-owned electric utilities in the United States to provide additional generating capacity, primarily in the western United States where geothermal resources are generally concentrated. We also respond to international tenders issued by foreign state-owned electric utilities for the development, construction and operation of new geothermal power plants. In addition, we apply our technological expertise to upgrade the facilities of our existing geothermal power plants and to continuously monitor and manage our existing geothermal resources in order to increase the efficiency and generating capacity of such facilities.
We are currently in varying stages of development or construction of new projects and enhancement of existing projects. Based on our current development and construction schedule, which is subject to change at any time and which we may not achieve, we expect to have approximately 66 additional MW in generating capacity in the United States by the end of 2006 and approximately 20 additional MW in Guatemala by June 2006. In addition, we have obtained exclusive rights to develop the geothermal resources of a project in China, which, if implemented, is expected to produce approximately 50 MW in generating capacity. We have recently held discussions with the Kenyan government and Kenya Power & Lighting Co. Ltd. regarding, among other things, the construction of Phase II of the Olkaria III project in Kenya and the provision of certain collateral and government support. If implemented, Phase II would add approximately 35 MW in generating capacity to the current Olkaria III project. We must notify Kenya Power & Lighting Co. Ltd., by April 17, 2005, whether we will proceed to construct Phase II of the Olkaria III project and, if we notify Kenya Power & Lighting Co. Ltd. that we will not proceed with such construction, then the portion of the current power purchase agreement applicable to Phase II of the Olkaria III project will be terminated (but the current portion applicable to Phase I will be unaffected). If we fail to provide such notification we will be required to construct Phase II and reach commercial operations by May 31, 2007 in order to avoid the application of financial penalties, or at the latest by April 17, 2008 in order to avoid termination of the entire power purchase agreement. We are also in the early development stage of two new projects in El Salvador. We intend to pursue these opportunities to the extent they continue to meet our investment criteria and business strategy.
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Our Products Business
We design, manufacture and sell products for electricity generation and provide the related services described below. Generally, we manufacture products only against customer orders and do not manufacture products for inventory purposes.
Power Units for Geothermal Power Plants. We design, manufacture and sell power units for geothermal electricity generation, which we refer to as Ormat Energy Converters or OECs. Our customers include contractors and geothermal plant owners and operators. We recently sold two of our OEC units, with a total gross output of approximately 18 MW, to Instituto Costarricense de Electricidad in Costa Rica, which is developing the Miravalles V geothermal power project in that country. We also recently sold one of our OEC units for approximately 2 MW for installation at Oserian Farm in Kenya, where farmers grow flowers for export.
Power Units for Recovered Energy-Based Power Generation. We design, manufacture and sell power units used to generate electricity from recovered energy or so-called "waste heat" that is generated as a residual by-product of gas turbine-driven compressor stations and a variety of industrial processes, such as cement manufacturing, and is not otherwise used for any purpose. Our existing and target customers include interstate natural gas pipeline owners and operators, gas processing plant owners and operators, cement plant owners and operators, and other companies engaged in other energy-intensive industrial processes. We have installed one of our recovered energy-based generation units at Enterprise Product's Neptune gas processing plant in Louisiana.
Remote Power Units and other Generators. We design, manufacture and sell fossil fuel powered turbo-generators with a capacity ranging between 200 watts and 5,000 watts, which operate unattended in extreme climate conditions, whether hot or cold. Our customers include contractors installing gas pipelines in remote areas. In addition, we design, manufacture and sell generators for various other uses, including heavy duty direct current generators. Our remote power units were recently installed on a Pemex pipeline in Mexico.
Engineering, Procurement and Construction of Power Plants. We engineer, procure and construct (EPC), as an EPC contractor, geothermal and recovered energy power plants on a turnkey basis, using power units we design and manufacture. Our customers are geothermal power plant owners as well as the same customers described above that we target for the sale of our power units for recovered energy-based power generation. Unlike many other companies that provide EPC services, we have an advantage in that we are using our own manufactured equipment and thus have better control over the timing and delivery of required equipment and its costs. Recent examples of our construction activities include the design and construction of the Mokai and Wairakei geothermal power plants in New Zealand.
Operation and Maintenance of Power Plants. We provide operation and maintenance services for geothermal power plants owned by us and by third parties.
In 2003, our actual revenues from our products business were $41.7 million, constituting approximately 20.4% of our total pro forma revenues and approximately 34.9% of our actual revenues.
Industry Background
Geothermal Energy
All of the projects we currently own produce electricity from geothermal energy. Geothermal energy is a clean, renewable and generally sustainable energy source that, because it does not utilize combustion in the production of electricity, releases significantly lower levels of emissions, principally steam, than those that result from energy generation based on the burning of fossil fuels. Geothermal energy is derived from the natural heat of the earth when water comes sufficiently close to hot molten rock to heat the water to temperatures of 300 degrees Fahrenheit or more. The heated water then ascends toward the surface of the earth where, if geological conditions are suitable for its commercial extraction, it can be extracted by drilling geothermal wells. The energy necessary to operate a geothermal power plant is typically obtained from several such wells which are drilled using
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established technology that is in some respects similar to that employed in the oil and gas industry. Geothermal production wells are normally located within approximately one to two miles of the power plant as geothermal fluids cannot be transported economically over longer distances due to heat and pressure loss which result in redistributive costs. The geothermal reservoir is a renewable source of energy if natural ground water sources and reinjection of extracted geothermal fluids are adequate over the long term to replenish the geothermal reservoir following the withdrawal of geothermal fluids as long as the wellfield is properly operated. Geothermal energy projects typically have higher capital costs (primarily as a result of the costs attributable to wellfield development) but tend to have significantly lower variable operating costs, principally consisting of maintenance expenditures, than fossil fuel-fired power plants that require ongoing fuel expenses.
Geothermal Power Plant Technologies
Geothermal power plants generally employ either binary systems or conventional flash systems. In our projects, we also employ our proprietary technology of combined geothermal cycle systems. See "Business—Our Technology."
Binary System
In a plant using a binary system, geothermal fluid, either hot water (also called brine) or steam or both, is extracted from the underground reservoir and flows from the wellhead through a gathering system of insulated steel pipelines to a heat exchanger, which heats a secondary working fluid which has a low boiling point. This is typically an organic fluid such as isopentane or isobutene, which is vaporized and is used to drive the turbine. The organic fluid is then condensed in a condenser which may be cooled by air or by water from a cooling tower. The condensed fluid is then recycled back to the heat exchanger, closing the cycle within the sealed system. The cooled geothermal fluid is then reinjected back into the reservoir. The binary technology is depicted in the graphic below.
Flash Design System
In a plant using flash design, geothermal fluid is extracted from the underground reservoir and flows from the wellhead through a gathering system of insulated steel pipelines to flash tanks and/or
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separators. There, the steam is separated from the brine and is sent to a demister in the plant, where any remaining water droplets are removed. This produces a stream of dry steam, which drives a turbine generator to produce electricity. In some cases, the brine at the outlet of the separator is flashed a second time (dual flash), providing additional steam at lower pressure used in the low pressure section steam turbine to produce additional electricity. Steam exhausted from the steam turbine is condensed in a surface or direct contact condenser cooled by cold water from a cooling tower. The non-condensable gases (such as carbon dioxide) are removed through the removal system in order to optimize the performance of the steam turbines. The condensate is used to provide make-up water for the cooling tower. The hot brine remaining after separation of steam is injected back into the geothermal resource through a series of injection wells. The flash technology is depicted in the graphic below.
In some instances, the wells directly produce dry steam (the flashing occurring under ground). In such cases, the steam is fed directly to the steam turbine and the rest of the system is similar to the flash power plant described above.
Market Opportunity
The geothermal energy industry in the United States experienced significant growth in the 1970s and 1980s, followed by a period of consolidation of owners and operators of geothermal assets in the 1990s. The industry, once dominated by large oil companies and investor-owned electric utilities, now includes several independent power producers. During the 1990s, growth and development in the geothermal energy industry occurred primarily in foreign markets, and only minimal growth and development occurred in the United States. Since 2001, there has been renewed interest in geothermal energy in the United States as production costs for electricity generated from geothermal resources have become more competitive relative to fossil fuel-based electricity generation, due to the increasing cost of natural gas, and as legislative and regulatory incentives, such as state renewable portfolio standards, have become more prevalent.
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Electricity generation from geothermal resources in the United States currently constitutes a $1.5 billion-a-year industry (in terms of revenues) and accounts for 19% of all non-hydropower renewable energy-based electricity generation in the United States. Although electricity generation from geothermal resources is currently concentrated in California, Nevada, Hawaii and Utah, there are opportunities for development in other states such as Alaska, Arizona, Idaho, New Mexico and Oregon due to the availability of geothermal resources and, in some cases, a favorable regulatory environment in such states.
A recent forecast of the U.S. Department of Energy projects the addition of geothermal installations with generating capacity totaling 6,840 MW by 2025, based on the assumption that natural gas prices will remain relatively stable at current levels. This forecast is based on existing, known geothermal resources and does not take into account any positive effects on generating capacity resulting from new technology, such as enhanced utilization of existing geothermal bases and engineered geothermal systems (according to the Energy Information Administration*, Annual Energy Outlook 2004).
Much of this growth potential stems from growing global concerns about the environment. Power plants that use fossil fuels generate higher levels of air pollution and their emissions have been linked to acid rain and global warming. In response to an increasing demand for "green" energy, many countries have adopted legislation requiring, and providing incentives for, electric utilities to sell electricity generated from renewable energy sources. In the United States, Arizona, California, Connecticut, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, Pennsylvania, Rhode Island, Texas, and Wisconsin have all adopted renewable portfolio standards, renewable portfolio goals, or other similar laws requiring or encouraging electric utilities in such states to generate or buy a certain percentage of their electricity from renewable energy sources or recovered heat sources. Eleven of these seventeen states (including California, Nevada and Hawaii, where we have been the most active in our geothermal energy development and in which all of our U.S. projects are located) define geothermal resources as "renewables." Several other states are also considering the adoption of renewable portfolio standards, renewable portfolio goals or similar legislation.
We believe that these legislative measures and initiatives present a significant market opportunity for us. For example, California generally requires that each investor-owned electric utility company operating within the state increase the amount of renewable generation in its resource mix by 1% per year so that 20% of its retail sales are procured from eligible renewable energy sources by 2017. Presently, approximately 10% of the electricity generated in California is derived from renewable resources. Nevada's renewable portfolio standard requires each Nevada electric utility to obtain 5% of its annual energy requirements from renewable energy sources in 2004, which requirement increases to 7% in 2005 and thereafter increases by 2% every two years until 2013, when 15% of such annual energy requirements must be provided from renewable energy sources. Hawaii's renewable portfolio standard requires each Hawaiian electric utility to obtain 8% of its net electricity sales from renewable energy sources by December 31, 2005 10% by December 31, 2010 and 20% by December 31, 2020.
In addition, in some states an entity generating electricity from renewable resources, such as geothermal energy, is awarded renewable energy credits, which we refer to as RECs, that can be sold for cash. RECs have been sold in the market for 0.5 cents to 2 cents a kWh during the past year.
The federal government also encourages production of electricity from geothermal resources through certain tax subsidies. We are permitted to claim approximately 10% of the cost of each new geothermal power plant as a credit against our federal income taxes. We are also permitted to deduct up to 95% of the cost of the power plant over five years on an accelerated basis, which results in more of the cost being deducted in the first few years than during the remainder of the depreciation period. These two tax benefits collectively offset approximately one-third of the capital cost of each new project.
* | The Energy Information Administration is a governmental agency under the U.S. Department of Energy. |
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In May 2004, the United States Senate passed a bill to allow geothermal power companies to claim a "production tax credit" of 1.8 cents per kWh on electricity produced from geothermal resources. According to such proposal, credits could be claimed on such electricity sold during the first ten years after a project achieves commercial operation. Only projects put into service during 2005 and 2006 would qualify for such production tax credits. The owner of the project would have to choose between this production tax credit and the 10% energy tax credit described above. The Senate bill, however, was not approved by the United States House of Representatives, which has passed its own version of a production tax credit bill, and will not become law unless the two legislative bodies reconcile the differences between the two bills.
Outside of the United States, the majority of power generating capacity has historically been owned and controlled by governments. During the past decade, however, many foreign governments have privatized their power generation industries through sales to third parties and have encouraged new capacity development and/or refurbishment of existing assets by independent power developers. These foreign governments have taken a variety of approaches to encourage the development of competitive power markets, including awarding long-term contracts for energy and capacity to independent power generators and creating competitive wholesale markets for selling and trading energy, capacity and related products. Different countries have also adopted active governmental programs designed to encourage clean renewable energy power generation. For example, China, where we are currently developing a project, has in place a five-year Plan for New and Renewable Energy Commercialization Development. The plan's goals include increasing production of geothermal energy as well as providing electricity in remote areas. Several Latin American countries have rural electrification programs and renewable energy programs. For example, Nicaragua, where we operate the Momotombo project, is currently developing a national rural electrification plan with the support of the World Bank. One of the plan's primary goals is the reduction of market barriers to renewable energy technologies useful for remote areas not connected to the main electricity grid. Nicaragua also has a national master plan for geothermal energy, which is intended to facilitate the awarding of concessions for geothermal exploration and development in the country. Guatemala, another country in which we have ongoing operations (the Zunil project) and development activities (the Amatitlan project), recently approved a law which creates incentives for power generation from renewable energy sources by, among other things, providing economic and fiscal incentives such as exemptions from taxes on the importation of relevant equipment and various tax exemptions for companies implementing renewable energy projects. We believe that these developments and governmental plans will create opportunities for us to acquire and develop geothermal power generation facilities internationally as well as create additional opportunities for us to sell our remote power units and other products.
In addition to our geothermal power generation activities, we have also identified recovered energy power generation as a significant market opportunity for us in the United States and internationally. We are initially targeting the North American market, where we expect that recovered energy-based power generation will be derived principally from compressor stations along interstate pipelines, from midstream gas processing facilities, and from processing industries in general. Several states, as well as the federal government, have recognized the environmental benefits of recovered energy-based power generation. For example, Nevada and Hawaii allow electric utilities to include recovered energy-based power generation in calculating their compliance with the state's renewable portfolio standards. In addition, North Dakota, South Dakota and the Department of Agriculture (through the Rural Electricity Service) have certified recovered energy-based power generation as "green" energy, which qualifies recovered energy-based power generators (whether in those two states or elsewhere in the United States) for federally subsidized, low-cost funding. We believe that the European market has similar potential and we expect to leverage our early success in North America in order to expand into such market and other markets worldwide. In North America alone, we estimate the potential total market for recovered energy-based generation to be approximately 1000 MW.
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Competitive Strengths
Competitive Assets. Our assets are competitive for the following reasons:
• | Contracted Generation. All of the electricity generated by our geothermal power plants is currently sold pursuant to long-term power purchase agreements, providing generally predictable cash flows. |
• | Baseload Generation. All of our geothermal power plants supply a part of the baseload capacity of the electric system in their respective markets, meaning that they operate to serve all or a part of the minimum power requirements of the electric system in such market on an around-the-clock basis. Because our projects supply a part of the baseload needs of the respective electric system and are only marginally weather dependent, we have a competitive advantage over other renewable energy sources, such as wind power, solar power, or hydro-electric power (to the extent dependent on rainfall), which compete with us to meet electric utilities' renewable portfolio requirements but which cannot serve baseload capacity because of the weather dependence and thus intermittent nature of these other renewable energy sources. |
• | Competitive Pricing. Geothermal power plants, while site specific, are economically feasible to develop, construct, own and operate in many locations, and the electricity they generate is generally price competitive as compared to electricity generated from fossil fuels or other renewable sources under existing economic conditions and existing tax and regulatory regimes. |
Growing Legislative Demand for Environmentally-Friendly Renewable Resource Assets. All of our existing projects produce electricity from geothermal energy sources. Geothermal energy is a clean, renewable and generally sustainable energy source. Unlike electricity produced by burning fossil fuels, electricity produced from geothermal energy sources is produced without emissions of certain pollutants such as nitrogen oxide, and with far lower emissions of other pollutants such as carbon dioxide. Such clean and renewable characteristics of geothermal energy give us a competitive advantage over fossil fuel-based electricity generation as countries increasingly seek to balance environmental concerns with demands for reliable sources of electricity.
High Efficiency from Vertical Integration. Unlike any of our competitors in the geothermal industry, we are a fully-integrated geothermal equipment, services and power provider. We design, develop and manufacture most of the equipment we use in our geothermal power plants. Our intimate knowledge of the equipment that we use in our operations allows us to operate and maintain our projects efficiently and to respond to operational issues in a timely and cost-efficient manner. Moreover, given the efficient communications among our subsidiary that designs and manufactures the products we use in our operations and our subsidiaries that own and operate our projects, we are able to quickly and cost effectively identify and repair mechanical issues and to have technical assistance and replacement parts available to us as and when needed.
Highly Experienced Management Team. We have a highly qualified senior management team with extensive experience in the geothermal power sector. The key members of our senior management team have worked in the power industry for most of their careers and average over 20 years of industry experience.
Technological Innovation. We own or have rights to use more than 70 patents relating to various processes and renewable resource technologies. All of our patents are internally developed and therefore costs related thereto are expensed as incurred. Our ability to draw upon internal resources from various disciplines related to the geothermal power sector, such as geological expertise relating to reservoir management, and equipment engineering relating to power units, allows us to be innovative in creating new technologies and technological solutions.
No Exposure to Fuel Price Risk. A geothermal power plant does not need to purchase fuel (such as coal, natural gas, or fuel oil) in order to generate electricity. Thus, once the geothermal reservoir has been identified and estimated to be sufficient for use in a geothermal power plant and the drilling of wells is complete, the plant is not exposed to fuel price or fuel delivery risk.
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Business Strategy
Our strategy is to continue building a geographically balanced portfolio of geothermal and recovered energy assets, and to continue to be a leading manufacturer and provider of products and services related to renewable energy. We intend to implement this strategy through:
• | Development and Construction of New Projects — continuously seeking out commercially exploitable geothermal resources and developing and constructing new geothermal and recovered energy-based power projects in jurisdictions where the regulatory, tax and business environments encourage or provide incentives for such development and which meet our investment criteria; |
• | Increasing Output from Our Existing Projects — increasing output from our existing geothermal power projects by adding additional generating capacity, upgrading plant technology, and improving geothermal reservoir operations, including improving methods of heat source supply and delivery; |
• | Acquisition of New Assets — acquiring from third parties additional geothermal and other renewable assets that meet our investment criteria; |
• | Technological Expertise — investing in research and development of renewable energy technologies and leveraging our technological expertise to continuously improve power plant components, reduce operations and maintenance costs, develop competitive and environmentally friendly products for electricity generation and target new service opportunities; |
• | Developing Recovered Energy Projects — establishing a first-to-market leadership position in recovered energy projects in North America and building on that experience to expand into other markets worldwide; and |
• | Long-term Contracts — entering into long-term contracts with energy purchasers that will provide stable cash flows. |
Operations of our Power Generation Segment
How We Own Our Power Plants. We customarily establish a separate subsidiary to own interests in each power plant. Our purpose in establishing a separate subsidiary for each plant is to ensure that the plant, and the revenues generated by it, will be the only source for repaying indebtedness, if any, incurred to finance the construction or the acquisition (or to refinance the acquisition) of the relevant plant. If we do not own all of the interest in a power plant, we enter into a shareholders agreement or a partnership agreement that governs the management of the specific subsidiary and our relationship with our partner in connection with our project. Our ability to transfer or sell our interest in certain projects may be restricted by certain purchase options or rights of first refusal in favor of our project partners or the project's power purchasers and/or certain change of control and assignment restrictions in the underlying project and financing documents. All of our domestic projects, with the exception of the Puna project, which is an EWG, are Qualifying Facilities and are eligible for regulatory exemptions from most provisions of the FPA, certain state laws and regulations, and PUHCA as set forth in 18 C.F.R. Section 292, Subpart F. As an EWG, the Puna project is exempt from regulation under PUHCA, and does not cause us to be regulated as a holding company under PUHCA. The Puna project is not subject to the FPA.
How We Obtain Development Sites and Geothermal Resources. For domestic projects, we either lease or own the sites on which our power plants are located. In our foreign projects, our lease rights for the plant site are generally contained in the terms of a concession agreement or other contract with the host government or an agency thereof. In certain cases, we also enter into one or more geothermal resource leases (or subleases) or a concession or other agreement granting us the exclusive right to extract geothermal resources from specified areas of land, with the owners (or sublessors) of such land. A geothermal resource lease (or sublease) or a concession or other agreement will usually give us the right to explore, develop, operate and maintain the geothermal field including, among
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other things, the right to drill wells (and if there are existing wells in the area, to alter them) and build pipelines for transmitting geothermal fluid. At times, the holder of rights in the geothermal resource is a governmental entity and at times, a private entity. Usually, the terms of the lease (or sublease) and concession agreement correspond to the terms of the relevant power purchase agreement. In certain other cases, we own the land where the geothermal resource is located, in which case there are no restrictions on its utilization.
How We Sell Electricity. In the United States, the purchasers of power from our projects are investor-owned electric utility companies. Outside of the United States, the purchaser is typically a state-owned utility or distribution company or a recently privatized state-owned entity and we typically operate our facilities pursuant to rights granted to us by a governmental agency pursuant to a concession agreement. In each case, we enter into long-term contracts (typically called power purchase agreements) for the sale of electricity or the conversion of geothermal resources into electricity. A project's revenues under a power purchase agreement usually consist of two payments, energy payments and capacity payments. Energy payments are normally based on a project's electrical output actually delivered to the purchaser measured in kilowatt hours, with payment rates either fixed or indexed to the power purchaser's "avoided" costs (i.e., the costs the power purchaser would have incurred itself had it produced the power it is purchasing from third parties, such as us). Capacity payments are normally calculated based on the generating capacity or the declared capacity of a project available for delivery to the purchaser, regardless of the amount of electrical output actually produced or delivered. In addition, most of our domestic projects located in California are eligible for capacity bonus payments under the respective power purchase agreements upon reaching certain levels of generation.
How We Operate and Maintain Our Power Plants. We usually employ one of our subsidiaries to act as operator of our power plants pursuant to the terms of an operation and maintenance agreement. Our operations and maintenance practices are designed to minimize operating costs without compromising safety or environmental standards while maximizing plant flexibility and maintaining high reliability. Our approach to plant management emphasizes the operational autonomy of our individual plant managers and staff to identify and resolve operations and maintenance issues at their respective projects, however, each project draws upon our available collective resources and experience and that of our subsidiaries. We have organized our operations such that inventories, maintenance, backup and other operational functions are pooled within each project complex and provided by one operation and maintenance provider. This approach enables us to realize cost savings and enhances our ability to meet our project availability goals.
We have a long track record of excellence in operating different power plants with diverse resource characteristics. We currently operate and maintain approximately 353 MW of generating capacity. Since our recent acquisitions in California and Nevada, as a result of our vertical integration, our proprietary technology and our operational and maintenance expertise, we have been successful in increasing the efficiency and performance of most of our acquired facilities and have been able to use the staff required to operate these facilities more efficiently. For example, we have been able to increase the output of the Brady project by approximately 50% since its acquisition by us.
Safety is a key area of concern to us. We believe that the most efficient and profitable performance of our projects can only be accomplished within a safe working environment for our employees. Our compensation and incentive program includes safety as a factor in evaluating our employees, and we have a well-developed reporting system to track safety and environmental incidents at our projects.
How We Finance Our Power Plants. Historically, we have funded our projects with a combination of non-recourse or limited recourse debt, parent company loans and internally generated cash. Such leveraged financing permits the development of projects with a limited amount of equity contributions, but also increases the risk that a reduction in revenues could adversely affect a particular project's ability to meet its debt obligations. Leveraged financing also means that distributions of dividends or other distributions by plant subsidiaries to us are contingent on compliance with financial and other covenants contained in the financing documents.
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Non-recourse debt refers to debt that is repaid solely from the project's revenues (rather than our revenues or revenues of any other project) and generally is secured by the project's physical assets, major contracts and agreements, cash accounts and, in many cases, our ownership interest in that project affiliate. This type of financing is referred to as "project financing." Project financing transactions generally are structured so that all revenues of a project are deposited directly with a bank or other financial institution acting as escrow or security deposit agent. These funds then are payable in a specified order of priority set forth in the financing documents to ensure that, to the extent available, they are used first to pay operating expenses, senior debt service and taxes and to fund reserve accounts. Thereafter, subject to satisfying debt service coverage ratios and certain other conditions, available funds may be disbursed for management fees or dividends or, where there are subordinated lenders, to the payment of subordinated debt service.
In the event of a foreclosure after a default, our project affiliate owning the project would only retain an interest in the assets, if any, remaining after all debts and obligations were paid in full. In addition, incurrence of debt by a project may reduce the liquidity of our equity interest in that project because the interest is typically subject both to a pledge in favor of the project's lenders securing the project's debt and to transfer and change of control restrictions set forth in the relevant financing agreements.
Limited recourse debt refers to project financing as described above with the addition of our agreement to undertake limited financial support for the project affiliate in the form of certain limited obligations and contingent liabilities. These obligations and contingent liabilities take the form of guarantees of certain specified obligations, indemnities, capital infusions and agreements to pay certain debt service deficiencies. To the extent we become liable under such guarantees and other agreements in respect of a particular project, distributions received by us from other projects and other sources of cash available to us may be required to be used to satisfy these obligations. To the extent of these limited recourse obligations, creditors of a project financing of a particular project may have direct recourse to us.
How We Mitigate International Political Risk. We generally purchase insurance policies to cover our exposure to certain political risks involved in operating in developing countries. The policies are issued by entities which specialize in such policies, such as the Multilateral Investment Guarantee Agency (an institution that is part of the World Bank Group). From time to time, we also examine the possibility of purchasing political risk insurance from private sector providers, such as Zurich Re, AIG and other such companies, however, to date all of our political risk insurance contracts are with the Multilateral Investment Guarantee Agency. Such insurance policies cover, in general and subject to the limitations and restrictions contained therein, 80%-90% of our revenue loss derived from a specified governmental act, such as confiscation, expropriation, riots, the inability to convert local currency into hard currency and, in certain cases, the breach of agreements. We have obtained such insurance for all of our foreign projects in operation except for the Leyte project.
Description of Our Projects
In 2003, pro forma revenues from the sale of electricity by our domestic projects were $128.7 million, constituting 79.1% of our total pro forma revenues from the sale of electricity, and pro forma revenues from the sale of electricity by our foreign projects were $33.9 million, constituting 20.9% of our total pro forma revenues from the sale of electricity. In 2003, our actual revenues from the sale of electricity by our domestic projects were $43.8 million and by our foreign projects were $34.0 million, respectively. Pro forma revenues from the sale of electricity constituted approximately 79.6% of our total pro forma revenues in 2003. As noted previously, such pro forma revenues do not include revenues generated from the Steamboat 2/3 project and Steamboat Hills project, two additional domestic projects that were acquired this year.
The financing of certain of our projects and the terms of our power purchase agreements and certain other agreements related to our operations are further described in the "Description of Certain of our Material Agreements" section.
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Domestic Projects
Our projects in operation in the United States have a generating capacity of approximately 240 MW. All of our current domestic projects are located in California, Nevada and Hawaii. We also have projects under construction and enhancement in California, Nevada and Hawaii.
The Ormesa Project
The Ormesa project is located in East Mesa, Imperial Valley, California. The Ormesa project consists of six plants, OG I, OG IE, OG IH (collectively, the OG I plants), OG II, GEM 2 and GEM 3. The various OG I plants commenced commercial operations between 1987 and 1989, and the OG II plant commenced commercial operations in 1988. The GEM 2 and GEM 3 plants commenced commercial operations in April 1989. The OG plants utilize a binary system, and the GEM plants utilize a flash system. The OG I plants have a generating capacity of 35 MW; the OG II plant has a generating capacity of 17 MW; and the GEM 2 and GEM 3 plants have a generating capacity of 28 MW. However, electricity generated by the GEM 2 and GEM 3 plants is not sold under a power purchase agreement because their power is used to provide auxiliary power for wellfield operations at the Ormesa project. The Ormesa project sells its electrical output to Southern California Edison Company under two separate power purchase agreements. In certain circumstances, Southern California Edison Company or its designee has a right of first refusal to acquire the OG I and OG II plants. The Ormesa project was acquired in April 2002, and was initially re-financed with project finance debt from United Capital. It is anticipated that on or before January 31, 2005, the United Capital loan will be paid off with a portion of the proceeds from the issuance by Ormat Funding of its senior secured notes on February 13, 2004.
In connection with the power purchase agreements for the Ormesa project, Southern California Edison Company has expressed its intent not to pay the contract rate for the power supplied by the GEM 2 and GEM 3 plants to the Ormesa project for auxiliary purposes. We have commenced discussions with Southern California Edison Company to resolve such dispute and, in addition, to combine the relevant power purchase agreements for the Ormesa project into one agreement, which would enhance our operating flexibility and would not otherwise adversely affect our operations. In the interim period, Southern California Edison Company has tentatively agreed to pay a lower fixed price for such power.
The Heber Projects
The Heber 1 Project. The Heber 1 project is located in Heber, Imperial County, California. The Heber 1 project includes one power plant, which commenced commercial operations in 1985, and a geothermal resources field. The plant utilizes a dual flash system and has a generating capacity of 38 MW. The Heber 1 project sells its electrical output to Southern California Edison Company under a power purchase agreement. In certain circumstances, Southern California Edison Company and its affiliated entities have a right of first refusal to acquire the power plant. Upon satisfaction of certain conditions specified in the power purchase agreement and subject to receipt of requisite approvals and negotiations between the parties, our project subsidiary will have the right to demand that Southern California Edison Company purchase the power plant. The Heber 1 project was acquired in December 2003 and was financed with project finance debt from Beal Bank in December 2003.
The Heber 2 Project. The Heber 2 project is located in Heber, Imperial County, California. The Heber 2 project includes one power plant which commenced commercial operations in 1993. The plant utilizes a binary system and has a generating capacity of 38 MW. The Heber 2 project sells its electrical output to Southern California Edison Company under a power purchase agreement. The Heber 2 project was acquired in December 2003, and was financed with project finance debt from Beal Bank in December 2003.
The Steamboat Projects
The Steamboat 1/1A Project. The Steamboat 1/1A project is located in Steamboat Hills, Washoe County, Nevada. The Steamboat 1/1A project includes two power plants which commenced
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commercial operations in 1986 and 1988, respectively. The Steamboat 1/1A project utilizes a binary system and has a generating capacity of 5 MW. The Steamboat 1/1A project sells its electrical output to Sierra Pacific Power Company under two separate power purchase agreements. The Steamboat 1/1A project was acquired in June 2003 using internally generated cash, and was re-financed with the proceeds from the issuance by Ormat Funding of its senior secured notes on February 13, 2004.
The Steamboat 2/3 Project. The Steamboat 2/3 project is also located in Steamboat, Washoe County, Nevada. The Steamboat 2/3 project consists of two power plants which commenced commercial operations in 1992. The Steamboat 2/3 project utilizes a binary system and has a generating capacity of 29 MW. The Steamboat 2/3 project sells its electrical output to Sierra Pacific Power Company under two separate power purchase agreements. The Steamboat 2/3 project was acquired in February 2004 using internally generated cash and was financed with the proceeds from the issuance by Ormat Funding of its senior secured notes on February 13, 2004.
The Steamboat Hills Project. The Steamboat Hills project is also located in Steamboat Hills, Washoe County, Nevada. The Steamboat Hills project is comprised of one plant and commenced commercial operations in 1988. The Steamboat Hills project utilizes a single flash system and water cooled condenser and has a generating capacity of 7 MW, although the power purchase agreement capacity is 12.5 MW. The Steamboat Hills project sells its electrical output to Sierra Pacific Power Company pursuant to a power purchase agreement. The project, under the predecessor owner, experienced difficulties operating at full capacity, among other reasons because of a well blow-out. We intend to increase the generating capacity of the Steamboat Hills project by additional drilling and certain other capital expenditures to take full advantage of the power purchase agreement. The Steamboat Hills project was acquired in May 2004 using internally generated cash.
The Mammoth Project
The Mammoth project is located in Mammoth Lakes, California. The Mammoth project is comprised of three plants, G-1, G-2 and G-3. The G-1 plant commenced commercial operations in 1985 and the G-2 and G-3 plants commenced commercial operations in 1990. The Mammoth project utilizes a binary system and has a generating capacity of 26 MW. Our project subsidiary owns a 50% partnership interest in Mammoth-Pacific, L.P., which owns 100% of the Mammoth project. The other 50% partnership interest is owned by an unrelated third party. The Mammoth project sells its electrical output to Southern California Edison Company under three separate power purchase agreements. Under the G-1 power purchase agreement, in certain circumstances, Southern California Edison Company or its affiliates has a right of first refusal to acquire the plant. Our 50% ownership interest in the Mammoth project was acquired in December 2003 using internally generated cash and was financed with project finance debt from Beal Bank in December 2003.
The Brady Project
The Brady project is located in Churchill County, Nevada and includes the Brady plant and the Desert Peak 1 plant. The Desert Peak 1 plant is approximately 4.5 miles southeast of the Brady plant. The Brady plant commenced commercial operations in 1992 and the Desert Peak 1 plant commenced commercial operations in 1985. The Brady project has a generating capacity of 20 MW and has in the past utilized a dual flash design. In August 2002, an additional 6 MW binary unit was added to the Brady plant to generate additional power from the brine before its reinjection. The Desert Peak 1 plant utilizes a dual flash design. The Brady project sells its electrical output from the Brady plant and Desert Peak 1 plant to Sierra Pacific Power Company under a power purchase agreement. Our project subsidiary is currently evaluating the replacement of the Desert Peak 1 plant with a new plant that would be more efficient. The new plant may be constructed on the same site as the existing Desert Peak 1 plant. Construction would likely begin in the first quarter of 2005 and be completed in early 2006, at an estimated total project cost of approximately $8 million. The Brady project was acquired in June 2001 using internally generated cash and was re-financed with the proceeds from the issuance by Ormat Funding of its senior secured notes on February 13, 2004.
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The Puna Project
The Puna project is located in the Puna district, Hawaii. The Puna plant commenced commercial operations in 1993. The Puna plant utilizes a geothermal combined cycle system, and has a generating capacity of 25 MW, although the power purchase agreement is for 30 MW. The Puna project sells its electrical output to Hawaii Electric Light Company under two power purchase agreements. Although the Puna project has significant geothermal resources, because of existing geological conditions, these resources are difficult to manage. In the past, the Puna project required extensive levels of investment mainly to address problems with the production and injection wells related to the geothermal resources. We intend to increase the output of the Puna project by upgrading the technology of the plant through the addition of Ormat Energy Converters, drilling another production well, and negotiating a new power purchase agreement for the additional generating capacity that will be available as a result of such activities. The Puna project was acquired in June 2004 with the proceeds of parent company loans and short-term bank loans.
Foreign Projects
Our foreign projects in operation have a generating capacity of approximately 114 MW. Our current foreign projects are located in the Philippines, Nicaragua, Kenya and Guatemala. We also have projects under development or construction in Guatemala, China, El Salvador and Kenya.
The Leyte Project (The Philippines)
The Leyte project is located in Leyte, Philippines, on the Isle of Leyte. The Leyte project consists of 4 power plants. The Leyte plants utilize steam systems and have a combined generating capacity of 49 MW. Our project subsidiary has an 80% partnership interest in Ormat-Leyte Co. Ltd., which owns 100% of the Leyte project. The remaining 20% partnership interest in Ormat-Leyte Co. Ltd. is held by two unrelated third parties. In August 1995, following a build-operate-transfer, which we refer to as BOT, international tender, Ormat Inc. (which later transferred its interest in the BOT agreement to Ormat-Leyte Co. Ltd.) entered into a BOT agreement with PNOC-Energy Development Corporation, a Philippine company wholly owned by Philippine National Oil Company, a government-owned company. Ormat-Leyte Co. Ltd. has an outstanding non-recourse loan to the Export-Import Bank of the United States the outstanding balance of which was $16.5 million as of June 30, 2004. The loan is due and payable in approximately equal quarterly installments until July 2007.
The Government of The Philippines has initiated the privatization of its electricity industry. However, we cannot foresee when such privatization may be completed. If such privatization is achieved in a manner that jeopardizes PNOC-Energy Development Corporation's or its affiliate's ability to comply with their obligations under the BOT agreement, the parties are required to negotiate an amendment to the power purchase agreement. Should they fail to reach an agreement, PNOC-Energy Development Corporation has the obligation (and our project subsidiary has the right to demand PNOC-Energy Development Corporation) to buy out Ormat-Leyte Co. Ltd.'s rights in the project at a price based upon the net present value of the projected cash flow from the project during the remaining term of the BOT agreement.
The Momotombo Project (Nicaragua)
The Momotombo project is located in Momotombo, Nicaragua. The Momotombo project is comprised of one plant and a geothermal field. The plant was already in existence when we signed the concession agreement for the project in March 1999, and had commenced commercial operations in the mid-1980s utilizing a dual flash system. In 2003, an additional 6 MW binary unit was added, bringing the generating capacity to approximately 28 MW. The Momotombo project has a power purchase agreement with Empresa Distribuidora de Electricidad del Norte (DISNORTE) and Empresa Distribuidora de Electricidad del Sur (DISSUR), two corporations which own the power distribution rights in Nicaragua. Our project subsidiary, which operates the Momotombo project, has an outstanding loan from Bank Hapoalim B.M., the outstanding balance of which was $18.5 million as of June 30, 2004.
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The Olkaria III Project — Phase I (Kenya)
The Olkaria III project is located in Naivasha, Kenya. The Olkaria III project is comprised of one plant, which commenced commercial operations in August 2000, and a geothermal field. The plant currently has a generating capacity of approximately 13 MW (early generation commercial operation for Phase I). The parties contemplated the construction of Phase II (full generation commercial operation) of this project which, upon completion, would increase the generating capacity of the Olkaria III project to approximately 48 MW. A description of Phase II of this project is set forth below in "Projects under Development." Phase I of the Olkaria III project utilizes a binary system. In November 1998, following an international tender, our project subsidiary entered into a power purchase agreement with the Kenya Power & Lighting Co. Ltd., which was further amended in July 2000 and April 2003. Our project subsidiary leases the site on which the geothermal resources and the plant facilities are located from the Kenyan government pursuant to an agreement which will expire in 2040. The Kenyan government granted our project subsidiary a license giving it exclusive rights of use and possession of the relevant geothermal resources for an initial period of 30 years, expiring in 2029, which initial period may be extended by two additional five year terms. The Kenyan Minister of Energy has the right to terminate or revoke the license in the event our project subsidiary ceases work in or under the license area during a period of six months, or has failed to comply with the terms of the license or the provisions of the law relating to geothermal resources. Our project subsidiary is obligated to pay the Kenyan government monthly fees and royalties based on the amount of power supplied to the Kenya Power & Lighting Co. Ltd.
The Zunil Project (Guatemala)
The Zunil project is located in Zunil, Guatemala. The Zunil project is comprised of one plant which commenced commercial operations in 1999. The plant utilizes a binary system consisting of Ormat Energy Converters and has a generating capacity of 24 MW. The project is owned by Orzunil I de Electricidad, Limitada, which owns 100% of the Zunil project. Our project subsidiary owns 21% of the outstanding partnership interests of Orzunil I de Electricidad, Limitada. Another of our subsidiaries provides operation and maintenance services to the project. The Zunil project sells its generating capacity to Instituto Nacional de Electrification pursuant to a power supply agreement. As of the date of this prospectus, Orzunil I de Electricidad, Limitada has two senior outstanding non-recourse loans, one from International Finance Corporation (IFC) and the other from the Commonwealth Development Corporation (CDC), the aggregate total balance of which was, as of June 30, 2004, $31.0 million. The loans are due and payable in quarterly installments until November 2011. Each of the IFC and the CDC owns 14% of the issued and outstanding partnership interests of Orzunil I de Electricidad, Limitada.
Projects under Construction
We are in varying stages of development and construction of projects, both domestic and foreign. Based on our current construction schedule, we expect to have an additional generating capacity of approximately 49 MW in the United States by the end of 2006 and approximately 20 additional MW in Guatemala by June 2006.
The Desert Peak 2 Project
Our project subsidiary is currently constructing the Desert Peak 2 project in Churchill County, Nevada (near the Brady project). The Desert Peak 2 project is expected to have a generating capacity of up to 15 MW and will utilize our Ormat Energy Converters. The electrical output from the project will be sold, and renewable energy and environmental credits will be transferred, to Nevada Power Company under a power purchase agreement that has a 20-year term commencing on the January 1 following the commercial operation date of such power plant. The Desert Peak 2 project is expected to be completed in early 2006.
The Amatitlan Project (Guatemala)
Our project subsidiary is currently constructing a geothermal power plant in Amatitlan, Guatemala on a "build, own and operate" or "BOO" basis. The project is comprised of one power
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plant, and has obtained the rights to various geothermal production and reinjection wells. The Amatitlan plant will use our Ormat Energy Converters.
The term of the power purchase agreement for the Amatitlan project is 20 years from the date of the commencement of operations at the power plant or 23 years from the date of commencement of the construction works, whichever is later. During a period of two years after the completion of the construction of the power plant, and subject to the signing of an additional agreement with Instituto Nacional de Electrification and the result of a feasibility test, our project subsidiary may increase the power generating capacity of the power plant to 50 MW by drilling additional wells. We anticipate that the Amatitlan project will be completed in 2006.
The Galena Project
Our project subsidiary is in the process of replacing the equipment currently used in the Steamboat 1/1A project with new upgraded equipment. Our project subsidiary will augment the operation of the Steamboat 1/1A project with additional geothermal resources extracted from the Steamboat 2/3 project's leases that will be diverted for use by Steamboat 1/1A project. After such upgrade, we will rename the Steamboat 1/1A project as the Galena project. We believe that this upgrade will allow the Galena project to obtain a generating capacity of 20 MW (adding an incremental 13 MW to the existing Steamboat complex). We anticipate that the Galena project will achieve commercial operations by the end of 2005 and that the project will sell its electrical output and transfer its renewable energy credits to Sierra Pacific Power Company under a power purchase agreement that has a 20-year term commencing on the January 1 following the commercial operation date of such power plant. Our project subsidiary is coordinating the transition from the Steamboat 1/1A project to the Galena project with Sierra Pacific Power Company. We intend to replace the existing equipment at the Steamboat 1/1A project with current Ormat technology, which we believe will optimize the geothermal resources available.
Enhancement of Operating Projects
We are currently pursuing the addition of Ormat Energy Converters for the Heber 1 and Heber 2 projects, the drilling of additional wells with respect to the Heber 2 project, and other enhancement activities for the Heber 1 and Heber 2 projects. We believe that these enhancements could increase the generating capacity of the Heber 1 and Heber 2 projects collectively by 18 MW, and we are currently in discussion with Southern California Edison Company and others regarding these proposed enhancements. We are also in the early engineering stages of an enhancement program for the Mammoth, Steamboat Hills and Puna projects, which we believe could increase the generating capacity of each of these facilities by 4 MW, 7 MW and 9 MW, respectively.
Projects under Development
We also have projects under development in the United States, China, El Salvador and Kenya. In certain cases, we have obtained concession agreements and/or financing commitments, and in other cases, the projects are in early development stages. We expect to continue to explore these and other opportunities for expansion so long as they continue to meet our business objectives and investment criteria.
The Desert Peak 3 Project
In the United States, the Desert Peak 3 project is currently under development and is expected to have a generating capacity of 10 MW. Our project subsidiary will sell electrical output from the plant, and transfer the renewable energy and environmental credits, to Nevada Power Company under a power purchase agreement that has a 20-year term commencing on the January 1 following the commercial operation date of the plant and which was signed as part of Nevada Power Company's efforts to comply with Nevada's renewable portfolio standards.
The Yunnan Project (China)
OrYunnan Geothermal Co., Ltd., which is a joint venture established between our project subsidiary and Yuan Province Geothermal Development Co., Ltd., owns exclusive rights to develop all
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of the geothermal resources in Teng Chong County, Baoshan City, in Yunnan Province, southwest China. Our project subsidiary owns 85% of the interests in OrYunnan Geothermal Co. Ltd., which owns all of the ownership interests in the Yunnan project. The area of the geothermal concession is approximately 65 square miles and is located approximately 200 miles southwest of Kunming, the provincial capital of Yunnan, and approximately 40 miles from the border with Myanmar. We estimate the potential of the geothermal resources in the concession area to be between 150 to 200 MW. Initially, our project subsidiary and its partner intend to develop a geothermal field and construct a power plant with a generating capacity of approximately 48 MW, which we estimate will require a capital investment of approximately CNY 940,000,000 (approximately $112.8 million calculated at the prevailing exchange rate as at June 30, 2004). As of the date hereof, our project subsidiary is awaiting completion of the Chinese central government approval procedures, following which negotiations with the provincial utility company towards the signing of a power purchase agreement can conclude. On May 29, 2002, our project subsidiary entered into a memorandum of understanding, which we refer to as an MOU, regarding the main terms of the power purchase agreement and other major project agreements with Yunan Electric Power Co., Ltd., a state-owned utility company, concerning the purchase of electric power by the utility company from our project subsidiary on a 30-year basis and the related interconnection arrangements. The MOU estimates that the commercial operation date of the plant is to be January 1, 2006. However, we have been in the development stage of the OrYunnan Project for several years and there is no assurance that this date will not have to be extended.
The San Vicente/Chanameca Project (El Salvador)
The San Vicente project and the Chanameca project in El Salvador are in the early development stage. Our project subsidiary has a concession over the relevant geothermal field and is in the process of evaluating the geothermal resources covered by the concession.
The Olkaria III Project — Phase II (Kenya)
As previously noted, our project subsidiary and Kenya Power & Lighting Co. Ltd. contemplated the construction of Phase II of the Olkaria III project. As of the date hereof, our project subsidiary has drilled the wells and commenced preliminary construction activities but has not begun any material construction activities with respect to Phase II. We halted our construction activities due to uncertainty relating to the form of government support that would be provided for the project and the related collateral package, both of which are pre-conditions for the financing of Phase II. Our project subsidiary has recently engaged in discussions with the Kenyan government and Kenya Power & Lighting Co. Ltd., as facilitated by the Multilateral Investment Guarantee Agency in connection with such matters. Pursuant to the power purchase agreement, our obligation to construct Phase II is contingent upon Kenya Power & Lighting Co. Ltd. providing to us (1) a letter of support from the Kenyan Government and (2) a certain deposit by April 17, 2004, a deadline which was not met. We currently have until April 17, 2005 to notify Kenya Power & Lighting Co. Ltd. whether we will proceed to construct Phase II of the Olkaria III project, in which case the current power purchase agreement with respect to Phase I will remain valid until 2020. If we notify Kenya Power & Lighting Co. Ltd. that we will not proceed, then the portion of the current power purchase agreement applicable to Phase II of the Olkaria III project will be terminated (but the current portion applicable to Phase I will be unaffected). If we fail to make such notification that we will not proceed, we will be required to construct Phase II and reach commercial operations by May 31, 2007 in order to avoid the application of financial penalties, or at the latest by April 17, 2008 in order to avoid termination of the entire power purchase agreement.
Geothermal Assets for Future Development in the United States
We have various geothermal leases for future development in the United States. These geothermal leases include the Meyberg lease near Steamboat, Nevada, the Newberry lease in Oregon, the Rhyolite Plateau lease near Mammoth, various leases for future development in Puna and various other leases for development in Nevada.
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Operations of our Products Segment
Power Units for Geothermal Power Plants. We design, manufacture and sell power units for geothermal electricity generation, which we refer to as Ormat Energy Converters or OECs. Our customers include contractors and geothermal plant owners and operators. Recently, one of our 1.8 MW power units was installed at Oserian Farm in Kenya, where farmers grow flowers for export.
The consideration for the power units is usually paid in installments, in accordance with milestones set in the supply agreement. Sometimes we agree to provide the purchaser with spare parts (or alternatively, with a non-exclusive license to manufacture such parts). We provide the purchaser with at least a 12-month warranty for such products. We usually also provide the purchaser (often, upon receipt of advances made by the purchaser) with a guarantee, which expires in part upon delivery of the equipment to the site and fully expires at the termination of the warranty period.
Power Units for Recovered Energy-Based Power Generation. We design, manufacture and sell power units used to generate electricity from recovered energy or so-called "waste heat" that is generated as a residual by-product of gas turbine-driven compressor stations and a variety of industrial processes, such as cement manufacturing, and is not otherwise used for any purpose. Our existing and target customers include interstate natural gas pipeline owners and operators, gas processing plant owners and operators, cement plant owners and operators, and other companies engaged in other energy-intensive industrial processes. We view recovered energy generation as a significant market opportunity for us, and we utilize two different business models in connection with such business opportunity. The first, which is similar to the model utilized in our geothermal power generation business, consists of the development, construction, ownership and operation of recovered energy-based generation power plants. In this case, we enter into agreements to purchase industrial waste heat, and into long-term power purchase agreements with offtakers to sell the electricity generated by the recovered energy generation unit that utilizes such industrial waste heat. We expect that the power purchasers in such cases will be investor-owned electric utilities or local electrical cooperatives.
Pursuant to the second business model, we construct and sell the power units for recovered energy-based power generation to third parties for use in "inside-the-fence" installations or otherwise. Our customers include gas processing plant owners and operators, cement plant owners and operators and companies in the process industry. Our Neptune recovered energy project is an example of such a model. We have installed one of our recovered energy-based generation units at Enterprise Product's Neptune gas processing plant in Louisiana. The unit utilizes exhaust gas from two gas turbines at the plant and is providing electrical power that is consumed internally by the facility (although a portion of the generated electricity is also sold to the local electric utility).
Our recovered energy generation units qualify as Qualifying Facilities for regulatory purposes and, if structured properly, may also be eligible for favorable tax treatment, such as the seven year modified accelerated cost recovery under relevant U.S. federal tax rules.
Remote Power Units and other Generators. We design, manufacture and sell fossil fuel powered turbo-generators with a capacity ranging between 200 watts and 5,000 watts, which operate unattended in extreme climate conditions, whether hot or cold. The remote power units supply energy for remote and unmanned installations and along communications lines and cathodic protection along gas and oil pipelines. Our customers include contractors installing gas pipelines in remote areas. In addition, we manufacture and sell generators for various other uses, including heavy duty direct current generators. Our remote power units were recently installed on a Pemex pipeline in Mexico. The terms of sale of the turbo-generators are similar to those for the power units produced for power plants.
Engineering, Procurement and Construction of Power Plants. We engineer, procure and construct (EPC), as an EPC contractor, geothermal and recovered energy power plants on a turnkey basis, using power units we design and manufacture. Our customers are geothermal power plant owners as well as the same customers described above that we target for the sale of our power units for recovered energy-based power generation. Unlike many other companies that provide EPC services, we have an advantage in that we are using our own manufactured equipment and thus have better control over
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the timing and delivery of required equipment and its costs. Recent examples of our construction activities include the design and construction of the Mokai and Wairakei geothermal power plants in New Zealand.
The consideration for such services is usually paid in installments, in accordance with milestones set in the EPC contract and related documents. We usually provide performance guarantees or letters of credit securing our obligations under the contract. Upon delivery of the plant to its owner, such guarantees are replaced with a warranty guarantee, usually for a period ranging from 12 months to 36 months. The EPC contract usually places a cap on our liabilities for failure to meet our obligations thereunder. For example, our subsidiary, Ormat Pacific, Inc., is currently acting as EPC contractor for two geothermal projects in New Zealand owned by Contact Energy Limited and Tuaropaki Power Company Limited, respectively. Ormat Industries has guaranteed Ormat Pacific, Inc.'s obligations under both agreements. Ormat Systems will supply the equipment and products necessary for the construction and operation of these power plants.
We also design and construct the recovered energy generation units on a turnkey basis, and may provide a long-term agreement to supply non-routine maintenance for such units. Our customers constitute interstate natural gas pipeline owners and operators, gas processing plant owners and operators, cement plant owners and operators and companies engaged in the process industry.
Operation and Maintenance of Power Plants. We provide operation and maintenance services for geothermal power plants owned by us and by third parties. For example, we provide operations and management services to the Orzunil project in Guatemala, in which we have a minority ownership interest.
Our manufacturing operations and products are certified ISO 9001, ISO 14001, ASME and TÜV, and we are an approved supplier to many electric utilities around the world.
Our Technology
Our proprietary technology covers power plants operating according to the Organic Rankine Cycle only or in combination with the Steam Rankine Cycle and Brayton Cycle, as well as integration of power plants with energy sources such as geothermal, recovered energy, biomass, solar energy and fossil fuels. Specifically, our technology involves original designs of turbines, pumps, and heat exchangers, as well as formulation of organic motive fluids. All of our motive fluids are non-ozone-depleting substances. Using advanced computerized fluid dynamics and other computer aided design, or CAD, software as well as our test facilities, we continuously seek to improve power plant components, reduce operations and maintenance costs, and increase the range of our equipment and applications. In particular, we are examining ways to increase the output of our plants by utilizing evaporative cooling, cold reinjection, performance simulation programs, and topping turbines. In the geothermal as well as the recovered energy (waste heat) area, we are examining two-level recovered energy systems and new motive fluids.
We also construct combined cycle geothermal plants in which the steam first produces power in a backpressure steam turbine and is subsequently condensed in a vaporizer of a binary plant, which produces additional power.
In the conversion of geothermal energy into electricity, our technology has a number of advantages compared with conventional geothermal steam turbine plants. A conventional geothermal steam turbine plant consumes significant quantities of water, causing depletion of the aquifer, and also requires cooling water treatment with chemicals and thus a need for the disposition of such chemicals. A conventional geothermal steam turbine plant also creates a significant visual impact in the form of an emitted plume from the cooling tower during cold weather. By contrast, our binary and combined cycle geothermal power plants have a low profile with minimum visual impact and do not emit a plume when they use air cooled condensers. Our binary and combined cycle geothermal power plants reinject all of the geothermal fluids utilized in the respective processes into the geothermal reservoir. Consequently, such processes generally have no emissions. Accidental or fugitive emissions (that result from minor leaks) of motive fluids are within the limits defined by federal, state and local regulatory standards.
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Other advantages of our technology include simplicity of operation and easy maintenance, low RPM, temperature and pressure in the Ormat Energy Converter, a high efficiency turbine and the fact that there is no contact between the turbine itself and often corrosive geothermal fluids.
We use the same elements of our technology in our recovered energy products. The heat source could be exhaust gases from a simple cycle gas turbine, low pressure steam or medium temperature liquid found in the process industry. In most cases, we attach an additional heat exchanger in which we circulate thermal oil to transfer the heat into the Ormat Energy Converter's own vaporizer in order to provide greater operational flexibility and control. Once this stage of each recovery is completed, the rest of the operation is identical to the Ormat Energy Converter used in our geothermal power plants. The same advantages of using the Organic Rankine Cycle apply here as well. In addition, our technology allows for better load following than a conventional steam turbine can exhibit, requires no water treatment as it is air cooled, and does not require the continuous presence of a steam licensed operator on site.
More than 70 United States patents (and about 10 pending patents) cover our products (mainly power units based on Organic Rankine Cycle) and systems (mainly geothermal power plants and industrial waste heat recovery for electricity production). The systems-related patents cover not only a particular component but rather the overall effectiveness of the plant's systems from the "fuel" (i.e., geothermal fluid, waste heat, biomass or solar) to generated electricity. The duration of such patents range from one year to 18 years. No single patent on its own is material to our business.
The products-related patents cover components such as turbines, heat exchanges, seals and controls. The system patents cover subjects such as disposal of non-condensable gases present in geothermal fluids, power plants for very high pressure geothermal resources and use of two-phase fluids. A number of patents cover the combined cycle geothermal power plants in which the steam first produces power in a backpressure steam turbine and is subsequently condensed in a vaporizer of a binary plant, which produces additional power.
We are also involved in developing new technology to extract heat from the earth by circulating fluid through an enhanced or man-made reservoir created in naturally low permeable or water-poor rocks. We are undertaking this development in cooperation with GeothermEx Inc., the University of Utah, Energy & Geoscience Institute, the University of Nevada-Reno and the Great Basin Center for Geothermal Energy, with funding support from the United States Department of Energy.
Competition
The power generation industry is characterized by intense competition from electric utilities, other power producers, and marketers. In recent years, the United States in particular has seen increasing competition in power sales, in part due to excess capacity in a number of U.S. markets and an emphasis on short-term markets, and competition has contributed to a reduction in electricity prices. There is also increasing competition between electric utilities, particularly in California where the California Public Utilities Commission has launched an initiative designed to give all electric consumers the ability to choose between competing suppliers of electricity.
In the geothermal power generation sector, our main competitors in the United States are CalEnergy, Calpine and Caithness. Some of these companies are also active outside of the United States. Outside of the United States, aside from these companies, we have not recently encountered competition from any private sector geothermal power developer, but may face competition from national electric utilities or state-owned oil companies.
In the products business, our main competitors are Mitsubishi, Fuji and Toshiba of Japan, GE/Nuevo Pignone and Ansaldo of Italy, Siemens of Germany, Alstom of France and Kaluga of Russia. In the remote power unit business, we face competition from Global Thermoelectric, as well as from manufacturers of diesel generator sets.
Siemens of Germany as well as other manufacturers of conventional steam turbines are potential competitors in the recovered energy generation business, although we believe that our recovered energy generation unit has technological and economical advantages over the Siemens/Kalina
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technology and the conventional steam technology. Recently, United Technologies announced the introduction of a small 200 kW Organic Rankine Cycle for recovered energy.
We also compete with companies engaged in the power generation business from renewable energy sources other than geothermal energy, such as wind power, solar power and hydro-electric power.
None of our competitors competes with us both in the sale of electricity and in the products business.
Customers
All of our revenues from the sale of electricity were derived from fully-contracted energy and/or capacity payments under long-term power purchase agreements with governmental and private utility companies. Southern California Edison Company, Hawaii Electric Light Company, PNOC-Energy Development Corporation and Sierra Pacific Power Company have accounted for 48.3%, 9.2%, 6.2% and 5.6% of our pro forma revenues, respectively, for the fiscal year ended December 31, 2003. Based on publicly available information, as of September 1, 2004, the issuer ratings of Southern California Edison Company, Sierra Pacific Power Company and Nevada Power Company (a potential power purchaser for the Desert Peak 2 and Desert Peak 3 projects) were Baa1 (stable outlook), B1 (negative outlook) and B1 (negative outlook), respectively, from Moody's Investors Services and BBB (stable outlook), B+ (negative outlook), and B+ (negative outlook), respectively, from Standard & Poor's Ratings Services and the issuer rating of Hawaii Electric Light Company was BBB+ (stable outlook) from Standard & Poor's Ratings Services. The credit ratings of any power purchaser may decrease from time to time. There is no publicly available information with respect to the credit rating or stability of the power purchasers under the power purchase agreements for our foreign power projects.
All of our revenues from the products business were derived from contractors or owners or operators of power plants, process companies and pipelines, including Miravalles and Mokai, which accounted for 25.8% and 24.8%, respectively, of our revenues from the sale of products in 2003.
Raw Materials
In connection with our manufacturing activities, we use raw materials such as steel and aluminium. We do not rely on any one supplier for the raw materials used in our manufacturing activities, as all of such raw materials are readily available from various suppliers.
Employees
As of July 1, 2004, we had 676 employees, of which 223 were in the United States, 294 were in Israel and 159 were located in other countries around the world. We expect that any future growth in the number of our employees would be mainly attributable to the purchase and/or development of new power plants.
None of our employees (other than the Momotombo project employees) are represented by a labor union, and we have never experienced any labor dispute, strike or work stoppage. We consider our relations with our employees to be satisfactory. We believe our future success will depend on our continuing ability to hire, integrate and retain qualified personnel.
We have no collective bargaining agreements with respect to our Israeli employees. However, by order of the Israeli Ministry of Labor and Welfare, the provisions of a collective bargaining agreement between the Histadrut (the General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (which includes the Industrialists Association) may apply to some of our non-managerial, finance and administrative, and sales and marketing personnel. This collective bargaining agreement principally concerns cost of living increases, length of the workday, minimum wages, insurance for work-related accidents, procedures for dismissing employees, annual and other vacation, sick pay, determination of severance pay, pension contributions and other conditions of employment. We currently provide such employees with benefits and working conditions which are at least as favorable as the conditions specified in the collective bargaining agreement.
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Insurance
We maintain business interruption insurance, casualty insurance, including flood and earthquake coverage, and primary and excess liability insurance, as well as customary worker's compensation and automobile insurance and such other insurance, if any, as is generally carried by companies engaged in similar businesses and owning similar properties in the same general areas and financed in a similar manner. To the extent any such casualty insurance covers both us and/or our projects, on the one hand, and any other person and/or plants, on the other hand, we generally have specifically designated as applicable solely to us and our projects "all risk" property insurance coverage in an amount based upon the estimated full replacement value of our projects (provided that earthquake and flood coverages may be subject to annual aggregate limits depending on the type and location of the project) and business interruption insurance in an amount that also varies from project to project.
We generally purchase insurance policies to cover our exposure to certain political risks involved in operating in developing countries. The policies are issued by entities which specialize in such policies, such as Multilateral Investment Guarantee Agency (a member of the World Bank Group). From time to time, we also examine the possibility of purchasing political risk insurance from private sector providers, such as Zurich Re, AIG and other such companies, however, to date all of our political risk insurance contracts are with the Multilateral Investment Guarantee Agency. Such insurance policies cover, in general, and subject to the limitations and restrictions contained therein, 80%-90% of our revenue loss derived from a specified governmental act, such as confiscation, expropriation, riots, the inability to convert local currency into hard currency and, in certain cases, the breach of agreements. We have obtained such insurance for all of our foreign projects in operation except for the Leyte project.
Legal Proceedings
In August 2003, Ormesa LLC agreed to enter into binding arbitration with the Imperial Irrigation District, which we refer to as IID, in connection with IID's claim that Ormesa LLC is obligated to pay scheduling and transmission charges (including those applicable to the GEM 2 and GEM 3 plants) through the effective date of relinquishment of nominated capacity for the GEM 2 and GEM 3 plants. The amount in dispute is $529,000. Ormesa LLC contends that it is not obligated to pay the subject charges for the GEM 2 and GEM 3 plants after the January 1, 2003 effective date of the Energy Services Agreement that Ormesa LLC entered into with the IID. Settlement discussions are in progress. We believe that the dispute will be resolved in 2004 and that any outcome will not have a material impact on our operations or relationship with the IID.
As a result of our acquisition of the Steamboat 1 plant and Steamboat 1A plant, our subsidiary Steamboat Geothermal LLC has become a party to litigation pending in the Second Judicial District Court in Washoe County, Nevada with Geothermal Development Associates and Delphi Securities, Inc. In April 2002, these plaintiffs initiated a lawsuit against the former owner and operator of the Steamboat 1/1A project. The plaintiffs dispute amounts owing to them pursuant to an agreement, dated July 14, 1985, through which Geothermal Development Associates assigned all of its right, title, and interest in the subject geothermal leasehold property in exchange for a net operating royalty interest in the revenues of the Steamboat 1 plant. The plaintiffs allege damages based upon three separate theories: (1) that the actions of the former owner in developing the Steamboat 1A plant have decreased the output of the Steamboat 1 plant; (2) that general, administrative, and corporate expenses included by the former owner in the calculation of the net royalty amount were overstated for the years 2000 and 2001; and (3) that, in addition to its royalty interest in the revenues from the Steamboat 1 plant, plaintiffs are entitled to a net revenue royalty interest from the Steamboat 1A plant. The plaintiffs have asserted in pleadings and in settlement negotiations that the sum of their claimed damages arising from these three claims is approximately $1 million. This case was originally set for trial in September 2003, but the trial date was continued in order to allow the plaintiffs to obtain substitute counsel. Prior to the continuance of the trial date, initial evidentiary disclosures had been made, as well as some initial discovery requests. No dispositive motions are pending before the court and the trial date has not been rescheduled. We have initiated settlement discussions with the plaintiffs and believe that any outcome will not have a material impact on our results of operations.
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From time to time, we (and our subsidiaries) are a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of our (and their) business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damage, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings, we accrue reserves in accordance with U.S. generally accepted accounting principles. We do not believe that any of these proceedings, individually or in the aggregate, would materially and adversely affect our business, financial condition, future results and cash flows.
Regulation of the Electric Utility Industry in the United States
The following is a summary overview of the electric utility industry and applicable regulations in the United States and should not be considered a full statement of the law or all issues pertaining thereto.
PURPA
PURPA, in relevant part, exempts renewable electric generating projects that are "Qualifying Facilities" from various regulations under the FPA. There are two types of Qualifying Facilities: "Qualifying Small Power Production Facilities" and "Qualifying Cogeneration Facilities." Under PURPA and the regulations promulgated thereunder, a power production facility is a "Qualifying Small Power Production Facility" if (1) the facility produces no more than 80 MW (on a net capacity basis) or satisfies certain FERC certification and construction dates, (2) the primary energy source of the facility is biomass, waste, renewable resources, geothermal resources or any combination thereof, and at least 75% of the total energy input is from these sources, and (3) the facility is owned by a person not primarily engaged in the generation or sale of electric power (other than electric power solely from cogeneration facilities or small power production facilities) ( i . e ., the project company cannot be controlled by, more than 50% of the equity interests of the facility may not be owned by, and more than 50% of the equity benefits cannot be received by an electric utility, an electric utility holding company or a combination thereof or their subsidiaries).
Under PURPA, Qualifying Facilities receive two primary benefits. First, PURPA exempts Qualifying Facilities, such as our domestic projects (other than the Puna project), from the definition of "electric utility company" under PUHCA, most provisions of the FPA and state laws and regulations relating to financial, organization and rate regulation of electric utilities. Second, the regulations promulgated by FERC under PURPA require, in relevant part, that electric utilities (1) purchase energy and capacity made available by Qualifying Facilities, construction of which commenced on or after November 9, 1978, at a rate based on the purchasing utility's full "avoided costs" and (2) sell supplementary, back-up, maintenance and interruptible power to Qualifying Facilities on a just and reasonable and nondiscriminatory basis. FERC's regulations define "avoided costs" as the "incremental costs to an 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." Utilities may also purchase power at prices other than avoided cost pursuant to negotiations as provided by FERC's regulations. Under an amendment to PURPA and PURPA regulations, FERC has also provided that utility geothermal small power production facilities (that is, geothermal small power production facilities that would be Qualifying Facilities except that they are owned by a person primarily engaged in the generation or sale of electric energy) are exempt from PUHCA but not state regulation or, if applicable, the FPA.
We expect that our domestic projects will continue to meet all of the criteria required for Qualifying Facilities under PURPA. If any of our domestic projects in which we have an interest loses its Qualifying Facility status or if amendments to PURPA are enacted that substantially reduce the benefits currently afforded Qualifying Facilities, our operations could be adversely affected. Loss of Qualifying Facility status for one of our domestic projects for having more than 50% utility ownership would make that facility a utility geothermal small power production facility. Such facilities are exempt from PUHCA but are subject to state regulation and, if applicable, the FPA. Loss of Qualifying
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Facility status for any other reason would also make the facility subject to state regulation and, if applicable, the FPA. In addition, loss of Qualifying Facility status for any reason other than utility ownership would make the facility subject to PUHCA unless it has EWG status or falls within another exemption. If a facility lost Qualifying Facility status for any reason other than utility ownership and was ineligible for EWG status because it made retail sales, we would face the choice between discontinuing the retail sales and filing for EWG status or becoming subject to PUHCA. At present, none of our domestic projects makes retail sales of electricity (other than to affiliates). In the unlikely event that we become a public utility holding company, which could be deemed to occur prospectively or retroactively to the date that any of our plants lost its Qualifying Facility status (assuming that that plant was neither an EWG nor a utility geothermal small power production facility), our other domestic projects could lose Qualifying Facility status because our interests in such projects could be considered to be electric utility holding company interests for purposes of the Qualifying Facility ownership requirements. This could cause all of our projects to become subject to federal and state energy regulations. In addition, a loss of Qualifying Facility status could allow the power purchaser, pursuant to the terms of the particular power purchase agreement, to cease taking and paying for electricity from the relevant project or, consistent with FERC precedent, to seek refunds of past amounts paid. This could cause the loss of some or all contract revenues, result in significant liability for refunds of past amounts paid, or otherwise impair the value of a project. If a power purchaser were to cease taking and paying for electricity or seek to obtain refunds of past amounts paid, there can be no assurance that the costs incurred in connection with the project could be recovered through sales to other purchasers or that we would have sufficient funds to make such refund payment. In addition, such a loss of status would be an event of default under the financing arrangements currently in place for some of our projects, which would enable the lenders to exercise their remedies and enforce the liens on the relevant project.
In 2003, Congress proposed legislation that, among other provisions, would have had the practical effect of repealing PUHCA and shifting regulatory oversight of holding companies to FERC, and of repealing the mandatory purchase requirements of PURPA. Although the 2003 legislation would not affect existing power purchase agreements for Qualifying Facilities, such legislation or other legislation could (1) repeal or amend PURPA in a manner that substantially reduces the benefits currently afforded Qualifying Facilities, or (2) otherwise make more burdensome the requirements for the projects to maintain their status as Qualifying Facilities. In such event, operations at the projects or compliance with the terms of the power purchase agreements could be adversely affected, which in turn could reduce our net income and materially and adversely affect our business, financial condition, future results and cash flow.
PUHCA
PUHCA, in relevant part, provides that any corporation, partnership or other entity or organized group that owns, controls or holds power to vote 10% or more of the outstanding voting securities of a "public utility company" (which is defined to include an "electric utility company" or a "gas utility company"), or of a company that is a "holding company" of a public utility company or public utility holding company, is subject to registration with the Securities and Exchange Commission and to regulation under PUHCA, unless exempted by a Securities and Exchange Commission rule, regulation or order. An entity may also be deemed to be a holding company if the Securities and Exchange Commission determines, after providing notice and an opportunity for a hearing, that such entity exercises a controlling influence over the management or policies of any public utility or holding company as to make it necessary or appropriate in the public interest or for the protection of investors or consumers that such entity be regulated as a holding company. Unless an exemption is obtained, PUHCA requires registration for a holding company of a public utility company and requires a public utility holding company to limit its utility operations to a single integrated utility system and to divest any other operations not functionally related to the operation of the utility system. In addition, a public utility company that is a subsidiary of a registered holding company under PUHCA is subject to financial and organizational regulation, including approval by the Securities and Exchange Commission of its financing transactions.
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Under current federal law, we are not subject to regulation as a holding company under PUHCA and will not be subject to such regulation as long as the plants in which we have an interest are (1) Qualifying Facilities, (2) "Exempt Wholesale Generators" (as defined in PUHCA) or (3) subject to another exemption or waiver, such as status as an electric utility geothermal small power production facility.
FPA
Under the FPA, FERC has exclusive rate-making jurisdiction over wholesale sales of electricity and transmission in interstate commerce. These rates may be based on a cost of service approach or may be determined through competitive bidding or negotiation. If a project were to lose its Qualifying Facility status, the rates set forth in its power purchase agreement would have to be filed with FERC and would be subject to review by FERC under the FPA, unless the project is located in Hawaii, Alaska or the parts of Texas that are not deemed to be interstate commerce, in which case state regulations would apply. Under FERC policy, the rates under those circumstances could be no higher than the rate or price the relevant power purchaser would have paid for energy had it not been required to purchase from such project under PURPA's mandatory purchase requirements, i.e., such power purchaser's economy energy (incremental) cost during the period of non-compliance with Qualifying Facility requirements, unless the applicable power purchase agreement otherwise provides for alternative rates to apply in the event of such loss of Qualifying Facility status and FERC accepts such alternative rates.
State Regulation
Our projects in California and Nevada, by virtue of being Qualifying Facilities and because they engage in wholesale sales of electricity to public electric utilities in California and Nevada, are not subject to rate, financial and organizational regulations applicable to public electric utilities in those states. The projects each sell or will sell their electrical output to public electric utilities (either Sierra Pacific Power Company, Nevada Power Company or Southern California Edison Company) which are regulated by their respective state public utility commission. Sierra Pacific Power Company and Nevada Power Company are regulated by the Public Utility Commission of Nevada, which we refer to as NPUC. Southern California Edison Company and a small portion of Sierra Pacific Power Company in the Lake Tahoe area are regulated by the California Public Utility Commission, which we refer to as CPUC. Since the NPUC and the CPUC regulate the retail rates through which the purchasing utilities recover their payments to our facilities from the retail electric customers of the public electric utilities under their jurisdiction, it is important for the purchasing electric utilities to obtain approval by their respective public utility commissions of their agreements with our projects. It is also important for the public electric utilities to be allowed continued recovery in their retail electric rates of the cost paid to our projects for electricity.
The NPUC has previously approved the agreements for each of our existing projects located in Nevada and has continuously allowed recovery of the costs of the electricity from those projects in the retail electric rates charged by Sierra Pacific Power Company. The NPUC, pursuant to a delegation of authority from FERC, also sets the avoided cost basis for updating the rates in several of our contracts. While we have no reason to believe that the NPUC will not continue to allow such recovery and continue to set the appropriate avoided cost rate, we cannot guarantee a specific avoided cost rate level or recovery in rates by the regulated public utility. The inability to recover the full cost of the electricity from our project by a public utility could adversely impact the ability of the public utility to pay for the electricity from a project, but such adverse treatment is unlikely given the pre-approval of the agreements. Further, we believe that federal law requires the state commissions to permit full recovery of PURPA-based wholesale rates by the purchasing utility, but we are aware of no judicial decisions in California, Nevada, or Hawaii upholding this principle.
Under Hawaii law, non-fossil generators are not public utilities. Hawaii law provides that a geothermal power producer is to negotiate the rate for its output with the public utility purchaser. If such rate cannot be determined by mutual accord, the Hawaii Public Utility Commission will set a just
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and reasonable rate. If a non-fossil generator in Hawaii is a Qualifying Facility, federal law applies to such Qualifying Facility and the utility is required to purchase the energy and capacity at full avoided cost.
Foreign Regulation of the Electric Utility Industry
The following is a summary overview of certain aspects of the electric industry in the foreign countries in which we have an operating geothermal power project and should not be considered a full statement of the laws in such countries or all of the issues pertaining thereto.
Nicaragua. Two recently approved laws, Law No. 272-98 and Law No. 271-98, define the structure of the new energy sector in Nicaragua. Law No. 272-98 provides for the establishment of a National Energy Commission, which we refer to as CNE, that is responsible for setting policies, strategies and objectives for such sector and approving indicative plans therefor. Law No. 271-98 formally assigned regulatory, supervisory, inspection and oversight functions to the Nicaraguan Institute of Energy, which we refer to as INE. The Nicaraguan government currently owns all of the commercial activities in the energy sector through Empresa Nacional de Electricidad (ENEL), a vertically integrated utility. The Nicaraguan energy sector has recently been restructured and partially privatized. Following such restructuring and privatization, the government has retained title and control of the transmission assets and has created the Empresa Estatal de Transmision, which will be in charge of the operation of the transmission system in the country and of the new wholesale market. As part of the recent restructuring of the energy sector, most of the distribution facilities previously owned by the Nicaraguan Electricity Company, the government-owned vertically-integrated monopoly, were transferred to two companies, Empresa Distribuidora de Electricidad del Norte (DISNORTE) and Empresa Distribuidora de Electricidad del Sur (DISSUR), which in turn were privatized and acquired by an affiliate of Union Fenosa, a large Spanish utility. Following such privatization, the power purchase agreement for our Momotombo project was assigned by the Nicaraguan Electricity Company to DISNORTE and DISSUR. A subsidiary of the Nicaraguan Electricity Company, ENTRESA, owns the transmission grid and is currently scheduled to be privatized. In addition, a National Dispatch Center was created to work with ENTRESA and provide for dispatch and wholesale market administration.
Guatemala. The General Electricity Law of 1996 created a wholesale electricity market in Guatemala and established a new regulatory framework for the electricity sector. The law created a new regulatory commission, the National Electric Energy Commission (CNEE) and a new wholesale power market administrator, the Administrator of the Wholesale Market (AMM), for the regulation and administration of such sector. The CNEE functions as an independent agency under the Ministry of Energy and Mines and is in charge of regulating the electricity law, overseeing the market and setting rates for transmission services and for electricity service to medium and small customers. All distribution companies must supply electricity to such customers pursuant to long-term contracts with electricity generators. Large customers can contract directly with electricity generators or power marketers, or buy energy in the spot market. Guatemala has approved a Law of Incentives for the Development of Renewable Energy Projects in order to promote the development of renewable energy projects in Guatemala. Such law provides certain benefits to companies utilizing renewable energy, including a 10-year corporate income tax exemption and a 10-year business tax exemption.
Kenya. Kenya's Electric Power Act of 1997 restructured the electricity sector in such country. Among other things, the Act provides for the licensing of electricity power producers and public electricity suppliers or distributors. The Kenya Power & Lighting Co. Ltd. is the only licensed public electricity supplier and has a monopoly in the transmission and distribution of electricity in the country. The Act permitted independent power producers (IPPs) to install power generators and sell electricity to Kenya Power & Lighting Co. Ltd., which is owned by various private and government entities and which purchases energy and capacity from three other IPPs in addition to our Olkaria III project. The Act also created the Electricity Regulation Board, as an independent regulator for the electricity sector. Kenya Power & Lighting Co. Ltd.'s retail electricity rates are subject to approval by the Electricity Regulation Board.
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Philippines. The Philippine's Electric Power Industry Reform Act of 2001 created the Energy Regulatory Commission, which is an independent quasi-judicial regulatory body mandated to promote competition, encourage market development, ensure customer choice and penalize abuse of market power in the restructured electricity industry. The Energy Regulatory Commission is responsible for the enforcement of the rules and regulations governing the operations of the electricity spot market and the activities of the spot market operator and other participants to ensure a greater supply and rational pricing of electricity. In addition, the Energy Regulatory Commission determines, fixes, and approves transmission and distribution wheeling charges and retail electricity rates for the captive market of a distribution utility through a methodology that it establishes and enforces. The Energy Regulatory Commission also monitors and takes measures to penalize abuse of market power and anti-competitive or discriminatory behavior by any electric power industry participant.
Permit Status
While our power generation operations produce electricity without emissions of certain pollutants such as nitrogen oxide, and with far lower emissions of other pollutants such as carbon dioxide, some of our projects do emit air pollutants in quantities that are subject to regulation under applicable environmental air pollution laws. Such operations typically require air permits. Especially critical to our geothermal operations are those permits and standards applicable to the construction and operation of geothermal wells and brine reinjection wells. In the United States, injection wells are regulated under the federal Safe Drinking Water Act Underground Injection Control, which we refer to as UIC, program. Our injection wells typically fall into UIC Class V, one of the least regulated categories, because fluids are reinjected to enhance utilization of the geothermal resource. Our projects are required to comply with numerous domestic and foreign federal, regional, state and local statutory and regulatory environmental standards and to maintain numerous environmental permits and governmental approvals required for their operation. Some of the environmental permits and governmental approvals that have been issued to the projects contain conditions and restrictions, including restrictions or limits on emissions and discharges of pollutants and contaminants, or may have limited terms.
Our operations are designed and conducted to comply with applicable permit requirements. Non-compliance with any such requirements could result in fines or other penalties. We are not aware of any non-compliance with such requirements that would be likely to result in fines or penalties, however, the Heber 1 and Heber 2 projects received a notice from the California Division of Oil, Gas and Geothermal Resources that the pressure levels at some of the geothermal fluid injection wells were too high, and the California Regional Water Quality Control Board and the Colorado River Basin Region has notified the Heber 1 and Heber 2 projects that recent tests have resulted in lower-than-required survival rates for bioassay toxicity tests conducted on the cooling tower blowdown water discharged under the NPDES permit. In order to address the pressure levels at the Heber 1 and Heber 2 projects, the Heber 1 and Heber 2 projects have proposed the construction and operation of a pipeline to carry geothermal injection fluid to other project injection wells, which proposal has been accepted as an appropriate solution to the pressure level by the California Division of Oil, Gas and Geothermal Resources. With the cooperation of the California Regional Water Quality Control Board, Colorado River Basin Region, the Heber 1 and Heber 2 projects are also conducting more frequent monitoring and bioassays, and conducting a Toxicity Identification Evaluation (TIE) study in an effort to determine the source of the apparent cooling tower blowdown water toxicity. If the source of the toxicity is not identified, or cannot easily be corrected, the Heber 1 and Heber 2 projects may instead inject the cooling tower blowdown water into the geothermal injection reservoir, as do other geothermal projects in the Imperial Valley.
As of the date of this prospectus, all of the material permits and approvals required to construct or operate our projects have been obtained and are currently valid, except for the fact that certain permits for some of the projects are held in the name of predecessor owners and must be transferred or reissued to the correct entity. We believe such transfer and reissuance will occur in the ordinary course.
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Environmental Laws and Regulations
Geothermal operations can produce significant quantities of brine and scale, which builds up on metal surfaces in our equipment with which the brine comes into contact. These waste materials, most of which are currently reinjected into the subsurface, can contain various concentrations of hazardous materials, including arsenic, lead, and naturally occurring radioactive materials. We also use various substances, including isobutene, isopentane, and industrial lubricants, that could become potential contaminants and are generally flammable. Hazardous materials are also used and generated in connection with our equipment manufacturing operations in Israel. As a result, our projects are subject to numerous domestic and foreign federal, state and local statutory and regulatory standards relating to the use, storage, fugitive emissions and disposal of hazardous substances. The cost of any remediation activities in connection with a spill or other release of such contaminants could be significant.
Although we are not aware of any mismanagement of these materials, including any mismanagement prior to the acquisition of some of our projects, that may have impacted any of the project sites, any disposal or release of these materials onto project sites, other than by means of permitted injection wells, could result in material cleanup requirements or other responsive obligations under applicable environmental laws. We believe that at one time there may have been a gas station located on the Mammoth project site (which we lease), but because of significant surface disturbance and construction since that time further physical evaluation of the former gas station site has been impractical. We believe that, given the subsequent surface disturbance and construction activity in the vicinity of the suspected location of the service station, it is likely that the former facilities and any associated underground storage tanks would have already been encountered if they still existed.
Properties
We lease our corporate offices at 980 Greg Street, Sparks, Nevada 89431. We also occupy an approximately 66,000 square meter office and manufacturing facility located in the industrial park of Yavne, Israel, which we sublease from Ormat Industries. See "Certain Relationships and Related Transactions." We also lease small offices in each of the countries in which we operate.
We believe that our current facilities are adequate for our operations as currently conducted. If additional facilities are required, we believe that we could obtain additional facilities at commercially reasonable prices.
Each of our plants is located on property that we lease or own, or property that is subject to a concession agreement. See "Business—Our Projects."
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MANAGEMENT
The following table sets forth the name, age and positions of our directors, executive officers, persons who are executive officers of certain of our subsidiaries who perform policy making functions for us, and our significant employees:
Name | Age | Position | ||||||||
Lucien Bronicki | 69 |
Chairman
of the Board of Directors;
Chief Technology Officer |
||||||||
Yehudit "Dita" Bronicki | 62 | Chief Executive Officer; Director | ||||||||
Yoram Bronicki | 37 | Chief Operating Officer—North America; Director Nominee† | ||||||||
Lisa Kidron | 40 | Chief Financial Officer, Ormat Systems * | ||||||||
Nadav Amir | 54 | Executive Vice President—Engineering, Ormat Systems * | ||||||||
Hezy Ram | 54 | Executive Vice President—Business Development, Ormat Nevada ** | ||||||||
Joseph Shiloah | 58 | Executive Vice President—Marketing and Sales, Ormat Systems * | ||||||||
Zvi Reiss | 53 | Executive Vice President—Project Management, Ormat Systems * | ||||||||
Aaron Choresh | 58 | Vice President—Operations and Product Support, Ormat Systems * | ||||||||
Zvi Krieger | 49 | Vice President—Geothermal Engineering, Ormat Systems * | ||||||||
Etty Rosner | 48 | Vice President—Contract Administrator; Corporate Secretary * | ||||||||
Connie Stechman | 48 | Vice President—Controller; Director | ||||||||
Independent Director Nominees: | ||||||||||
Dani Falk | 59 | Independent Director Nominee† | ||||||||
Edward R. Muller | 52 | Independent Director Nominee† | ||||||||
Lester P. Silverman | 57 | Independent Director Nominee†† | ||||||||
Jacob J. Worenklein | 55 | Independent Director Nominee† | ||||||||
Significant Employees: | ||||||||||
Shimon Hatzir | 42 | Vice President—Electrical and Conceptual Engineering, Ormat Systems * | ||||||||
Ran Raviv | 36 | Vice President—Business Development, Ormat Nevada ** | ||||||||
Daniel Schochet | 73 | Vice President, Market Development** | ||||||||
Ohad Zimron | 49 | Vice President—Product Engineering, Ormat Systems * | ||||||||
Uzi Albert | 52 | Manager—Logistics and Production, Ormat Systems * | ||||||||
* | Performs the functions described in the table, but is employed by Ormat Systems. |
** | Performs the functions described in the table, but is employed by Ormat Nevada. |
† | This nominee will be appointed prior to the completion of the offering. |
†† | This nominee is expected to be appointed in the first quarter of 2005. |
Lucien Bronicki . Lucien Bronicki is the Chairman of our board of directors, a position he has held since our inception in 1994, and is also our Chief Technology Officer, effective as of July 1, 2004. Mr. Bronicki co-founded Ormat Turbines Ltd. in 1965 and is the Chairman of the board of directors of Ormat Industries, the publicly-traded successor to Ormat Turbines Ltd., and various of its subsidiaries. Since 1992, Mr. Bronicki has also been the Chairman of the board of directors of Bet Shemesh Engines, a manufacturer of jet engines, and of OPTI Canada Inc. Mr. Bronicki is also the Chairman of the board of directors of Orad Hi-Tec Systems Ltd., a manufacturer of image processing systems, and was the Co-Chairman of Orbotech Ltd., a NASDAQ-listed manufacturer of equipment
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for inspecting and imaging circuit boards and display panels. Mr. Bronicki has worked in the power industry since 1958. He is a member of the Executive Council of the Weizmann Institute of Science and chairs the Israeli Committee of the World Energy Council. Yehudit Bronicki and Lucien Bronicki are married. Mr. Bronicki obtained a postgraduate degree in Nuclear Engineering from Conservatoire National des Arts et Metiers in 1958 and a Master of Science in Physics from Universite de Paris in 1958 and a Master of Science in Mechanical Engineering from Ecole Nationale Superieure d'Ingenieurs Arts et Metiers in 1957.
Yehudit "Dita" Bronicki . Yehudit "Dita" Bronicki is our Chief Executive Officer, effective as of July 1, 2004, and is also a member of our board of directors, our President and our Secretary, positions she has held since our inception in 1994. Mrs. Bronicki is also the President of Ormat Systems, effective as of July 1, 2004. Mrs. Bronicki was also a co-founder of Ormat Turbines Ltd. and is a member of the board of directors and the General Manager (a CEO-equivalent position) of Ormat Industries, the publicly-traded successor to Ormat Turbines Ltd., and various of its subsidiaries. Since 1992, Mrs. Bronicki has also been a director of Bet Shemesh Engines. Mrs. Bronicki is also a member of the board of directors of OPTI Canada Inc., and of Orbotech Ltd., a NASDAQ-listed manufacturer of equipment for inspecting and imaging circuit boards and display panels. From 1994 to 2001, Mrs. Bronicki was on the Advisory Board of the Bank of Israel. Mrs. Bronicki has worked in the power industry since 1965. Yehudit Bronicki and Lucien Bronicki are married. Mrs. Bronicki obtained a Bachelor of Arts in Social Sciences from Hebrew University in 1965.
Yoram Bronicki . Yoram Bronicki is our Chief Operating Officer, effective as of July 1, 2004. Mr. Bronicki is also a member of the board of directors of Ormat Industries, a position he has held since 2001. Mr. Bronicki will be appointed a director of Ormat Technologies prior to the completion of the offering. From 2001 to 2004, Mr. Bronicki was Vice President of OPTI Canada Inc., from 1999 to 2001, he was Project Manager of Ormat Industries and Ormat International, from 1996 to 1999, he was Project Manager of Ormat Industries, and from 1995 to 1996, he was Project Engineer of Ormat Industries. Mr. Bronicki is the son of Lucien and Yehudit Bronicki. Mr. Bronicki obtained a Bachelor of Science in Mechanical Engineering from Tel Aviv University in 1989 and a Certificate from the Technion Institute of Management Senior Executives Program.
Lisa Kidron . Lisa Kidron performs the function of our Chief Financial Officer and is the Chief Financial Officer of Ormat Systems, effective as of July 1, 2004. Ms. Kidron is also the Chief Financial Officer of Ormat Industries, a position she has held since 2002. From 2000 to 2002, Ms. Kidron was Chief Financial Officer at MUL-T-LOCK Ltd. and from 1999 to 2000, Ms. Kidron was Chief Financial Officer at MUL-T-LOCK Technologies Ltd. Ms. Kidron served as a director on the boards of various subsidiaries within the MUL-T-LOCK group from 1999 to 2002. Until 1999, Ms. Kidron was a senior manager in the accounting firm Kost-Forrer & Gabai (Ernst & Young, Global Services). Ms. Kidron obtained an L.L.M. Degree in Law from Bar-Ilan University in 2002, a Bachelor of Arts in Accounting from Tel Aviv University in 1994, a Master of Science in Industrial Engineering from Ben Gurion University in 1987 and a Bachelor of Science in Computer Science and Mathematics from Rutgers University in 1985.
Nadav Amir . Nadav Amir performs the function of our Executive Vice President of Engineering, and is the Executive Vice President of Engineering of Ormat Systems, effective as of July 1, 2004. From 2001 through June 30, 2004, Mr. Amir was Executive Vice President of Engineering of Ormat Industries, from 1993 to 2001, he was Vice President of Engineering of Ormat Industries, from 1988 to 1993, he was Manager of Engineering of Ormat Industries, from 1984 to 1988, he was Manager of Product Engineering of Ormat Industries, and from 1983 to 1984, he was Manager of Research and Development of Ormat Industries. Mr. Amir obtained a Bachelor of Science in Aeronautical Engineering from Technion Haifa in 1972.
Hezy Ram . Hezy Ram performs the function of our Executive Vice President of Business Development, and is the Executive Vice President of Ormat Nevada, a position he has held since January 1, 2004. From 1999 through December 31, 2003, Mr. Ram was Executive Vice President of Business Development of Ormat Industries. Mr. Ram obtained a Master of Business Administration
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from Hebrew University in 1978, a Master of Science in Mechanical Engineering from Ben Gurion University in 1977 and a Bachelor of Science in Mechanical Engineering from Ben Gurion University in 1975.
Joseph Shiloah . Joseph Shiloah performs the function of our Executive Vice President of Marketing and Sales, and is the Executive Vice President of Marketing and Sales of Ormat Systems, effective as of July 1, 2004. From 2001 through June 30, 2004, Mr. Shiloah was the Executive Vice President of Marketing and Sales at Ormat Industries, from 1989 to 2000, he was Vice President of Marketing and Sales of Ormat Industries, from 1983 to 1989, he was Vice President of Special Projects of Ormat Turbines Ltd., from 1984 to 1989, he was Operating Manager of the Solar Pond project of Solmat Systems Ltd., a subsidiary of Ormat Turbines Ltd., and from 1981 to 1983, he was Project Administrator of the Solar Pond power plant project of Ormat Turbines Ltd. and Solmat Systems Ltd. Mr. Shiloah obtained a Bachelor of Arts in Economics from Hebrew University in 1972.
Zvi Reiss . Zvi Reiss performs the function of our Executive Vice President of Project Management, and is the Executive Vice President of Project Management of Ormat Systems, effective as of July 1, 2004. From 2001 through June 30, 2004, Mr. Reiss was the Executive Vice President of Project Management of Ormat Industries, from 1995 to 2000, he was Vice President of Project Management of Ormat Industries and, from 1993 to 1994, he was Director of Projects of Ormat Industries. Mr. Reiss obtained a Bachelor of Science in Mechanical Engineering from Ben Gurion University in 1975.
Aaron Choresh . Aaron Choresh performs the function of our Vice President of Operations and Product Support, and is the Vice President of Operations and Product Support of Ormat Systems, effective as of July 1, 2004, and will also serve in that capacity and provide services to us upon the completion of this offering. From 1999 through June 30, 2004, Mr. Choresh was the Vice President of Operations and Product Support of Ormat Industries, from 1993 to 1998, he was the Director of Operations and Product Support of Ormat Industries, from 1991 to 1992, he was Manager of Project Engineering and Product Support, and from 1989 to 1990, he was Manager of Project Engineering of Ormat Industries. Mr. Choresh obtained a Bachelor of Science in Electrical Engineering from Technion Haifa in 1982.
Zvi Krieger . Zvi Krieger performs the function of our Vice President of Geothermal Engineering, and is the Vice President of Geothermal Engineering of Ormat Systems, effective as of July 1, 2004. From 2001 through June 30, 2004, Mr. Krieger was the Vice President of Geothermal Engineering of Ormat Industries. Mr. Krieger has been with Ormat Industries since 1981 and served as Application Engineer, Manager of System Engineering, Director of New Technologies Business Development and Vice President of Geothermal Engineering. Mr. Krieger obtained a Bachelor of Science in Mechanical Engineering from the Technion, Israel Institute of Technology in 1980.
Etty Rosner . Etty Rosner performs the function of our Corporate Secretary, and is the Corporate Secretary of Ormat Systems, effective as of July 1, 2004. Ms. Rosner is also the Corporate Secretary of Ormat Industries, a position she has held since 1991, and Vice President of Contract Management of Ormat Industries, a position she has held since 1999. From 1991 to 1999, Ms. Rosner was Contract Administrator Manager and Corporate Secretary and from 1981 to 1991, she was the Manager of the Export Department and Office Administrative Manager. Ms. Rosner obtained a Diploma in General Management from Tel Aviv University in 1990.
Connie Stechman . Connie Stechman is a member of our board of directors and our Vice President and Controller, positions she has held since our inception in 1994. Prior to joining Ormat Technologies, Ms. Stechman worked for an international public accounting firm. Ms. Stechman is a Certified Public Accountant and obtained a Bachelor of Science in Business and Concentration Accounting from California State University, Sacramento, in 1977.
Dani Falk . Dani Falk will be appointed as a director of Ormat Technologies prior to the completion of the offering. Mr. Falk is also a member of the Board of Directors of Ormat Industries Ltd., Orbotech Ltd., Nice System Ltd., Attunity Ltd., ClickSoftware Technologies Ltd. and Jacada Ltd. From 2001 to 2004, Mr. Falk was a business consultant to several public and private companies. From
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1999 to 2000, Mr. Falk was Chief Operating Officer and Chief Executive Officer of Sapiens International NV. From 1995 to 1999, Mr. Falk was an Executive Vice President of Orbotech Ltd. From 1985 to 1995, Mr. Falk was Vice President of Finance and Chief Financial Officer of Orbotech Systems Ltd. and of Orbotech Ltd. Mr. Falk obtained a Master of Business Administration from Hebrew University in 1972 and a Bachelor of Arts in Economics and Political Science from Hebrew University in 1968.
Edward R. Muller . Edward Muller will be appointed a director of Ormat Technologies prior to the completion of the offering. Mr. Muller is also a member of the board of directors of GlobalSantaFe Corp. and The Keith Companies, Inc. Since 2000, Mr. Muller has been a private investor. From 1993 to 2000, Mr. Muller was President and Chief Executive Officer of Edison Mission Energy, the wholly owned subsidiary of Edison International. From 1991 to 1993, Mr. Muller was Vice President, Chief Financial Officer, General Counsel and Secretary of Whittaker Corp. and Vice President, General Counsel and Secretary of BioWhittaker, Inc. Mr. Muller obtained a Bachelor of Arts in history from Dartmouth College in 1973 and a Juris Doctor in Law from Yale Law School in 1976.
Jacob J. Worenklein . Jacob Worenklein will be appointed a director of Ormat Technologies prior to the completion of the offering. Mr. Worenklein is also president and Chief Executive Officer of US Power Generating Company. From 1998 to 2003, he was Managing Director and Global Head of Project and Sectorial Finance for Societe Generale and, from 1996 to 1998, he was Managing Director and Head of Project Finance, Export Finance and Commodities, for Societe Generale. Prior to joining Societe Generale in 1996, Mr. Worenklein was Managing Director and Global Head of Project Finance at Lehman Brothers and prior thereto was a partner and member of the executive committee of the law firm of Milbank, Tweed, Hadley & McCloy, LLP, where he founded and headed the firm's power and project finance practice. Mr. Worenklein served as Adjunct Professor of Finance at New York University and is a trustee of the Committee for Economic Development and a member of the Council on Foreign Relations. He is a member of the board of directors and audit committee of CDC Globeleq, an affiliate of the UK's Commonwealth Development Corporation. Mr. Worenklein obtained a Bachelor of Arts from Columbia College in 1970 and a Juris Doctor and Master of Business Administration from New York University in 1973.
Lester P. Silverman . Lester Silverman is expected to be appointed a director of Ormat Technologies in the first quarter of 2005, following his retirement from McKinsey & Company, Inc. He is on the Board of Trustees of Arena Stage and a board member for Carnegie Mellon Electricity Industry Center and Council on Excellence in Government. From 1982 to the present, Mr. Silverman has served as a Director with McKinsey & Company, Inc., serving in the North American Energy Practice, the Global Electric Power and Natural Gas Practice and in the Global Nonprofit Practice. Mr. Silverman obtained a Bachelor of Science in Administration and Management Sciences from Carnegie Mellon University in 1969, a Master in Science in Industrial Administration in 1969, and a Ph.D. in Economics from Carnegie Mellon University in 1973.
Shimon Hatzir . Shimon Hatzir performs the function of our Vice President of Electrical and Conceptual Engineering, and is the Vice President of Electrical and Conceptual Engineering of Ormat Systems, effective as of July 1, 2004. From 2002 through June 30, 2004, Mr. Hatzir was the Vice President of Electrical and Conceptual Engineering of Ormat Industries, from 1996 to 2001, he was Manager of Electrical and Conceptual Engineering of Ormat Industries, and from 1989 to 1995, he was Project Engineer in the Engineering Division. Mr. Hatzir obtained a Bachelor of Science in Mechanical Engineering from Tel Aviv University in 1988 and a Certificate of the Technology Institute of Management, Senior Executive Program.
Ran Raviv . Ran Raviv performs the function of our Vice President of Business Development, and is the Vice President of Business Development of Ormat Nevada, a position he has held since 2001. From 1997 to 2001, Mr. Raviv was Manager of Business Development of Ormat Industries, and from 1994 to 1997, he was a business manager at Green Land Ltd., a subsidiary of Browning Ferris Inc. of Houston, Texas. In 1993, Mr. Raviv was a management consultant at Global Present Ltd. Mr.
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Raviv obtained a Bachelor of Science in Computer Science and Business Studies from the University of Buckingham in 1992 and a Master of Business Administration from City University Business School in 1993.
Daniel Schochet. Daniel Schochet performs the function of our Vice President of Market Development, and is the Vice President of Market Development of Ormat Nevada, a position he has held since September 1, 1992. From 1987 to 1992, Mr. Schochet was Vice President of Geothermal Project Development of OESI, Inc., from 1984 to 1987, he was Vice President and General Manager of Ormat, Inc.'s geothermal operations in the United States, from 1980 to 1984, he was Director of International Marketing of Ormat Systems, and from 1975 to 1979, he was Managing Director of Ormat's subsidiary in Iran. Prior to joining Ormat, Mr. Schochet held a number of technical and management positions in the aerospace, electrical power and biomedical research industries. Mr. Schochet is a Member of the Board of Directors of the Geothermal Energy Association and the Geothermal Resources Council and has served as co-chairman of the U.S. Department of Energy's Geo-Powering the West Peer Review Committee. Mr. Schochet received a Master of Science in Electrical Engineering from Columbia University School of Engineering in 1958 and a Bachelor of Electrical Engineering from the Cooper Union School of Engineering in 1953.
Ohad Zimron . Ohad Zimron performs the function of our Vice President of Product Engineering, and is the Vice President of Product Engineering of Ormat Systems, effective as of July 1, 2004. From 1999 through June 30, 2004, Mr. Zimron was the Vice President of Product Engineering of Ormat Industries, from 1992 to 1999, he was Manager of Product Engineering of Ormat Industries, from 1986 to 1992 he was Product Engineer of Ormat Industries, from 1984 to 1986, he was Product Support Manager of Ormat Systems Inc. and from 1981 to 1984, he was Product Engineer of Ormat Turbines Ltd. Mr. Zimron obtained a Bachelor of Science in Mechanical Engineering from Ben Gurion University in 1979 and a Master of Business Administration from Bar Ilan University in 2002.
Uzi Albert . Uzi Albert performs the function of our Manager of Logistics and Production, and is the Manager of Logistics and Production of Ormat Systems, effective as of July 1, 2004. From 1998 through June 30, 2004, Mr. Albert was the Manager of Logistics and Production of Ormat Industries. Mr. Albert obtained a Diploma of Business Administration from Tel Aviv University in 1991.
Security Ownership of Certain Beneficial Owners and Management
We are a wholly owned subsidiary of Ormat Industries. Ormat Industries is an Israeli company that is publicly traded on the Tel Aviv Stock Exchange. Based on publicly available information, Lucien Bronicki, the Chairman of our board of directors, Yehudit Bronicki, our Chief Executive Officer, Yoram Bronicki, our Chief Operating Officer, and their family beneficially own 35.15%, as of June 30, 2004, of the shares of common stock of Ormat Industries.
Board Composition
Our board of directors is currently composed of three members. Before this offering is completed, we intend to increase the number of directors on our board of directors to a total of six members, including three independent directors, Dani Falk, Edward Muller and Jacob Worenklein. We expect to appoint Lester Silverman to our board of directors in the first quarter of 2005, following his retirement from McKinsey & Company, Inc. Also, before this offering is completed, our board of directors will be classified into three classes of directors serving staggered, three-year terms and may be removed only for cause. In addition, in order to ensure compliance with the independence requirements of the New York Stock Exchange, the composition of the board of directors may change prior to and following the offering. It is our intention to be in full and timely compliance with all applicable rules of the New York Stock Exchange and applicable laws, including with respect to the independence of our directors. We intend to rely on the "controlled company" exception to the board of directors and committee composition requirements under the rules of the New York Stock Exchange. The "controlled company" exception does not modify the independence requirements for the audit committee, and we intend to comply with the requirements of the Sarbanes-Oxley Act of 2002 and the New York Stock Exchange rules which require that our audit committee be composed of at least three independent directors.
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Board Committees
Our board of directors has the authority to appoint committees to perform certain management and administration functions. Our board of directors currently intends to establish an audit committee, a compensation committee and a nominating and corporate governance committee, effective upon completion of this offering.
Audit Committee. The audit committee will select, on behalf of our board of directors, an independent public accounting firm to be engaged to audit our financial statements, discuss with the independent auditors their independence, review and discuss the audited financial statements with the independent auditors and management and review our compliance with legal and regulatory requirements with respect to accounting policies, internal controls and financial reporting. The audit committee will consist of three or more members, all of whom will be independent directors. We intend to appoint Dani Falk, Jacob Worenklein and Edward Muller to the audit committee, and to appoint Dani Falk as the chair of the audit committee. Dani Falk qualifies as a financial expert under the rules of the SEC.
Compensation Committee. The compensation committee will review and either approve, on behalf of our board of directors, or recommend to the board of directors for approval (1) the annual salaries and other compensation of our chief executive officer and certain other executive officers and (2) individual stock and stock option grants. The compensation committee also provides recommendations with respect to our compensation policies and practices and incentive compensation plans and equity plans. The compensation committee will consist of three or more members, of which at least two will be independent directors. We intend to appoint Yehudit Bronicki, Jacob Worenklein and Dani Falk to the compensation committee and to appoint Yehudit Bronicki as the chair of the compensation committee.
Nominating and Corporate Governance Committee. The nominating and corporate governance committee will assist our board of directors in fulfilling its responsibilities by identifying and approving individuals qualified to serve as members of our board of directors, selecting director nominees for our annual meetings of stockholders, and developing and recommending to our board of directors corporate governance guidelines and oversight with respect to corporate governance and ethical conduct. The nominating and corporate governance committee will consist of three or more directors, of which at least one will be an independent director. We intend to appoint Lucien Bronicki, Dani Falk and Edward Muller to the nominating and corporate governance committee, and to appoint Lucien Bronicki as the chair of the nominating and corporate governance committee. Lester Silverman will replace Dani Falk as a member of the committee upon being appointed to our board of directors.
Compensation Committee Interlocks and Insider Participation
Prior to the completion of this offering, we have not had a compensation committee. Lucien Bronicki, Yehudit Bronicki and Connie Stechman served as the Chairman of our board of directors, President and Controller, respectively, during 2003. Lucien Bronicki and Yehudit Bronicki also held such positions in our parent and all of our subsidiaries and Connie Stechman also held such positions in a number of our subsidiaries during fiscal year 2003. See "Certain Relationships and Related Transactions."
Compensation of Directors
After consummation of this offering, we intend to pay our non-employee directors an annual retainer of $25,000 as fees related to their service on our board of directors and an additional board and committee meeting fee of $500 to $2,500 for each meeting they participate in. Any non-employee director who also serves as chairman of the audit committee will receive an annual retainer of $7,500. The non-employee directors shall also receive options to purchase 7,500 shares of our common stock at the public offering price, and 5,000 shares of our common stock at the market price on the relevant grant date on an annual basis from the second year of service.
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We intend to promptly reimburse all directors for reasonable expenses incurred to attend meetings of our board of directors or committees.
Executive Compensation
The following table sets forth all compensation received during the year ended December 31, 2003, 2002 and 2001 by our named executive officers. The compensation described in this table does not include medical, group life insurance, or other benefits which are available generally to all of our salaried employees.
Summary Compensation Table
Name and Principal Position(s) | Year | Salary ($) (1) | Bonus ($) (2) |
Other
Annual
Compensation ($) |
Securities
Underlying Options (#) (3) |
All Other
Compensation ($) (4) |
||||||||||||||||||||
Yehudit Bronicki | 2003 | 45,518 | — | — | — | — | ||||||||||||||||||||
Chief Executive Officer | 2002 | — | — | — | — | — | ||||||||||||||||||||
2001 | — | — | — | — | — | |||||||||||||||||||||
Nadav Amir | 2003 | — | — | — | — | — | ||||||||||||||||||||
Executive Vice President | 2002 | — | — | — | — | — | ||||||||||||||||||||
—Engineering | 2001 | — | — | — | — | — | ||||||||||||||||||||
Hezy Ram | 2003 | — | — | — | — | — | ||||||||||||||||||||
Executive Vice President | 2002 | — | — | — | — | — | ||||||||||||||||||||
—Business Development | 2001 | — | — | — | — | — | ||||||||||||||||||||
Zvi Reiss | 2003 | — | — | — | — | — | ||||||||||||||||||||
Executive Vice President | 2002 | — | — | — | — | — | ||||||||||||||||||||
—Project Management | 2001 | — | — | — | — | — | ||||||||||||||||||||
Aaron Choresh | 2003 | — | — | — | — | — | ||||||||||||||||||||
Vice President | 2002 | — | — | — | — | — | ||||||||||||||||||||
—Operations and Product Support | 2001 | — | — | — | — | — | ||||||||||||||||||||
(1) | In 2003, 2002 and 2001, in addition to these amounts, Mrs. Bronicki received $58,438, $100,206 and $110,794, respectively, as salary compensation from Ormat Industries; and in 2003, 2002 and 2001, Mr. Amir received $169,820, $156,016 and $166,004, respectively, Mr. Ram received $145,495, $110,593 and $127,951, respectively, Mr. Choresh received $115,819, $110,185 and $95,688, respectively, and Mr. Reiss received $135,441, $124,970 and $132,993, respectively, as salary compensation from Ormat Industries. |
(2) | In 2002, Mr. Amir earned $101,492, as bonus compensation from Ormat Industries; in 2003, 2002 and 2001, Mr. Ram earned $333,242, $128,739 and $118,516, respectively, and Mr. Choresh earned $22,161, $19,543 and $16,592, respectively, as bonus compensation from Ormat Industries. |
(3) | In 2003, 2002 and 2001, Mr. Amir received options to purchase 33,000, 33,000 and 33,000 shares of Ormat Industries' common stock, respectively, Mr. Ram received options to purchase 33,000, 33,000 and 33,000 shares of Ormat Industries' common stock, respectively, Mr. Reiss received options to purchase 33,000, 33,000 and 24,750 shares of Ormat Industries' common stock, respectively, and Mr. Choresh received options to purchase 22,500, 20,000 and 20,000 shares of Ormat Industries' common stock, respectively. |
(4) | In 2003, 2002 and 2001, Mrs. Bronicki received $7,872, $7,271 and $8,000, respectively, Mr. Amir received $6,017, $5,561 and $5,987, respectively, Mr. Ram received $3,996, $3,693 and $3,316, respectively, Mr. Reiss received $3,996, $3,693 and $3,757, respectively, and Mr. Choresh received $3,996, $3,693 and $3,757, respectively, from Ormat Industries reflecting the private use of company-leased cars. |
Option Grants
We have not granted any options to any of our executive officers since our inception.
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Stock Option Plan
Our board of directors intends to adopt, prior to completion of this offering, subject to approval of the shareholders, the Ormat Technologies, Inc. 2004 Incentive Compensation Plan. The plan is a broad-based equity incentive compensation plan which will cover the employees, directors and independent contractors of Ormat Technologies. The compensation committee will have the flexibility to grant a wide range of equity-based compensation, including incentive and non-qualified stock options, tandem and free-standing stock appreciation rights, restricted and unrestricted stock, restricted and unrestricted stock units, phantom stock, cash incentives, or any combination thereof. For both equity and cash compensation awards, there may either be time-based or performance-based criteria for full vesting of the award. The awards with performance-based criteria for vesting will satisfy the requirements of Internal Revenue Code Section 162(m), where applicable.
Employment Agreements
We have entered into an executive employment agreement with Mrs. Yehudit Bronicki, as our Chief Executive Officer, effective as of July 1, 2004. Such employment agreement is for a four-year term expiring on June 30, 2008, unless terminated earlier pursuant to the terms of the agreement. Such employment agreement, when expired, will be automatically extended for additional successive four-year terms subject to the conditions set forth in the agreement. Mrs. Bronicki's employment may be terminated by either us or Mrs. Bronicki pursuant to the terms of the agreement.
Such employment agreement provides for a monthly base salary of $12,500. Mrs. Bronicki is also entitled to a bonus and other benefits set forth in the agreement and a company automobile. Pursuant to the terms of the agreement, if we or Mrs. Bronicki terminate the agreement, by providing the other party with 180 days' written notice prior to the end of the respective term, Mrs. Bronicki will be entitled to her salary, bonus and other benefits for such 180-day period. In the event of such termination, Mrs. Bronicki is entitled to an assignment of her "executive manager's insurance policy" and monies accumulated under such policy, and a payment of the difference, if any, between the sums accumulated under such policy on account of her severance pay, and the amount of severance pay she is entitled to based on her last base salary multiplied by the number of years she has been employed by us or Ormat Industries.
Mrs. Bronicki is also entitled to change in control payments. If, within three years following the occurrence of a change in control, we terminate Mrs. Bronicki's employment or Mrs. Bronicki terminates her own employment for good reason, other than for disability or other reasons set forth in the agreement, or if, within 180 days following a change in control, Mrs. Bronicki terminates her employment agreement with 90 days' prior written notice, then we are required to pay her a lump sum equal to (1) her full unpaid and accrued base salary through the date of termination; plus (2) her monthly base salary at the time of the change of control including any increases therein multiplied by 24; plus (3) the average of the annual bonus paid to Mrs. Bronicki for the two years immediately preceding the change in control multiplied by two; plus (4) a portion of the annual bonus for the year in which the termination of employment occurs with the amount thereof multiplied by a fraction, the numerator of which is the number of days in the relevant year through the date of termination and the denominator of which is 365, and any unpaid annual bonus for any completed year. In addition, Mrs. Bronicki is also entitled to all employee health, accident, life insurance, disability and other employee welfare benefits for a two-year period following her last day worked, or until she obtains new employment, whichever is earlier.
Hezy Ram is currently employed by Ormat Nevada and serves as our Executive Vice President of Business Development pursuant to an employment agreement dated January 1, 2004, which expires on December 31, 2004. Mr. Ram's employment agreement provides for an annual base salary of $175,000. Pursuant to the terms of Mr. Ram's employment agreement, in addition to his annual salary, Mr. Ram is entitled to certain other benefits paid for by us, including, among other things, annual bonuses and medical and hospitalization insurance. Pursuant to the terms of Mr. Ram's employment agreement, if we terminate his employment without cause, Mr. Ram is entitled to receive his monthly salary for the following 90-day period. If Mr. Ram terminates his employment voluntarily, he is not entitled to
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receive any subsequent payments. Mr. Ram's employment agreement also contains a one-year non-competition and non-solicitation provision.
Nadav Amir is employed by Ormat Systems and serves as our Executive Vice President of Engineering, Aaron Choresh is employed by Ormat Systems and serves as our Vice President of Operations and Product Support and Zvi Reiss is employed by Ormat Systems and serves as our Executive Vice President of Project Management. Each of Messrs. Amir, Choresh and Reiss is party to an employment agreement with Ormat Systems that sets forth their respective terms of employment that are generally applicable to all of Ormat Systems' staff, covering matters such as vacation, health and other benefits. Under such employment agreements, any Ormat Systems employee may be terminated for any reason subject to 30 days' prior notice. However, termination for cause does not require any prior notice. An employee that is terminated for cause is not entitled to any subsequent payments.
The actual salary and other compensation arrangements of Messrs. Amir, Choresh, and Reiss are agreed separately with each employee. Mr. Amir is entitled to a base salary of approximately $173,750 and a guaranteed bonus for 2004 of approximately $44,440, Mr. Choresh is entitled to a base salary of approximately $115,600 and a guaranteed bonus for 2004 of approximately $35,500 and Mr. Reiss is entitled to a base salary of approximately $139,500 and a guaranteed bonus for 2004 of approximately $44,400. Each of these individuals is also covered by Ormat Systems' management insurance plan, to which Ormat Systems contributes a percentage of such individual's salary, and which covers any compensation that such individual may be entitled to receive upon termination. In addition, each of the individuals has the benefit of the use of a company-leased car.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loan Agreement between us and Ormat Industries
In 2003, we entered into a loan agreement with Ormat Industries, which was further amended on September 20, 2004. Pursuant to this loan agreement, Ormat Industries agreed to make a loan to us in one or more advances not exceeding a total aggregate amount of $150,000,000. The proceeds of the loan are to be used to fund our general corporate activities and investments. We are required to repay the loan and accrued interest in full and in accordance with an agreed-upon repayment schedule and in any event on or prior to June 5, 2010.
Interest on the loan is calculated on the balance from the date of the receipt of each advance until the date of payment thereof at a rate per annum equal to Ormat Industries' average effective cost of funds plus 0.3% percent in U.S. dollars, which represented a rate of 7.5% for the advances made during year 2003. All computations of interest shall be made by Ormat Industries on the basis of a year consisting of 360 days. As of June 30, 2004, the outstanding balance of the loan was approximately $143.2 million.
The loan agreement contains customary representations and warranties to Ormat Industries and also contains customary events of default and notice provisions.
The loan agreement is governed by, and interpreted and construed under, the laws of Israel.
We believe that the terms of the loan agreement are as beneficial to us as could be obtained from unaffiliated third parties.
Capital Note Issued to Ormat Industries
Pursuant to the terms of a capital note, as further amended on September 20, 2004, Ormat Industries converted outstanding balances owed by us to Ormat Industries into a subordinated non-interest bearing loan in an amount equal to NIS 240.0 million. We can repay the loan in full or, upon demand by Ormat Industries, we will be required to repay the loan in full at any time after November 30, 2007. The final maturity of the loan is December 30, 2009. In accordance with the terms of such note, we will not be required to repay any amount in excess of $50 million (using the exchange rate existing on the date of such note).
We believe that the terms of the capital note are as beneficial to us as could be obtained from unaffiliated third parties.
Guarantee Fee Agreement between us and Ormat Industries
In 1999, we entered into a guarantee fee agreement with Ormat Industries, pursuant to which Ormat Industries agreed to issue certain standby letters of credit and guarantees on our behalf to certain of our customers, as well as guarantees with respect to our bank credit lines.
Such agreement establishes a fee, calculated quarterly, equal to 1% per annum of all amounts guaranteed or subject to an outstanding letter of credit during the relevant quarter. Such payment is due quarterly in arrears and is payable against the receipt of an invoice from Ormat Industries.
We believe that the terms of the guarantee fee agreement are as beneficial to us as could be obtained from unaffiliated third parties.
Reimbursement Agreement between us and Ormat Industries
On July 15, 2004, we entered into a reimbursement agreement pursuant to which we agreed to reimburse Ormat Industries for any draws made on any standby letter of credit subject to the guarantee fee agreement, dated as of January 1, 1999, between us and Ormat Industries, and for any payments made under any guarantee provided by Ormat Industries subject to such guarantee fee agreement. Interest on any amounts owing pursuant to the reimbursement agreement is paid at a rate per annum equal to Ormat Industries' average effective cost of funds plus 0.3% in U.S. dollars. There are no amounts currently owing to Ormat Industries pursuant to the reimbursement agreement.
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Asset Purchase Agreement between us and Ormat Industries
Pursuant to an asset purchase agreement, effective as of July 1, 2004, Ormat Industries sold and assigned to our subsidiary, Ormat Systems, certain assets and liabilities related to Ormat Industries' geothermal power plants and power units business, which is described elsewhere in this prospectus as our products business. The parties agreed to use their best efforts to assign the contracts and liabilities related to this business to Ormat Systems within 12 months from July 15, 2004, and until then, their unassigned assets are to be held in trust by Ormat Industries for Ormat Systems. As part of this transaction, Ormat Industries agreed, for so long as it holds more than 50% of the voting interest in us, not to compete or engage in any business which is in the same field of the business acquired by Ormat Systems.
As total consideration for the purchase, Ormat Systems agreed to pay Ormat Industries the amount of $11.0 million, which consists of a cash payment and the assumption of an outstanding loan to Bank Continental and certain employment liabilities.
As part of this transaction, Ormat Systems also agreed to pay to Ormat Industries certain commissions ranging between 2.5% and 5.0% on revenues from sale orders entered into prior to July 1, 2004. The aggregate amount of such commissions is subject to receipt of payment from customers and is approximately $2.2 million.
The asset purchase agreement and the following sublease agreement, license agreement, service agreement and reimbursement agreement are agreements that set forth the terms and conditions of the sale and assignment by Ormat Industries' products business to Ormat Systems. We believe that, taken as a whole, the terms of these agreements, collectively, are reasonable and appropriately benefit the company.
Sublease between us and Ormat Industries
Our subsidiary, Ormat Systems, has entered into a sublease with Ormat Industries for real estate leased by Ormat Industries from the Israeli Land Administration on which our production and manufacturing facilities are located. Such sublease is effective as of July 1, 2004 and the term of such sublease is 4 years and 11 months, which term may be extended for up to 25 years (which includes the initial term) provided certain consents are obtained from the Israeli Land Administration, if necessary, and if not, the sublease term will automatically be 25 years.
Pursuant to the sublease, Ormat Systems agreed to pay rent, in advance, on a monthly basis, equal to $52,250.00 (plus VAT) per month. Payment will be adjusted every year to reflect increases in the Israeli Consumer Price Index, but will in no event be lower than the rent paid during the previous year. Pursuant to the sublease, Ormat Systems has also agreed to pay taxes and other compulsory charges, to make other required payments, and to indemnify Ormat Industries for taxes (other than income taxes) imposed in connection with the subleased real estate.
Pursuant to the sublease, Ormat Systems agreed to certain other customary undertakings, including indemnification and insurance undertakings.
The sublease was executed in connection with the asset purchase agreement between Ormat Systems and Ormat Industries.
License Agreement between us and Ormat Industries
On July 15, 2004, our subsidiary, Ormat Systems, entered into a patents and trademarks license agreement, effective as of July 1, 2004, pursuant to which Ormat Industries granted a world-wide royalty-free license to Ormat Systems (which is exclusive with respect to the patents and certain of the trademarks) to internally copy, use, and create derivatives of certain patents and trademarks. The license survives sales and/or transfers of the patents and trademarks and Ormat Systems owns the derivatives created from the licensed patents. The term of the license agreement continues until the patents or trademarks expire or are assigned to Ormat Systems (which are intended to be assigned, subject to tax and other considerations) and the agreement may be terminated if either party becomes insolvent.
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The license agreement was executed in connection with the asset purchase agreement between Ormat Systems and Ormat Industries.
Service Agreement between us and Ormat Industries
On July 15, 2004, our subsidiary, Ormat Systems, entered into a service agreement, effective as of July 1, 2004, pursuant to which Ormat Systems agreed to provide, as an independent contractor, certain corporate, financial, secretarial and administrative services to Ormat Industries. At the request of Ormat Industries, Ormat Systems may also provide certain engineering services.
Ormat Industries is required to pay $10,000 per month for all services (other than engineering services) rendered pursuant to such service agreement plus all out-of-pocket expenses of Ormat Systems. For engineering services, Ormat Industries is required to pay a fee equal to the cost of such services plus 10.0% and all out-of-pocket expenses of Ormat Systems. On each anniversary of such services agreement, such monthly fees are adjusted in accordance with the Israeli Consumer Price Index during the previous 12-month period plus 10.0%.
The service agreement was executed in connection with the asset purchase agreement between Ormat Systems and Ormat Industries.
Registration Rights Agreement between us and Ormat Industries
At or prior to the closing of this offering, we will enter into a registration rights agreement with Ormat Industries. Under this agreement, Ormat Industries may require us on one occasion to register our common stock for sale on Form S-1 under the Securities Act if we are not eligible to use Form S-3 under that Act. After we become eligible to use Form S-3, Ormat Industries may require us on unlimited occasions to register our common stock for sale on this form. In addition, we will be required to file a registration statement on Form S-3 to register for sale shares of our common stock that are or have been acquired by directors, officers and employees of Ormat Industries upon the exercise of options granted to them by Ormat Industries. Ormat Industries will also have an unlimited number of piggyback registration rights. This means that any time we register our common stock for sale, Ormat Industries may require us to include shares of our common stock held by it or its directors, officers and employees in that offering and sale. Ormat Industries will not be allowed to exercise any registration rights during the lock-up period.
We will also agree to pay all expenses that result from the registration of our common stock under the registration rights agreement, other than underwriting commissions for such shares and taxes. We have also agreed to indemnify Ormat Industries, its directors, officers and employees against liabilities that may result from their sale of our common stock, including Securities Act liabilities.
Employment Agreements
We have entered into an executive employment agreement with Mr. Lucien Bronicki, as our Chief Technology Officer, effective as of July 1, 2004. Such employment agreement is for a four-year term expiring on June 30, 2008, unless terminated earlier pursuant to the terms of the agreement. Such employment agreement, when expired, will be automatically extended for additional successive four-year terms subject to conditions set forth in the agreement. The employment may be terminated by either us or Mr. Lucien Bronicki pursuant to the terms of the agreement.
Such employment agreement provides for a monthly base salary of $10,333. Mr. Lucien Bronicki is also entitled to a bonus and other benefits set forth in the agreement and a company automobile. Pursuant to the terms of the agreement, if we or Mr. Lucien Bronicki terminate the agreement, by providing the other party with 180 days' written notice prior to the end of the respective term, Mr. Lucien Bronicki will be entitled to his salary, bonus and other benefits for such 180-day period. In the event of such termination, Mr. Lucien Bronicki is entitled to an assignment of his "executive manager's insurance policy" and monies accumulated under such policy, and payment of the difference, if any, between the sums accumulated under such policy on account of his severance pay, and the amount of severance pay he is entitled to based on his last base salary multiplied by the number of years he has been employed by us or Ormat Industries, as specified in the agreement.
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Mr. Lucien Bronicki is also entitled to change in control payments. If, within three years following the occurrence of a change in control, we terminate Mr. Lucien Bronicki's employment or Mr. Lucien Bronicki terminates his own employment for good reason, other than for disability or other reasons set forth in the agreement, or if, within 180 days following a change in control, he terminates his employment agreement with 90 days' prior written notice, then we are required to pay him a lump sum equal to (1) his full unpaid and accrued base salary through the date of termination; plus (2) his monthly base salary at the time of the change of control including any increases therein multiplied by 24; plus (3) the average of the annual bonus paid to Mr. Lucien Bronicki for the two years immediately preceding the change in control multiplied by two; plus (4) a portion of the annual bonus for the year in which the termination of employment occurs with the amount thereof multiplied by a fraction, the numerator of which is the number of days in the relevant year through the date of termination and the denominator of which is 365, and any unpaid annual bonus for any completed year. In addition, Mr. Lucien Bronicki is also entitled to all employee health, accident, life insurance, disability and other employee welfare benefits for a two-year period following his last day worked, or until he obtains new employment, whichever is earlier.
We have also entered into an executive employment agreement with Yehudit Bronicki, as our President. For a description of the employment agreement of Yehudit Bronicki, see "Management-Employment Agreement."
We have also entered into an executive agreement with Mr. Yoram Bronicki, as our Chief Operating Officer, effective as of July 1, 2004. Such employment agreement is for a two-year term expiring on June 30, 2006, unless terminated earlier pursuant to the terms of the agreement. Such employment agreement, when terminated, will be automatically extended for additional successive two-year terms subject to conditions set forth in the agreement.
Such employment agreement with Mr. Yoram Bronicki provides for a monthly base salary of $14,000. Mr. Yoram Bronicki is also entitled to a bonus and other benefits set forth in the agreement. Pursuant to the terms of the agreement, if we terminate Mr. Yoram Bronicki's employment without cause, by providing him with a 120 days' written notice prior to the end of the respective term, Mr. Yoram Bronicki will be entitled to his salary, bonus and other benefits for the unexpired portion of the remaining term of his employment agreement, except that if such prior notice is given for a period less than 120 days prior to the termination of his employment agreement, such salary, bonus and other benefits will be paid for a period of 120 days after such notice is given. If Mr. Yoram Bronicki is terminated for cause, he will not be entitled to any salary, bonus or other benefits except for accrued but unpaid salary through the last day worked prior to such termination. If Mr. Yoram Bronicki voluntarily terminates his employment upon providing 120-day period prior written notice, unless we are in breach of the provisions of his agreement, Mr. Yoram Bronicki will be entitled to receive salary, bonus and other compensation or benefits through the last day worked prior to such termination.
Mr. Yoram Bronicki is also entitled to change in control payments. If, within three years following the occurrence of a change in control, as defined in the agreement, we terminate Mr. Yoram Bronicki's employment or Mr. Yoram Bronicki terminates his own employment for good reason, other than for disability or other reasons set forth in the agreement, or if, within 180 days following a change in control, he terminates his employment agreement with 90 days' prior written notice then we are required to pay him a lump sum equal to (1) his full unpaid and accrued base salary through the date of termination; plus (2) his monthly base salary at the time of the change of control including any increases therein multiplied by 24; plus (3) the average of the annual bonus paid to Mr. Yoram Bronicki for the two years immediately preceding the change in control multiplied by two; plus (4) the amount of the annual contribution that would be made by us to his 401(k) plan assuming his maximum contribution under the plan, multiplied by two; plus (4) a portion of the annual bonus for the year in which the termination of employment occurs with the amount thereof multiplied by a fraction, the numerator of which is the number of days in the relevant year through the date of termination and the denominator of which is 365, and any unpaid annual bonus for any completed year. In addition, Mr. Yoram Bronicki is also entitled to all employee health, accident, life insurance, disability and other employee welfare benefits for a two-year period following his last day worked, or until he obtains new employment, whichever is earlier.
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DESCRIPTION OF CERTAIN MATERIAL AGREEMENTS
The following is a description of the material terms of our material agreements relating to our projects:
Financing Agreements
Beal Bank Credit Agreement and Related Documents
On December 18, 2003, our subsidiary, OrCal Geothermal, Inc., entered into a credit agreement with Beal Bank, S.S.B. pursuant to which Beal Bank made a loan to OrCal Geothermal, Inc. in the amount of $154,500,000. The proceeds of this loan were used to fund a portion of the purchase price for the Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth project. Such loan amortizes quarterly in amounts set forth in the credit agreement. The loan accrues at an interest rate determined on each anniversary date of the loan as the greater of 7.125%, which increases 0.50% starting December 2011, or the three-month LIBOR plus 5.125%, with the margin stepping up after a certain number of years. We have entered into cap transactions with Union Bank of California and Lehman Brothers Special Financing Inc. pursuant to which our effective interest rate is capped at 6% for the period between March 30, 2007 and March 31, 2011. The final maturity of the loan is December 18, 2019. As of June 30, 2004, the outstanding balance on the loan was $153.7 million.
Effective January 30, 2004, Beal Bank released its security interest over our partnership interest in the Mammoth project, which was subsequently included in the collateral package supporting the issuance by Ormat Funding of its 8¼% senior secured notes described below.
The loan is secured by liens over (1) all real and personal property comprising the Heber 1 project and the Heber 2 project, (2) the bank accounts into which revenues from these projects are required to be paid, and (3) all capital stock and partnership interests in OrCal Geothermal, Inc. and its subsidiaries, including the entities that own the Heber 1 project and the Heber 2 project.
The credit agreement and related documents contain various affirmative and negative covenants regarding the manner in which OrCal Geothermal, Inc. and its subsidiaries conduct their business, including their ownership, operation, and maintenance of the Heber 1 project and the Heber 2 project and the performance of their obligations and exercise of their rights under the project documents related to these projects. Such covenants include, but are not limited to, restrictions on the ability of OrCal Geothermal, Inc. and its subsidiaries (1) to take actions which would constitute or result in any material alteration to the nature of its business or the nature and scope of the Heber 1, Heber 2 and Mammoth projects, (2) to consolidate or merge, (3) to modify or amend its organizational documents, (4) to enter into certain leases, (5) to make certain investments, or (6) to incur any additional indebtedness. OrCal Geothermal, Inc. and its subsidiaries also may not expand their geothermal fields, develop new geothermal resources, or drill new geothermal wells without the lenders' consent. We are currently in compliance with all of the covenants set forth in the credit agreement and related documents. In addition, OrCal Geothermal, Inc. is prohibited from declaring dividends or making certain payments to holders of any share capital unless certain conditions are satisfied, including debt service coverage ratios and cash flow forecasts that do not demonstrate an inability to amortize the loan. The failure to perform or observe any such covenants, subject to various cure periods, will result in the occurrence of an event of default.
The credit agreement contains customary events of default, some of which are subject to cure periods and, in some instances, materiality thresholds. Such customary events of default include, but are not limited to (1) the failure to pay any principal or interest due pursuant to the credit agreement, (2) the bankruptcy or insolvency of OrCal Geothermal, Inc., (3) defaults under any of its other debt obligations over certain thresholds, (4) material final judgments against it, (5) the failure to perform or observe material covenants, (6) adverse regulatory events, (7) loss of collateral or (8) a change of control in its ownership. Upon the occurrence of any such event of default, the lenders under the credit agreement will be able to, among other things, accelerate the loan and enforce their liens on the collateral.
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All project revenues from the Heber 1 project and the Heber 2 project are required to be deposited into a bank account over which Beal Bank has a lien. Amounts from time to time on deposit in this account are disbursed into other segregated accounts (over which Beal Bank has liens) available to pay or fund operating expenses of the Heber 1 project and the Heber 2 project, fees and expenses of the lenders and their agents, principal and interest on the loan, debt service reserve obligations, capital expenditure reserve obligations, and dividends. During the 2004 and 2005 calendar years, OrCal Geothermal, Inc. is required to use project revenues to establish and maintain a capital expenditures reserve in an amount equal to 50% of the capital expenditures reasonably anticipated to become due and payable during such years. We estimate the required amount of these reserves during these years to be between $4.2 million and $10.5 million. In subsequent calendar years, OrCal Geothermal, Inc. must use project revenues to maintain a capital expenditures reserve in an amount at any time that is equal to 100% of the capital expenditures reasonably anticipated to become due and payable during the next three months.
Senior Secured Notes and Related Documents
On February 13, 2004, our subsidiary Ormat Funding issued $190,000,000 of 8¼% senior secured notes due 2020 in an offering under Rule 144A and Regulation S of the U.S. Securities Act of 1933, as amended. The proceeds of the senior secured notes were used to finance the acquisition of the Steamboat 2/3 project, refinance the acquisition of the Brady project, the Steamboat 1/1A project and the Mammoth project, provide funds for the capital expenditures associated with the upgrade of the Steamboat 1/1A project and the Galena repowering, fund a reserve account to repay a loan from United Capital Bank (the proceeds of which were previously used to refinance the acquisition of the Ormesa project), repay a portion of a certain subordinated loan from Ormat Nevada, prepay a portion of the Meyberg lease, and pay transaction expenses associated with the issuance of such notes.
The notes have a final maturity date of December 30, 2020, unless redeemed earlier. Interest on the notes is payable in arrears on June 30 and December 30 of each year, beginning June 30, 2004. The principal of the notes amortizes over time in amounts set forth in the indenture.
The notes are secured by liens over (1) the capital stock of Ormat Funding and all of the capital stock held by Ormat Funding in each of the direct and indirect subsidiaries that own the Brady project, the Steamboat 1/1A project, the Steamboat 2/3 project, and the Mammoth project, (2) with certain exceptions for unassigned leases, all real property owned or leased by Ormat Funding and all of its direct and indirect subsidiaries that own the Brady, Steamboat 1/1A and Steamboat 2/3 projects, (3) all contractual rights under the agreements relating to the Brady, Steamboat 1/1A and Steamboat 2/3 projects (such as the power purchase agreements and all other relevant contracts) and all governmental approvals and permits relating to such projects; (4) all of Ormat Funding's revenues and all of the revenues derived from the Brady, Steamboat 1/1A and Steamboat 2/3 projects, including amounts received as distributions from the Ormesa and Mammoth projects, as well as all of Ormat Funding bank accounts and those of Ormat Funding direct and indirect subsidiaries that own the Brady, Steamboat 1/1A, Steamboat 2/3 and Mammoth projects; (5) any intercompany notes payable to Ormat Funding or any of the direct or indirect subsidiaries that own the Brady, Steamboat and Mammoth projects; (6) insurance policies covering the Brady, Steamboat 1/1A and Steamboat 2/3 projects and, to the extent of our interest therein, any insurance maintained with respect to the Mammoth project; and (7) guarantees from each of the direct and indirect subsidiaries that own the Brady, Steamboat 1/1A and Steamboat 2/3 projects.
Following the repayment of the United Capital Bank loan, which we expect will happen on or prior to January 31, 2005, or such other date as of which Ormesa LLC is no longer prohibited by the terms of the United Capital Bank loan to grant liens on its assets, Ormat Funding and Ormesa LLC are obligated to grant similar liens over similar items of collateral in favor of the indenture trustee and collateral agent for the senior secured notes.
Ormat Funding may redeem all or a portion of the senior secured notes at our option, at any time, at a redemption price equal to the principal amount of the senior secured notes to be redeemed, plus a "make-whole" premium, accrued interest and liquidated damages, if any, to the redemption
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date. The make-whole premium is calculated using a discount rate equal to the interest on U.S. Treasury securities with a comparable maturity, plus 50 basis points. In no event can the sum of the redemption price for the notes being redeemed and the make-whole premium be less than 100% of the principal amount of senior secured notes to be redeemed.
Under certain circumstances, Ormat Funding must redeem a portion of the senior secured notes. If Ormat Funding has not satisfied the initial conditions with respect to the Galena re-powering, such as the execution of the Galena power purchase agreement, the execution of the interconnection and operating agreement for such project and the approval of the Public Utilities Commission of the State of Nevada and FERC, on or prior to September 30, 2005, or Ormat Funding fails to achieve certain levels of generating capacity from the Galena re-powering or from the Mammoth enhancement by March 31, 2006 or January 1, 2006, respectively, Ormat Funding will have to redeem the senior secured notes at a price equal to 101% together with accrued interest and liquidated damages, if any, to the redemption date, in an amount calculated in accordance with the indenture for the senior secured notes which cannot exceed, in the aggregate, $20.0 million. Upon receiving more than $5.0 million of insurance proceeds or the receipt of other amounts resulting from the occurrence of a compulsory transfer or the taking of a material part of the collateral or a project by any governmental authority or as a result of damage to a portion of the project and similar events described in the indenture for the senior secured notes, Ormat Funding will have to use any funds received in connection with such events to redeem the senior secured notes at a price equal to the principal amount of the notes scheduled to be redeemed plus accrued interest to the redemption date.
The indenture for the senior secured notes and related documents contains various affirmative and negative covenants regarding the manner in which Ormat Funding and its direct or indirect subsidiaries that own the Brady, Steamboat, Mammoth and, after the repayment of the United Capital Bank loan, Ormesa projects conduct their business, including their ownership, operation and maintenance of these projects and the performance of their obligations and exercise of their rights under the relevant project documents (such as the power purchase agreement and other relevant contracts) relating to such projects. In addition, Ormat Funding cannot make any dividend distribution to its immediate parent, Ormat Nevada, unless certain conditions are satisfied, including compliance with debt service coverage ratios and projected debt service coverage ratios that are at or above specified levels, and the absence of defaults and events of default under the indenture for the senior secured notes and related documents. We are currently in compliance with all of the covenants set forth in the senior secured notes and related documents.
The indenture for the senior secured notes contains customary events of default, some of which are subject to cure periods and, in some instances, materiality thresholds. Such customary events of default include, but are not limited to (1) the failure to pay any principal or interest due under the senior secured notes, (2) the bankruptcy or insolvency of Ormat Funding Corp. or any of its subsidiaries, (3) defaults with respect to any of its other debt obligations, (4) material final judgments against it, (5) the failure to perform or observe material covenants, or (6) a change of control with respect to its ownership, in which a party other than Ormat Nevada and its affiliates becomes, in certain circumstances, the beneficial owner of 50% or more of the economic and voting interests in Ormat Funding. Upon the occurrence of any such event of default, including any failure to perform or observe material covenants, the lenders under the credit agreement will be able to, among other things, accelerate the loan and enforce their liens on the collateral.
Under the depositary agreement for the senior secured notes, all revenues from the projects (other than the Ormesa project, which are not required to be deposited until the United Capital Bank loan is paid off) are required to be deposited into certain bank accounts established with a collateral agent and pledged as security for payment obligations under the senior secured notes. The principal accounts so established constitute a revenue account, operating account, debt service payment account and debt service reserve account. All revenues are required to be deposited initially in the revenue account, and are then transferred in a prescribed order to pay operating expenses, to pay principal and interest on the senior secured notes, to fund the debt service reserve account, and to fund certain other accounts.
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The indenture for the senior secured notes authorizes Ormat Funding to issue an unlimited aggregate principal amount of senior secured notes, subject to compliance with certain financial and other conditions set forth in the indenture. Ormat Funding may decide to issue additional senior secured notes under the indenture in the future in connection with possible financing or refinancing of additional projects.
In connection with the issuance of the senior secured notes, Ormat Funding entered into a registration rights agreement, pursuant to which it (1) undertook to file a registration statement with the Securities and Exchange Commission and offer to exchange the senior secured notes for publicly registered notes with substantially identical terms and conditions to the senior secured notes and consummate the exchange offer within 330 days from February 13, 2004; and (2) undertook to file a shelf registration statement for the resale of senior secured notes if the exchange offer described in the foregoing clause could not be consummated within the time period prescribed in such agreement and in certain other circumstances. If Ormat Funding does not comply with these exchange or registration obligations, it will be required under certain circumstances to pay to holders of the senior secured notes liquidated damages until such obligations are satisfied.
Credit Facility Agreement (The Momotombo Project)
On September 15, 2000, our subsidiary Ormat Momotombo Power Company Ltd. entered into a credit facility agreement (as amended as of March 25, 2003) with Bank Hapoalim B.M. The loan, in an aggregate amount equal to $26,435,000, was made pursuant to two tranches, which are used to finance up to 70% of the costs of Phases I and II of the project. Tranche one of the loan bears interest at LIBOR plus 2.375%. Tranche two of the loan bears interest at LIBOR plus 3%. As of June 30, 2004, the outstanding balance on the loan was approximately $18.5 million. The first tranche of the loan is due by December 2009 and the final maturity of the second tranche of the loan is December 2010.
The loan is secured by liens over (1) all real and personal property comprising the Momotombo project, (2) all project revenues and the bank account into which they are required to be deposited, and (3) all of the equity interests in Ormat Momotombo Power Company Ltd.
Ormat Systems has also guaranteed the repayment of 50% of such outstanding obligations to Bank Hapoalim B.M. upon the occurrence of certain events.
Pursuant to the terms of the credit facility agreement, Ormat Momotombo Power Company Ltd. is required to repay all principal amounts disbursed under the credit facility agreement in approximately equal, successive quarterly installments.
Subject to the successful receipt of any required governmental approvals, Ormat Momotombo Power Company Ltd. may, at any time on at least 30 but not more than 60 days' prior written notice to Bank Hapoalim, prepay all or any part of the outstanding principal amount, without premium or penalty.
The credit facility agreement contains various affirmative and negative covenants regarding the manner in which Ormat Momotombo Power Company Ltd. conducts its business, including its ownership, operation and maintenance of the project and the performance of its obligations and exercise of its rights under the related project documents. Such covenants include, but are not limited to, restrictions on the ability of Ormat Momotombo Power Company Ltd. (1) to take actions which would constitute or result in any material alteration to the nature of its business or the nature and scope of the Momotombo project without Bank Hapoalim's prior written consent, (2) to consolidate, merge or consolidate its assets, (3) to modify or amend its organizational documents or its filings with the Nicaraguan Foreign Investment Committee, (4) to declare dividends or make certain payments to holders of any share capital, (5) to enter into certain leases (subject to certain exceptions contained in the credit facility agreement) or (6) to incur any additional indebtedness. Ormat Momotombo Power Company Ltd. must also maintain certain leverage and debt service coverage ratios under the terms of the credit facility agreement. We are currently in compliance with all of the covenants set forth in the credit facility agreement.
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The credit facility agreement contains customary events of default, some of which are subject to cure periods and, in some instances, materiality thresholds. Such customary events of default include, but are not limited to (1) the failure to pay any principal or interest due under the credit facility agreement, (2) the bankruptcy or insolvency of Ormat Momotombo Power Company Ltd., (3) defaults with respect to any of its debt obligations or the default of ENEL under its agreements with Ormat Momotombo Power Company Ltd., (4) the termination of the Momotombo power purchase agreement, (5) the failure to perform or observe material covenants, (6) adverse regulatory events, (7) loss of collateral, or (8) the non-completion of the project within the budget or on time as established under the existing business plan. Upon the occurrence of any such event of default, including any failure to perform or observe material covenants, Bank Hapoalim B. M. will be able to accelerate all amounts due under the credit facility agreement and enforce its liens on the collateral.
Eximbank Credit Agreement (The Leyte Project)
On May 13, 1996, our subsidiary Ormat-Leyte Co. Ltd. entered into a credit agreement with the Export-Import Bank of the United States, an agency of the United States, pursuant to which the Export-Import Bank made a loan to Ormat-Leyte Co. Ltd. in the amount of $44,448,038. The credit was established as part of the overall debt financing for the construction of the Leyte project and the proceeds of the loan were used to repay in part certain short-term previous loans made by other lenders to the project owner. As of June 30, 2004, the outstanding balance on the loan was approximately $16.5 million. The final maturity of the loan is July 2007.
The loan is secured by liens over (1) all real and personal property comprising the Leyte project, (2) the bank accounts into which revenues from the project are required to be deposited and (3) all of the equity interests in Ormat-Leyte Co. Ltd.
Pursuant to the terms of the credit agreement, Ormat-Leyte Co. Ltd. is required to repay all principal amounts disbursed under the credit agreement in approximately equal, successive quarterly installments. Ormat-Leyte Co. Ltd. is required to pay interest at a rate equal to 6.54% per annum.
Subject to providing 10 business days' prior written notice, Ormat-Leyte Co. Ltd. may from time to time prepay all or any part of the outstanding principal amount of the loan, together with accrued interest and all other amounts due to Eximbank under the credit agreement and the related financing documents, and a prepayment premium, as provided for in the credit agreement.
The credit agreement contains various customary affirmative and negative covenants regarding the manner in which Ormat-Leyte Co. Ltd. conducts its business, including its ownership, operation and maintenance of the Leyte project and the performance of its obligations and exercise of its rights under the related project documents. We are currently in compliance with all of the covenants set forth in the credit agreement.
The credit agreement contains customary events of default, some of which are subject to cure periods and, in some instances, materiality thresholds. Such customary events of default include, but are not limited to (1) the failure to pay any principal or interest due under the credit agreement, (2) the bankruptcy or insolvency of Ormat-Leyte Co. Ltd., (3) defaults with respect to any of its other debt obligations, (4) the failure to perform or observe material covenants, (5) adverse regulatory events, (6) loss of collateral, or (7) a change of control with respect to its ownership. Upon the occurrence of any such event of default, including any failure to perform or observe material covenants, the Export-Import Bank under the credit agreement will be able to, among other things, accelerate the loan and enforce their liens on the collateral.
Project-related Agreements
Power Purchase Agreements For Our Nevada Projects
Our existing projects in Nevada sell, and the Galena project will sell, their electrical output to Sierra Pacific Power Company under individual power purchase agreements for each project. The Desert Peak 2 and Desert Peak 3 projects will sell their electrical output to Nevada Power Company
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under separate power purchase agreements. These agreements have different durations, but generally have similar terms and conditions, except as specifically noted below. We refer to our Nevada project, including our projects under development, construction or enhancement as, the Galena, Steamboat 1/1A, Steamboat 2/3, Steamboat Hills, Brady, Desert Peak 2 and Desert Peak 3 projects.
The power purchase agreements with Sierra Pacific Power Company (other than the Steamboat 1 and Galena power purchase agreements) generally provide that they may be terminated by Sierra Pacific Power Company prior to their respective expiry dates if our project subsidiaries fail to deliver energy for 180 consecutive days, so long as our project subsidiaries are not attempting to resume operations of the relevant project. In the case of the Galena, Desert Peak 2 and Desert Peak 3 power purchase agreements, early termination may occur if the required approval from the NPUC or FERC is not obtained or, in the case of the Galena power purchase agreement, after a force majeure event has occurred and continued for longer than six months (or twelve months if the force majeure event caused loss of a major component of the plant). In the case of the Steamboat 1 power purchase agreement, early termination may occur if there is a force majeure event.
Pursuant to the Steamboat 1 and Steamboat 1A power purchase agreements, our project subsidiaries are entitled to receive, on a monthly basis, energy payments equal to the short term avoided cost rates for energy in effect for the relevant billing period. Under the Brady power purchase agreement and the Steamboat 2 and Steamboat 3 power purchase agreements, our project subsidiaries are entitled to receive, on a monthly basis, energy and capacity payments. The energy payment escalates each year under the Steamboat 2, Steamboat 3 and the Brady power purchase agreements. The capacity payments under these power purchase agreements are subject to reduction if certain capacity availability percentages are not met. There is also a scheduled reduction in the capacity price that will occur in the future with respect to the Steamboat 2, Steamboat 3 and Brady power purchase agreements. In addition, under these power purchase agreements, Sierra Pacific Power Company may dispatch the Steamboat 2/3 and Brady projects up to a certain number of hours per year at a reduced energy rate.
Pursuant to the Galena, Desert Peak 2 and Desert Peak 3 power purchase agreements, our project subsidiaries are obligated to deliver energy on a continuous basis, along with dedicating all renewable energy credits and environmental credits, to Sierra Pacific Power Company. Our project subsidiaries receive an energy payment for all energy they deliver under such agreements, which payment escalates over time. In the event our project subsidiaries do not supply 95% of the amount of energy required during a certain period, they must compensate Sierra Pacific Power Company or Nevada Power Company for its replacement costs to purchase such shortfall amount from an alternate source. In addition, if our project subsidiaries do not transfer all of our renewable energy credits associated with the project to Sierra Pacific Company or Nevada Power Company, our project subsidiaries may have to compensate for Sierra Pacific Power Company's or Nevada Power Company's replacement cost to purchase such credits from alternate sources.
Our project subsidiaries are generally relieved from their obligations under the power purchase agreements to the extent they cannot wholly or partly perform such obligations as a result of the occurrence of a force majeure event. Generally, under these power purchase agreements, such relief is contingent upon our providing Sierra Pacific Power Company or Nevada Power Company with prompt notice of the suspension of our performance and our project subsidiaries attempting to remedy the inability to perform.
Pursuant to most of the power purchase agreements, including those of the Brady, Steamboat 1A, Steamboat 2, Steamboat 3, Steamboat Hills, Desert Peak 2 and Desert Peak 3 projects, the non-availability of the geothermal resource by itself is not a force majeure event. The Brady, Steamboat 2 and Steamboat 3 power purchase agreements provide that if the project does not maintain peak period capacity values of at least 85% of those listed in the contract, our relevant project subsidiary will be obligated to pay liquidated damages to Sierra Pacific Power Company in amounts ranging from $1.0 million to $1.5 million.
Pursuant to the Steamboat 1, Steamboat 1A, Steamboat 2, Steamboat 3, Steamboat Hills and Brady power purchase agreements, our project subsidiaries must indemnify Sierra Pacific Power
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Company and Nevada Power Company from and against any and all loss and liability for personal injury, bodily injury or property damage, resulting from or arising out of (1) the engineering design, construction, maintenance, or operation of or (2) the making of replacements, additions or betterments to, our project subsidiaries' facilities. Pursuant to the Galena, Desert Peak 2, and Desert Peak 3 power purchase agreements, our project subsidiaries will indemnify Sierra Pacific Power Company for all losses arising out of our project subsidiary's breach of its obligations under the power purchase agreement, except that no party will be indemnified for any loss resulting from its gross negligence, fraud or willful misconduct.
Pursuant to the Steamboat Hills and Steamboat 1A power purchase agreements, our project subsidiaries must provide notice of the project's availability for sale to Sierra Pacific Power Company. Under the Steamboat 2, Steamboat 3, Brady, Galena, Desert Peak 2 and Desert Peak 3 power purchase agreements, our project subsidiaries must provide Sierra Pacific Power Company or Nevada Power Company, as the case may be, with a right of first refusal for the acquisition of such projects.
Our project subsidiaries are generally required to coordinate scheduled maintenance on the plants with Sierra Pacific by providing a list of proposed maintenance operations certain months in advance. In the case of the Steamboat 1 power purchase agreement, our project subsidiary is obligated only to give notice to Sierra Pacific Power Company of scheduled maintenance outages. In the case of the Galena, Desert Peak 2 and Desert Peak 3 power purchase agreements, our project subsidiaries have an obligation to obtain Sierra Pacific Power Company's or Nevada Power Company's, as the case may be, consent for any non-forced outage and are limited to fifteen days per year for the Galena project and thirty days per year for the Desert Peak 2 and Desert Peak 3 projects.
Our project subsidiaries are required to obtain and maintain insurance coverage for our plants. Other than in the case of the Steamboat 1, Desert Peak 2, Desert Peak 3 and the Galena power purchase agreements, if our project subsidiaries fail to carry insurance, our project subsidiaries may not deliver capacity and energy to Sierra Pacific Power Company and Sierra Pacific Power Company has no obligation to accept or pay for any capacity or energy until appropriate insurance is obtained or reinstated. If any of our Desert Peak 2 or Desert Peak 3 project subsidiaries fails to maintain the requisite coverage, it must indemnify Nevada Power Company for liabilities that would have been protected against had our project subsidiary maintained such coverage.
Pursuant to the Desert Peak 2 and Desert Peak 3 power purchase agreements, our project subsidiaries are required to maintain minimum credit ratings of BBB by S&P or Baa2 by Moody's credit rating systems or to provide a letter of credit or cash in an escrow account, or provide a guarantee from an entity rated at least BBB by S&P or Baa2 by Moody's, in the amount of $1 million in the case of the Desert Peak 2 project and $0.5 million ($0.55 million if the output of the facility is increased) in the case of the Desert Peak 3 project as collateral in favor of Nevada Power Company. Pursuant to the Galena power purchase agreement, our project subsidiary is required to provide certain collateral as security in favor of Sierra Pacific Power Company.
Our project subsidiaries generally cannot assign the power purchase agreements without the prior written consent of Sierra Pacific Power Company or Nevada Power Company, as the case may be, although the power purchase agreements of all our project subsidiaries provide for collateral assignment for financing purposes without consent from Sierra Pacific Power Company or Nevada Power Company.
The Steamboat 1 power purchase agreement term continues until December 5, 2006 and is then automatically renewed each year unless terminated by either party; the Steamboat 1A power purchase agreement expires on December 14, 2018; the Steamboat 2 and Steamboat 3 power purchase agreements expire on December 19, 2022; the Steamboat Hills power purchase agreement expires in February, 2018; the Brady power purchase agreement expires in July 2022; and the Galena, Desert Peak 2 and Desert Peak 3 power purchase agreements expire twenty years from the first January 1 after the commercial operation date, which we currently expect to be the end of 2005, in the case of the Galena project, and early 2006 in the case of the Desert Peak 2 and Desert Peak 3 projects.
We have an aggregate of six power purchase agreements with respect to our Nevada projects. We derived $11.4 million of pro forma revenues in 2003 from three of such power purchase agreements
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(excluding three other power purchase agreements which were acquired in 2004). We rely on all of such power purchase agreements for the relevant portion of our revenues.
Interconnection Arrangements For Our Nevada Projects
The Steamboat 1A plant is interconnected to Sierra Pacific Power Company's grid pursuant to the terms of a special facilities agreement. There are no material outstanding obligations under this agreement remaining to be performed by our project subsidiary. The Steamboat 1 and Steamboat Hills projects are interconnected to Sierra Pacific Power Company's grid pursuant to the terms of each project's power purchase agreement.
Our project subsidiaries also have interconnected the Steamboat 2 and Steamboat 3 plants to Sierra Pacific Power Company's grid pursuant to the terms of a special facilities agreement. Our project subsidiaries reimburse Sierra Pacific Power Company, the interconnecting utility, for costs incurred in the operation, maintenance and refurbishment of the interconnection facilities and equipment. As a part of the interconnection agreement, it was stipulated that Sierra Pacific Power Company would perform a reduced scope of work, as certain recommendations made by Sierra Pacific Power Company were not agreed to by us. As a result of the reduced scope of work performed by Sierra Pacific Power Company, our project subsidiaries agreed, under the terms of the agreement to assume certain increased risks of outages, indemnify Sierra Pacific Power Company from liability resulting from the reduced scope of work, and add certain equipment to our facilities before expanding the plants.
All of the special facilities agreements for the Steamboat 1A, Steamboat 2, and Steamboat 3 projects require our project subsidiaries to indemnify Sierra Pacific Power Company from liability arising out of the engineering, design, construction, maintenance or operation of, or the making of improvements or additions to, our facilities. However, our project subsidiaries do not have an obligation to indemnify Sierra Pacific Power Company for liability or loss to the extent such liability or loss results from Sierra Pacific Power Company's negligence or willful misconduct.
Our project subsidiary has interconnected the Brady project to Sierra Pacific Power Company's grid pursuant to the terms of the Brady power purchase agreement. Our project subsidiary has an obligation under this agreement to maintain all project property required for the receipt of energy from the interconnecting utility.
Power Purchase Agreements For Our California Projects
Our California project subsidiaries sell electricity from our Mammoth, Ormesa, Heber 1 and Heber 2 projects under seven separate power purchase agreements with Southern California Edison Company. In the case of our Mammoth project subsidiary, there are three such agreements which we refer to as the G-1, G-2 and G-3 power purchase agreements. In the case of our Ormesa project subsidiary, there are two such power purchase agreements, which we refer to as the Ormesa I and Ormesa II power purchase agreements. Each of our Heber 1 and Heber 2 project subsidiaries also has one such power purchase agreement. These agreements have different durations, but generally have the same terms and conditions, except as specifically noted below.
The G-1, G-2, G-3, Ormesa I, Ormesa II, Heber 1 and Heber 2 power purchase agreements do not terminate at their stated expiry dates unless either party gives prior written notice. The notice period is five years in the case of the G-1 power purchase agreement and 90 days in the case of the other power purchase agreements. The Heber 1 power purchase agreement may be terminated by our project subsidiary prior to its stated expiry upon making payment to Southern California Edison Company in an amount equal to the difference between (1) the total capacity payments paid by Southern California Edison Company up to and including the date of receipt of the termination notice and (2) the total capacity payments which Southern California Edison Company would have paid our project subsidiary for the period of our project subsidiary's actual performance at the adjusted capacity price with interest compounded monthly up to the date of termination of the power purchase agreement.
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Under all of the power purchase agreements, our project subsidiaries are entitled to receive, against performance of their obligations, capacity and energy payments on a monthly basis. The energy payments for all of our California project subsidiaries are currently set pursuant to the terms of settlement agreements through April 2007, but beginning in May 2007 will be based on Southern California Edison Company's short run avoided cost. Under the G-3, Ormesa I, Ormesa II and Heber 1 and 2 power purchase agreements, our project subsidiaries potentially are entitled to receive capacity bonuses if the performance of the respective facilities exceed certain requisite performance requirements. Under the G-2, G-3, Ormesa I, Ormesa II and Heber 2 power purchase agreements, Southern California Edison Company may request that our project subsidiaries discontinue or reduce the delivery of energy during off-peak periods if certain economic circumstances exist.
Our project subsidiaries are entitled to perform scheduled maintenance on the respective facilities subject to certain limitations. Under the G-1 power purchase agreement, our project subsidiary has agreed to give reasonable prior written notice of its intent to perform scheduled maintenance and must use its best efforts to schedule such outages during off-peak hours. Under the G-2, G-3, Ormesa I, Ormesa II, Heber 1 and Heber 2 power purchase agreements, our project subsidiaries have agreed to give prior written notice of all scheduled outages; not to perform major overhauls during peak months; to use reasonable efforts to schedule routine maintenance during off-peak months; to cap the number of outage hours that may be taken during peak hours of peak months; and to cap the number of outage hours that may be taken during any twelve-month period.
Under the G-3, Ormesa I, Ormesa II and Heber 1 and 2 power purchase agreements, each of our project subsidiaries has an obligation to meet certain minimum performance requirements set forth in such agreements and to demonstrate its capacity on an annual basis. To meet such minimum performance requirements, each of our project is required to provide the following stipulated contract capacity: 10 MW for the G-3 plant, 24 MW for the Ormesa I plant, 15 MW for the Ormesa II plant, 45 MW for the Heber 1 project, and 40 MW for the Heber 2 project in each peak month for all on-peak hours (as such terms are defined in each relevant power purchase agreement) less an allowance of 20% for forced outages. If one of our project subsidiaries fails to meet such minimum performance requirements, it may be placed on probation, the capacity of the relevant plant may be permanently reduced and, in such an instance, a refund would be owed from such project subsidiary to Southern California Edison Company. If one of our project subsidiaries fails to demonstrate its capacity, the capacity of the relevant power plant may be permanently reduced and, in such case, a refund would be required to be made from such project subsidiary to Southern California Edison Company. Our project subsidiary may also reduce the capacity of the plants upon notice to Southern California Edison Company and after making a certain payment to it.
All of our project subsidiaries have an obligation pursuant to their respective power purchase agreements to indemnify Southern California Edison Company for most losses, damages, claims, costs, charges, or expenses to the extent caused by the negligent acts of our project subsidiaries.
As part of their obligations, our project subsidiaries must maintain certain insurance coverage for the relevant project. If any of our project subsidiaries fails to maintain such coverage, it must indemnify Southern California Edison Company for liabilities to the extent Southern California Edison Company would have been protected had our project subsidiary maintained such insurance coverage.
Our project subsidiaries are released from their obligations under the relevant power purchase agreement to the extent any of them cannot wholly or partly perform such obligations as a result of uncontrollable force, so long as our project subsidiary provides prompt written notice to Southern California Edison Company and attempts to remedy its inability to perform. In addition, under the G-3, Ormesa I, Ormesa II, and Heber 1 and 2 power purchase agreements, Southern California Edison Company is obligated to make capacity payments for up to 90 days during the occurrence of an uncontrollable force. Also, pursuant to the Heber 1, Ormesa I and Ormesa II power purchase agreements, an uncontrollable force that prevents operation for certain prolonged periods of time is deemed to be an abandonment of the project. An abandonment, whether due to an uncontrollable force or other specified events provides Southern California Edison Company with certain rights to purchase the relevant power plant.
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All of our project subsidiaries are prohibited from assigning their respective power purchase agreements without the prior written consent of Southern California Edison Company, except that all of our project subsidiaries other than Heber 1 may assign their respective power purchase agreement in connection with the merger or a sale of substantially all of the project assets. The Ormesa II power purchase agreement may be assigned by our project subsidiary to a lender in connection with a related financing. Our Heber 1 and 2 project subsidiaries may assign their power purchase agreements without the prior written consent of Southern California Edison Company to an affiliate.
Under the Ormesa I and Ormesa II power purchase agreements, under certain circumstances, Southern California Edison Company or its designee has a right of first refusal to acquire the facility. Under the G-1 power purchase agreements, under certain circumstances, Southern California Edison Company or its subsidiary or affiliate has a right of first refusal to acquire the facility. Under the Heber 1 power purchase agreement, under certain circumstances, Southern California Edison Company or its subsidiary has a right of first refusal to acquire the facility.
The G-1 power purchase agreement expires on February 26, 2014; the G-2 power purchase agreement expires on December 7, 2020 and the G-3 power purchase agreement expires on December 22, 2020. The Ormesa I and Ormesa II power purchase agreements expire on October 2016 and March 1, 2017, respectively. Our Heber 1 and 2 power purchase agreements expire on December 2015 and July 2023, respectively.
We have an aggregate of seven power purchase agreements with respect to our California projects, from which we derived $98.6 million of pro forma revenues in 2003. We rely on all of such power purchase agreements for the relevant portion of our revenues.
Interconnection Arrangements for our California Projects
Each of our project subsidiaries have entered into an interconnection facilities agreement for the Mammoth G-1, G-2 and G-3 plants with Southern California Edison Company. Each of our project subsidiaries has an obligation to operate and maintain the interconnection facilities at its own expense. Each of our project subsidiaries must indemnify the interconnecting utility from liability arising out of any fault or damage to our interconnection facilities, the interconnecting utility's transmission system or the public as a result of its operation of the G-1, G-2 and G-3 plants.
Each of our project subsidiaries interconnects the Ormesa project (for the Ormesa I and Ormesa II power purchase agreements) and Heber 1 and 2 projects to Southern California Edison Company's grid by way of transmission lines owned by the Imperial Irrigation District, which we refer to as IID. These transmission lines interconnect the Ormesa, Heber 1 and Heber 2 projects with Southern California Edison Company's transmission system and are governed by the terms of certain plant connection agreements. IID has the right to curtail the amount of electricity it carries on such transmission lines under certain circumstances. Transmission service charges are paid monthly to IID pursuant to certain transmission service agreements.
Power Purchase Agreement for the Puna Project
Our Puna project subsidiary in Hawaii sells its electrical output to Hawaii Electric Light Company under a long-term power purchase agreement.
The power purchase agreement with Hawaii Electric Light Company provides that either party may terminate the agreement if an event of force majeure occurs and is continuing for twelve consecutive months and the affected party has not taken action to cure the event.
Under the Puna power purchase agreement, our project subsidiary is entitled to receive, on a monthly basis, energy payments and capacity payments. The energy payments for a portion of the energy delivered by our project subsidiary are equal to the higher of the short term avoided cost rates for energy in effect for the relevant billing period or a fixed rate. The energy payments for a smaller portion of energy to be delivered by our project subsidiary to Hawaii Electric Light Company are equal to an amount based on a fuel rate and a variable operation and maintenance rate, as each are
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adjusted over the term of the agreement, but which rate will never go below a certain floor. Our project subsidiary also receives a payment for providing reactive power to Hawaii Electric Light Company. To meet the minimum capacity performance requirement provided for in the agreement, our project is required to furnish stipulated contract capacity of 30 MW in each peak month for all on-peak hours (as such terms are defined in the power purchase agreement). If our project subsidiary does not meet its minimum capacity performance requirements, our project subsidiary will be required to pay Hawaii Electric Light Company $0.0214 per on-peak hour for each kilowatt of deficiency for the first 5 MW of deficiency and $0.0339 per on-peak hour for each kilowatt of deficiency in excess of 5 MW of deficiency. In addition, for each contract year in which the on-peak availability of the facility is less than 95%, unless the deficiency is due to a catastrophic equipment failure, our project subsidiary is required to pay $7,992 to Hawaii Electric Light Company for each full percentage point of the deficiency, and if such availability is less than 80%, our project subsidiary is required to pay $11,875 for each full percentage point of the deficiency. For each power plant trip in excess of six per contract year, our project subsidiary will pay $10,000 to Hawaii Electric Light Company.
Our project subsidiary is not required to perform its obligations under the power purchase agreement following the occurrence of a force majeure event, upon providing Hawaii Electric Light Company with prompt notice of the suspension of our project subsidiary's performance and commencing with remedial measures. Issues with the geothermal resource by itself do not constitute a force majeure event unless our project subsidiary has taken adequate measures to try to mitigate the adverse impacts of such issues.
Our project subsidiary has an obligation to indemnify Hawaii Electric Light Company from and against any and all loss and liability in connection with personal injury, bodily injury or property damage, directly or indirectly resulting from or arising out of or in connection with the interconnection or parallel operation of our project subsidiary's facility which is attributable to (1) the negligence or willful misconduct of our project subsidiary and/or (2) the breach of representations or warranties in the relevant power purchase agreement. Our project subsidiary is also required to obtain and maintain insurance coverage for the power plant.
Our project subsidiary is generally required to coordinate scheduled maintenance with respect to the power plant with Hawaii Electric Light Company. Our project subsidiary has an obligation to obtain Hawaii Electric Light Company's approval in order to schedule the days each year during which a plant overhaul may be performed.
Our project subsidiary cannot assign the power purchase agreement without the prior written consent of Hawaii Electric Light Company, although our project subsidiary may assign the power purchase agreement to lending institutions in connection with the financing of the project without the prior consent of Hawaii Electric Light Company.
The initial term of the Puna power purchase agreement is scheduled to expire on December 31, 2027 which term will continue in effect after such initial term until either party has given notice of not less than five years of its intent to terminate such power purchase agreement.
We have one power purchase agreement with respect to the Puna project, from which we derived $18.7 million of pro forma revenues in 2003. We rely on such power purchase agreement for the relevant portion of our revenues.
Interconnection Arrangement for the Puna Project
Our project subsidiary is interconnected to Hawaii Electric Light Company's transmission system pursuant to agreements to design and construct transmission lines and substation facilities. There are no material outstanding obligations under these agreements.
Foreign Projects
Power Purchase Agreement for the Leyte Project
The Leyte project in the Philippines sells energy and capacity to the Philippine National Power Corporation. According to the BOT agreement which was subsequently amended in February and
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April 1996, Ormat-Leyte Co. Ltd. is required to deliver the electricity generated at the Leyte Project to the Philippine National Power Corporation, on behalf of PNOC-Energy Development Corporation. PNOC-Energy Development Corporation agreed to supply Ormat-Leyte Co. Ltd. with the geothermal fluid necessary for operating the power plant during the entire term of the BOT agreement at no cost. Under the BOT agreement, our project subsidiary will dedicate all energy and capacity of the power plant to the purchaser, and the purchaser is obligated to purchase all of the electricity generated by the project and provide our project with capacity payments and energy fees. PNOC-Energy Development Corporation agreed to make the Leyte Power Expansion Geothermal Reservation site available exclusively to us at no cost in exchange for the construction and operation of the project. The BOT agreement expires in September 2007, at the end of which the power plant will be transferred to PNOC-Energy Development Corporation (for no further consideration).
We have a BOT Agreement with respect to the Leyte project, from which we derived $12.6 million of pro forma revenues in 2003. We rely on such BOT agreement for the relevant portion of our revenues.
Power Purchase Agreement for the Momotombo Project
The Momotombo project in Nicaragua sells electricity to the Nicaraguan Electricity Company. The Momotombo project has a power purchase agreement and a concession agreement with Nicaraguan Electricity Company, both of which will expire in 2014. The revenues from the Momotombo project will cease at the time the concession expires. The term of the concession may be extended for an additional period of 15 years or less with both parties' consent. There is also a provision for possible extension of the power purchase agreement, subject to both parties' consent. In 2001, Nicaraguan Electricity Company assigned the power purchase agreement to Empresa Distribuidora de Electricidad del Norte (DISNORTE) and Empresa Distribuidora de Electricidad del Sur (DISSUR), two corporations which own the power-distribution rights in Nicaragua. Under the power purchase agreement, Ormat Momtombo Power Company, our wholly owned project subsidiary that operates the project, is required to use all available geothermal steam extracted by the plant in order to generate electricity. Our project subsidiary cannot sell the electricity to any person or organization other than the power purchasers. The power purchasers are required to pay for the electricity each month according to the amount of electricity that our project subsidiary sold or is deemed to have sold. Our project subsidiary may sell electricity to third parties if the power purchase agreement is terminated prior to the end of its term for reasons attributable to the power purchasers. However, if the price at which the electricity is sold to the third party is higher than the price fixed in the power purchase agreement, the power purchasers are entitled to 85% of such difference.
We have one power purchase agreement with respect to the Momotombo project, from which we derived $11.6 million of pro forma revenues in 2003. We rely on such power purchase agreement for the relevant portion of our revenues.
Power Purchase Agreement for the Olkaria III Project
The Olkaria III project in Kenya sells electricity to the Kenya Power & Lighting Co. Ltd. Under the power purchase agreement, the purchaser is obligated to pay the project a capacity fee and an energy fee. The term of the power purchase agreement expires in 2020 or, if Phase II of the project is constructed, 20 years from the date on which such Phase II commences commercial operation, and may be extended with both parties' consent on such terms as the parties may agree.
We have one power purchase agreement with respect to the Olkaria III project, from which we derived $9.7 million of pro forma revenues in 2003. We rely on such power purchase agreement for the relevant portion of our revenues.
Power Purchase Agreement for the Zunil Project
The Zunil project in Guatemala sells electricity to Instituto Nacional de Electrification. Pursuant to the power purchase agreement, which will expire in October 2019, the power purchaser is responsible for supplying the geothermal fluid to the plant. The power purchaser is obligated to
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purchase all the power generated by the plant's facilities, as converted from the geothermal fluid. The power purchaser is required to make both an energy payment and a capacity payment to the project, the rate of which is pre-determined under the power purchase agreement, regardless of whether or not the power purchaser is able to supply the geothermal fluid to the plant. Instituto Nacional de Electrification has the option to receive, by way of allotment for no consideration, 3% of the issued share capital of Orzunil, the owner of the Zunil project. Upon termination of the power purchase agreement, Instituto Nacional de Electrification will have the right of first refusal to acquire the power plant's assets at a price no lower than its market value. In the event that our project terminates the power purchase agreement, it will have the right to continue and operate the power plant and sell electricity to any other purchaser. Pursuant to the power purchase agreement, the purchaser is responsible, among other things, for building and maintaining transmission lines and maintaining and operating the geothermal reservoir.
Bureau of Land Management Geothermal Leases
Certain of our domestic project subsidiaries have entered into geothermal resources leases with the U.S. government, pursuant to which they have obtained the right to conduct their geothermal development and operations on federally-owned land. These leases are made pursuant to the Geothermal Steam Act of 1970, which we refer to as the Act, and the lessor under such leases is the U.S. government, acting through the U.S. Department of the Interior, Bureau of Land Management, which we refer to as the BLM.
Typically, BLM geothermal leases grant projects the exclusive right and privilege to drill for, extract, produce, remove, utilize, sell and dispose of geothermal steam and associated geothermal resources. The projects are also granted certain nonexclusive rights, which include, among others, the right to conduct within the leased area geological and geophysical exploration (in accordance with certain applicable regulations), as well as the right to construct and operate within the leased area power generating plants and certain other works and related structures and to use so much of the surface of the land as may be necessary or reasonably convenient for the production, utilization and processing of geothermal resources (subject to applicable laws and regulations). Additionally, projects are granted the right to reinject into the leased lands geothermal resources and condensates to the extent that such resources and condensates are not utilized and to the extent that such reinjection is necessary for geothermal operations.
The leases provide for a primary term of 10 years and so long thereafter as geothermal steam is being produced or utilized in commercial quantities, but cannot exceed a period of 40 years after the end of the primary term. However, if at the end of the such 40-year period geothermal steam is still being produced or utilized in commercial quantities and the applicable leased lands are not needed for other purposes, the project will have a preferential right for a renewal of the lease for a second 40-year term, in accordance with such terms and conditions as the BLM deems appropriate. If actual drilling operations are commenced on the leased lands or under an approved plan or agreement on behalf of the leased lands prior to the end of the primary term and are being diligently prosecuted at the end of the primary term, the lease will be extended for 5 additional years and so long thereafter (but not more than 35 years) as geothermal steam is produced or utilized in commercial quantities. If at the end of such extended term, geothermal steam is still being produced or utilized in commercial quantities, the project will have the preferential right for a renewal for a second term. The leases also provide for extensions under certain other circumstances.
Under the terms of the BLM leases, projects are required to pay an annual rental fee (on a per acre basis), which escalates according to a schedule described therein, until production of geothermal steam in commercial quantities has commenced. After such production has commenced, the projects are required to pay royalties (on a monthly basis) on the amount or value of (1) steam, (2) by-products derived from production and (3) commercially de-mineralized water sold or utilized by the project (or reasonably susceptible to such sale or use).
Such BLM leases include certain covenants that require the projects to conduct their operations under the lease in a workmanlike manner and in accordance with all applicable laws and BLM
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directives and to take all mitigating actions required by the BLM to protect the surface of and the environment surrounding the land. Additionally, certain leases contain additional requirements, some of which concern the mitigation or avoidance of disturbance of any antiquities, cultural values or threatened or endangered plants or animals, the payment of royalties for timber and the imposition of certain restriction on residential development on the leased land.
In the event of a default under any such BLM lease, or the failure to comply with any of the provisions of the Act or regulations issued under the Act or the terms or stipulations of the lease, the BLM may, 30 days after notice of default is provided to the relevant project, (1) suspend operations until the requested action is taken or (2) cancel the lease.
Private Geothermal Leases
Certain of our domestic project subsidiaries have entered into geothermal resources leases with private parties, pursuant to which they have obtained the right to conduct their geothermal development and operations on privately owned land.
Typically, the leases grant our project subsidiaries the exclusive right and privilege to drill for, produce, extract, take and remove from the leased land water, brine, steam, steam power, minerals (other than oil), salts, chemicals, gases (other than gases associated with oil), and other products produced or extracted by such project subsidiary. The project subsidiaries are also granted certain rights pertaining to the construction and operation of plants, structures and facilities on the leased land. Additionally, the project subsidiaries are granted the right to dispose of waste brine and other waste products as well as the right to reinject into the leased land water, brine, steam and gases in a well or wells for the purpose of maintaining or restoring pressure in the productive zones beneath the leased land or other land in the vicinity.
The leases provide for a term consisting of a primary term in the range of five to 30 years, depending on the lease, and so long thereafter as lease products are being produced or the project subsidiary is engaged in drilling, extraction, processing or reworking operations on the leased land.
As consideration under such leases, the project subsidiary must pay to the lessor a certain specified percentage of the value "at the well" (which is not attributable to the enhanced value of electricity generation), gross proceeds or gross revenues of all lease products produced, saved and sold on a monthly basis.
In addition, pursuant to the leases, the project subsidiary typically agrees to commence drilling, extraction or processing operations on the leased land within the primary term, and to conduct such operations with reasonable diligence until lease products have been found, extracted and processed in quantities deemed "paying quantities" by the project subsidiary, or until further operations would, in such project subsidiary's judgment, be unprofitable or impracticable, or the project subsidiary may at any time within the primary term terminate the lease and surrender the relevant land. If the project subsidiary has not commenced any such operations on said land or on the unit area or terminated the lease within the primary term, the project subsidiary must pay to the lessor, annually in advance, a rental fee until operations are commenced on the leased land.
If the project subsidiary fails to pay any installment of royalty or rental when due and if such default continues for a period of 15 days after its receipt of written notice thereof from the lessor, then at the option of the lessor, the lease will terminate as to the portion or portions thereof as to which the project subsidiary is in default.
If the project subsidiary defaults in the performance of any obligations under the lease, other than a payment default, and if, for a period of 90 days after written notice is given to it by the lessor of such default, the project subsidiary fails to commence and thereafter diligently and in good faith take remedial measures to remedy such default, the lessor may terminate the lease.
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PRINCIPAL STOCKHOLDERS
The following table shows information with respect to the beneficial ownership of our common stock as of June 30, 2004, and as adjusted to reflect the sale of common stock being offered in this offering, for:
• | each person, or group of affiliated persons, known to us to own beneficially 5% or more of our outstanding common stock; |
• | each of our directors; |
• | each of our named executive officers; and |
• | all of our directors and executive officers as a group. |
Percentage ownership before the offering is based on 32,307,692 shares of common stock outstanding as of June 30, 2004, subject to the assumptions set forth below. Percentage ownership after the offering is based on shares of common stock outstanding immediately after the closing of this offering. Beneficial ownership is determined in accordance with the rules of the SEC. Except as indicated by footnote and subject to community property laws where applicable, to our knowledge, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are exercisable as of June 30, 2004, or will become exercisable within 60 days thereafter are deemed outstanding, while such shares are not deemed outstanding for purposes of computing percentage ownership of any other person.
Shares
of Ormat Technologies
Common Stock Beneficially Owned |
Shares of Ormat Industries
Common Stock Beneficially Owned |
Maximum
Number of Shares being Sold in the Over- Allotment Option, if Any |
Shares Beneficially
Owned After the Offering if the Underwriters' Over- Allotment Option is Exercised in Full |
|||||||||||||||||||||||||||||||
Percent
in this Offering |
||||||||||||||||||||||||||||||||||
Name of Beneficial Owner |
Number of
Shares |
Before
Offering |
After
Offering |
Number | Percent |
Number
of Shares |
Percentage
Ownership |
|||||||||||||||||||||||||||
Principal Stockholder: | ||||||||||||||||||||||||||||||||||
Ormat Industries Ltd. † | 32,307,692 (1) | 100 | % | % | — | — | ||||||||||||||||||||||||||||
Directors and Executive Officers: | ||||||||||||||||||||||||||||||||||
Yehudit Bronicki † | — | — | % | 32,269,130 | (2) | 35.15 | % | |||||||||||||||||||||||||||
Nadav Amir† | — | — | % | 33,000 | (3) | * | ||||||||||||||||||||||||||||
Hezy Ram†† | — | — | % | 24,750 | (4) | * | ||||||||||||||||||||||||||||
Aaron Choresh† | — | — | % | 20,625 | (5) | * | ||||||||||||||||||||||||||||
Zvi Reiss† | — | — | % | 28,875 | (6) | * | ||||||||||||||||||||||||||||
All executive officers and directors as a group (eleven (11) persons) | — | — | % | 38,906,811 | 42.66 | % | ||||||||||||||||||||||||||||
Holders
of more than 5%
of shares: |
||||||||||||||||||||||||||||||||||
Bronicki Investment Ltd. † | — | — | % | 32,269,030 | 35.15 | % | ||||||||||||||||||||||||||||
Lucien Bronicki † | — | — | % | 32,269,130 | (2) | 35.15 | % | |||||||||||||||||||||||||||
Youval Bronicki † | — | — | % | 6,456,968 | (7) | 7.08 | % | |||||||||||||||||||||||||||
Yoram Bronicki † | — | — | % | 6,453,806 | (8) | 7.08 | % | |||||||||||||||||||||||||||
Michal Cath † | — | — | % | 6,453,806 | (8) | 7.08 | % | |||||||||||||||||||||||||||
† | c/o Ormat Industries Ltd., Industrial Area, P.O. Box 68 Yavneh 81100, Israel |
†† | c/o Ormat Technologies, Inc., 980 Greg Street, Sparks, NV 89431 |
* | Represents beneficial ownership of less than 1% of the outstanding shares of common stock. |
(1) | The members of the board of directors of Ormat Industries, including Lucien Bronicki, Dita Bronicki and Yoram Bronicki, have voting control of our shares held by Ormat Industries. As of September 1, 2004, Mr. and Mrs. Bronicki and their family beneficially owned approximately 35.15% of the shares of Ormat Industries through their holdings in Ormat Investment Ltd. |
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(2) | Includes 32,269,030 shares beneficially owned by Bronicki Investment Ltd. Mr. and Mrs. Bronicki are directors of Bronicki Investment Ltd. and have voting control of such shares held by Bronicki Investment Ltd. Each of Mr. and Mrs. Bronicki also owns 20% of Bronicki Investment Ltd. Accordingly, they may be deemed to share beneficial ownership of such shares held by Bronicki Investment Ltd. Each of Mr. and Mrs. Bronicki disclaims beneficial ownership of all shares held by Bronicki Investment Ltd., except to the extent of his or her 20% ownership in Bronicki Investment Ltd. |
(3) | Represents currently exercisable options granted to Mr.Amir to purchase 33,000 shares of common stock of Ormat Industries; this excludes options to purchase 66,000 shares of common stock of Ormat Industries which are not exercisable within 60 days of June 30, 2004. |
(4) | Represents currently exercisable options granted to Mr. Ram to purchase 24,750 shares of common stock of Ormat Industries; this excludes options to purchase 66,000 shares of common stock of Ormat Industries which are not exercisable within 60 days of June 30, 2004. |
(5) | Represents currently exercisable options granted to Mr. Choresh to purchase 20,625 shares of common stock of Ormat Industries; this excludes options to purchase 41,875 shares of common stock of Ormat Industries which are not exercisable within 60 days of June 30, 2004. |
(6) | Represents currently exercisable options granted to Mr. Reiss to purchase 28,875 shares of common stock of Ormat Industries; this excludes options to purchase 61,875 shares of common stock of Ormat Industries which are not exercisable within 60 days of June 30, 2004. |
(7) | Includes shares indirectly owned through the 20% ownership in Bronicki Investment Ltd. |
(8) | Represents shares indirectly owned through the 20% ownership in Bronicki Investment Ltd. |
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DESCRIPTION OF CAPITAL STOCK
The following is a description of our capital stock and the material provisions of our amended and restated certificate of incorporation, amended and restated by-laws and other agreements to which we and our stockholders are parties, in each case upon the closing of this offering. The following is only a summary and is qualified by applicable law and by the provisions of the amended and restated certificate of incorporation, amended and restated by-laws and other agreements, copies of which are available as set forth under the caption entitled "Where You Can Find More Information."
General
As of June 30, 2004, 32,307,692 shares of our common stock were issued and outstanding, all of which were owned by Ormat Industries. Our amended and restated certificate of incorporation provides that our authorized capital stock will consist of an aggregate number of 200,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share, of which our board of directors has designated 500,000 shares as Series A Junior Participatory Preferred Stock for issuance in connection with the exercise of our preferred share purchase rights pursuant to a rights plan which we intend to adopt. See "—Rights Plan" below. Each such outstanding share of our common stock will be validly issued, fully paid and non-assessable. In addition, at such time, shares of our common stock will be reserved for issuance upon exercise of outstanding options.
Common Stock
Voting. The holders of our common stock are entitled to one vote for each outstanding share of common stock owned by that stockholder on every matter properly submitted to the stockholders for their vote. Stockholders are not entitled to vote cumulatively for the election of directors.
Dividend Rights. Subject to the dividend rights of the holders of any outstanding series of preferred stock, holders of our common stock are entitled to receive ratably such dividends and other distributions of cash or any other right or property as may be declared by our board of directors out of our assets or funds legally available for such dividends or distributions.
Liquidation Rights. In the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs, holders of our common stock would be entitled to share ratably in our assets that are legally available for distribution to stockholders after payment of liabilities. If we have any preferred stock outstanding at such time, holders of the preferred stock may be entitled to distribution and/or liquidation preferences. In either such case, we must pay the applicable distribution to the holders of our preferred stock before we may pay distributions to the holders of our common stock.
Conversion, Redemption and Preemptive Rights. Holders of our common stock have no conversion, redemption, preemptive, subscription or similar rights.
Preferred Stock
Our amended and restated certificate of incorporation authorizes our board of directors, subject to limitations prescribed by law, to issue up to 5,000,000 shares of preferred stock in one or more series without further stockholder approval. The board will have discretion to determine the rights, preferences, privileges and restrictions of, including, without limitation, voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of, and to fix the number of shares of, each series of our preferred stock.
Our board of directors has designated 500,000 shares of our preferred stock as Series A Junior Participatory Preferred Stock for issuance in connection with the exercise of our preferred share purchase rights pursuant to a rights plan which we intend to adopt. Although our board of directors has no intention at the present time of doing so, it could authorize the issuance of shares of preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest. See "—Rights Plan" below.
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Limitations on Directors' Liability
Our amended and restated certificate of incorporation and by-laws contain provisions indemnifying our directors and officers to the fullest extent permitted by law. Prior to the completion of this offering, we intend to enter into indemnification agreements with each of our directors which may, in some cases, be broader than the specific indemnification provisions contained under Delaware law.
In addition, as permitted by Delaware law, our amended and restated certificate of incorporation provides that no director will be liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director. The effect of this provision is to restrict our rights and the rights of our stockholders in derivative suits to recover monetary damages against a director for breach of fiduciary duty as a director, except that a director will be personally liable for:
• | any breach of his or her duty of loyalty to us or our stockholders; |
• | acts or omissions not in good faith which involve intentional misconduct or a knowing violation of law; |
• | the payment of dividends or the redemption or purchase of stock in violation of Delaware law; or |
• | any transaction from which the director derived an improper personal benefit. |
This provision does not affect a director's liability under the federal securities laws.
To the extent that our directors, officers and controlling persons are indemnified under the provisions contained in our amended and restated certificate of incorporation, Delaware law or contractual arrangements against liabilities arising under the Securities Act, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Provisions of Our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws and Delaware Law that May Have an Anti-Takeover Effect
Amended and Restated Certificate of Incorporation and Amended and Restated By-laws
Certain provisions in our amended and restated certificate of incorporation and amended and restated by-laws summarized below may be deemed to have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interests, including attempts that might result in a premium being paid over the market price for the shares held by stockholders.
Classified Board of Directors . Our amended and restated certificate of incorporation provides that the number of directors is fixed by our board of directors. Other than directors elected by the holders of any series of preferred stock or any other series or class of stock (except common stock), our directors are divided into three classes. Each class consists as nearly as possible of an equal number of directors. Currently, the terms of office for the three classes of directors expire, respectively, at our annual meetings in 2005, 2006 and 2007. The term of the successors of each class of directors expires three years from the year of election. Directors elected by stockholders at an annual meeting of stockholders will be elected by a plurality of all votes cast.
Special Meetings . Our amended and restated certificate of incorporation and amended and restated by-laws provide that a special meeting of stockholders may be called only by the Chairman of the Board, the President, our board of directors, the holders of not less than a majority of all of the outstanding shares of the corporation entitled to vote at the meeting or, at any time that Ormat Industries (or a certain transferee of Ormat Industries) owns at least 20% of the then outstanding shares of our common stock, by Ormat Industries (or such transferee). Stockholders are not permitted to call, or to require that the board of directors call, a special meeting of stockholders. Moreover, the business permitted to be conducted at any special meeting of stockholders is limited to the business
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brought before the meeting pursuant to the notice of the meeting given by us. Our amended and restated by-laws establish an advance notice procedure for stockholders to nominate candidates for election as directors or to bring other business before meetings of our stockholders.
The foregoing proposed provisions of our amended and restated certificate of incorporation and amended and restated by-laws could discourage potential acquisition proposals and could delay or prevent a change in control. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the board of directors and in the policies formulated by the board of directors and to discourage certain types of transactions that may involve an actual or threatened change of control. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our common stock that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in our management.
Rights Plan
Prior to the completion of this offering, we intend to enter into a rights agreement. The material terms of such rights agreement and the preferred share purchase rights will be determined and disclosed upon adoption of the rights plan prior to the completion of this offering.
Delaware Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any "business combination" (as defined below) with any "interested stockholder" (as defined below) for a period of three years following the date that such stockholder became an interested stockholder, unless: (1) prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (2) on consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (3) on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.
Section 203 of the Delaware General Corporation Law defines "business combination" to include: (1) any merger or consolidation involving the corporation and the interested stockholder; (2) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; (3) subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (4) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (5) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an "interested stockholder" as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person.
The New York Stock Exchange
We will apply to list our common stock on the New York Stock Exchange under the symbol "ORA".
Transfer Agent and Registrar
We have appointed American Stock Transfer & Trust Company (AST) as the transfer agent and registrar for our common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock, and a significant public market for our common stock may not develop or be sustained after this offering. Future sales of significant amounts of our common stock, including shares of our outstanding common stock and shares of our common stock issued upon exercise of outstanding options, in the public market after this offering could adversely affect the prevailing market price of our common stock and could impair our future ability to raise capital through the sale of our equity securities.
Sale of Restricted Shares and Lock-Up Agreements
Upon the closing of this offering, we will have outstanding shares of common stock based upon our shares outstanding as of .
Of these shares, the shares of common stock sold in this offering will be freely tradable without restriction under the Securities Act, unless purchased by affiliates of our company, as that term is defined in Rule 144 under the Securities Act.
The remaining shares of common stock were issued and sold by us in private transactions, and are eligible for public sale if registered under the Securities Act or sold in accordance with Rules 144, 144(k) or 701 of the Securities Act. However, of these remaining shares of common stock are held by officers, directors, and existing stockholders who are subject to lock-up agreements for a period of 180 days after the date of this prospectus under which all holders of our common stock have agreed not to sell or otherwise dispose of their shares of common stock.
The representative, in its sole discretion, may release the shares subject to the lock-up agreements in whole or in part at anytime with or without notice. We have been advised by the representative that, when determining whether or not to release shares from the lock-up agreements, it will consider, among other factors, the stockholder's reasons for requesting the release, the number of shares for which the release is being requested and market conditions at the time. The representative has advised us that they have no present intention to release any of the shares subject to the lock-up agreements prior to the expiration of the lock-up period.
As of the date of this prospectus, up to of the remaining shares may be eligible for sale in the public market. Beginning 180 days after the date of this prospectus, of these remaining shares will be eligible for sale in the public market, although all but shares will be subject to certain volume limitations under Rule 144.
Rule 144
In general, Rule 144 allows a stockholder (or stockholders where shares are aggregated) who has beneficially owned shares of our common stock for at least one year and who files a Form 144 with the SEC to sell within any three month period commencing 90 days after the date of this prospectus a number of those shares that does not exceed the greater of:
• | 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or |
• | the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of the Form 144 with respect to such sale. |
Sales under Rule 144, however, are subject to specific manner of sale provisions, notice requirements, and the availability of current public information about our company. We cannot estimate the number of shares of common stock our existing stockholders will sell under Rule 144, as this will depend on the market price for our common stock, the personal circumstances of the stockholders, and other factors.
Rule 144(k)
Under Rule 144(k), in general, a stockholder who has beneficially owned shares of our common stock for at least two years and who is not deemed to have been an affiliate of our company at any
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time during the immediately preceding 90 days may sell shares without complying with the manner of 98 sale provisions, notice requirements, public information requirements, or volume limitations of Rule 144. Affiliates of our company, however, must always sell pursuant to Rule 144, even after the otherwise applicable Rule 144(k) holding periods have been satisfied.
Rule 701
Rule 701 generally allows a stockholder who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation, or notice provisions of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required to wait until 90 days after the date of this prospectus before selling such shares pursuant to Rule 701.
As of the date of this prospectus, no shares of our outstanding common stock had been issued in reliance on Rule 701 as a result of exercises of stock options.
Options
In addition to the shares of common stock outstanding, immediately after this offering, as of , there were outstanding options to purchase shares of our common stock. As soon as practicable after the closing of this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering shares of our common stock issued or reserved for issuance under our 2004 Incentive Compensation Plan. Accordingly, shares of our common stock registered under such registration statement will be available for sale in the open market upon exercise by the holders, subject to vesting restrictions with us, contractual lock-up restrictions, and/or market stand-off provisions applicable to each option agreement that prohibit the sale or other disposition of the shares of common stock underlying the options for a period of 180 days after the date of this prospectus without the prior written consent from us or our underwriters.
Registration Rights
At or prior to the closing of this offering, we will enter into a registration rights agreement with Ormat Industries. See "Certain Relationships and Related Transactions." We do not have any other contractual obligations to register our common stock.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a description of the material United States federal income tax consequences that may be relevant to Non-U.S. Holders, as defined below, with respect to the acquisition, ownership and disposition of our common stock. This description addresses only the United States federal income tax considerations of holders that are initial purchasers of our common stock pursuant to the offering and that will hold our common stock as capital assets. This description does not address tax considerations applicable to holders that are U.S. persons or that may be subject to special tax rules, including:
• | financial institutions or insurance companies; |
• | real estate investment trusts, regulated investment companies or grantor trusts; |
• | dealers or traders in securities or currencies; |
• | tax-exempt entities; |
• | persons that received our stock as compensation for the performance of services; |
• | persons that will hold our stock as part of a "hedging" or "conversion" transaction or as a position in a "straddle" for United States federal income tax purposes; |
• | persons that have a "functional currency" other than the U.S. dollar; or |
• | holders that own or are deemed to own 10% or more, by voting power or value, of our stock. |
Moreover, except as set forth below, this description does not address the United States federal estate and gift or alternative minimum tax consequences of the acquisition, ownership and disposition of our common stock.
This description is based on the Internal Revenue Code of 1986, as amended, which we refer to as the Code, existing, proposed and temporary United States Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date hereof. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below.
For purposes of this description, a "Non-U.S. Holder" is a beneficial owner of our common stock that, for United States federal income tax purposes, is not:
• | a citizen or resident of the United States; |
• | a partnership or corporation created or organized in or under the laws of the United States or any state thereof, including the District of Columbia; |
• | an estate the income of which is subject to United States federal income taxation regardless of its source; or |
• | a trust if such trust validly elects to be treated as a United States person for United States federal income tax purposes or if (1) a court within the United States is able to exercise primary supervision over its administration and (2) one or more United States persons have the authority to control all of the substantial decisions of such trust. |
If a partnership (or any other entity treated as a partnership for United States federal income tax purposes) holds our common stock, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner should consult its tax advisor as to its tax consequences.
You should consult your own tax advisor with respect to the United States federal, state, local and foreign tax consequences of acquiring, owning and disposing of our common stock.
Distributions
Generally, but subject to the discussions below under "Status as United States Real Property Holding Corporation" and "Backup Withholding Tax and Information Reporting Requirements," if
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you are a Non-U.S. Holder, distributions of cash or property paid to you will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable United States income tax treaty. In order to obtain the benefit of any applicable United States income tax treaty, you will have to file certain forms (e.g., Form W-8BEN). Such forms generally would contain your name and address and a certification that you are eligible for the benefits of such treaty.
Except as may be otherwise provided in an applicable United States income tax treaty, if you are a Non-U.S. Holder and conduct a trade or business within the United States, you generally will be taxed at ordinary United States federal income tax rates (on a net income basis) on dividends that are effectively connected with the conduct of such trade or business and such dividends will not be subject to the withholding described above. If you are a foreign corporation, you may also be subject to a 30% "branch profits tax" unless you qualify for a lower rate under an applicable United States income tax treaty. To claim an exemption from withholding because the income is effectively connected with a United States trade or business, you must provide a properly executed Form W-8ECI (or such successor form as the Internal Revenue Service designates) prior to the payment of dividends.
Sale or Exchange of Our Common Stock
Generally, but subject to the discussions below under "Status as United States Real Property Holding Corporation" and "Backup Withholding Tax and Information Reporting Requirements," if you are a Non-U.S. Holder, you will not be subject to United States federal income or withholding tax on any gain realized on the sale or exchange of our common stock unless (1) such gain is effectively connected with your conduct of a trade or business in the United States or (2) if you are an individual, you are present in the United States for 183 days or more in the taxable year of such sale or exchange and certain other conditions are met.
Status as United States Real Property Holding Corporation
If you are a Non-U.S. Holder, under certain circumstances, gain recognized on the sale or exchange of, and certain distributions in excess of basis with respect to, our common stock would be subject to United States federal income tax, notwithstanding your lack of other connections with the United States, if we are or have been a "United States real property holding corporation" for United States federal income tax purposes at any time during the five-year period ending on the date of such sale or exchange (or distribution). We believe that we will not be classified as a United States real property holding corporation as of the date of this offering and do not expect to become a United States real property holding corporation.
Federal Estate Tax
Our common stock held by an individual at death, regardless of whether such individual is a citizen, resident or domiciliary of the United States, will be included in the individual's gross estate for United States federal estate tax purposes, subject to an applicable estate tax or other treaty, and therefore may be subject to United States federal estate tax.
Backup Withholding Tax and Information Reporting Requirements
United States backup withholding tax and information reporting requirements generally apply to certain payments to certain non-corporate holders of stock. The backup withholding tax rate is currently 28%.
If you are not a United States person, under current Treasury regulations, backup withholding will not apply to distributions on our common stock to you, provided that we have received valid certifications meeting the requirements of the Code and neither we nor the payor has actual knowledge or reason to know that you are a United States person for purposes of such backup withholding tax requirements.
If provided by a beneficial owner, the certification must give the name and address of such owner, state that such owner is not a United States person, or, in the case of an individual, that such person is
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neither a citizen or resident of the United States, and must be signed by the owner under penalties of perjury. If provided by a financial institution, other than a financial institution that is a qualified intermediary, the certification must state that the financial institution has received from the beneficial owner the certificate set forth in the preceding sentence, set forth the information contained in such certificate (and include a copy of such certificate), and be signed by an authorized representative of the financial institution under penalties of perjury. Generally, the furnishing of the names of the beneficial owners of our common stock that are not United States persons and a copy of such beneficial owner's certificate by a financial institution will not be required where the financial institution is a qualified intermediary.
In the case of such payments made within the United States to a foreign simple trust, a foreign grantor trust or a foreign partnership, other than payments to a foreign simple trust, a foreign grantor trust or a foreign partnership that qualifies as a "withholding foreign trust" or a "withholding foreign partnership" within the meaning of such United States Treasury Regulations and payments to a foreign simple trust, a foreign grantor trust or a foreign partnership that are effectively connected with the conduct of a trade or business in the United States, the beneficiaries of the foreign simple trust, the persons treated as the owners of the foreign grantor trust or the partners of the foreign partnership, as the case may be, will be required to provide the certification discussed above, and the trust or partnership, as the case may be, will need to provide an appropriate intermediary certification form, in order to establish an exemption from backup withholding tax and information reporting requirements. Moreover, a payor may rely on a certification provided by a payee that is not a United States person only if such payor does not have actual knowledge or a reason to know that any information or certification stated in such certificate is incorrect.
The above description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of our common stock. You should consult your own tax advisor concerning the tax consequences of your particular situation.
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UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the registration statement relating to this prospectus, each of the underwriters named below, for whom Lehman Brothers Inc., sole book-running manager and representative of the underwriters listed below, has severally agreed to purchase from us, on a firm commitment basis, subject only to the conditions contained in the underwriting agreement, the number of shares of common stock shown opposite each of their names below:
Underwriter | Number of Shares | |||||
Lehman Brothers Inc. | ||||||
Deutsche Bank Securities, Inc. | ||||||
RBC Capital Markets Corporation | ||||||
Wells Fargo Securities, LLC | ||||||
Total | ||||||
The underwriting agreement provides that the underwriters' obligations to purchase our common stock depend on the satisfaction of the conditions contained in the underwriting agreement, which include:
• | if any shares of common stock are purchased by the underwriters, then all of the shares of common stock the underwriters agreed to purchase must be purchased; |
• | the representations and warranties made by us to the underwriters are true; |
• | there is no material change in the financial markets; and |
• | we deliver customary closing documents to the underwriters. |
Commissions and Expenses
The representative has advised us that the underwriters propose to offer the common stock directly to the public at the public offering price presented on the cover page of this prospectus, and to selected dealers, that may include the underwriters, at the public offering price less a selling concession not in excess of $ per share. The underwriters may allow, and the selected dealers may re-allow, a concession not in excess of $ per share to brokers and dealers. After the offering, the underwriters may change the offering price and other selling terms.
The following table summarizes the underwriting discounts and commissions that we will pay. The underwriting discount is the difference between the offering price and the amount the underwriters pay to purchase the shares from us. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase up to an additional shares. The underwriting discounts and commissions equal % of the public offering price.
No Exercise | Full Exercise | |||||||||
Per share | $ | $ | ||||||||
Total | ||||||||||
We estimate that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately . We have agreed to pay such expenses.
Over-Allotment Option
We have granted to the underwriters an option to purchase up to an aggregate of additional shares of common stock, exercisable to cover over-allotments, if any, at the public offering price less the underwriting discounts and commissions shown on the cover page of this prospectus. The underwriters may exercise this option at any time, and from time to time, until 30 days after the date of the underwriting agreement. To the extent the underwriters exercise this option, each
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underwriter will be committed, so long as the conditions of the underwriting agreement are satisfied, to purchase a number of additional shares of common stock proportionate to that underwriter's initial commitment as indicated in the preceding table, and we will be obligated, under the over-allotment option, to sell the additional shares of common stock to the underwriters.
Lock-Up Agreements
Pursuant to lock-up agreements, we will agree not to, and each of our officers, directors and stockholders will agree not to, for period of 180 days from the date of this prospectus, directly or indirectly, (1) offer for sale, sell, pledge or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of common stock or securities convertible into or exchangeable for common stock (other than the stock and shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans existing on the date hereof or pursuant to currently outstanding options, warrants or rights), or sell or grant options, rights or warrants with respect to any shares of common stock or securities convertible into or exchangeable for common stock (other than the grant of options pursuant to option plans existing on the date hereof), (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such shares of common stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of common stock or other securities, in cash or otherwise, in each case without the prior written consent of Lehman Brothers Inc. on behalf of the underwriters. During such 180-day period, the representative may, together in its sole discretion, give such consent in whole or in party at any time with or without notice. When determining whether to or not to give their consent, the representative will consider, among other factors, the stockholder's reason for requesting such consent, the number of shares for which such consent is being requested and market conditions at the time. If (1) during the last 17 days of such 180-day period we issue an earnings release or material news or a material event relating to us occurs or (2) prior to the expiration of such 180-day period, we announce that we will release earnings results during the 17-day period beginning on the last day of such 180-day period, then such 180-day period shall continue to apply until the expiration of the 17-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
Offering Price Determination
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be negotiated between the representative and us. In determining the initial public offering price of our common stock, the representative will consider:
• | prevailing market conditions; |
• | estimates of our business potential and earning prospects; |
• | our historical performance and capital structure; |
• | an overall assessment of our management; and |
• | the consideration of these factors in relation to market valuation of companies in related businesses. |
Indemnification
We have agreed to indemnify the underwriters against certain liabilities relating to the offering, including liabilities under the Securities Act, liabilities arising from breaches of the representations and warranties contained in the underwriting agreement, and to contribute to payments that the underwriters may be required to make for these liabilities.
Discretionary Shares
The underwriters have informed us that they do not intend to confirm sales to discretionary accounts that exceed 5% of the total number of shares of our common stock offered by them.
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Stabilization, Short Positions and Penalty Bids
The underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Exchange Act:
• | Over-allotment involves sales by the underwriters of shares of common stock in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option, in whole or in part, or purchasing shares in the open market. |
• | Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. |
• | Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. |
• | Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. |
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the New York Stock Exchange or otherwise and, if commenced, may be discontinued at any time.
Neither we, nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we, nor any of the underwriters make any representation that the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.
Stamp Taxes
Purchasers of the shares of our common stock offered in this prospectus may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover page of this prospectus. Accordingly, we urge you to consult a tax advisor with respect to whether you may be required to pay those taxes or charges, as well as any other tax consequences that may arise under the laws of the country of purchase.
Electronic Distribution
A prospectus in electronic format may be made available on Internet sites or through other online services maintained by one or more of the underwriters and/or selling group members
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participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations.
Other than the prospectus in electronic format, the information on any underwriter's or selling group member's web site and any information contained in any other web site maintained by an underwriter or selling group member is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter or selling group member in its capacity as underwriter or selling group member and should not be relied upon by investors.
Relationships
Certain of the underwriters have performed and may in the future perform investment banking and advisory services for us from time to time for which they may in the future receive customary fees and expenses. Certain of the underwriters have and may, from time to time, engage in transactions with or perform services for us in the ordinary course of their business.
Foreign Securities Laws Restrictions
Prior to the expiry of a period of six months from the closing date of this offering, no common stock may be offered or sold, as the case many be, to persons in the United Kingdom, except to persons whose ordinary activities involve them acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995, as amended, or the Regulations. Any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000, or FSMA) received in connection with the issue or sale of any common stock may only be communicated or caused to be communicated in circumstances in which section 21(1) of the FSMA does not apply to us. All applicable provisions of the Regulations and of the FSMA with respect to anything done in relation to the common stock in, from or otherwise involving the United Kingdom must be complied with.
Any shares of common stock that are offered, as part of their initial distribution or by way of re-offering, in The Netherlands shall, in order to comply with the Netherlands Securities Market Supervision Act 1995, only be offered, and such an offer shall only be announced in writing (whether electronically or otherwise), to individuals or legal entities in The Netherlands who or which trade or invest in securities in the conduct of a business or profession (which includes banks, securities intermediaries (including dealers and brokers), insurance companies, pension funds, collective investment institutions, central governments, large international and supranational organizations, other institutional investors and other parties, including treasury departments of commercial enterprises, which as an ancillary activity regularly invest in securities), or Professional Investors, provided that in the offer and in any documents or advertisements in which a forthcoming offering of common stock is publicly announced (whether electronically or otherwise) it is stated that such offer is and will be exclusively made to such Professional Investors.
142
VALIDITY OF COMMON STOCK
The validity of the shares of common stock offered hereby will be passed upon for us by Chadbourne & Parke LLP, New York, New York, and for the underwriters by White & Case LLP, New York, New York. Chadbourne & Parke LLP has from time to time represented Lehman Brothers, Inc. on unrelated matters. White & Case LLP has from time to time represented one of our subsidiaries on unrelated matters.
143
EXPERT
Our (Ormat Technologies, Inc.) financial statements as of December 31, 2002 and 2003 and for each of the three years in the period ended December 31, 2003 and those of Puna Geothermal Venture as of December 31, 2002 and 2003 and for the year ended December 31, 2002 and for the period from January 1, 2003 to December 10, 2003, and for the period from December 11, 2003 to December 31, 2003, Combined Heber and Affiliates as of December 31, 2002 and December 17, 2003, and for the years ended December 31, 2001 and 2002, and for the period from January 1, 2003 to December 17, 2003, and Mammoth-Pacific, L.P. as of December 31, 2002 and September 30, 2003 and for the year ended December 31, 2002 and the nine months ended September 30, 2003, included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. The report on Ormat Technologies, Inc. contains an explanatory paragraph relating to the restatement of the financial statements as described in Note 20 to the financial statements. The report on Combined Heber and Affiliates contains an explanatory paragraph indicating that Heber and Affiliates filed a petition for reorganization under the provisions of Chapter 11 of the Bankruptcy Code on April 1, 2002 and emerged from bankruptcy on December 18, 2003.
144
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 (including the exhibits, schedules, and amendments to the registration statement) under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus does not contain all the information set forth in the registration statement. For further information with respect to us and the shares of common stock to be sold in this offering, we refer you to the registration statement. Statements contained in this prospectus as to the contents of any contract, agreement or other document are only summaries. With respect to any contract, agreement or document filed as an exhibit to the registration statement, we refer you to the exhibit for a copy of such contract, agreement or other document, and each such statement in this prospectus regarding such contract, agreement or document is qualified by reference to such exhibit. Our website is located at http://www.ormat.com. Information contained on our company Web site is not a part of this prospectus.
Upon completion of this offering, we will become subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended, and, as a result, will file periodic and current reports, proxy statements, and other information with the SEC. You may read and copy this information at the Public Reference Room of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Copies of all or any part of the registration statement may be obtained from the SEC's offices upon payment of fees prescribed by the SEC. The SEC maintains an Internet site that contains periodic and current reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC's website is http://www.sec.gov.
145
INDEX TO FINANCIAL STATEMENTS
F-1
Ormat
Technologies, Inc.
and Subsidiaries
Report on Audits of
Consolidated
Financial Statements
As of December 31, 2002 and 2003, and for the
years
ended December 31, 2001, 2002 and 2003
and
Unaudited Consolidated Financial
Statements
As of June
30, 2004 and for
six month
periods
ended
June 30, 2003 and
2004
F-2
Report of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholder of
Ormat Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income (loss), of stockholder's equity and of cash flows present fairly, in all material respects, the financial position of Ormat Technologies, Inc. and its subsidiaries at December 31, 2002 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion.
As discussed in Note 11 to the financial statements, effective January 1, 2003, the Company adopted the provisions of Statement of Financial Accounting Standards No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets .
As discussed in Note 20, the consolidated financial statements have been restated for adjustments required to amounts due to/from Parent and stockholder's equity.
/s/ PricewaterhouseCoopers LLP
Sacramento, California
July 19,
2004, except for Note 20
as to which the date is
September
26,
2004
F-3
Ormat Technologies, Inc. and
Subsidiaries
Consolidated Balance Sheets (dollars in thousands,
except per share
amounts)
December 31, | ||||||||||||||
2002 | 2003 | June 30, 2004 | ||||||||||||
(unaudited) | ||||||||||||||
Restated | Restated | |||||||||||||
Assets | ||||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | 36,684 | $ | 8,873 | $ | 21,170 | ||||||||
Restricted cash and cash equivalents | 8,010 | 16,371 | 37,145 | |||||||||||
Receivables: | ||||||||||||||
Trade | 20,713 | 28,689 | 33,445 | |||||||||||
Related entities | 1,756 | 1,939 | 1,722 | |||||||||||
Other | 2,658 | 729 | 2,856 | |||||||||||
Inventories, net | 5,948 | 3,712 | 7,456 | |||||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | — | 1,922 | 3,586 | |||||||||||
Prepaid expenses and other | 1,853 | 2,091 | 1,991 | |||||||||||
Total current assets | 77,622 | 64,326 | 109,371 | |||||||||||
Restricted cash and cash equivalents | — | — | 25,805 | |||||||||||
Unconsolidated investments | 8,363 | 46,760 | 48,459 | |||||||||||
Deposits and other | 12,395 | 13,071 | 14,367 | |||||||||||
Property, plant and equipment, net | 152,342 | 344,015 | 472,217 | |||||||||||
Construction-in-process | 27,776 | 35,118 | 41,745 | |||||||||||
Deferred financing costs, net | 1,624 | 7,843 | 16,461 | |||||||||||
Intangible assets, net | 7,256 | 32,005 | 49,758 | |||||||||||
Total assets | $ | 287,378 | $ | 543,138 | $ | 778,183 | ||||||||
Liabilities and Stockholder's Equity | ||||||||||||||
Current liabilities: | ||||||||||||||
Short-term debt | $ | 65,000 | $ | — | $ | — | ||||||||
Accounts payable and accrued expenses | 18,650 | 27,479 | 34,764 | |||||||||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 3,153 | 7,843 | 8,042 | |||||||||||
Current portion of long-term debt: | ||||||||||||||
Limited and non-recourse | 11,036 | 15,686 | 21,260 | |||||||||||
Full recourse | 8,271 | 10,490 | 30,489 | |||||||||||
Senior secured notes (non-recourse) | — | — | 3,279 | |||||||||||
Due to Parent | 51,365 | 151 | 413 | |||||||||||
Total current liabilities | 157,475 | 61,649 | 98,247 | |||||||||||
Long-term debt, net of current portion: | ||||||||||||||
Limited and non-recourse | 44,171 | 193,251 | 165,449 | |||||||||||
Full recourse | 32,329 | 41,061 | 35,317 | |||||||||||
Senior secured notes (non-recourse) | — | — | 186,506 | |||||||||||
Notes payable to Parent | — | 177,004 | 193,852 | |||||||||||
Other liabilities | 1,549 | 1,469 | 1,429 | |||||||||||
Deferred income taxes | 11,951 | 13,886 | 15,928 | |||||||||||
Liabilities for severance pay | 9,534 | 9,993 | 10,135 | |||||||||||
Asset retirement obligation | — | 5,737 | 8,019 | |||||||||||
Total liabilities | 257,009 | 504,050 | 714,882 | |||||||||||
Minority interest in net assets of subsidiaries | 2,532 | 2,113 | 69 | |||||||||||
Commitments and contingencies (Notes 6, 11, 17 and 18) | ||||||||||||||
Stockholder's equity: | ||||||||||||||
Common stock, par value $0.001 per share; 200,000,000 shares authorized; 30,769,230, 30,769,230 and 32,307,692 shares issued and outstanding | 31 | 31 | 33 | |||||||||||
Additional paid-in capital | 6,980 | 6,994 | 26,992 | |||||||||||
Divisional deficit | (6,599 | ) | (11,263 | ) | (10,293 | ) | ||||||||
Unearned stock-based compensation | (111 | ) | (86 | ) | (51 | ) | ||||||||
Retained earnings | 27,536 | 41,299 | 46,551 | |||||||||||
Total stockholder's equity | 27,837 | 36,975 | 63,232 | |||||||||||
Total liabilities and stockholder's equity | $ | 287,378 | $ | 543,138 | $ | 778,183 | ||||||||
The accompanying notes are an integral part of these financial statements.
F-4
Ormat Technologies, Inc. and
Subsidiaries
Consolidated Statements of Operations and
Comperhensive Income (loss)
(dollars in thousands, except per
share
amounts)
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||
(unaudited) | ||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||
Electricity: | ||||||||||||||||||||||
Energy and capacity | $ | 33,956 | $ | 65,491 | $ | 77,752 | $ | 35,651 | $ | 48,048 | ||||||||||||
Lease | — | — | — | — | 22,167 | |||||||||||||||||
Total electricity | 33,956 | 65,491 | 77,752 | 35,651 | 70,215 | |||||||||||||||||
Products | 13,959 | 20,138 | 41,688 | 16,022 | 29,491 | |||||||||||||||||
47,915 | 85,629 | 119,440 | 51,673 | 99,706 | ||||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||
Electricity: | ||||||||||||||||||||||
Energy and capacity | 12,536 | 33,482 | 46,726 | 21,762 | 29,440 | |||||||||||||||||
Lease | — | — | — | — | 11,172 | |||||||||||||||||
Total electricity | 12,536 | 33,482 | 46,726 | 21,762 | 40,612 | |||||||||||||||||
Products | 17,454 | 17,293 | 29,494 | 10,709 | 23,122 | |||||||||||||||||
29,990 | 50,775 | 76,220 | 32,471 | 63,734 | ||||||||||||||||||
Gross margin | 17,925 | 34,854 | 43,220 | 19,202 | 35,972 | |||||||||||||||||
Operating expenses: | ||||||||||||||||||||||
Research and development expenses | 1,729 | 1,503 | 1,391 | 871 | 1,202 | |||||||||||||||||
Selling and marketing expenses | 6,535 | 6,051 | 7,087 | 2,666 | 3,946 | |||||||||||||||||
General and administrative expenses | 5,444 | 7,073 | 9,252 | 4,053 | 5,219 | |||||||||||||||||
Operating income | 4,217 | 20,227 | 25,490 | 11,612 | 25,605 | |||||||||||||||||
Other income (expense): | ||||||||||||||||||||||
Interest income | 1,323 | 609 | 607 | 299 | 431 | |||||||||||||||||
Interest expense | (4,333 | ) | (6,179 | ) | (8,120 | ) | (3,835 | ) | (19,475 | ) | ||||||||||||
Foreign currency translation and transaction gain (loss) | 305 | (323 | ) | (316 | ) | (151 | ) | (397 | ) | |||||||||||||
Other non-operating income | 300 | 1,195 | 464 | 278 | 145 | |||||||||||||||||
Income from continuing operations before income taxes, minority interest, and equity in income of investees | 1,812 | 15,529 | 18,125 | 8,203 | 6,309 | |||||||||||||||||
Income tax provision | (3,065 | ) | (6,135 | ) | (2,506 | ) | (2,173 | ) | (1,957 | ) | ||||||||||||
Minority interest in earnings of subsidiaries | (645 | ) | (1,194 | ) | (519 | ) | (399 | ) | (108 | ) | ||||||||||||
Equity in income of investees | 166 | 314 | 559 | 188 | 2,035 | |||||||||||||||||
Income (loss) from continuing operations | (1,732 | ) | 8,514 | 15,659 | 5,819 | 6,279 | ||||||||||||||||
Discontinued operations (Note 2): | ||||||||||||||||||||||
Loss from operations of discontinued activities in Kazakhstan | (4,681 | ) | (3,114 | ) | — | — | — | |||||||||||||||
Loss on sale of Kazakhstan operations | — | (6,444 | ) | — | — | — | ||||||||||||||||
Income (loss) before cumulative effect of change in accounting principle | (6,413 | ) | (1,044 | ) | 15,659 | 5,819 | 6,279 | |||||||||||||||
Cumulative effect of change in accouting principle | ||||||||||||||||||||||
(net of tax benefit of $125) | — | — | (205 | ) | (205 | ) | — | |||||||||||||||
Net income (loss) | (6,413 | ) | (1,044 | ) | 15,454 | 5,614 | 6,279 | |||||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||
Foreign currency translation adjustments | (1,133 | ) | (51 | ) | — | — | — | |||||||||||||||
Reclassification adjustments | — | 1,184 | — | — | — | |||||||||||||||||
Comprehensive income (loss) | $ | (7,546 | ) | $ | 89 | $ | 15,454 | $ | 5,614 | $ | 6,279 | |||||||||||
Basic and diluted income (loss) per share: | ||||||||||||||||||||||
Income (loss) from continuing operations | $ | (0.06 | ) | $ | 0.28 | $ | 0.51 | $ | 0.19 | $ | 0.20 | |||||||||||
Loss from discontinued operations | (0.15 | ) | (0.31 | ) | — | — | — | |||||||||||||||
Cumulative effect of change in accounting principle | — | — | (0.01 | ) | (0.01 | ) | — | |||||||||||||||
Net income (loss) | $ | (0.21 | ) | $ | (0.03 | ) | $ | 0.50 | $ | 0.18 | $ | 0.20 | ||||||||||
Weighted average number of shares outstanding | 30,769,230 | 30,769,230 | 30,769,230 | 30,769,230 | 30,786,136 | |||||||||||||||||
The accompanying notes are an integral part of these financial statements.
F-5
Ormat Technologies, Inc. and
Subsidiaries
Consolidated Statements of Stockholders' Equity
(dollars in
thousands)
Common Stock |
Additional
Paid-in Capital |
Divisional
Deficit |
Unearned
Stock-based Compensation |
Retained
Earnings |
Accumulated
Other Comprehensive Loss |
Total | ||||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||||
(in thousands) | (Restated) | (Restated) | (Restated) | |||||||||||||||||||||||||||||||
Balance, December 31, 2000 | 30,769 | $ | 31 | $ | 6,831 | $ | 6,539 | $ | — | $ | 15,600 | $ | — | $ | 29,001 | |||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | (1,133 | ) | (1,133 | ) | ||||||||||||||||||||||||
Contribution from Parent | — | — | — | 1,511 | — | — | — | 1,511 | ||||||||||||||||||||||||||
Net income (loss) | — | — | — | (12,550 | ) | — | 6,137 | — | (6,413 | ) | ||||||||||||||||||||||||
Balance, December 31, 2001 | 30,769 | 31 | 6,831 | (4,500 | ) | — | 21,737 | (1,133 | ) | 22,966 | ||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | (51 | ) | (51 | ) | ||||||||||||||||||||||||
Reduction of accumulated foreign currency translation losses | — | — | — | — | — | — | 1,184 | 1,184 | ||||||||||||||||||||||||||
Unearned stock-based compensation | — | — | 149 | — | (149 | ) | — | — | — | |||||||||||||||||||||||||
Amortization of unearned stock-based compensation | — | — | — | — | 38 | — | — | 38 | ||||||||||||||||||||||||||
Contribution from Parent | — | — | — | 4,744 | — | — | — | 4,744 | ||||||||||||||||||||||||||
Net income (loss) | — | — | — | (6,843 | ) | — | 5,799 | — | (1,044 | ) | ||||||||||||||||||||||||
Balance, December 31, 2002 | 30,769 | 31 | 6,980 | (6,599 | ) | (111 | ) | 27,536 | — | 27,837 | ||||||||||||||||||||||||
Unearned stock-based compensation | — | — | 14 | — | (14 | ) | — | — | — | |||||||||||||||||||||||||
Amortization of unearned stock-based compensation | — | — | — | — | 39 | — | — | 39 | ||||||||||||||||||||||||||
Distribution to Parent | — | — | — | (6,355 | ) | — | — | — | (6,355 | ) | ||||||||||||||||||||||||
Net income | — | — | — | 1,691 | — | 13,763 | — | 15,454 | ||||||||||||||||||||||||||
Balance, December 31, 2003 | 30,769 | 31 | 6,994 | (11,263 | ) | (86 | ) | 41,299 | — | 36,975 | ||||||||||||||||||||||||
Amortization of unearned stock- based compensation (unaudited) | — | — | — | — | 35 | — | — | 35 | ||||||||||||||||||||||||||
Conversion of note payable to Parent to equity (unaudited) | — | 2 | 19,998 | — | — | — | — | 20,000 | ||||||||||||||||||||||||||
Distribution to Parent (unaudited) | — | — | — | (57 | ) | — | — | — | (57 | ) | ||||||||||||||||||||||||
Net income (unaudited) | — | — | — | 1,027 | — | 5,252 | — | 6,279 | ||||||||||||||||||||||||||
Balance, June 30, 2004 (Unaudited) | 30,769 | $ | 33 | $ | 26,992 | $ | (10,293 | ) | $ | (51 | ) | $ | 46,551 | $ | — | $ | 63,232 | |||||||||||||||||
The accompanying notes are an integral part of these financial statements.
F-6
Ormat Technologies, Inc. and
Subsidiaries
Consolidated Statements of Cash Flows (dollars in
thousands)
Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||
(unaudited) | ||||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||
Net income (loss) | $ | (6,413 | ) | $ | (1,044 | ) | $ | 15,454 | $ | 5,614 | $ | 6,279 | ||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||||||||
Depreciation and amortization | 11,245 | 14,477 | 16,619 | 7,270 | 14,258 | |||||||||||||||||
Minority interest in earnings of subsidiaries | 645 | 1,194 | 519 | 398 | 108 | |||||||||||||||||
Loss on sale of subsidiary | — | 6,444 | — | — | — | |||||||||||||||||
Equity in income of investees | (166 | ) | (314 | ) | (559 | ) | (188 | ) | (2,035 | ) | ||||||||||||
Distributions from unconsolidated investments | — | — | — | — | 5,182 | |||||||||||||||||
Provision for (recovery of) doubtful accounts | 465 | (256 | ) | (234 | ) | — | — | |||||||||||||||
Deferred income tax provision | 2,782 | 5,883 | 2,060 | 2,172 | 1,592 | |||||||||||||||||
Cumulative effect of change in accounting principle | — | — | 205 | 205 | — | |||||||||||||||||
Changes in operating assets and liabilities, net of sale and acquisitions: | ||||||||||||||||||||||
Receivables | 1,242 | (10,516 | ) | 1,343 | 1,146 | (4,568 | ) | |||||||||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | — | — | (1,922 | ) | — | (1,664 | ) | |||||||||||||||
Inventories | (1,058 | ) | 408 | 2,236 | 412 | (3,744 | ) | |||||||||||||||
Prepaid expenses and other | (1,106 | ) | 1,628 | 32 | 1,145 | 16 | ||||||||||||||||
Deposits and other | 1,763 | (2,033 | ) | (231 | ) | (60 | ) | 1,526 | ||||||||||||||
Accounts payable and accrued expenses | 1,742 | (3,676 | ) | 5,266 | (1,666 | ) | 4,771 | |||||||||||||||
Due from/to related entities, net | 214 | 195 | (150 | ) | (82 | ) | 446 | |||||||||||||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 74 | (581 | ) | 4,691 | — | 199 | ||||||||||||||||
Liabilities for severance pay | (431 | ) | (175 | ) | 459 | 419 | 142 | |||||||||||||||
Asset retirement obligation | — | — | 231 | — | 152 | |||||||||||||||||
Net cash provided by operating activities | 10,998 | 11,634 | 46,019 | 16,785 | 22,660 | |||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||
Change in restricted cash and cash equivalents | 254 | (3,343 | ) | (2,403 | ) | 688 | (50,724 | ) | ||||||||||||||
Capital expenditures | (32,265 | ) | (22,710 | ) | (25,296 | ) | (16,940 | ) | (6,615 | ) | ||||||||||||
Decrease of cash resulting from deconsolidation of OLCL | — | — | — | — | (1,800 | ) | ||||||||||||||||
Increase in severance fund asset, net | (565 | ) | (448 | ) | (446 | ) | (220 | ) | (217 | ) | ||||||||||||
Repayment from joint ventures | 651 | 1,674 | 794 | 413 | 485 | |||||||||||||||||
Cash received from sale of subsidiary | — | 3,966 | — | — | — | |||||||||||||||||
Cash paid for acquisitions, net of cash received | (30,511 | ) | (39,660 | ) | (257,829 | ) | — | (174,258 | ) | |||||||||||||
Net cash used in investing activities | (62,436 | ) | (60,521 | ) | (285,180 | ) | (16,059 | ) | (233,129 | ) | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||
Due to Parent, net | 9,277 | 5,154 | (582 | ) | 22,526 | — | ||||||||||||||||
Proceeds from issuance of notes payable to Parent | — | — | 126,339 | — | 92,848 | |||||||||||||||||
Payments of notes payable to Parent | — | — | — | — | (56,000 | ) | ||||||||||||||||
Distributions to minority shareholders | (890 | ) | (1,320 | ) | (940 | ) | (440 | ) | — | |||||||||||||
Contributions from (distributions to) Parent | 1,511 | 4,744 | (6,355 | ) | (12 | ) | (57 | ) | ||||||||||||||
Proceeds from issuance of short-term debt | — | 50,000 | — | — | — | |||||||||||||||||
Proceeds from issuance of long-term debt | 51,662 | 20,279 | 178,018 | 13,518 | 210,000 | |||||||||||||||||
Payments of long-term debt | (6,698 | ) | (6,437 | ) | (23,336 | ) | (55,284 | ) | (10,408 | ) | ||||||||||||
Payments of short-term debt | — | — | (55,000 | ) | —— | — | ||||||||||||||||
Deferred debt issue costs | — | — | (6,794 | ) | — | (9,448 | ) | |||||||||||||||
Payment for interest rate cap | — | — | — | — | (3,820 | ) | ||||||||||||||||
Deferred stock offering costs | — | — | — | — | (349 | ) | ||||||||||||||||
Net cash provided by (used in) financing activities | 54,862 | 72,420 | 211,350 | (19,692 | ) | 222,766 | ||||||||||||||||
Effect of foreign currency translation adjustments | (293 | ) | (51 | ) | — | — | — | |||||||||||||||
Net increase (decrease) in cash and cash equivalents | 3,131 | 23,482 | (27,811 | ) | (18,966 | ) | 12,297 | |||||||||||||||
Cash and cash equivalents, beginning of the period | 10,071 | 13,202 | 36,684 | 36,684 | 8,873 | |||||||||||||||||
Cash and cash equivalents, end of the period | $ | 13,202 | $ | 36,684 | $ | 8,873 | $ | 17,718 | $ | 21,170 | ||||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||||||||
Cash paid during the year for: | ||||||||||||||||||||||
Interest | $ | 4,248 | $ | 5,055 | $ | 4,937 | $ | 658 | $ | 13,289 | ||||||||||||
Income taxes | $ | 297 | $ | 453 | $ | — | $ | — | $ | — | ||||||||||||
Supplemental non-cash investing and financing activities: | ||||||||||||||||||||||
Effect of adopting SFAS No. 143: | ||||||||||||||||||||||
Asset retirement cost | $ | — | $ | — | $ | 2,475 | $ | — | $ | — | ||||||||||||
Asset retirement obligation | $ | — | $ | — | $ | 2,805 | $ | — | $ | — | ||||||||||||
Conversion of amounts due to Parent to notes payable to Parent | $ | — | $ | — | $ | 50,665 | $ | — | $ | — | ||||||||||||
Conversion of note payable to Parent to equity | — | — | — | — | $ | 20,000 | ||||||||||||||||
Accounts payable related to purchases of fixed assets | $ | 71 | $ | — | $ | 748 | $ | — | $ | 1,306 | ||||||||||||
Deconsolidation of OLCL Non-cash Assets | $ | — | $ | — | $ | — | $ | — | $ | 3,081 | ||||||||||||
Net deferred tax liabilities resulting from the change in functional currency of the Company's Kazakhstan operations | $ | 839 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Business acquisitions — See Note 2 | ||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
F-7
Ormat
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
1. Business and Significant Accounting Policies
Business
Ormat Technologies, Inc. ("Company"), a wholly owned subsidiary of Ormat Industries Ltd. ("Parent"), is engaged in the geothermal and recovered energy business, including supply of equipment that is manufactured by the Company and design and construction of such power plants for projects owned by the Company or for third parties. The Company owns and operates geothermal power plants in various countries, including Kenya, Nicaragua, the Philippines, Guatemala and the United States of America ("U.S."). The Company also owned coal fueled heating and electricity power plants and distribution facilities in the Republic of Kazakhstan ("Kazakhstan"), that were sold on September 16, 2002 (Note 2). The Company's equipment manufacturing operations are located in Israel.
Several of the Company's power plant facilities are listed as Qualifying Facilities (QF) under the Public Utility Regulatory Policies Act (PURPA). The related power purchase agreements for such facilities are dependent upon the Company maintaining the QF status.
Recapitalization
On June 29, 2004, the Company amended and restated its certificate of incorporation, pursuant to which the authorized capital stock of the Company was increased from 1,000 shares of $1.00 par value common stock to 205,000,000 authorized shares, comprising of 200,000,000 shares of $0.001 par value common stock and 5,000,000 shares of $0.001 par value preferred stock, of which, 500,000 shares have been designated as Series A Preferred Stock. The board of directors has the authority to issue the undesignated preferred stock in one or more series and to establish the rights, preferences, privileges and restrictions thereof.
Additionally, on June 29, 2004, the outstanding and issued 200 shares of $1.00 par value common stock were divided and converted (stock split) to 30,769,230 shares of $0.001 par value common stock. Accordingly, all common share and per common share amounts in the accompanying consolidated financial statements have been restated to give retroactive effect to the stock split for all periods presented.
Further, on June 29, 2004, $20,000 outstanding pursuant to the note payable to Parent was converted to 1,538,462 shares of $0.001 par value common stock of the Company. Such conversion reduced the amounts payable pursuant to the Parent Loan Agreement and increased the stockholder's equity by $20,000 and no gain or loss was recognized as a result thereof.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, an 85% interest in OrYunnan Geothermal Co. Ltd. ("OrYunnan"), a 79% interest in Ormat Leyte Co, Ltd. ("OLCL"), a 50% interest in Karaganda Holding Company ("KHC") prior to March 12, 2002, and a 100% interest in KHC from March 12, 2002 to September 16, 2002. All intercompany accounts and transactions are eliminated.
In November 1999, the Company, through a wholly owned subsidiary, entered into an agreement with Yunnan Province Geothermal Development Co. ("YPGD") to form OrYunnan, a limited liability joint venture, whereby the Company is to contribute, for an 85% ownership interest, $2,550 and YPGD is to contribute, for the remaining 15% ownership interest, $450. Pursuant to such agreement, 15% of the capital contribution was made in April 2000, and the remaining portion is to be paid within 60 days after the date on which a power purchase agreement is executed. OrYunnan is currently in the process of negotiating a power purchase agreement. OrYunnan was formed for the purpose of utilizing, for electric power generation, all of the geothermal resources of Teng Chong County of the Yunnan Province in the Republic of China.
F-8
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
OLCL is a limited partnership established for the purpose of developing, financing, constructing, owning, operating, and maintaining geothermal power plants in Leyte Provina, the Philippines.
The Company's consolidated balance sheets include 100% of the assets and liabilities of OrYunnan and of OLCL prior to March 31, 2004. The unrelated entity's 15% interests in OrYunnan, and 21% interest in OLCL prior to March 31, 2004, have been reflected as "Minority interest in net assets of subsidiaries" in the Company's consolidated balance sheets and the earnings therefrom have been reflected on the consolidated statements of operations and comprehensive income for all periods presented and have been reflected in "Minority interest in earnings of subsidiaries". Intercompany accounts and transactions have been eliminated in the consolidation.
The Company accounts for its interests in partnerships and companies in which it has equal to or less than a 50% ownership interest under the equity method. Under the equity method, original investments are recorded at cost and adjusted by the Company's share of undistributed earnings or losses of such companies. The Company's earnings in investments accounted for under the equity method have been reflected as "Equity in income of investees" on the Company's consolidated statements of operations and comprehensive income.
Adoption of FIN No. 46R
In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB 51 ("FIN No. 46"), and amended it by issuing FIN No. 46R in December 2003. Among other things, FIN No. 46R generally deferred the effective date of FIN No. 46 to the quarter ended March 31, 2004. The objectives of FIN No. 46R are to provide guidance on the identification of Variable Interest Entities ("VIEs") for which control is achieved through means other than ownership of a majority of the voting interest of the entity, and how to determine which company (if any), as the primary beneficiary, should consolidate the VIE. A variable interest in a VIE, by definition, is an asset, liability, equity, contractual arrangement or other economic interest that absorbs the entity's economic variability.
Effective as of March 31, 2004, the Company adopted FIN No. 46R. In connection with the adoption of FIN No. 46R, the Company concluded that OLCL, in which the Company has an 80% ownership interest, should be deconsolidated. OLCL's operating results continued to be accounted for using the consolidated method of accounting for the three month period ended March 31, 2004, and effective April 1, 2004, the Company's ownership interest in OLCL is accounted for using the equity method of accounting. The Company's maximum exposure to loss as a result of its involvement with OLCL is estimated to be $4.3 million, which is the Company's net investment at June 30, 2004 (unaudited).
The Company also has variable interests in certain other consolidated wholly owned VIEs that will continue to be consolidated because the Company is the primary beneficiary. Further, the Company has concluded that the Company's remaining significant equity investments do not require consolidation as they are not VIEs.
Purchase of the power generation business from the Parent
As of July 1, 2004, a wholly owned subsidiary of the Company, Ormat Systems Ltd. ("OSL"), an Israeli company, acquired from the Parent for $11 million the power generation business which includes the manufacturing and sale of energy-related products pertaining mainly to the geothermal and recovered energy industry.
The Company considers this business to be synergistic with its ownership and operation of geothermal power plants as well as to the construction of the projects (on a turnkey basis). In addition to acquiring the tangible net assets of the power generation business, OSL has assumed the title and interest to certain related contracts and liabilities and rights under agreements with employees and
F-9
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
consultants, and obtained a perpetual license of all intellectual property pertaining to the power generation business from the Parent. Further, in connection with binding work and product orders that the Parent had with its customers, which were transferred to OSL as part of the acquisition, OSL has agreed to pay the Parent a commission ranging from 2.5% to 5% of sales by OSL related to such work and product orders.
In connection with the acquisition, OSL and the Parent have entered into an agreement whereby OSL will provide to the Parent, for a monthly fee of $10, services including certain corporate administrative services, including the services of executive officers. In addition, OSL has agreed to provide the Parent with services of certain skilled engineers at OSL's cost plus 10%. Such agreements may be terminated by either party after the initial term through 2009.
Also in connection with the acquisition, OSL entered into a rental agreement with the Parent for the use of office and manufacturing facilities in Yavne, Israel, for a monthly rent of $52, adjusted annually for the Israeli Consumer Price Index, plus tax and other costs to maintain the properties. The term of the rental agreement is for 59 months and expires in June 2009.
The Company has recorded the purchase of the power generation business at historical net book value, and has accounted for the purchase as a transfer of assets between entities under common control in a manner similar to the pooling of interests, accordingly, all prior period consolidated financial statements of the Company have been restated to include the results of operations, financial position, and cash flows of the power generation business.
Of the $11 million purchase price, the Company paid $4.8 million in cash and assumed $6.2 million in debt and other liabilities. As the Company's purchase of the power generation business effective July 1, 2004 has been accounted as a transfer of assets between entities under common control, the excess of the consideration paid over the historical net book value of the purchased business will be recorded as a distribution to the Parent, which will have the effect of reducing stockholder's equity by approximately $4.8 million at July 1, 2004. Because the deferred taxes have a full valuation allowance, there was no tax effect for the difference between the book and tax basis of the purchased assets and liabilities. Additionally, on July 1, 2004, the Company will be reclassifying the divisional equity to additional paid-in capital.
Interim financial statements
The interim financial statements, including information contained in the notes to the financial statements, as of June 30, 2004, and for the six months ended June 30, 2003 and 2004, is unaudited, however, in the opinion of the Company, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for such interim periods. The interim amounts presented are not necessarily indicative of the results of operations of the Company for the year ending December 31, 2004.
Cash and cash equivalents
The Company considers all highly liquid instruments, with an original maturity of three months or less, to be cash equivalents.
Restricted cash and cash equivalents
Under the terms of certain long-term debt agreements, the Company is required to maintain certain debt service reserve, cash collateral and operating fund accounts that have been classified as restricted cash and cash equivalents. Funds that will be used to satisfy obligations due during the next twelve months are classified as current restricted cash and cash equivalents, with the remainder classified as non-current restricted cash and cash equivalents. Such amounts are invested primarily in money
F-10
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
market accounts. The Company considers all highly liquid instruments, with an original maturity of three months or less, to be cash equivalents.
Concentration of credit risk
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash investments and accounts receivable.
The Company places its temporary cash investments with high credit quality financial institutions located in the U.S. and in foreign countries. At December 31, 2002 and 2003, and June 30, 2004 (unaudited), the Company had deposits in four, six and seven respectively, U.S. financial institutions that were federally insured up to $100 per financial institution. At December 31, 2002 and 2003, and June 30, 2004 (unaudited), the Company's deposits in foreign countries of approximately $9,642, $9,927, and $5,000 respectively, were not insured.
At December 31, 2002 and 2003, and June 30, 2004 (unaudited), accounts receivable related to operations in foreign countries amounted to approximately $15,093, $13,029, and $14,170, respectively. At December 31, 2002 and 2003, and June 30, 2004 (unaudited), accounts receivable from the Company's major customers (Note 15) amounted to approximately 61%, 57% and 65% of the Company's accounts receivable, respectively. The Company performs ongoing credit evaluations of its customers' financial condition. The Company requires the customer in Nicaragua to provide a cash security arrangement for its payment obligations. The Company has historically been able to collect on all of its receivable balances, and accordingly, no provision for doubtful accounts has been made.
Inventories
Inventories consist primarily of raw material parts and sub assemblies for power units, and are stated at the lower of cost or market value, using the moving-average cost method, which approximates the first-in first-out method, and is stated net of provision for slow-moving and obsolescence, which was not significant.
Deposits and other
Deposits and other consist primarily of performance bonds for construction projects and a long-term insurance contract.
Property, plant and equipment
Property, plant and equipment are stated at cost. All costs associated with the acquisition, development and construction incurred as part of the construction of power plants operated by the Company are capitalized. Major improvements are capitalized and repairs and maintenance costs are expensed. Power plants operated by the Company are depreciated using the straight-line method over the term of the relevant power purchase agreement (Note 13). The geothermal power plants in the Philippines and Nicaragua are to be fully depreciated over the period that the plants are owned by the Company. The other assets are depreciated using the straight-line method over the following estimated useful lives of the assets:
Leasehold improvements | 25 years | |||||
Machinery and equipment - manufacturing | 10 years | |||||
Machinery and equipment - computers | 3 years | |||||
Office equipment - furniture and fixtures | 15 years | |||||
Office equipment - other | 10 years | |||||
Automobiles | 7 years | |||||
F-11
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
The cost and accumulated depreciation of items sold or retired are removed from the accounts. Any resulting gain or loss is recognized currently and is recorded in operating income.
The Company capitalizes interest costs as part of constructing power plants. Such capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. Capitalized interest costs amounted to approximately $974, $201, and $297 for the years ended December 31, 2001, 2002 and 2003, respectively. No amounts were capitalized during the six months ended June 30, 2003 and 2004 (unaudited).
Intangible assets
Intangible assets consist of allocated acquisition cost of power purchase agreements, that are amortized over the 15 to 20-year terms of the agreements using the straight-line method.
Deferred financing costs
Deferred financing costs are amortized over the term of the related obligation using the effective interest method. Amortization of deferred financing costs are presented as interest expense in the statement of operations. Accumulated amortization related to deferred financing costs amounted to $0, $576 and $1,406 at December 31, 2002 and 2003 and June 30, 2004 (unaudited), respectively. Amortization expense for the years ended December 31, 2001, 2002 and 2003 and for the six months ended June 30, 2003 and 2004 (unaudited) amounted to $0, $0, $576, $288 and $830, respectively.
Impairment of long-lived assets and long-lived assets to be disposed of
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Management believes that no impairment exists for long-lived assets, however, future estimates as to the recoverability of such assets may change based on revised circumstances.
Derivative instruments
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted by other related accounting literature, establishes accounting and reporting standards for derivative instruments (including certain derivative instruments embedded in other contracts). SFAS No. 133 requires companies to record derivatives on their balance sheets as either assets or liabilities measured at their fair value unless exempted from derivative treatment as a normal purchase and sale. All changes in the fair value of derivatives are recognized currently in earnings unless specific hedge criteria are met, which requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.
The Company maintains a risk management strategy that incorporates the use of interest rate swaps and interest rate caps to minimize significant fluctuation in cash flows and/or earnings that are caused by interest rate volatility. Gain or loss on contracts that initially qualify for cash flow hedge accounting is included as a component of other comprehensive income and are subsequently reclassified into earnings when interest on the related debt is paid. Gain or loss on contracts that are not designated to qualify as a cash flow hedge is included as a component of interest expense.
F-12
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
The Company is subject to the provisions of SFAS No. 133 Derivative Implementation Group ("DIG") Issue No. C15 (DIG Issue No. C15), Normal Purchases and Normal Sales Exception for Certain Option-Type Contracts and Forward Contracts in Electricity , which expands the requirements for the normal purchase and normal sales exception to include electricity contracts entered into by a utility company when certain criteria are met. Also under DIG Issue No. C15, contracts that have a price adjustment clause based on an index that is not directly related to the electricity generated, as defined in SFAS No. 133, do not meet the requirements for the normal purchases and normal sales exception. The Company has power sales agreements that qualify as derivative instruments under DIG Issue No. C15 because they have a price adjustment clause based on an index that does not directly relate to the sources of the power used to generate the electricity. The adoption of the provisions of DIG Issue No. C15 in 2002 did not have a material impact on the Company's consolidated financial position and results of operations.
In June 2003, the FASB issued DIG Issue No. C20, Scope Exceptions: Interpretation of the Meaning of Not Clearly and Closely Related in Paragraph 10(b) regarding Contracts with a Price Adjustment Feature . DIG Issue No. C20 superseded DIG Issue No. C11 Interpretation of Clearly and Closely Related in Contracts That Qualify for the Normal Purchases and Normal Sales Exception , and specified additional circumstances in which a price adjustment feature in a derivative contract would not be an impediment to qualifying for the normal purchases and normal sales scope exception under SFAS No. 133. DIG Issue No. C20 was effective as of the first day of the fiscal quarter beginning after July 10, 2003, (i.e. October 1, 2003, for the Company). In conjunction with initially applying the implementation guidance, DIG Issue No.C20 requires contracts that did not previously qualify for the normal purchases normal sales scope exception, and do qualify for the exception under DIG Issue No. C20, to freeze the fair value of the contract as of the date of the initial application, and amortized such fair value over the remaining contract period. Upon adoption of DIG Issue No. C20, the Company elected the normal purchase and normal sales scope exception under FAS No. 133 related to its power purchase agreements. Such adoption did not have a material impact on the Company's consolidated financial position and results of operations.
Foreign currency translation
The functional currency of all foreign entities is the reporting currency (U.S. dollars). For these entities, monetary assets and liabilities are translated at the current exchange rate, while non-monetary items are translated at historical rates. Income and expense items are translated at the average exchange rate for the year, except for depreciation, which is translated at historical rates. Translation adjustments and transaction gains or losses are included in results of operations.
The Company's functional currency of certain Kazakhstan activities was considered to be the local currency, accordingly all assets and liabilities were translated at the exchange rate as of the balance sheet date. Revenues, costs and expenses were translated at the weighted average exchange rate for the period. Translation adjustments were accumulated in a separate component of equity. Upon sale of the Kazakhstan business (Note 2), the accumulated foreign currency translation losses were eliminated.
Comprehensive income reporting
The Company accounts for comprehensive income with SFAS No. 130, Reporting Comprehensive Income, which requires comprehensive income and its components to be reported when a company has items of other comprehensive income. Comprehensive income includes net income plus other comprehensive income, which for the Company consists of foreign currency translation adjustments and is reported as a separate component of stockholder's equity rather than in the current year's earnings. The changes to accumulated other comprehensive loss for all periods presented consist
F-13
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
entirely of changes in foreign currency translation adjustments, which changes have been presented in the accompanying statements of stockholder's equity. Such adjustments did not have any tax effect as Karaganda Holding Company ("KHC") was not in a taxable position due to its recurring losses that resulted in a full valuation of deferred taxes. In connection with the sale of KHC that is further discussed in Note 2, the Company recorded a reduction of $1,184 in accumulated foreign currency translation losses, and included such accumulated losses as a component of "loss on sale of Kazakhstan operations" in determining the net loss for the year ended December 31, 2002.
Revenue and cost of revenues
Revenues are primarily related to (i) sale of electricity from geothermal power plants owned and operated by the Company; and (ii) geothermal and recovered energy power plant equipment engineering, sale, construction and installation and operating services.
Revenues related to the sale of electricity from geothermal power plants and capacity payments are recorded based upon output delivered and capacity provided at rates specified under relevant contract terms. For power purchase agreements (PPAs) acquired as part of the projects purchased since July 1, 2003 (Note 2), revenues related to the lease element of the PPA are included as "lease" revenues, with the remaining revenues related to the production and delivery of energy presented as "energy and capacity".
Revenues from engineering, operating services, and parts and product sales are recorded upon providing the service or delivery of the products and parts. Revenue from the construction of geothermal and recovered energy power plant equipment on behalf of others is recognized on the percentage completion method. Revenue is based on the percentage relationship that incurred costs bear to total estimated costs. Costs include direct material, labor, and indirect costs. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
Warranty on products sold
The Company generally provides a one-year warranty against defects in workmanship and materials related to the sale of products for electricity generation. A provision for warranty reserve is recorded currently for the estimated costs that may be incurred under its warranty. Such reserve is estimated based on past experience, which have historically been immaterial.
Research and development
Research and development costs incurred by OSL for the development of existing and new geothermal, recovered energy, and remote power technologies, are expensed as incurred. Grants received from the Office of the Chief Scientist ("OCS") of the Israeli Government are offset against the related research and development expenses. Such grants amounted to $1,030, $531 and $142 during the years ended December 31, 2001, 2002, and 2003, respectively. No grants were received during the six months ended June 30, 2003 and 2004 (unaudited). During 2003, OSL discontinued requesting any further grants from OCS.
Advertising expense
Advertising costs are expensed as incurred and totaled $118, $72, $58, $26, and $43 for the years ended December 31, 2001, 2002, and 2003, and the six months ended June 30, 2003 and 2004 (unaudited), respectively.
F-14
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Patent expense
Patents are internally developed, and therefore costs are expensed as incurred and totaled $404, $436, $377, $171, and $172 for the years ended December 31, 2001, 2002 and 2003, and six months ended June 30, 2003 and 2004 (unaudited), respectively.
Income taxes
Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of current and deferred tax assets and liabilities are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The Company accounts for investment tax credits as a reduction to income taxes in the year in which the credit arises. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.
Income (loss) per share
Basic income (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. The Company does not have any equity instruments that are dilutive. The stock options granted to employees of the Company in the Parent's stock are not dilutive to the Company's earnings per share.
Stock-based compensation
The Company accounts for stock-based compensation based on the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation , and other related interpretations which states that no compensation expense is recorded for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of common stock on the grant date. In the event that stock options are granted at a price lower than the fair market value at that date, the difference between the fair market value of the common stock and the exercise price of the stock options is recorded as unearned compensation. Unearned compensation is amortized to compensation expense over the vesting period applicable to the stock option. The Company has adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), as it relates to stock options granted to employees, which requires proforma net income be disclosed based on the fair value of the options granted at the date of the grant.
The Company calculated the fair value of each option on the date of grant using the Black-Scholes option pricing model using the following assumptions:
Year Ended December 31, |
Six months
ended
June 30, |
|||||||||||||||||
2001 | 2002 | 2003 | 2004 | |||||||||||||||
Risk-free interest rates | 4.8 | % | 4.7 | % | 4.7 | % | 4.7 | % | ||||||||||
Expected lives (in years) | 5 | 5 | 5 | 5 | ||||||||||||||
Dividend yield | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||||
Expected volatility | 44 | % | 37 | % | 31 | % | 28 | % | ||||||||||
F-15
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Had compensation cost for the options granted to employees of the Company been determined based on the fair value method prescribed by SFAS No. 123, the Company's proforma net income (loss) and earnings (loss) per share would have been as follows:
Year Ended December 31, |
Six
Months
Ended June 30, |
|||||||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||
Net income (loss): | ||||||||||||||||||||||||||
As reported | $ | (6,413 | ) | $ | (1,044 | ) | $ | 15,454 | $ | 5,614 | $ | 6,279 | ||||||||||||||
Add: Total stock-based employee compensation expense included in reported net income, net of tax | — | 24 | 24 | 12 | 12 | |||||||||||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method, net of tax | — | (94 | ) | (175 | ) | — | — | |||||||||||||||||||
Pro forma net income (loss) | $ | (6,413 | ) | $ | (1,114 | ) | $ | 15,303 | $ | 5,626 | $ | 6,291 | ||||||||||||||
Basic and diluted net income (loss) per share: | ||||||||||||||||||||||||||
As reported | $ | (0.21 | ) | $ | (0.03 | ) | $ | 0.50 | $ | 0.18 | $ | 0.20 | ||||||||||||||
Pro forma | $ | (0.21 | ) | $ | (0.03 | ) | $ | 0.50 | $ | 0.18 | $ | 0.20 | ||||||||||||||
Fair value of financial instruments
The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of those instruments. The fair value of long-term debt is estimated based on the current borrowing rates for similar issues, which approximates carrying amount.
Accounting estimates
The preparation of 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 the disclosure of contingent assets and liabilities at the dates of such financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
New accounting pronouncements
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 and reporting for derivative instruments, including certain derivatives embedded in other contracts, and hedging activities under SFAS No. 133. The amendments in SFAS No. 149 require that contracts with comparable characteristics be accounted for similarly. SFAS No. 149 clarifies the circumstances under which a contract with an initial net investment meets the characteristics of a derivative according to SFAS No. 133 and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. The requirements of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company adopted the provisions of SFAS No. 149 effective July 1, 2003, which did not have a material impact on its consolidated results of operations and financial position as of December 31, 2003.
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 how an issuer
F-16
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability because that financial instrument embodies an obligation of the issuer. The requirements of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, effective the first interim period beginning after June 15, 2003. For financial instruments created prior to the issuance date of SFAS No. 150, transition shall be achieved by reporting the cumulative effect of a change in accounting principle. The Company adopted the provisions of SFAS No. 150 effective July 1, 2003, which did not have a material impact on its consolidated results of operations and financial position as of December 31, 2003.
In May 2003, the Emerging Issues Task Force ("EITF") reached consensus in EITF Issue No. 01-8, Determining Whether an Arrangement Contains a Lease , to clarify the requirements of identifying whether an arrangement contains a lease at its inception. The guidance in the consensus is designed to broaden the scope of arrangements, such as power purchase agreements, accounted for as leases. EITF Issue No. 01-8 requires both parties to an arrangement to determine whether a service contract or similar arrangement is, or includes, a lease within the scope of SFAS No. 13, Accounting for Leases . The consensus is being applied prospectively to arrangements agreed to, modified, or acquired in business combination on or after July 1, 2003. The adoption of EITF No. 01-8 effective July 1, 2003 did not have a material effect to the Company's financial position or results of operations. As further discussed in Note 13, power purchase agreements acquired as part of the projects purchased since July 1, 2003 (Heber 1 and 2, Steamboat 2/3, Steamboat Hills, and Puna projects – see Note 2), contain lease elements within the scope of SFAS 13. Lease revenue related to the Heber 1 and 2 projects from the date of acquisition (December 18, 2003) to December 31, 2003 was not material.
2. Business Acquisitions and Sale
Karaganda Holding Company ("KHC")
KHC was established for the purpose of generating power and selling and distributing electricity and heating power in Kazakhstan. Prior to March 12, 2002, the Company had a 50% ownership interest in KHC. Effective March 12, 2002, the Company purchased the remaining 50% interest in KHC for $500. Such transaction was accounted for using the purchase method, and the allocation of the $500 purchase price was as follows:
Cash and cash equivalents | $ | 2,541 | ||||
Accounts receivable assumed | 6,988 | |||||
Property, plant and equipment | 9,089 | |||||
Other assets assumed | 3,056 | |||||
Accounts payable and accrued liabilities assumed | (9,747 | ) | ||||
Long-term debt assumed | (10,632 | ) | ||||
Deferred tax liabilities assumed | (795 | ) | ||||
Total purchase price allocation | $ | 500 | ||||
On September 16, 2002, the Company sold all of its ownership interest in KHC to a third party for approximately $4.1 million, less $184 of costs related to the sale. The Company recognized a loss on the sale of this subsidiary equal to approximately $6.4 million during 2002, in addition to the operational losses incurred prior to such sale. The net assets of KHC on the date of the sale were as follows:
F-17
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Accounts receivable | $ | 12,718 | ||||
Inventory, prepaid expenses and other | 5,035 | |||||
Property, plant and equipment | 27,061 | |||||
Accounts payable and accrued liabilities | (13,966 | ) | ||||
Long-term debt | (19,988 | ) | ||||
Deferred tax liabilities | (1,634 | ) | ||||
Accumulated foreign currency translation adjustments | 1,184 | |||||
Net assets | $ | 10,410 | ||||
The sale of KHC resulted in the Company discontinuing its operating activities in Kazakhstan. The net results of operations of the discontinued activities in Kazakhstan prior to September 16, 2002 are shown in the statement of operations as "Loss from discontinued activities in Kazakhstan" for the years ended December 31, 2001 and 2002.
The Ormesa Project
In April 2002, the Company acquired 100% of the equity interests in the combined 52-megawatt ("MW") generating capacity of the Ormesa Project, located in Imperial Valley, Southern California, to expand its geothermal power plant operations. The Ormesa Project consists of six power plants and was owned by several unrelated companies. The Company acquired 100% interests in four of the entities and acquired the assets of a fifth entity. These entities and assets were merged into Ormesa, LLC ("Ormesa") in 2002. The Company paid approximately $41.7 million for the ownership of the Ormesa Project, of which approximately $35.7 million and $6 million has been allocated to property, plant and equipment and intangible assets, respectively. The acquisition was accounted for as a purchase and the acquired assets are being depreciated over their estimated useful lives of five to fifteen years.
The Steamboat Projects
On June 30, 2003, the Company acquired from two groups of unrelated sellers, a 100% interest in Steamboat Geothermal LLC ("SG"), which owns geothermal power plants ("Steamboat 1/1A") in Nevada. The purchase price of $1,215 was paid in cash, of which, $2,138 has been recorded as property, plant and equipment, less assumption of liabilities of $923. The acquisition has been accounted for as a purchase and the acquired assets are being depreciated over their estimated useful lives of three to fifteen years.
On February 11, 2004, the Company acquired 100% of the outstanding shares of capital stock of Steamboat Development Corp. ("SDC"), and certain real property ("Meyberg Property") from an unrelated party. SDC owned certain leasehold interests as a lessee in the two Steamboat 2/3 geothermal power plants and certain related geothermal leases. On February 13, 2004, the Company acquired all of the beneficial rights, title, and interest in the Steamboat 2/3 geothermal power plants from the lessor. The Company acquired SDC and the Meyberg Property to increase its geothermal power plant operations in the United States. The Company acquired the lessee and lessor positions of the Steamboat 2/3 geothermal power plants for a combined purchase price of approximately $82 million, plus transaction cost of approximately $0.8 million. The results of SDC's operations have been included in the consolidated financial statements since February 11, 2004.
The acquisition of the Steamboat 2/3 power plants and the Meyberg Property have been accounted for under the purchase method of accounting and the depreciable acquired assets and intangibles, are being depreciated over their estimated useful lives of approximately 19 years. The purchase price of the lessee and lessor position has been allocated based on independent valuation and management's estimates as follows (unaudited):
F-18
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Current assets | $ | 1,944 | ||||
Property, plant and equipment | 78,719 | |||||
Intangibles (power purchase agreement) | 4,499 | |||||
Accounts payable and other liabilities assumed | (2,396 | ) | ||||
Net assets acquired | $ | 82,766 | ||||
The Heber and Mammoth Projects
On December 18, 2003, the Company purchased certain geothermal assets from Covanta Energy Corporation ("CEC"), an unrelated entity for a total purchase price of $215 million, plus transaction costs of approximately $3.2 million. As further discussed in Note 10, the Company entered into a loan agreement and borrowed $154.5 million from Beal Bank, all of which is collateralized by the acquired assets described below, except for the assets related to the Company's 50% ownership interest in Mammoth-Pacific, L.P. ("Mammoth").
The assets purchased
include (i) a 100% ownership in Heber Geothermal Company, which
owns a 38 MW geothermal power plant ("Heber
1") located near Heber, California, (ii) a 100%
ownership in Second Imperial Geothermal Company
("SIGC"), that has rights to the lessee
position of a 38 MW geothermal power plant ("Heber
2"), adjacent to the Heber 1 plant, (iii) a 100%
ownership in Heber Field Company, that has the rights to the geothermal
resources used by Heber 1 and Heber 2, and (iv) 50% ownership
interest in Mammoth, that owns and operates three geothermal plants,
with a combined generating capacity of 26 MW located near the city of
Mammoth, California.
In addition, the Company acquired all of the beneficial rights, title and interest in the Heber 2 geothermal power plant from the lessor for a purchase price of approximately $38.5 million.
The SG and Heber and Mammoth projects asset acquisitions have been accounted for under the purchase method of accounting and the acquired assets and intangibles are being depreciated over their estimated useful lives of three to 20 years. The purchase price has been allocated based on independent valuation and management's estimates as follows:
The following unaudited pro forma financial information for the years ended December 31, 2002 and 2003, assumes the Heber and Mammoth projects acquisition occurred as of the beginning of the respective periods, after giving effect to certain adjustments, including the amortization of intangible assets, interest expense on acquisition debt, depreciation based on the adjustments to the fair market value of the property, plant and equipment acquired, and related income tax effects. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the
F-19
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
results of operations that may occur in the future or that would have occurred had the acquisition of the Heber and Mammoth projects been affected on the dates indicated.
Year Ended December 31, | ||||||||||
2002 | 2003 | |||||||||
(unaudited) | ||||||||||
Revenues | $ | 150,707 | $ | 185,571 | ||||||
Income before cumulative effect of accounting change | 10,684 | 42,246 | ||||||||
Net income | 10,684 | 40,381 | ||||||||
Basic and diluted income per share | $ | 0.35 | $ | 1.31 | ||||||
Puna Project (unaudited)
On June 3, 2004, the Company completed the acquisition of 100% of the equity interests of Puna Geothermal Venture ("PGV") from an unrelated party for a purchase price of $71,231, including acquisition costs of $231. PGV operates a geothermal power plant ("Puna Project") located on the island of Hawaii. The Company purchased PGV in order to increase its geothermal power plant operations in the United States. The results of PGV's operations have been included in the consolidated financial statements since June 3, 2004.
The Puna Project was not in compliance with the threshold minimum performance requirements of its power purchase agreement at the time of the acquisition, and is currently not in compliance with such requirements, which non-compliance has resulted in the imposition of sanctions that reduce the aggregate amounts of revenues payable to the Company from the relevant power purchaser, and amounted to $6 for the period from June 3, 2004 to June 30, 2004.
Steamboat Hills Project (unaudited)
On May 20, 2004, the Company completed the acquisition of 100% of the equity interests of Yankee Caithness Joint Venture, L.P. ("Yankee"), which we refer to as Steamboat Hills, from unrelated parties for a purchase price of $20,261, including acquisition costs of $111. Yankee owns and operates a geothermal electric generation plant, located in Steamboat Springs, Nevada. The Company purchased Yankee in order to increase its geothermal power plant operations in the United States. Yankee was subsequently renamed as Steamboat Hills. The result of Steamboat Hills' operations have been included in the consolidated financial statements since May 20, 2004.
The Puna Project and the Steamboat Hills Project acquisitions have been accounted for under the purchase method of accounting and the acquired depreciable assets and intangibles are being depreciated over their estimated useful lives of three to 23 years. The purchase price has been allocated based on independent valuation and management's estimates as follows (unaudited):
Steamboat
Hills Project |
Puna
Project |
Total | ||||||||||||
Accounts receivable assumed | $ | — | $ | 1,870 | $ | 1,870 | ||||||||
Property, plant and equipment | 20,809 | 55,763 | 76,572 | |||||||||||
Intangibles (power purchase agreement) | — | 14,418 | 14,418 | |||||||||||
Accounts payable and other liabilities assumed | — | (179 | ) | (179 | ) | |||||||||
Asset retirement obligation | (548 | ) | (641 | ) | (1,189 | ) | ||||||||
Total purchase price allocation | $ | 20,261 | $ | 71,231 | $ | 91,492 | ||||||||
F-20
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
3. Cost and Estimated Earnings on Uncompleted Contracts
December 31, | June 30, | |||||||||||||
2002 | 2003 | 2004 | ||||||||||||
(unaudited) | ||||||||||||||
Costs and estimated earnings incurred on uncompleted contracts | $ | 7,622 | $ | 12,493 | $ | 37,253 | ||||||||
Less billings to date | (10,775 | ) | (18,414 | ) | ($41,709 | ) | ||||||||
Total | $ | (3,153 | ) | $ | (5,921 | ) | ($4,456 | ) | ||||||
These amounts are included in the accompanying balance sheets under the following captions:
The completion costs of the Company's construction contracts are subject to estimation. Due to uncertainties inherent in the estimation process, it is reasonably possible that estimated contract earnings will be further revised in the near term.
Total costs of a construction contract completed during the six months ended June 30, 2003 decreased by $2.7 million as a result of the cancellation of a provision recorded during the year ended 2002, following negotiations with a customer. Such decrease in cost resulted in an increase in pretax income of $2.7 million during the six months ended June 30, 2003 and had no effect on future periods.
4. Inventories
Inventories consist of the following:
December 31, | June 30, | |||||||||||||
2002 | 2003 | 2004 | ||||||||||||
(unaudited) | ||||||||||||||
Raw materials and purchased parts for assembly | $ | 3,090 | $ | 2,181 | $ | 3,772 | ||||||||
Self-manufactured assembly parts and finished products | 2,858 | 1,531 | 3,684 | |||||||||||
Total | $ | 5,948 | $ | 3,712 | $ | 7,456 | ||||||||
F-21
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
5. Unconsolidated Investments
Unconsolidated investments in power plant projects consist of the following:
December 31, | June 30, | |||||||||||||
2002 | 2003 | 2004 | ||||||||||||
(unaudited) | ||||||||||||||
Orzunil: | ||||||||||||||
Investment | $ | 2,303 | $ | 2,722 | $ | 3,056 | ||||||||
Advances | 6,060 | 5,266 | 4,781 | |||||||||||
8,363 | 7,988 | 7,837 | ||||||||||||
Mammoth | — | 38,772 | 36,319 | |||||||||||
OLCL | — | — | 4,303 | |||||||||||
Total | $ | 8,363 | $ | 46,760 | $ | 48,459 | ||||||||
The Zunil Project
The Company has a 21% ownership interest in Orzunil I de Electricidad, Limitada ("Orzunil"), a limited responsibility company incorporated in Guatemala and established for the purpose of the generation and co-generation of power from a geothermal power plant in the Province of Quetzaltenango in Guatemala. The Company operates and maintains the geothermal power plant and the power purchaser supplies geothermal fluid to the power plant. The Company's 21% ownership interest in Orzunil is accounted for under the equity method of accounting as the Company has the ability to exercise significant influence, but not control, over Orzunil.
Notes receivable for cash advances to Orzunil consist of the following:
December 31, |
June
30,
2004 |
Interest
Rate |
Maturity
Date |
|||||||||||||||||||
2002 | 2003 | |||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||
Subordinated | $ | 4,499 | $ | 4,207 | $ | 3,991 | Libor +4% | 11/15/2011 | ||||||||||||||
Junior subordinated | 1,561 | 1,059 | 790 | 0% | see below | |||||||||||||||||
$ | 6,060 | $ | 5,266 | $ | 4,781 | |||||||||||||||||
All available cash after the debt service under the Subordinated Loan is used to repay the Junior Subordinated Loan. Interest income received from these loans amounted to approximately $546, $296, $270, and $111 during the years ended December 31, 2001, 2002 and 2003, and the six months ended June 30, 2004 (unaudited), respectively.
The Company's equity in income of Orzunil was not significant for each of the periods presented in the accompanying financial statements.
The Mammoth Project
As discussed in Note 2, on December 18, 2003, the Company acquired a 50% interest in the Mammoth Project, which is comprised of three geothermal power plants. The purchase price was less than the underlying net equity of Mammoth by approximately $9.3 million. As such, the basis difference will be amortized over the remaining useful life of the property, plant and equipment and the power purchase agreements, which range from 12 to 17 years. Effective December 18, 2003, the Company operates and maintains the geothermal power plants under an O&M agreement. The Company's 50% ownership interest in Mammoth is accounted for under the equity method of accounting as the Company has the ability to exercise significant influence, but not control, over Mammoth.
F-22
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
The condensed financial position and results of operations of Mammoth are summarized below:
December
31,
2003 |
June
30,
2004 |
|||||||||||||
(unaudited) | ||||||||||||||
Condensed balance sheets: | ||||||||||||||
Current assets | $ | 11,182 | $ | 8,398 | ||||||||||
Non-current assets | 88,918 | 86,394 | ||||||||||||
Current liabilities | 608 | 464 | ||||||||||||
Non-current liabilities | 3,680 | 3,738 | ||||||||||||
Stockholders' equity | 95,812 | 90,590 | ||||||||||||
Period from
December 18, 2003 to December 31, 2003 |
Six
Months
Ended June 30, 2004 |
|||||||||
(unaudited) | ||||||||||
Condensed statements of operations: | ||||||||||
Net sales | $ | 672 | $ | 7,690 | ||||||
Gross margin | 252 | 1,772 | ||||||||
Net income | 246 | 1,778 | ||||||||
Company's equity in income of Mammoth: | ||||||||||
50% of Mammoth net income | $ | 123 | $ | 889 | ||||||
Plus amortization of the equity | 18 | 297 | ||||||||
$ | 141 | $ | 1,186 | |||||||
The Leyte Project
The Company holds an 80% interest in OLCL (which owns the Leyte Project), however, as further discussed in Note 1, upon the adoption of FIN No. 46R, the balance sheet of OLCL was deconsolidated as of March 31, 2004, and the income and cash flow statements will be deconsolidated effective April 1, 2004.
The condensed financial position and results of operations of OLCL at June 30, 2004, is summarized below (unaudited):
Condensed balance sheets: | ||||||
Current assets | $ | 6,561 | ||||
Non-current assets | 19,901 | |||||
Current liabilities | 5,691 | |||||
Non-current liabilities | 11,406 | |||||
Stockholders' equity | 9,365 | |||||
F-23
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Condensed statements of operations | ||||||
for the three months ended June 30, 2004: | ||||||
Net sales | $ | 3,184 | ||||
Gross margin | $ | 1,477 | ||||
Net Income | 877 | |||||
Company's equity in income of OLCL: | ||||||
80% of OLCL net income | $ | 702 | ||||
Plus amortization of deferred revenue on intercompany profit ($3.2 million unamortized balance at June 30, 2004) | 263 | |||||
Total | $ | 965 | ||||
OLCL's operating results for all periods prior to March 31, 2004 have been accounted for on the consolidated method of accounting, and effective April 1, 2004, the Company's ownership interest in OLCL will be accounted for using the equity method of accounting.
6. Property, plant and equipment
Property, plant and equipment, net, consists of the following :
December 31, |
June 30,
2004 |
|||||||||||||
2002 | 2003 | |||||||||||||
(unaudited) | ||||||||||||||
Land | $ | 399 | $ | 1,090 | $ | 11,221 | ||||||||
Leasehold improvements | 993 | 907 | 948 | |||||||||||
Machinery and equipment | 9,630 | 10,672 | 11,023 | |||||||||||
Office equipment | 2,151 | 2,218 | 2,301 | |||||||||||
Automobiles | 1,003 | 1,221 | 1,156 | |||||||||||
Geothermal power plants, including geothermal wells: | ||||||||||||||
United States of America | 71,094 | 269,108 | 418,086 | |||||||||||
Foreign countries | 111,212 | 113,177 | 64,037 | |||||||||||
Asset retirement cost | — | 5,316 | 7,424 | |||||||||||
196,482 | 403,709 | $ | 516,196 | |||||||||||
Less accumulated depreciation | (44,140 | ) | (59,694 | ) | (43,979 | ) | ||||||||
$ | 152,342 | $ | 344,015 | $ | 472,217 | |||||||||
U.S. operations:
The net book value of the property, plant and equipment, including construction in progress, located in the United States is approximately $67,640, $274,465 and $428,102, as of December 31, 2002 and 2003, and June 30, 2004 (unaudited), respectively.
Foreign operations:
In 1996, OLCL entered into a Build, Operate, and Transfer ("BOT") agreement with PNOC-Energy Development Corporation (PNOC) in connection with the geothermal power plants located in Leyte, Philippines. The BOT agreement calls for the Company to design, construct, own, and operate geothermal electricity generating plants, utilizing the geothermal resources of the Leyte Geothermal Power Optimization Project Area. During 1997, the power plants started commercial operations and began selling power to PNOC under a 10 year power purchase agreement (tolling arrangement). The
F-24
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Company owns the plants for a ten-year period ending September 2007, at which time they will be transferred to PNOC for no further consideration. As such, the Company's cost is being depreciated over the 10 year period. The net book value of the assets related to the geothermal power plants located in the Philippines amounted to approximately $22,078 and $17,433, at December 31, 2002 and 2003. As further discussed in Note 1, the Company deconsolidated the balance sheet of OLCL as of March 31, 2004.
During 1998, the Company entered into a power purchase agreement with Kenya Power and Lighting Company Limited ("KPLC"). Under the agreement, the Company will design, construct and operate geothermal power plants in Kenya in several phases. Upon the completion of construction of each phase, KPLC is committed to purchase the electricity generated by the power plants for a minimum of 20 years under the terms of the power purchase agreement. The first phase has been completed and the net book value of the assets related to the generation power plant and the related wells amounted to approximately $33,269, $32,722 and $31,892 at December 31, 2002 and 2003, and June 30, 2004 (unaudited), respectively. The Company is currently in discussions with the Kenyan government and KPLC regarding, among other things, the construction of Phase II of the Olkaria III project in Kenya and the provision of certain collateral and government support. The Company must notify KPLC, by April 17, 2005, whether the Company will proceed to construct Phase II of the Olkaria III project and, if the company notifies KPLC that the Company will not proceed with such construction, then the portion of the current power purchase agreement applicable to Phase II of the Olkaria III project will be terminated (but the current portion applicable to Phase I will be unaffected). If the Company fails to provide such notification the Company will be required to construct Phase II and reach commercial operations by May 31, 2007 in order to avoid the application of financial penalties, or at the latest by April 17, 2008 in order to avoid termination of the entire power purchase agreement. As of December 31, 2002 and 2003, and June 30, 2004 (unaudited), the Company had incurred approximately $22,913, $22,189 and $22,370, respectively, (included in construction-in-process) in connection with construction of Phase II of the power plant, which is required to be completed no later than 2007. Management believes that the discussions will be successful and the project will be completed in the required timeframe.
In June 1999, the Company entered into an agreement with Nicaraguan Electricity Company ("NEC") a Nicaraguan power utility, whereby the Company will rehabilitate existing wells, drill new wells, and operate the geothermal facilities. The Company owns the plants for a fifteen-year period ending in 2014, at which time they will be transferred to NEC at no cost. The Company sells the power from the facilities to two power companies who are assignees of NEC at the agreed upon price and terms of the "take or pay" power purchase agreement. The net book value of the assets related to the constructed plant and wells and rehabilitated existing wells amounted to approximately $27,567, $26,087 and $24,849 at December 31, 2002 and 2003, and June 30, 2004 (unaudited), respectively. Additionally, as of December 31, 2002 and 2003, and June 30, 2004 (unaudited), the Company has incurred approximately $1,506, $1,103 and $1,144, respectively, (included in construction-in-process) to drill an additional well.
The Company is engaged in the construction of several geothermal power plants in other foreign countries. At December 31, 2002 and 2003, and June 30, 2004 (unaudited), such projects were in the early stages of construction and the related costs totaling approximately $2,260, $3,588 and $3,900, respectively, have been included as construction-in-process.
7. Intangible assets
Intangible assets consist of all of the Company's power purchase agreements acquired in business combinations and amounted to $7,256, $32,005 and $49,758, net of accumulated amortization of $402, $926 and $2,090 as of December 31, 2002, 2003 and June 30, 2004 (unaudited), respectively.
F-25
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Amortization expense for the years ended December 31, 2001, 2002 and 2003, and for the six months ended June 30, 2003 and 2004 (unaudited) amount to $40, $362, $524, $262, and $1,164, respectively.
Estimated future amortization expense for the intangible assets as of December 31, 2003 is as follows:
Year ending December 31: | ||||||
2004 | $ | 1,743 | ||||
2005 | 1,743 | |||||
2006 | 1,743 | |||||
2007 | 1,743 | |||||
2008 | 1,743 | |||||
Thereafter | 23,290 | |||||
Total | $ | 32,005 | ||||
8. Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following:
December 31, |
June
30,
2004 |
|||||||||||||
2002 | 2003 | |||||||||||||
(unaudited) | ||||||||||||||
Trade payables | $ | 9,455 | $ | 11,528 | $ | 20,072 | ||||||||
Scheduling and transmission charges | 890 | 3,684 | 3,058 | |||||||||||
Royalties | 406 | 2,570 | 1,654 | |||||||||||
Salaries and other payroll costs | 3,216 | 3,854 | 4,054 | |||||||||||
Debt issue costs | — | 1,313 | — | |||||||||||
Accrued interest | 1,460 | 631 | 537 | |||||||||||
VAT payable | 349 | 306 | 250 | |||||||||||
Other | 2,874 | 3,593 | 5,139 | |||||||||||
Total | $ | 18,650 | $ | 27,479 | $ | 34,764 | ||||||||
9. Short-term debt
Line of credit
In July 2002, the Company consolidated an existing line of credit into a new line of credit for $55,000, all of which was outstanding as of December 31, 2002. During 2003, the line of credit was repaid in full and expired on June 30, 2004.
Bridge loan
During 2002, the Company entered into a $40,000 bridge loan agreement ("Bridge Loan") with an unrelated party, of which $10,000 was outstanding at December 31, 2002. During 2003, the Bridge Loan was amended and reclassified to long-term debt (Note 10).
F-26
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
10. Long-term debt
Long-term debt consists of notes payable under the following agreements:
December 31, | June 30, | |||||||||||||
2002 | 2003 | 2004 | ||||||||||||
(unaudited) | ||||||||||||||
Limited and non-recourse agreements: | ||||||||||||||
Non-recourse agreements: | ||||||||||||||
Eximbank Credit Agreement (Term loan) | $ | 24,129 | $ | 19,049 | $ | — | ||||||||
Ormesa loan | 20,000 | 15,473 | 14,510 | |||||||||||
Beal bank credit agreement | — | 154,500 | 153,728 | |||||||||||
Limited recourse agreements: | ||||||||||||||
Credit facility agreement | 11,078 | 19,915 | 18,471 | |||||||||||
55,207 | 208,937 | 186,709 | ||||||||||||
Less current portion | (11,036 | ) | (15,686 | ) | (21,260 | ) | ||||||||
$ | 44,171 | $ | 193,251 | $ | 165,449 | |||||||||
Full recourse agreements with banks: | ||||||||||||||
Loan one | $ | 6,000 | $ | 5,000 | $ | 4,000 | ||||||||
Loan two | 5,600 | 4,900 | 4,550 | |||||||||||
Loan three | 10,000 | 6,667 | 5,000 | |||||||||||
Loan four | 9,500 | 8,143 | 6,786 | |||||||||||
Loan five | 9,500 | 6,786 | 5,428 | |||||||||||
Bridge loan | — | 20,000 | 20,000 | |||||||||||
Bridge loan two | — | — | 20,000 | |||||||||||
Other | — | 55 | 42 | |||||||||||
40,600 | 51,551 | 65,806 | ||||||||||||
Less current portion | (8,271 | ) | (10,490 | ) | (30,489 | ) | ||||||||
$ | 32,329 | $ | 41,061 | $ | 35,317 | |||||||||
Senior secured notes (non recourse) | $ | — | $ | — | $ | 189,785 | ||||||||
Less current portion | — | — | (3,279 | ) | ||||||||||
$ | — | $ | — | $ | 186,506 | |||||||||
Eximbank Credit Agreement (Term Loan)
In connection with the construction of four geothermal power generation plants, with a total capacity of 49MW in Leyte, Philippines, the Company obtained a term loan ("Term Loan") amounting to approximately $44.5 million from the Export-Import Bank of the government of the United States ("Eximbank"). Principal is payable in equal quarterly installments through July 2007. Interest on the Term Loan is at a fixed rate of 6.54% and is payable quarterly. The Term Loan is collateralized by mortgage on all real property, assignment of revenues, and pledge of partnership interest in OLCL. There are various covenants under the Term Loan, which include maintaining minimum levels of equity ratio, as defined, and limitations on additional indebtedness and payment of dividends.
Ormesa Loan
On December 31, 2002, a wholly owned subsidiary of the Company ("Ormesa LLC"), that owns and operates the Ormesa Complex, entered into a credit facility agreement ("Ormesa Loan") amounting
F-27
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
to $20 million with a bank. Principal payments are payable in 20 varying quarterly payments that commenced in March 2003. As further discussed below, in connection with the Company's issuance of 8¼% senior secured notes, the Company has committed under the terms of the notes to repay in full the Ormesa Loan no later than January 31, 2005. Interest is computed at LIBOR (2.1% at December 31, 2003, and 1.61% at June 30, 2004 – unaudited) plus 5%, and is also payable quarterly. The Ormesa Loan is collateralized by all of the assets of Ormesa LLC and the Company's ownership interest in Ormesa LLC. There are various restrictive covenants under the Ormesa Loan, which include limitations on additional indebtedness and payments of dividends.
As required by the Ormesa Loan agreement, the Company entered into an interest rate cap agreement ("Cap Agreement") with another bank. This agreement allows the Company to receive limited reimbursement, as defined in the Cap Agreement, for interest payments the Company will pay to the bank under the Ormesa Loan if the LIBOR rate should increase to more than 6%.
Beal Bank Credit Agreement
In December 2003, in connection with the acquisition of the CEC geothermal power plant assets (Note 2), OrCal Geothermal, Inc. ("OrCal"), a wholly owned subsidiary of the Company, entered into a loan agreement with Beal Bank ("Beal Bank Credit Agreement") amounting to $154.5 million. Principal payments range from 0.25% to 3.5% of the outstanding balance and are payable in quarterly payments that commenced in June 2004 and continue through December 2019. Interest payments on the unpaid principal balance commenced in March 2004, and are payable quarterly at a variable rate determined on each anniversary date of the loan as the greater of 7.125% or LIBOR plus 5.125%. The applicable interest rate will increase by 0.5% starting in December 2011.
The Beal Bank Credit Agreement is collateralized by substantially all of the assets of OrCal and certain OrCal subsidiaries ("OrCal Subsidiaries"). Performance under the Beal Bank Credit Agreement is guaranteed by OrCal and its subsidiaries. Funds held in debt service reserve accounts established under a depository agreement are pledged for the benefit of Beal Bank and have been included in restricted cash in the accompanying balance sheet.
There are various restrictive covenants under the Beal Bank Credit Agreement, which include limitations on indebtedness, transactions with related parties and payments of dividends. Beal Bank maintains the right, through December 31, 2004, to refinance up to $100 million of the Beal Bank Credit Agreement as senior secured notes under the 1933 Securities Act, at terms consistent with the terms of the Beal Bank Credit Agreement. Should Beal Bank exercise its right, OrCal would be required to provide necessary information in connection with the issuance of such senior secured notes, and pay reasonable fees and expenses, not to exceed $25. Mandatory prepayment of the Beal Bank Credit Agreement is required to the extent that OrCal or its subsidiaries receives funds from an issuance of equity or debt securities, as well as in the occurrence of a major casualty resulting from damage or destruction of power plants owned by OrCal, whereby, receipt of insurance proceeds are in excess of $2,500.
During the second quarter of 2004 (unaudited), the Company entered into two separate interest rate cap agreements ("Cap Transactions") with two different financial institutions to mitigate the interest rate risk associated with the Beal Bank Credit Agreement. Pursuant to the Cap Transactions, the Company paid an aggregate of $3,820 to the financial institutions providing such interest rate investments. The Cap Transactions are effective as of March 30, 2007 and terminate on March 31, 2011. Pursuant to the terms of the Cap Transactions, the financial institutions providing the cap are required to pay to the Company the difference between the LIBOR rate and 6.0%, (if LIBOR is greater than 6.0%), times the notional amount, which for each of the contracts will be $67,401 on the effective date and reduces each payment period down to $49,633 upon termination. The fair value of the Cap Transactions at June 30, 2004 amounted to $2,922, and the decrease in the fair value of $898 has been recorded in the consolidated statement of operations as interest expense.
F-28
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Credit Facility Agreement (the Momotombo Project)
In September 2000, Ormat Momotombo Power Company ("OMPC"), a wholly owned subsidiary of the Company, entered into a credit facility agreement with Bank Hapoalim B.M. pursuant to which the Company executed a two-phase loan with the bank in the amounts of $11,435 ("Phase I Loan") and $36,800 ("Phase II Loan") (collectively "Credit Facility Agreement"). In March 2003, the Company signed an amendment to the Credit Facility Agreement changing the amount of the Phase II Loan from $36,800 to $15,000. Principal and interest payments on the Phase I Loan are payable in 32 equal quarterly payments that commenced upon completion of Phase I of the project in December 2001. Interest on the Phase I Loan is variable based on LIBOR plus 2.375%. Principal and interest payments on the Phase II Loan are payable in equal 28 quarterly payments that commenced in March 2004. Interest on the Phase II Loan is variable based on LIBOR plus 3.0%, and is added to the outstanding balances of the Phase II Loan until the commencement of the principal and interest payments. At December 31, 2003, and June 30, 2004 (unaudited), approximately $8,046 and $7,451, respectively, was outstanding under the Phase I Loan and approximately $11,869 and $11,020, respectively, was outstanding under the Phase II Loan. The Credit Facility Agreement is collateralized by liens over all real and personal property comprising the Momotombo Project and the Company's ownership interest in OMPC. Additionally, the Parent has provided to the lender a repayment guarantee of 50% of the unpaid principal, interest and all other amounts of the Credit Facility Agreement which become past due and are not paid by the Company due to any event of default as defined in the Credit Facility Agreement. There are various restrictive covenants under the Credit Facility Agreement, which include maintaining certain levels of debt to equity ratio and debt service coverage ratio, and limitations on additional indebtedness and payment of dividends.
Loan one
In May 1998, the Company entered into an $8,000 loan agreement, with principal payable in $1,000 annual installments that commenced in May 2001, and continue through May 2008. Interest is computed at LIBOR plus 1.7%, and is payable annually. The Parent has provided a guarantee, whereby in the event that the Company fails to perform its obligation under the loan agreement, the Parent would be required to pay the bank the remaining outstanding balance of the loan.
In 2003, the Company obtained a waiver from the bank with respect to the failure by the Parent in 2001 and 2002 to meet certain financial ratios contained in its guarantee. The Company provided no consideration for such waiver. The Parent has since been in compliance with the required financial ratios.
Loan two
In July 2000, the Company entered into a $5,600 loan agreement with principal payable in equal semi-annual payments that commenced in January 2003, and continue through July 2010. Interest is computed at LIBOR plus 1.7% and is payable semi-annually. The Parent has provided a guarantee, whereby in the event that the Company fails to perform its obligation under the loan agreement, the Parent would be required to pay the bank the remaining outstanding balance of the loan. On July 14, 2004 (unaudited), the Company repaid the loan in full.
Loan three
In March 2001, the Company entered into a $10,000 loan agreement, with principal payable in equal quarterly payments that commenced in April 2003, and continue through January 2006. Interest is computed at LIBOR plus a margin as calculated by the bank each quarter (1.8% at December 31, 2003), and is payable quarterly. The Parent has provided a guarantee, whereby in the event that the Company fails to perform its obligation under the loan agreement, the Parent would be required to pay the bank the remaining outstanding balance of the loan.
F-29
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Loan four
In July 2001, the Company entered into a $9,500 loan agreement with a bank, with principal payable in equal semi-annual payments that commenced in July 2003, and continue through July 2006. Interest is computed at LIBOR plus 1% and is payable annually. The Parent has provided a guarantee, whereby in the event that the Company fails to perform its obligation under the loan agreement, the Parent would be required to pay the bank the remaining outstanding balance of the loan. In July 2004 (unaudited) the Company committed to the lender to repay the entire loan no later than January 14, 2005 or convert the outstanding balance into a five year loan bearing interest at LIBOR plus 2.5%. In addition, the Company is subject to various restrictive covenants. If neither of the actions is taken, the lender is entitled to demand immediate repayment of the above loan.
Loan five
In July 2001, the Company entered into a $9,500 loan agreement with a bank, with principal payable in equal semi-annual payments that commenced in May 2003, and continue through May 2006. Interest is computed at LIBOR plus 1% and is payable annually. The Parent has provided a guarantee, whereby in the event that the Company fails to perform its obligation under the loan agreement, the Parent would be required to pay the bank the remaining outstanding balance of the loan. In July 2004 (unaudited) the Company committed to the lender to repay the entire loan no later than January 14, 2005 or convert the outstanding balance into a five year loan bearing interest at LIBOR plus 2.5%. In addition, the Company is subject to various restrictive covenants. If neither of the actions is taken, the lender is entitled to demand immediate repayment of the above loan.
In December 2002, the Company entered into an interest rate swap agreement with a financial institution that involves the exchange of fixed interest rate payments at a rate of 2.26% on a notional amount of $9,500 at the effective date of February 21, 2003, that is reduced periodically ($6,786 at December 31, 2003) in exchange for floating interest rate payments that equal the interest due under Loan Five. As the Company did not achieve hedge accounting on such swap, the net payments or receipts under such agreement are recognized as an adjustment to interest expense. This agreement expires on May 22, 2006.
The fair value of the interest rate swap is the estimated amount that the Company would currently pay to terminate the swap agreement at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The estimated fair value of the interest rate swap was a liability of $41 at December 31, 2003. The effect of the interest rate swap utilized to offset variable rate funding was to increase interest expense by approximately $74 in 2003.
Bridge loan
During 2003, a wholly owned subsidiary of the Company amended the Bridge Loan by changing the maximum loan amount from $40,000 to $20,000. The amendment also changed the interest rate from LIBOR plus 1% to LIBOR plus 1.5%, which is payable quarterly, and extended the maturity date to February 2005. Under the terms of the Bridge Loan, the Parent has provided a letter of credit in the amount of $21 million that expires in March 2005 as collateral for the Bridge Loan.
Bridge loan two (unaudited)
In June 2004, the Company entered into a $20,000 loan agreement with a financial institution, with principal payable by November 2005. Interest is computed at LIBOR plus 1.45%, and is payable semi-annually. The parent has provided a guarantee, whereby in the event that the Company fails to perform its obligation under the loan agreement, the Parent would be required to pay the financial institution the remaining outstanding balance of the loan.
F-30
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Future Minimum Payments
Future minimum payments under long-term obligations, excluding notes payable to Parent, as of December 31, 2003 are as follows:
Year ending December 31: | ||||||
2004 | $ | 26,176 | ||||
2005 | 48,048 | |||||
2006 | 26,082 | |||||
2007 | 23,960 | |||||
2008 | 15,016 | |||||
Thereafter | 121,206 | |||||
Total | $ | 260,488 | ||||
Senior Secured Notes (Unaudited)
On February 13, 2004, the Company, through Ormat Funding Corporation ("OFC"), a wholly owned subsidiary, completed the issuance of 8¼% senior secured notes ("Notes") pursuant to an exempt offering under Rule 144A and Regulation S of the Securities Act of 1933 ("Offering"), amounting to $190 million, and received net cash proceeds of approximately $179.7 million net of bond issuance costs of approximately $10.3 million, which have been included in deferred financing costs at June 30, 2004. The Notes have a final maturity date of December 30, 2020. Principal and interest on the Notes are payable in semi-annual payments that commenced in June 30, 2004. The Notes are collateralized by substantially all of the assets of OFC and fully and unconditionally guaranteed by all of the wholly owned subsidiaries of OFC, other than Ormesa LLC ("Ormesa"), which will be obligated to guarantee the Notes upon the earlier of (i) January 31, 2005, (ii) the date that all the obligations under the Ormesa Loan have been repaid in full, and (iii) the date that Ormesa is no longer prohibited pursuant to the terms of the Ormesa Loan from providing a guarantee and (with certain exceptions) by all real property, contractual rights, revenues and bank accounts, intercompany notes, certain insurance policies and guarantees of OFC and its subsidiaries. There are various restrictive covenants under the Note, which include limitations on additional indebtedness and payment of dividends.
The Company may redeem the Notes, in whole or in part, at any time at a redemption price equal to the principal amount of the Notes to be redeemed plus accrued interest, premium and liquidated damages, if any, plus a "make-whole" premium. Under certain conditions, as defined in the note agreement, the Company may be required to redeem the Notes at a redemption price ranging from 100% to 101% of the principal amount of the Notes being redeemed plus accrued interest, premium and liquidated damages, if any.
OFC has agreed to file a registration statement with the Securities and Exchange Commission and offer to exchange the Notes for publicly registered exchange notes with substantially identical terms and consummate the exchange offer prior to January 8, 2005.
Non-current restricted cash at June 30, 2004 relating to proceeds from the Offering consists of the following:
Galena re-powering construction reserve
As required by the Offering, the Company has set aside approximately $25.8 million to replace the existing equipment at the Steamboat 1/1A project with more efficient equipment, in order to optimize the geothermal resources available. After such replacement, the company will rename the Steamboat 1/1A project as the Galena project. The Company expects the re-powering will be complete and the project will achieve commercial operations by the end of 2005.
F-31
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Also as required under the terms of the Notes, the Company has restricted cash accounts, consisting of the following, which are classified as current on the balance sheet:
Debt service reserve
The Company maintains an account to fund an amount sufficient to pay scheduled debt service amounts, including principal and interest, due under the terms of the Notes in the following six months. As of June 30, 2004 the required funds amounted to $8.1 million.
Ormesa debt reserve
The Company has committed under the Offering to repay in full the Ormesa Loan no later than January 31, 2005. Approximately $12.9 million of the proceeds from the Offering equal to the outstanding balance on the Ormesa Loan, less the deposit in the Debt Service reserve account described above, was placed in escrow to be released to the Company for principal payments toward the Ormesa Loan. If the Ormesa Loan is not paid in full by January 31, 2005, the balance in the escrow account will be used to repay the outstanding balance on the Ormesa Loan.
Revenue reserve
The Company deposits all revenues received into the revenue account. Such amounts are used to pay operating expenses and fund the debt service reserve account, but the funds are only available to the Company upon submission of draw requests by the Company to the bank. As such amounts are not fully unrestricted to use by the Company, they have been classified as restricted on the accompanying balance sheet. As of June 30, 2004 the balance of such account was approximately $0.2 million.
11. Asset Retirement Obligation
The Company adopted SFAS No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets , effective January 1, 2003. Under SFAS No. 143, entities are required to record the fair value of a legal liability for an asset retirement obligation in the period in which it is incurred. The Company's legal liabilities include capping wells and post-closure costs of geothermal power producing sites. When a new liability for asset retirement obligations is recorded, the Company capitalizes the costs of the liability by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. At retirement, an entity settles the obligation for its recorded amount or incurs a gain or loss. On January 1, 2003, the Company recorded a cumulative effect of change in accounting principle of $205, net of related tax benefit of $125. As a result of adopting the provisions of SFAS No. 143, the net income for the year ended December 31, 2003, decreased by $238, net of tax benefit of $144. The proforma net loss for the years ended December 31, 2001 and 2002 reflecting the adoption of SFAS No. 143 applied retroactively would have been $6,435 and $1,227, respectively.
F-32
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
The following table summarizes the impact on the Company's balance sheet following the adoption of SFAS No. 143:
Balance
at
December 31, 2002 |
Change
Resulting from Application of SFAS No. 143 |
Balance at
January 1, 2003 |
||||||||||||
Property, plant and equipment | $ | 196,482 | $ | 2,615 | $ | 199,097 | ||||||||
Accumulated depreciation | (44,140 | ) | (140 | ) | (44,280 | ) | ||||||||
Net property, plant and equipment | $ | 152,342 | $ | 2,475 | $ | 154,817 | ||||||||
Deferred income tax liability (benefit) | $ | 11,951 | $ | (125 | ) | $ | 11,826 | |||||||
Non-current asset retirement obligation | $ | — | $ | 2,805 | $ | 2,805 | ||||||||
The proforma changes to the non-current asset retirement obligation, based on the information, assumptions and interest rates as of January 1, 2003 are presented below to show what the Company would have reported if the provisions of SFAS No. 143 had been in effect for the periods presented below (unaudited):
12. Stock Options
The Parent has four stock option plans: the 2001 Employee Stock Option Plan, the 2002 Employee Stock Option Plan, the 2003 Employee Stock Option Plan, and the 2004 Employee Stock Option Plan (collectively "the Plans"). Options under the 2004 Employee Stock Option Plan were granted in April 2004. Under the Plans, employees of the Company were granted options in the Parent's Ordinary shares, which are registered and traded on the Tel-Aviv Stock Exchange Ltd. Options under the Plans cliff vest and are exercisable from the grant date as follows: 25% after 24 months, 25% after 36 months, and the remaining 50% after 48 months. Vested shares may be exercised for up to five years from the date of grant. The maximum aggregate number of shares that may be optioned and sold under the Plans is determined each year by the board of directors of the Parent, and is equal to the number of options granted during each plan year. None of the options are exercisable or convertible into shares of the Company.
The following table summarizes the status of the Plans as of and for the periods presented below (shares in thousands):
F-33
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
2001 |
Year
Ended December
31,
2002 |
2003 |
Six
Months Ended June 30, 2004 |
|||||||||||||||||||||||||||||||
Shares |
Weighted-
Average Exercise Price |
Shares |
Weighted-
Average Exercise Price |
Shares |
Weighted-
Average Exercise Price |
Shares |
Weighted-
Average Exercise Price |
|||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||||||||
Outstanding, beginning of year | — | $ | — | 695 | $ | 2.26 | 1,320 | $ | 1.86 | 1,930 | $ | 1.81 | ||||||||||||||||||||||
Granted, above fair value | 706 | 2.26 | — | — | — | — | — | — | ||||||||||||||||||||||||||
Granted, below fair value | — | — | 693 | 1.41 | 710 | 1.75 | 651 | 3.78 | ||||||||||||||||||||||||||
Exercised | — | — | — | — | (68 | ) | 2.26 | (170 | ) | 1.98 | ||||||||||||||||||||||||
Forfeited | (11 | ) | 2.26 | (68 | ) | 1.82 | (32 | ) | 2.00 | — | — | |||||||||||||||||||||||
Outstanding at period end | 695 | 2.26 | 1,320 | 1.86 | 1,930 | 1.81 | 2,411 | 2.40 | ||||||||||||||||||||||||||
Options exercisable at period end | — | — | — | — | 92 | 2.26 | 267 | 1.89 | ||||||||||||||||||||||||||
Weighted-average fair value of options granted during the period: | ||||||||||||||||||||||||||||||||||
Above fair value | $ | 0.92 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||
Below fair value | $ | — | $ | 0.85 | $ | 0.60 | $ | 1.73 | ||||||||||||||||||||||||||
The following table summarizes information about stock options outstanding at December 31, 2003 (shares in thousands):
Exercise
Prices |
Number
of
Shares Outstanding |
Weighted-Average
Remaining Contractual Life in Years |
Number
of
Shares Exercisable |
Weighted-Average
Remaining Contractual Life in Years |
||||||||||||||
$ 1.41 | 656 | 3.2 | — | — | ||||||||||||||
1.75 | 704 | 4.2 | — | — | ||||||||||||||
2.26 | 570 | 2.1 | 92 | 2.1 | ||||||||||||||
1,930 | 3.2 | 92 | 2.1 | |||||||||||||||
The following table summarizes information about stock options outstanding at June 30, 2004 (shares in thousands)(unaudited):
Exercise
Prices |
Number
of
Shares Outstanding |
Weighted-Average
Remaining Contractual Life in Years |
Number
of
Shares Exercisable |
Weighted-Average
Remaining Contractual Life in Years |
||||||||||||||
$1.41 | 599 | 2.7 | 107 | 2.7 | ||||||||||||||
1.75 | 704 | 3.7 | — | — | ||||||||||||||
2.26 | 457 | 1.6 | 160 | 1.6 | ||||||||||||||
3.78 | 651 | 4.8 | — | — | ||||||||||||||
2,411 | 3.5 | 267 | 2.1 | |||||||||||||||
13. Power Purchase Agreements
U.S. operations:
The Company has various power purchase agreements in the U.S. as follows:
Southern California Edison Company ("SCE")
The Company has two power purchase agreements ("PPAs") with SCE related to the Ormesa Complex and two PPAs related to Heber 1 and Heber 2. The PPAs provide for the sale of
F-34
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
capacity and energy through their respective terms, with the following expiring dates: Ormesa PPAs expiring in 2017 and 2018, and Heber 1 and Heber 2 PPAs expiring in 2015 and 2023, respectively. Under the PPAs, the Company receives a fixed energy payment through April 30, 2007, and thereafter an energy payment based on SCE's short-run avoided cost ("SRAC"). The PPAs provide for firm capacity and bonus payments established by the contracts and are paid to the Company each month through the contracts' term based on plant performance. Bonus capacity payments are earned based on actual capacity available during certain peak hours.
In connection with the power purchase agreements for the Ormesa project, SCE has expressed its intent not to pay the contract rate for the power supplied by the GEM 2 and GEM 3 plants to the Ormesa project for auxiliary purposes. The Company has commenced discussions with SCE to resolve the dispute. In the interim period, SCE has tentatively agreed to pay a lower fixed price for such power. The Company cannot evaluate the potential long-term financial impact of a failure to reach a resolution with SCE, among other things because the current contract rates will fluctuate as of May 2007, however, financial loss at the reduced price paid by SCE for the year ending December 31, 2005 may be in the range of $1 million.
The temperature of the geothermal resource at the Heber 1 project has declined since the project commenced operations and as a result is currently operating at a level that is close to the minimum performance requirements set forth in its power purchase agreement. If the Company fails to upgrade the facilities and the project's performance deteriorates below minimum capacity requirements, the Company will be obligated to pay a one-time penalty to SCE of approximately $500,000 per each MW of reduced capacity.
SPPC — Nevada
The Company also has six power purchase agreements with Sierra Pacific Power Company ("SPPC"); one related to the Brady Power Plant, two related to the Steamboat 1 and 1A Power Plants, one related to the Steamboat Hills Plant, and two related to the Steamboat 2 and 3 Power Plants. The PPAs provide for the sale of energy, and for capacity for all power plants except Brady, through their respective terms, with the following expiring dates: Steamboat 1 and 1A expire in 2006 and 2018, Steamboat Hills expires in 2018, and Brady and Steamboat 2 and 3 expire in 2022. Energy payments under the Brady PPA are based on deliveries during specified winter and summer seasons for on-peak, mid-peak, and off-peak times.
HELCO — Hawaii
The Company has one power purchase agreement with Hawaii Electric Light Company ("HELCO") related to the Puna project. The PPA provides for monthly energy payments and capacity payments. The energy payments for a portion of the energy delivered are equal to the higher of the SRAC rates for energy in effect for the relevant billing period or a fixed rate. The energy payments for a smaller portion of energy to be delivered are equal to an amount based on a fuel rate and a variable operation and maintenance rate, as each are adjusted over the term of the agreement, but which rate will never go below a minimum floor. The Puna project also receives a payment for providing reactive power to HELCO.
Foreign operations:
The Company has power purchase agreements in various foreign countries as follows:
The Olkaria III Project (Kenya)
In connection with the agreement with KPLC (Note 6), the subsidiary in Kenya sells power to KPLC at the agreed upon price and terms of a 20-year power purchase agreement. Fees are paid each month through the term of the agreement and vary based on plant performance.
F-35
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
The Leyte Project (Philippines)
In connection with the BOT agreement with PNOC (Note 6), the subsidiary in the Philippines converts the steam delivered by PNOC into electric energy required by the National Power Corporation ("NPC") in accordance with the power purchase agreement between NPC and PNOC during the term of the BOT agreement. OLCL receives capacity and energy fees from PNOC established by the BOT agreement. Fees are paid each month through the term of the BOT agreement and vary based on plant performance.
The Momotombo Project (Nicaragua)
In connection with the agreement with NEC (Note 6), the subsidiary in Nicaragua sells power to two assignees of NEC at the agreed upon price and terms of a "take or pay" power purchase agreement. Fees are paid each month through the term of the agreement and vary based on plant performance.
Pursuant to the terms of certain of the power purchase agreements described above, the Company may be required to make payments to the relevant power purchaser under certain conditions, such as shortfall on delivery of renewable energy and energy credits, and not meeting certain threshold performance requirements, as defined. The amount of payment required is dependent upon the level of shortfall on delivery or performance requirements and is recorded in the period the shortfall occurs. The Brady and Steamboat 2 and 3 PPA's provide that if the project does not maintain peak period capacity values of at least 85% of those listed in each of their respective contracts, the Company will be obligated to pay liquidated damages to SPPC in amounts ranging from $1.0 million to $1.5 million. If the Ormesa and Heber 1 and Heber 2 projects fail to meet minimum performance requirements, as defined, the respective project may be placed on probation, the capacity of the relevant plant may be permanently reduced and, in such an instance, a refund would be owed from such project to SCE. Each of the projects may also reduce the capacity of the plants upon notice to SCE and after making a certain payment to it. If the Puna project does not meet its minimum capacity performance requirement, such project will be required to pay HELCO $0.0214 per on-peak hour for each kilowatt of deficiency for the first 5 MW of deficiency and $0.0339 per on-peak hour for each kilowatt of deficiency in excess of 5 MW of deficiency. In addition, for each contract year in which the on-peak availability of the facility is less than 95%, unless the deficiency is due to a catastrophic equipment failure, the Puna project is required to pay $8 to HELCO for each full percentage point of the deficiency, and if such availability is less than 80%, the Puna project is required to pay $12 for each full percentage point of the deficiency. The Company has not and does not currently expect to be obligated to make any material payments under their power purchase agreements.
As required by EITF 01-8 (Note 1), the Company assessed all PPA's acquired since July 1, 2003, and concluded that all such PPA's related to our Heber 1 and Heber 2, Steamboat 2/3, Steamboat Hills, and Puna projects (see Note 2) contained a lease element requiring lease accounting. Accordingly, revenue related to the lease element of the PPA is presented as "lease" revenue, with the remaining revenue related to the production and delivery of the energy being presented as "energy and capacity" revenue in the accompanying consolidated statements of operations. Future minimum lease revenues under PPAs which contain a lease element as of December 31, 2003 (Heber 1 and Heber 2) were as follows:
For the year ending: | ||||||
2004 | $ | 48,810 | ||||
2005 | 57,349 | |||||
2006 | 56,998 | |||||
2007 | 56,084 | |||||
2008 | 53,379 | |||||
Thereafter | 713,737 | |||||
$ | 986,357 | |||||
F-36
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
14. Income Taxes
Income (loss) from continuing operations before provision for income taxes, minority interest, and equity in income of investees consisted of:
Year Ended December 31, |
Six Months
Ended
June 30, |
|||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||
(unaudited) | ||||||||||||||||||||||
U.S. | $ | (2,843 | ) | $ | 5,756 | $ | 2,263 | $ | 1,267 | $ | 733 | |||||||||||
Non-U.S. (foreign) | 4,655 | 9,773 | 15,862 | 6,936 | 5,576 | |||||||||||||||||
$ | 1,812 | $ | 15,529 | $ | 18,125 | $ | 8,203 | $ | 6,309 | |||||||||||||
The components of income tax expense (benefit) from continuing operations are as follows:
The significant components of the deferred income tax expense (benefit) from continuing operations are as follows:
Year Ended December 31, |
Six Months
Ended
June 30, |
|||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||
(unaudited) | ||||||||||||||||||||||
Deferred tax expense (exclusive of the effect of other components listed below) | $ | 3,657 | $ | 9,846 | $ | 5,233 | $ | 4,185 | $ | 5,865 | ||||||||||||
Benefit of operating loss carryforwards – US | (1,154 | ) | (3,573 | ) | (1,643 | ) | (2,012 | ) | (4,273 | ) | ||||||||||||
(Benefit)
utilization of operating loss
carryforwards – Israel |
(4,482 | ) | (1,248 | ) | 1,019 | 560 | 407 | |||||||||||||||
Change in valuation allowance | 4,539 | 1,248 | (1,019 | ) | (560 | ) | (407 | ) | ||||||||||||||
Benefit of investment tax credits | 222 | (390 | ) | (1,530 | ) | — | — | |||||||||||||||
$ | 2,782 | $ | 5,883 | $ | 2,060 | $ | 2,173 | $ | 1,592 | |||||||||||||
F-37
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
The difference between the U.S. federal statutory tax rate and the Company's effective rate are as follows:
Year Ended December 31, |
Six Months
Ended
June 30, |
|||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||
(unaudited) | ||||||||||||||||||||||
U.S. federal statutory tax rate | 34.0 | % | 34.0 | % | 34.0 | % | 34.0 | % | 34.0 | % | ||||||||||||
State taxes, net of federal benefit | — | 2.5 | 1.7 | 1.3 | 0.8 | |||||||||||||||||
Effect of foreign income tax, net | (110.9 | ) | (6.1 | ) | (7.0 | ) | (2.8 | ) | 2.6 | |||||||||||||
Valuation allowance – Israel | 250.5 | 8.0 | (5.6 | ) | (6.8 | ) | (6.5 | ) | ||||||||||||||
Investment tax credits | — | (2.5 | ) | (8.4 | ) | — | — | |||||||||||||||
Other, net | (4.4 | ) | 3.6 | (0.9 | ) | 0.8 | 0.1 | |||||||||||||||
169.2 | % | 39.5 | % | 13.8 | % | 26.5 | % | 31.0 | % | |||||||||||||
The net deferred tax assets and liabilities consist of the following:
December 31, | June 30, | |||||||||||||
2002 | 2003 | 2004 | ||||||||||||
(unaudited) | ||||||||||||||
Deferred tax assets (liabilities): | ||||||||||||||
Net foreign deferred taxes, primarily depreciation | $ | (8,194 | ) | $ | (11,032 | ) | $ | (12,782 | ) | |||||
Depreciation | (9,361 | ) | (11,704 | ) | (16,271 | ) | ||||||||
Net operating loss carryforwards – U.S. | 5,702 | 7,345 | 11,618 | |||||||||||
Net operating loss carryforwards – Israel | 7,047 | 6,028 | 5,621 | |||||||||||
Investment tax credits | 441 | 1,971 | 1,971 | |||||||||||
State income taxes | — | 73 | 75 | |||||||||||
(4,365 | ) | (7,319 | ) | (9,768 | ) | |||||||||
Valuation allowance | (7,586 | ) | (6,567 | ) | (6,160 | ) | ||||||||
$ | (11,951 | ) | $ | (13,886 | ) | $ | (15,928 | ) | ||||||
Realization of the deferred tax assets and investment tax credits is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that the deferred tax asset, except for those of the Company's Israeli operations (separate tax jurisdiction), will be realized.
At December 31, 2003, the Company had U.S. federal and state net operating loss carryforwards of approximately $20.7 million and $7.3 million, respectively, available to reduce future taxable income, which expire between 2021 and 2023, and 2014, respectively. The investment tax credits carry over indefinitely until utilized.
At December 31, 2003, the Company had net operating loss carryforwards related to its Israeli operations of approximately $16.7 million available to reduce future taxable income, which carryover indefinitely until utilized. Further, despite the fact that the net operating losses carryforward indefinitely, there is currently uncertainty as to the Israeli tax laws related to establishing limitations on the use of net operating losses. Due to OSL's history of operating losses and based on OSL's inability to generate sufficient taxable income in the foreseeable future, management believes it is not more likely than not that such net operating loss carry forwards will be utilized. Accordingly, the Company has recorded a full valuation allowance against such deferred tax assets.
The total amount of undistributed earnings of foreign subsidiaries for income tax purposes was approximately $31 million at December 31, 2003. It is the Company's intention to reinvest undistributed earnings of its foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes or U.S. income taxes which
F-38
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
may become payable if undistributed earnings of foreign subsidiaries were paid as dividends to the Company. The additional taxes on that portion of undistributed earnings which is available for dividends are not practicably determinable.
Income taxes related to foreign operations
Philippines – From OLCL's inception in 1996 to September 2003, OLCL, an 80% owned subsidiary with operations in the Philippines, had an income tax holiday. Subsequent to September 2003, OLCL is subject to the Philippines regular corporate income tax rate of 32%. The tax holiday, assuming a tax rate of 32%, has the effect of reducing tax expense by $1,032, $1,978, $798, $487, and $0, and increasing earnings per share by $0.03, $0.06, $0.03, $0.02, and $0, for the years ended December 31, 2001, 2002 and 2003 and for the six months ended June 30, 2003 and 2004 (unaudited), respectively.
Israel – The Company's operations in Israel through OSL are taxed at the regular corporate tax rate of 36%. However, under the Israeli Law for the Encouragement of Capital Investments, some of the operations of OSL have been granted "Approved Enterprise" status under expansion plan of 1996 and 2003, whereby income from the Approved Enterprise, which is determined as the increase of revenues in a particular year compared to those of the program's determined base year (1995 and 2002), will be exempt from taxes for two years commencing in the first year OSL generates taxable income, which for OSL has not commenced yet, and at a reduced tax rate of 25% for a remaining five years. The Approved Enterprise status plans of 1996 and 2003 expire in 2010 and 2017, respectively.
Other significant foreign countries – The Company's operations in Nicaragua and Kenya are taxed at the rates of 25% and 40%, respectively.
15. Business Segments
The Company has two reporting segments that are aggregated based on similar products, market and operating factors; electricity and products segments. Such segments are managed and reported separately as each offers different products and serves different markets. The electricity segment is engaged in the sale of electricity according to power purchase agreements. The products segment is engaged in the manufacture, including design and development, of turbines and power units for the supply of electrical energy and in the associated construction of power plants utilizing the power units manufactured by the Company to supply energy from geothermal fields and other alternative energy sources. Transfer prices between the operating segments were determined on current market values or cost plus markup of the seller's business segment.
F-39
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Summarized financial information concerning the Company's reportable segments is shown in the following tables:
Electricity | Products | Consolidated | ||||||||||||
Year ended December 31, 2001: | ||||||||||||||
Net revenues from external customers | $ | 33,956 | $ | 13,959 | $ | 47,915 | ||||||||
Intersegment revenues | — | 1,481 | 1,481 | |||||||||||
Depreciation and amortization expense | 10,634 | 611 | 11,245 | |||||||||||
Operating income (loss) | 12,931 | (8,714 | ) | 4,217 | ||||||||||
Segment assets at period end | 202,658 | 23,959 | 226,617 | |||||||||||
Expenditures for long-lived assets | 68,324 | 52 | 68,376 | |||||||||||
Year ended December 31, 2002: | ||||||||||||||
Net revenues from external customers | $ | 65,491 | $ | 20,138 | $ | 85,629 | ||||||||
Intersegment revenues | — | 10,157 | 10,157 | |||||||||||
Depreciation and amortization expense | 13,780 | 697 | 14,477 | |||||||||||
Operating income | 21,971 | (1,744 | ) | 20,227 | ||||||||||
Segment assets at period end | 260,181 | 27,197 | 287,378 | |||||||||||
Expenditures for long-lived assets | 76,568 | 207 | 76,775 | |||||||||||
Year ended December 31, 2003: | ||||||||||||||
Net revenues from external customers | $ | 77,752 | $ | 41,688 | $ | 119,440 | ||||||||
Intersegment revenues | — | 7,130 | 7,130 | |||||||||||
Depreciation and amortization expense | 15,969 | 650 | 16,619 | |||||||||||
Operating income | 20,390 | 5,100 | 25,490 | |||||||||||
Segment assets at period end | 519,140 | 28,396 | 547,536 | |||||||||||
Expenditures for long-lived assets | 276,266 | 386 | 276,652 | |||||||||||
Six months ended June 30, 2003 (unaudited): | ||||||||||||||
Net revenues from external customers | $ | 35,651 | $ | 16,022 | $ | 51,673 | ||||||||
Intersegment revenues | — | 6,780 | 6,780 | |||||||||||
Operating income | 9,656 | 1,956 | 11,612 | |||||||||||
Segment assets at period end | 248,988 | 25,690 | 274,678 | |||||||||||
Six months ended June 30, 2004 (unaudited): | ||||||||||||||
Net revenues from external customers | $ | 70,215 | $ | 29,491 | $ | 99,706 | ||||||||
Operating income | 23,149 | 2,456 | 25,605 | |||||||||||
Segment assets at period end | 750,673 | 30,831 | 781,504 | |||||||||||
F-40
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Reconciling information between reportable segments and the Company's consolidated totals is shown in the following table:
Year Ended December 31, |
Six
Months Ended
June 30, |
|||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||
(unaudited) | ||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||
Total segment revenues | $ | 47,915 | $ | 85,629 | $ | 119,440 | $ | 51,673 | $ | 99,706 | ||||||||||||
Intersegment revenues | 1,481 | 10,157 | 7,130 | 6,780 | — | |||||||||||||||||
Elimination of intersegment sales | (1,481 | ) | (10,157 | ) | (7,130 | ) | (6,780 | ) | — | |||||||||||||
Total consolidated sales | $ | 47,915 | $ | 85,629 | $ | 119,440 | $ | 51,673 | $ | 99,706 | ||||||||||||
Operating income: | ||||||||||||||||||||||
Operating income | $ | 4,217 | $ | 20,227 | $ | 25,490 | $ | 11,612 | $ | 25,605 | ||||||||||||
Interest expenses, net | (3,010 | ) | (5,570 | ) | (7,513 | ) | (3,536 | ) | (19,044 | ) | ||||||||||||
Non-operating income and other | 605 | 872 | 148 | 127 | (252 | ) | ||||||||||||||||
Total consolidated income from continuing operations before income taxes | $ | 1,812 | $ | 15,529 | $ | 18,125 | $ | 8,203 | $ | 6,309 | ||||||||||||
F-41
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Business segments according to geographical location: The Company sells products for power plants and others, mainly to the geographical areas according to location of the customers, as detailed below. The following table presents certain data by geographic area:
Year Ended December 31, |
Six Months
Ended
June 30, |
|||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||
(unaudited) | ||||||||||||||||||||||
Revenues from external customers attributable to: (1) | ||||||||||||||||||||||
North America | $ | 4,901 | $ | 33,557 | $ | 52,534 | $ | 19,619 | $ | 57,050 | ||||||||||||
Pacific Rim | 1,646 | 4,502 | 10,340 | 746 | 25,505 | |||||||||||||||||
Latin America | 12,002 | 18,459 | 25,016 | 17,611 | 6,887 | |||||||||||||||||
Africa | 8,688 | 9,236 | 12,171 | 7,512 | 4,927 | |||||||||||||||||
Far East | 16,119 | 17,937 | 17,793 | 4,743 | 4,436 | |||||||||||||||||
Europe | 4,559 | 1,938 | 1,586 | 1,442 | 901 | |||||||||||||||||
Consolidated total | $ | 47,915 | $ | 85,629 | $ | 119,440 | $ | 51,673 | $ | 99,706 | ||||||||||||
(1) | Revenues as reported in the geographic area in which they originate |
December 31, | June 30, | |||||||||||||||||
2001 | 2002 | 2003 | 2004 | |||||||||||||||
(unaudited) | ||||||||||||||||||
Long-lived assets (primarily power plants and related assets) relating to continuing operations located in: | ||||||||||||||||||
North America | $ | 37,537 | $ | 77,617 | $ | 314,296 | $ | 494,930 | ||||||||||
Latin America | 18,256 | 31,333 | 30,778 | 29,269 | ||||||||||||||
Africa | 50,189 | 56,182 | 54,911 | 54,262 | ||||||||||||||
Far East | 26,592 | 22,078 | 17,433 | — | ||||||||||||||
Europe | 2,240 | 1,788 | 1,563 | 1,620 | ||||||||||||||
Consolidated total | $ | 134,814 | $ | 188,998 | $ | 418,981 | $ | 580,081 | ||||||||||
F-42
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
The following table presents revenues from major customers:
Year ended December 31, | Six months ended June 30, | |||||||||||||||||||||||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||||||||||||||||||||||
Revenues | % | Revenues | % | Revenues | % | Revenues | % | Revenues | % | |||||||||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||||||||||||||||
Revenues from major customers: | ||||||||||||||||||||||||||||||||||||||||||
Customer A (1) | $ | — | — | $ | 21,845 | 26 | $ | 32,458 | 27 | $ | 13,097 | 25 | $ | 41,776 | 42 | |||||||||||||||||||||||||||
Customer B (2) | — | — | — | — | 10,318 | 9 | — | — | 16,041 | 16 | ||||||||||||||||||||||||||||||||
Customer C (1) | 12,475 | 26 | 15,593 | 18 | 12,620 | 11 | 6,342 | 12 | 3,096 | 3 | ||||||||||||||||||||||||||||||||
Customer D (1) | 8,910 | 19 | 9,221 | 11 | 11,617 | 10 | 5,978 | 12 | 6,128 | 6 | ||||||||||||||||||||||||||||||||
Customer E (1) | 3,964 | 8 | 9,606 | 11 | 11,389 | 10 | 5,495 | 11 | 12,537 | 13 | ||||||||||||||||||||||||||||||||
Customer F (1) | 8,607 | 18 | 9,225 | 11 | 9,669 | 8 | 4,739 | 9 | 4,816 | 5 | ||||||||||||||||||||||||||||||||
Customer G (2) | — | — | 7,025 | 8 | 10,754 | 9 | 10,754 | 21 | — | — | ||||||||||||||||||||||||||||||||
Customer H | — | — | — | — | — | — | — | — | 8,666 | 9 | ||||||||||||||||||||||||||||||||
(1) | Revenues reported in electricity segment |
(2) | Revenues reported in products segment |
F-43
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
16. Transactions with related entities
Transactions between the Company and the related entities during the periods presented below and balances as of the periods presented below, other than those disclosed elsewhere in the financial statements, approximated:
Year Ended December 31, |
Six
Months Ended
June 30, |
|||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||
(unaudited) | ||||||||||||||||||||||
Transactions | ||||||||||||||||||||||
Revenues on construction project to subsidiary of Parent | $ | 303 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Revenues on construction of Zunil project | $ | 330 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Property rental fee expense paid to Parent | $ | 627 | $ | 627 | $ | 627 | $ | 314 | $ | 314 | ||||||||||||
Interest expense on note payable to Parent | $ | 1,131 | $ | 1,068 | $ | 1,874 | $ | 783 | $ | 4,568 | ||||||||||||
Guarantee fees to Parent | $ | 145 | $ | 783 | $ | 709 | $ | 352 | $ | 218 | ||||||||||||
Corporate financial, administrative and executive services provided to Parent | $ | 120 | $ | 120 | $ | 120 | $ | 60 | $ | 60 | ||||||||||||
Year-End Balances (at end of period) | ||||||||||||||||||||||
Due from Orzunil | $ | 132 | $ | 145 | $ | 149 | ||||||||||||||||
Due from subsidiaries of Parent | $ | 1,624 | $ | 1,794 | $ | 1,573 | ||||||||||||||||
The Company has an agreement with the Parent whereby, for a fee, the Parent maintains certain standby letters of credit on behalf of the Company. During the years ended December 31, 2001, 2002 and 2003, and the six months ended June 30, 2003 and 2004 (unaudited), the fees under the agreement totaled approximately $145, $783, $709, $352 and $218, respectively.
The current liability due to Parent at December 31, 2002 and 2003, and June 30, 2004 (unaudited) of $51,365, $151 and $413, respectively, represents the net obligation resulting from ongoing operations and transactions with the Parent and is payable from available cash flow. Interest is computed on balances greater than 60 days at LIBOR plus 1%, however not less than the Israeli Consumer Price Index plus 4%, compounded quarterly, and is accrued and paid to the Parent annually.
Notes payable to Parent
In 2003, the Company entered into a loan agreement ("Parent Loan Agreement") with the Parent pursuant to which the Company may borrow up to $150 million in one or more advances. Interest accrues on the unpaid principal of the loan amount at a rate per annum of the Parent's average effective interest plus 0.3% (7.5% during 2003). The principal and interest on the Parent Loan Agreement are payable in varying amounts through the loan due date of June 2010. The outstanding balance of such loan at December 31, 2003 and June 30, 2004 (unaudited) was $126,339 and $143,187, respectively. As further discussed in Note 1, on June 29, 2004 (unaudited), $20,000 outstanding under the Parent Loan Agreement was converted to 1,538,462 shares of $0.001 par value common stock of the Company.
In 2003, the Company entered into a $50,665 non-interest bearing note agreement with the Parent. Principal is payable upon demand at any time after November 2007, but no later than December 2009. The loan is subordinated to all other liabilities of the Company.
F-44
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Future minimum payments under the notes payable to Parent as of December 31, 2003 are as follows:
Year ending December 31: | ||||||
2004 | $ | — | ||||
2005 | 17,834 | |||||
2006 | 78,100 | |||||
2007 | 27,435 | |||||
2008 | 27,435 | |||||
Thereafter | 26,200 | |||||
$ | 177,004 | |||||
17. Employee benefit plan
401(k) Plan
Prior to July 1, 2002, the Company had a Simple IRA ("IRA Plan") plan covering substantially all employees of the Company, age 21 or older, with minimum service requirements. The Company contributed 2% of the eligible employees' compensation for the year. The Company contributed $17 and $6 to the plan for year ended December 31, 2001 and for the six-month period ended June 30, 2002, respectively. On July 1, 2002 the Company discontinued making contributions to the IRA Plan, as the Company exceeded the maximum number of employees allowed for such a plan due to the purchase of the Ormesa Project. Any amounts remaining in the IRA Plan will continue to be invested, and earnings applied to the participating employees' accounts. All contributions made after July 1, 2002 are contributed into the Company's new 401(k) plan, discussed below.
On July 1, 2002 the Company established a 401(k) Plan (the "Plan") for the benefit of its employees. Employees of the Company who have completed one year of service or who had one year of service upon establishment of the Plan are eligible to participate in the Plan. Contributions are made by employees through pretax deductions up to 60% of their annual salary. Contributions made by the Company are matched up to a maximum of 2% of the employee's annual salary. The Company's contributions to the Plan were $46, $83, $24 and $79 and for the six-month period ended December 31, 2002, the year ended December 31, 2003 and for the six months ended June 30, 2003 and 2004 (unaudited), respectively.
Severance plan
The Company, through OSL, provides limited non-pension benefits to all current employees in Israel who are entitled to benefits in the event of termination or retirement in accordance with the Israeli government sponsored programs. These plans generally obligate the Company to pay one month's salary per year of service to employees in the event of involuntary termination. There is no limit on the number of years of service in calculation of the benefit obligation. The liabilities for these plans are accounted for under the guidance of EITF 88-1, Determination of Vested Benefit Obligation for a Defined Benefit Pension Plan , using what is commonly referred to as the "shut down" method, where a company records the undiscounted obligation as if it was payable at each balance sheet date. Such liabilities have been presented on the balance sheet as "Liability for severance pay". The Company has an obligation to partially fund the liabilities through regular deposits in pension funds and severance pay funds. The amounts funded amounted to $9,047, $9,440, and $9,483 at December 31, 2002 and 2003, and June 30, 2004 (unaudited), of which $8,067, $8,227 and $8,259 was restricted, respectively, and have been presented on the balance sheet as part of "Deposits and other". Under the severance pay law, restricted funds may not be withdrawn or pledged until the respective
F-45
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
severance pay obligations have been met. As allowed under the program, earnings from the investment are used to offset severance pay costs. Severance pay expenses for the years ended December 31, 2001, 2002 and 2003, and for the six month periods ended June 30, 2003 and 2004 (unaudited) were $516, $456, $511, $156, and $316, respectively, which includes losses (income) amounting to $(49), $8, $65, $34, and $46, respectively, generated from the regular deposits and amounts accrued in severance funds.
18. Commitments and contingencies
Geothermal Resources
The Company, through its project subsidiaries in the United States, controls certain rights to geothermal fluids through certain leases with the Bureau of Land Management ("BLM") or through private leases. Royalties on the utilization of the geothermal resources are computed and paid to the lessors as defined in the respective agreements. Royalties expense under the geothermal resource agreements were $135, $925, $1,181, $572 and $2,283 for the years ended December 31, 2001, 2002 and 2003, and for the six months ended June 30, 2003 and 2004, respectively.
Letters of credit
In the ordinary course of business with customers, vendors, and lenders, the Company is contingently liable for performance under letters of credit and other financial guarantees obtained by the Parent and issued on behalf of the Company totaling $19,736 and $27,558 at December 31, 2003 and June 30, 2004 (unaudited). Management does not expect any material losses to result from these off-balance-sheet instruments because performance is not expected to be required, and, therefore, is of the opinion that the fair value of these instruments is zero.
LOC Agreement
On June 30, 2004 (unaudited), a subsidiary of the Company entered into a letter of credit and loan agreement ("LOC Agreement") with a bank pursuant to which the bank agreed to issue one or more letters of credit in an amount not to exceed $15 million in the aggregate, which LOC agreement has an initial term which expires on June 30, 2007, and which is automatically extended for successive one-year periods unless notice is provided by either the Company or the bank to the contrary. In the event that the bank is required to pay on a letter of credit drawn by the beneficiary thereof, such letter of credit converts into a loan, bearing interest at LIBOR plus 4.0%, and matures on the succeeding expiration date of the LOC Agreement. There are various restrictive covenants in the LOC Agreement, which include maintaining certain levels of tangible net worth, leverage ratio, and minimum coverage ratio. On June 30, 2004 (unaudited), a letter of credit amounting to $8,125, and subsequent to June 30, 2004, another letter of credit amounting to $3,644 was issued under the LOC Agreement, which have been used to replace cash on deposit in reserve funds that were used as a pledge against the OFC Notes and the Beal Bank Credit Agreement. The amount on one of the letters of credit will increase by $2,674 in December 2004.
Grants and royalties
The Company, through OSL, has historically requested and received grants for research and development from the Office of the Chief Scientist of the Israeli Government. OSL is required to pay royalties to the Israeli Government at a rate of 3.5% to 5.0% of the revenues derived from products and services developed using such grants, and amounted to $42, $700, $1,171, $500, and $1,139 for the years ended December 31, 2001, 2002 and 2003, and for the six months ended June 30, 2003 and 2004 (unaudited), respectively. Such royalties are capped at the amount of the grants received plus interest at LIBOR, and the cap at December 31, 2003 and June 30, 2004 (unaudited), amounted to $7,050 and $6,617, respectively, of which approximately $5,268 and $4,919 of the cap, respectively, increases based on the LIBOR rate, as defined.
F-46
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
In addition, OSL is obligated to pay royalties to an unaffiliated entity at 2% of its domestic sales up to a cumulative amount of $9.25 million, and royalties at a rate of 0.2% of revenues on the next $5.4 million related to a certain technology that is not currently being utilized. However, no royalties will be paid after 30 years have elapsed from the completion of the related project. OSL has not derived any revenues from this technology to date, nor have any royalties been paid to date.
Employment agreements
The Company has employment agreements with three of its senior executive officers, the terms of which expire at various times through June 2008. Such agreements provide for monthly base salary amounts, as well as for bonus and other benefits. The aggregate commitment for future salaries at June 30, 2004 (unaudited), excluding bonuses and benefits, was approximately $1.4 million.
Such executives are also entitled to change in control payments, whereby, if within three years following the occurrence of a change in control, the Company terminates the employee or the employee terminates his or her employment for good reason, as defined, or if, within 180 days following a change in control, the employee terminates his or her employment, the Company is required to pay 24 months of such employee's monthly base salary at the time of the change in control, plus unpaid and accrued base salary and bonuses. The aggregate of 24 months of these executive's base salary, excluding bonuses and benefits, as of June 30, 2004 (unaudited) approximated $0.9 million.
Contingencies
In August 2003, Ormesa agreed to enter into binding arbitration with the Imperial Irrigation District in connection with Imperial Irrigation District's claim that Ormesa is obligated to pay scheduling and transmission charges in the amount of $529 through the effective date of relinquishment of nominated capacity for two of the Ormesa Project plants. Ormesa contends that it is not obligated to pay the subject charges after the January 1, 2003, effective date of the Energy Services Agreement that Ormesa entered into with the Imperial Irrigation District. The Company believes that the dispute will be resolved in 2004 and that any outcome will not have a material impact on the Company's operations or relationship with the Imperial Irrigation District.
In response to an order issued by a California State Court of Appeal, the California Public Utilities Commission ("CPUC"), has commenced an administrative proceeding in order to address short run avoided cost pricing for Qualifying Facilities for the period spanning from December 2000 to March 2001. The court directed that the CPUC modify short run avoided cost pricing on a retroactive basis to the extent that the CPUC determined that short run avoided cost prices were not sufficiently "accurate" or "correct." If the short run avoided cost prices charged during the period in question were determined by the CPUC to not be "accurate" or "correct," retroactive price adjustments could be required for any of the Company's Qualifying Facilities in California whose payments are tied to short run avoided cost pricing, including the Heber 1, Heber 2, Mammoth and Ormesa projects. Currently it is not possible to predict the outcome of such proceeding, however, any retroactive price adjustment required to be made in relation to any of the Company's projects may require such projects to make refund payments, which could materially effect the financial condition, future results and cash flow of the Company.
SG is party to litigation related to a dispute over amounts owed to the plaintiffs under certain operating agreements. SG has initiated settlement discussions with the plaintiff and the Company believes that any outcome will not have a material impact on the Company's results of operations.
The Company is a defendant in various other legal suits in the ordinary course of business. It is the opinion of the Company's management that the expected outcome of these matters, individually or in the aggregate, will not have a material effect on the results of operations and financial condition of the Company.
F-47
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
Certain of the Company's projects are subject to contested FERC rulings whereby an adverse outcome could result in a refund of a portion of previous revenues and/or a reduction in future revenues from those projects. The outcome of this matter cannot be predicted at this time.
19. Subsequent events (unaudited)
Reimbursement agreement
On July 15, 2004, the Company entered into a reimbursement agreement with its Parent pursuant to which the Company agreed to reimburse its Parent for (1) any draws made on any standby letter of credits issued by the Parent for the benefit of the Company and (2) any payments made under any guarantee provided by the Parent for the benefit of the Company. Interest on any amounts owing pursuant to the reimbursement agreement is payable at a rate per annum equal to the Parent's average effective cost of funds plus 0.3% in U.S. dollars.
Finance arrangements
In connection with the acquisition transaction between OSL and the Parent, the Company amended certain terms of its debt related to Loans 1 and 4, and the Bridge Loan (Note 5), pursuant to which the Company is subject to various financial covenants, including maintaining certain levels of debt service coverage ratios and a debt to equity ratio.
In July 2004, the Company also entered into an agreement with a financial institution pursuant to which the Company has assumed, as the primary obligor, existing contingent obligations of approximately $17.2 million in outstanding letters of credit that were previously obtained by the Parent (see letters of credit under Note 18).
20. Restatement
The accompanying consolidated balance sheets as of December 31, 2002 and 2003, and the consolidated statements of stockholder's equity for each of the three years in the period ended December 31, 2003 have been revised to reclassify certain amounts due to/from Parent, originally reported as an asset/liability, as a component of stockholder's equity. The Company has determined that certain divisional equity of the power generation business originally reported as amounts due to/from Parent is more appropriately reported as a component of stockholder's equity. Accordingly, the amounts due to/from Parent and stockholder's equity were increased (reduced) by $1,806 and $(4,549) as of December 31, 2002 and 2003, respectively. Additionally, the components of stockholder's equity have been modified to separately reflect the purchased power generation business's divisional equity, which (reduced) increased retained earnings by $(10,988), $1,562, $8,405, and $6,714 as of December 31, 2000, 2001, 2002, and 2003, respectively.
F-48
Puna Geothermal Venture
Financial Statements
As of December 31, 2002
and 2003, and for the Year Ended
December 31, 2002 and for
Periods from January 1, 2003 to
December 10, 2003
and December 11, 2003 to December 31,
2003 and
Unaudited Financial Statements
As of March 31, 2004 and for the
Three-Months Ended
March 31, 2003 and
2004
F-49
Report of Independent Auditors
To the Partners
of
Puna Geothermal Venture
In our opinion, the accompanying balance sheet present fairly, in all material respects, the financial position of Puna Geothermal Venture (the "Company") at December 31, 2002, and the results of its operations, partners' equity, and its cash flows for the period from January 1, 2003 to December 10, 2003 and 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 statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion.
As discussed in Notes 2 and 8, effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations .
As discussed in Notes 1 and 2 to the financial statements, on December 11, 2003, CE Puna I Corporation, a subsidiary of Constellation Power Corporation, acquired the entire partnership interest of AMOR VIII Corporation, resulting in the Company being wholly owned by Constellation Power Corporation, through its subsidiaries. The financial statements for the period subsequent to December 10, 2003 have been prepared on the basis of accounting arising from this acquisition.
/s/ PricewaterhouseCoopers LLP
Honolulu,
Hawaii
April 30, 2004, except for Notes 3 and
9,
as to which the date is
July 1, 2004
F-50
Report of Independent Auditors
To the Partners of
Puna Geothermal Venture
In our opinion, the accompanying balance sheet present fairly, in all material respects, the financial position of Puna Geothermal Venture (the "Company") at December 31, 2003, and the results of its operations, partners' equity, and its cash flows for the period from December 11, 2003 to December 31, 2003, 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 statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, 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 audit provides a reasonable basis for our opinion.
As discussed in Notes 2 and 8, effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations .
As discussed in Notes 1 and 2 to the financial statements, on December 11, 2003, CE Puna I Corporation, a subsidiary of Constellation Power Corporation, acquired the entire partnership interest of AMOR VIII Corporation, resulting in the Company being wholly owned by Constellation Power Corporation, through its subsidiaries. The financial statements for the period subsequent to December 10, 2003 have been prepared on the basis of accounting arising from this acquisition.
/s/ PricewaterhouseCoopers LLP
Honolulu,
Hawaii
April 30, 2004, except for Notes 3 and
9,
as to which the date is
July 1, 2004
F-51
Puna Geothermal Venture
Balance
Sheets
December 31, 2002 and 2003 and March 31, 2004
Predecessor
Company |
Successor Company | |||||||||||||
December 31,
2002 |
December 31,
2003 |
March 31,
2004 |
||||||||||||
(unaudited) | ||||||||||||||
Assets | ||||||||||||||
Current assets | ||||||||||||||
Cash and cash equivalents | $ | 1,194,294 | $ | 4,618,961 | $ | 5,111,961 | ||||||||
Restricted cash (Note 3) | 6,107,759 | 3,063,035 | 3,068,807 | |||||||||||
Advances | — | 2,240 | 2,321 | |||||||||||
Accounts receivable — HELCO | 363,474 | 1,975,136 | 1,878,977 | |||||||||||
Spare parts inventory | 2,087,529 | 4,511,926 | 4,511,926 | |||||||||||
Other current assets | 71,006 | 105,690 | 77,205 | |||||||||||
Total current assets | 9,824,062 | 14,276,988 | 14,651,197 | |||||||||||
Plant and equipment | ||||||||||||||
Plant and equipment | 208,700,816 | 196,309,698 | 196,319,826 | |||||||||||
Less accumulated depreciation | 52,029,567 | 58,827,358 | 60,281,276 | |||||||||||
156,671,249 | 137,482,340 | 136,038,550 | ||||||||||||
Construction in progress | 2,019,245 | 52,724 | 52,724 | |||||||||||
158,690,494 | 137,535,064 | 136,091,274 | ||||||||||||
Deferred financing costs | 1,205,321 | 1,071,449 | 1,037,981 | |||||||||||
Other assets | 31,535 | 31,535 | 123,233 | |||||||||||
Total assets | $ | 169,751,412 | $ | 152,915,036 | $ | 151,903,685 | ||||||||
Liabilities and Partners' Equity | ||||||||||||||
Current liabilities | ||||||||||||||
Note payable to Credit Suisse, current portion (Note 3) | $ | 3,678,051 | $ | 4,004,990 | $ | 3,024,176 | ||||||||
Trade accounts payable | 2,861,678 | 932,662 | 286,299 | |||||||||||
HELCO sanction (Note 5) | 608,831 | 203,005 | 18,808 | |||||||||||
Payable to custodian | 26,443 | — | — | |||||||||||
Accrued expenses | 483,299 | 638,573 | 247,561 | |||||||||||
COSI — Puna, Inc. payables | 887,871 | 897,263 | 1,355,780 | |||||||||||
Constellation Power, Inc. payables | 264,000 | — | 66,000 | |||||||||||
Total current liabilities | 8,810,173 | 6,676,493 | 4,998,624 | |||||||||||
Noncurrent liabilities | ||||||||||||||
Swap agreements (Note 4) | 4,758,265 | 3,692,233 | 2,769,130 | |||||||||||
Note payable to Credit Suisse, noncurrent portion (Note 3) | 44,300,097 | 40,294,892 | 40,294,892 | |||||||||||
Asset retirement obligation | — | 2,041,043 | 2,080,844 | |||||||||||
Total liabilities | 57,868,535 | 52,704,661 | 50,143,490 | |||||||||||
Partners' equity | ||||||||||||||
Partners' capital | 116,641,142 | 103,902,608 | 104,529,325 | |||||||||||
Accumulated other comprehensive loss | (4,758,265 | ) | (3,692,233 | ) | (2,769,130 | ) | ||||||||
Total partners' equity | 111,882,877 | 100,210,375 | 101,760,195 | |||||||||||
Total liabilities and partners' equity | $ | 169,751,412 | $ | 152,915,036 | $ | 151,903,685 | ||||||||
The accompanying notes are an integral part of the financial statements.
F-52
Puna
Geothermal Venture
Statements of Operations
Year Ended December
31, 2002, Period from January 1, 2003 to December 10, 2003, Period from
December 11, 2003 to December 31, 2003, and Three Months Ended March
31, 2003 and 2004
Predecessor
Company |
Successor
Company |
Predecessor
Company |
Successor
Company |
|||||||||||||||||||
Year
Ended
December 31, 2002 |
Period from
January 1, 2003 to December 10, 2003 |
Period from
December 11, 2003 to December 31, 2003 |
Three Months Ended March 31, | |||||||||||||||||||
2003 | 2004 | |||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||
Operating revenues, all from a single customer | ||||||||||||||||||||||
Electricity sales | $ | 4,465,946 | $ | 9,485,176 | $ | 728,746 | $ | 1,581,283 | $ | 4,607,244 | ||||||||||||
Capacity payments | 1,859,310 | 7,901,795 | 620,882 | 314,557 | 996,132 | |||||||||||||||||
Total operating revenues | 6,325,256 | 17,386,971 | 1,349,628 | 1,895,840 | 5,603,376 | |||||||||||||||||
Operating expenses | ||||||||||||||||||||||
Operating expenses | 5,392,745 | 5,607,777 | 579,585 | 1,120,728 | 1,613,993 | |||||||||||||||||
General and administration expenses | 1,888,530 | 1,481,763 | 122,759 | 448,528 | 519,195 | |||||||||||||||||
Royalties and land lease expenses (Note 6) | 711,308 | 1,125,392 | 54,765 | 343,838 | 499,051 | |||||||||||||||||
Depreciation and amortization | 6,182,169 | 6,466,810 | 418,530 | 1,509,138 | 1,483,163 | |||||||||||||||||
Accretion of asset retirement obligations (Note 8) | — | 158,804 | 9,826 | 41,066 | 39,801 | |||||||||||||||||
Capacity sanction expenses | 608,831 | 313,473 | — | 108,076 | 18,808 | |||||||||||||||||
Total operating expenses | 14,783,583 | 15,154,019 | 1,185,465 | 3,571,374 | 4,174,011 | |||||||||||||||||
Non-operating income (expenses) | ||||||||||||||||||||||
Interest income | 80,262 | 43,508 | 1,964 | 16,212 | 17,849 | |||||||||||||||||
Interest expense | (3,801,492 | ) | (3,293,191 | ) | (174,916 | ) | (885,427 | ) | (820,497 | ) | ||||||||||||
Net income (loss) before cumulative effect of change in accounting principle | (12,179,557 | ) | (1,016,731 | ) | (8,789 | ) | (2,544,749 | ) | 626,717 | |||||||||||||
Cumulative effect of change in accounting principle (Note 8) | — | 1,157,265 | — | 1,157,265 | — | |||||||||||||||||
Net income (loss) | $ | (12,179,557 | ) | $ | (2,173,996 | ) | $ | (8,789 | ) | $ | (3,702,014 | ) | $ | 626,717 | ||||||||
Proforma income tax provision (benefit) (unaudited) | $ | (4,628,200 | ) | $ | (826,100 | ) | $ | (3,300 | ) | $ | (1,406,800 | ) | $ | 238,200 | ||||||||
Proforma net income (loss) reflecting tax provision (Note 2) (unaudited) | $ | (7,551,357 | ) | $ | (1,347,896 | ) | $ | (5,489 | ) | $ | (2,295,214 | ) | $ | 388,517 | ||||||||
The accompanying notes are an integral part of the financial statements.
F-53
Puna Geothermal Venture
Statements of
Partners' Equity
Year Ended December 31, 2002, Period from
January 1, 2003 to December 10, 2003, Period from December 11, 2003 to
December 31, 2003, and Three Months Ended March 31, 2004
Partners' Capital |
Accumulated
Other Comprehensive Loss |
Total
Partners' Equity |
||||||||||||||||||||||||||||
Capital |
Preferred
Capital |
Total
Partners' Capital |
||||||||||||||||||||||||||||
AMOR VIII
Corporation |
CE
Puna
I |
CE Puna
L.P. |
CE Puna
L.P. |
|||||||||||||||||||||||||||
Balance at January 1, 2002 | $ | 21,430,098 | $ | — | $ | 37,686,019 | $ | 54,643,835 | $ | 113,759,952 | $ | (2,595,000 | ) | $ | 111,164,952 | |||||||||||||||
Capital contribution | — | — | — | 15,060,747 | 15,060,747 | — | 15,060,747 | |||||||||||||||||||||||
Comprehensive loss | ||||||||||||||||||||||||||||||
Change in unrealized holding loss | — | — | — | — | — | (2,163,265 | ) | (2,163,265 | ) | |||||||||||||||||||||
Partnership loss for 2002 | (121,795 | ) | — | (12,057,762 | ) | — | (12,179,557 | ) | — | (12,179,557 | ) | |||||||||||||||||||
Total comprehensive loss | (14,342,822 | ) | ||||||||||||||||||||||||||||
Balance at December 31, 2002 | 21,308,303 | — | 25,628,257 | 69,704,582 | 116,641,142 | (4,758,265 | ) | 111,882,877 | ||||||||||||||||||||||
Capital contribution | — | — | 964,726 | 9,675,735 | 10,640,461 | — | 10,640,461 | |||||||||||||||||||||||
Comprehensive loss | ||||||||||||||||||||||||||||||
Change in unrealized holding loss | — | — | — | — | — | 265,699 | 265,699 | |||||||||||||||||||||||
Partnership loss for the period from January 1, 2003 to December 10, 2003 | (12,093 | ) | — | (2,161,903 | ) | — | (2,173,996 | ) | — | (2,173,996 | ) | |||||||||||||||||||
Total comprehensive loss | (1,908,297 | ) | ||||||||||||||||||||||||||||
Balance at December 10, 2003 | $ | 21,296,210 | $ | — | $ | 24,431,080 | $ | 79,380,317 | $ | 125,107,607 | $ | (4,492,566 | ) | $ | 120,615,041 | |||||||||||||||
Balance at December 11, 2003 | $ | — | $ | 100,000 | $ | 24,431,080 | $ | 79,380,317 | $ | 103,911,397 | $ | (4,492,566 | ) | $ | 99,418,831 | |||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||
Change in unrealized holding loss | — | — | — | — | — | 800,333 | 800,333 | |||||||||||||||||||||||
Partnership loss for the period from December 11, 2003 to December 31, 2003 | — | (88 | ) | (8,701 | ) | — | (8,789 | ) | — | (8,789 | ) | |||||||||||||||||||
Total comprehensive income | 791,544 | |||||||||||||||||||||||||||||
Balance at December 31, 2003 | — | 99,912 | 24,422,379 | 79,380,317 | 103,902,608 | (3,692,233 | ) | 100,210,375 | ||||||||||||||||||||||
Comprehensive loss (unaudited) | ||||||||||||||||||||||||||||||
Change in unrealized holding loss | — | — | — | — | — | 923,103 | 923,103 | |||||||||||||||||||||||
Partnership income for the period from January 1, 2004 to March 31, 2004 | — | 6,268 | 620,449 | — | 626,717 | — | 626,717 | |||||||||||||||||||||||
Total comprehensive loss | 1,549,820 | |||||||||||||||||||||||||||||
Balance at March 31, 2004 (unaudited) | $ | — | $ | 106,180 | $ | 25,042,828 | $ | 79,380,317 | $ | 104,529,325 | $ | (2,769,130 | ) | $ | 101,760,195 | |||||||||||||||
The accompanying notes are an integral part of the financial statements.
F-54
Puna Geothermal Venture
Statements of
Cash Flows
Year Ended December 31, 2002, Period from January 1,
2003 to December 10, 2003, Period from December 11, 2003 to December
31, 2003, and Three Months Ended March 31, 2003 and 2004
Predecessor
Company |
Successor
Company |
Predecessor
Company |
Successor
Company |
|||||||||||||||||||
Year
Ended
December 31, 2002 |
Period from
January 1, 2003 to December 10, 2003 |
Period from
December 11, 2003 to December 31, 2003 |
Three Months Ended March 31, | |||||||||||||||||||
2003 | 2004 | |||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||||
Net income (loss) | $ | (12,179,557 | ) | $ | (2,173,996 | ) | $ | (8,789 | ) | $ | (3,702,014 | ) | $ | 626,719 | ||||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities | ||||||||||||||||||||||
Depreciation and amortization | 6,182,169 | 6,466,810 | 418,530 | 1,509,138 | 1,483,163 | |||||||||||||||||
Accretion of asset retirement obligations | — | 158,804 | 9,826 | 41,066 | 39,801 | |||||||||||||||||
Cumulative effect of change in accounting principle | — | 1,157,265 | — | 1,157,265 | — | |||||||||||||||||
Changes in | ||||||||||||||||||||||
Accounts receivable – HELCO | 1,244,851 | (1,856,173 | ) | 244,511 | (416,285 | ) | 96,158 | |||||||||||||||
Spare parts inventory | (216,253 | ) | (2,424,397 | ) | — | — | — | |||||||||||||||
Other current and non-current assets | 145,495 | 198 | (37,122 | ) | (619 | ) | (81 | ) | ||||||||||||||
Accounts payable and accrued expenses | (372,589 | ) | 749,936 | (229,334 | ) | 121,396 | (832,172 | ) | ||||||||||||||
COSI – Puna, Inc. payables | 399,507 | (171,951 | ) | 662,069 | — | — | ||||||||||||||||
Constellation Power, Inc. payables | 198,000 | 220,000 | — | 66,000 | 66,000 | |||||||||||||||||
Net cash provided by (used in) operating activities | (4,598,377 | ) | 2,126,496 | 1,059,691 | (1,224,053 | ) | 1,479,588 | |||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||
Capital expenditures | (9,515,147 | ) | (8,454,072 | ) | (349,641 | ) | (6,798,633 | ) | — | |||||||||||||
Decrease (increase) in restricted cash | (3,103,908 | ) | 3,046,688 | (1,964 | ) | 3,063,989 | (5,772 | ) | ||||||||||||||
Net cash used in investing activities | (12,619,055 | ) | (5,407,384 | ) | (351,605 | ) | (3,734,644 | ) | (5,772 | ) | ||||||||||||
Cash flows from financing activities | ||||||||||||||||||||||
Principal payments on note payable | (3,228,513 | ) | (2,697,452 | ) | (980,814 | ) | (899,079 | ) | (980,814 | ) | ||||||||||||
Capital contributions | 15,060,747 | 9,675,735 | — | 5,397,753 | — | |||||||||||||||||
Net cash provided by (used in) financing activities | 11,832,234 | 6,978,283 | (980,814 | ) | 4,498,674 | (980,814 | ) | |||||||||||||||
Increase (decrease) in cash and cash equivalents | (5,385,198 | ) | 3,697,395 | (272,728 | ) | (460,023 | ) | 493,002 | ||||||||||||||
Cash and cash equivalents | ||||||||||||||||||||||
Beginning of period | 6,579,492 | 1,194,294 | 4,891,689 | 1,194,294 | 4,618,961 | |||||||||||||||||
End of period | $ | 1,194,294 | $ | 4,891,689 | $ | 4,618,961 | $ | 734,271 | $ | 5,111,963 | ||||||||||||
Other cash flow information | ||||||||||||||||||||||
Cash paid during the period for interest | $ | 3,800,766 | $ | 3,267,676 | $ | 199,480 | $ | 885,427 | $ | 820,496 | ||||||||||||
Noncash investing activity | ||||||||||||||||||||||
Accounts payable converted to Partners' capital | $ | — | $ | 964,726 | $ | — | $ | — | $ | — | ||||||||||||
The accompanying notes are an integral part of these financial statements.
F-55
Puna
Geothermal Venture
Notes to Financial Statements
December 31,
2002 and 2003 and March 31,
2004
1. | Organization and Operations |
Puna Geothermal Venture ("PGV"), a Hawaii General Partnership, operates under the Second Amended and Restated Partnership Agreement dated December 2, 1996 (the "Partnership Agreement"). Prior to December 11, 2003, the partners of PGV were CE Puna Limited Partnership ("CE Puna"), a subsidiary of Constellation Power Corporation and AMOR VIII Corporation ("AMOR"). Each partner had a 50% interest. However, under the Partnership Agreement and other agreements between the partners, CE Puna has provided a larger percentage of PGV's capital and, therefore, is entitled to a greater percentage of PGV's income or loss, tax benefits and cash flow. In particular, CE Puna is to receive 100% of net cash flow until its Preferred Capital, together with a cumulative Preferred Capital Return of 10% per annum, is paid. On December 11, 2003, CE Puna I Corporation ("CE Puna I"), a subsidiary of Constellation Power Corporation, consummated an agreement to purchase the entire partnership interest of AMOR. At December 31, 2003, the partners are CE Puna I and CE Puna, subsidiaries of Constellation Power Corporation.
PGV developed and is operating a geothermal energy project on the island of Hawaii in the State of Hawaii. PGV sells the electricity it generates to Hawaii Electric Light Company, Inc. ("HELCO") under the terms of a long-term power purchase agreement. PGV began generating electricity commercially in 1993.
During 2002, PGV encountered problems with the production capacity and injection wells related to geothermal resources and production levels fell significantly below minimum performance requirements under the Power Purchase Agreement ("PPA") (Note 5) with HELCO. Such non-compliance with the PPA subjected PGV to PPA-based sanctions (Note 5).
In January 2003, PGV finished development of a well which increased the production under the PPA with HELCO and, in April 2003, PGV finished development of another well that further increased production. The costs of completing these projects were funded by capital contributions from CE Puna.
Management expects to generate positive cash flows from operations in fiscal 2004 in amounts sufficient to fund debt service requirements.
2. | Summary of Significant Accounting Policies |
Basis of Presentation
On December 11, 2003, Constellation Power Corporation ("Constellation") closed on the purchase of the remaining interest in PGV that it did not already own. As a result, PGV is wholly owned by Constellation Power Corporation, through its subsidiaries. The purchase was accounted for as an acquisition of an asset, as opposed to the acquisition of a business, and is subject to the purchase method of accounting. Starting on December 11, 2003, PGV's financial statements reflected Constellation's (through its subsidiaries) "pushed down" accounting basis. The change in the partnership equity as a result of this acquisition was an approximately $21.2 million decrease in Partners' capital.
The following reconciles PGV's partners' capital as of December 10, 2003 to Constellation's "pushed down" accounting basis as of December 11, 2003:
Partners' capital as of December 10, 2003 | $ | 125,107,607 | ||||
Acquisition of AMOR VIII Corporation's investment in PGV by Constellation | ||||||
Constellation's acquisition cost of AMOR VIII's interest | 100,000 | |||||
AMOR VIII's capital account | (21,296,210 | ) | ||||
Constellation's "pushed down" accounting basis at December 11, 2003 | $ | 103,911,397 | ||||
F-56
Puna
Geothermal Venture
Notes to Financial Statements
December 31,
2002 and 2003 and March 31,
2004
PGV's plant and equipment was written down by approximately $21.2 million; there were no other changes in the basis of any other assets and liabilities as a result of the "push down."
Interim Financial Data
The interim financial data for the three months ended March 31, 2004 and 2003 is unaudited; however, in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of the interim periods.
Cash Equivalents
PGV considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted Cash
PGV funds reserve accounts for new wells, debt service, working capital and major maintenance repairs as required by its financing agreement.
Spare Parts Inventory
Spare parts inventory is stated at cost determined on a weighted average basis.
Plant and Equipment
Plant and equipment consists of costs incurred during the development and construction of the power plant, the wellfield and transmission lines (the "plant"). Construction period interest totaling $18,423,973 was capitalized in connection with development and construction of the plant and has been allocated to the assets to which it relates. The plant went in service on August 1, 1993.
Plant and equipment is depreciated using the straight-line method over the lesser of the estimated useful lives of the assets (generally 35 years) or the number of years remaining in the power purchase agreement with HELCO (34.33 years at August 1, 1993.)
Deferred Financing Costs
The expense of issuance of the long-term note payable is being amortized over the fifteen-year life of the note payable under the interest method.
Income Taxes
No provision for federal or state income taxes is made in the financial statements as the individual partners are responsible for reporting their respective shares of PGV's income, loss, deductions and credits to taxing authorities. The proforma net income (loss) on the statements of operations reflects a tax provision (benefit) of 38%, the effective rate of the company that acquired CE Puna I and CE Puna's ownership interest (see Note 9).
Financial Instruments
The carrying amount of cash and cash equivalents and restricted cash approximates fair value because of the short maturity of these instruments. The carrying amount of long-term debt approximates fair value because its interest rate is variable. The estimated termination cost associated with the interest rate swap at December 31, 2003, which represents fair value, is approximately $3,692,000.
F-57
Puna
Geothermal Venture
Notes to Financial Statements
December 31,
2002 and 2003 and March 31,
2004
Use of Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates involve judgments with respect to, among other things, various future economic factors, which are difficult to predict and are beyond the control of PGV. Therefore, actual amounts could differ from these estimates.
Impairment of Long-Lived Assets
Long-lived assets subject to the requirements of Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of , as amended by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , are evaluated for impairment through a review of undiscounted expected future cash flows. If the sum of the undiscounted expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. As a result of the change in PGV's ownership in 2003 and PGV's inability to meet the minimum performance requirements as set forth in its power purchase agreement (Note 5), a detailed impairment analysis was performed. The result of this analysis concluded that the sum of the undiscounted expected future cash flows was more than the carrying amount of its long-lived assets. Accordingly, PGV recognized no impairment losses of its long-lived assets in 2003 or in any other periods presented.
Asset Retirement Obligation
On July 22, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). Under SFAS 143, retirement obligations associated with tangible long-lived assets acquired are to be recognized at fair value in the period in which incurred, effective for financial statements issued for fiscal years beginning after June 15, 2002. PGV adopted SFAS 143 beginning January 1, 2003. See Note 8 for further discussion.
Derivative Instruments
On January 1, 2001, PGV adopted SFAS No. 133, as amended by SFAS No. 138, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). Under SFAS 133, all derivative instruments are recognized in the balance sheet at their fair values. PGV's interest rate swap agreements qualify as a cash flow hedge under SFAS 133. See Note 4 for further discussion.
Concentrations of Credit Risk
Financial instruments that potentially subject PGV to a concentration of credit risk primarily consist of cash and cash equivalents and trade accounts receivable.
PGV's cash and cash equivalents are deposited with two financial institutions in the United States of America and may exceed federally insured amounts. PGV has not experienced any losses on its cash and cash equivalents.
PGV's customer base is comprised of one single customer, HELCO. Loss of or default by this customer could have an adverse effect upon PGV's financial position, results of operations and cash flows.
PGV's production wells are subject to volatility and potential shutdown on exhaustion. A shutdown of a well, as occurred in 2002, could have adverse effects on PGV's ability to produce ample power in accordance with the Power Purchase Agreement (see Note 5), subjecting PGV to reduced revenues and sanctions by HELCO in compensation of the inability to meet specified energy production levels.
F-58
Puna
Geothermal Venture
Notes to Financial Statements
December 31,
2002 and 2003 and March 31,
2004
3. | Note Payable |
PGV has entered into a Credit Agreement dated as of December 2, 1996 with Credit Suisse, which provides for a 15-year term loan in an amount not to exceed $65,387,594. Substantially all of the assets of PGV are pledged as collateral on amounts due under the Credit Agreement. Principal is due quarterly. Amounts outstanding under the Credit Agreement bear interest at LIBOR plus 1.50% or the lender's Base Rate plus .75%, at PGV's option. On the fifth and tenth anniversary of the closing of the Credit Agreement, the interest rate increases by 25 basis points. In addition, the interest rate may be increased by 25 basis points if PGV fails to maintain at least a 1.25:1 debt service coverage ratio. The interest rate at December 31, 2003 and 2002 was 2.94% and 3.56%, respectively.
As required under the Credit Agreement, Constellation Investments, Inc., an affiliate of CE Puna, established several reserves and guarantees in order to fund specific needs of PGV. Under the agreement, a Debt Service Reserve, a New Well Field Reserve and an Underground Injection Control ("UIC") Guaranty were established. PGV is required, per the amended Credit Agreement, to maintain $3.0 million in the New Well Field Reserve for the purpose of funding well improvements as structured in PGV's Restoration Plan. The Debt Service Reserve Guaranty includes a guaranty of $4.5 million by Constellation Investments, Inc. and a Debt Service Reserve to be maintained by PGV of $1.8 million. The reserve balances recorded as restricted cash by PGV as of December 31, 2002, 2003 and March 31, 2004 were as follows:
March 31, | ||||||||||||||
2002 | 2003 | 2004 | ||||||||||||
(unaudited) | ||||||||||||||
New Well Field Reserve | $ | 3,073,759 | $ | 2,224 | $ | 2,224 | ||||||||
Debt Service Reserve | 1,815,644 | 1,831,786 | 1,835,261 | |||||||||||
Maintenance Reserve | 625,990 | 631,479 | 632,660 | |||||||||||
Working Capital Reserve | 592,366 | 597,546 | 598,662 | |||||||||||
$ | 6,107,759 | $ | 3,063,035 | $ | 3,068,807 | |||||||||
These reserve accounts are classified as current restricted cash since they are used and replenished for servicing current debt and for funding current operations.
Under terms of the Revised Credit Agreement, reserve accounts were funded at closing for debt service, working capital and major maintenance repairs. Additional payments into these and other reserve accounts will occur as provided in the Revised Credit Agreement. Distributions to the partners are made after all required funding of reserves.
At December 31, 2003, the scheduled maturities under the Credit Agreement are as follows:
Years Ending | ||||||
2004 | $ | 4,004,990 | ||||
2005 | 4,413,661 | |||||
2006 | 5,108,405 | |||||
2007 | 5,925,752 | |||||
2008 | 6,579,627 | |||||
Thereafter | 18,267,447 | |||||
$ | 44,299,882 | |||||
See Note 9 for subsequent event.
4. | Derivative Instruments |
As required under the Credit Agreement to reduce the impact of changes in interest rates on its variable rate debt, PGV entered into 10-year interest rate swap agreements on approximately 75%
F-59
Puna
Geothermal Venture
Notes to Financial Statements
December 31,
2002 and 2003 and March 31,
2004
of the amounts outstanding under the Credit Agreement. The swap agreements qualify for hedge accounting as a cash flow hedge. The average fixed LIBOR is 6.67% under the swap agreements.
For the periods from December 11, 2003 to December 31, 2003, from January 1, 2003 to December 10, 2003, and for the year ended December 31, 2002, unrealized holding gains of $800,333 and $265,699 and unrealized holding loss of $2,163,265, respectively, were recorded in accumulated other comprehensive income/loss to recognize the change in fair value of the swap agreements. An unrealized holding gain of $923,103 was recorded for the three months ended March 31, 2004 (unaudited).
PGV made payments of $1,814,620 under the swap agreements for the year ended December 31, 2002. Payments totaled $1,447,950 for the period January 1, 2003 to December 10, 2003 and $480,157 for the period December 11, 2003 to December 31, 2003. PGV made payments of $231,065 for the three months ended March 31, 2004 (unaudited).
PGV may be exposed to a potential loss in the event of nonperformance by the other parties to the swap agreements, but PGV does not anticipate any such nonperformance. The notional value of the amounts outstanding under the swap agreements is approximately $32 million.
The swap agreements were terminated on June 3, 2004. The unrealized holding loss for the period April 1, 2004 through June 2, 2004 amounted to approximately $31,000 (unaudited).
5. | Power Purchase Agreement |
PGV has entered into a long-term non-cancelable power purchase agreement with HELCO. HELCO agreed to purchase up to 30 MW of net output during peak hours and up to 22 MW of net output during off peak hours through the year 2027. The agreement specifies energy rates of the greater of avoided costs of 6.56¢ per kWh for the first 25 MW of peak energy and 5.43¢ per kWh for the first 22 MW of off peak energy. Energy rates for production in excess of 25 MW for peak hours and in excess of 22 MW for off peak hours are greater of the avoided energy payment rates of 4.325¢ per kWh for peak hours and 3.325¢ per kWh for off peak hours. In addition, PGV receives capacity payments for providing peak period energy. Capacity payments are 3.39¢ per kWh for the first 25 MW and 2.14¢ per kWh for the additional 5 MW based on annual capacity payments of $4 million and $504,750, respectively, and 4,718 peak hours in a year.
PGV is subject to sanctions in the power purchase agreement in cases where PGV is not able to provide the agreed upon power output, within a 5% yield. Such sanctions do not result in the agreement becoming cancelable at HELCO's discretion. In 2003 and 2002, PGV was not able to meet the specified goals for power output and as such, was subject to sanctions based on the following: 1) reductions are made to the monthly capacity payments noted above for deficiencies at the above rates and 2) on an annual basis, shortfalls of the on-peak availability provide for payments due of $7,992 per full percentage point below 95% to and including 80% and $11,875 per full percentage point less than 80%. Pursuant to the agreement as summarized above, PGV recognized capacity sanction expenses of $608,831 in fiscal 2002, $313,473 in the period January 1, 2003 to December 10, 2003, and $18,808 in the three-months ended March 31, 2004 (unaudited), based on the capacity shortfalls for these periods.
6. | Royalty and Lease Agreements |
PGV has entered into various long-term royalty and lease agreements related to the use of geothermal resources and to the land on which the facility is situated. Such agreements call for PGV to pay royalty payments based on gross revenues derived from energy sales. Royalties are remitted to the State of Hawaii based on steam value at approximately 3% of gross revenue. Royalties to the State of Hawaii were $179,753 in 2002, $497,530 from January 1, 2003 to December 10, 2003 and $30,373 from
F-60
Puna
Geothermal Venture
Notes to Financial Statements
December 31,
2002 and 2003 and March 31,
2004
December 11, 2003 to December 31, 2003. Royalties for the three months ended March 31, 2004 were $157,550 (unaudited). Royalties are remitted to Thermal Power based on steam value. Royalties to Thermal Power were $69,988 in 2002, $191,227 from January 1, 2003 to December 10, 2003 and $11,674 from December 11, 2003 to December 31, 2003. Royalties for the three months ended March 31, 2004 were $66,911 (unaudited). Royalties are remitted to the lessor of the facility site and associated properties, Kapoho Land Partnership ("KLP"), at approximately 3% of steam value. Royalty payments to KLP are subject to minimum payments of $260,520 per year with the minimum payment made for 2003 and 2002. In addition, KLP receives operating lease payments of $167,107 annually for the use of the site. Minimum royalty payments are subject to adjustment every five years based upon changes in the CPI. Payments for the use of the site are subject to renegotiation every five years based on rental value of comparable properties.
At December 31, 2003, the total remaining minimum commitments for royalties and operating leases, excluding the effects of future renegotiations, are as follows:
Years Ending | ||||||
2004 | $ | 427,627 | ||||
2005 | 427,627 | |||||
2006 | 427,627 | |||||
2007 | 427,627 | |||||
2008 | 427,627 | |||||
Thereafter | 8,124,913 | |||||
$ | 10,263,048 | |||||
7. | Related Party Transactions |
During December 1996, PGV and COSI Puna, Inc., an affiliate of Constellation Power, Inc., entered into an Operation and Maintenance Agreement effective as of December 2, 1996. COSI Puna, Inc.'s fees under the agreement are 10% of the total labor plus related burden costs. The fee for 2002 was $251,676 and payments to COSI Puna, Inc. for payroll related costs and fees totaled $2,719,084 in 2002. In connection with CE Puna I's acquisition of AMOR's ownership interest in PGV, COSI Puna, Inc. agreed to waive payment of certain fees payable at the acquisition date. Such payable amounted to $480,726. PGV has recognized the forgiveness of this payable as a capital contribution in the period ended December 10, 2003.
Two employees of Constellation Power, Inc. ("CPI") serve as Owner's Representative and Financial Manager of PGV. In addition, other employees of CPI and its affiliates perform human resources, risk management, environmental and safety, financial and consultation services for PGV. The cost for such services in 2002 totaled $264,000. In connection with CE Puna I's acquisition of AMOR's ownership interest in PGV, CPI agreed to waive payment of all fees payable at the acquisition date. Such payable amounted to $484,000. PGV has recognized the forgiveness of this payable as a capital contribution in the period ended December 10, 2003.
8. | Asset Retirement Obligation |
Effective January 1, 2003, PGV adopted SFAS No. 143, Accounting for Asset Retirement Obligations . SFAS No. 143 provides the accounting requirements for recognizing an estimated liability for legal obligations associated with the retirement of tangible long-lived assets. PGV measures the liability at fair value when incurred and capitalizes a corresponding amount as part of the book value of the related long-lived assets. The increase in the capitalized cost is included in determining depreciation expense over the estimated useful life of these assets. Since the fair value of the asset retirement obligations ("ARO") is determined using a present value approach, accretion of the liability due to
F-61
Puna
Geothermal Venture
Notes to Financial Statements
December 31,
2002 and 2003 and March 31,
2004
the passage of time is recognized each period to "Accretion of asset retirement obligations" in PGV's Statements of Operations until the settlement of the liability. A gain or loss is recorded when the liability is settled after retirement. The adoption of SFAS No. 143 on January 1, 2003 resulted in an increase to plant and equipment of $715,148, net of accumulated depreciation and the establishment of an asset retirement obligation liability of $1,872,413. The cumulative effect of this change for periods prior to January 1, 2003 of $1,157,265 is shown as the cumulative effect of change in accounting principle in the Statements of Operations.
Inherent in the fair value calculation of ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, and timing of settlement. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment will be made to the plant and equipment balance.
The change in the "Asset retirement obligation" liability during 2003 was as follows:
Liability at January 1, 2003 | $ | 1,872,413 | ||||
Accretion expense through December 31, 2003 | 158,804 | |||||
Accretion expense – December 11, 2003 to December 31, 2003 | 9,826 | |||||
Liability at December 31, 2003 | 2,041,043 | |||||
Accretion expense – January 1, 2004 to March 31, 2004 (unaudited) | 39,801 | |||||
Liability at March 31, 2004 (unaudited) | $ | 2,080,844 | ||||
The pro-forma asset retirement obligation PGV would have recognized as of January 1, 2002, had PGV implemented SFAS No. 143 as of that date, was approximately $1,760,146 based on the information, assumptions, and interest rates as of January 1, 2003 used to determine the $1,872,413 liability recognized upon the adoption of SFAS No. 143. The following discloses the pro forma effect of the implementation on the Company's net loss for the year ended December 31, 2002, had SFAS No. 143 been adopted by the Company on January 1, 2002:
Net loss, as reported | $ | (12,179,557 | ) | |||
Effect on net loss had SFAS No. 143 been applied | (129,160 | ) | ||||
Net loss, as adjusted | $ | (12,308,717 | ) | |||
9. | Subsequent Event |
Constellation Power Corporation sold its interest in CE Puna I and CE Puna to an unrelated third party on June 3, 2004. In connection with this transaction, the Company's note payable to Credit Suisse was paid in full, and the Credit Agreement and Revised Credit Agreement with Credit Suisse and swap agreements were terminated.
F-62
Combined Heber and Affiliates
(Debtors-in-Possession)
Report on Audits
of Combined Financial Statements
As of December 31, 2002 and
December 17, 2003,
And for the years ended December 31, 2001 and
2002, and
for the period from January 1, 2003 to December 17,
2003
F-63
Report of Independent Auditors
To the Partners of Combined Heber and Affiliates
In our opinion, the accompanying combined balance sheet and the related combined statements of operations, of partners' capital and of cash flows present fairly, in all material respects, the financial position of Heber Geothermal Company, Heber Field Company, and Second Imperial Geothermal Company (collectively "Heber and Affiliates" or the "Company") at December 31, 2002 and December 17, 2003, and the results of their operations and their cash flows for the years ended December 31, 2001 and 2002, and for the period from January 1, 2003 to December 17, 2003 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 audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits 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 our opinion.
As discussed in Note 1 to the combined financial statements, Covanta Energy Corporation and 123 of its subsidiaries, including the Company, filed voluntary petitions on April 1, 2002 with the United States Bankruptcy Court for the Southern District of New York for reorganization under the provisions of Chapter 11 of the Bankruptcy Code. The Company's Debtor's Third Amended Joint Plan of Reorganization Under Chapter 11 (Heber Plan) was substantially consummated on December 18, 2003, and the Company emerged from bankruptcy.
As discussed in Note 1 to the financial statements, on December 18, 2003, OrCal Geothermal, Inc. acquired the partnership interests in the Company.
As discussed in Note 5 to the financial statements, effective January 1, 2003, the Company adopted the provisions of Statement of Financial Accounting Standards No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets .
/s/ PricewaterhouseCoopers LLP
Sacramento,
California
July 19, 2004
F-64
Combined Heber and
Affiliates
(California Limited
Partnerships)
(Debtors-in-Possession)
Balance Sheets (in
thousands)
December 31,
2002 |
December 17,
2003 |
|||||||||
Assets | ||||||||||
Current assets: | ||||||||||
Cash | $ | 57 | $ | — | ||||||
Restricted cash and cash equivalents | 2,583 | 1,897 | ||||||||
Accounts receivable | 9,815 | 7,183 | ||||||||
Prepaid expenses | 811 | 258 | ||||||||
Total current assets | 13,266 | 9,338 | ||||||||
Property, plant and equipment, net | 78,086 | 69,713 | ||||||||
Restricted cash and cash equivalents | 3,003 | 4,064 | ||||||||
Total assets | $ | 94,355 | $ | 83,115 | ||||||
Liabilities and Partners' Capital | ||||||||||
Current liabilities: | ||||||||||
Accounts payable and accruals | $ | 3,570 | $ | 2,729 | ||||||
Notes payable | 12,519 | — | ||||||||
Current portion of finance obligation | 10,736 | 6,112 | ||||||||
Total current liabilities | 26,825 | 8,841 | ||||||||
Finance obligation, net of current portion | 19,729 | 13,617 | ||||||||
Liabilities subject to compromise | 51,386 | — | ||||||||
Asset retirement obligation | — | 2,101 | ||||||||
Total liabilities | 97,940 | 24,559 | ||||||||
Commitments and contingencies (Notes 4, 6 and 8) | ||||||||||
Partners' Capital | (3,585 | ) | 58,556 | |||||||
Total liabilities and partners' capital | $ | 94,355 | $ | 83,115 | ||||||
The accompanying notes are an integral part of these financial statements
F-65
Combined Heber and
Affiliates
(California Limited
Partnerships)
(Debtors-in-Possession)
Statements of Operations
(in thousands)
Year Ended
December 31, 2001 |
Year Ended
December 31, 2002 |
Period
from
January 1, 2003 to December 17, 2003 |
||||||||||||
Revenues, all from a single customer: | ||||||||||||||
Energy | $ | 60,140 | $ | 51,291 | $ | 52,417 | ||||||||
Capacity | 12,570 | 12,556 | 12,507 | |||||||||||
Capacity bonus | 1,500 | 1,230 | 1,207 | |||||||||||
74,210 | 65,077 | 66,131 | ||||||||||||
Cost of revenues: | ||||||||||||||
Operating expenses | 24,978 | 26,451 | 28,775 | |||||||||||
Depreciation and amortization | 9,000 | 9,088 | 8,708 | |||||||||||
33,978 | 35,539 | 37,483 | ||||||||||||
Gross margin | 40,232 | 29,538 | 28,648 | |||||||||||
General and administrative expenses | 8,515 | 7,488 | 29 | |||||||||||
Income from operations | 31,717 | 22,050 | 28,619 | |||||||||||
Other income (expense): | ||||||||||||||
Gain on discharge of liabilities subject to compromise | — | — | 31,460 | |||||||||||
Recovery of bad debt provision | 2,109 | — | — | |||||||||||
Reorganization costs | — | (3,289 | ) | (4,029 | ) | |||||||||
Interest income | 2,005 | 141 | 99 | |||||||||||
Interest expense | (7,412 | ) | (3,929 | ) | (1,794 | ) | ||||||||
Income before cumulative effect of change in accounting principle | 28,419 | 14,973 | 54,355 | |||||||||||
Cumulative effect of change in accounting principle | — | — | (1,660 | ) | ||||||||||
Net income | $ | 28,419 | $ | 14,973 | $ | 52,695 | ||||||||
Pro forma net income reflecting the adoption of SFAS 143 applied retroactively (Note 5) (unaudited) | $ | 28,268 | $ | 14,822 | $ | 54,355 | ||||||||
Pro forma income tax provision (unaudited) | $ | 9,929 | $ | 5,690 | $ | 20,024 | ||||||||
Pro forma net income reflecting tax provision (Note 1) (unaudited) | $ | 18,490 | $ | 9,283 | $ | 32,671 | ||||||||
The accompanying notes are an integral part of these financial statements
F-66
Combined Heber and
Affiliates
(California Limited
Partnerships)
(Debtors-in-Possession)
Statements of
Partners' Capital (in thousands)
Balance, December 31, 2000 | $ | (23,064 | ) | |||
Distributions | (11,865 | ) | ||||
Net income | 28,419 | |||||
Balance, December 31, 2001 | (6,510 | ) | ||||
Distributions | (12,048 | ) | ||||
Net income | 14,973 | |||||
Balance, December 31, 2002 | (3,585 | ) | ||||
Distributions | (2,577 | ) | ||||
Contributions | 12,023 | |||||
Net income | 52,695 | |||||
Balance, December 17, 2003 | $ | 58,556 | ||||
The accompanying notes are an integral part of these financial statements.
F-67
Combined Heber and
Affiliates
(California Limited
Partnerships)
(Debtors-in-Possession)
Statements of Cash Flows
(in thousands)
Year
Ended
December 31, 2001 |
Year Ended
December 31, 2002 |
Period from
January 1, 2003 to December 17, 2003 |
||||||||||||
Cash flows from operating activities: | ||||||||||||||
Net income | $ | 28,419 | $ | 14,973 | $ | 52,695 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Depreciation and amortization | 9,000 | 9,088 | 8,708 | |||||||||||
Accretion of asset retirement obligation | — | — | 150 | |||||||||||
Gain on discharge of liabilities subject to compromise | — | — | (31,460 | ) | ||||||||||
Recovery of doubtful account | (2,109 | ) | — | — | ||||||||||
Cumulative effect of change in accounting principle | — | — | 1,660 | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||
Accounts receivable | (21,695 | ) | 24,908 | 2,632 | ||||||||||
Prepaid expenses | 125 | 70 | 553 | |||||||||||
Accounts payable and accrued expenses | 2,254 | (3,155 | ) | (841 | ) | |||||||||
Liabilities subject to compromise | — | — | (19,926 | ) | ||||||||||
Due to related entities | (11,006 | ) | 13,533 | — | ||||||||||
Net cash provided by operating activities | 4,988 | 59,417 | 14,171 | |||||||||||
Cash flows from investing activities: | ||||||||||||||
Change in restricted cash and cash equivalents | (984 | ) | (61 | ) | (375 | ) | ||||||||
Capital expenditures | (1,458 | ) | (3,334 | ) | (44 | ) | ||||||||
Net cash used in investing activities | (2,442 | ) | (3,395 | ) | (419 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||
Distributions to partners | (11,865 | ) | (12,048 | ) | (2,577 | ) | ||||||||
Contributions from partners | — | — | 12,023 | |||||||||||
Principal payment on finance obligation | (12,364 | ) | (13,093 | ) | (10,736 | ) | ||||||||
Payments on notes payable | — | (9,141 | ) | (12,519 | ) | |||||||||
Proceeds from (payments on) other long-term liabilities | 21,691 | (21,691 | ) | — | ||||||||||
Net cash used in financing activities | (2,538 | ) | (55,973 | ) | (13,809 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents | 8 | 49 | (57 | ) | ||||||||||
Cash and cash equivalents, beginning of period | — | 8 | 57 | |||||||||||
Cash and cash equivalents, end of period | $ | 8 | $ | 57 | $ | — | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||
Cash paid during the year for: | ||||||||||||||
Interest | $ | 5,052 | $ | 5,890 | $ | 1,792 | ||||||||
Supplemental non-cash investing and financing activities: | ||||||||||||||
Effect of adopting of SFAS No. 143: | ||||||||||||||
Asset retirement cost | $ | — | $ | — | $ | 291 | ||||||||
Asset retirement obligation | $ | — | $ | — | $ | 1,951 | ||||||||
Reclassification of amounts due to related entities and accounts payable to liabilities subject to compromise | $ | — | $ | 51,386 | $ | — | ||||||||
The accompanying notes are an integral part of these financial statements.
F-68
Combined
Heber and Affiliates
(California Limited
Partnerships)
(Debtors-in-Possession)
Notes to Financial
Statements (in thousands)
1. Business and Significant Accounting Policies
Basis of combination and presentation
The accompanying financial statements have been prepared by combining the following three legal entities, all of which were under common control, through affiliates, by Covanta Energy Corporation ("CEC") for all periods presented prior to December 18, 2003, and effective December 18, 2003 (see discussion below regarding sale of company), by OrCal Geothermal, Inc. ("OrCal"), a wholly owned subsidiary of Ormat Nevada, Inc. (ONI), which in turn is a wholly owned subsidiary of Ormat Technologies, Inc. (OTI):
• | Second Imperial Geothermal Company ("SIGC" or "Heber 2"), a California limited partnership, that was formed on November 24, 1992 for the purpose of developing, constructing and operating a geothermal electrical generating facility located in Heber, California. |
• | Heber Geothermal Company ("HGC" or "Heber 1"), a California general partnership, that was formed on August 12, 1983 for the purpose of designing, constructing and operating a geothermal electrical generating station located in Heber, California. |
• | Heber Field Company ("HFC"), a California general partnership, that was formed on November 1, 1991 for the purpose of acquiring and operating a geothermal field located in Heber, California, and selling the geothermal fluid to HGC and to SIGC. |
The combination of the above entities is collectively referred to as "Heber and Affiliates" or the "Company". Intercompany accounts and transactions have been eliminated in the combination.
Bankruptcy and sale transaction
On April 1, 2002 ("Petition Date"), CEC and 123 of its domestic subsidiaries (collectively the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). CEC and these subsidiaries, which include the Company, have been operating their businesses as debtors in possession pursuant to the Bankruptcy Code.
The Company's Financial Statements have been prepared in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7 ("SOP 90-7"), Financial Reporting by Entities in Reorganization under the Bankruptcy Code. Accordingly, all pre-petition liabilities believed to be subject to compromise have been segregated in the balance sheet and classified as liabilities subject to compromise, at the estimated amount of allowable claims. As of December 31, 2002 such liabilities consisted mainly of amounts due to related entities (Note 7). Liabilities not believed to be subject to compromise are separately classified as current and non-current.
On September 29, 2003, the court entered an order approving competitive bidding and auction procedures for the purpose of obtaining the highest or best offer for the sale of the Company. On November 19, 2003 the Debtors held an auction before the Court. As a result of the auction, the Debtors determined that the offer submitted by OrCal, was the best and highest bid.
On November 21, 2003, the Bankruptcy Court confirmed the Debtor's Third Amended Joint Plan of Reorganization Under Chapter 11 (Heber Plan) and approved the sale of interests to OrCal. On December 18, 2003, each of the conditions precedent to the Confirmation Date pursuant to Heber Plan occurred or was waived in accordance with the Heber Plan, and the Company was sold to OrCal for a combined purchase price of approximately $180 million.
F-69
Combined
Heber and Affiliates
(California Limited
Partnerships)
(Debtors-in-Possession)
Notes to Financial
Statements (in thousands)
Cash
Cash consists of deposit accounts with banks.
Restricted cash and cash equivalents
Under the terms of the lease agreement (Note 4), the Company was required to maintain a debt service reserve and operating fund accounts that have been classified as restricted cash and cash equivalents. Such amounts were invested primarily in money market accounts. The Company considers all highly liquid instruments, with an original maturity of three months or less, to be cash equivalents. Due to the revolving nature of the operating fund account, the amounts are classified as current assets. Due to the long-term nature of the debt service reserve account, the amounts are classified as non-current assets.
Concentration of credit risk
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash investments and accounts receivable. The Company places its temporary cash investments with high credit quality financial institutions located in the United States of America. At December 31, 2002 and December 17, 2003, the Company maintained all of its deposits in three U.S. financial institutions that were federally insured up to $100 per financial institution. All of the Company's revenues, and the related receivable balances, are earned from one customer, Southern California Edison Company ("SCE"). The Company has historically been able to collect on all of its receivable balances from SCE, accordingly no provision for doubtful accounts has been made.
Property, plant and equipment
Property, plant and equipment are stated at cost. All costs associated with acquisition, development and construction of power plant facilities are capitalized. Major improvements are capitalized, and repairs and maintenance costs are expensed. Power plants were depreciated using the straight-line method over the estimated service period of 24 to 28 years. The cost and accumulated depreciation of items sold or retired are removed from the accounts. Any resulting gain or loss is recognized currently in operating income.
Impairment of long-lived assets and long-lived assets to be disposed of
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. As further discussed in Note 6, Heber 1 is currently operating at a level that is close to the minimum performance requirements set forth in its power purchase agreement, however, the Company believes that no impairment for long-lived assets exists as the fair value of the assets, based on, an independent valuation of such long-lived assets in connection with the sale of the Company discussed in Note 1, was greater than the net book value of such assets. While management currently believes that no impairment exists for long-lived assets, future estimates as to the recoverability of such assets may change based on revised circumstances.
Derivative instruments
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted by other related accounting literature,
F-70
Combined
Heber and Affiliates
(California Limited
Partnerships)
(Debtors-in-Possession)
Notes to Financial
Statements (in thousands)
establishes accounting and reporting standards for derivative instruments (including certain derivative instruments embedded in other contracts). SFAS No. 133 requires companies to record derivatives on their balance sheets as either assets or liabilities measured at their fair value unless exempted from derivative treatment as a normal purchase and sale. All changes in the fair value of derivatives are recognized currently in earnings unless specific hedge criteria are met, which requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.
The Company is subject to the provisions of SFAS No. 133 Derivative Implementation Group ("DIG") Issue No. C15 (DIG Issue No. C15), Normal Purchases and Normal Sales Exception for Certain Option-Type Contracts and Forward Contracts in Electricity , which expands the requirements for the normal purchase and normal sales exception to include electricity contracts entered into by a utility company when certain criteria are met. Also under DIG Issue No. C15, contracts that have a price adjustment clause based on an index that is not directly related to the electricity generated, as defined in SFAS No. 133, do not meet the requirements for the normal purchases and normal sales exception. The Company has power sales agreements that qualify as derivative instruments under DIG Issue No. C15 because they have a price adjustment clause based on an index that does not directly relate to the sources of the power used to generate the electricity. The adoption of the provisions of DIG Issue No. C15 in 2002 did not have a material impact on the Company's consolidated financial position and results of operations.
In June 2003, the FASB issued DIG Issue No. C20, Scope Exceptions: Interpretation of the Meaning of Not Clearly and Closely Related in Paragraph 10(b) regarding Contracts with a Price Adjustment Feature . DIG Issue No. C20 superseded DIG Issue No. C11 Interpretation of Clearly and Closely Related in Contracts That Qualify for the Normal Purchases and Normal Sales Exception , and specified additional circumstances in which a price adjustment feature in a derivative contract would not be an impediment to qualifying for the normal purchases and normal sales scope exception under SFAS No. 133. DIG Issue No. C20 was effective as of the first day of the fiscal quarter beginning after July 10, 2003, (i.e. October 1, 2003, for the Company). In conjunction with initially applying the implementation guidance, DIG Issue No. C20 requires contracts that did not previously qualify for the normal purchases normal sales scope exception, and do qualify for the exception under DIG Issue No. C20, to freeze the fair value of the contract as of the date of the initial application, and amortized such fair value over the remaining contract period. Upon adoption of DIG Issue No. C20, the Company elected the normal purchase and normal sales scope exception under FAS No. 133 related to its power purchase agreements. Such adoption did not have a material impact on the Company's consolidated financial position and results of operations.
Revenue recognition
Revenue from the sale of electricity is recorded based upon output delivered and capacity provided at rates as specified under terms of long-term power purchase agreements (Note 6).
Income taxes
The net income of the Company for income tax purposes is the responsibility of the individual partners. Accordingly, no provision for income taxes has been recorded in the accompanying financial statements. The pro forma net income on the statement of operations reflects a tax provision of 38%, the effective rate of the company that acquired the Company's ownership interest.
Accounting estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets
F-71
Combined
Heber and Affiliates
(California Limited
Partnerships)
(Debtors-in-Possession)
Notes to Financial
Statements (in thousands)
and liabilities and disclosure of contingent assets and liabilities at the date of such financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Fair value of financial instruments
The carrying amount of cash, restricted cash and cash equivalents approximates fair value because of the short maturity of those instruments. The fair value of long-term debt is estimated based on the current borrowing rates for similar issues, which approximates carrying amount.
Recently issued accounting pronouncements
In April 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities . SFAS No. 149 amends and clarifies the accounting and reporting for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities under SFAS No. 133. The amendments in SFAS No. 149 require that contracts with comparable characteristics be accounted for similarly. SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative according to SFAS No. 133 and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. In addition, SFAS No. 149 amends the definition of an "underlying" to conform it to language used in FIN No. 45 and amends certain other existing pronouncements. The provisions of SFAS No. 149 that relate to SFAS No. 133 "Implementation Issues" that have been effective for periods that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. The requirements of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company adopted the provisions of SFAS No. 149 effective July 1, 2003, which did not have a material impact on its results of operations and financial position as of December 17, 2003.
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 how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability because that financial instrument embodies an obligation of the issuer. The requirements of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003. For financial instruments created prior to the issuance date of SFAS No. 150, transition shall be achieved by reporting the cumulative effect of a change in accounting principle. The Company adopted the provisions of SFAS No. 150 effective July 1, 2003, which did not have a material impact on its results of operations and financial position as of December 17, 2003.
F-72
Combined
Heber and Affiliates
(California Limited
Partnerships)
(Debtors-in-Possession)
Notes to Financial
Statements (in thousands)
2. Property, Plant and Equipment
Property, plant and equipment, consists of the following:
December
31,
2002 |
December 17,
2003 |
|||||||||
Power plant facility | $ | 154,870 | $ | 154,915 | ||||||
Asset retirement cost | — | 527 | ||||||||
154,870 | 155,442 | |||||||||
Less accumulated depreciation | (76,784 | ) | (85,729 | ) | ||||||
$ | 78,086 | $ | 69,713 | |||||||
Included in the power plant facility are assets recorded under capital lease, as further discussed in Note 4.
3. Notes Payable
On December 17, 1999, the Company entered into a note agreement with General Electric Capital Corporation ("GECC") for $21.7 million. Under the agreement, principal was due by July 31, 2003. Interest was payable quarterly and was computed at 7.5% per annum through March 14, 2001. Then, for the periods from March 14, 2001 to January 31, 2002 and from January 31, 2002 to July 31, 2003, interest was computed at a rate per annum of LIBOR plus 2.75% and LIBOR plus 4.75%, respectively.
The notes were fully paid during the period from January 1, 2003 to December 17, 2003.
4. Finance Obligation
Construction of the Heber 2 project was financed through a $115 million construction loan obtained by SIGC from GECC. On September 1, 1993, SIGC sold the project to GECC for a purchase price equal to the balance of the construction loan and simultaneously agreed to lease back the project under a lease with an initial term that would have expired in 2008.
The lease was collateralized by all of SIGC assets including the power purchase agreement (PPA) (Note 6), geothermal leases, SCE payments and cash reserve through an escrow agreement.
All revenues from the project were required to be deposited into a series of escrow accounts administered by an independent escrow agent. The related project agreements provided for the disbursement of funds by the escrow agent for the project's operating costs and lease payments, as well as the establishment of certain long-term cash escrow accounts. During the initial lease term, these long-term cash escrow accounts could have been used in limited situations to pay current operating and lease expenses to the extent that project revenues were not sufficient to fund such expenses.
In connection with OrCal's purchase of the Company, the lease was cancelled and OTI purchased the lessor position from GECC.
5. Asset Retirement Obligation
The Company adopted SFAS No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets , effective January 1, 2003. Under SFAS No. 143, entities are required to record the fair value of a legal liability for an asset retirement obligation in the period in which it is incurred. The Company's legal liabilities include capping wells and post-closure costs of geothermal power
F-73
Combined
Heber and Affiliates
(California Limited
Partnerships)
(Debtors-in-Possession)
Notes to Financial
Statements (in thousands)
producing sites. When a new liability for asset retirement obligations is recorded, the Company capitalizes the costs of the liability by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. At retirement, an entity settles the obligation for its recorded amount or incurs a gain or loss. On January 1, 2003 the Company recorded a cumulative effect of change in accounting principle of $1,660. As a result of adopting the provisions of SFAS No. 143, the net income for period from January 1, 2003 to December 17, 2003, decreased by approximately $165.
The following table summarizes the impact on the Company balance sheet following the adoption of SFAS No. 143:
Balance
at
December 31, 2002 |
Change Resulting
From Application of SFAS No. 143 |
Balance at
January 1, 2003 |
||||||||||||
Property, plant and equipment | $ | 154,870 | $ | 527 | $ | 155,397 | ||||||||
Accumulated depreciation | (76,784 | ) | (236 | ) | (77,020 | ) | ||||||||
Net property, plant and equipment | $ | 78,086 | $ | 291 | $ | 78,377 | ||||||||
Non-current asset retirement obligation | $ | — | $ | 1,951 | $ | 1,951 | ||||||||
The unaudited pro-forma changes to the non-current asset retirement obligation, based on the information, assumptions, and interest rates as of January 1, 2003, are presented below to show what the Company would have reported if the provisions of SFAS No. 143 had been in effect for the periods presented below:
Year
Ended
December 31, 2002 |
For the Period
From January 1, 2003 to December 17, 2003 |
|||||||||
Balance, beginning of period | $ | 1,800 | $ | 1,951 | ||||||
Accretion expense | 151 | 150 | ||||||||
Balance, end of period | $ | 1,951 | $ | 2,101 | ||||||
6. Power Purchase Agreements
The Company has two power purchase agreements (PPAs) with SCE. The PPAs provide for the sale of capacity and energy through their respective terms, one expiring in 2015 and the other in 2023. Under the PPAs, the Company receives a fixed energy payment through April 30, 2007, and thereafter an energy payment based on SCE's short-run avoided cost (SRAC). The PPAs provide for firm capacity and bonus payments established by the contracts and are paid to the Company each month through the contracts' term based on plant performance. Bonus capacity payments are earned based on actual capacity available during certain peak hours.
The temperature of the geothermal resource at the Heber 1 project has declined from the date on which the project commenced operations and as a result is currently operating at a level that is close to the minimum performance requirements set forth in its power purchase agreement. If the Company fails to upgrade the facilities and the project's performance deteriorates below minimum capacity requirements, the Company will be obligated to pay a one-time penalty to SCE of approximately $500,000 per each MW of reduced capacity.
F-74
Combined
Heber and Affiliates
(California Limited
Partnerships)
(Debtors-in-Possession)
Notes to Financial
Statements (in thousands)
7. Related Party Transactions
Operation and Maintenance Contracts
The Heber plant was operated by Covanta Imperial Power Services, Inc ("CIPS"), an affiliated entity, under a long term agreement, for the same term as the PPA. In return for providing all personnel, equipment, materials, supplies and services to operate and maintain the plant, CIPS received a fixed fee, which escalates by 5% annually, and received reimbursement for its non-labor costs.
HFC was operated by Covanta Geothermal Operations, Inc ("CGO"), an affiliated entity, under a long term agreement similar to CIPS agreement with HGC.
The Heber 2 plant was operated by Covanta SIGC Geothermal Operations, Inc. ("SIGC Operator"), an affiliated entity, under a long term agreement that extended for the life of the PPA. SIGC Operator was responsible for providing all customary operations and maintenance services. SIGC Operator was reimbursed for all costs incurred in running the plant. The contract also provided for an annual bonus to be paid to the operator if electricity production and on-peak capacity factors exceeded specified levels.
Amounts recorded for operation and maintenance are as follows:
Year
Ended
December 31, 2001 |
Year Ended
December 31, 2002 |
Period from
January 1, 2003 to December 17, 2003 |
||||||||||||
O&M expenses | $ | 9,935 | $ | 9,316 | $ | 9,375 | ||||||||
Operating Bonus | 1,642 | 1,657 | 1,682 | |||||||||||
$ | 11,577 | $ | 10,973 | $ | 11,057 | |||||||||
Management Services
Management services were provided by ERC Energy, Inc (an affiliated entity) to HGC and HFC, and by Amor 14 (an affiliated entity) to SIGC. For the years ended December 31, 2001 and 2002 and for the period from January 1, 2003 to December 17, 2003 the fees relating to those services amounted to $228, $240 and $243, respectively.
Allocated Administrative Costs
Administrative costs incurred by CEC were allocated to the Company. Such costs amounted to $7,226 and $7,337 for the years ended December 31, 2001 and 2002, respectively. No such costs were allocated to the Company in 2003.
As of December 31, 2002, amounts due to related entities was $50,749, which resulted from expenses to be paid under the operations and maintenance contracts, management service fees, and allocated administrative costs. In 2003, all amounts due to related entities were determined to be rejected claims under the bankruptcy proceedings, and as such the balance as of December 31, 2002 has been included in liabilities subject to compromise on the accompanying balance sheet. The outstanding balance of $31,460 as of December 17, 2003, was discharged and recognized as a gain on discharge of liabilities subject to compromise on the accompanying statement of operations.
8. Commitment and contingencies
Contingencies
The lessors owning interest in the Heber Geothermal Area (an area where the Company obtains its geothermal resource) filed a claim in the Company's bankruptcy proceedings totaling approximately
F-75
Combined
Heber and Affiliates
(California Limited
Partnerships)
(Debtors-in-Possession)
Notes to Financial
Statements (in thousands)
$80 million. The Company reached a full and final settlement with a group of the royalty related claims totaling $2.175 million, which was fully executed on October 6, 2003 and approved by the bankruptcy court on October 10, 2003. In addition, it was agreed that the method of calculating royalties would remain the same. The Company also paid legal fees of $550 related to that group. Such amounts have been reflected in operating expenses in the accompanying statement of operations for the period from January 1, 2003 to December 17, 2003.
For those royalty related claims not included in the group settlement, the Company began negotiations to settle such claims. The Company had accrued approximately $744 as of December 17, 2003 as their best estimate of the settlements remaining, including amounts not yet paid for the group settlement mentioned above, which is included in account payable and accruals on the accompanying balance sheet. In 2004, a settlement was reached with most of the remaining parties for approximately $478. The Company believes that the remaining $266 accrued will satisfy the remaining parties not yet fully settled or those for which settlements have been reached but have not yet paid.
For lessors with non-royalty surface right related claims, the Company agreed to pay a one time payment of $390, and increase prospective annual rental and/or severance payments by approximately $67 per year, which will be adjusted for the cost of living each year.
In response to an order issued by a California State Court of Appeal, the California Public Utilities Commission ("CPUC"), has commenced an administrative proceeding in order to address short run avoided cost pricing for Qualifying Facilities for the period spanning from December 2000 to March 2001. The court directed that the CPUC modify short run avoided cost pricing on a retroactive basis to the extent that the CPUC determined that short run avoided cost prices were not sufficiently "accurate" or "correct." If the short run avoided cost prices charged during the period in question were determined by the CPUC to not be "accurate" or "correct," retroactive price adjustments could be required for either of the Company's Qualifying Facilities. Currently it is not possible to predict the outcome of such proceeding, however, any retroactive price adjustment required to be made in relation to either of the Company's projects may require such projects to make refund payments or receive less from future revenues, which could materially affect the financial condition, future results and cash flow of the Company.
Commitment
HFC pays monthly royalties under several mineral right leases. The monthly royalties total approximately 5% of the HGC's and SIGC's revenues, respectively, less transmissions and scheduling charges. Royalty expenses recorded for the years ended December 31, 2001 and 2002, and for the period from January 1, 2003 to December 17, 2003 totaled $4,341, $3,194 and $3,509, respectively.
F-76
Mammoth Pacific, L.P.
Report on Audits of
Financial Statements
As of December 31, 2002 and September 30,
2003,
and for the year ended December 31, 2002, and for
nine-month period ended September 30, 2003
And
Unaudited
Financial Statements
for the nine-month period ended September
30,
2002
F-77
Report of Independent Auditors
To the Partner of Mammoth Pacific, L.P. (OrMammoth, Inc.)
In our opinion, the accompanying balance sheets and the related statements of operations, of partners' capital and of cash flows present fairly, in all material respects, the financial position of Mammoth Pacific, L.P. ("Partnership") at December 31, 2002 and September 30, 2003, and the results of its operations and its cash flows for the year ended December 31, 2002 and for the nine-month period ended September 30, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership'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 auditing standards generally accepted in the United States of America, which require that we plan and perform the audits 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 our opinion.
As discussed in Note 3 to the financial statements, effective January 1, 2003, the Partnership adopted the provisions of Statement of Financial Accounting Standards No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets .
/s/ PricewaterhouseCoopers LLP
Sacramento, California
January
26, 2004
F-78
Mammoth Pacific, L.P.
(A California
Limited Partnership)
Balance Sheets
December 31, 2002 and
September 30,
2003
December
31,
2002 |
September 30,
2003 |
|||||||||
Assets | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 4,416,984 | $ | 8,096,196 | ||||||
Accounts receivable | 2,705,284 | 3,140,124 | ||||||||
Prepaid expenses and other | 1,282,268 | 902,713 | ||||||||
Total current assets | 8,404,536 | 12,139,033 | ||||||||
Property, plant and equipment, net | 93,198,635 | 90,144,731 | ||||||||
Total assets | $ | 101,603,171 | $ | 102,283,764 | ||||||
Liabilities and Partners' Capital | ||||||||||
Current liabilities: | ||||||||||
Accounts payable | $ | 14,561 | $ | 118,933 | ||||||
Accrued and other liabilities | 678,997 | 296,512 | ||||||||
Due to related entities | 168,900 | 238,579 | ||||||||
Total current liabilities | 862,458 | 654,024 | ||||||||
Due to related entities | 752,631 | 709,210 | ||||||||
Asset retirement obligation | — | 2,930,664 | ||||||||
Total liabilities | 1,615,089 | 4,293,898 | ||||||||
Commitments and contingencies (Notes 3, 4, 5 and 6) | ||||||||||
Partners' capital | 99,988,082 | 97,989,866 | ||||||||
Total liabilities and partners' capital | $ | 101,603,171 | $ | 102,283,764 | ||||||
The accompanying notes are an integral part of these financial statements.
F-79
Mammoth Pacific, L.P.
(A California
Limited Partnership)
Statements of Operations
For the year
ended December 31, 2002 and for the nine-month periods ended
September 30, 2002 and
2003
Year
Ended
December 31, 2003 |
Nine Months Ended
September 30, |
|||||||||||||
2002 | 2003 | |||||||||||||
(Unaudited) | ||||||||||||||
Revenues: | ||||||||||||||
Energy | $ | 10,040,290 | $ | 6,790,268 | $ | 8,624,754 | ||||||||
Capacity | 4,282,968 | 3,883,062 | 3,725,617 | |||||||||||
Capacity bonus | 265,228 | 177,758 | 181,116 | |||||||||||
Total revenues | 14,588,486 | 10,851,088 | 12,531,487 | |||||||||||
Cost of revenues: | ||||||||||||||
Operating expenses | 4,510,896 | 3,239,707 | 3,550,965 | |||||||||||
Royalties | 685,392 | 490,725 | 902,012 | |||||||||||
Property taxes | 823,682 | 606,902 | 648,346 | |||||||||||
Depreciation and amortization | 5,294,823 | 3,968,353 | 4,004,851 | |||||||||||
Gross margin | 3,273,693 | 2,545,401 | 3,425,313 | |||||||||||
General and administrative expenses | 114,620 | 86,110 | 153,000 | |||||||||||
Income from operations | 3,159,073 | 2,459,291 | 3,272,313 | |||||||||||
Other income: | ||||||||||||||
Interest income | 411,036 | 398,062 | 36,471 | |||||||||||
Income before change in accounting principle | 3,570,109 | 2,857,353 | 3,308,784 | |||||||||||
Cumulative effect of change in accounting prinicple | — | — | (2,107,000 | ) | ||||||||||
Net income | $ | 3,570,109 | $ | 2,857,353 | $ | 1,201,784 | ||||||||
Proforma net income reflecting the adoption of SFAS No. 143 (Note 3) applied retroactively | $ | 3,334,109 | $ | 2,680,353 | $ | 3,308,784 | ||||||||
Proforma income tax provision (unaudited) | $ | 1,356,641 | $ | 1,085,794 | $ | 456,678 | ||||||||
Proforma net income reflecting tax provision (Note 1) (unaudited) | $ | 2,213,468 | $ | 1,771,559 | $ | 745,106 | ||||||||
The accompanying notes are an integral part of these financial statements.
F-80
Mammoth Pacific, L.P.
(A
California Limited Partnership)
Statements of Partners'
Capital
For the year ended December 31, 2002 and for the nine-month
period ended
September 30,
2003
General Partners | Limited Partners | |||||||||||||||||||||||||||||
Mammoth
Geothermal Company |
CD
Mammoth Lakes I |
Pacific
Geothermal Company |
CD
Mammoth Lakes I |
CD
Mammoth Lakes II |
Total
Partners' Capital |
|||||||||||||||||||||||||
Balance, January 1, 2002 | $ | 59,615,568 | $ | 1,216,644 | $ | 1,216,644 | $ | 29,199,462 | $ | 30,416,106 | $ | 121,664,424 | ||||||||||||||||||
Distributions | (12,370,760 | ) | (252,465 | ) | (252,465 | ) | (6,059,148 | ) | (6,311,613 | ) | (25,246,451 | ) | ||||||||||||||||||
Net income | 1,749,354 | 35,701 | 35,701 | 856,826 | 892,527 | 3,570,109 | ||||||||||||||||||||||||
Balance, December 31, 2002 | 48,994,162 | 999,880 | 999,880 | 23,997,140 | 24,997,020 | 99,988,082 | ||||||||||||||||||||||||
Distributions | (1,568,000 | ) | (32,000 | ) | (32,000 | ) | (768,000 | ) | (800,000 | ) | (3,200,000 | ) | ||||||||||||||||||
Net income | 588,873 | 12,018 | 12,018 | 288,428 | 300,446 | 1,201,784 | ||||||||||||||||||||||||
Balance, September 30, 2003 | $ | 48,015,035 | $ | 979,898 | $ | 979,898 | $ | 23,517,568 | $ | 24,497,466 | $ | 97,989,866 | ||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
F-81
Mammoth Pacific, L.P.
(A California
Limited Partnership)
Statements of Cash Flows
For the year
ended December 31, 2002 and for the nine-month periods ended
September 30, 2002 and
2003
Year
Ended
December 31, 2002 |
Nine Months
Ended
September 30, |
|||||||||||||
2002 | 2003 | |||||||||||||
(Unaudited) | ||||||||||||||
Cash flows from operating activities: | ||||||||||||||
Net income | $ | 3,570,109 | $ | 2,857,353 | $ | 1,201,784 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Depreciation | 5,294,823 | 3,968,353 | 4,004,851 | |||||||||||
Acccretion of asset retirement obligation | — | — | 165,664 | |||||||||||
Cumulative effect of change in accounting principle | — | — | 2,107,000 | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||
Accounts receivable | 13,072,566 | 12,370,819 | (434,840 | ) | ||||||||||
Other receivables | 8,153,363 | 8,153,363 | — | |||||||||||
Prepaid expenses and other | (223,864 | ) | 83,091 | 379,555 | ||||||||||
Accounts payable | (449,893 | ) | (169,485 | ) | 104,372 | |||||||||
Accrued and other liabilities | (2,725,554 | ) | (1,856,123 | ) | (382,485 | ) | ||||||||
Due to related entities | 107,057 | (47,369 | ) | 26,258 | ||||||||||
Net cash provided by operating activities | 26,798,607 | 25,360,002 | 7,172,159 | |||||||||||
Cash flows from investing activities: | ||||||||||||||
Change in restricted cash | 378,117 | 378,117 | — | |||||||||||
Capital expenditures | (1,962,913 | ) | (1,806,909 | ) | (292,947 | ) | ||||||||
Net cash used in operating activities | (1,584,796 | ) | (1,428,792 | ) | (292,947 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||
Distributions to Partners | (25,246,451 | ) | (22,846,451 | ) | (3,200,000 | ) | ||||||||
Net cash used in financing activities | (25,246,451 | ) | (22,846,451 | ) | (3,200,000 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents | (32,640 | ) | 1,084,759 | 3,679,212 | ||||||||||
Cash and cash equivalents, beginning of period | 4,449,624 | 4,449,624 | 4,416,984 | |||||||||||
Cash and cash equivalents, end of period | $ | 4,416,984 | $ | 5,534,383 | $ | 8,096,196 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||
Effect of adopting of SFAS No. 143 (Note 3): | ||||||||||||||
Asset retirement cost, net | $ | — | $ | — | $ | 658,000 | ||||||||
Asset retirement obligation | $ | — | $ | — | $ | 2,765,000 | ||||||||
The accompanying notes are an integral part of these financial statements.
F-82
Mammoth
Pacific, L.P.
(A California Limited Partnership)
Notes to
Financial Statements
1. Business and Summary of Significant Accounting Policies
Business
Mammoth Pacific, L.P., a California limited partnership (the Partnership), owns and operates three geothermal electric generation plants located in Mammoth Lakes, California. Such geothermal plants are collectively referred to herein as the "Project".
The partners are Mammoth Geothermal Company (MGC) and Pacific Geothermal Company (PGC), which are both wholly owned subsidiaries of Covanta Energy Corporation (CEC), and CD Mammoth Lakes I (CDI) and CD Mammoth Lakes II (CDII), which are both wholly owned subsidiaries of Constellation Energy Inc., which is a wholly owned subsidiary of Constellation Holdings, Inc., which is a wholly owned subsidiary of Baltimore Gas and Electric Corporation.
The partners' general and limited partnership interests as of December 31, 2002 and September 30, 2003 are as follows
General partners:
MGC 49%
CDI 1%
Limited partners:
PGC 1%
CDI 24%
CDII
25%
All income, loss, tax deductions and credits, cash distributions from operations, and net proceeds from dissolution and liquidation of the Partnership shall be allocated to the partners in percentages equal to their partnership interests.
Interim financial data
The interim financial data for the nine months ended September 30, 2002 is unaudited; however, in the opinion of the Partnership, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim period.
Cash and cash equivalents
The Partnership considers all investments purchased with an original maturity of three months or less to be cash equivalents.
Concentration of credit risk
Financial instruments that potentially subject the Partnership to concentration of credit risk consist principally of temporary cash investments and accounts receivable. The Partnership places its temporary cash investments with high credit quality financial institutions located in the United States of America. At December 31, 2002 and September 30, 2003, the Partnership maintained all of its deposits in one U.S. financial institution that is federally insured up to $100,000. All of the Partnership's revenues, and the related receivable balances, are earned from one power company, Southern California Edison Company.
Property, plant and equipment
Property, plant and equipment are stated at cost. All costs associated with acquisition, development and construction of power plant facilities are capitalized. Major improvements are capitalized, and
F-83
Mammoth
Pacific, L.P.
(A California Limited Partnership)
Notes to
Financial Statements
repairs and maintenance costs are expensed. Power plants are depreciated using the straight-line method over the estimated service period of 28 years. The other assets are depreciated using the straight-line method over the following estimated useful lives of the assets: Transportation equipment, five years, Furniture and fixtures, five to seven years. The cost and accumulated depreciation of items sold or retired are removed from the accounts. Any resulting gain or loss is recognized currently.
Impairment of long-lived assets and long-lived assets to be disposed of
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. Management believes that no impairment exists for long-lived assets, however future estimates as to the recoverability of such assets may change based on revised circumstances.
Derivative instruments
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted by other related accounting literature, establishes accounting and reporting standards for derivative instruments (including certain derivative instruments embedded in other contracts). SFAS No. 133 requires companies to record derivatives on their balance sheets as either assets or liabilities measured at their fair value unless exempted from derivative treatment as a normal purchase and sale. All changes in the fair value of derivatives are recognized currently in earnings unless specific hedge criteria are met, which requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.
The Company is subject to the provisions of SFAS No. 133 Derivative Implementation Group ("DIG") Issue No. C15 (DIG Issue No. C15), Normal Purchases and Normal Sales Exception for Certain Option-Type Contracts and Forward Contracts in Electricity , which expands the requirements for the normal purchase and normal sales exception to include electricity contracts entered into by a utility company when certain criteria are met. Also under DIG Issue No. C15, contracts that have a price adjustment clause based on an index that is not directly related to the electricity generated, as defined in SFAS No. 133, do not meet the requirements for the normal purchases and normal sales exception. The Company has power sales agreements that qualify as derivative instruments under DIG Issue No. C15 because they have a price adjustment clause based on an index that does not directly relate to the sources of the power used to generate the electricity. The adoption of the provisions of DIG Issue No. C15 in 2002 did not have a material impact on the Company's consolidated financial position and results of operations.
In June 2003, the FASB issued DIG Issue No. C20, Scope Exceptions: Interpretation of the Meaning of Not Clearly and Closely Related in Paragraph 10(b) regarding Contracts with a Price Adjustment Feature . DIG Issue No. C20 superseded DIG Issue No. C11 Interpretation of Clearly and Closely Related in Contracts That Qualify for the Normal Purchases and Normal Sales Exception , and specified additional circumstances in which a price adjustment feature in a derivative contract would not be an impediment to qualifying for the normal purchases and normal sales scope exception under SFAS No. 133. DIG Issue No. C20 was effective as of the first day of the fiscal quarter beginning after July 10, 2003, (i.e. October 1, 2003, for the Company). In conjunction with initially applying the implementation guidance, DIG Issue No.C20 requires contracts that did not previously qualify for the
F-84
Mammoth
Pacific, L.P.
(A California Limited Partnership)
Notes to
Financial Statements
normal purchases normal sales scope exception, and do qualify for the exception under DIG Issue No. C20, to freeze the fair value of the contract as of the date of the initial application, and amortized such fair value over the remaining contract period. Upon adoption of DIG Issue No. C20, the Company elected the normal purchase and normal sales scope exception under FAS No. 133 related to its power purchase agreements. Such adoption did not have a material impact on the Company's consolidated financial position and results of operations.
Income taxes
The net income of the Partnership for income tax purposes is the responsibility of the individual partners. Accordingly, no provision for income taxes has been recorded in the accompanying financial statements. The proforma net income on the statement of operations reflects a tax provision of 38%, the effective rate of the company that acquired MGC and PGC's ownership interest (Note 7).
Revenue recognition
Revenue from the sale of electricity is recorded based upon output delivered and capacity provided at rates as specified under terms of long-term power purchase agreements (see Note 4).
Accounting estimates
The preparation of 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 those estimates.
Fair value of financial instruments
The fair value of cash and cash equivalents, accounts receivable, and accounts payable approximate their reported carrying amounts because of the short maturity of those instruments.
Recently issued accounting pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations , and SFAS No. 142, Goodwill and Other Intangible Assets . They also issued SFAS No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets , and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , in August and October 2001, respectively.
SFAS No. 141 requires all business combinations initiated after June 30, 2001 be accounted for under the purchase method. SFAS No. 141 supersedes Accounting Principles Board (APB) Opinion No. 16, Business Combinations , and SFAS No. 38, Accounting for Pre-acquisition Contingencies of Purchased Enterprises , and is effective for all business combinations initiated after June 30, 2001.
SFAS No. 142 addresses the financial accounting and reporting for acquired goodwill and other intangible assets. Under the new rules, the Partnership is no longer required to amortize goodwill and other intangible assets with indefinite lives, but will be subject to periodic testing for impairment. SFAS No. 142 supersedes APB Opinion No. 17, Intangible Assets . The Partnership adopted the provisions of SFAS No. 142 effective January 1, 2002, which did not have a material impact on its results of operations and financial position, as the Partnership did not have any material amounts of goodwill and other intangible assets.
As further discussed in Note 3, the Partnership adopted the provisions of SFAS No. 143 effective January 1, 2003.
F-85
Mammoth
Pacific, L.P.
(A California Limited Partnership)
Notes to
Financial Statements
SFAS No. 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS No. 144 superseded SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of , and APB Opinion No. 30, Reporting the Results of Operations-- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions . The Partnership adopted the provisions of SFAS No. 144 effective January 1, 2002, which did not have a material impact on its results of operations and financial position.
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 and reporting for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities under SFAS No. 133. The amendments in SFAS No. 149 require that contracts with comparable characteristics be accounted for similarly. SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative according to SFAS No. 133 and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. In addition, SFAS No. 149 amends the definition of an "underlying" to conform it to language used in FIN No. 45 and amends certain other existing pronouncements. The provisions of SFAS No. 149 that relate to SFAS No. 133 "Implementation Issues" that have been effective for periods that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. The requirements of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Partnership adopted the provisions of SFAS No. 149 effective July 1, 2003, which did not have a material impact on its results of operations and financial position as of September 30, 2003.
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 how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability because that financial instrument embodies an obligation of the issuer. The requirements of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003. For financial instruments created prior to the issuance date of SFAS No. 150, transition shall be achieved by reporting the cumulative effect of a change in accounting principle. The Partnership adopted the provisions of SFAS No. 150 effective July 1, 2003, which did not have a material impact on its results of operations and financial position as of September 30, 2003.
2. Property, Plant and Equipment
Property, plant and equipment, consists of the following:
December 31, | September 30, | |||||||||
2002 | 2003 | |||||||||
Plant and related equipment | $ | 152,196,497 | $ | 152,181,247 | ||||||
Transportation equipment | 181,442 | 181,442 | ||||||||
Furniture and fixtures | 117,665 | 120,667 | ||||||||
Asset retirement cost | — | 1,097,000 | ||||||||
152,495,604 | 153,580,356 | |||||||||
Less accumulated depreciation | (59,296,969 | ) | (63,435,625 | ) | ||||||
$ | 93,198,635 | $ | 90,144,731 | |||||||
3. Asset Retirement Obligation
The Partnership adopted SFAS No. 143 effective January 1, 2003. Under SFAS No. 143, entities are required to record the fair value of a legal liability for an asset retirement obligation in the period in
F-86
Mammoth
Pacific, L.P.
(A California Limited Partnership)
Notes to
Financial Statements
which it is incurred. The Partnership's legal liabilities include capping wells and post-closure costs of geothermal power producing sites. When a new liability for asset retirement obligations is recorded, the Partnership capitalizes the costs of the liability by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. At retirement, an entity settles the obligation for its recorded amount or incurs a gain or loss. On January 1, 2003 the Partnership recorded a cumulative effect of change in accounting principle of $2,107,000, net of related tax benefit of $0. As a result of adopting the provisions of SFAS No. 143, the net income for the nine-month period ended September 30, 2003 decreased by approximately $166,000. The pro-forma amounts shown on the statements of operations have been adjusted for the effect of retroactive application of SFAS No. 143.
The following table summarizes the impact on the Partnership's balance sheet following the adoption of SFAS No. 143:
Change | ||||||||||||||
Balance at | Resulting from | Balance at | ||||||||||||
December 31, | Application of | January 1, | ||||||||||||
2002 | SFAS No. 143 | 2003 | ||||||||||||
Property, plant and equipment | $ | 152,495,604 | $ | 1,097,000 | $ | 153,592,604 | ||||||||
Accumulated depreciation | (59,296,969 | ) | (439,000 | ) | (59,735,969 | ) | ||||||||
Net property, plant and equipment | $ | 93,198,635 | $ | 658,000 | $ | 93,856,635 | ||||||||
Non-current asset retirement obligation | $ | — | $ | 2,765,000 | $ | 2,765,000 | ||||||||
The unaudited pro-forma changes to the non-current asset retirement obligation, based on the information, assumptions, and interest rates as of January 1, 2003, are presented below to show what the Partnership would have reported if the provisions of SFAS No. 143 had been in effect for the periods presented below:
Year Ended | Nine Months Ended | |||||||||||||
December 31, | September 30, | |||||||||||||
2002 | 2003 | |||||||||||||
Balance at beginning of period | $ | 2,565,000 | $ | 2,765,000 | ||||||||||
Accretion expense | 200,000 | 165,664 | ||||||||||||
Balance at end of period | $ | 2,765,000 | $ | 2,930,664 | ||||||||||
4. Power Purchase Agreements
The Partnership has three power purchase agreements (the PPA's) with Southern California Edison Company (SCE), that provide for the sale of capacity and energy through their respective terms, expiring from 2015 to 2020. Under the PPA's, the Partnership received payments based on SCE's short-run avoided cost (SRAC) and receives a fixed energy payment starting in May 2002 through April 2007, and thereafter based on SCE's SRAC. The PPA's provide for firm capacity and bonus payments established by the contracts and are paid to the Partnership each month through the contracts' term based on plant performance. Bonus capacity payments are earned based on actual capacity available during certain peak hours.
5. Commitments and Contingencies
The geothermal resources being utilized by the Project are owned by unrelated parties, which receive royalties based on a percentage of gross revenues from the sale of energy.
F-87
Mammoth
Pacific, L.P.
(A California Limited Partnership)
Notes to
Financial Statements
Effective January 1, 1995, the Partnership entered into an operating agreement with a wholly owned subsidiary of CEC (the Operator), for the operation and maintenance of the Project. Operator fees are equal to the Operator's labor costs and overhead, plus a $15,000 annual administration fee. Total expenses incurred under this agreement were approximately $1,851,200, $1,296,300 and $1,396,200 for the year ended December 31, 2002, and for the nine-month periods ended September 30, 2002 (unaudited) and 2003, respectively, of which approximately $147,100 and $203,300 was included in due to related entities at December 31, 2002 and September 30, 2003, respectively.
The Partnership is planning to construct a pipeline and two new production wells for a total expected cost of approximately $5 million to be completed by January 2006.
Subsequent to September 30, 2003, in response to an order issued by a California State Court of Appeal, the California Public Utilities Commission, "CPUC", has commenced a proceeding to address SRAC pricing for Qualifying Facilities for the period December 2000 to March 2001. The court directed that the CPUC modify SRAC pricing on a retroactive basis to the extent the CPUC determined that SRAC prices were not sufficiently "accurate" or "correct." If the SRAC prices during the period in question were determined by the CPUC to not be "accurate" or "correct," retroactive price adjustments could be required. Currently it is not possible to predict the outcome of such proceeding, however, any retroactive price adjustment may require the Partnership to make refund payments or receive less from future revenues, which could materially affect the financial condition, future results and cash flows.
6. Related Party Transactions
MGC has been designated as the managing general partner and is reimbursed for direct expenses and allocated costs incurred on behalf of the Partnership. Total expenses incurred were approximately $73,600, $11,300 and $152,700 for the year ended December 31, 2002, and for the nine-month periods ended September 30, 2002 (unaudited) and 2003, respectively.
Included in the amount due to related entities are amounts due to MGC of approximately $752,600 and $709,200 as of December 31, 2002 and September 30, 2003, respectively, for advances received. Such amounts are to be repaid monthly, subject to available operating cash flow, over a 20-year period beginning January 1, 1996.
7. Subsequent Events
On December 18, 2003, the partnership interests owned by MGC and PGC were sold to an unrelated entity.
F-88
Shares
Common Stock
PROSPECTUS
2004
L
EHMAN
B
ROTHERS
Sole
Book
-
Running
Manager
D
EUTSCHE
B
ANK
S
ECURITIES
Joint
Lead
Manager
RBC C APITAL M ARKETS
W ELLS F ARGO S ECURITIES
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses, other than the underwriting discounts and commissions, payable by us in connection with the sale and distribution of the securities being registered. All amounts shown are estimates, except the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. filing fee and the New York Stock Exchange application fee.
SEC registration fee | $ | 14,571 | ||||
NASD filing fee | $ | 12,000 | ||||
New York Stock Exchange application fee | $ | 200,000 | ||||
Accounting fees and expenses | $ | * | ||||
Legal fees and expenses | $ | * | ||||
Printing and engraving expenses | $ | 350,000 | ||||
Transfer agent fees and expenses | $ | 14,900 | ||||
Blue sky fees and expenses | $ | 3,000 | ||||
Miscellaneous fees and expenses | $ | * | ||||
Total | $ | * | ||||
* | To be filed by amendment. |
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent to Ormat Technologies, Inc. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for any breach of the director's duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions, or for any transaction from which the director derived an improper personal benefit.
Article Eleventh of Ormat Technologies, Inc.'s certificate of incorporation provides that a director of Ormat Technologies, Inc. shall not be liable to Ormat Technologies, Inc. or its stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by Delaware law. In addition, Section 10.1 of Ormat Technologies, Inc.'s by-laws provides that Ormat Technologies, Inc. shall indemnify its directors and officers to the fullest extent permitted by Delaware law, including all expenses liability and loss actually and reasonably incurred or suffered by such director or officer in connection therewith in defending or otherwise participating in any proceeding in advance of its final disposition.
Prior to the completion of this offering, we intend to enter into indemnification agreements with our directors and officers. The indemnification agreements provide indemnification to our directors
II-1
and officers under certain circumstances for acts or omissions which may not be covered by directors' and officers' liability insurance, and may, in some cases, be broader than the specific indemnification provisions contained under Delaware law. We have also obtained directors' and officers' liability insurance, which insures against liabilities that our directors or officers may incur in such capacities.
Item 15. Recent Sales of Unregistered Securities
On June 30, we issued 1,538,462 shares of our common stock to Ormant Industries in connection with the capitalization of an outstanding loan in the amount of $20.0 million with Ormant Industries. We have relied on the private placement exemption pursuant to Section 4(2) of the Securities Act of 1933, as amended, with respect to the issuance of such shares.
Item 16. Exhibits and Financial Statement Schedules
Exhibit No. | Document | |||||
1.1 | Form of Underwriting Agreement* | |||||
3.1 | Amended and Restated Certificate of Incorporation** | |||||
3.2 | Amended and Restated By-laws*** | |||||
4.1 | Form of Common Share Stock Certificate** | |||||
4.2 | Form of Preferred Share Stock Certificate** | |||||
5.1 | Opinion of Chadbourne & Parke LLP, related to the shares of common stock being sold in the initial public offering*** | |||||
8.1 | Opinion of Chadbourne & Parke LLP, related to tax matters*** | |||||
10.1 | Financing Agreements | |||||
10.1.1 | Foreign Currency Loan Agreement, dated June 1, 2004, between Ormat Technologies, Inc. and United Mizrahi Bank LTD.** | |||||
10.1.2 | Amended and Restated Bridge Loan Agreement, dated October 2, 2003, by and between Ormat Nevada, Inc. and Bank Leumi USA* | |||||
10.1.3 | Credit Facility Agreement, dated September 5, 2000, between Ormat Momotombo Power Company and Bank Hapoalim B.M.* | |||||
10.1.4 | Credit Agreement, dated as of December 31, 2002, among ORMESA LLC, United Capital, a division of Hudson United Bank and the Lenders party to such agreement from time to time* | |||||
10.1.5 | Credit Agreement, dated as of December 18, 2003, among OrCal Geothermal Inc. and Beal Bank, S.S.B. and the financial institutions party thereto from time to time* | |||||
10.1.6 | Credit Agreement, dated May 13, 1996, between Ormat-Leyte and Export-Import Bank of the United States* | |||||
10.1.7 | Indenture, dated February 13, 2004, among Ormat Funding Corp., Brady Power Partners, Steamboat Development Corp., Steamboat Geothermal LLC, OrMammoth Inc., ORNI 1 LLC, ORNI 2 LLC, ORNI 7 LLC, Ormesa LLC and Union Bank of California* | |||||
10.1.8 | First Supplemental Indenture, dated May 14, 2004, among Ormat Funding Corp., Brady Power Partners, Steamboat Development Corp., Steamboat Geothermal LLC, OrMammoth Inc., ORNI 1 LLC, ORNI 2 LLC, ORNI 7 LLC, Ormesa LLC and Union Bank of California* | |||||
10.1.9 | Loan Agreement, dated October 1, 2003, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | |||||
II-2
Exhibit No. | Document | |||||
10.1.10 | Amendment No. 1 to Loan Agreement, dated September 20, 2004, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | |||||
10.1.11 | Capital Note, dated December 22, 2003, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | |||||
10.1.12 | Amendment to Capital Note, dated September 20, 2004, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | |||||
10.1.13 | Guarantee Fee Agreement, dated January 1, 1999, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | |||||
10.1.14 | Reimbursement Agreement, dated July 15, 2004, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | |||||
10.1.15 | Services Agreement, dated July 15, 2004, by and between Ormat Industries Ltd. and Ormat Systems Ltd.* | |||||
10.2 | Purchase Agreements | |||||
10.2.1 | Purchase and Sale Agreement, dated April 22, 2004, by and among Constellation Power, Inc. and Cosi Puna, Inc. and ORNI 8 LLC and Ormat Nevada, Inc.* | |||||
10.2.2 | Purchase Agreement, dated July 15, 2004, by and between Ormat Industries Ltd. and Ormat Systems Ltd.** | |||||
10.3 | Power Purchase Agreements | |||||
10.3.1 | Power Purchase Contract, dated July 18, 1984, between Southern California Edison Company and Republic Geothermal, Inc.* | |||||
10.3.2 | Amendment No. 1, to the Power Purchase Contract, dated December 23, 1988, between Southern California Edison Company and Ormesa Geothermal** | |||||
10.3.3 | Power Purchase Contract, dated June 13, 1984, between Southern California Edison Company and Ormat Systems, Inc.* | |||||
10.3.4 | Power Purchase and Sales Agreement, dated as of August 26, 1983, between Chevron U.S.A. Inc. and Southern California Edison Company** | |||||
10.3.5 | Amendment No. 1, to Power Purchase and Sale Agreement, dated as of December 11, 1984, between Chevron U.S.A. Inc., HGC and Southern California Edison Company* | |||||
10.3.6 | Settlement Agreement and Amendment No. 2, to Power Purchase Contract, dated August 7, 1995, between HGC and Southern California Edison Company* | |||||
10.3.7 | Power Purchase Contract dated, April 16, 1985, between Southern California Edison Company and Second Imperial Geothermal Company* | |||||
10.3.8 | Amendment No. 1, dated as of October 23, 1987, between Southern California Edison Company and Second Imperial Geothermal Company** | |||||
10.3.9 | Amendment No. 2, dated as of July 27, 1990, between Southern California Edison Company and Second Imperial Geothermal Company** | |||||
10.3.10 | Amendment No. 3, dated as of November 24, 1992, between Southern California Edison Company and Second Imperial Geothermal Company** | |||||
10.3.11 | Amended and Restated Power Purchase and Sales Agreement, dated December 2, 1986, between Mammoth Pacific and Southern California Edison Company* | |||||
10.3.12 | Amendment No. 1, to Amended and Restated Power Purchase and Sale Agreement, dated May 18, 1990, between Mammoth Pacific and Southern California Edison Company** | |||||
II-3
Exhibit No. | Document | |||||
10.3.13 | Power Purchase Contract, dated April 15, 1985, between Mammoth Pacific and Southern California Edison Company* | |||||
10.3.14 | Amendment No. 1, dated as of October 27, 1989, between Mammoth Pacific and Southern California Edison Company* | |||||
10.3.15 | Amendment No. 2, dated as of December 20, 1989, between Mammoth Pacific and Southern California Edison Company** | |||||
10.3.16 | Power Purchase Contract, dated April 16, 1985, between Southern California Edison Company and Santa Fe Geothermal, Inc.* | |||||
10.3.17 | Amendment No. 1, to Power Purchase Contract, dated October 25, 1985, between Southern California Edison Company and Mammoth Pacific* | |||||
10.3.18 | Amendment No. 2, to Power Purchase Contract, dated December 20, 1989, between Southern California Edison Company and Pacific Lighting Energy Systems* | |||||
10.3.19 | Interconnection Facilities Agreement, dated October 20, 1989, by and between Southern California Edison Company and Mammoth Pacific* | |||||
10.3.20 | Interconnection Facilities Agreement, dated October 13, 1985, by and between Southern California Edison Company and Mammoth Pacific (II)* | |||||
10.3.21 | Interconnection Facilities Agreement, dated October 20, 1989, by and between Southern California Edison Company and Pacific Lighting Energy Systems* | |||||
10.3.22 | Interconnection Agreement, dated August 12, 1985, by and between Southern California Edison Company and Heber Geothermal Company* | |||||
10.3.23 | Plant Connection Agreement for the Heber Geothermal Plant No.1, dated, July 31, 1985, by and between Imperial Irrigation District and Heber Geothermal Company* | |||||
10.3.24 | Plant Connection Agreement for the Second Imperial Geothermal Company Power Plant No.1, dated, October 27, 1992, by and between Imperial Irrigation District and Second Imperial Geothermal Company* | |||||
10.3.25 | IID-SIGC Transmission Service Agreement for Alternative Resources, dated, October 27, 1992, by and between Imperial Irrigation District and Second Imperial Geothermal Company* | |||||
10.3.26 | Plant Connection Agreement for the Ormesa Geothermal Plant, dated October 1, 1985, by and between Imperial Irrigation District and Ormesa Geothermal* | |||||
10.3.27 | Plant Connection Agreement for the Ormesa IE Geothermal Plant, dated, October 21, 1988, by and between Imperial Irrigation District and Ormesa IE* | |||||
10.3.28 | Plant Connection Agreement for the Ormesa IH Geothermal Plant, dated, October 3, 1989, by and between Imperial Irrigation District and Ormesa IH* | |||||
10.3.29 | Plant Connection Agreement for the Geo East Mesa Limited Partnership Unit No.2, dated, March 21, 1989, by and between Imperial Irrigation District and Geo East Mesa Limited Partnership* | |||||
10.3.30 | Plant Connection Agreement for the Geo East Mesa Limited Partnership Unit No.3, dated, March 21, 1989, by and between Imperial Irrigation District and Geo East Mesa Limited Partnership* | |||||
10.3.31 | Transmission Service Agreement for the Ormesa I, Ormesa IE and Ormesa IH Geothermal Power Plants, dated, October 3, 1989, between Imperial Irrigation District and Ormesa Geothermal* | |||||
II-4
Exhibit No. | Document | |||||
10.3.32 | Transmission Service Agreement for the Geo East Mesa Limited Partnership Unit No. 2, dated, March 21, 1989, by and between Imperial Irrigation District and Geo East Mesa Limited Partnership* | |||||
10.3.33 | Transmission Service Agreement for the Geo East Mesa Limited Partnership Unit No. 3, dated, March 21, 1989, by and between Imperial Irrigation District and Geo East Mesa Limited Partnership* | |||||
10.3.34 | IID-Edison Transmission Service Agreement for Alternative Resources, dated, September 26, 1985, by and between Imperial Irrigation District and Southern California Edison Company* | |||||
10.3.35 | Plant Amendment No. 1, to IID-Edison Transmission Service Agreement for Alternative Resources, dated, August 25, 1987, by and between Imperial Irrigation District and Southern California Edison Company* | |||||
10.3.36 | Leyte Optimization Project BOT Agreement, dated August 4, 1995, by and between PNOC-Energy Development Corporation and Ormat Inc.** | |||||
10.3.37 | First Amendment to Leyte Optimization Project BOT Agreement, dated February 29, 1996, by and between PNOC-Energy Development Corporation and Ormat Leyte Co. Ltd.** | |||||
10.3.38 | Second Amendment to Leyte Optimization Project BOT Agreement, dated April 1, 1996, by and between PNOC-Energy Development Corporation and Ormat Leyte Co. Ltd.** | |||||
10.3.39 | Agreement Addressing Renewable Energy Pricing and Payment Issues, dated June 15, 2001, by and between Second Imperial Geothermal Company QFID No. 3021 and Southern California Edison Company* | |||||
10.3.40 | Amendment No. 1 to Agreement Addressing Renewable Energy Pricing and Payment Issues, dated November 30, 2001, by and between Second Imperial Geothermal Company QFID No. 3021 and Southern California Edison Company* | |||||
10.3.41 | Agreement Addressing Renewable Energy Pricing and Payment Issues, dated June 15, 2001, by and between Heber Geothermal Company QFID No. 3001 and Southern California Edison Company* ‡‡‡ | |||||
10.3.42 | Amendment No. 1 to Agreement Addressing Renewable Energy Pricing and Payment Issues, dated November 30, 2001, by and between Heber Geothermal Company QFID No. 3001 and Southern California Edison Company* ‡‡‡ | |||||
10.3.43 | Energy Services Agreement, dated February 2003, by and between Imperial Irrigation District and ORMESA, LLC* | |||||
10.3.44 | Purchase Power Contract, dated March 24, 1986, by and between Hawaii Electric Light Company and Thermal Power Company* | |||||
10.3.45 | Firm Capacity Amendment to Purchase Power Contract, dated July 28, 1989, by and between Hawaii Electric Light Company and Puna Geothermal Venture* | |||||
10.3.46 | Amendment to Purchase Power Contract, dated October 19, 1993, by and between Hawaii Electric Light Company and Puna Geothermal Venture* | |||||
10.3.47 | Third Amendment to the Purchase Power Contract, dated March 7, 1995, by and between Hawaii Electric Light Company and Puna Geothermal Venture* | |||||
10.3.48 | Performance Agreement and Fourth Amendment to the Purchase Power Contract, dated February 12, 1996, by and between Hawaii Electric Light Company and Puna Geothermal Venture* | |||||
II-5
Exhibit No. | Document | |||||
10.3.49 | Agreement to Design 69 KV Transmission Lines, a Substation at Pohoiki, Modifications to Substations at Puna and Kaumana, and a Temporary 34.5 Facility to Interconnect PGV's Geothermal Electric Plant with HELCO's System Grid (Phase II and III), dated June 7, 1990, by and between Hawaii Electric Light Company and Puna Geothermal Venture* | |||||
10.4 | Leases | |||||
10.4.1 | Ormesa BLM Geothermal Resources Lease CA 966 ‡ * | |||||
10.4.2 | Ormesa BLM License for Electric Power Plant Site CA 24678 ‡‡ * | |||||
10.4.3 | Geothermal Resources Mining Lease, dated February 20, 1981, by and between the State of Hawaii, as Lessor, and Kapoho Land Partnership, as Lessee* | |||||
10.4.4 | Geothermal Lease Agreement, dated October 20, 1975, by and between Ruth Walker Cox and Betty M. Smith, as Lessor, and Gulf Oil Corporation, as Lessee † * | |||||
10.4.5 | Geothermal Lease Agreement, dated August 1, 1976, by and between Southern Pacific Land Company, as Lessor, and Phillips Petroleum Company, as Lessee † * | |||||
10.4.6 | Geothermal Resources Lease, dated November 18, 1983, by and between Sierra Pacific Power Company, as Lessor, and Geothermal Development Associates, as Lessee † * | |||||
10.4.7 | Lease Agreement, dated November 1, 1969, by and between Chrisman B. Jackson and Sharon Jackson, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.8 | Lease Agreement, dated September 22, 1976, by and between El Toro Land & Cattle Co., as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.9 | Lease Agreement, dated February 17, 1977, by and between Joseph L. Holtz, as Lessor, and Chevron U.S.A. Inc., as Lessee** | |||||
10.4.10 | Lease Agreement, dated March 11, 1964, by and between John D. Jackson and Frances Jones Jackson, also known as Frances J. Jackson, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.11 | Lease Agreement, dated February 16, 1964, by and between John D. Jackson, conservator for the estate of Aphia Jackson Wallan, as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.12 | Lease Agreement, dated March 17, 1964, by and between Helen S. Fugate, a widow, as Lessor, and Standard Oil Company of California, as Lessee* | |||||
10.4.13 | Lease Agreement, dated February 16, 1964, by and between John D. Jackson and Frances J. Jackson, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee † * | |||||
10.4.14 | Lease Agreement, dated February 20, 1964, by and between John A. Straub and Edith D. Straub, also known as John A. Straub and Edythe D. Straub, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.15 | Lease Agreement, dated July 1, 1971, by and between Marie L. Gisler and Harry R. Gisler, as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.16 | Lease Agreement, dated February 28, 1964, by and between Gus Kurupas and Guadalupe Kurupas, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.17 | Lease Agreement, dated April 7, 1972, by and between Nowlin Partnership, as Lessor, and Standard Oil Company of California, as Lessee** | |||||
II-6
Exhibit No. | Document | |||||
10.4.18 | Geothermal Lease Agreement, dated July 18, 1979, by and between Charles K. Corfman, an unmarried man as his sole and separate property, and Lessor, and Union Oil Company of California, as Lessee* | |||||
10.4.19 | Lease Agreement, dated January 1, 1972, by and between Holly Oberly Thomson, also known as Holly F. Oberly Thomson, also known as Holly Felicia Thomson, as Lessor, and Union Oil Company of California, as Lessee † * | |||||
10.4.20 | Lease Agreement, dated June 14, 1971, by and between Fitzhugh Lee Brewer, Jr., a married man as his separate property, Donna Hawk, a married woman as her separate property, and Ted Draper and Helen Draper, husband and wife, as Lessor, and Union Oil Company of California, as Lessee † * | |||||
10.4.21 | Lease Agreement, dated May 13, 1971, by and between Mathew J. La Brucherie and Jane E. La Brucherie, husband and wife, and Robert T. O'Dell and Phyllis M. O'Dell, husband and wife, as Lessor, and Union Oil Company of California, as Lessee † * | |||||
10.4.22 | Lease Agreement, dated June 2, 1971, by and between Dorothy Gisler, a widow, Joan C. Hill, and Jean C. Browning, as Lessor, and Union Oil Company of California, as Lessee** | |||||
10.4.23 | Geothermal Lease Agreement, dated February 15, 1977, by and between Walter J. Holtz, as Lessor, and Magma Energy Inc., as Lessee † * | |||||
10.4.24 | Geothermal Lease, dated August 31, 1983, by and between Magma Energy Inc., as Lessor, and Holt Geothermal Company, as Lessee † * | |||||
10.4.25 | Unprotected Lease Agreement, dated July 15, 2004, by and between Ormat Industries Ltd. and Ormat Systems Ltd.** | |||||
10.4.26 | Geothermal Resources Lease, dated June 27, 1988, by and between Bernice Guisti, Judith Harvey and Karen Thompson, Trustees and Beneficiaries of the Guisti Trust, as Lessor, and Far West Capital, Inc., as Lessee † * | |||||
10.4.27 | Amendment to Geothermal Resources Lease, dated January, 1992, by and between Bernice Guisti, Judith Harvey and Karen Thompson, Trustees and Beneficiaries of the Guisti Trust, as Lessor, and Far West Capital, Inc., as Lessee † * | |||||
10.4.28 | Second Amendment to Geothermal Resources Lease, dated June 25, 1993, by and between Bernice Guisti, Judith Harvey and Karen Thompson, Trustees and Beneficiaries of the Guisti Trust, as Lessor, and Far West Capital, Inc. and its Assignee, Steamboat Development Corp., as Lessee* | |||||
10.4.29 | Geothermal Resources Sublease, dated May 31, 1991, by and between Fleetwood Corporation, as Lessor, and Far West Capital, Inc., as Lessee † * | |||||
10.4.30 | KLP Lease and Agreement, dated March 1, 1981, by and between Kapoho Land Partnership, as Lessor, and Thermal Power Company, as Lessee † * | |||||
10.4.31 | Amendment to KLP Lease and Agreement, dated July 9, 1990, by and between Kapoho Land Partnership, as Lessor, and Puna Geothermal Venture, as Lessee † * | |||||
10.4.32 | Second Amendment to KLP Lease and Agreement, dated December 31, 1996, by and between Kapoho Land Partnership, as Lessor, and Puna Geothermal Venture, as Lessee* | |||||
10.5 | General | |||||
10.5.1 | Engineering, Procurement and Construction Contract, dated August 23, 2002, by and between Tuaropaki Power Company Limited and Ormat Pacific Inc.* | |||||
10.5.2 | Amendment No. 1, to Engineering, Procurement and Construction Contract, dated, 2003, by and between Tuaropaki Power Company Limited and Ormat Pacific Inc.** | |||||
II-7
Exhibit No. | Document | |||||
10.5.3 | Engineering, Procurement and Construction Contract, dated, 2003, by and between Contact Energy Limited and Ormat Pacific Inc.* | |||||
10.5.4 | Patent License Agreement, dated July 15, 2004, by and between Ormat Industries Ltd. and Ormat Systems Ltd.* | |||||
10.5.5 | Registration Rights Agreement, dated July 15, 2004, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.*** | |||||
10.6 | Ormat Technologies, Inc. 2004 Incentive Compensation Plan*** | |||||
10.7 | Form of Executive Employment Agreement of Lucien Bronicki* | |||||
10.8 | Form of Executive Employment Agreement of Yehudit Bronicki* | |||||
10.9 | Form of Executive Employment Agreement of Yoram Bronicki* | |||||
10.10 | Form of Indemnification Agreement* | |||||
21.1 | Subsidiaries of the registrant** | |||||
23.1 | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm* | |||||
23.2 | Consent of Chadbourne & Parke LLP (contained in Exhibit 5.1) | |||||
23.3 | Consent of Dani Falk* | |||||
23.4 | Consent of Edward R. Muller* | |||||
23.5 | Consent of Lester P. Silverman* | |||||
23.6 | Consent of Jacob J. Worenklein* | |||||
24.1 | Power of attorney (Included on signature page of the registration statement) | |||||
99.1 | Material terms with respect to BLM geothermal resources leases** | |||||
99.2 | Material terms with respect to BLM site leases** | |||||
99.3 | Material terms with respect to agreements addressing renewable energy pricing and payment issues* | |||||
* | Filed herewith. |
** | Previously filed. |
*** | To be filed by subsequent amendment. |
† | Portions of this exhibit have been omitted pursuant to a request for confidential treatment. The omitted portions have been separately filed with the Securities and Exchange Commission. |
‡ | We have entered into other BLM geothermal resources leases that are substantially similar in terms with this exhibit. Any deviation in terms with this exhibit have been described in Exhibit 99.1. |
‡‡ | We have entered into other BLM site leases that are substantially similar in terms with this exhibit. Any deviation in terms with this exhibit have been described in Exhibit 99.2. |
‡‡‡ | We have entered into other agreements addressing renewable energy pricing and payment issues with Southern California Edison Company that are substantially similar in terms with these exhibits. Any deviation in terms with these exhibits have been described in Exhibit 99.3. |
Item 17. Undertakings
(a) | The undersigned Registrant hereby undertakes to provide to the underwriters at the closing certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. |
II-8
(b) | Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described in "Item 14—Indemnification of Directors and Officers" above, or otherwise, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification by the Registrant against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. |
(c) | The undersigned Registrant hereby undertakes that: |
(1) | For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
(2) | For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 1 to the registration statement (No. 333-117527) to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, on September 28, 2004.
ORMAT TECHNOLOGIES, INC.
By: /s/ Yehudit Bronicki
Name: Yehudit Bronicki
Title: President |
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the registration statement (No. 333-117527) has been signed by the following persons in the capacities on September 28, 2004
Signature | Title | |
* | Chairman of the Board and Director | |
Lucien Bronicki | ||
/s/ Yehudit Bronicki |
Director,
President, Treaurer and Secretary (Principal
Executive
Officer) |
|
Yehudit Bronicki | ||
* | Director (Principal Financial Officer, Controller and Principal Accounting Officer) | |
Connie Stechman | ||
*By: /s/ Yehudit Bronicki
Yehudit Bronicki
Attorney-In-Fact
II-10
EXHIBIT INDEX
Exhibit No. | Document | |||||
1.1 | Form of Underwriting Agreement* | |||||
3.1 | Amended and Restated Certificate of Incorporation** | |||||
3.2 | Amended and Restated By-laws*** | |||||
4.1 | Form of Common Share Stock Certificate** | |||||
4.2 | Form of Preferred Share Stock Certificate** | |||||
5.1 | Opinion of Chadbourne & Parke LLP, related to the shares of common stock being sold in the initial public offering*** | |||||
8.1 | Opinion of Chadbourne & Parke LLP, related to tax matters*** | |||||
10.1 | Financing Agreements | |||||
10.1.1 | Foreign Currency Loan Agreement, dated June 1, 2004, between Ormat Technologies, Inc. and United Mizrahi Bank LTD.** | |||||
10.1.2 | Amended and Restated Bridge Loan Agreement, dated October 2, 2003, by and between Ormat Nevada, Inc. and Bank Leumi USA* | |||||
10.1.3 | Credit Facility Agreement, dated September 5, 2000, between Ormat Momotombo Power Company and Bank Hapoalim B.M.* | |||||
10.1.4 | Credit Agreement, dated as of December 31, 2002, among ORMESA LLC, United Capital, a division of Hudson United Bank and the Lenders party to such agreement from time to time* | |||||
10.1.5 | Credit Agreement, dated as of December 18, 2003, among OrCal Geothermal Inc. and Beal Bank, S.S.B. and the financial institutions party thereto from time to time* | |||||
10.1.6 | Credit Agreement, dated May 13, 1996, between Ormat-Leyte and Export-Import Bank of the United States* | |||||
10.1.7 | Indenture, dated February 13, 2004, among Ormat Funding Corp., Brady Power Partners, Steamboat Development Corp., Steamboat Geothermal LLC, OrMammoth Inc., ORNI 1 LLC, ORNI 2 LLC, ORNI 7 LLC, Ormesa LLC and Union Bank of California* | |||||
10.1.8 | First Supplemental Indenture, dated May 14, 2004, among Ormat Funding Corp., Brady Power Partners, Steamboat Development Corp., Steamboat Geothermal LLC, OrMammoth Inc., ORNI 1 LLC, ORNI 2 LLC, ORNI 7 LLC, Ormesa LLC and Union Bank of California* | |||||
10.1.9 | Loan Agreement, dated October 1, 2003, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | |||||
10.1.10 | Amendment No. 1 to Loan Agreement, dated September 20, 2004, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | |||||
10.1.11 | Capital Note, dated December 22, 2003, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | |||||
10.1.12 | Amendment to Capital Note, dated September 20, 2004, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | |||||
10.1.13 | Guarantee Fee Agreement, dated January 1, 1999, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | |||||
10.1.14 | Reimbursement Agreement, dated July 15, 2004, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | |||||
10.1.15 | Services Agreement, dated July 15, 2004, by and between Ormat Industries Ltd. and Ormat Systems Ltd.* | |||||
10.2 | Purchase Agreements | |||||
10.2.1 | Purchase and Sale Agreement, dated April 22, 2004, by and among Constellation Power, Inc. and Cosi Puna, Inc. and ORNI 8 LLC and Ormat Nevada, Inc.* | |||||
10.2.2 | Purchase Agreement, dated July 15, 2004, by and between Ormat Industries Ltd. and Ormat Systems Ltd.** | |||||
Exhibit No. | Document | |||||
10.3 | Power Purchase Agreements | |||||
10.3.1 | Power Purchase Contract, dated July 18, 1984, between Southern California Edison Company and Republic Geothermal, Inc.* | |||||
10.3.2 | Amendment No. 1, to the Power Purchase Contract, dated December 23, 1988, between Southern California Edison Company and Ormesa Geothermal** | |||||
10.3.3 | Power Purchase Contract, dated June 13, 1984, between Southern California Edison Company and Ormat Systems, Inc.* | |||||
10.3.4 | Power Purchase and Sales Agreement, dated as of August 26, 1983, between Chevron U.S.A. Inc. and Southern California Edison Company** | |||||
10.3.5 | Amendment No. 1, to Power Purchase and Sale Agreement, dated as of December 11, 1984, between Chevron U.S.A. Inc., HGC and Southern California Edison Company* | |||||
10.3.6 | Settlement Agreement and Amendment No. 2, to Power Purchase Contract, dated August 7, 1995, between HGC and Southern California Edison Company* | |||||
10.3.7 | Power Purchase Contract dated, April 16, 1985, between Southern California Edison Company and Second Imperial Geothermal Company* | |||||
10.3.8 | Amendment No. 1, dated as of October 23, 1987, between Southern California Edison Company and Second Imperial Geothermal Company** | |||||
10.3.9 | Amendment No. 2, dated as of July 27, 1990, between Southern California Edison Company and Second Imperial Geothermal Company** | |||||
10.3.10 | Amendment No. 3, dated as of November 24, 1992, between Southern California Edison Company and Second Imperial Geothermal Company** | |||||
10.3.11 | Amended and Restated Power Purchase and Sales Agreement, dated December 2, 1986, between Mammoth Pacific and Southern California Edison Company* | |||||
10.3.12 | Amendment No. 1, to Amended and Restated Power Purchase and Sale Agreement, dated May 18, 1990, between Mammoth Pacific and Southern California Edison Company** | |||||
10.3.13 | Power Purchase Contract, dated April 15, 1985, between Mammoth Pacific and Southern California Edison Company* | |||||
10.3.14 | Amendment No. 1, dated as of October 27, 1989, between Mammoth Pacific and Southern California Edison Company* | |||||
10.3.15 | Amendment No. 2, dated as of December 20, 1989, between Mammoth Pacific and Southern California Edison Company** | |||||
10.3.16 | Power Purchase Contract, dated April 16, 1985, between Southern California Edison Company and Santa Fe Geothermal, Inc.* | |||||
10.3.17 | Amendment No. 1, to Power Purchase Contract, dated October 25, 1985, between Southern California Edison Company and Mammoth Pacific* | |||||
10.3.18 | Amendment No. 2, to Power Purchase Contract, dated December 20, 1989, between Southern California Edison Company and Pacific Lighting Energy Systems* | |||||
10.3.19 | Interconnection Facilities Agreement, dated October 20, 1989, by and between Southern California Edison Company and Mammoth Pacific* | |||||
10.3.20 | Interconnection Facilities Agreement, dated October 13, 1985, by and between Southern California Edison Company and Mammoth Pacific (II)* | |||||
10.3.21 | Interconnection Facilities Agreement, dated October 20, 1989, by and between Southern California Edison Company and Pacific Lighting Energy Systems* | |||||
10.3.22 | Interconnection Agreement, dated August 12, 1985, by and between Southern California Edison Company and Heber Geothermal Company* | |||||
10.3.23 | Plant Connection Agreement for the Heber Geothermal Plant No.1, dated, July 31, 1985, by and between Imperial Irrigation District and Heber Geothermal Company* | |||||
Exhibit No. | Document | |||||
10.3.24 | Plant Connection Agreement for the Second Imperial Geothermal Company Power Plant No.1, dated, October 27, 1992, by and between Imperial Irrigation District and Second Imperial Geothermal Company* | |||||
10.3.25 | IID-SIGC Transmission Service Agreement for Alternative Resources, dated, October 27, 1992, by and between Imperial Irrigation District and Second Imperial Geothermal Company* | |||||
10.3.26 | Plant Connection Agreement for the Ormesa Geothermal Plant, dated October 1, 1985, by and between Imperial Irrigation District and Ormesa Geothermal* | |||||
10.3.27 | Plant Connection Agreement for the Ormesa IE Geothermal Plant, dated, October 21, 1988, by and between Imperial Irrigation District and Ormesa IE* | |||||
10.3.28 | Plant Connection Agreement for the Ormesa IH Geothermal Plant, dated, October 3, 1989, by and between Imperial Irrigation District and Ormesa IH* | |||||
10.3.29 | Plant Connection Agreement for the Geo East Mesa Limited Partnership Unit No.2, dated, March 21, 1989, by and between Imperial Irrigation District and Geo East Mesa Limited Partnership* | |||||
10.3.30 | Plant Connection Agreement for the Geo East Mesa Limited Partnership Unit No.3, dated, March 21, 1989, by and between Imperial Irrigation District and Geo East Mesa Limited Partnership* | |||||
10.3.31 | Transmission Service Agreement for the Ormesa I, Ormesa IE and Ormesa IH Geothermal Power Plants, dated, October 3, 1989, between Imperial Irrigation District and Ormesa Geothermal* | |||||
10.3.32 | Transmission Service Agreement for the Geo East Mesa Limited Partnership Unit No. 2, dated, March 21, 1989, by and between Imperial Irrigation District and Geo East Mesa Limited Partnership* | |||||
10.3.33 | Transmission Service Agreement for the Geo East Mesa Limited Partnership Unit No. 3, dated, March 21, 1989, by and between Imperial Irrigation District and Geo East Mesa Limited Partnership* | |||||
10.3.34 | IID-Edison Transmission Service Agreement for Alternative Resources, dated, September 26, 1985, by and between Imperial Irrigation District and Southern California Edison Company* | |||||
10.3.35 | Plant Amendment No. 1, to IID-Edison Transmission Service Agreement for Alternative Resources, dated, August 25, 1987, by and between Imperial Irrigation District and Southern California Edison Company* | |||||
10.3.36 | Leyte Optimization Project BOT Agreement, dated August 4, 1995, by and between PNOC-Energy Development Corporation and Ormat Inc.** | |||||
10.3.37 | First Amendment to Leyte Optimization Project BOT Agreement, dated February 29, 1996, by and between PNOC-Energy Development Corporation and Ormat Leyte Co. Ltd.** | |||||
10.3.38 | Second Amendment to Leyte Optimization Project BOT Agreement, dated April 1, 1996, by and between PNOC-Energy Development Corporation and Ormat Leyte Co. Ltd.** | |||||
10.3.39 | Agreement Addressing Renewable Energy Pricing and Payment Issues, dated June 15, 2001, by and between Second Imperial Geothermal Company QFID No. 3021 and Southern California Edison Company* | |||||
10.3.40 | Amendment No. 1 to Agreement Addressing Renewable Energy Pricing and Payment Issues, dated November 30, 2001, by and between Second Imperial Geothermal Company QFID No. 3021 and Southern California Edison Company* | |||||
10.3.41 | Agreement Addressing Renewable Energy Pricing and Payment Issues, dated June 15, 2001, by and between Heber Geothermal Company QFID No. 3001 and Southern California Edison Company* ‡‡‡ | |||||
Exhibit No. | Document | |||||
10.3.42 | Amendment No. 1 to Agreement Addressing Renewable Energy Pricing and Payment Issues, dated November 30, 2001, by and between Heber Geothermal Company QFID No. 3001 and Southern California Edison Company* ‡‡‡ | |||||
10.3.43 | Energy Services Agreement, dated February 2003, by and between Imperial Irrigation District and ORMESA, LLC* | |||||
10.3.44 | Purchase Power Contract, dated March 24, 1986, by and between Hawaii Electric Light Company and Thermal Power Company* | |||||
10.3.45 | Firm Capacity Amendment to Purchase Power Contract, dated July 28, 1989, by and between Hawaii Electric Light Company and Puna Geothermal Venture* | |||||
10.3.46 | Amendment to Purchase Power Contract, dated October 19, 1993, by and between Hawaii Electric Light Company and Puna Geothermal Venture* | |||||
10.3.47 | Third Amendment to the Purchase Power Contract, dated March 7, 1995, by and between Hawaii Electric Light Company and Puna Geothermal Venture* | |||||
10.3.48 | Performance Agreement and Fourth Amendment to the Purchase Power Contract, dated February 12, 1996, by and between Hawaii Electric Light Company and Puna Geothermal Venture* | |||||
10.3.49 | Agreement to Design 69 KV Transmission Lines, a Substation at Pohoiki, Modifications to Substations at Puna and Kaumana, and a Temporary 34.5 Facility to Interconnect PGV's Geothermal Electric Plant with HELCO's System Grid (Phase II and III), dated June 7, 1990, by and between Hawaii Electric Light Company and Puna Geothermal Venture* | |||||
10.4 | Leases | |||||
10.4.1 | Ormesa BLM Geothermal Resources Lease CA 966 ‡ * | |||||
10.4.2 | Ormesa BLM License for Electric Power Plant Site CA 24678 ‡‡ * | |||||
10.4.3 | Geothermal Resources Mining Lease, dated February 20, 1981, by and between the State of Hawaii, as Lessor, and Kapoho Land Partnership, as Lessee* | |||||
10.4.4 | Geothermal Lease Agreement, dated October 20, 1975, by and between Ruth Walker Cox and Betty M. Smith, as Lessor, and Gulf Oil Corporation, as Lessee † * | |||||
10.4.5 | Geothermal Lease Agreement, dated August 1, 1976, by and between Southern Pacific Land Company, as Lessor, and Phillips Petroleum Company, as Lessee † * | |||||
10.4.6 | Geothermal Resources Lease, dated November 18, 1983, by and between Sierra Pacific Power Company, as Lessor, and Geothermal Development Associates, as Lessee † * | |||||
10.4.7 | Lease Agreement, dated November 1, 1969, by and between Chrisman B. Jackson and Sharon Jackson, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.8 | Lease Agreement, dated September 22, 1976, by and between El Toro Land & Cattle Co., as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.9 | Lease Agreement, dated February 17, 1977, by and between Joseph L. Holtz, as Lessor, and Chevron U.S.A. Inc., as Lessee** | |||||
10.4.10 | Lease Agreement, dated March 11, 1964, by and between John D. Jackson and Frances Jones Jackson, also known as Frances J. Jackson, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.11 | Lease Agreement, dated February 16, 1964, by and between John D. Jackson, conservator for the estate of Aphia Jackson Wallan, as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.12 | Lease Agreement, dated March 17, 1964, by and between Helen S. Fugate, a widow, as Lessor, and Standard Oil Company of California, as Lessee* | |||||
10.4.13 | Lease Agreement, dated February 16, 1964, by and between John D. Jackson and Frances J. Jackson, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee † * | |||||
Exhibit No. | Document | |||||
10.4.14 | Lease Agreement, dated February 20, 1964, by and between John A. Straub and Edith D. Straub, also known as John A. Straub and Edythe D. Straub, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.15 | Lease Agreement, dated July 1, 1971, by and between Marie L. Gisler and Harry R. Gisler, as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.16 | Lease Agreement, dated February 28, 1964, by and between Gus Kurupas and Guadalupe Kurupas, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.17 | Lease Agreement, dated April 7, 1972, by and between Nowlin Partnership, as Lessor, and Standard Oil Company of California, as Lessee** | |||||
10.4.18 | Geothermal Lease Agreement, dated July 18, 1979, by and between Charles K. Corfman, an unmarried man as his sole and separate property, and Lessor, and Union Oil Company of California, as Lessee* | |||||
10.4.19 | Lease Agreement, dated January 1, 1972, by and between Holly Oberly Thomson, also known as Holly F. Oberly Thomson, also known as Holly Felicia Thomson, as Lessor, and Union Oil Company of California, as Lessee † * | |||||
10.4.20 | Lease Agreement, dated June 14, 1971, by and between Fitzhugh Lee Brewer, Jr., a married man as his separate property, Donna Hawk, a married woman as her separate property, and Ted Draper and Helen Draper, husband and wife, as Lessor, and Union Oil Company of California, as Lessee † * | |||||
10.4.21 | Lease Agreement, dated May 13, 1971, by and between Mathew J. La Brucherie and Jane E. La Brucherie, husband and wife, and Robert T. O'Dell and Phyllis M. O'Dell, husband and wife, as Lessor, and Union Oil Company of California, as Lessee † * | |||||
10.4.22 | Lease Agreement, dated June 2, 1971, by and between Dorothy Gisler, a widow, Joan C. Hill, and Jean C. Browning, as Lessor, and Union Oil Company of California, as Lessee** | |||||
10.4.23 | Geothermal Lease Agreement, dated February 15, 1977, by and between Walter J. Holtz, as Lessor, and Magma Energy Inc., as Lessee † * | |||||
10.4.24 | Geothermal Lease, dated August 31, 1983, by and between Magma Energy Inc., as Lessor, and Holt Geothermal Company, as Lessee † * | |||||
10.4.25 | Unprotected Lease Agreement, dated July 15, 2004, by and between Ormat Industries Ltd. and Ormat Systems Ltd.** | |||||
10.4.26 | Geothermal Resources Lease, dated June 27, 1988, by and between Bernice Guisti, Judith Harvey and Karen Thompson, Trustees and Beneficiaries of the Guisti Trust, as Lessor, and Far West Capital, Inc., as Lessee † * | |||||
10.4.27 | Amendment to Geothermal Resources Lease, dated January, 1992, by and between Bernice Guisti, Judith Harvey and Karen Thompson, Trustees and Beneficiaries of the Guisti Trust, as Lessor, and Far West Capital, Inc., as Lessee † * | |||||
10.4.28 | Second Amendment to Geothermal Resources Lease, dated June 25, 1993, by and between Bernice Guisti, Judith Harvey and Karen Thompson, Trustees and Beneficiaries of the Guisti Trust, as Lessor, and Far West Capital, Inc. and its Assignee, Steamboat Development Corp., as Lessee* | |||||
10.4.29 | Geothermal Resources Sublease, dated May 31, 1991, by and between Fleetwood Corporation, as Lessor, and Far West Capital, Inc., as Lessee † * | |||||
10.4.30 | KLP Lease and Agreement, dated March 1, 1981, by and between Kapoho Land Partnership, as Lessor, and Thermal Power Company, as Lessee † * | |||||
10.4.31 | Amendment to KLP Lease and Agreement, dated July 9, 1990, by and between Kapoho Land Partnership, as Lessor, and Puna Geothermal Venture, as Lessee † * | |||||
10.4.32 | Second Amendment to KLP Lease and Agreement, dated December 31, 1996, by and between Kapoho Land Partnership, as Lessor, and Puna Geothermal Venture, as Lessee* | |||||
Exhibit No. | Document | |||||
10.5 | General | |||||
10.5.1 | Engineering, Procurement and Construction Contract, dated August 23, 2002, by and between Tuaropaki Power Company Limited and Ormat Pacific Inc.* | |||||
10.5.2 | Amendment No. 1, to Engineering, Procurement and Construction Contract, dated, 2003, by and between Tuaropaki Power Company Limited and Ormat Pacific Inc.** | |||||
10.5.3 | Engineering, Procurement and Construction Contract, dated, 2003, by and between Contact Energy Limited and Ormat Pacific Inc.* | |||||
10.5.4 | Patent License Agreement, dated July 15, 2004, by and between Ormat Industries Ltd. and Ormat Systems Ltd.* | |||||
10.5.5 | Registration Rights Agreement, dated July 15, 2004, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.*** | |||||
10.6 | Ormat Technologies, Inc. 2004 Incentive Compensation Plan*** | |||||
10.7 | Form of Executive Employment Agreement of Lucien Bronicki* | |||||
10.8 | Form of Executive Employment Agreement of Yehudit Bronicki* | |||||
10.9 | Form of Executive Employment Agreement of Yoram Bronicki* | |||||
10.10 | Form of Indemnification Agreement* | |||||
21.1 | Subsidiaries of the registrant** | |||||
23.1 | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm* | |||||
23.2 | Consent of Chadbourne & Parke LLP (contained in Exhibit 5.1) | |||||
23.3 | Consent of Dani Falk* | |||||
23.4 | Consent of Edward R. Muller* | |||||
23.5 | Consent of Lester P. Silverman* | |||||
23.6 | Consent of Jacob J. Worenklein* | |||||
24.1 | Power of attorney (Included on signature page of the registration statement) | |||||
99.1 | Material terms with respect to BLM geothermal resources leases** | |||||
99.2 | Material terms with respect to BLM site leases** | |||||
99.3 | Material terms with respect to agreements addressing renewable energy pricing and payment issues* | |||||
* | Filed herewith. |
** | Previously filed. |
*** | To be filed by subsequent amendment. |
† | Portions of this exhibit have been omitted pursuant to a request for confidential treatment. The omitted portions have been separately filed with the Securities and Exchange Commission. |
‡ | We have entered into other BLM geothermal resources leases that are substantially similar in terms with this exhibit. Any deviation in terms with this exhibit have been described in Exhibit 99.1. |
‡‡ | We have entered into other BLM site leases that are substantially similar in terms with this exhibit. Any deviation in terms with this exhibit have been described in Exhibit 99.2. |
‡‡‡ | We have entered into other agreements addressing renewable energy pricing and payment issues with Southern California Edison Company that are substantially similar in terms with these exhibits. Any deviation in terms with these exhibits have been described in Exhibit 99.3. |
Exhibit 1.1 [ ] SHARES ORMAT TECHNOLOGIES, INC. COMMON STOCK UNDERWRITING AGREEMENT [______], 2004 LEHMAN BROTHERS INC. As Representative of the several underwriters named in Schedule 1 hereto c/o LEHMAN BROTHERS INC. 745 Seventh Avenue New York, NY 10019 Ladies and Gentlemen: Ormat Technologies, Inc., a Delaware corporation (the "COMPANY"), proposes to sell [ ] shares (the "FIRM STOCK") of the Company's Common Stock, par value $[ ] per share (the "COMMON STOCK"). In addition, the Company proposes to grant to the Underwriters named in Schedule 1 hereto (the "UNDERWRITERS") an option to purchase up to an additional [ ] shares of the Common Stock on the terms and for the purposes set forth in Section 3 (the "OPTION STOCK"). The Firm Stock and the Option Stock, if purchased, are hereinafter collectively called the "STOCK." This is to confirm the agreement concerning the purchase of the Stock from the Company by the Underwriters. SECTION 1. Representations, Warranties and Agreements of the Company. The Company represents, warrants and agrees that: (a) A registration statement on Form S-1 with respect to the Stock has (i) been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"), and the rules and regulations (the "RULES AND REGULATIONS") of the United States Securities and Exchange Commission (the "COMMISSION") thereunder, (ii) been filed with the Commission under the Securities Act and (iii) become effective under the Securities Act. Copies of such registration statement and each of the amendments thereto have been delivered by the Company to you as the representative (the "REPRESENTATIVE") of the Underwriters. As used in this Agreement, "EFFECTIVE TIME" means the date and the time as of which such registration statement, or the most recent post-effective amendment thereto, if any, was declared effective by the Commission; "EFFECTIVE DATE" means the date of the Effective Time; "PRELIMINARY PROSPECTUS" means each prospectus included in such registration statement, or amendments thereof, before it became effective under the Securities Act and any prospectus filed with the Commission by the Company with the consent of the Representative pursuant to Rule 424(a) of the Rules and Regulations; "REGISTRATION STATEMENT" means such registration statement, as amended at the Effective Time, including all information contained in the final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations and deemed to be a part of the registration statement as of the Effective Time pursuant to Rule 430A of the Rules and Regulations; and "PROSPECTUS" means the prospectus in the form first used to confirm sales of Stock. If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462 Registration Statement. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or suspending the effectiveness of the Registration Statement, and no proceedings for such purpose has been instituted or threatened by the Commission. (b) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will, when they become effective or are filed with the Commission, as the case may be, conform in all respects to the requirements of the Securities Act and the Rules and Regulations and the Registration Statement and any amendments thereto do not and will not, as of the applicable effective date, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus and any amendment or supplement thereto will not, as of the applicable filing date and each Delivery Date (as defined in Section 5 below) contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with written information furnished to the Company through the Representative by or on behalf of any Underwriter specifically for inclusion therein; and the statistical and market-related data included in the Prospectus and the Registration Statement are based on or derived from sources which the Company believes to be reliable and accurate. (c) The Company and each of its subsidiaries (as defined in Section 15) have been duly incorporated or formed, as applicable, and are validly existing as corporations, limited liability companies or partnerships, as applicable, in good standing under the laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign corporations, limited liability companies or partnerships, as applicable, in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified or in good standing would not have, individually or in the aggregate, a material adverse effect on the general affairs, management, business, prospects, financial condition, revenues or expenses, properties, stockholders' equity or results of operations of the Company and its subsidiaries taken as a whole (a "MATERIAL ADVERSE EFFECT"), and have all power and authority necessary to own or hold their respective properties and to conduct the businesses in which they are engaged; and none of the subsidiaries of the Company other than those listed on Schedule 2 hereto is a "significant subsidiary", as such term is defined in Rule 405 of the Rules and Regulations. (d) The Company has an authorized capitalization as set forth in the Prospectus. All of the issued shares of capital stock of the Company have been duly and validly authorized and 2 issued, were issued in compliance with federal and state securities laws. All of the Company's options, warrants and other rights to purchase or exchange any securities for shares of the Company's capital stock have been duly and validly authorized and issued, were issued in compliance with federal and state securities laws, and conform to the description thereof contained in the Prospectus. All of the issued shares of capital stock, limited liability company interests or partnership interests, as applicable, of each subsidiary of the Company have been duly and validly authorized and issued and are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims, other than as set forth in the Prospectus. The Company has not, at any time, granted any preemptive rights, resale rights, rights of first refusal or similar rights with respect to its capital stock. (e) The shares of the Stock to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized and, when issued and delivered against payment therefor in accordance with this Agreement, will be duly and validly issued, fully paid and non-assessable and free of statutory and contractual preemptive rights, resale rights, rights of first refusal and similar rights; and the Stock will conform to the description of the material terms thereof contained in the Prospectus under the caption "Description of Capital Stock". Upon payment for and delivery of the Stock to be sold by the Company pursuant to this Agreement, the Underwriters will acquire good and valid title to such Stock, in each case free and clear of all liens, encumbrances, equities, preemptive rights, subscription rights, other rights to purchase, voting or transfer restrictions and other claims. (f) This Agreement has been duly authorized, executed and delivered by the Company. (g) The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby and the application of the proceeds from the sale of Stock as described under "Use of Proceeds" in the Prospectus will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such actions result in any violation of the provisions of the charter or by-laws of the Company or any of its subsidiaries or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets; and except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act of 1934, as amended (the "EXCHANGE ACT"), the applicable state securities laws or by the New York Stock Exchange, Inc., if any, in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby. (h) Except as described in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require 3 the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act. The holders of outstanding shares of the Company's capital stock are not entitled to preemptive rights, co-sale rights, rights of first refusal or other rights to subscribe for or purchase any shares of the Stock and there are no contracts, agreements or understandings between the Company and any person granting such person such preemptive rights, co-sale rights, rights of first refusal or other rights to subscribe for or purchase the Stock. Except for the options to purchase from the Company [_] shares of Common Stock, in the aggregate, granted to directors, officers and employees of the Company under the Company's Ormat Technologies, Inc. 2004 Incentive Compensation Plan (the "2004 PLAN"), there are no options, warrants or other rights to purchase from the Company, agreements or other obligations of the Company to issue, or right to convert any obligations of the Company into or exchange any securities of the Company for shares of Capital Stock of or ownership interests in the Company. (i) The Company has not sold or issued any shares of Common Stock during the six-month period preceding the date of the Prospectus, including any sales pursuant to Rule 144A under, or Regulation D or S of, the Securities Act other than (A) shares issued to Ormat Industries Ltd. (the "PARENT") in exchange for outstanding shares held by the Parent in connection with the recapitalization of the Company and the repayment of a portion of an outstanding intercompany loan between the Parent and the Company, each as of June 29, 2004 (collectively, the "RECAPITALIZATION") and (B) shares underlying options issued pursant to the 2004 Plan. (j) Neither the Company nor any of its subsidiaries has sustained, since the date of the latest audited financial statements included in the Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since such date, other than the Recapitalization, there has not been any change in the capital stock, limited liability company interests or partnership interests, as applicable, or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development reasonably likely to have a Material Adverse Effect, otherwise than as set forth or contemplated in the Prospectus. (k) The financial statements (including the related notes and supporting schedules) filed as part of the Registration Statement or included in the Prospectus present fairly the financial condition and results of operations of the entities purported to be shown thereby, at the dates and for the periods indicated, and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved. The pro forma financial information included in the Registration Statement and Prospectus has been prepared in accordance with the applicable requirements of the Securities Act and the Rules and Regulations and includes all adjustments necessary to present fairly the pro forma financial position of the respective entity or entities presented therein at the respective dates indicated and the results of their operations for the respective periods specified. There are no material off-balance sheet arrangements (as defined in Regulation S-K Item 303(a)(4)(ii)) that are reasonably likely to have a current or future material effect on the Company's financial condition, revenues 4 or expenses, results of operations, liquidity, capital expenditures or capital resources. (l) PricewaterhouseCoopers LLP, who have certified certain financial statements of the Company, whose report appears in the Prospectus and who have delivered the letters referred to in Section 7(g) hereof, are independent public accountants as required by the Securities Act and the Rules and Regulations. Except as described in the Prospectus and as preapproved in accordance with the requirements set forth in Section 10A of the Exchange Act, since May 6, 2003, PricewaterhouseCoopers LLP has, to the best of the Company's knowledge, not engaged in any "prohibited activities" (as defined in Section 10A of the Exchange Act) on behalf of the Company. (m) The Company and each of its subsidiaries have good and marketable title in fee simple to all real property owned by them and good and marketable title to all personal property owned by them that is material to the business of the Company and its subsidiaries, in each case, free and clear of all liens, encumbrances and defects, except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and all assets held under lease by the Company and its subsidiaries (including, without limitation, all geothermal resources held under lease) are held by them under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries, in each case, except as described in or contemplated by the Prospectus. (n) The leases (including, without limitation, all geothermal resources leases), easements, licenses, rights of way and other rights possessed by the Company and its subsidiaries provide the Company and its subsidiaries with all rights and property interests required to enable them to obtain, in all material respects, all services, materials (including, without limitation, geothermal resources) or rights (including, without limitation, access rights and rights to extract and develop such geothermal resources that may exist in the properties covered by such geothermal resources leases) required for the operation and maintenance of their operating projects, as contemplated by the Prospectus. (o) Each of the power purchase agreements, transmission agreements, interconnection agreements, financing documents, leases and other agreements referred to in the Prospectus is a valid and binding agreement, enforceable against each party thereto in accordance with its terms, except as such enforceability (i) may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) is subject to general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law) and, except as described in the Prospectus, the Company and any subsidiary of the Company are not in any material default, and have no knowledge of any material default of any of the counterparties thereto, under any such power purchase agreement, transmission agreement, interconnection agreement, financing document, lease or other agreement referred to in the Prospectus. (p) The Company and each of its subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective 5 businesses and the value of their respective properties and as is customary for companies engaged in similar businesses in similar industries. (q) The Company conducts no business other than as described in the Prospectus (other than non-material business activities which, in the aggregate, do not represent an investment expense in excess of $2 million). (r) The Company and each of its subsidiaries own or possess adequate rights to use all patents, patent applications, trademarks, service marks, service names, trade names, trademark registrations, service mark registrations, copyrights, inventions, trade secrets, licenses and other intellectual property necessary for the conduct of their respective businesses (collectively, the "INTELLECTUAL PROPERTY") and are not aware of any rights of third parties to any such Intellectual Property. The Company and each of its subsidiaries have no reason to believe that the conduct of their respective businesses conflict, infringe or misappropriate, or will conflict with, infringe or misappropriate, the intellectual property rights of others, and have not received any notice of any claim of conflict with, infringement or misappropriation of, the intellectual property rights of others. There is no pending or, to the Company's best knowledge, threatened action, suit, proceeding or claim by others challenging the validity or scope of such Intellectual Property (and the Company and its subsidiaries are not aware of any facts which would form a reasonable basis for such claim). To the Company's and each of its subsidiaries' best knowledge: (a) there is no infringement by third parties of any such Intellectual Property and (b) there is no U.S. patent or published U.S. patent application which contains claims that dominate or may dominate any Intellectual Property or that interferes with the issued or pending claims of any such Intellectual Property. There is no prior art of which the Company or its subsidiaries is aware that may render any U.S. patent held by the Company or its subsidiaries invalid or any U.S. patent application held by the Company or its subsidiaries unpatentable, which has not been disclosed to the U.S. Patent and Trademark Office. (s) There are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property or assets of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, could reasonably be expected to have a Material Adverse Effect; and to the best of the Company's knowledge no such proceedings are threatened or contemplated by governmental authorities or threatened by others. (t) Except as disclosed in the Prospectus, the Company and each of its subsidiaries possess adequate certificates, authorizations or permits issued by appropriate governmental agencies or bodies necessary to conduct the business described in the Prospectus, except for such certificates, authorizations or permits that the failure to so possess would not, individually or in the aggregate, have a Material Adverse Effect and except for those not yet required to be obtained by the Company, which the Company intends to obtain in due course. The Company, and each of its subsidiaries have not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit that would, individually or in the aggregate, have a Material Adverse Effect. (u) There are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been described in the Prospectus or filed as exhibits to the 6 Registration Statement. Each contract, agreement or arrangement to which the Company or any of its subsidiaries is a party or by which it may be bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject, has been duly and validly authorized, executed and delivered by the Company or any of its subsidiaries, as the case may be; neither the Company nor any of its subsidiaries knows of any present condition or fact which would prevent compliance by the Company or any of its subsidiaries or any other party thereto with the terms of any such contract, agreement or arrangement in accordance with its terms; except as described in the Prospectus, neither the Company nor any of its subsidiaries has any present intention to exercise any right that it may have to cancel any such contract, agreement or arrangement or otherwise to terminate its rights and obligations thereunder other than in the ordinary course of business, and neither the Company nor any of its subsidiaries has any knowledge that any other party to any such contract, agreement or arrangement has any current intention not to render full performance as contemplated by the terms thereof. (v) Except as described in the Prospectus, no relationships (including without limitation any loans or advances), direct or indirect, exists, nor has any transaction been entered into since January 1, 2001, between or among the Company and its subsidiaries on the one hand, and the directors, officers, shareholders of the Company or any subsidiary on the other hand. Since July 30, 2002, the Company has not, directly or indirectly, including through any subsidiary, extended or maintained credit, or arranged for the extension of credit, or renewed or amended any extension of credit, in the form of a personal loan to or for any of its directors or executive officers. (w) No labor disturbance by the employees of the Company exists or, to the knowledge of the Company, is imminent, which could reasonably be expected to have a Material Adverse Effect. (x) Each of the Company's operating projects in the United States, other than PUNA, is a "qualifying small power production facility" within the meaning of Section 3(17)(C) of the Federal Power Act, as amended ("FPA") and a "qualifying facility" within the meaning of 18 C.F.R. ss.292.101(b)(1) that is eligible for the regulatory exemptions from the FPA, certain state laws and regulations, and the Public Utility Company Holding Act of 1935, as amended ("PUHCA") set forth in 18 C.F.R. Section 292, Subpart F. (y) PUNA is an "eligible facility" owned by an "exempt wholesale generator" as such terms are defined in Section 32(a) of PUHCA. As such, none of the Company or its subsidiaries are considered to be an "electric utility company" as defined in Section 2(a)(3) of PUHCA. (z) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "REPORTABLE EVENT" (as defined in Section 4043 of ERISA) has occurred with respect to any "PENSION PLAN" subject to Title IV of ERISA (a "Title IV Plan") (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to the termination of, or withdrawal from, any Title IV Plan or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "CODE"); and each "pension plan" 7 for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (aa) The Company has filed all tax returns required to be filed through the date hereof (other than any tax returns not so required to be filed through the date hereof as a result of the existence of waiver or extension granted in connection with any such tax returns) and has paid all taxes shown to be due thereon, and no tax deficiency has been determined adversely to the Company or any of its subsidiaries which has had (nor does the Company have any knowledge of any tax deficiency which, if determined adversely to the Company or any of its subsidiaries, could reasonably be expected to have) a Material Adverse Effect. (bb) Since the date as of which information is given in the Prospectus through the date hereof, and except as may otherwise be disclosed in the Prospectus, the Company has not (i) issued or granted any securities (other than options issued pursuant to the 2004 Plan as described in the Prospectus), (ii) incurred any liability or obligation, direct or contingent, other than non-material liabilities and obligations which were incurred in the ordinary course of business, (iii) entered into any transaction not in the ordinary course of business or (iv) declared or paid any dividend on its capital stock. (cc) The Company (i) makes and keeps accurate books and records and (ii) maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (C) access to its assets is permitted only in accordance with management's authorization and (D) the reported accountability for its assets is compared with existing assets at reasonable intervals. (dd) Neither the Company nor any of its subsidiaries (i) is in violation of its charter or by-laws or other governing documents, (ii) is in default, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any material indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject or (iii) is in violation of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject or has failed to obtain any license, permit, certificate, franchise variance, special exception or other governmental authorization or permit or municipal government approval necessary to the ownership of its property or to the conduct of its business, except, in the case of clauses (ii) and (iii), for such defaults, violations or failures to obtain as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (ee) Neither the Company nor any of its subsidiaries, nor any director, officer, employee or other person acting on behalf of the Company or any of its subsidiaries nor, to the best of the Company's knowledge, any agent or other person associated with the Company, has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of 8 any provision of the Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment. (ff) Except as disclosed in the Prospectus, there has been no storage, disposal, generation, manufacture, refinement, transportation, handling or treatment of toxic wastes, medical wastes, hazardous wastes or hazardous substances by the Company or any of its subsidiaries (or, to the knowledge of the Company, any of their predecessors in interest) at, upon or from any of the property now or previously owned or leased by the Company or its subsidiaries in violation of any applicable environmental law, ordinance, rule, regulation, order, judgment, decree or permit or which would require remedial action under any applicable environmental law, ordinance, rule, regulation, order, judgment, decree or permit, except for any violation or remedial action which would not have, or would not be reasonably likely to have, individually or in the aggregate with respect to all such violations and remedial actions, a Material Adverse Effect; there has been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or any of its subsidiaries or with respect to which the Company or any of its subsidiaries have knowledge, except for any such spill, discharge, leak, emission, injection, escape, dumping or release which is authorized pursuant to an applicable law or permit or which would not have or would not be reasonably likely to have, individually or in the aggregate with respect to all such spills, discharges, leaks, emissions, injections, escapes, dumpings and releases, a Material Adverse Effect. The terms "HAZARDOUS WASTES", "TOXIC WASTES", "HAZARDOUS SUBSTANCES" and "MEDICAL WASTES" shall have the meanings specified in any applicable local, state, federal and foreign laws or regulations with respect to environmental protection. (gg) None of the Company or any of its subsidiaries is an "electric utility company," a "gas utility company," a "holding company," a "subsidiary company" of a "holding company," an "affiliate" of a "holding company" or an "associate company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. (hh) Neither the Company nor any of its subsidiaries is, or, after giving effect to the offering and sale of the Stock and the application of the net proceeds therefrom as described in the Prospectus will be, an "investment company" as defined in the Investment Company Act of 1940, as amended together with the rules and regulations promulgated thereunder (the "INVESTMENT COMPANY ACT"). (ii) Except for this Agreement, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder's fee or other like payment in connection with the offering and sale of the Stock contemplated by this Agreement. (jj) Except as disclosed in the Prospectus, neither the Company nor any subsidiary has abandoned (or intends to abandon) any of its operating projects. (kk) The material mechanical, electrical and other operating systems on and in the Company's operating projects are in all material respects in good working order and repair 9 relative to their time in service (ordinary wear and tear excepted) and are adequate in all material respects for the operation of the projects by the Company and its subsidiaries as described in the Prospectus. (ll) Except as disclosed in the Prospectus, there are no pending actions, suits or proceedings against or affecting the Company or any of its subsidiaries in connection with the condemnation or appropriation of any of its operating projects. (mm) The Company has established and maintains disclosure controls and procedures (as such term is defined in Rule 13a-15 under the Exchange Act), which (i) are designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company's principal executive officer and its principal financial officer by others within those entities, particularly during the preparation of the Registration Statement, and in the future, during the periods in which the periodic reports required under the Exchange Act are being prepared and (ii) as of the date hereof are effective in all material respects to perform the functions for which they were established. (nn) The Company is not aware of (i) any significant deficiency or material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; or (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel to the Underwriters in connection with the transaction contemplated hereunder shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby SECTION 2. Purchase of the Stock by the Underwriters. On the basis of the representations and warranties contained in, and subject to the terms and conditions of, this Agreement, the Company agrees to sell [ ] shares of the Firm Stock to the several Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase the number of shares of the Firm Stock set forth opposite that Underwriter's name in Schedule 1 hereto. The respective purchase obligations of the Underwriters with respect to the Firm Stock shall be rounded among the Underwriters to avoid fractional shares, as the Representative may determine. In addition, the Company grants to the Underwriters an option to purchase up to [ ] shares of Option Stock. Such option is granted for the purpose of covering over-allotments in the sale of Firm Stock and is exercisable as provided in Section 4 hereof. Shares of Option Stock shall be purchased severally for the account of the Underwriters in proportion to the number of shares of Firm Stock set forth opposite the name of such Underwriters in Schedule 1 hereto. The respective purchase obligations of each Underwriter with respect to the Option Stock shall be adjusted by the Representative so that no Underwriter shall be obligated to purchase Option Stock other than in 100 share amounts. The price of both the Firm Stock and any Option Stock shall be $[ ] per share. 10 The Company shall not be obligated to deliver any of the Stock to be delivered on any Delivery Date (as hereinafter defined), except upon payment for all the Stock to be purchased on such Delivery Date as provided herein. SECTION 3. Offering of Stock by the Underwriters. Upon authorization by the Representative of the release of the Firm Stock, the several Underwriters propose to offer the Firm Stock for sale upon the terms and conditions set forth in the Prospectus. SECTION 4. Delivery of and Payment for the Stock. Delivery of and payment for the Firm Stock shall be made at the offices of White & Case LLP, 1155 Avenue of the Americas, New York, New York, 10036, at 10:00 A.M., New York City time, on the fourth full business day following the date of this Agreement or at such other date or place as shall be determined by agreement between the Representative and the Company. This date and time are sometimes referred to as the "FIRST DELIVERY DATE." On the First Delivery Date, the Company shall deliver or cause to be delivered certificates representing the Firm Stock to the Representative for the account of each Underwriter against payment to or upon the order of the Company of the purchase price by wire transfer in immediately available funds. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Firm Stock shall be registered in such names and in such denominations as the Representative shall request in writing not less than two full business days prior to the First Delivery Date. For the purpose of expediting the checking and packaging of the certificates for the Firm Stock, the Company shall make the certificates representing the Firm Stock available for inspection by the Representative in New York, New York, not later than 2:00 P.M., New York City time, on the business day prior to the First Delivery Date. The option granted in Section 2 will expire 30 days after the date of this Agreement and may be exercised in whole or in part from time to time by written notice being given to the Company by the Representative. Such notice shall set forth the aggregate number of shares of Option Stock as to which the option is being exercised, the names in which the shares of Option Stock are to be registered, the denominations in which the shares of Option Stock are to be issued and the date and time, as determined by the Representative, when the shares of Option Stock are to be delivered; provided, however, that this date and time shall not be earlier than the First Delivery Date nor earlier than the second business day after the date on which the option shall have been exercised nor later than the fifth business day after the date on which the option shall have been exercised. The date and time the shares of Option Stock are delivered are sometimes referred to as a "SECOND DELIVERY DATE" and the First Delivery Date and any Second Delivery Date are sometimes each referred to as a "DELIVERY DATE". Delivery of and payment for the Option Stock shall be made at the place specified in the first sentence of the first paragraph of this Section 4 (or at such other place as shall be determined by agreement between the Representative and the Company) at 10:00 A.M., New York City time, on such Second Delivery Date. On such Second Delivery Date, the Company shall deliver or cause to be delivered the certificates representing the Option Stock to the Representative for the account of each Underwriter against payment to or upon the order of the Company of the purchase price by wire transfer in immediately available funds. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further 11 condition of the obligation of each Underwriter hereunder. Upon delivery, the Option Stock shall be registered in such names and in such denominations as the Representative shall request in the aforesaid written notice. For the purpose of expediting the checking and packaging of the certificates for the Option Stock, the Company shall make the certificates representing the Option Stock available for inspection by the Representative in New York, New York, not later than 2:00 P.M., New York City time, on the business day prior to such Second Delivery Date. SECTION 5. Further Agreements of the Company. The Company covenants and agrees: (a) To prepare the Prospectus in a form approved by the Representative and to file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act; to make no further amendment or any supplement to the Registration Statement or to the Prospectus except as permitted herein; to advise the Representative, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representative with copies thereof; to advise the Representative, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, of the suspension of the qualification of the Stock for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending any such qualification, to use promptly its best efforts to obtain its withdrawal; (b) To furnish promptly to each of the Representative and to counsel for the Underwriters a signed copy of the Registration Statement as originally filed with the Commission, and each amendment thereto filed with the Commission, including all consents and exhibits filed therewith; (c) To deliver promptly to the Representative, without charge, such number of the following documents as the Representative shall reasonably request: (i) conformed copies of the Registration Statement as originally filed with the Commission and each amendment thereto (in each case excluding exhibits) and (ii) each Preliminary Prospectus, the Prospectus and any amended or supplemented Prospectus; and, if the delivery of a prospectus is required at any time after the Effective Time in connection with the offering or sale of the Stock relating thereto and if at such time any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary to amend or supplement the Prospectus in order to comply with the Securities Act, to notify the Representative and, upon their request, to file such document and to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as the Representative may from time to time reasonably request of an 12 amended or supplemented Prospectus which will correct such statement or omission or effect such compliance; (d) To file promptly with the Commission any amendment to the Registration Statement or the Prospectus or any supplement to the Prospectus that may, in the judgment of the Company or the Representative, be required by the Securities Act or requested by the Commission; (e) Prior to filing with the Commission any amendment to the Registration Statement or supplement to the Prospectus or any Prospectus pursuant to Rule 424 of the Rules and Regulations, to furnish a copy thereof to the Representative and counsel for the Underwriters and obtain the consent of the Representative to the filing (which consent shall not be unreasonably withheld); (f) As soon as practicable and, in any event, no later than 15 months after the Effective Date, to make generally available to the Company's security holders and to deliver to the Representative an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Securities Act and the Rules and Regulations (including, at the option of the Company, Rule 158); (g) For a period of three years following the Effective Date, to furnish to the Representative copies of all materials furnished by the Company to its shareholders and all public reports and all reports and financial statements furnished by the Company to the principal national securities exchange upon which the Common Stock may be listed pursuant to requirements of or agreements with such exchange or to the Commission pursuant to the Exchange Act or any rule or regulation of the Commission thereunder; (h) Promptly from time to time to take such action as the Representative may reasonably request to qualify the Stock for offering and sale under the securities laws of such jurisdictions as the Representative may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Stock; provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction in which it is not so qualified or subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise subject; (i) For a period of 180 days from the date of the final Prospectus (the "Lock-Up Period"), not to, directly or indirectly, (1) offer for sale, sell, pledge or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock or securities convertible into or exchangeable for Common Stock (other than the Stock and securities convertible into or exchangeable for Common Stock issued pursuant to the 2004 Plan), or sell or grant options, rights or warrants with respect to any shares of Common Stock or securities convertible into or exchangeable for Common Stock (other than the grant of Common Stock or securities convertible into or exchangeable for Common Stock pursuant to the 2004 Plan), (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such shares of Common Stock, whether 13 any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise, in each case without the prior written consent of the Representative on behalf of the Underwriters; and to cause each stockholder, optionholder, officer and director of the Company to furnish to the Representative, prior to the First Delivery Date, a letter or letters, substantially in the form of Exhibit A hereto, pursuant to which each such person shall agree not to, directly or indirectly, (A) offer for sale, sell, pledge or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock or securities convertible into or exchangeable for Common Stock or (B) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such shares of Common Stock, whether any such transaction described in clause (A) or (B) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise, in each case for a period of 180 days from the date of the Prospectus, without the prior written consent of Lehman Brothers Inc. on behalf of the Underwriters; provided however that, notwithstanding the foregoing, if (1) during the last 17 days of the Lock-Up Period the Company issues an earnings release or material news or a material event relating to the Company occurs or (2) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results during the 17-day period beginning on the last day of the Lock-Up Period, then the Lock-Up Period shall continue to apply until the expiration of the 17-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event; (j) To apply for listing of the Stock on the New York Stock Exchange, Inc., and to use its best efforts to complete that listing, subject only to official notice of issuance, prior to the First Delivery Date; (k) To apply the net proceeds from the sale of the Stock as set forth in the Prospectus; (l) To take such steps as shall be necessary to ensure that neither the Company nor any subsidiary shall become an "investment company" as defined in the Investment Company Act; (m) To comply, in all material respects, with all effective applicable provisions of the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations promulgated thereunder. SECTION 6. Expenses. The Company agrees to pay (a) the costs incident to the authorization, issuance, sale and delivery of the Stock and any taxes payable in that connection; (b) the costs incident to the preparation, printing and filing under the Securities Act of the Registration Statement and any amendments and exhibits thereto; (c) the costs of distributing the Registration Statement as originally filed and each amendment thereto and any post-effective amendments thereof (including, in each case, exhibits), any Preliminary Prospectus, the Prospectus and any amendment or supplement to the Prospectus, all as provided in this Agreement; (d) the costs of producing and distributing this Agreement, any supplemental agreement among the Underwriters and any other related documents in connection with the offering, purchase, sale and delivery of the Stock; (e) the filing fees incident to securing the review by the National Association of Securities Dealers, Inc. of the terms of sale of the Stock (including related reasonable fees and expenses of counsel to the Underwriters); (f) any applicable listing or other fees; (g) the fees and 14 expenses of qualifying the Stock under the securities laws of the several jurisdictions as provided in Section 5(h) and of preparing, printing and distributing a Blue Sky Memorandum (including related fees and expenses of counsel to the Underwriters); (h) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Stock, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show and (i) all other costs and expenses incident to the performance of the obligations of the Company under this Agreement; provided that, except as provided in this Section 6, in Section 8 and in Section 11, the Underwriters shall pay their own costs and expenses, including the costs and expenses of their counsel, any transfer taxes on the Stock which they may sell and the expenses of advertising any offering of the Stock made by the Underwriters. SECTION 7. Conditions of Underwriters' Obligations. The respective obligations of the Underwriters hereunder are subject to the accuracy, when made and on each Delivery Date, of the representations and warranties of the Company contained herein, to the performance by the Company of its obligations hereunder, and to each of the following additional terms and conditions: (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 5(a); no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement or the Prospectus or otherwise shall have been complied with. (b) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Stock, the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be reasonably satisfactory in all material respects to counsel for the Underwriters, and the Company shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters. (c) Chadbourne & Parke LLP shall have furnished to the Representative their written opinion, as special U.S. counsel to the Company, addressed to the Underwriters and dated such Delivery Date, substantially in the form as set forth in Exhibit B, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters. (d) The Representative shall have received from White & Case LLP, counsel for the Underwriters, such opinion or opinions, dated such Delivery Date, with respect to the issuance and sale of the Stock, the Registration Statement, the Prospectus and other related matters as the Representative may reasonably require, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters. 15 (e) The Representative shall have received from Hale Leen Peek Dennison and Howard, special Nevada counsel for the Company, an opinion, dated such Delivery Date, substantially in the form as set forth in Exhibit C, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass on such matters. (f) The Representative shall have received from Chadbourne & Parke LLP, special California counsel for the Company, an opinion, dated such Delivery Date, substantially in the form as set forth in Exhibit C, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass on such matters. (g) The Representative shall have received from Carlsmith Ball LLP, special Hawaii counsel for the Company, an opinion, dated such Delivery Date, substantially in the form as set forth in Exhibit C, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass on such matters. (h) The Representative shall have received from Kaplan & Stratton, special Kenya counsel for the Company, an opinion, dated such Delivery Date, substantially in the form as set forth in Exhibit C, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass on such matters. (i) The Representative shall have received from Z.A.F. Consultores, S.A., Servicios Legales Especializados, special Nicaragua counsel for the Company, an opinion, dated such Delivery Date, substantially in the form as set forth in Exhibit C, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass on such matters. (j) The Representative shall have received from Rodriguez, Archila, Castellanos, Solares Y Aguilar, S.C., special Guatemala counsel for the Company, an opinion, dated such Delivery Date, substantially in the form as set forth in Exhibit C, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass on such matters. (k) The Representative shall have received from SyCip Salazar Hernandez & Gatmaitan, special Philippines counsel for the Company, an opinion, dated such Delivery Date, substantially in the form as set forth in Exhibit C, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass on such matters. (l) The Representative shall have received from [ ], special Utah counsel for the Company, an opinion, dated such Delivery Date, substantially in the form as set forth in Exhibit C, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass on such matters. (m) The Representative shall have received from M. Seligman & Co., special Israel counsel for the Company, an opinion, dated such Delivery Date, substantially in the form as set forth in Exhibit C, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass on such matters. 16 (n) At the time of execution of this Agreement, the Representative shall have received from PricewaterhouseCoopers LLP a letter or letters, in form and substance satisfactory to the Representative, addressed to the Underwriters and dated the date hereof (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission and (ii) stating, as of the date hereof (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than three days prior to the date hereof), the conclusions and findings of such firm with respect to the financial information and other matters ordinarily covered by accountants' "comfort letters" to underwriters in connection with registered public offerings. (o) With respect to the letter or letters of PricewaterhouseCoopers LLP referred to in the preceding paragraph and delivered to the Representative concurrently with the execution of this Agreement (the "INITIAL LETTERS"), the Company shall have furnished to the Representative a letter (the "BRING-DOWN LETTER") of such accountants, addressed to the Underwriters and dated such Delivery Date (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date of the bring-down letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than three days prior to the date of the bring-down letter), the conclusions and findings of such firm with respect to the financial information and other matters covered by the initial letters and (iii) confirming in all material respects the conclusions and findings set forth in the initial letters. (p) The Company shall have furnished to the Representative a certificate, dated such Delivery Date, of either its Chairman of the Board, its President or a Vice President and its chief financial officer stating that: (i) The representations, warranties and agreements of the Company in Section 1 are true and correct as of such Delivery Date; the Company has complied with all its agreements contained herein; and the conditions set forth in Sections 7(a) and 7(q) have been fulfilled; and (ii) They have carefully examined the Registration Statement and the Prospectus and, in their opinion, in their capacity as officers of the Company and not individually, (A) as of the Effective Date, the Registration Statement and Prospectus did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they are made) not misleading, and (B) since the Effective Date no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement or the Prospectus which has not been so set forth. (q) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Prospectus (A) any loss or interference with its business from fire, explosion, flood or other calamity, whether or not 17 covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus or (B) since such date, there shall not have been any change in the capital stock (other than shares of capital stock issued in connection with the Recapitalization) or long-term debt of the Company or any of its subsidiaries or any change, or any development that is reasonably likely to have a Material Adverse Effect otherwise than as set forth or contemplated in the Prospectus exclusive of any amendments or supplements as of the date hereof, the effect of which, in any such case described in clause (A) or (B), is, in the judgment of the Representative, so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. (r) Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange or the American Stock Exchange or in the over-the-counter market, or trading in any securities of the Company on any exchange or in the over-the-counter market, shall have been suspended or materially limited or the settlement of such trading generally shall have been materially disrupted or minimum prices shall have been established on any such exchange or such market by the Commission, by such exchange or by any other regulatory body or governmental authority having jurisdiction, (ii) a banking moratorium shall have been declared by federal or any state authority, (iii) the United States shall have become engaged in hostilities, there shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States or there shall have occurred any other calamity or crisis (other than any hostilities involving the United States and Iraq and Afghanistan existing on the date hereof) or (iv) there shall have occurred such a material adverse change in general economic, political or financial conditions, including, without limitation, as a result of terrorist activities after the date hereof (or the effect of international conditions on the financial markets in the United States shall be such) as to make it, in the judgment of the Representative, impracticable or inadvisable to proceed with the public offering or delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. (s) The New York Stock Exchange, Inc. shall have approved the Stock for listing, subject only to official notice of issuance. (t) No Underwriter shall have discovered and disclosed to the Company on or prior to such Delivery Date that the Registration Statement or the Prospectus or any amendment or supplement thereto contains an untrue statement of a fact which, in the reasonable opinion of White & Case LLP, counsel for the Underwriters, is material or omits to state a fact which, in the reasonable opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein (in the case of the Prospectus, excluding any amendments or supplements thereto, in light of the circumstances under which they were made) not misleading. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters. 18 SECTION 8. Indemnification and Contribution. (a) The Company shall indemnify and hold harmless each Underwriter, its directors, officers and employees and each person, if any, who controls any Underwriter within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of Stock), to which that Underwriter, any such director, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto or (B) in any materials or information provided to investors by, or with the express approval of, the Company in connection with the marketing of the offering of the Stock, including any roadshow or investor presentations made to investors by the Company (whether in person or electronically) (the "Marketing Materials"), (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, or in any Marketing Materials, any material fact required to be stated therein or necessary to make the statements therein not misleading or (iii) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon matters covered by clause (i) or (ii) above (provided that the Company shall not be liable under this clause (iii) to the extent that it is determined in a final judgment by a court of competent jurisdiction that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct), and shall reimburse each Underwriter and each such director, officer, employee or controlling person promptly upon demand for any legal or other expenses reasonably incurred by that Underwriter, director, officer, employee or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any such amendment or supplement, in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representative by or on behalf of any Underwriter specifically for inclusion therein which information consists solely of the information specified in Section 8(e); and further provided that, with respect to the Preliminary Prospectus, the Company shall not be liable to any Underwriter to the extent that (w) such loss, claim, damage, or liability of such Underwriter results from an untrue statement of a material fact or an omission of a material fact contained in the Preliminary Prospectus, which untrue statement or omission was completely corrected in the Prospectus dated the Effective Date (the "Final Prospectus") and (x) the Company sustains the burden of proving that such Underwriter sold shares of Stock to the person alleging such loss, claim, liability, expense or damage without sending or giving, at or prior to written confirmation of such sale, a copy of the Final Prospectus and (y) the Company had previously furnished sufficient quantities of the Final Prospectus to the Underwriters within a reasonable amount of time prior to such sale or such confirmation, and (z) such Underwriter failed to deliver the Final 19 Prospectus, if required by law to have so delivered it, and such delivery would have been a complete defense against the person asserting such loss, claim, liability, expense or damage. The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to any Underwriter or to any director, officer, employee or controlling person of that Underwriter. (b) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, its officers who have signed the Registration Statement, each of its directors, and each person, if any, who controls the Company within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company or any such director, officer or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto, or (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, any material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representative by or on behalf of that Underwriter specifically for inclusion therein, which information is limited to the information set forth in Section 8(e), and shall reimburse the Company and any such director, officer or controlling person for any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred. The foregoing indemnity agreement is in addition to any liability which any Underwriter may otherwise have to the Company or any such director, officer, or controlling person. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the claim or the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 8 except to the extent it has been materially prejudiced by such failure and, provided further, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 8. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 8 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that the Representative shall have the right to employ counsel to represent jointly the Representative and those other Underwriters and their respective 20 directors, officers, employees and controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Underwriters against the Company under this Section 8 if, in the reasonable judgment of the Representatives, it is advisable for the Representatives and those Underwriters, directors, officers, employees and controlling persons to be jointly represented by separate counsel, and in that event the fees and expenses of such separate counsel shall be paid by the Company. No indemnifying party shall (i) without the prior written consent of the indemnified parties (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding, or (ii) be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with the consent of the indemnifying party or if there be a final judgment of the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 8 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or 8(b) in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from the offering of the Stock purchased under this Agreement (before deducting expenses) received by the Company, on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the shares of the Stock purchased under this Agreement, on the other hand, bear to the total gross proceeds from the offering of the shares of the Stock under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an 21 indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 8 shall be deemed to include, for purposes of this Section 8(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8(d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the shares of Stock underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 8(d) are several in proportion to their respective underwriting obligations and not joint. (e) The Underwriters severally confirm and the Company acknowledges that (i) the statement with respect to the timing of the delivery of the Stock by the Underwriters set forth on the cover page of the Prospectus, (ii) the concession discussion in the first two paragraphs under the caption "Commission and Expenses" in the Underwriting section of the Prospectus, (iii) the factors the Representative will consider in pricing as set forth under the caption "Offering Price Determination" in the Underwriting section of the Prospectus and (iv) the bullet list of transactions appearing under the heading "Stabilization, Short Positions and Penalty Bids" in the Underwriting section of the Prospectus are correct and constitute the only information concerning such Underwriters furnished in writing to the Company by or on behalf of the Underwriters specifically for inclusion in the Registration Statement and the Prospectus. SECTION 9. Defaulting Underwriters. If, on either Delivery Date, any Underwriter defaults in the performance of its obligations under this Agreement, the remaining non-defaulting Underwriters shall be obligated to purchase the Stock which the defaulting Underwriter agreed but failed to purchase on such Delivery Date in the respective proportions which the number of shares of the Firm Stock set opposite the name of each remaining non-defaulting Underwriter in Schedule 1 hereto bears to the total number of shares of the Firm Stock set opposite the names of all the remaining non-defaulting Underwriters in Schedule 1 hereto; provided, however, that the remaining non-defaulting Underwriters shall not be obligated to purchase any of the Stock on such Delivery Date if the total number of shares of the Stock which the defaulting Underwriter or Underwriters agreed but failed to purchase on such date exceeds 9.09% of the total number of shares of the Stock to be purchased on such Delivery Date, and any remaining non-defaulting Underwriter shall not be obligated to purchase more than 110% of the number of shares of the Stock which it agreed to purchase on such Delivery Date pursuant to the terms of Section 2. If the foregoing maximums are exceeded, the remaining non-defaulting Underwriters, or those other underwriters satisfactory to the Representative who so agree, shall have the right, but shall not be obligated, to purchase, in such proportion as may be agreed upon among them, all the Stock to be purchased on such Delivery Date. If the remaining Underwriters or other underwriters satisfactory to the Representative do not elect to purchase the shares which the defaulting Underwriter or Underwriters agreed but failed to purchase on such Delivery Date, this Agreement (or, with respect to the Second Delivery Date, the obligation of the Underwriters to purchase, and of the 22 Company to sell, the Option Stock) shall terminate without liability on the part of any non-defaulting Underwriter or the Company, except that the Company will continue to be liable for the payment of expenses to the extent set forth in Sections 6 and 11. As used in this Agreement, the term "UNDERWRITER" includes, for all purposes of this Agreement unless the context requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to this Section 9, purchases Stock which a defaulting Underwriter agreed but failed to purchase. Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company for damages caused by its default. If other Underwriters are obligated or agree to purchase the Stock of a defaulting or withdrawing Underwriter, either the Representative or the Company may postpone the Delivery Date for up to seven full business days in order to effect any changes that in the opinion of counsel for the Company or counsel for the Underwriters may be necessary in the Registration Statement, the Prospectus or in any other document or arrangement. SECTION 10. Termination. The obligations of the Underwriters hereunder may be terminated by the Representative by notice given to and received by the Company prior to delivery of and payment for the Firm Stock if, prior to that time, any of the events described in Sections 7(q) or 7(r), shall have occurred or if the Underwriters shall decline to purchase the Stock for any reason permitted under this Agreement. SECTION 11. Reimbursement of Underwriters' Expenses. If the Company shall fail to tender the Stock for delivery to the Underwriters by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company is not fulfilled (unless such non-fulfillment is due to any action or inaction by an Underwriter of its obligations hereunder), the Company will reimburse the Underwriters for all reasonable out-of-pocket expenses (including reasonable fees and disbursements of counsel) incurred by the Underwriters in connection with this Agreement and the proposed purchase of the Stock, and upon demand the Company shall pay the full amount thereof to the Representative. If this Agreement is terminated pursuant to Section 9 by reason of the default of one or more Underwriters, the Company shall not be obligated to reimburse any defaulting Underwriter on account of those expenses. SECTION 12. Notices, Etc. All statements, requests, notices and agreements hereunder shall be in writing, and: (a) if to the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission to Lehman Brothers Inc., 745 Seventh Avenue, New York, N.Y. 10019, Attention: Syndicate Registration Department, Fax (212) 526-0943, with a copy, in the case of any notice pursuant to Section 8(c), to the Director of Litigation, Office of the General Counsel, Lehman Brothers Inc., 399 Park Avenue, 15th Floor, New York, NY 10022; (b) if to the Company, shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Chief Executive Officer at 980 Greg Street, Sparks, Nevada 89431 (Fax: 011-972-8-943-9901) with a copy to Chadbourne & Parke LLP, 30 Rockefeller Plaza, New York, NY 10112 Attention: 23 Noam Ayali, Esq. and Philip L. Colbran, Esq. (Fax: (212) 541-5369); provided, however, that any notice to an Underwriter pursuant to Section 8(c) shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its acceptance telex to the Representative, which address will be supplied to any other party hereto by the Representative upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. The Company shall be entitled to act and rely upon any request, consent, notice or agreement given or made on behalf of the Underwriters by Lehman Brothers Inc. on behalf of the Representative. SECTION 13. Persons Entitled to Benefit of Agreement. This Agreement shall inure to the benefit of and be binding upon the Underwriters, the Company, and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that (A) the representations, warranties, indemnities and agreements of the Company contained in this Agreement shall also be deemed to be for the benefit of the directors, officers and the person or persons, if any, who control any Underwriter within the meaning of Section 15 of the Securities Act and (B) the indemnity agreements of the Underwriters contained in Section 8(b) of this Agreement shall be deemed to be for the benefit of directors of the Company, officers of the Company who have signed the Registration Statement and any person controlling the Company within the meaning of Section 15 of the Securities Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 13, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. SECTION 14. Survival. The respective indemnities, representations, warranties and agreements of the Company and the Underwriters contained in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall survive the delivery of and payment for the Stock and shall remain in full force and effect, regardless of any investigation made by or on behalf of any of them or any person controlling any of them. SECTION 15. Definition of the Terms "BUSINESS DAY" and "SUBSIDIARY". For purposes of this Agreement, (a) "BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday or Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close and (b) "SUBSIDIARY" has the meaning set forth in Rule 405 of the Rules and Regulations. SECTION 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of New York applicable to agreements made and performed in the State of New York without regard to conflicts of laws provisions. SECTION 17. Counterparts. This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original but all such counterparts shall together constitute one and the same instrument. SECTION 18. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. 24 If the foregoing correctly sets forth the agreement between the Company and the Underwriters, please indicate your acceptance in the space provided for that purpose below. Very truly yours, ORMAT TECHNOLOGIES, INC. By ------------------------- Name: -------------------- Title: ------------------- Accepted: LEHMAN BROTHERS INC. For themselves and as Representative of the several Underwriters named in Schedule 1 hereto By LEHMAN BROTHERS INC. By ----------------------- Authorized Representative 25 SCHEDULE 1 Underwriter Number of Firm Shares to be Purchased ----------- ------------------------------------- Lehman Brothers Inc. Deutsche Bank Securities, Inc. RBC Capital Markets Corporation Wells Fargo Securities, LLCSCHEDULE 2 LIST OF SIGNIFICANT SUBSIDIARIES OF THE COMPANY -------------------------------------------------------------------------------- STATE/JURISDICTION OF INCORPORATION NAME OF SIGNIFICANT SUBSIDIARY OR ORGANIZATION -------------------------------------------------------------------------------- Ormat Systems Ltd. Israel Ormat International, Inc. Delaware Ormat Nevada, Inc. Delaware Ormat Funding Corp. Delaware OrCal Geothermal, Inc. Delaware OrHeber 1, Inc. Delaware ORMESA LLC Delaware Ormat Holding Corp. Cayman Islands Heber Field Company California Second Imperial Geothermal Company L.P. California Heber Geothermal Company California OrPower 4, Inc. Cayman Islands Ormat Momtombo Power Company Cayman Islands Orleyte Company Cayman Islands Ormat-Leyte Co. Ltd. Philippines OrMammoth Inc. Delaware Exhibit A LOCK-UP LETTER AGREEMENT LEHMAN BROTHERS INC. As Representative of the several Underwriters named in Schedule 1 to the Underwriting Agreement, c/o Lehman Brothers Inc. 745 Seventh Avenue New York, NY 10019 Ladies and Gentlemen: The undersigned understands that you and certain other firms propose to enter into an Underwriting Agreement (the "UNDERWRITING AGREEMENT") providing for the purchase by you and such other firms (the "UNDERWRITERS") of shares (the "SHARES") of Common Stock, par value $0.001 per share (the "COMMON SHARES"), of Ormat Technologies, Inc., a Delaware corporation (the "COMPANY"), and that the Underwriters propose to reoffer the Shares to the public (the "OFFERING"). In consideration of the execution of the Underwriting Agreement by the Underwriters, and for other good and valuable consideration, the undersigned hereby irrevocably agrees that, without the prior written consent of Lehman Brothers Inc. on behalf of the Underwriters, the undersigned will not, directly or indirectly, (1) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any Common Shares (including, without limitation, Common Shares that may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission and Common Shares that may be issued upon exercise of any option or warrant) or securities convertible into or exchangeable for Common Shares (other than the Shares) owned by the undersigned on the date of execution of this Lock-Up Letter Agreement or on the date of the completion of the Offering, or (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such Common Shares, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Shares or other securities, in cash or otherwise, for a period of 180 days after the date of the final Prospectus relating to the Offering (the "LOCK-UP PERIOD"). Notwithstanding the foregoing, if (1) during the last 17 days of the Lock-Up Period the Company issues an earnings release or material news or a material event relating to the Company occurs or (2) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results during the 17-day period beginning on the last day of the Lock-Up Period, then the Lock-Up Period shall continue to apply until the expiration of the 17-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.The immediately foregoing paragraph shall not apply to (i) bona fide gifts, sales or other dispositions of shares of any class of the Company's capital stock, in each case, that are made exclusively between and among the undersigned and members of the undersigned's family for estate planning purposes (including family trusts, family corporations, family limited liability companies or family partnerships), or affiliates (as defined in Rule 144(a)(i) of the Securities Act of 1933, as amended) of the undersigned (including, but not limited to, its subsidiaries (if a corporation), its partners (if a partnership) or members (if a limited liability company)) or (ii) a bona fide pledge of the shares of any class of the Company's capital stock, made in the ordinary course of business, for the sole purpose of obtaining financing for the undersigned, in the ordinary course of its business; provided, that it shall be a condition to any such transfer or pledge (or the foreclosure on any pledge of shares of the Company's capital stock) that (i) the transferee/donee or pledgee agrees to be bound by the terms of this Lock-Up Letter Agreement to the same extent as if the transferee or pledgee were a party hereto (including, without limitation, with respect to any of the restrictions on the sale, transfer or other disposition of such capital stock received as a result of a foreclosure of any pledge of shares of such capital stock), (ii) no filing by any party (donor, donee, transferor, transferee or pledgee (upon creation of such pledge of shares or foreclosure of such pledge of shares) under the Securities Exchange Act of 1934, as amended, shall be required or shall be voluntarily made in connection with such transfer, distribution or pledge (or the foreclosure of such pledge of shares) (other than a filing on a Form 5, Schedule 13D or Schedule 13G (or 13D-A or 13G-A) made after the expiration of the Lock-Up Period), (iii) each party (donor, donee, transferor, transferee or pledgee) shall not be required by law (including without limitation the disclosure requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934) to make, and shall agree to not voluntarily make, any public announcement of the transfer, disposition or pledge (or the foreclosure of such pledge of shares) and (iv) the undersigned notifies Lehman Brothers' Equity Capital Markets at least two business days prior to the proposed transfer, disposition or pledge (or foreclosure on such pledge of shares). In furtherance of the foregoing, the Company and its Transfer Agent are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this Lock-Up Letter Agreement. It is understood that, if the Company notifies you that it does not intend to proceed with the Offering, if the Underwriting Agreement does not become effective on or before December 31, 2004, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Shares, the undersigned will be released from its obligations under this Lock-Up Letter Agreement. The undersigned understands that the Company and the Underwriters will proceed with the Offering in reliance on this Lock-Up Letter Agreement. Whether or not the Offering actually occurs depends on a number of factors, including market conditions. Any Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriters. The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Letter Agreement and that, upon request, the undersigned will execute any additional documents necessary in connection with the enforcement hereof. Any obligations of the undersigned shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Very truly yours, [ ] -------------------------- By: ------------------------- Name: Title: Dated: Exhibit B [Form of Opinion and Disclosure Letter of Chadbourne & Parke LLP] (i) The Company and each of the subsidiaries listed on Schedule A hereto (the "OPINION SUBSIDIARIES") have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification and have all power and authority necessary to own or hold their respective properties and conduct the businesses in which they are engaged; (ii) The Company has an authorized capitalization as set forth in the Prospectus. All of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectus. All of the Company's options, warrants and other rights to purchase or exchange any securities for shares of the Company's capital stock have been duly and validly authorized and issued, and conform to the description thereof contained in the Prospectus. All of the issued shares of capital stock of each Opinion Subsidiary of the Company have been duly and validly authorized and issued and are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims. (iii) The shares of the Stock being delivered on such Delivery Date to the Underwriters hereunder have been duly and validly authorized and, when issued and delivered against payment therefor will be duly and validly issued, fully paid and non-assessable; (iv) Except as described in the Prospectus, there are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any shares of the Stock pursuant to the Company's certificate of incorporation or by-laws, each as amended to date, or any agreement or other instrument known to such counsel; (v) To the best of our knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property or assets of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, could have a Material Adverse Effect (as defined in the Underwriting Agreement); and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (vi) The Registration Statement was declared effective under the Securities Act as of the date and time specified in such opinion, the Prospectus was filed with the Commission pursuant to the subparagraph of Rule 424(b) of the Rules and Regulations specified in such opinion on the date specified therein and no stop order suspending the effectiveness of the Registration Statement has been issued and, to the knowledge of such counsel, no proceeding for that purpose is pending or threatened by the Commission; (vii) The Registration Statement and the Prospectus and any further amendments or supplements thereto made by the Company prior to such Delivery Date (except for the financial statements and related schedules therein, as to which such counsel need express no belief) comply as to form in all material respects with the requirements of the Securities Act and the Rules and Regulations; (viii) The statements contained in the Prospectus under the captions "Business", "Description of Capital Stock", "Shares Eligible for Future Sale" and "United States Federal Income Tax Consequences to Non-U.S. Holders", insofar as they describe U.S. federal statutes, rules and regulations, constitute a fair summary thereof and the opinion of such counsel filed as Exhibit 8.1 to the Registration Statement is confirmed and the Underwriters may rely upon such opinion as if it were addressed to them; (ix) To the best of our knowledge, there are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been described or filed as exhibits to the Registration Statement; (x) the Underwriting Agreement has been duly authorized, executed and delivered by the Company; (xi) The issue and sale of the shares of Stock being delivered on such Delivery Date by the Company pursuant to the Underwriting Agreement and the execution, delivery and performance by the Company of its obligations under the Underwriting Agreement will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument listed on Schedule B hereto, nor will such actions result in any violation of the provisions of the certificate of incorporation or by-laws of the Company, each as amended to date, or the organizational documents of the Opinion Subsidiaries or any statute or any order, rule or regulation known to us of any New York or federal court or governmental authority having jurisdiction over the Company or the Opinion Subsidiaries or any of their properties or assets; and, except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act, applicable state securities laws (as to which we express no opinion) and the New York Stock Exchange, Inc., if any, in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such New York or federal governmental authority is required for the execution, delivery and performance of the Underwriting Agreement and the consummation of the transactions contemplated hereby, except for such consents, approvals, authorizations, orders, filings or registrations as have been obtained or made; (xii) Except as described in the Prospectus, to the best of our knowledge, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act; (xiii) Neither the Company nor any Opinion Subsidiary is an "investment company" as defined in the Investment Company Act; and (xiv) None of the Company or any of its Opinion Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. (xv) Each of the domestic projects other than the Puna project is a "qualifying small power production facility" within the meaning of Section 3(17)(C) of the Federal Power Act, as amended ("FPA"), and a "qualifying facility" within the meaning of 18 C.F.R. ss. 292.101(b)(1). None of the domestic projects other than the Puna project will, solely as a result of the execution and delivery of the [Underwriting Agreement, the filing of the Registration Statement and the Prospectus with the Securities and Exchange Commission] and the consummation of the transactions contemplated thereby, cease to be a "qualifying small power production facility" within the meaning of Section 3(17)(C) of the FPA and a "qualifying facility" within the meaning of 18 C.F.R. ss. 292.101(b)(1). The domestic projects, Company and domestic projects, other than the Puna project and Puna Geothermal Venture, qualify for all of the exemptions from the FPA, the Public Utility Holding Company Act of 1935, as amended ("PUHCA") and certain state laws and regulations provided under 18 C.F.R ss.ss. 292.601 and 292.602. (xvi) The execution and delivery of the Underwriting Agreement and the consummation of the transactions contemplated thereby do not require any filing with, or consent, authorization, or approval by the Federal Energy Regulatory Commission under the FPA or the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA"), or the Securities and Exchange Commission under PUHCA. (xvii) The Puna project is an "eligible facility" owned by an "exempt wholesale generator," as such terms are defined in Section 32(a) of PUHCA. The Puna project will not, solely as a result of the execution and delivery of the Underwriting Agreement and the consummation of the transactions contemplated thereby, cease to be an "eligible facility" owned by an "exempt wholesale generator," as such terms are defined under PUHCA. (xviii) The Company and the project subsidiaries are not subject to and will not, solely as a result of the execution and delivery of the Underwriting Agreement and the consummation of the transactions contemplated thereby, be subject to regulation (i) as an "electric utility company," a "gas utility company," a "holding company," a "subsidiary company" of a "holding company," an "affiliate" of a "holding company," or an "associate company," as such terms are defined under PUHCA or (ii) as a matter of federal law, under the law of any state respecting the rates or the financial or organizational regulation of electric utilities. In rendering this opinion, counsel may state that its opinion is limited to matters governed by the federal laws of the United States of America, the laws of the State of New York and the General Corporation Law of the State of Delaware. Such counsel shall also deliver an opinion or letter to the effect that (x) such counsel has acted as special U.S. counsel to the Company in connection with the preparation of the Registration Statement and (y) based on the foregoing, no facts have come to the attention of such counsel which lead it to believe that the Registration Statement (except for the financial statements and related schedules therein, as to which such counsel need express no belief) as of the Effective Date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, or that the Prospectus (except as stated above) contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The foregoing opinion and statement may be qualified by a statement to the effect that such counsel does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus (other than as set forth in clause (viii) above). Schedule A to Exhibit B List of Opinion Subsidiaries -------------------------------------------------------------------------------- ENTITY JURISDICTION -------------------------------------------------------------------------------- OrCal Geothermal Inc. Delaware Orda IV, Inc. Delaware Orda V, Inc. Delaware Orda 7, Inc. Delaware Orda 8, Inc. Delaware OrHerber 1, Inc. Delaware OrHerber 2, Inc. Delaware OrHerber 3, Inc. Delaware OrMammoth Inc. Delaware Ormat Funding Corp. Delaware Ormat Inc. Delaware Ormat International, Inc. Delaware Ormat Nevada Inc. Delaware Ormat Pacific, Inc. Delaware Ormat Power Inc. Delaware Ormat Technologies, Inc. Delaware Ormesa Inc. Delaware Ormesa LLC Delaware ORNI 1 LLC Delaware ORNI 2 LLC Delaware ORNI 3 LLC Delaware ORNI 7 LLC Delaware ORNI 9 LLC Delaware ORNI 10 LLC Delaware ORNI 11 LLC Delaware ORNI 12 LLC Delaware Steamboat Geothermal LLC Delaware Steamboat Hills Delaware Western State Geothermal Company Delaware Schedule B to Exhibit B List of Certain Agreements(1) -------------------------- Indenture, dated February 13, 2004 among Ormat Funding Corp., Brady Power Partners, Steamboat Development Corp., Steamboat Geothermal LLC, OrMammoth Inc., ORNI LLC, ORNI 2 LLC, ORNI 7 LLC, Ormesa LLC and Union Bank of California Fist Supplement to Indenture, dated May 14, 2004 among Ormat Funding Corp., Brady Power Partners, Steamboat Development Corp., Steamboat Geothermal LLC, OrMammoth Inc., ORNI LLC, ORNI 2 LLC, ORNI 7 LLC, Ormesa LLC and Union Bank of California Foreign Currency Loan Agreement, dated June 1, 2004, between Ormat Technologies, Inc. and United Mizrahi Bank LTD. Amended and Restated Bridge Loan Agreement, dated October 2, 2003, by and between Ormat Nevada, Inc. and Bank Leumi USA Credit Agreement, dated as of December 31, 2002, among ORMESA LLC, United Capital, a division of Hudson United Bank and the Lenders party to such agreement from time to time Credit Agreement, dated as of December 18, 2003, among OrCal Geothermal Inc. and Beal Bank, S.S.B. and the financial institutions party thereto from time to time Loan Agreement, dated October 1, 2003, by and between Ormat Technologies, Inc. and Ormat Industries Ltd. Amendment No.1 to Loan Agreement, dated September 20, 2004, by and between Ormat Technologies, Inc. and Ormat Industries Ltd. Capital Note, dated December 22, 2003, by and between Ormat Technologies, Inc. and Ormat Industries Ltd. Amendment No. 1 to Capital Note, dated September 20, 2004, by and between Ormat Technologies, Inc. and Ormat Industries Ltd. Guarantee Fee Agreement, dated January 1, 1999, by and between Ormat Technologies, Inc. and Ormat Industries Ltd. Reimbursement Agreement, dated July 15, 2004, by and between Ormat Technologies, Inc. and Ormat Industries Ltd. ---------------- (1) [Depending on the governing law of the agreement, some of these agreements may be covered in local counsel opinions] B-1 Loan Agreement, dated July 25, 2000, by and between Israel Discount Bank of New York and Ormat International, Inc. Power Purchase Contract, dated July 18, 1984, between Southern California Edison Company and Republic Geothermal, Inc. Amendment No.1, to the Power Purchase Contract, dated December 23, 1988, between Southern California Edison Company and Ormesa Geothermal Power Purchase and Sales Agreement, dated as of August 26, 1983, between Chevron U.S.A. Inc. and Southern California Edison Company Amendment No. 1, to Power Purchase and Sale Agreement, dated as of December 11, 1984, between Chevron U.S.A. Inc., HGC and Southern California Edison Company Settlement Agreement and Amendment No. 2, to Power Purchase Contract, dated August 7, 1995, between HGC and Southern California Edison Company Power Purchase Contract dated, April 16, 1985, between Southern California Edison Company and Second Imperial Geothermal Company Amendment No. 1, dated as of October 23, 1987, between Southern California Edison Company and Second Imperial Geothermal Company Amendment No. 2, dated as of July 27, 1990, between Southern California Edison Company and Second Imperial Geothermal Company Amendment No. 3, dated as of November 24, 1992, between Southern California Edison Company and Second Imperial Geothermal Company Amended and Restated Power Purchase and Sales Agreement, dated December 2, 1986, between Mammoth Pacific and Southern California Edison Company Amendment No. 1, to Amended and Restated Power Purchase and Sale Agreement, dated May 18, 1990, between Mammoth Pacific and Southern California Edison Company Power Purchase Contract, dated April 15, 1985, between Mammoth Pacific and Southern California Edison Company Amendment No. 1, dated as of October 27, 1989, between Mammoth Pacific and Southern California Edison Company B-2 Amendment No. 2, dated as of December 20, 1989, between Mammoth Pacific and Southern California Edison Company Power Purchase Contract, dated April 16, 1985, between Southern California Edison Company and Santa Fe Geothermal, Inc. Amendment No. 1, to Power Purchase Contract, dated October 25, 1985, between Southern California Edison Company and Mammoth Pacific Amendment No. 2, to Power Purchase Contract, dated December 20, 1989, between Southern California Edison Company and Pacific Lighting Energy Systems Interconnection Facilities Agreement, dated October 20, 1989, by and between Southern California Edison Company and Mammoth Pacific Interconnection Facilities Agreement, dated October 13, 1985, by and between Southern California Edison Company and Mammoth Pacific (II) Interconnection Facilities Agreement, dated October 20, 1989, by and between Southern California Edison Company and Pacific Lighting Energy Systems Interconnection Agreement, dated August 12, 1985, by and between Southern California Edison Company and Heber Geothermal Company Plant Connection Agreement for the Heber Geothermal Plant No.1, dated, July 31, 1985, by and between Imperial Irrigation District and Heber Geothermal Company Plant Connection Agreement for the Second Imperial Geothermal Company Power Plant No.1, dated, October 27, 1992, by and between Imperial Irrigation District and Second Imperial Geothermal Company IID-SIGC Transmission Service Agreement for Alternative Resources, dated, October 27, 1992, by and between Imperial Irrigation District and Second Imperial Geothermal Company Plant Connection Agreement for the Ormesa Geothermal Plant, dated October 1, 1985, by and between Imperial Irrigation District and Ormesa Geothermal Plant Connection Agreement for the Ormesa IE Geothermal Plant, dated, October 21, 1988, by and between Imperial Irrigation District and Ormesa IE B-3 Plant Connection Agreement for the Ormesa IH Geothermal Plant, dated, October 3, 1989, by and between Imperial Irrigation District and Ormesa IH Plant Connection Agreement for the Geo East Mesa Limited Partnership Unit No.2, dated, March 21, 1989, by and between Imperial Irrigation District and Geo East Mesa Limited Partnership Plant Connection Agreement for the Geo East Mesa Limited Partnership Unit No.3, dated, March 21, 1989, by and between Imperial Irrigation District and Geo East Mesa Limited Partnership Transmission Service Agreement for the Ormesa I, Ormesa IE and Ormesa IH Geothermal Power Plants, dated, October 3, 1989, between Imperial Irrigation District and Ormesa Geothermal Transmission Service Agreement for the Geo East Mesa Limited Partnership Unit No.2, dated, March 21, 1989, by and between Imperial Irrigation District and Geo East Mesa Limited Partnership Transmission Service Agreement for the Geo East Mesa Limited Partnership Unit No.3, dated, March 21, 1989, by and between Imperial Irrigation District and Geo East Mesa Limited Partnership IID-Edison Transmission Service Agreement for Alternative Resources, dated, September 26, 1985, by and between Imperial Irrigation District and Southern California Edison Company Plant Amendment No.1, to IID-Edison Transmission Service Agreement for Alternative Resources, dated, August 25, 1987, by and between Imperial Irrigation District and Southern California Edison Company Credit Facility Agreement, dated September 5, 2000, between Ormat Momotombo Power Company and Bank Hapoalim B.M. Credit Agreement, dated May 13, 1996, between Ormat-Leyte and Export-Import Bank of the United States Purchase and Sale Agreement, dated April 22, 2004, by and among Constellation Power, Inc. and Cosi Puna, Inc. and ORNI 8 LLC and Ormat Nevada, Inc. B-4 Power Purchase Contract, dated June 13, 1984, between Southern California Edison Company and Ormat Systems, Inc. Agreement Addressing Renewable Energy Pricing and Payment Issues, dated June 15, 2001, by and between Second Imperial Geothermal Company QFID No. 3021 and Southern California Edison Company Amendment No. 1 to Agreement Addressing Renewable Energy Pricing and Payment Issues, dated November 30, 2001, by and between Second Imperial Geothermal Company QFID No. 3021 and Southern California Edison Company Agreement Addressing Renewable Energy Pricing and Payment Issues, dated June 15, 2001, by and between Heber Geothermal Company QFID No. 3001 and Southern California Edison Company Amendment No. 1 to Agreement Addressing Renewable Energy Pricing and Payment Issues, dated November 30, 2001, by and between Heber Geothermal Company QFID No. 3001 and Southern California Edison Company Energy Services Agreement, dated February 2003, by and between Imperial Irrigation District and ORMESA, LLC Purchase Power Contract, dated March 24, 1986, by and between Hawaii Electric Light Company and Thermal Power Company Firm Capacity Amendment to Purchase Power Contract, dated July 28, 1989, by and between Hawaii Electric Light Company and Puna Geothermal Venture Amendment to Purchase Power Contract, dated October 19, 1993, by and between Hawaii Electric Light Company and Puna Geothermal Venture Third Amendment to the Purchase Power Contract, dated March 7, 1995, by and between Hawaii Electric Light Company and Puna Geothermal Venture Performance Agreement and Fourth Amendment to the Purchase Power Contract, dated February 12, 1996, by and between Hawaii Electric Light Company and Puna Geothermal Venture Agreement to Design 69 KV Transmission Lines, a Substation at Pohoiki, Modifications to Substations at Puna and Kaumana, and a Temporary 34.5 Facility to Interconnect PGV's Geothermal Electric Plant with HELCO's System Grid (Phase II and III), dated June 7, 1990, by and between Hawaii Electric Light Company and Puna Geothermal Venture B-5 Ormesa BLM Geothermal Resources Lease CA 966 Ormesa BLM License for Electric Power Plant Site CA 24678 Geothermal Resources Mining Lease, dated February 20, 1981, by and between the State of Hawaii, as Lessor, and Kapoho Land Partnership, as Lessee Geothermal Lease Agreement, dated October 20, 1975, by and between Ruth Walker Cox and Betty M. Smith, as Lessor, and Gulf Oil Corporation, as Lessee Geothermal Lease Agreement, dated August 1, 1976, by and between Southern Pacific Land Company, as Lessor, and Phillips Petroleum Company, as Lessee Geothermal Resources Lease, dated November 18, 1983, by and between Sierra Pacific Power Company, as Lessor, and Geothermal Development Associates, as Lessee Lease Agreement, dated November 1, 1969, by and between Chrisman B. Jackson and Sharon Jackson, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee Lease Agreement, dated September 22, 1976, by and between El Toro Land & Cattle Co., as Lessor, and Standard Oil Company of California, as Lessee Lease Agreement, dated February 17, 1977, by and between Joseph L. Holtz, as Lessor, and Chevron U.S.A. Inc., as Lessee Lease Agreement, dated March 11, 1964, by and between John D. Jackson and Frances Jones Jackson, also known as Frances J. Jackson, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee Lease Agreement, dated February 16, 1964, by and between John D. Jackson, conservator for the estate of Aphia Jackson Wallan, as Lessor, and Standard Oil Company of California, as Lessee Lease Agreement, dated March 17, 1964, by and between Helen S. Fugate, a widow, as Lessor, and Standard Oil Company of California, as Lessee B-6 Lease Agreement, dated February 16, 1964, by and between John D. Jackson and Frances J. Jackson, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee Lease Agreement, dated February 20, 1964, by and between John A. Straub and Edith D. Straub, also known as John A. Straub and Edythe D. Straub, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee Lease Agreement, dated July 1, 1971, by and between Marie L. Gisler and Harry R. Gisler, as Lessor, and Standard Oil Company of California, as Lessee Lease Agreement, dated February 28, 1964, by and between Gus Kurupas and Guadalupe Kurupas, husband and wife, as Lessor, and Standard Oil Company of California, as Lessee Lease Agreement, dated April 7, 1972, by and between Nowlin Partnership, as Lessor, and Standard Oil Company of California, as Lessee Geothermal Lease Agreement, dated July 18, 1979, by and between Charles K. Corfman, an unmarried man as his sole and separate property, and Lessor, and Union Oil Company of California, as Lessee Lease Agreement, dated January 1, 1972, by and between Holly Oberly Thomson, also known as Holly F. Oberly Thomson, also known as Holly Felicia Thomson, as Lessor, and Union Oil Company of California, as Lessee Lease Agreement, dated June 14, 1971, by and between Fitzhugh Lee Brewer, Jr., a married man as his separate property, Donna Hawk, a married woman as her separate property, and Ted Draper and Helen Draper, husband and wife, as Lessor, and Union Oil Company of California, as Lessee Lease Agreement, dated May 13, 1971, by and between Mathew J. La Brucherie and Jane E. La Brucherie, husband and wife, and Robert T. O'Dell and Phyllis M. O'Dell, husband and wife, as Lessor, and Union Oil Company of California, as Lessee Lease Agreement, dated June 2, 1971, by and between Dorothy Gisler, a widow, Joan C. Hill, and Jean C. Browning, as Lessor, and Union Oil Company of California, as Lessee Geothermal Lease Agreement, dated February 15, 1977, by and between Walter J. Holtz, as Lessor, and Magma Energy Inc., as Lessee B-7 Geothermal Lease, dated August 31, 1983, by and between Magma Energy Inc., as Lessor, and Holt Geothermal Company, as Lessee Unprotected Lease Agreement, dated July 15, 2004, by and between Ormat Industries Ltd. and Ormat Systems Ltd. Geothermal Resources Lease, dated June 27, 1988, by and between Bernice Guisti, Judith Harvey and Karen Thompson, Trustees and Beneficiaries of the Guisti Trust, as Lessor, and Far West Capital, Inc., as Lessee Amendment to Geothermal Resources Lease, dated January, 1992, by and between Bernice Guisti, Judith Harvey and Karen Thompson, Trustees and Beneficiaries of the Guisti Trust, as Lessor, and Far West Capital, Inc., as Lessee Second Amendment to Geothermal Resources Lease, dated June 25, 1993, by and between Bernice Guisti, Judith Harvey and Karen Thompson, Trustees and Beneficiaries of the Guisti Trust, as Lessor, and Far West Capital, Inc. and its Assignee, Steamboat Development Corp., as Lessee Geothermal Resources Sublease, dated May 31, 1991, by and between Fleetwood Corporation, as Lessor, and Far West Capital, Inc., as Lessee KLP Lease and Agreement, dated March 1, 1981, by and between Kapoho Land Partnership, as Lessor, and Thermal Power Company, as Lessee Amendment to KLP Lease and Agreement, dated July 9, 1990, by and between Kapoho Land Partnership, as Lessor, and Puna Geothermal Venture, as Lessee Second Amendment to KLP Lease and Agreement, dated December 31, 1996, by and between Kapoho Land Partnership, as Lessor, and Puna Geothermal Venture, as Lessee B-8 Exhibit C [Form of Special Counsel Opinions](1) 1. As of the date of this Opinion and under the current plan for operation of the [California/Nevada/Hawaii/Philippines/Nicaragua/Kenya/Guatemala] Facilities, there are no material Permits (as defined below) required under the Covered Laws (as defined below) that are necessary to be obtained by the [relevant Project Companies] in connection with the construction, testing, interconnection, ownership, use, operation and maintenance of, the transmission of electricity for, and the generation and sale of electricity related to the [California/Nevada/Hawaii/Philippines/Nicaragua/Kenya/Guatemala] Facilities, other than the Permits described in Permit Schedule A (attached hereto as Schedule A). Except as qualified or limited expressly herein or as noted on Permit Schedule A, each Permit identified on Permit Schedule A has been duly obtained by, or assigned to, the [relevant Project Companies], as applicable, is in full force and effect in solely the name of the owner or operator of the [California/Nevada/Hawaii/Philippines/Nicaragua/Kenya/Guatemala] Facility, is final and is not subject to any appeals or further proceedings or to any unsatisfied condition that may allow material modification, suspension or revocation, and all applicable administrative and judicial appeals periods have expired. 2. The execution and delivery of the Underwriting Agreement and the consummation of the transactions contemplated thereby will not (i) require any material Permits under the Covered Laws and (ii) violate any provision of the Covered Laws or any rule or order issued by any state or local governmental regulatory agency in California/Nevada/Hawaii/Philippines/Nicaragua/Kenya/Guatemala] that has jurisdiction to regulate the [California/Nevada/Hawaii/Philippines/Nicaragua/Kenya/Guatemala] Facilities and the [relevant Project Companies]. 3. The Company and the Project Companies will not become subject to regulation under the Covered Laws as a result of the consummation of the transactions contemplated by the Underwriting Agreement beyond such regulation under the Covered Laws to which the Company and Project Companies were subject prior to the consummation of the transactions contemplated by the Underwriting Agreement. 4. The Power Purchase Agreements, Interconnection Agreements, Transmission Service Agreements and Concession Agreements related to the Facilities and the Power Purchase Agreements related to the Desert Peak 2 Project, the Desert Peak 3 Project, the Galena Project and the Amatitlan Project are valid and binding obligations of the Project Companies enforceable against the Project Companies in accordance with their respective terms. All necessary Permits related to the Power Purchase Agreements, Interconnection Agreements and Transmission ---------------------- 1 Opinion paragraphs 1-4 will not be provided by Utah and Israel special counsel, and opinion paragraph 5 will be provided by California, Nevada, Utah and Israel special counsel only. Service Agreements for the Facilities and the Power Purchase Agreements for the Desert Peak 2 Project, Desert Peak 3 Project and the Galena Project are final and are not subject to any appeals or further proceedings or to any unsatisfied condition that may allow material modification, suspension or revocation, and all applicable administrative and judicial appeals periods have expired; 5. [California/Utah/Nevada/Israel subsidiaries of the Company] have been duly incorporated and are validly existing as corporations in good standing under the laws of [California/Utah/Nevada/Israel], are duly qualified to do business and are in good standing as foreign corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification and have all power and authority necessary to own or hold their respective properties and conduct the businesses in which they are engaged.]
Exhibit 10.1.2 AMENDED AND RESTATED BRIDGE LOAN AGREEMENT ------------------------------------------ This AMENDED AND RESTATED BRIDGE LOAN AGREEMENT (this "Agreement") is made as of October 2, 2003 by and between ORMAT NEVADA, INC. (the "Borrower"), a Delaware corporation having its principal place of business at 980 Greg Street, Sparks, Nevada 89431-6039, and BANK LEUMI USA (the "Bank"), a New York State chartered banking institution with its office at 564 Fifth Avenue, New York, NY 10036. The Borrower and the Bank heretofore entered into a Bridge Loan Agreement, made as of May 2, 2002, which was subsequently amended by a First Amendment made as of July 11, 2002, and letter agreements dated April 30 and July 2, 2003 (the said Bridge Loan Agreement as so amended is the "Initial Agreement"). This Agreement amends, restates and supersedes the Initial Agreement. 1. DEFINITIONS Certain capitalized terms are defined below: Affiliate: Any individual, corporation, partnership, trust, unincorporated association, business, or other legal entity that would be considered to be an affiliate of the Borrower under Rule 144(a) of the Rules and Regulations of the Securities and Exchange Commission, as in effect on the date hereof, if the Borrower were issuing securities. Agreement: See preamble, which term shall include this Agreement and the Schedules hereto, all as amended and in effect from time to time. Bank: Bank Leumi USA. BLITA: Bank Leumi Le-Israel B.M., an Israeli banking institution and an Affiliate of the Bank. Borrower: Ormat Nevada, Inc. Business Day: Any day on which banks in New York, NY, are open for business generally. Charter Documents: In respect of any entity, the certificate or articles of incorporation or organization and the by-laws of such entity, or other constitutive documents of such entity. Commitment: The undertaking of the Bank, subject to the terms and conditions of this Agreement, to make Loans to the Borrower up to an aggregate outstanding principal amount not to exceed the Commitment Amount; provided, however, that the Bank is in receipt of a Standby Letter of Credit in an amount which is not less than 105% of the intended outstanding principal amount of each Loan (which Standby Letter of Credit shall be a condition precedent to making such Loan). Commitment Amount: $20,000,000. Consent: In respect of any person or entity, any permit, license or exemption from, approval, consent of, registration or filing with any local, state or federal governmental or regulatory agency or authority, required under applicable law. Default: An event or act which with the giving of notice and/or the lapse of time, would become an Event of Default. Drawdown Date: In respect of any Loan, the date on which such Loan is made to the Borrower. Environmental Laws: All laws pertaining to environmental matters, including without limitation, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, in each case as amended, and all rules, regulations, judgments, decrees and orders arising under all such laws. ERISA: The Employee Retirement Income Security Act of 1974, as amended, and all rules, regulations, judgments, decrees, and orders arising thereunder. Event of Default: Any of the events listed as such in the Restated Note or in (section) VIII hereof. Federal Funds Effective Rate: For any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Bank from three funds brokers of recognized standing selected by the Bank. Financials: In respect of any period, the balance sheet of any person or entity as at the end of such period, and the related statement of income and statement of cash 2 flow for such period, each setting forth in comparative form the figures for the previous comparable fiscal period, all in reasonable detail and prepared in accordance with GAAP. GAAP: Generally accepted accounting principles consistent with those adopted by the Financial Accounting Standards Board and its predecessor, as in effect from time to time. Indebtedness: In respect of any entity, all obligations, contingent and otherwise, that in accordance with GAAP should be classified as liabilities, including without limitation (i) all debt obligations, (ii) all liabilities secured by Liens, (iii) all guarantees and (iv) all liabilities in respect of bankers' acceptances or letters of credit. Interest Period: As defined in the Restated Note. Liens: Any encumbrance, mortgage, pledge, hypothecation, charge, restriction or other security interest of any kind securing any obligation of any entity or person. Loan: Any loan made or to be made to the Borrower pursuant to (section) II hereof. Loan Documents: This Agreement, the Restated Note and the Standby Letter of Credit in each case as from time to time amended or supplemented. Loan Request: See (section) 2.1. Materially Adverse Effect: Any materially adverse effect on the financial condition or business operations of the Borrower or material impairment of the ability of the Borrower to perform its obligations hereunder or under any of the other Loan Documents. Maturity Date: February 2, 2005, or such earlier date on which all Loans may become due and payable pursuant to the terms hereof. Obligations: All indebtedness, obligations and liabilities of the Borrower to the Bank, existing on the date of this Agreement or arising thereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise, arising or incurred under this Agreement or any other Loan Document or in respect of any of the Loans or the Restated Note or other instruments at any time evidencing any thereof. Requirement of Law: In respect of any person or entity, any law, treaty, rule, regulation or final and binding determination of an arbitrator, court, or other 3 governmental authority, in each case applicable to or binding upon such person or entity or affecting any of its property. Restated Note: See (section) 2.1 . Standby Letter of Credit: One or more unconditional, irrevocable standby letters of credit in a total amount of not less than 105% of the outstanding principal amount of each Loan made up to the Commitment Amount issued by BLITA in favor of the Bank, and expiring not earlier than thirty (30) days after the Maturity Date. The Standby Letter of Credit shall be available for drawing at any given time in an amount equal to the sum of the then outstanding principal, accrued interest and other amounts payable with respect to the Loans. 2. BRIDGE LOAN FACILITY 2.1 Commitment to Lend. (a) On the terms and subject to the conditions of this Agreement, the Bank agrees to lend to the Borrower such sums that the Borrower may request, from the date hereof until, but not including, the Maturity Date, provided that the sum of the outstanding principal amount of all Loans (after giving effect to amounts requested) shall at no time exceed the then applicable Commitment Amount. (b) The Commitment Amount is Twenty Million Dollars ($20,000,000). (c) Loans shall be in the minimum aggregate amount of $1,000,000 or an integral multiple thereof. The Borrower shall deliver to the Bank and to BLITA in writing or telephonically a notice of the principal amount of each requested Loan. Each such notice must be received by the Bank and by BLITA not later than 12:00 p.m. New York time three Business Days before the Drawdown Date (which must be a Business Day). Subject to the foregoing, so long as the Commitment is then in effect and the conditions set forth in Section VI hereof are fully satisfied as of such Drawdown Date, the Bank shall advance the amount requested to the Borrower's account at the Bank in immediately available funds not later than the close of business on such Drawdown Date. The obligation of the Borrower to repay to the Bank the principal of the Loans and interest accrued thereon is evidenced by an amended and restated promissory note (the "Restated Note"), dated as of even date with this Agreement, in the maximum aggregate principal amount of $20,000,000.00 executed and delivered by the Borrower and payable to the order of the Bank, in form and substance satisfactory to the Bank. 4 2.2 Interest. The Borrower shall pay interest on the Loans in accordance with the terms of the Restated Note. 2.3 Repayments, Prepayments and Reborrowings. (a) The Borrower shall pay to the Bank on the Maturity Date the entire unpaid principal of and interest on all Loans. (b) The Borrower may elect to prepay the outstanding principal of all or any part of any Loan, without premium or penalty, in a minimum amount of $1,000,000 or an integral multiple thereof, upon written notice to the Bank given by 10:00 a.m. New York time on the Business Day before the date of such prepayment, of the amount to be prepaid. If prepayment is made on a date other than the last day of an Interest Period, Borrower shall also pay to the Bank additional compensation as prescribed in the Restated Note. (c) Each repayment or prepayment of principal of any Loan shall be accompanied by payment of the unpaid interest accrued to such date on the principal being repaid or prepaid. (d) The Borrower may elect to reduce or terminate the Commitment Amount by a minimum principal amount of $2,000,000 or an integral multiple thereof, upon written notice to the Bank given by 10:00 a.m. New York time at least two (2) Business Days prior to the date of such reduction or termination. The Borrower shall not be entitled to increase or reinstate the Commitment Amount following such reduction or termination. 3. CHANGES IN CIRCUMSTANCES If after the date hereof the Bank determines that (i) the adoption of or any change in any banking law, rule, regulation or guideline or the administration thereof (whether or not having the force of law), or (ii) compliance by the Bank or its parent bank holding company with any guideline, request or directive (whether or not having the force of law), has the effect of reducing the return on the Bank's or such holding company's capital as a consequence of the Commitment or the Loans to a level below that which the Bank or such holding company could have achieved but for such adoption, change or compliance by any amount deemed by the Bank to be material, the Bank may notify the Borrower thereof. The Borrower agrees to pay the Bank the amount of the Borrower's allocable share of the amount of such reduction in the return on capital as and when such reduction is determined, upon presentation by the Bank of a statement in the amount and setting forth the Bank's calculation thereof, which statement shall be deemed true and correct absent manifest error. The Bank agrees to allocate shares of such 5 reduction among the Borrower and the Bank's other customers similarly situated on a fair and nondiscriminatory basis. 4. FEES AND PAYMENTS 4.1 Up-front Fees. Contemporaneously with execution and delivery of this Agreement, the Borrower shall pay to the Bank a one-time total up-front fee in the amount of $20,000. 4.2 Commitment Fees. Until the earlier of the Maturity Date or the date upon which the Commitment is no longer in effect, the Borrower shall pay to the Bank, on the first day of each calendar quarter hereafter, and upon the Maturity Date or the date upon which the Commitment is no longer in effect, a commitment fee calculated at a rate per annum which is equal to one quarter percent (1/4%) of the average daily difference by which the then applicable Commitment Amount exceeds the aggregate of the outstanding Loans during the preceding calendar quarter or portion thereof. 4.3 Manner of Payment. All payments to be made by the Borrower under this Agreement shall be made in U.S. dollars in immediately available funds at the Bank's office at 564 Fifth Avenue, New York, NY 10036 without set-off or counterclaim and without any withholding or deduction whatsoever. The Bank shall be entitled to charge any account of the Borrower with the Bank for any sum due and payable by the Borrower to the Bank hereunder, or under any of the other Loan Documents. If any payment hereunder is required to be made on a day which is not a Business Day, it shall be paid on the immediately preceding Business Day. All computations of interest or of the commitment fee payable hereunder shall be made by the Bank on the basis of actual days elapsed and on a 360-day year. The aggregate unpaid amount of Loans set forth on the Bank's internal records shall be prima facie evidence of the principal amount thereof owing and unpaid to the Bank, but the failure to record, or any error in so recording, any such amount on the Bank's records shall not affect the obligations of the Borrower hereunder or under the Restated Note to make payments of principal of and interest on the Restated Note when due. 5. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Bank on the date hereof, on the date of any Loan Request, and on each Drawdown Date that: (a) the Borrower is duly organized, validly existing, and in good standing under the laws of the State of Delaware, is duly qualified and in good standing in every other jurisdiction where it is doing business, and the execution, delivery and performance by the Borrower of the Loan Documents (i) are within its corporate 6 authority, (ii) have been duly authorized, and (iii) do not conflict with or contravene its Charter Documents; (b) upon execution and delivery thereof, each Loan Document shall constitute the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms; (c) the Borrower has good and marketable title to all its material properties, and possesses all assets, including intellectual properties, franchises and Consents, adequate for the conduct of its business as now conducted, without known conflict with any rights of others; (d) the Borrower has provided to the Bank its unaudited Financials as at December 31, 2002, and for the period then ended, and such Financials are complete and correct and fairly present the position of the Borrower as at such date and for such period in accordance with GAAP consistently applied; (e) since December 31, 2002, there has been no materially adverse change of any kind in the Borrower which would have a Materially Adverse Effect; (f) there are no legal or other proceedings or investigations pending or threatened against the Borrower before any court, tribunal or regulatory authority which would, if adversely determined, alone or together, have a Materially Adverse Effect; (g) the execution, delivery, performance of its obligations, and exercise of its rights under the Loan Documents by the Borrower, including borrowing under this Agreement (i) do not require any Consents; and (ii) are not and will not be in conflict with or prohibited or prevented by (A) any Requirement of Law, or (B) any Charter Document, corporate minute or resolution, instrument, agreement or provision thereof, in each case binding on it or affecting its property; and (h) the Borrower is not in violation of (i) any Charter Document, corporate minute or resolution, (ii) any instrument or agreement, in each case binding on it or affecting its property, or (iii) any Requirement of Law, in a manner which could have a Materially Adverse Effect. 6. CONDITIONS PRECEDENT In addition to the making of the foregoing representations and warranties, the payment of fees, and the delivery of the Loan Documents, the obligation of the Bank to 7 make each Loan hereunder shall be subject to the satisfaction, as of the date of the funding of each such Loan, of the following further conditions precedent: (a) BLITA shall have advanced funds to the Bank in the amount of such Loan; (b) the Standby Letter of Credit shall be in full force and effect; (c) the representations and warranties of the Borrower to the Bank shall be true and correct in all material respects as of the time made or claimed to have been made; (d) no Default or Event of Default shall be continuing; (e) all proceedings in connection with the transactions contemplated hereby shall be in form and substance satisfactory to the Bank, and the Bank shall have received all information and documents as it may have reasonably requested; (f) no change shall have occurred in any law or regulation or in the interpretation thereof that in the reasonable opinion of the Bank would make it unlawful for the Bank to make such Loan; and (g) prior to the funding of the first Loan under this Agreement, the Bank shall have received the legal opinion of counsel to the Borrower, substantially in the form attached as Exhibit A. 7. COVENANTS 7.1 Affirmative Covenants. The Borrower agrees that until the termination of the Commitment and the payment and satisfaction in full of all the Obligations, the Borrower will comply with its obligations as set forth throughout this Agreement and will: (a) furnish the Bank: (i) as soon as available but in any event within ninety (90) days after the close of each fiscal year, its Financials, prepared in accordance with GAAP, for such fiscal year, in such form as is satisfactory for inclusion in the audited Financials of Ormat Industries Ltd. (the ultimate parent company), and certified by the Borrower's accountants; (ii) as soon as available but in any event within sixty (60) days after the end of each fiscal quarter its unaudited Financials for such quarter, certified by its chief financial officer; and (iii) together with the quarterly and annual audited Financials, a certificate of the Borrower certifying that no Default or Event of Default has occurred, or if it has, the actions taken by the Borrower with respect thereto; 8 (b) keep true and accurate books of account, maintain its current fiscal year and permit the Bank or its designated representatives to inspect the Borrower's premises during normal business hours and to examine and be advised as to such or other business records upon the request of the Bank; (c) (i) maintain its corporate existence, business and assets, (ii) keep its business and assets adequately insured, (iii) maintain its chief executive office in the United States, (iv) continue to engage in the same lines of business, and (v) comply with all Requirements of Law, including ERISA and Environmental Laws; (d) notify the Bank promptly in writing of (i) the occurrence of any Default or Event of Default, (ii) any material noncompliance with ERISA or any Environmental Law or proceeding in respect thereof which could have a Materially Adverse Effect, (iii) any change of address, (iv) any threatened or pending litigation or similar proceeding affecting the Borrower or any Affiliate which could have a Materially Adverse Effect, or any material adverse change in any such litigation or proceeding previously reported, and (v) material claims against any assets or properties of the Borrower or any of its Affiliates encumbered in favor of the Bank; and (e) cooperate with the Bank, take such action, execute such documents, and provide such information as the Bank may from time to time reasonably request in order further to effect the transactions contemplated by and the purposes of the Loan Documents. 7.2 Negative Covenants. The Borrower agrees that until the termination of the Commitment and the payment and satisfaction in full of all the Obligations, the Borrower will not, without the prior written consent of the Bank: (a) make any distributions on or in respect of its capital of any nature whatsoever to its shareholders in their capacity as shareholders; (b) become party to a merger or sale-leaseback transaction, or effect any disposition of assets other than in the ordinary course. 8. EVENTS OF DEFAULT; ACCELERATION Each of the following shall constitute an Event of Default under this Agreement: 9 (a) the Borrower shall fail to pay when due and payable any principal of the Loans when the same becomes due; (b) the Borrower shall fail to pay interest on the Loans or any other sum due under any of the Loan Documents within two (2) Business Days after the date on which the same shall have first become due and payable; (c) the Borrower shall fail to perform any term, covenant or agreement contained in (sections) 7.1(c)(i) and 7.2; (d) the Borrower shall fail to perform any other term, covenant or agreement contained in any Loan Document within fourteen (14) days after the Bank has given written notice of such failure to the Borrower; (e) any representation or warranty of the Borrower in the Loan Documents or in any certificate or notice given in connection therewith shall have been false or misleading in any material respect at the time made or deemed to have been made; (f) the Borrower, or any Affiliate of Borrower, shall be in default (after any applicable period of grace or cure period) under any agreement evidencing Indebtedness owing to the Bank, or shall fail to pay such Indebtedness when due (after any applicable period of grace or cure period); (g) any of the Loan Documents shall cease to be in full force and effect; (h) the Borrower (i) shall make an assignment for the benefit of creditors, (ii) shall be adjudicated bankrupt or insolvent, (iii) shall seek the appointment of, or be the subject of an order appointing, a trustee, liquidator or receiver as to all or part of its assets, (iv) shall commence, approve or consent to, any case or proceeding under any bankruptcy, reorganization or similar law and, in the case of an involuntary case or proceeding, such case or proceeding is not dismissed within forty-five (45) days following the commencement thereof, or (v) shall be the subject of an order for relief in an involuntary case under federal bankruptcy law; (i) the Borrower shall be unable to pay its debts as they mature; (j) there shall remain undischarged for more than thirty (30) days any final judgment or execution action against the Borrower that, together with other outstanding claims and execution actions against the Borrower exceeds $200,000 in the aggregate; (k) the commencement of a foreclosure proceeding affecting any Approved Geothermal Project; 10 (l) the Borrower, or any Affiliate of Borrower, shall be in default (after any applicable period of grace or cure period) under any agreement evidencing Indebtedness owing to BLITA, or to any Affiliate of BLITA other than the Bank, or shall fail to pay such Indebtedness when due (after any applicable period of grace or cure period); or (m) a change in the financial condition or affairs of Borrower which in the reasonable opinion of the Bank materially reduces Borrower's ability to pay all the Obligations. If any of the Events of Default shall occur and be continuing, then, or at any time thereafter: (a) In the case of any Event of Default under clause (h) or (i), the Commitment shall automatically terminate, and the entire unpaid principal amount of the Loans, all interest accrued and unpaid thereon, and all other amounts payable thereunder and under the other Loan Documents shall automatically become forthwith due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower; (b) In the case of any Event of Default under clause (a) or (b), the Bank may, by written notice to the Borrower, terminate the Commitment and/or declare the unpaid principal amount of the Loans, all interest accrued and unpaid thereon, and all other amounts payable hereunder and under the other Loan Documents to be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; and (c) In the case of any Event of Default other than (a), (b), (h) or (i), the Bank may, by two (2) Business Days' prior written notice to the Borrower, and where such Event of Default has not been cured during such period, terminate the Commitment and/or declare the unpaid principal amount of the Loans, all interest accrued and unpaid thereon, and all other amounts payable hereunder and under the other Loan Documents to be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower. No remedy herein conferred upon the Bank is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and in addition to every other remedy hereunder, now or hereafter existing at law or in equity or otherwise. 11 9. SETOFF Regardless of the adequacy of any collateral for the Obligations, any deposits or other sums credited by or due from the Bank to the Borrower may be applied to or set off against any principal, interest and any other amounts due from the Borrower to the Bank at any time without notice to the Borrower, or compliance with any other procedure imposed by statute or otherwise, all of which are hereby expressly waived by the Borrower. 10. MISCELLANEOUS (a) The Borrower agrees to indemnify and hold harmless the Bank, its officers, employees, affiliates, agents, and controlling persons from and against all claims, damages, liabilities and losses of every kind, including reasonable legal fees, arising out of the Loan Documents, and including claims in respect of the application of Environmental Laws to the Borrower, absent the gross negligence and willful misconduct of the Bank. (b) The Borrower shall pay to the Bank promptly on demand in accordance with the mutual agreement of the Bank and the Borrower reasonable costs and expenses (including reasonable legal fees) incurred by the Bank in connection with the subsequent amendment, administration or enforcement of any of the Loan Documents, provided that the costs and expenses incurred with respect to the execution and preparation of this Agreement, and the related documents by counsel to the Bank shall not exceed the maximum amount of US$ 7,000. (c) Any communication to be made hereunder shall (i) be made in writing, but unless otherwise stated, may be made by facsimile transmission or letter, and (ii) be made or delivered to the address of the party receiving notice which is identified with its signature below (unless such party has by five (5) days' written notice specified another address), and shall be deemed made or delivered, when dispatched, left at that address, or five (5) days after being mailed, postage prepaid, to such address. (d) This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns, but the Borrower may not assign its rights or obligations hereunder. This Agreement may not be amended or waived except by a written instrument signed by the Borrower and the Bank, and any such amendment or waiver shall be effective only for the specific purpose given. No failure or delay by the Bank to exercise any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other right, power or privilege. The provisions of this Agreement are severable and if any one provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, such 12 invalidity or unenforceability shall affect only such provision in such jurisdiction. This Agreement, together with all Schedules hereto, expresses the entire understanding of the parties with respect to the transactions contemplated hereby. This Agreement and any amendment hereby may be executed in several counterparts, each of which shall be an original, and all of which shall constitute one agreement. In proving this Agreement, it shall not be necessary to produce more than one such counterpart executed by the party to be charged. (e) THIS AGREEMENT AND THE RESTATED NOTE ARE CONTRACTS UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL BE CONSTRUED IN ACCORDANCE THEREWITH AND GOVERNED THEREBY. THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR ANY FEDERAL COURT SITTING THEREIN. The Borrower, as an inducement to the Bank to enter into this Agreement, hereby waives its right to a jury trial with respect to any action arising in connection with any Loan Document. (f) In the event of inconsistency between this Agreement and any other Loan Document, the provisions of this Agreement shall control. IN WITNESS WHEREOF, the undersigned have duly executed this Bridge Loan Agreement as a sealed instrument as of the date first above written. ORMAT NEVADA, INC. By: /s/ Connie Stechman --------------------------------- Name: Connie Stechman Title: Assistant Secretary Address: 980 Greg Street Sparks, NV 90431 Phone: 775-356-9029 Fax: 775-356-9039 13 BANK LEUMI USA By: /s/ Michaela Klein -------------------------------- Name: Michaela Klein Title: Senior Vice President By: /s/ Yuval Talmy -------------------------------- Name: Yuval Talmy Title: Assistant Vice President Address: 564 Fifth Avenue New York, NY 10036 Phone: 212-626-1061 Fax: 212-626-1072 Bank Leumi Le-Israel B.M. hereby executes a copy of this Agreement for the sole purpose of undertaking to the Borrower that, in each case in which all of other conditions set forth in the Agreement to the obligation of the Lender to make a Loan have been satisfied, Bank Leumi Le-Israel B.M. will advance to the Lender funds equal to the amount of such Loan, as described in Section 6(a) of the Agreement. BANK LEUMI LE-ISRAEL B.M. By: ------------------------------------ Name: Shuki Zeitak Title: Customer Relationship Manager 12 STATE OF NEVADA ) : ss: COUNTY OF WASHOE ) On November 6th, 2003 before me, Patricia Mayes, a Notary Public, personally appeared Connie Stechman, personally, known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that she executed the same in her authorized capacity, and that by her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. /s/ Patricia Mayes ---------------------------------------- -------------------------------------- [GRAPHIC] PATRICIA MAYES Notary Public - State of Nevada Appointment Recorded in Washoe County No: 92-0753-2 Expires February 1, 2004 -------------------------------------- 13 EXHIBIT A [Form of Legal Opinion] 14 [PERKINS COIE LOGO] 1201 Third Avenue, Suite 4800 Seattle, WA 98101-3099 PHONE: 206-983-8888 FAX: 206-583-8500 www.perkinscoie.com November 6, 2003 Bank Leumi USA 579 Fifth Ave. New York, NY 10017 RE: AMENDED AND RESTATED BRIDGE LOAN AGREEMENT WITH ORMAT NEVADA, INC., DATED AS OF OCTOBER 2, 2003 Ladies and Gentlemen: We have acted as special counsel to Ormat Nevada, Inc., a Delaware corporation ("Borrower"), in connection with certain loans (the "Loans") contemplated by the Amended and Restated Bridge Loan Agreement dated as of October 2, 2003 (the "Loan Agreement") between the Borrower and Bank Leumi USA (the "Bank"). Capitalized terms used but not defined herein shall have the meanings set forth in the Loan Agreement. A. DOCUMENTS AND MATTERS EXAMINED In connection with this opinion, we have examined the original, or a copy certified or otherwise identified to our satisfaction, of the Loan Agreement and the Restated Note (the "Loan Documents"). Our opinions are based solely upon a review of the Loan Documents and, as to factual matters, certificates provided by the Secretary of State of the States of Delaware and Nevada, and by the Borrower and, with your consent, we have reviewed no other documents, records, certificates or other statements as a basis for the opinions herein expressed. Whenever a statement herein is qualified by the phrase "to our knowledge," or by any other phrase of similar import, or where it is noted that nothing has been brought to our attention, it means that the opinion stated is based solely upon the consoious awareness of information as to the matters being opined upon by the attorney who signs, on behalf of Perkins Coie LLP, this opinion letter. We have not been involved on behalf of the Borrower in the negotiation or preparation of the Loan Documents. With your consent, we have not undertaken, nor were we obligated or expected to undertake, an independent investigation to determine the accuracy of the facts or other information as to which our knowledge is sought, and any limited inquiry undertaken by us during the preparation of this opinion letter should not be regarded as such an investigation. In particular, the attorneys at Perkins Coie LLP preparing this opinion have not made inquiry of other attorneys in the firm (other than attorneys actively involved in PC-Opinion-Ormat/Bank Leumi ANCHORAGE . BEIJING . BELLEVUE . BOISE . CHICAGO . DENVER . HONG KONG . LOS ANGELES MENLO PARK - OLYMPIA . FORTLAND . SAN FRANCISCO . SEATTLE . WASHINGTON, D.C. Perkins Coie LLP (Perkins Coie LLC in Illinois) Bank Leumi USA November 6, 2003 Page 2 preparing this opinion), and have not researched court or agency records. No inference as to our knowledge of any matters bearing on the accuracy of any such statement should be drawn from the fact of our representation of Borrower. B. ASSUMPTIONS For purposes of this opinion letter, we have relied without investigation, upon the following assumptions: B-1. The signatures of persons signing the Loan Documents are genuine. B-2. All natural persons who are involved on behalf of Borrower have sufficient legal capacity to enter into and perform the transactions contemplated by the Loan Documents. B-3. Each document submitted to us for review is accurate and complete, each such document that is an original is authentic, each such document that is a copy conforms to an authentic original. B-4. The Bank has acted in good faith and without notice of any defense against the enforceability of any rights created by, or adverse claim to any property or security interest transferred or created as a part of, the transaction. B-5. There are no agreements or understandings among the parties, written or oral, and there is no usage of trade or course of prior dealing among the parties that would, in either case, define, supplement or qualify the terms of the Loan Documents. B-6. The constitutionality or validity of the relevant statute, rule, regulation or agency action is not in issue unless a reported decision in the opining jurisdiction has specifically addressed but not resolved, or has established, its unconstitutionality or invalidity. B-7. The Bank has the power, authority and legal right to execute and deliver, and to perform its obligations under, the Loan Documents. B-8. The factual representations and warranties in the Loan Documents are true, and the facts and circumstances contemplated pursuant to the Loan Documents are as contemplated therein. PC-Opinion-Ormat/Bank Leumi Bank Leumi USA November 6, 2003 Page 3 B-9. The Bank has complied with all legal requirements pertaining to its status as such status relates to its rights to enforce the Loan Documents against the Borrower. B-10. The conduct of the parties to the transaction has complied with any requirement of good faith, fair dealing and conscionability. B-11. Each of the parties to the Loan Documents will receive sufficient consideration to support the creation of the obligations found in each of the Loan Documents to which it is a party. B-12. The Bank has satisfied those legal requirements applicable to it that are necessary to make the documents signed by it enforceable against it in accordance with its terms. B-13. The party to whom this opinion letter is directed and any agent acting for it in connection with the transactions have acted in good faith and without notice of any defense against the enforceability of any rights created by, or adverse claim to any property or security interest transferred or created as a part of the transactions. B-14. There are no agreements or understandings among the parties, written or oral, and there is no usage of trade or course of prior dealing among the parties that would, in either case, define, supplement or qualify the terms of the Loan Documents. C. OPINIONS Based upon the foregoing examinations and assumptions and subject to the exclusions stated below, we are of the opinion that: C-1. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of Delaware, and has all requisite corporate power and authority to own its properties and to carry on its business as now being conducted and is duly qualified and in good standing as a foreign corporation, and authorized to do business, under the laws of each jurisdiction where the character of the properties owned or leased by it or the transaction of its business makes such qualification or authorization necessary, except where such failure to qualify would not have a material adverse effect on the Borrower's business. PC-Opinion-Ormat/Bank Leumi Bank Leumi USA November 6, 2003 Page 4 C-2. The Borrower has full power and authority to enter into and perform its obligations under the Loan Documents and to borrow the Loans, all of which have been duly authorized by all necessary and proper corporate action. No consent or approval (governmental or otherwise) or the taking of any other action (including, without limitation, by shareholders of the Borrower) is required as a condition to the validity or enforceability of any of the Loan Documents except for any consents and approvals heretofore delivered to you. C-3. Each of the Loan Documents, when duly executed and delivered by the Borrower, will constitute the valid and legally binding obligations of the Borrower, enforceable in accordance with its respective terms. C-4. To our knowledge, there are no actions, suits, investigations or administrative proceedings of or before any court, arbitrator or governmental authority, pending or threatened against the Borrower or any of its subsidiaries, properties, or other assets which (i) if adversely determined, would materially, adversely affect the business, operations or condition, financial or otherwise, of the Borrower; or (ii) question the validity of any of the Loan Documents or any action to be taken in connection with the transactions contemplated thereby. C-5. The execution, delivery and performance by the Borrower of the Loan Documents do not and will not (i) violate any provision of the corporate charter or by-laws of the Borrower; (ii) to our knowledge violate any order, decree or judgment to which Borrower is a party or by which its assets are bound, or any provisions of any statute, rule or regulation applicable to Delaware corporations; (iii) violate or conflict with, result in a breach of or constitute (with notice or lapse of time, or both) a default under any material shareholder agreement, stock preference agreement, mortgage, indenture or contract to which the Borrower is a party, or by which any of its properties are bound or affected; or (iv) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or assets of the Borrower. C-6. To the best of our knowledge (after due inquiry) the proceeds of the Loans are not being and will not be used, directly or indirectly, for the purpose of "purchasing" or "carrying" any "margin stock" in contravention of Regulation U or X promulgated by the Board of Governors of the Federal Reserve System. PC-Opinion-Ormat/Bank Leumi Bank Leumi USA November 6, 2003 Page 5 C-7. The Borrower is not in default with respect to any order, writ, injunction or decree of any court or of any federal, state, municipal or other governmental department, commission, board, bureau, agency or authority, domestic or foreign known to us to which it is a party or by which it or any of its property may be bound or affected except for such defaults which, in the aggregate, will not have a material, adverse effect on the business operations or condition, financial or otherwise, of the Borrower. D. EXCLUSIONS AND QUALIFICATIONS D-1. We express no opinion as to the effect, if any, of the following: (a) the choice of law, service of process, consent to jurisdiction and consent to venue provisions in the Loan Documents; (b) federal securities laws and regulations administered by the Securities and Exchange Commission, state "blue sky" laws and regulations, and laws and regulations relating to commodity (and other) futures and indices and other similar instruments; and (c) pension and employee benefit laws and regulations. D-2. The opinion set forth herein as to enforceability of the Loan Documents is subject to the effect of bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws affecting the rights and remedies of creditors generally and the effect of general principles of equity, whether applied by a court of law or equity. D-3. The opinions set forth herein are subject to the effect of generally applicable rules of law that: (a) limit or affect the enforceability of provisions of a contract that purport to require waiver of the obligations of good faith, fair dealing, diligence and reasonableness; (b) limit the availability of a remedy under certain circumstances where another remedy has been elected; PC-Opinion-Ormat/Bank Leumi Bank Leumi USA November 6, 2003 Page 6 (c) limit the enforceability of provisions releasing, exculpating or exempting a party from, or requiring indemnification of a party for, liability for its own action or inaction, to the extent that the action or inaction involves negligence, recklessness, willful misconduct, or unlawful conduct; (d) may, where less than all of a contract may be enforceable, limit the enforceability of the balance of the contract to circumstances in which the unenforceable portion is not an essential part of the agreed exchange; (e) govern and afford judicial discretion regarding the determination of damages and entitlement to attorneys' fees and other costs; and (f) may permit a party who has materially failed to render or offer performance required by the contract to cure that failure unless (i) permitting a cure would unreasonably hinder the aggrieved party from making substitute arrangements for performance or (ii) it is important in the circumstances to the aggrieved party that performance occur by the date stated in the contract. D-4. We express no opinion as to the validity, binding effect or enforceability of purported waivers of any statutory or other rights, court rules or defenses to obligations to the extent that such waivers (i) are against public policy or (ii) constitute waivers of rights that by law, regulation or judicial decision may not be waived. D-5. The enforceability of provisions in the Loan Documents to the effect that terms may not be waived or modified except in writing may be limited under certain circumstances. D-6. We express no opinion as to the effect of the laws of any jurisdiction in which the Bank is located (other than the State of New York) that limit the interest, fees or other charges that the Bank may impose for the loan or use of money or other credit. PC-Opinion-Ormat/Bank Leumi Bank Leumi USA November 6, 2003 Page 7 D-7. We have not reviewed, nor are our opinions in any way predicated upon an examination of, the laws of any jurisdiction other than the federal laws of the United States of America, the laws of the State of New York and the Delaware corporation law. We expressly disclaim responsibility for advising you as to the effect, if any, that the laws of any other jurisdiction may have upon the opinions set forth herein. Furthermore, we express no opinion as to matters that may be affected by pending or proposed federal, state or local legislation, even though such legislation, if subsequently enacted, might affect the opinions expressed herein. Please be advised that we do not maintain an office in either Delaware or New York. D-8. The opinions set forth herein are as of the date hereof, and we disclaim any undertaking or obligation to update these opinions for events and circumstances occurring after the date hereof or as to facts relating to prior events that are subsequently brought to our attention. D-9. The opinions set forth herein, including those opinions as to the enforceability of the Loan Documents, are subject to the qualification that they do not address, except as expressly stated elsewhere in the opinion letter, enforceability of any of the following provisions included in such documents: (a) provisions that contain a waiver of (i) broadly or vaguely stated rights, (ii) the benefits of statutory, regulatory or constitutional rights, unless and to the extent the statute, regulation or constitution explicitly allows waiver, (iii) unknown future defenses, and (iv) rights to damages; (b) provisions that attempt to change or waive rules of evidence or fix the method or quantum of proof to be applied in litigation or similar proceedings; (c) provisions waiving the pledgor's rights under the Uniform Commercial Code, including the right that Collateral be disposed of in a reasonable commercial manner; and (d) provisions appointing one party as attorney-in-fact for an adverse party. PC-Opinion-Ormat/Bank Leumi Bank Leumi USA November 6, 2003 Page 8 This opinion letter is rendered only to you and your successors and assigns and is solely for your benefit in connection with the transactions contemplated by the Loan Documents. This opinion letter may not be used or relied upon for any other purpose or by any other person without our prior written consent. Very truly yours, /s/ PERKINS COIE LLP ---------------------------------------- PERKINS COIE LLP PC-Opinion-Ormat/Bank Leumi Bank Leumi USA Member FDIC RESTATED PROMISSORY NOTE (GRID) New York, N.Y., October 2, 2003 $20,000,000.00 For Value Received, Ormat Nevada Inc., a Delaware corporation ("Borrower"), promises to pay to the order of BANK LEUMI USA (the "Bank"), at its offices at 564 Fifth Avenue, New York NY 10036 the principal sum of Twenty Million Dollars ($20,000,000.00) ("Maximum Principal Amount") or, if less, the aggregate unpaid principal sum of all Loans made by the Bank, to the Borrower of this Restated Note from time to time in accordance with the Amended and Restated Bridge Loan Agreement between the Borrower and the Bank of even date herewith (the "Loan Agreement"). The principal sum of each such Loan shall be payable on February 2, 2005, or such earlier date as may be specified herein or in the Loan Agreement. This Restated Note evidences borrowings under and has been issued by the Borrower in accordance with the terms of the Loan Agreement. The Borrower acknowledges that the obligation of the Bank to make Loans is subject to satisfaction at the time of each such Loan of the conditions set forth in the Loan Agreement. The Bank and any holder hereof is entitled to the benefits of the Loan Agreement and the other Loan Documents, and may enforce the agreements of the Borrower contained therein, and any holder hereof may exercise the respective remedies provided for thereby or otherwise available in respect thereof, all in accordance with the respective terms thereof. All capitalized terms used in this Restated Note and not otherwise defined herein shall have the same meanings herein as in the Loan Agreement. The Borrower has the right in certain circumstances and the obligation under certain other circumstances to prepay the whole or part of the principal of this Restated Note, and the right under certain circumstances to reborrow, on the terms and conditions specified in the Loan Agreement. Each Loan shall bear interest (from the date of such Loan) at a rate per annum which shall be equal to one-and-one-half percentage points (1.5%) per annum above the Libor Rate (Reserve Adjusted) for a three month term, calculated by the Bank, in the manner hereinafter provided, ---------- * "Libor Rate" means, relative to any Interest Period (hereinafter defined) (i) the rate quoted by the British Bankers Association in London as its "LIBOR" rate for U.S. dollar deposits at or about 11:00 a.m., London time, on the second Business Day prior to the commencement of the Interest Period; provided, however, that if the Bank adopts generally in its business a different rate quoting system or service for obtaining the rate of interest commonly known as "LIBOR" for U.S. dollar deposits, then upon giving prompt notice to the Borrower such alternative rate quoting system or service shall be utilized for determining "IBOR" in lieu of the rate quoted by the British Bankers Association, and (ii) if the rate may not be determined by the Bank as provided in the preceding clause (i) for any reason, as determined by the Bank in its reasonable judgment, then the rate equal to the rate of interest per annum determined by the Bank to be the arithmetic mean (rounded upward to the next l/16th of 1%) of the rates of interest per annum at which U.S. dollar deposits in the approximate amount of the amount of the Loan to be made or continued hereunder by the Bank and having a maturity comparable to such Interest Period would be offered to the Bank in the London Interbank market at its request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period. The "Libor Reserve Percentage" means, relative to any Interest Period for Loans hereunder, the percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day (whether or not applicable to the Bank) under regulations issued from time to time by the Federal Reserve System Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency but in no event in excess of the maximum rate permitted by applicable law; provided, that if the Bank shall have determined that by reason of circumstances affecting the Libor Rate (Reserve Adjusted) adequate and reasonable means do not exist for ascertaining the Libor Rate (Reserve Adjusted) for any Interest Period, or if the time remaining to the stated maturity date of this Restated Note is less than the Interest Period, then in either such case, the applicable rate of interest during such Interest Period shall be equal to the rate of interest designated by the Bank, and in effect from time to time, as its "Reference Rate", adjusted when said Reference Rate changes, but in no event in excess of the maximum rate permitted by law (the Borrower acknowledges that the Reference Rate may not necessarily represent the lowest rate of interest charged by the Bank to customers). No Libor Rate (Reserve Adjusted)-based Loan shall be made less than three months before the stated maturity date of this Restated Note or after the occurrence and continuance of an Event of Default or an event which, upon notice, passage of time or both would constitute an Event of Default. Interest hereunder shall be payable on the last day of each Interest Period and at maturity (whether by acceleration or otherwise). The term "Interest Period" as used in this Restated Note shall mean a period of three months. No Interest Period shall extend beyond the stated maturity date of this Restated Note. The initial Interest Period for this Restated Note shall begin on the day of the initial draw down under the Restated Note, and each subsequent Interest Period shall begin on the last day of the immediately preceding Interest Period. If an Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall end on the next succeeding Business Day; provided, however, that, if any Interest Period would otherwise end on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall end on the next preceding Business Day and further provided that if any Interest Period commences on the last Business Day in a calendar month or if there is no corresponding day in the calendar month in which it is to end, then it shall end on the last Business Day in a calendar month. The Bank shall give notice to the Borrower of the interest rate determined for each Interest Period as provided herein, and such notice shall be conclusive and binding upon the Borrower for all purposes absent manifest error. Borrower shall pay to the Bank to compensate it for any loss, cost or expense that the Bank determines is attributable to any prepayment of a Loan bearing interest at the Libor Rate (Reserve Adjusted). Such compensation shall be an amount equal to the excess (if any) of (i) the amount of interest that otherwise would have accrued on the principal amount so prepaid for the period from the date of such prepayment to the last day of the then current Interest Period for such Loan at the applicable rate of interest for such Loan provided for herein, less (ii) the amount of interest that otherwise would have accrued on such principal amount from the date of such prepayment until the end of the then current Interest Period at a rate per annum equal to the interest component of the amount the Bank would have bid in The London Interbank market for dollar deposits of leading banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by the Bank). The term "Business Day" shall mean any day of the year on which the Bank is open for business (as required or permitted by law or otherwise) and on which dealings in U.S. dollar deposits are carried on in London, England. If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful for the Bank to make Libor Rate (Reserve Adjusted)-based Loans, or to maintain interest rates based on Libor, then in the former event, any obligation of the Bank contained herein or in any agreement of the Bank to make available such unlawful Libor Rate -------------------------------------------------------------------------------- funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Federal Reserve System Board). "Libor Rate (Reserve Adjusted)" means, relative to any Loan to be made or continued hereunder for any Interest Period, the rate of interest per annum (rounded upwards to the next 1/16th of 1%) determined by the Bank as follows: Libor Rate Libor Rate ------------------------- (Reserve Adjusted) = 1.00-Libor Reserve Percentage (Reserve Adjusted)-based Loans shall immediately be cancelled, and in the latter event, any such unlawful Libor Rate (Reserve Adjusted)-based Loans then outstanding shall be converted, at the Bank's option, so that interest on the outstanding principal balance subject hereto is determined in relation to the Reference Rate as herein above provided; provided however, that if any such Change in Law shall permit any Libor Rate (Reserve Adjusted)-based Loans to remain in effect until the expiration of the Interest Period applicable thereto, then such permitted Libor Rate (Reserve Adjusted)-based Loans shall continue in effect until the expiration of such Inerest Period. Upon the occurrence of any of the foregoing events, Borrower shall pay to the Bank immediately upon demand such amounts as may be necessary to compensate the Bank for any fines, fees, charges, penalties or other costs incurred or payable by the Bank as a result thereof and which are attributable to any Libor Rate (Reserve Adjusted) options made available to Borrower hereunder, and any reasonable allocation made by the Bank among its operations shall be conclusive and binding upon Borrower. If any Change in Law or compliance by the Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall: (A) subject the Bank to any tax, duty or other charge with respect to any Libor Rate (Reserve Adjusted) options, or change the basis of taxation of payments to the Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of the Bank); or (B) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition or funds by any office of the Bank; or (C) impose on the Bank any other condition; and the result of any of the foregoing is to increase the cost to the Bank of making, renewing or maintaining any Libor Rate (Reserve Adjusted)-based Loan hereunder and/or to reduce any amount receivable by the Bank in connection therewith, then in any such case, Borrower shall pay to the Bank immediately upon demand such amounts as may be necessary to compensate the Bank for any additional costs incurred by the Bank and/or reductions in amounts received by the Bank which are attributable to such Libor Rate (Reserve Adjusted)-based Loan. In determining which costs incurred by the Bank and/or reductions in amounts received by the Bank are attributable to any Libor Rate (Reserve Adjusted)-based Loan made to Borrower hereunder, any reasonable allocation made by the Bank among its operations shall be conclusive and binding upon Borrower. The Bank is hereby authorized to enter on the schedule attached hereto the amount of each Loan (including all Loans now outstanding and evidenced by the Note made pursuant to the Initial Agreement) and each payment of principal thereon, without any further authorization on the part of the Borrower, but the Bank's failure to make such entry shall not limit or otherwise affect the obligations of the Borrower. In the event that any other Liabilities (as hereinafter defined) of Borrower to the Bank are due at any time that the Bank receives a payment from Borrower on account of this Restated Note or any such other Liabilities of Borrower, the Bank may apply such payments to amounts due under this Restated Note or any such other Liabilities in such manner as the Bank, in its discretion, elects, regardless of any instructions from Borrower to the contrary. Interest shall be computed on the basis of a 360-day year. The Borrower authorizes (but shall not require) the Bank to debit any account maintained by the Borrower with the Bank, at any date on which the payment of principal or of interest on any of the Liabilities is due; in an amount equal to any unpaid portion of such payment. If the time for payment of principal of or interest on any of the Liabilities or any other money payable hereunder or with respect to any of the Liabilities becomes due on a day on which the Bank's offices are closed (as required or permitted by law or otherwise), such payment shall be made on the next succeeding Business Day, and such extension shall be included in computing interest in connection with such payment. All payments by any Borrower of this Restated Note on account of principal, interest or fees hereunder shall be made in lawful money of the United States of America, in immediately available funds. All Property (as hereinafter defined) held by the Bank shall be subject to a security interest in favor of the Bank or holder hereof as security for any and all Liabilities. The term "Property" shall mean the balance of every deposit account of the Borrower with the Bank or any of the Bank's nominees or agents and all other obligations of the Bank or any of its nominees or agents to the Borrower, whether now existing or hereafter arising, and all other personal property of the Borrower (including without limitation all money, accounts, general intangibles, goods, instruments, documents and chattel paper) which, or evidence of which, are now or at any time in the future shall come into the possession or under the control of or be in transit to the Bank or any of its nominees or agents for any purpose, whether or not accepted for the purposes for which it was delivered. The term "Liabilities" shall mean the indebtedness evidenced by this Restated Note and all other indebtedness, liabilities and obligations of any kind of the Borrower (or any partnership or other group of which the Borrower is a member) to (a) the Bank, (b) any group of which the Bank is a member, or (c) any other person if the Bank has a participation or other interest in such indebtedness, liabilities or obligations, whether (i) for the Bank's own account or as agent for others, (ii) acquired directly or indirectly by the Bank from the Borrower or others, (iii) absolute or contingent, joint or several, secured or unsecured, liquidated or unliquidated, due or not due, contractual or tortious, now existing or hereafter arising, or (iv) incurred by the Borrower as principal, surety, endorser, guarantor or otherwise, and including without limitation all expenses, including attorneys' fees, incurred by the Bank in connection with any such indebtedness, liabilities or obligations or any of the Property (including any sale or other disposition of the Property). Upon the occurrence of any Event of Default, as defined in the Loan Agreement, this Restated Note may become, or may be declared, due and payable immediately without demand or notice, and all other debts or obligations of the Borrower to the Bank or holder hereof, whether due or not due and whether direct or contingent and howsoever evidenced, shall, at the option of the Bank or holder hereof, also become due and payable immediately without demand or notice. After this Restated Note becomes due, at stated maturity or on acceleration, any unpaid balance hereof shall bear interest from the date it becomes due until paid at a rate per annum 3% above the rate borne by this Restated Note when it becomes due or, if such rate shall not be lawful with respect to the undersigned, then at the highest lawful rate. The liability of any party to commercial paper held by the Bank or holder hereof, other than the Borrower hereof, shall remain unaffected hereby, and such parties shall remain liable thereon in accordance with the original tenor thereof. The Borrower agrees that if an attorney is retained to enforce or collect this Restated Note or any other obligations by reason of non-payment of this Restated Note when due or made due hereunder, a reasonable attorneys' fee shall be paid in addition. This Restated Note shall be governed by the laws of the State of New York and shall be binding upon the Borrower and the Borrower's heirs, administrators, successors and assigns. The Borrower hereby irrevocably consents to the jurisdiction of any New York State or Federal court located in New York City over any action or proceeding arising out of any dispute between the Borrower and the Bank, and the Borrower further irrevocably consents to the service of process in any such action or proceeding by the mailing of a copy of such process to the Borrower at the address set forth below. In the event of litigation between the Bank and the Borrower over any matter connected with this Restated Note or resulting from transactions hereunder, the right to a trial by jury is hereby waived by the Bank and the Borrower. The Borrower also waives the right to interpose any set-off or counterclaim of any nature. The Bank or any holder may accept late payments, or partial payments, even though marked "payment in full" or containing words of similar import or other conditions, without waiving any of its rights. No amendment, modification or waiver of any provision of this Restated Note nor consent to any departure by Borrower therefrom shall be effective, irrespective of any course of dealing, unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. The rights and remedies of the Bank provided for hereunder (including but not limited to the right to accelerate Liabilities of Borrower and to realize on any security for any such Liabilities) are cumulative with the rights and remedies of the Bank available under any other instrument or agreement or under applicable law. The Restated Note amends, restates and supersedes the Note made pursuant to the Initial Agreement. IN WITNESS WHEREOF, the Borrower has caused this Restated Note to be signed in its corporate name and its corporate seal to be impressed thereon by its duly authorized officer as of the day and year first above written. ORMAT NEVADA, INC. By: /s/ Connie Stechman ------------------------------------ Name: Connie Stechman Title: Assistant Secretary [Corporate Seal]
Exhibit 10.1.3 ================================================================================ CREDIT FACILITY AGREEMENT DATED AS OF SEPTEMBER 5, 2000 BY AND BETWEEN ORMAT MOMOTOMBO POWER COMPANY AS BORROWER AND BANK HAPOALIM B.M., AS LENDER MOMOTOMBO FIELD AND POWER PLANT REHABILITATION (NICARAGUA) ================================================================================ HOLLAND & KNIGHT LLP 2100 PENNSYLVANIA AVENUE, N.W., SUITE 400 WASHINGTON, D.C. 20037 CREDIT FACILITY AGREEMENT ================================================================================ ================================================================================ TABLE OF CONTENTS Page ARTICLE 1. DEFINED TERMS AND PRINCIPLES OF CONSTRUCTION...............1 SECTION 1.01 DEFINED TERMS AND PRINCIPLES OF CONSTRUCTION...............1 ARTICLE 2. AMOUNT AND TERMS OF THE CREDIT.............................1 SECTION 2.01 THE TOTAL COMMITMENT.......................................1 SECTION 2.02 PROCEDURES FOR DISBURSEMENT OF THE LOANS...................2 SECTION 2.03 INTEREST...................................................3 SECTION 2.04 REPAYMENT..................................................4 SECTION 2.05 FEES.......................................................4 SECTION 2.06 PAYMENTS...................................................5 SECTION 2.07 PAYMENT ALLOCATION.........................................5 SECTION 2.08 CURRENCY OF PAYMENT........................................5 SECTION 2.09 TAXES......................................................6 SECTION 2.10 TERMINATION OF TOTAL COMMITMENT............................7 SECTION 2.11 VOLUNTARY PREPAYMENT.......................................7 SECTION 2.12 INTENTIONALLY OMITTED......................................7 SECTION 2.13 FUNDING COSTS..............................................7 SECTION 2.14 MAINTENANCE AMOUNT.........................................7 SECTION 2.15 ILLEGALITY.................................................9 SECTION 2.16 SUBSTITUTE BASIS OF BORROWING..............................9 SECTION 2.17 MITIGATION PROVISION......................................10 SECTION 2.18 CERTIFICATE OF LENDER.....................................10 SECTION 2.19 SURVIVAL..................................................10 ARTICLE 3. REPRESENTATIONS AND WARRANTIES............................10 SECTION 3.01 STATUS....................................................10 SECTION 3.02 POWER AND AUTHORITY.......................................11 SECTION 3.03 NO VIOLATION..............................................11 SECTION 3.04 ORGANIZATION..............................................11 SECTION 3.05 SUBSIDIARIES..............................................12 SECTION 3.06 SINGLE-PURPOSE BORROWER...................................12 i CREDIT FACILITY AGREEMENT ================================================================================ ================================================================================ SECTION 3.07 FINANCIAL STATEMENTS; FINANCIAL CONDITION: UNDISCLOSED LIABILITIES; ETC...........................................12 SECTION 3.08 LITIGATION; LABOR DISPUTES.................................12 SECTION 3.09 TRUE AND COMPLETE DISCLOSURE...............................13 SECTION 3.10 TAX RETURNS AND PAYMENTS...................................13 SECTION 3.11 GOVERNMENTAL APPROVALS.....................................13 SECTION 3.12 COMPLIANCE WITH STATUTES, ETC..............................14 SECTION 3.13 ENVIRONMENTAL MATTERS......................................14 SECTION 3.14 PATENTS, LICENSES, FRANCHISES AND FORMULAS.................15 SECTION 3.15 SUBMISSION TO LAW AND JURISDICTION.........................15 SECTION 3.16 STATUS OF THE LOANS........................................15 SECTION 3.17 PROJECT DOCUMENTS; SUFFICIENCY OF PROJECT DOCUMENTS........15 SECTION 3.18 FEES AND ENFORCEMENT.......................................16 SECTION 3.19 AVAILABILITY AND TRANSFER OF FOREIGN CURRENCY..............16 SECTION 3.20 BUSINESS PLAN..............................................16 SECTION 3.21 TITLES; LIENS..............................................16 SECTION 3.22 TRANSACTIONS WITH AFFILIATES...............................17 SECTION 3.23 NO ADDITIONAL FEES.........................................17 SECTION 3.24 REGULATION OF PARTIES......................................17 ARTICLE 4. CONDITIONS PRECEDENT.......................................17 SECTION 4.01 CONDITIONS OF FIRST DISBURSEMENT OF LOAN I.................17 SECTION 4.02 CONDITIONS OF EACH DISBURSEMENT............................20 SECTION 4.03 NO WAIVERS.................................................22 SECTION 4.04 CONDITIONS FOR FIRST DISBURSEMENT OF LOAN II...............22 ARTICLE 5. COVENANTS..................................................23 SECTION 5.01 INFORMATION COVENANTS......................................23 SECTION 5.02 BOOKS, RECORDS AND INSPECTIONS; ACCOUNTING AND AUDIT MATTERS....................................................25 SECTION 5.03 MAINTENANCE OF PROPERTY; INSURANCE.........................26 SECTION 5.04 MAINTENANCE OF EXISTENCE; PRIVILEGES; ETC..................27 SECTION 5.05 COMPLIANCE WITH STATUTES...................................27 SECTION 5.06 PROJECT IMPLEMENTATION.....................................27 SECTION 5.07 AUDITORS...................................................27 SECTION 5.08 TAXES, DUTIES, ETC.........................................27 SECTION 5.09 PERFORMANCE OF OBLIGATIONS.................................28 ii CREDIT FACILITY AGREEMENT ================================================================================ ================================================================================ SECTION 5.10 AVAILABILITY AND TRANSFER OF FOREIGN EXCHANGE..............28 SECTION 5.11 NAME CHANGES; ETC..........................................28 SECTION 5.12 CONSOLIDATION, MERGER, SALE OF ASSETS......................29 SECTION 5.13 DISTRIBUTIONS; RESTRICTED PAYMENTS.........................29 SECTION 5.14 LEASES.....................................................29 SECTION 5.15 INDEBTEDNESS...............................................29 SECTION 5.16 LIENS......................................................30 SECTION 5.17 GUARANTEES.................................................30 SECTION 5.18 SUBSIDIARIES; ADVANCES, INVESTMENTS AND LOANS..............30 SECTION 5.19 TRANSACTIONS...............................................31 SECTION 5.20 OTHER TRANSACTIONS.........................................31 SECTION 5.21 MODIFICATIONS OF ORGANIZATION DOCUMENTS; ADDITIONAL AGREEMENTS; ASSIGNMENTS AND MODIFICATIONS OF AGREEMENTS; ETC............................................31 SECTION 5.22 NO OTHER BUSINESS..........................................32 SECTION 5.23 ABANDONMENT................................................32 SECTION 5.24 IMPROPER USE...............................................32 SECTION 5.25 BUSINESS PLAN EXPENDITURES.................................33 SECTION 5.26 ISSUANCE OR TRANSFER OF SHARES.............................33 SECTION 5.27 AMENDMENT OF BUSINESS PLAN.................................33 SECTION 5.28 BANK ACCOUNTS..............................................33 SECTION 5.29 PRESS RELEASES; ADVERTISING................................33 SECTION 5.30 ADDITIONAL DOCUMENTS; FILINGS AND RECORDINGS...............33 SECTION 5.31 EMPLOYEES AND EMPLOYEE PLANS...............................34 SECTION 5.32 ACCOUNTING CHANGES.........................................34 SECTION 5.33 DEBT SERVICE RESERVE ACCOUNT...............................34 SECTION 5.34 FINANCIAL RATIOS...........................................35 SECTION 5.35 COMPLETION CERTIFICATE.....................................35 SECTION 5.36 LENDER'S EXPERTS AND CONSULTANTS...........................35 SECTION 5.37 REGULATORY STATUS..........................................36 SECTION 5.38 CHILD LABOR AND FORCED LABOR...............................36 SECTION 5.39 INSURANCE PROCEEDS.........................................36 SECTION 5.40 NOTARIZATION, CONSULARIZATION AND REGISTRATION OF CFA......36 SECTION 5.41 MIGA PREMIUM PAYMENTS......................................36 SECTION 5.42 PPA AMENDMENT..............................................37 iii CREDIT FACILITY AGREEMENT ================================================================================ ================================================================================ SECTION 5.43 MIGA ARBITRATION...........................................37 ARTICLE 6. EVENTS OF DEFAULT..........................................37 SECTION 6.01 PAYMENTS...................................................37 SECTION 6.02 REPRESENTATIONS, ETC.......................................37 SECTION 6.03 COVENANTS..................................................37 SECTION 6.04 DEFAULT UNDER OTHER AGREEMENTS.............................38 SECTION 6.05 BANKRUPTCY, ETC............................................39 SECTION 6.06 PROJECT EVENTS.............................................39 SECTION 6.07 MATERIAL ADVERSE EFFECT....................................40 SECTION 6.08 PROJECT DOCUMENTS; SECURITY DOCUMENTS......................40 SECTION 6.09 OWNERSHIP OF THE BORROWER..................................40 SECTION 6.10 JUDGMENTS..................................................40 SECTION 6.11 GOVERNMENTAL ACTION........................................41 SECTION 6.12 PERMITS....................................................41 SECTION 6.13 TRANSFER OF COLLATERAL; EVENT OF LOSS; DIMINUTION OF PROPERTY RIGHTS............................................41 SECTION 6.14 COMPLETION BY DATE CERTAIN.................................41 SECTION 6.15 SPONSOR PROJECT FUNDING AGREEMENT..........................42 SECTION 6.16 CONTINGENT GUARANTEE AGREEMENT.............................42 SECTION 6.17 MIGA CONTRACTS.............................................42 SECTION 6.18 REMEDIES...................................................42 ARTICLE 7. MISCELLANEOUS..............................................42 SECTION 7.01 NOTICES....................................................42 SECTION 7.02 ENGLISH LANGUAGE...........................................45 SECTION 7.03 INDEMNITIES AND EXPENSES...................................45 SECTION 7.04 SURVIVAL...................................................46 SECTION 7.05 GOVERNING LAW; SUBMISSION TO JURISDICTION..................47 SECTION 7.06 SUCCESSORS AND ASSIGNS.....................................48 SECTION 7.07 COUNTERPARTS...............................................49 SECTION 7.08 RIGHT OF SETOFF............................................49 SECTION 7.09 NO WAIVER; REMEDIES CUMULATIVE.............................49 SECTION 7.10 SEVERABILITY...............................................50 SECTION 7.11 CALCULATION................................................50 SECTION 7.12 HEADINGS DESCRIPTIVE.......................................50 iv CREDIT FACILITY AGREEMENT ================================================================================ ================================================================================ SECTION 7.13 AMENDMENT OR WAIVER........................................50 SECTION 7.14 DISCLAIMER.................................................50 SECTION 7.15 PAYMENTS SET ASIDE.........................................50 SECTION 7.16 CONFIDENTIAL INFORMATION...................................51 SECTION 7.17 NO RECOURSE................................................51 v CREDIT FACILITY AGREEMENT ================================================================================ ================================================================================ SCHEDULES, APPENDICES, ANNEXES AND EXHIBITS SCHEDULES SCHEDULE DESCRIPTION -------- ----------- 2.02 Application for Funding 3.08 Litigation; Labor Disputes 3.11 Governmental Approvals 4.04 Provisions for Alternative Amendment to PPA 5.01(d) Officer's Certificate 5.03 Insurance Policies 5.43 Form of Original Amendment to PPA APPENDICES APPENDIX DESCRIPTION -------- ----------- A Definitions ANNEXES ANNEX DESCRIPTION ----- ----------- A Business Plan vi CREDIT FACILITY AGREEMENT ================================================================================ ================================================================================CREDIT FACILITY AGREEMENT CREDIT FACILITY AGREEMENT (this "Agreement"), dated as of September 5, 2000 (the "Effective Date"), between ORMAT MOMOTOMBO POWER COMPANY, an exempted limited liability company incorporated and existing under the laws of the Cayman Islands, (the "Borrower") and BANK HAPOALIM B.M., a commercial bank organized and existing under the laws of the State of Israel, as lender ("Lender"). Capitalized terms used herein shall have the meanings set forth in Appendix A, unless otherwise defined herein. WITNESSETH: WHEREAS, the Borrower has requested the Lender to make a credit facility (the "Credit") available to it on the terms and subject to the conditions set forth in this Agreement, for the purpose of financing the Project in Nicaragua as more fully described in the Agreement of Association in Participation and in the Business Plan; and WHEREAS, the Lender is willing to provide the Credit to the Borrower on the terms and subject to the conditions set forth in this Agreement, for the purpose described above; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1. DEFINED TERMS AND PRINCIPLES OF CONSTRUCTION SECTION 1.01. DEFINED TERMS AND PRINCIPLES OF CONSTRUCTION. For all purposes of this Agreement, (a) capitalized terms used but not otherwise defined herein shall have the meanings set forth in Appendix A attached hereto and (b) the principles of construction set forth in Appendix A shall apply. ARTICLE 2. AMOUNT AND TERMS OF THE CREDIT SECTION 2.01 THE TOTAL COMMITMENT. Subject to the terms and conditions of this Agreement, the Lender agrees to make available to the Borrower, during the applicable Availability Period, the Loans not to exceed the Total Commitment amount of $48,235,000 in two tranches identified as Loan I and Loan II as follows: (a) Loan I. An amount up to $11,435,000 on account of Loan I to finance up to 70% of the costs of Phase I of the Project; and (b) Loan II. An amount up to $36,800,000 on account of Loan II to finance up to (i) an amount equal to 75% of costs of Phase II of the Project, plus (ii) an amount equal to 5% of the costs of Phase I of the Project (the "Additional Amount"). (c) No Reborrowing. The Loans are not revolving in nature, and any amounts repaid, prepaid or canceled pursuant to the terms of this Agreement may not be reborrowed. (d) Benefit of Collateral. Any and all amounts due to the Lender with respect to the Loans under this Agreement and any other Financing Documents are entitled to the benefit of the Collateral which is held by the Lender pursuant to the terms of the Security Documents and the Sponsor Project Funding Agreement. CREDIT FACILITY AGREEMENT ================================================================================ ================================================================================ (e) Availability. For the purpose of making Disbursements hereunder: (i) Loan I will be available during the Loan I Availability Period; and, (ii) Loan II will be available during the Loan II Availability Period. The Loan I Availability Period and the Loan II Availability Period shall run consecutively, but not concurrently, unless otherwise agreed by the Lender. SECTION 2.02 PROCEDURES FOR DISBURSEMENT OF THE LOANS. (a) Procedure. Subject to the terms specified in this Section 2.02, the Borrower may submit to the Lender from time to time, but not more frequently than once per month, a properly executed Application for Funding in the form of Schedule 2.02 ("Application for Funding") for Disbursements to be made in accordance with the Business Plan as: (i) reimbursements to the Borrower for payments previously made to Project contractors, subcontractors, suppliers, vendors and other Persons; (ii) advances to the Borrower for payment for work performed or to be performed by Project contractors, subcontractors, suppliers, vendors and other Persons for amounts payable by the Borrower within thirty (30) days following the date of Disbursement in each case as budgeted in the Business Plan; (iii) advances to fund MIGA premium payments in accordance with Section 5.41; (iv) advances to fund the payment of fees under Section 2.05; and (v) advances to fund payments by the Borrower of Attorney Costs and other expenses incurred by the Lender pursuant to Section 7.03(b)(i). The Borrower shall use such Application for Funding to request each Disbursement under (i) Loan I during the Loan I Availability Period and (ii) Loan II during the Loan II Availability Period. The Borrower shall submit each such Application for Funding at least twelve (12) Business Days prior to the date on which a Disbursement is requested. No Application for Funding shall request a Disbursement (i) in excess of the then unutilized and uncancelled amount of the Loan I or Loan II Commitment, respectively, less the amount required to permit the Lender to fund the Borrower's obligation under Section 5.33 (nor shall the aggregate amount of the Disbursements exceed the Total Commitment), or (ii) that is less than $300,000 (except with respect to the last Disbursement in respect of each Loan). Except in the case of the first Application for Funding submitted under Loan I, each Application for Funding shall include an implementation report, prepared and executed by the Borrower's representative in accordance with Section 5.01(f). (b) Adherence to Business Plan. All amounts requested under each Application for Funding shall be consistent with the Business Plan. The Lender shall not disburse all or any part of the amounts requested in an Application for Funding (i) for which all conditions precedent for the making of such Disbursement have not been satisfied or waived pursuant to this Agreement or (ii) with respect to Disbursements to be made under Loan II, as to which documentation required to be delivered to the Lender or the Lender's Engineer, as the case may be, has not been timely delivered by the Borrower. With respect to Loan II, the making of any Disbursement thereunder shall be contingent on the Lender's receipt four Business Days prior to the date on which a Disbursement is requested of a certificate from the Lender's Engineer appointed under Section 5.36(a) hereof to the effect that the costs incurred or to be paid are reasonable and appropriate for the value of the work performed or to be performed and that such work is in conformity with the Business Plan. (c) Errors in Applications for Funding. If any Application for Funding shall be disapproved in whole or in part on the basis of errors contained therein or on the basis of incompleteness of such Application for Funding, the Lender will cooperate in good faith with the Borrower in the Borrower's efforts to correct any and all such errors or incompleteness so as to 2 CREDIT FACILITY AGREEMENT permit the making of a Disbursement in a timely manner (taking into account the due date for the payment of Project Costs which are the subject of such Application for Funding). The Borrower acknowledges that, as a result of any such disapproval of an Application for Funding, the date on which a Disbursement is actually approved and/or proceeds actually disbursed may be later than the date requested in such Application for Funding. (d) Fundings under Sponsor Project Funding Agreement. All disbursements to be made by the Sponsor pursuant to the Sponsor Project Funding Agreement shall be made in accordance with the terms thereof, and it shall not be necessary for the Borrower to submit an Application for Funding in connection therewith. The Borrower shall certify to the Lender in each Application for Funding that the amounts required to be disbursed to the Borrower in accordance with the terms of the Sponsor Project Funding Agreement have been made as of the date of the requested Disbursement. (e) Loan Disbursement Account. All Disbursements, irrespective of whether made as reimbursements or advances shall be made to the Borrower's current account with the New York Branch of the Lender. SECTION 2.03 INTEREST. (a) Interest Rate and Payment. Interest shall accrue and be payable in arrears on each Interest Payment Date on the outstanding balances of Loan I and Loan II, respectively, at the rate of LIBOR plus 2.5% per annum until the beginning of the first Interest Period following the completion date of Phase I with respect to Loan I, and the completion date of Phase II with respect to Loan II, at which time the interest rate on each such Loan shall be LIBOR plus 2.375% per annum (the "Interest Rate"). (b) Capitalized Interest Payment. (i) Loan I. On each Interest Payment Date until the first scheduled Loan I Principal Repayment Date, interest at the Interest Rate due on each such date with respect to Loan I shall be capitalized by adding such amount to the outstanding balance of Loan I. (ii) Loan II. On each Interest Payment Date until the first scheduled Loan II Principal Repayment Date, interest at the Interest Rate due on each such date with respect to Loan II, shall be capitalized by adding such amount to the outstanding balance of Loan II. (c) Additional Interest. With respect to any other interest due to the Lender, on each Interest Payment Date, the Borrower shall pay to the Lender interest in respect of each Interest Period, on the daily unpaid principal amounts of any Loan outstanding during such Interest Period, in arrears, at the rates per annum equal to the Interest Rates in effect applicable to each such period (or at such other interest rates as may be specified in this Article 2). (d) Overdue Interest. Without prejudice to the remedies available to the Lender under this Agreement or otherwise, the Borrower shall pay, in Dollars, interest at the rate of LIBOR Overnight Rate plus 4.50% on any principal amount of any Loan or any other amount which is due under this Agreement which is not paid when due (whether by lapse of time, acceleration, requirement for mandatory prepayment or otherwise), for each day that such amount remains unpaid until payment in full thereof. 3 CREDIT FACILITY AGREEMENT (e) Computation of Interest. Interest shall be computed on the basis of the actual number of days elapsed in the relevant Interest Period and a year of 360 days. SECTION 2.04 REPAYMENT. (a) Loan I. The principal of Loan I shall be repaid in 32 consecutive equal payments, commencing on the Principal Repayment Date occurring on the earlier of (i) 27 months from the Effective Date or (ii) the last day of the Interest Period ending not sooner than thirty (30) days following receipt of a Phase I Completion Certificate, and on each Principal Repayment Date thereafter. (b) Loan II. The principal of Loan II shall be repaid in 28 equal consecutive payments, commencing on the Principal Repayment Date occurring after the earlier of (i) 63 months from the Effective Date or (ii) the last day of the Interest Period which ends at least 30 days following receipt of a Phase II Completion Certificate, but in no event later than 39 months after the Loan II Closing Date, and on each Principal Repayment Date thereafter. SECTION 2.05 FEES. (a) Commitment Fee. (i) Loan I. The Borrower shall pay to the Lender a commitment fee (the "Loan I Commitment Fee") which shall be at the rate of 0.25% per annum of the difference, determined as of the relevant due date, between (A) the Loan I Commitment and (B) the drawn amount under Loan I. The Loan I Commitment Fee shall begin to accrue with retroactive effect as of March 15, 2000 and shall be increased to 0.50% per annum on the Effective Date. (ii) Loan II. The Borrower shall pay to the Lender a commitment fee (the "Loan II Commitment Fee") which shall be at the rate of 0.25% per annum of the difference, determined as of the relevant due date, between (A) the Loan II Commitment and (B) the drawn amount under Loan II. The Loan II Commitment Fee shall begin to accrue with retroactive effect as of March 15, 2000 and shall be increased to 0.50% per annum on the Loan II Closing Date. Commitment Fee shall accrue from day to day, beginning on March 15, 2000, and shall be computed on the basis of the actual number of days elapsed and a year of 360 days. Commitment Fee shall be due and payable in advance, on March 15, 2000 and every three months thereafter until the first Interest Payment Date and on every Interest Payment Date thereafter, terminating on the last day of the Loan II Availability Period or upon such earlier date as the Total Commitment is reduced to zero or the undisbursed amount thereafter is cancelled or terminated. (b) Arrangement Fee. The Borrower shall pay a non-refundable arrangement fee (the "Arrangement Fee") equal to 0.25% of the Total Commitment within 30 days of the Effective Date, but in no event later than the first Disbursement under Loan I. (c) Front-End Fee. The Borrower shall pay a non-refundable, front-end fee (the "Front-End Fee") in the amount of 1.25% of the Total Commitment, payable in two installments. The first installment shall be due and payable on the Loan I Closing Date and shall be equal to 1.25% 4 CREDIT FACILITY AGREEMENT of the Loan I Commitment plus 0.3125% of the Loan II Commitment; the second installment shall be due and payable on the Loan II Closing Date and shall be equal to 0.9375% of the Loan II Commitment. SECTION 2.06 PAYMENTS. (a) Time and Place of Payment. Except as otherwise specifically provided herein, all payments to be made by the Borrower under this Agreement shall be made in full in Same Day Funds, without retention, set-off or counter claim and free and clear of any deductions and charges, not later than 12:00 p.m. (New York time) on the date upon which the relevant payment is due, to the Lender's account No. 373700001501 with Bank Hapoalim B.M., 1177 Avenue of the Americas, New York, N.Y., 10036, mentioning "Ormat/Momotombo Project", or to such other account as the Lender may designate from time to time by written notice to the Borrower five Business Days prior to the date on which any payment is made by the Borrower hereunder. The Borrower shall advise the Lender by facsimile of the payment about to be made by the Borrower. (b) Payment on a Business Day. If any date for any payment under this Agreement shall not be a Business Day then such payment shall be made on the next succeeding Business Day and interest (or Commitment Fee, as the case may be) shall continue to accrue for the period from such due date to the next succeeding Business Day. SECTION 2.07 PAYMENT ALLOCATION. Any payment made by the Borrower to the Lender and any other amount received by the Lender under any of the Financing Documents (excluding voluntary prepayments received by the Lender pursuant to Section 2.11) shall be applied as follows: (i) against charges, fees, costs and expenses due to the Lender; (ii) against interest on interest which became overdue, if any, with respect to the Loans; (iii) against interest on principal of the Loans which became overdue, if any; (iv) against interest due on the Loans; and thereafter, (v) against the principal amount of the Loans due and payable applied pro-rata to Loan I and Loan II and applied pro-rata to installments within each such Loan, and any remaining amount shall be paid or returned to the Borrower unless there is an Event of Default which is continuing. SECTION 2.08 CURRENCY OF PAYMENT. The obligation of the Borrower to pay all amounts payable under this Agreement shall be in Dollars and shall not be deemed to have been novated, discharged or satisfied by any tender of (or recovery under judgment expressed in) any currency other than Dollars, except to the extent to which such tender (or recovery) shall result in the effective payment of such aggregate amount in Dollars at the place where such payment is to be made and, accordingly, the amount (if any) by which any such tender (or recovery) shall fall short of such aggregate amount shall be and remain due to the Lender, as a separate obligation, unaffected by judgment having been obtained (if such is the case) for any other amounts due under or in respect of this Agreement. SECTION 2.09 TAXES. (a) Payments Free and Clear of Taxes. Any and all payments by the Borrower to the Lender under this Agreement and any other Financing Document shall be made free and clear of 5 and without deduction or withholding for any Taxes. In addition, the Borrower shall pay all Other Taxes. (b) Indemnity. The Borrower agrees to indemnify and hold harmless the Lender for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed on amounts payable under this Section 2.09) paid by the Lender and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Payment under this indemnity shall be made within 30 days after the date the Lender makes written demand therefor. (c) Gross-Up. If the Borrower shall be required by law to deduct or withhold any Taxes or Other Taxes from or in respect of any sum payable hereunder or under any Financing Document to the Lender, then: (i) the sum payable shall be increased as necessary so that, after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section 2.09), the Lender receives an amount equal to the sum it would have received had no such deductions or withholdings been made; (ii) the Borrower shall make such deductions and withholdings; and (iii) the Borrower shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with Applicable Law. (d) Receipts. Within 30 days after the date of any payment by the Borrower of Taxes or Other Taxes, the Borrower shall furnish to the Lender the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to the Lender. (e) Mitigation. If the Borrower is required to pay additional amounts to the Lender pursuant to Section 2.09(c), then the Lender shall endeavor to use reasonable efforts (consistent with legal and regulatory restrictions) as may be available to it to mitigate the effect of such circumstances, including booking the Loans in a different jurisdiction so as to minimize any such additional payment by the Borrower which may thereafter accrue, if such change in the judgment of the Lender is not otherwise disadvantageous to the Lender. (f) Claims Against Lender. The Lender shall give notice to the Borrower of the assertion of any claim against the Lender relating to the Lender's Taxes or Other Taxes as promptly as is practicable after being notified of such assertion; provided that any failure to notify the Borrower promptly of such assertion shall not relieve the Borrower of its obligations under this Section 2.09. (g) Survival. Without prejudice to the survival of any other agreement of the Borrower under this Agreement or any other Project Document, the provisions set forth in this Section 2.09 shall survive the payment of all amounts due to the Lender under Loan I and Loan II, respectively. SECTION 2.10 TERMINATION OF TOTAL COMMITMENT. The Lender may terminate the Total Commitment upon the occurrence of an Event of Default in accordance with the provisions of Article 6 hereof. The Borrower may cancel the undisbursed amount of the Total Commitment 6 CREDIT FACILITY AGREEMENT with the consent of the Lender upon the Lender's satisfaction that such amounts are not needed to complete the Project. The Borrower may also cancel the Total Commitment on account of Loan II either (i) if the Borrower decides not to commence Phase II and notifies the Lender of its decision and that it does not plan to commission the Technical Report referred to in Section 4.04, or (ii) upon delivery to the Lender of a Phase II Completion Certificate in accordance with Section 5.35 hereof. SECTION 2.11 VOLUNTARY PREPAYMENT. Subject to any required Governmental Approvals having been obtained, the Borrower shall have the right, at any time on at least 30 but not more than 60 days' prior written notice to the Lender, to prepay all or a part of the principal amount then outstanding of the Loans, without premium or penalty; provided that (a) no prepayment of any part of any Loan shall be made on a day which is not the last day of an Interest Period with respect thereto, (b) the amount of such prepayment is applied pro rata to Loan I and Loan II and applied pro rata to outstanding installments of principal within each Loan, (c) all accrued interest on the principal amount of the Loans to be prepaid and all other amounts then due to the Lender hereunder are paid at the same time, and (d) in the case of partial prepayment, such prepayment shall be in an amount equal to $500,000 or more in integral multiples of $500,000. SECTION 2.12 INTENTIONALLY OMITTED. SECTION 2.13 FUNDING COSTS. If, as a result of (a) any failure by the Borrower to pay when due the principal amount of or interest on any Loan (or portion thereof), (b) any failure by the Borrower to make a borrowing of any Loan after the Borrower has made a request for disbursement, (c) any failure by the Borrower to make any prepayment of any Loan after the Borrower has given any notice required hereunder regarding such prepayment or (d) the making of a payment or prepayment (including, without limitation, on acceleration) on a day which is not the last day of an Interest Period with respect thereto, the Lender shall incur any costs, expenses or losses, then the Borrower shall pay, upon request by the Lender, the amount which the Lender shall notify the Borrower as being the aggregate of such costs, expenses and losses. For the purposes of the preceding sentence, "costs, expenses or losses" shall include, without limitation, any interest paid or payable to carry any unpaid amount and any loss, premium, penalty or expense which may be incurred in liquidating or employing deposits of or borrowings from third parties in order to make, maintain or fund the Loans or any portion thereof. SECTION 2.14 MAINTENANCE AMOUNT. (a) Obligation to Pay. On each Interest Payment Date, the Borrower shall pay in addition to interest on the Loans, the amount which the Lender shall from time to time notify to the Borrower as the aggregate of the Maintenance Amount (as defined in subsection (b) below), if any, of the Lender, accrued and unpaid prior to such Interest Payment Date. (b) Definitions. For the purposes of subsection (a) above, the following terms shall have the following meanings: (i) "Maintenance Amount" means the amount, if any, certified in the Maintenance Amount Certification to be the net incremental costs of the Lender with respect to the making or maintaining of any Loan which result from (A) any change in, or introduction of, 7 CREDIT FACILITY AGREEMENT any Applicable Law and/or (B) any compliance with any request from, guideline or requirement of, any central bank or other monetary or other comparable authority or any Governmental Authority (whether or not having the force of law), which in either case, subsequent to the date of this Agreement, shall: (A) impose, modify or deem applicable any reserve, capital adequacy (only to the extent such capital adequacy requirement is generally applicable to financial institutions that are subject to the same regulatory controls as the Lender), special deposit or similar requirements against assets held by, or deposits with or for the account of, or Loans by, the Lender; (B) impose a cost on the Lender as a result of its having made, funded or maintained any Loan or its commitment to make, fund or maintain any Loan, or reduce the rate of return on the overall capital of the Lender which it would have been able to achieve if it had not made or committed itself to make such Loan; (C) change the basis of taxation on payments received by the Lender in respect of its Loans otherwise than by a change in taxation of the overall net income of the Lender; or (D) impose on the Lender any other condition regarding the making or maintaining of the Loans; and (ii) "Maintenance Amount Certification" means a certification furnished from time to time by the Lender to the Borrower, certifying: (A) the circumstances giving rise to the Maintenance Amount; (B) that such net costs have increased and that such net costs are within the definition of Maintenance Amount; (C) that, in the opinion of the Lender it has exercised reasonable efforts to minimize or eliminate such increase; and (D) the Maintenance Amount. (c) Optional Prepayment. Notwithstanding anything in Section 2.11, and subject to any Governmental Approvals having been obtained (including from the Central Bank), the Borrower shall have the right on any Interest Payment Date for the Loans, upon not less than thirty (30) days' prior written notice to the Lender (which notice shall be irrevocable and shall bind the Borrower to make the prepayment specified below) and upon payment of all accrued interest and Maintenance Amount (if any) on the amount to be prepaid, to prepay all or, as the case may be, that portion of the Loans with respect to which the Lender informs the Borrower that Maintenance Amount is then being charged. SECTION 2.15 ILLEGALITY. (a) Illegality of Total Commitment or Loan. Notwithstanding any other provision of this Agreement, if, subsequent to the date of this Agreement, the making, funding or continuance of 8 CREDIT FACILITY AGREEMENT the Total Commitment or any Loan has been made (i) unlawful by any change made in any Applicable Law, (ii) impossible by compliance by the Lender with any request of a Governmental Authority (whether or not having force of law) or (iii) impracticable as a result of a contingency occurring after the Effective Date which materially and adversely affects the London interbank dollar market, the Borrower shall, upon notice by the Lender (but subject to the approval of the appropriate Governmental Authorities (including the Central Bank), which the Borrower agrees to take all reasonable steps to obtain as quickly as possible, if such approval is then required), prepay in full and on the next occurring Interest Payment Date unless the effect of the Applicable Law, request or contingency requires earlier or immediate repayment, in which case, on such earlier date or immediately, as relevant, that portion of the principal amount of the Loans affected thereby together with all accrued interest and Maintenance Amount (if any) thereon and all amounts, if any, determined by the Lender to be payable to it pursuant to Section 2.13 hereof. In addition, the Total Commitment of the Lender to make Loans similar to those affected by the foregoing shall terminate immediately. (b) Illegality of Interest Rate. Notwithstanding any other provision of this Agreement, if, subsequent to the date of this Agreement, the making, funding or continuance by the Lender of a Disbursement or any Loan bearing interest based on LIBOR has been made (i) unlawful by any change made in any Applicable Law, (ii) impossible by compliance by the Lender with any request of a Governmental Authority (whether or not having the force of law), then the Lender shall promptly give notice thereof to the Borrower and the obligation of the Lender to make or continue Loans bearing interest based on LIBOR shall be immediately suspended and during such suspension be converted into an obligation bearing interest at the rate per annum equal to the Base Rate plus 2.375%; provided, however, that if the Lender determines that it may lawfully continue to maintain and fund any outstanding Loans bearing interest based on LIBOR until the end of the applicable Interest Period then in effect with respect thereto, upon written notice from the Borrower to the Lender, such outstanding Loans shall be converted into Loans bearing interest at the rate per annum equal to the Base Rate plus 2.375% on the last day of the then current Interest Period applicable to such Loans. SECTION 2.16 SUBSTITUTE BASIS OF BORROWING. If, on or before the first day of any Interest Period relating to the Loans, either (a) the Lender determines that, for whatever reason, deposits in Dollars for a period equal to such Interest Period or in the relevant amounts are not being offered to the Lender in the London interbank market or (b) the Lender gives notice to the Borrower that the Interest Rate then in effect based on LIBOR for such Interest Period does not adequately reflect the cost to the Lender of making, funding or otherwise maintaining the Loans for such Interest Period, the Lender shall promptly notify the Borrower of such event. Thereafter, the obligations of the Lender to make or maintain the Loans bearing interest at LIBOR shall be suspended until the Lender revokes such notice in writing and interest for such Interest Period with respect to a scheduled Disbursement and for outstanding Loans for which interest is then scheduled to be determined shall accrue at the rate per annum equal to the Base Rate plus 2.375%. SECTION 2.17 MITIGATION PROVISION. The Lender agrees that (a) as promptly as practicable after it becomes aware of the occurrence of an event or the existence of a condition arising after the date hereof that would cause it to be affected under Section 2.13 and (b) as promptly as practicable after it has made a determination to make a claim for amounts under Sections 2.13, 2.14 or 2.15, as the case may be, with respect to events or conditions arising after 9 CREDIT FACILITY AGREEMENT the date hereof, it shall notify the Borrower of the same and use commercially reasonable efforts (consistent with legal and regulatory restrictions and the Lender's internal policies) to mitigate the effect of such provisions on the Borrower, including (i) in the case of Sections 2.13, 2.14 or 2.15, efforts to make, fund, issue or maintain its Loans, as relevant, through another office of the Lender, and (ii) in the case of Section 2.15, efforts to reemploy amounts held by the Lender, (A) if as a result thereof the additional moneys which would otherwise be required to be paid to the Lender pursuant to any of such provisions of this Agreement would be reduced, or the illegality or other adverse circumstances which would otherwise require a prepayment of such Loans pursuant to any of such provisions would cease to exist, and (B) if, as determined by the Lender in good faith, the making, funding or maintaining of the Loan through such other office would not otherwise adversely affect the Lender. SECTION 2.18 CERTIFICATE OF LENDER. If the Lender claims reimbursement under Sections 2.13, 2.14, 2.15 or 2.16, it shall deliver to the Borrower a certificate setting forth in reasonable detail, including calculations thereof, the amount payable to the Lender and such certificate shall be conclusive and binding on the Borrower in the absence of manifest error. SECTION 2.19 SURVIVAL. Without prejudice to the survival of any other agreement of the Borrower under this Agreement and any other Project Document, the agreements and obligations of the Borrower set forth in Sections 2.13 2.14, 2.15 and 2.16 shall survive the payment of the Loans. ARTICLE 3. REPRESENTATIONS AND WARRANTIES. In order to induce the Lender to enter into this Agreement and each of the other Financing Documents to which it is a party and in order to induce the Lender to make the Loans, the Borrower makes the following representations, warranties and agreements as of the date of this Agreement, which shall survive the execution and delivery of this Agreement and the making and repayment of the Loans: SECTION 3.01 STATUS. The Borrower (a) is an exempted limited liability company duly incorporated, validly existing and in good standing under the laws of the Cayman Islands, (b) is duly qualified to do business under the laws of each jurisdiction in which the character of the properties owned by it or in which the transaction of its business as presently conducted or proposed to be conducted makes such qualification necessary, and (c) has full power and authority to own the property and assets owned by it and to transact the business in which it is engaged or proposes to be engaged and to do all things necessary or appropriate in respect of the Project and to consummate the transactions contemplated by the Project Documents in effect or required to be in effect as of each date this representation is made or deemed made. SECTION 3.02 POWER AND AUTHORITY. The Borrower has the full power and authority to execute and deliver, and to perform the terms and provisions of, each of the Project Documents to which it is party and has taken all proper and necessary action to authorize the execution, delivery and performance by it of each of such Project Documents as have been executed and delivered as of each date this representation and warranty is made. The Borrower, has, or, in the case of the Project Documents other than this Agreement, by the Loan I Closing Date will have, duly executed and delivered each of the Project Documents to which it is a party, and each of such Project Documents constitutes or, in the case of each such other Project Document when 10 CREDIT FACILITY AGREEMENT executed and delivered will constitute, the legal, valid and binding obligations of the Borrower, enforceable in accordance with its respective terms, except as the enforceability thereof may be limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally, and (b) general equitable principles, regardless of whether the issue of enforceability is considered in a proceeding in equity or at law. SECTION 3.03 NO VIOLATION. Neither the execution and delivery by the Borrower of the Project Documents to which it is a party, nor the Borrower's compliance with or performance of the terms and provisions thereof, or the use of the proceeds of the Loans as contemplated by this Agreement (a) will contravene or violate any provision of any Applicable Law to which the Borrower, any of its assets, the Project or any transaction contemplated by the Project Documents are subject, (b) will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien (except any Permitted Liens) upon any of the property or assets of the Borrower pursuant to the terms of any indenture, mortgage, deed of trust, credit agreement, loan agreement or any other agreement, contract or instrument to which the Borrower is a party or by which it or any of its property or assets is bound or to which it may be subject, (c) will violate any provision of any other Organization Document of the Borrower or (d) will require any consent or approval of any Governmental Authority or any other Person which has not been obtained. SECTION 3.04 ORGANIZATION. All of the issued and outstanding shares of the Borrower are owned by Ormat Holding Corp. except as provided in the Share Pledge and Sponsor Participation Retention Agreement. SECTION 3.05 SUBSIDIARIES. The Borrower has no Subsidiaries and owns no equity interest in any other Person. SECTION 3.06 SINGLE-PURPOSE BORROWER. The Borrower (a) has not incurred any liabilities other than in connection with its participation in the transactions contemplated by the Project Documents and (b) has not engaged in any business other than the Project. The Borrower is not a party to any material agreement, contract or commitment (other than the ENEL Agreements, the Fiduciary Account Agreement, the Financing Documents, the Investment Agreement and any Implementation Agreements). SECTION 3.07 FINANCIAL STATEMENTS; FINANCIAL CONDITION: UNDISCLOSED LIABILITIES; ETC. (a) No Material Adverse Effect. The financial statements of the Borrower for the Fiscal Year ended December 31, 1999, heretofore furnished to the Lender, present fairly the financial condition of the Borrower at the date thereof and the results of the operations of the Borrower for the fiscal period referred to in such statements. Such financial statements have been prepared in accordance with GAAP. Since the date of such financial statements, no event, condition or circumstance (including, without limitation, Force Majeure) has existed or has occurred which is reasonably likely to have a Material Adverse Effect. (b) No Likelihood of Material Adverse Effect. Except as fully reflected in the financial statements referred to in Section 3.07(a), there are no liabilities or obligations with respect to the 11 Borrower (whether absolute, accrued, contingent or otherwise and whether or not due) for the period to which such financial statements relate which, either individually or in the aggregate, is reasonably likely to have a Material Adverse Effect. The Borrower does not know of any reasonable basis for the assertion against the Borrower of any liability or obligation of any nature whatsoever for such relevant period that is not fully reflected in the financial statements referred to in Section 3.07(a) which, either individually or in the aggregate, is reasonably likely to have a Material Adverse Effect. SECTION 3.08 LITIGATION; LABOR DISPUTES. (a) No Proceedings. Except as disclosed in Schedule 3.08 hereto, there is no action, suit, investigation or proceeding by or before any court, arbitrator, administrative agency or other Governmental Authority pending or, to the best of the Borrower's knowledge, threatened against or affecting the Borrower or any of its properties, revenues or assets or the Project or the Site (including Environmental Claims) which has had or is reasonably likely to have a Material Adverse Effect. The Borrower is not in default with respect to any order of any court, arbitrator, administrative agency or other Governmental Authority. There is no injunction, writ, preliminary restraining order or any order of any nature issued by an arbitrator, court or other Governmental Authority directing that any of the material transactions provided for in any of the Project Documents not be consummated as herein or therein provided. To the best of the Borrower's knowledge, there is no action, suit, investigation or proceeding by or before any court, arbitrator, administrative agency or other Governmental Authority pending or threatened against or affecting the Borrower or any of its properties, revenues or assets, and the Borrower does not have actual knowledge of any such action, suit, investigation or proceeding pending or threatened against or affecting any other party to any Project Document or any of their respective properties, revenues or assets, in each case described in this sentence which has had or is reasonably likely to have a Material Adverse Effect. (b) No Labor Claims Pending. There are no strikes, slowdowns or work stoppages by the Borrower's employees ongoing, or, to the knowledge of the Borrower, threatened which are reasonably likely to have a Material Adverse Effect. There are no claims pending against the Borrower arising from the transfer of personnel pursuant to the terms of the ENEL Agreements. SECTION 3.09 TRUE AND COMPLETE DISCLOSURE. All factual information (taken as a whole), which, for the avoidance of doubt (a) shall not include any information by way of projections, estimates or other expressions of view as to future circumstances, provided that such projections, estimates or other expressions of view are expressed in good faith and on the basis of reasonable assumptions and (b) shall be qualified by any disclaimers with respect to such factual information provided by the Borrower to the Lender heretofore or contemporaneously furnished by or on behalf of the Borrower in writing to the Lender (including without limitation such factual information related to the Project as is contained in the preliminary business plan dated February 27, 2000 (financial model) previously submitted to the Lender on February 27, 2000 with respect to the Project and as stated in the Lender's Offer Letter dated March 14, 2000 and in the Business Plan), and all other such factual information (taken as a whole) hereafter furnished by or on behalf of the Borrower in writing to the Lender will be, true and accurate in all material respects on the date as of which such information is stated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect in light of the circumstances and the time under which or 12 CREDIT FACILITY AGREEMENT at which such information was provided. There are in existence no documents or agreements which have not been disclosed to the Lender which are material in the context of the Project Documents or which have the effect of varying any of the Project Documents or their meaning. SECTION 3.10 TAX RETURNS AND PAYMENTS. Except as disclosed in Schedule 3.11, the Borrower has filed all tax returns required by Applicable Law to be filed by it and has paid all income taxes payable by it which have become due pursuant to such tax returns and all other taxes and assessments payable by it which have become due, other than those not yet delinquent and except for those contested in good faith and for which adequate reserves have been established. The Borrower has paid, or has provided adequate reserves for the payment of, all national, regional or local income taxes applicable for all prior Fiscal Years and for the current Fiscal Year to the date hereof, except as disclosed under Schedule 3.11. SECTION 3.11 GOVERNMENTAL APPROVALS. All Governmental Approvals necessary under Applicable Law in connection with (a) the due execution and delivery of, and performance by the Borrower of its obligations and the exercise of its rights under, the Project Documents in effect or required to be in effect as of each date this representation is made or deemed made, (b) the grant by the Borrower of the Liens created pursuant to the Security Documents and the validity, enforceability and perfection thereof and the exercise by the Lender of its rights and remedies thereunder and (c) the construction and operation of the Project as contemplated by the Project Documents, to be obtained by the Borrower and to be obtained by any other Person (to the best knowledge of the Borrower) are set forth in Schedule 3.11 hereto. Except as disclosed in Part C of Schedule 3.11, each of the Governmental Approvals set forth in Part A and Part C of Schedule 3.11 hereto and each other Governmental Approval obtained by the Borrower after the date hereof but on or prior to the date this representation is made, has been duly obtained or made, is validly issued, is in full force and effect, is not subject to appeal (it being understood that for purposes of this Section 3.11, a Governmental Approval shall not be considered to be subject to appeal if it is being contested or challenged solely by Persons other than the Governmental Authority which issued the Governmental Approval or any other Governmental Authority notwithstanding that such contest or challenge is ongoing) and is free from conditions or requirements compliance with which is reasonably likely to have a Material Adverse Effect or which the Borrower does not reasonably expect to be able to satisfy. There is no proceeding pending or, to the best knowledge of the Borrower, threatened which is reasonably likely to result in the rescission, termination, material modification, suspension or determination of invalidity or lack of effectiveness of any such Governmental Approval. The information set forth in each application and other written material submitted by the Borrower to the applicable Governmental Authority in connection with each such Governmental Approval was accurate and complete in all material respects at that time (provided, that no representation is made regarding the accuracy and completeness of any projections, estimates or other expressions of view as to future circumstances, and provided further that any such information is further qualified by any disclaimers with respect thereto included therein). The Borrower has no reason to believe that any Governmental Approval that has not been obtained by the Borrower, but which will be required in the future, will not be granted to it in due course, on or prior to the date when required and free from any condition or requirement compliance with which is reasonably likely to have a Material Adverse Effect or which the Borrower does not reasonably expect to be able to satisfy. The Project, if constructed and performed in accordance with the Business Plan, will conform to and comply in all material respects with all covenants, conditions, restrictions and reservations in the Governmental Approvals and the Project Documents applicable thereto and 13 CREDIT FACILITY AGREEMENT all Applicable Laws. The Borrower has no reason to believe that the Lender will not be entitled, without undue expense or delay, to the benefit of each Governmental Approval set forth on Schedule 3.11 hereto upon the exercise of remedies under the Security Documents. The Lender has received a true and complete copy of each Governmental Approval heretofore obtained or received by the Borrower. SECTION 3.12 COMPLIANCE WITH STATUTES, ETC. (a) Compliance with Applicable Laws. Except as set forth in (b) below, and in Section 3.13, and in Part C of Schedule 3.11, the Borrower is in compliance with all Applicable Laws in respect of the conduct of its business and the ownership of its property (including, without limitation, Applicable Laws relating to environmental standards and controls and resettlements and Applicable Laws relating to the maintenance of debt to equity ratios). (b) Environmental Compliance. The Borrower's business and the Project are being carried out in compliance with the Project Remediation Program. SECTION 3.13 ENVIRONMENTAL MATTERS. To the best of the Borrower's knowledge, neither the Site nor the Power Plant (nor any other property with respect to which the Borrower has retained or assumed liability either contractually or by operation of the law) has been affected by any Hazardous Material, other than as described in the Project Remediation Program, in a manner which does or is reasonably likely to give rise to any material liability of the Borrower under any Environmental Law or which has had or is reasonably likely to have a Material Adverse Effect. SECTION 3.14 PATENTS, LICENSES, FRANCHISES AND FORMULAS. The Borrower owns or has the right to use all intellectual property including all the patents, trademarks, permits, service marks, trade names, copyrights, licenses, franchises and formulas, or rights with respect thereto, and has obtained assignments of all leases and other rights of whatever nature, necessary for the present and proposed conduct of its business and the carrying out of the Project in the manner contemplated by the Project Documents, without any known conflict with the rights of others which, or the failure to obtain which, as the case may be, is reasonably likely to have a Material Adverse Effect. SECTION 3.15 SUBMISSION TO LAW AND JURISDICTION. The choice of governing law for each of the respective Project Documents in effect or required to be in effect as of the Loan I Closing Date will be recognized in the courts of Nicaragua, and those courts will recognize and give effect to any judgment in respect of such Project Document obtained by or against the Borrower in the courts the jurisdictions of which the Borrower has submitted to. SECTION 3.16 STATUS OF THE LOANS. The Loans constitute direct, unconditional, and general obligations of the Borrower and rank senior as to priority of payment to any or all Indebtedness of the Borrower except as permitted under Section 5.15(b). Except as permitted by Section 5.16 of this Agreement, the Borrower has not secured or agreed to secure any such other Indebtedness by any Lien upon any of its present or future revenues, assets or properties or upon any shares of stock of the Borrower. 14 CREDIT FACILITY AGREEMENT SECTION 3.17 PROJECT DOCUMENTS; SUFFICIENCY OF PROJECT DOCUMENTS. (a) All Project Documents Received. The Lender has received a complete copy of each Project Document in effect or required to be in effect as of each date this representation is made or deemed made (including all exhibits, schedules and disclosure letters referred to therein or delivered pursuant thereto, if any). (b) All Rights Obtained. To the best of the Borrower's knowledge, the services to be performed, the materials to be supplied and the easements, licenses and other rights granted or to be granted to the Borrower pursuant to the terms of the Project Documents provide or will provide the Borrower with all rights and property interests required to enable the Borrower to obtain all services, materials or rights (including access) required for the rehabilitation, operation and maintenance of the Project, including the Borrower's full and prompt performance of its obligations, and full and timely satisfaction of all conditions precedent to the performance by others of their obligations, under the Project Documents, other than those services, materials or rights that reasonably can be expected to be obtainable in the ordinary course of business without material additional expense or material delay. SECTION 3.18 FEES AND ENFORCEMENT. Other than amounts that have been paid in full or will have been paid in full by the Loan I Closing Date, no fees or taxes, including without limitation, stamp, transaction, registration or similar taxes, are required to be paid for the legality, validity, or enforceability of this Agreement or any of the other Project Documents in effect or required to be in effect as of each date this representation is made or deemed made. This Agreement and each of such Project Documents are each in proper legal form under the laws of Nicaragua, and under the respective governing laws selected in such Project Documents, for the enforcement thereof in such jurisdiction without any further action on the part of the Lender. SECTION 3.19 AVAILABILITY AND TRANSFER OF FOREIGN CURRENCY. All requisite foreign exchange control approvals and other authorizations, if any, by Nicaragua or any department or agency thereof have been validly obtained and will be kept current and in full force and effect to assure (a) the ability of the Borrower to receive any and all payments to the Borrower contemplated by the Project Documents, (b) the availability of Dollars to enable the Borrower to perform all of its obligations hereunder and under the other Project Documents, as the case may be, in accordance with their respective terms, and (c) the ability of the Borrower to convert into Dollars all sums received in Cordoba amounts from ENEL, immediately upon receipt thereof, and to use the Dollars as necessary to perform all of its obligations under the Project Documents, in accordance with their respective terms. There are no restrictions or requirements which limit the availability or transfer of foreign exchange, or the conversion to foreign exchange, for the purpose of the performance by the Borrower of its obligations under this Agreement or under any of the other Project Documents. SECTION 3.20 BUSINESS PLAN. (a) Effectiveness. The Business Plan as in effect on the date hereof is attached hereto as Annex A. The Business Plan accurately specifies, to the best of the Borrower's knowledge, all costs and expenses incurred and anticipated to be incurred prior to the date on which a Phase I Completion Certificate and a Phase II Completion Certificate will have been issued. In addition, to the best of the Borrower's knowledge, the amount of all costs and expenses required or 15 CREDIT FACILITY AGREEMENT expected to be paid or incurred prior to the latest date on which a Phase I Completion Certificate or a Phase II Completion Certificate, as the case may be, will have been issued does not exceed the amount reflected in the Business Plan. (b) Assumptions. To the best of the Borrower's knowledge, all projections and budgets furnished to the Lender by or on behalf of the Borrower and the summaries of significant assumptions related thereto (i) have been prepared with due care, (ii) fairly present the Borrower's expectations as to the matters covered thereby as of their date, (iii) are based on reasonable assumptions as to all factual and legal matters material to the estimates therein as of their date (including interest rates and costs) and (iv) are in all material respects consistent with the provisions of the Project Documents. SECTION 3.21 TITLES; LIENS. The Borrower has good and valid title to all of its properties and assets, in each case, free and clear of all Liens other than Permitted Liens. No mortgage or financing statement or other instrument or recordation covering all or any part of the property or assets of the Borrower is on file in any recording office, except such as relate only to Permitted Liens described in clauses (a) and (b) of Section 5.16 hereof. SECTION 3.22 TRANSACTIONS WITH AFFILIATES. The Borrower is not a party to any contracts or agreements with, or any other commitments to, any Affiliate, other than in the ordinary course of business on terms at least as favorable to the Borrower as available on an arm's-length basis from third parties. SECTION 3.23 NO ADDITIONAL FEES. Other than as expressly set forth in the Business Plan, the Borrower has not paid or become obligated to pay any fee or commission to any agent, broker, finder or intermediary for or on account of arranging the financing of the transactions contemplated by the Project Documents. SECTION 3.24 REGULATION OF PARTIES. None of the Borrower, its Affiliates or the Lender is or will be, solely as a result of the participation by such parties separately or as a group in the transactions contemplated hereby or by any other Project Document, or as a result of the ownership, use or operation of the Project, subject to regulation by any Governmental Authority of the United States as a "public utility", an "electric utility", an "electric utility holding company", a "public utility holding company", a "holding company", or an "electrical corporation" or a subsidiary or affiliate of any of the foregoing under any Applicable Law of the United States (including, without limitation, PUHCA) or by any Governmental Authority of Nicaragua as a "public utility" under any Applicable Law of Nicaragua. The Borrower is not a holding company organized under the laws of the United States or the District of Columbia. Neither the Borrower nor its Affiliates owns any utility assets located within any state of the United States or the District of Columbia. ARTICLE 4. CONDITIONS PRECEDENT. SECTION 4.01 CONDITIONS OF FIRST DISBURSEMENT OF LOAN I. The first Disbursement of Loan I hereunder shall be subject to the satisfaction in form and substance of the Lender of the following conditions on or prior to the Loan I Closing Date: (a) Project Documents. (i) Each of the Project Documents shall have been entered into by the respective parties thereto, shall be unconditional and fully effective in accordance with 16 CREDIT FACILITY AGREEMENT their respective terms (except for this Agreement having become unconditional and fully effective, if that is a condition of effectiveness of any of such documents) and the Borrower shall deliver to the Lender a certificate signed by an authorized officer of the Borrower certifying the foregoing, which certification shall be incorporated into each Application for Funding; and (ii) the Lender shall have received a copy of the Nicaragua Government Support Letter and of the ENEL Agreements (which shall be construed, for the purposes of this Section 4.01(a), as not including the Nicaragua Government Support Letter), in its escritura publica form, accompanied by a certificate executed by a Financial Officer of the Borrower certifying that the attached copies are true and correct copies of the original Nicaragua Government Support Letter and the ENEL Agreements (as defined for purposes of this Section 4.01(a)). (b) Insurance; MIGA Guarantee. Each of the Insurance Contracts and the MIGA Contracts shall be in full force and effect and in respect of the MIGA Guarantee, in form and substance satisfactory to the Lender. (c) Opinions of Counsel. The Lender shall have received signed legal opinions, each in form and substance satisfactory to the Lender, of (i) Cayman Islands counsel to the Borrower, (ii) United States counsel to the Sponsor, (iii) Israeli counsel to Ormat Industries Ltd., (iv) US and Nicaraguan counsel to the Lender, and (v) counsel to such other Person as the Lender may reasonably require. (d) Organization Documents; Proceedings. (i) The Lender shall have received a certificate, signed by the Secretary or Assistant Secretary of the Borrower, in form and substance satisfactory to the Lender, together with copies of Organization Documents of the Borrower and resolutions of the Borrower's board of directors approving the financing to be provided pursuant to the terms of this Agreement, certifying that the documents attached to such certificate are true, correct and complete copies of such documents. (ii) The Lender shall have received a certificate signed by the Secretary or Assistant Secretary of the Sponsor in form and substance satisfactory to the Lender, together with copies of the Organization Documents of the Sponsor and resolutions of the Sponsor's board of directors approving the documents to which Sponsor is party with respect to the provision of financing pursuant to the provisions of this Agreement, certifying that the documents attached to such certificate are true, correct and complete copies of such Organization Documents and resolutions. (iii) The Lender shall have received a letter from the Auditors confirming the acceptance of their appointment as the Auditors. (iv) The Lender shall have received a certificate from each of the Borrower, the Sponsor, the Shareholder and the Sponsor Parent, in form and substance satisfactory to the Lender, signed by an authorized officer certifying the incumbency of the parties executing any Project Document or related document on behalf of the Borrower, the Sponsor, the Shareholder and the Sponsor Parent, respectively. (e) Auditors. The Lender shall have received a copy of the authorization to the Auditors referred to in Section 5.02(b). 17 CREDIT FACILITY AGREEMENT (f) Security Documents. The Borrower shall have delivered to the Lender fully executed Security Documents, in full force and effect, with all registration fees in connection therewith paid in full, and with executed instruments of transfer delivered by the Borrower if required. (g) Consent Letters. The Lender shall have received a letter, in form and substance satisfactory to the Lender, from CT Corporation System, presently located 111 Eighth Avenue, New York, New York 10011, indicating the consent of CT Corporation System to its appointment by the Borrower, the Sponsor, the Shareholder and the Sponsor Parent as their agent to receive service of process. (h) Certificates. The Lender shall have received copies of each executed Project Document, together with a certificate of a Financial Officer of the Borrower certifying that the Borrower is not in default in the performance, observance or fulfillment of any of its material obligations, covenants or conditions contained therein and, to the best of the Borrower's knowledge, no other party to any such Project Document is in default in the performance, observance or fulfillment of any of its material obligations, covenants or conditions contained therein and the Lender shall have received evidence or copies of all Governmental Approvals set forth in Schedule 3.11 hereof (other than those set forth in Parts B and C thereof), certified by a Financial Officer of the Borrower as being in full force and effect and not subject to appeal, except as disclosed in Schedule 3.11 hereof. For purposes of this Section 4.01(h), a Governmental Approval shall not be considered to be subject to appeal if it is being contested or challenged solely by Persons other than the Governmental Authority who issued the Governmental Approval or any other Governmental Authority notwithstanding that such contest or challenge is ongoing. (i) Business Plan. The Lender shall have received the Business Plan, which shall be in form and substance satisfactory to the Lender. (j) Financial Statements. The Lender shall have received copies of the most recent audited financial statements of the Borrower (except that for the Fiscal Year ending December 31, 1999 financial statements may be submitted unaudited) and audited financial statements of the Sponsor, and the Lender shall have received copies of the most recent unaudited financial statements (if audited financial statements are not otherwise available) of the Borrower and the Sponsor showing, for each such Person, no material adverse change in the financial condition of such Person since the date of the last financial statements provided to the Lender prior to the date of this Agreement, and certificates dated the Loan I Closing Date signed by a Financial Officer of each such Person stating that (i) such financial statements are true, complete and correct and (ii) no material adverse change as to such Person has occurred since the date of such financial statements. (k) Evidence of Authority. The Lender shall have received evidence of the authority of the Borrower to enter into this Agreement and the names, specimen signatures and evidences of authority of the Persons signing this Agreement, and the other documents required by this Agreement as of the date of execution hereof or who will otherwise act as representatives of the Borrower in the operation of the Credit. 18 CREDIT FACILITY AGREEMENT (l) Accounts. The Borrower shall have established: (i) the Debt Service Reserve Account with the Lender's New York Branch, fully funded in accordance with Section 5.33; and (ii) the bank account with the Lender's New York Branch in accordance with Section 5.28(a). (m) Other Instruments, Conditions, Due Diligence, Etc. The delivery of every other instrument and agreement, and the satisfaction of any other condition as the Lender may reasonably request, including due diligence reports satisfactory to the Lender. (n) Fees, Costs, Etc. The Fees, and all other fees, costs and expenses (including any and all Attorney Costs of Lender's outside counsel) due and payable on or before the Loan I Closing Date shall have been paid. (o) MIGA Premium. The Borrower will execute and deliver to the Lender an irrevocable instruction to the Lender's New York Branch to debit the Borrower's Account established pursuant to Section 5.28(a) for payment of the MIGA premium upon the direction of the Lender and the Lender shall deliver to the Borrower the relevant renewal notice. SECTION 4.02 CONDITIONS OF EACH DISBURSEMENT. Each Disbursement hereunder shall be subject to the satisfaction in form and substance of the Lender of the following conditions: (a) No Default; Representations and Warranties. Immediately before and after giving effect to such Disbursement: (i) no Event of Default shall have occurred and be continuing; (ii) all representations and warranties made by the Borrower and contained herein (other than the representations made pursuant to Section 3.07(b)) or in the other Project Documents shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of such Disbursement, except where expressed to be made only as of an earlier date; (iii) the following representations and warranties shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of such Disbursement: (A) except as fully reflected in each financial statement delivered prior to such Disbursement pursuant to Sections 5.01(a) and 5.01(b), there shall have been, as of the date of such financial statement, no liabilities or obligations with respect to the Borrower of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due) which, either individually or in the aggregate, is reasonably likely to have a Material Adverse Effect, and (B) the Borrower does not know of any reasonable basis for the assertion against the Borrower of any liability or obligation of any nature whatsoever that is not fully reflected in the financial statements delivered pursuant to Sections 5.01(a) and 5.01(b) which, either individually or in the aggregate, is reasonably likely to have a Material Adverse Effect. (b) Security. The Security, in form and substance satisfactory to the Lender, shall have been duly created, perfected and, where appropriate, registered as required hereunder, to create a first priority security interest and charge over the Collateral in existence at the date of such Disbursement. Without limitation to the preceding sentence, the Borrower shall have duly authorized, executed and delivered or, as the case may be, provided: 19 CREDIT FACILITY AGREEMENT (i) acknowledgment copies of proper financing statements or other instruments duly filed under the Applicable Law of each jurisdiction as may be necessary or, in the reasonable opinion of the Lender, desirable to perfect the charges and security interests purported to be created by the Security Documents; (ii) upon the reasonable request of the Lender, certified copies of requests for information or copies, or equivalent reports, listing the financing statements and instruments referred to in clause (i) above and all other effective financing statements that name the Borrower as debtor and that are filed in the jurisdictions referred to in said clause (i), together with copies of such other financing statements and instruments (none of which shall cover the Collateral except to the extent of Permitted Liens); (iii) evidence of the completion of all other recordings and filings of, or with respect to, the Security Documents as may be necessary or, in the reasonable opinion of the Lender, desirable to perfect the security interests purported to be created by the Security Documents; and (iv) evidence that all other actions necessary or, in the reasonable opinion of the Lender, desirable to perfect and protect the security interests purported to be created by the Security Documents have been taken. (c) Consents and Approvals. There shall have been obtained, or there shall have been made arrangements satisfactory to the Lender for obtaining, in addition to the Project Documents, all other governmental, corporate, creditors', shareholders' and other necessary licenses, approvals or consents for: (i) the financing by the Lender under this Agreement; (ii) the carrying on of the business of the Borrower as it is presently carried on and is contemplated to be carried on; (iii) the carrying out of Phase I of the Project with respect to Loan I and Phase II with respect to Loan II; (iv) the due execution and delivery of, and performance under, each Project Document which has been entered into at the time of such Disbursement, the Security, and any documents in implementation of any thereof; and (v) the remittance to the Lender of all monies payable pursuant to each Project Document which has been entered into at the time of such Disbursement, and any documents in implementation of any thereof. In addition, a true and complete copy of each material license, approval or consent described in this Section 4.02(c) shall have been delivered by the Borrower to the Lender. (d) No Project Document Default. Each of the Project Documents which has been entered into or which is required to have been entered into at the time of such Disbursement shall be in full force and effect and no material breach or default shall have occurred under any such Project Document. No event of Force Majeure shall have occurred which has had, or in the reasonable judgment of the Lender is reasonably likely to have, a Material Adverse Effect. (e) ENEL Agreements. The Lender shall have received from the Borrower a certification, in form and substance satisfactory to the Lender, signed by an authorized representative of the Borrower and expressed to be effective as of the date of the relevant Disbursement, stating that the Borrower is in compliance in all material respects with all provisions of the ENEL Agreements. 20 (f) No Material Adverse Effect. Since the Loan I Closing Date, no event or events shall have occurred which has had or is reasonably likely to have a Material Adverse Effect. (g) Insurance; Shareholder's MIGA Guarantee. The Borrower shall have certified to the Lender that each of the Insurance Contracts required pursuant to Section 5.03 and the Shareholder's MIGA Guarantee, continue to be in full force and effect on the date of such Disbursement and that the Insurance Contracts are in compliance and in full accord with the recommendations of the Lender's Insurance Consultant. (h) Fees and Expenses. The Borrower shall have paid all fees, expenses and other charges then payable by it under this Agreement. (i) Debt Service Reserve Account. The Debt Service Reserve Account shall have been funded in accordance with Section 5.33. (j) Disbursements for Additional Amount. In respect of each Disbursement made in respect of Additional Amounts, the Senior Loan Debt to Borrower's Equity ratio shall not exceed 3:1 after giving effect to the requested Disbursement. (k) Sponsor Advances. The Sponsor shall have made advances to the Borrower either as additional equity or subordinated long term loans on the same terms and conditions as set forth in Section 2.02 of the Sponsor Project Funding Agreement in an amount which when added to the Borrower's Equity shall be equal to, as the case may be, (i) forty-two and eight hundred fifty-seven thousandths percent (42.857%) of the sum of the requested Disbursement to be made under Loan I plus any Interest to be capitalized pursuant to Section 2.03 plus all amounts previously disbursed under Loan I, or (ii) thirty-three and three hundred thirty-three thousandths percent (33.333%) of the sum of the requested Disbursement to be made under Loan II (including any Disbursement to be made in respect of an Additional Amount) plus any Interest to be capitalized pursuant to Section 2.03 plus all amounts previously disbursed. (l) Phase II - Approval of Lender's Engineer. With respect to Disbursements to be made under Loan II, the Lender shall have received the approval of the Lender's Engineer as required under Section 2.02(b). SECTION 4.03 NO WAIVERS. No course of dealing or waiver by the Lender in connection with any condition of Disbursement under this Agreement shall impair any right, power or remedy of the Lender with respect to any other condition of Disbursement, or be construed to be a waiver thereof; nor shall the action of the Lender in respect of any Disbursement affect or impair any right, power or remedy of the Lender in respect of any other Disbursement. SECTION 4.04 CONDITIONS FOR FIRST DISBURSEMENT OF LOAN II. The Lender shall have received at the Borrower's expense each of the following on or prior to the Loan II Closing Date: (a) a Technical Report from a recognized and independent engineer or consulting firm acceptable to the Lender confirming costs, technical and commercial feasibility of the Business Plan; (b) an opinion of Nicaraguan legal counsel acceptable to the Lender confirming the legal opinion provided pursuant to Section 4.01(c) and such other opinions related to any changes in Applicable Law that have occurred since the date thereof, in form and substance satisfactory to the Lender; (c) payment to the Lender of (i) the Loan II Commitment Fee and (ii) the final installment of the Front-End Fee; and (d) in the event that the amendment to the PPA referred to 21 CREDIT FACILITY AGREEMENT in Section 5.43 is not in full force and effect, an executed amendment to the PPA incorporating substantially the provisions set forth in Schedule 4.04 shall be in full force and effect and executed in the form of an escritura publica prepared by a Nicaraguan notary public. ARTICLE 5. COVENANTS The Borrower covenants and agrees that: SECTION 5.01 INFORMATION COVENANTS. The Borrower shall furnish to the Lender: (a) Quarterly Financial Statements of Borrower. As soon as available but, in any event, within 90 days after the close of each of the first three quarterly accounting periods in each Fiscal Year, (i) complete unaudited financial statements of the Borrower as at the end of such quarterly period with statements of operations and statement of cash flows for such quarterly period and for the elapsed portion of the Fiscal Year ended with the last day of such quarterly period, in each case setting forth comparative figures for the related periods in the prior Fiscal Year, subject to normal year-end audit adjustments; (ii) a report on any event or condition which has had or which is reasonably likely to have a Material Adverse Effect; and (iii) a statement, in form and detail reasonably satisfactory to the Lender, of all financial transactions in such Quarter between the Borrower and any Affiliate of the Borrower, including a certification on behalf of the Borrower by a Financial Officer of the Borrower that such transactions were in the ordinary course of business on terms at least as favorable to the Borrower as available on an arm's-length basis from third parties. (b) Annual Financial Statements of Borrower. As soon as available but, in any event, within 120 days after the close of each Fiscal Year, (i) the financial statements of the Borrower as at the end of such Fiscal Year with statements of operations and statement of cash flows for such Fiscal Year, in each case setting forth comparative figures for the preceding Fiscal Year ending after December 30, 1999 and (except in the case of financial statements of the Borrower for the Fiscal Year ended December 31, 1999) certified by the Auditors (all such statements being in agreement with the Borrower's books of account and prepared in accordance with GAAP), and (ii) for all fiscal years after December 31, 1999 a report of the Auditors stating that in the course of its regular audit of the financial statements of the Borrower, which audit was conducted in accordance with generally accepted auditing standards, the Auditors obtained no knowledge of any Default or Event of Default which has occurred and is continuing or, if in the opinion of the Auditors such a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof . (c) Management Letters. Promptly after the Borrower's receipt thereof, a copy of any "management letter" or other similar communication received by the Borrower, from the Auditors, as the case may be, in relation to the Borrower's financial, accounting and other systems, management and accounts. 22 CREDIT FACILITY AGREEMENT (d) Officer's Certificates. Except as required for purposes of the first Disbursement under Loan I, at the time of the delivery of the financial statements provided for in Sections 5.01(a) and 5.01(b), a certificate of a Financial Officer of the Borrower to the effect that, to the best of his knowledge, no Default or Event of Default has occurred and is continuing or, if any such Default or Event of Default has occurred and is continuing, specifying the nature and extent thereof and what action the Borrower is taking or proposes to take in response thereto. (e) Notice of Default, Litigation, etc. (i) Immediately upon the Borrower obtaining actual knowledge thereof, notice, by facsimile, of the occurrence of any Default or Event of Default or any breach or default under any of the other Project Documents by the Borrower or any other party thereto, specifying the nature thereof and the action which the Borrower is taking and proposes to take with respect to the same; and (ii) promptly, and in any event within twenty (20) Business Days after Borrower obtains actual knowledge thereof, notice of: (A) any litigation or governmental proceeding, pending (1) against the Borrower, Sponsor or ENEL (x) involving a claim in excess of $100,000 with respect to the Borrower and $5,000,000 with respect to the Sponsor or ENEL (or the equivalent thereof in other currency) or (y) which is reasonably likely to have a Material Adverse Effect or (2) with respect to any Project Document; (B) any proposal by any Governmental Authority to acquire compulsorily the Borrower, Sponsor, the Shareholder or ENEL, any Collateral or a substantial part of the business or assets of any of them; (C) any substantial dispute between or among the Borrower, the Sponsor, the Shareholder or ENEL and any Governmental Authority or any other of the Borrower, Sponsor, the Shareholder or ENEL; (D) any change in the authorized officers or directors referred to in Section 4.01(d) above, giving certified specimen signatures of any new officer or director so appointed and, if requested by the Lender, satisfactory evidence of the authority of such new officer or director; (E) any actual or proposed termination, rescission, discharge (otherwise than by performance), amendment or waiver or indulgence under, any material provision of any Project Document (other than by the Lender); (F) any material notice or correspondence received or initiated by the Borrower relating to a Governmental Approval or other license or authorization necessary for the performance by it of its obligations under the Project Documents; (G) any Lien (including a Permitted Lien) becoming enforceable over any of the Borrower's assets; 23 CREDIT FACILITY AGREEMENT (H) any proposed material change in the nature or scope of the Project or the business or operations of the Borrower, the Sponsor or ENEL and any one or more events, conditions or circumstances (including without limitation Force Majeure as defined in the ENEL Agreements) that exist or have occurred which are reasonably likely to have a Material Adverse Effect; or (I) the occurrence of any event or act which could reasonably qualify as the basis for a claim under either of the MIGA Contracts. (f) Implementation Reports. Within 21 days of the end of each month, beginning with the end of the month hereof, a report executed by the Borrower's chief engineer and attached to each Application for Funding in a form satisfactory to the Lender, on the implementation and progress of the Project, including (i) any factors materially and adversely affecting or which are reasonably likely to materially and adversely affect the carrying out of Phase II of the Project and (ii) copies of any reports received by the Borrower from any outside technical consultant identifying any matter that is of material adverse significance to the rehabilitation or operation of the Power Plant. Upon reasonable request of the Lender, the Borrower shall provide to the Lender copies of all reports submitted by the Borrower to ENEL or CNDC under the ENEL Agreements. (g) Fiduciary Account Reports. The Borrower shall provide to the Lender any and all copies of monthly reports issued by Banco de Credito Centroamericano ("Banco") in accordance with Section 2.2 of the Fiduciary Account Agreement. Such reports shall be provided no later than the tenth day of each calendar month. The Borrower shall attach to each copy of such reports a copy of the notice specified under Section 2.1(c) of such Fiduciary Account Agreement indicating the amount to be required to be deposited in the account for the applicable month(s). (h) Other Information. Any other information or reports related to the Borrower, Sponsor, the Shareholder, ENEL or the Project as the Lender may reasonably request. SECTION 5.02 BOOKS, RECORDS AND INSPECTIONS; ACCOUNTING AND AUDIT MATTERS. (a) Maintenance of Books and Records; Inspections. The Borrower will keep proper books of record and account adequate to reflect truly and fairly the financial condition and results of operations of the Borrower (including the progress of the Project) in which full, true and correct entries in conformity with GAAP shall be made. The Borrower will permit officers and designated representatives of the Lender to visit and inspect, under guidance of officers of the Borrower, any of the properties of the Borrower, and to examine and make copies of the books of record and account of the Borrower and discuss the affairs, finances and accounts of the Borrower with, and be advised as to the same by, its officers, all at such reasonable times and intervals and to such reasonable extent as the Lender may request. (b) Consultation with Auditors. The Borrower shall (i) authorize the Auditors to communicate directly with the representatives of the Lender at reasonable intervals, but if a Default or Event of Default has occurred or is continuing, then at any time, regarding the Borrower's accounts and operations and (ii) furnish to the Lender a copy of such authorization, provided, however, that the Lender will (i) provide the Borrower with copies of any correspondence between such representatives and the Auditors; and (ii) provide the Borrower 24 CREDIT FACILITY AGREEMENT with reasonable notice of any meeting between such representatives and the Auditors, with a description of the matters to be discussed at such meeting, and allow the Borrower to attend any such meeting. SECTION 5.03 MAINTENANCE OF PROPERTY; INSURANCE. (a) Obligation to Maintain Property and Insurances. The Borrower will (i) keep all property in its business in good working order and condition; (ii) keep its present and future properties and business insured (with business interruption coverage in an amount sufficient to cover fixed operating costs plus Debt Service as set forth in the approved Business Plan for a 24-month period commencing on the date of loss with financially sound and reputable insurers satisfactory to the Lender against loss or damage in such manner and to the same extent as specified in Schedule 5.03 until the expiration of such policies and continuously immediately thereafter, in each case pursuant to policies naming the Lender except as otherwise provided in Schedule 5.03 as sole loss payee thereunder, permitting the Lender to make claims thereunder and containing cut-through endorsements to reinsurers and provisions requiring that the Lender shall receive notices of extensions or renewals of insurance policies and notice of any non-payment of premiums and that such policy may only be canceled for non-payment of premiums, if cancelable, upon sixty (60) days prior notice to the Lender. Under no circumstances shall the Lender become liable for the payment of any premiums or any other amounts due or payable under the Insurance Contracts. On or prior to the dates required pursuant to this Section 5.03, the Borrower will submit to the Lender certificates of insurance relating to the insurances specified in Schedule 5.03 (together with copies of such insurance policies if then available) from the Borrower's insurers and insurance brokers (including confirmation of premium payments then due), which certificates shall indicate the properties insured, amounts and risks covered, names of the beneficiaries, expiration dates, names of the insurers and special features of the insurance policies. The Borrower shall provide the Lender with copies of insurance policies relating to the insurances specified in Schedule 5.03 hereto on or prior to the date such policies are required to be delivered to the Lender such policies to be in form and substance, and issued by companies, satisfactory to the Lender. (b) Compliance with MIGA Contracts. The Borrower shall comply with or perform and shall procure compliance with or performance of all obligations specified under the MIGA Contracts as required to be complied with or performed by the Project Enterprise (as defined in the MIGA Contracts) or by the Guarantee Holder (as defined in the Shareholder's MIGA Guarantee) and shall not take any action or fail to take any action which would permit MIGA to terminate any of the MIGA Contracts. (c) Effectiveness of Assignments. In the event that any insurance whatsoever is purchased, taken or otherwise obtained by the Borrower with respect to the Project, excluding insurance policies under Section 4.2.1 of the PPA, otherwise than as required hereunder or if not properly endorsed to the Lender as the sole loss payee or otherwise made upon the terms required in this Section 5.03, without limitation to any provision of the Security Documents, such insurance shall be considered assigned hereunder to the Lender with the right of the Lender to exercise its rights and remedies under any of the Financing Documents or under any Applicable Law. 25 (d) Reinstatement and Renewal of Insurances. Promptly after the issuance, renewal, expiration or termination of any of the Insurance Contracts other than the MIGA Guarantee required to be maintained under this Section 5.03, or upon the reasonable request of the Lender, the Borrower shall cause issuance of a certificate stating that each of such Insurance Contracts is in full force and effect. SECTION 5.04 MAINTENANCE OF EXISTENCE; PRIVILEGES; ETC. The Borrower shall at all times (a) preserve and maintain in full force and effect (i) its existence as an exempted limited liability company and in good standing under the laws of the Cayman Islands, (ii) its qualification to do business in each other jurisdiction in which the character of the properties owned or leased by it or in which the transaction of its business as conducted or proposed to be conducted makes such qualification necessary and (iii) all of its powers, rights, privileges and franchises necessary for the construction, ownership, maintenance and operation of the Project and the maintenance of its existence, (b) obtain in a timely manner and maintain in full force and effect (or where appropriate, renew) all Governmental Approvals (including, without limitation, those under Environmental Laws) and all other licenses, registrations, waivers, consents and approvals required at any time or advisable in connection with the construction, maintenance, ownership or good and orderly operation of the Project and all licenses, consents and approvals necessary for the conversion to Dollars of all Cordoba amounts payable under the PPA, the Nicaragua Government Support Letter for the remission to the United States in Dollars of any amounts paid or payable to the Lender in connection with any Financing Document or the transactions contemplated thereby, and (c) preserve and maintain good and marketable title to its properties and assets (it being understood that the Borrower's rights with respect to the Site are solely as set forth in the Agreement of Association in Participation) subject to no Liens other than Permitted Liens. SECTION 5.05 COMPLIANCE WITH STATUTES. The Borrower will comply with all Applicable Laws in respect of the conduct of its business and the ownership, operation and use of its property. SECTION 5.06 PROJECT IMPLEMENTATION. The Borrower shall (i) carry out the Project and conduct its business with due diligence and efficiency and in accordance with sound engineering, financial, and business practices; (ii) obtain, or cause to be obtained, approval by the competent authority of the Republic of Nicaragua of the Project Remediation Plan; and (iii) use the proceeds of all Disbursements only for the purposes set forth in Section 2.02(a) and strictly in accordance with the Business Plan. SECTION 5.07 AUDITORS. In the event that PricewaterhouseCoopers, Nicaragua should cease to be the Auditors of the Borrower for any reason, the Borrower shall appoint and maintain as the Auditors another firm of independent public accountants approved by the Lender. SECTION 5.08 TAXES, DUTIES, ETC. The Borrower will pay and discharge all taxes, duties, fees, assessments and other governmental charges (including, without limitation, any documentary, stamp, registration, transaction or similar tax or fee) imposed on it, on its income or profits, on any of its property, or in connection with the execution, issue, delivery, registration, notarization, assignment or transfer of any interest in or for the legality, validity or enforceability of any Project Document (including, without limitation, any such tax or fee imposed in connection with any assignment or transfer by any Lender of the Loans or any of its 26 CREDIT FACILITY AGREEMENT interests therein or herein) prior to the date on which penalties attach thereto, and all claims, levies or liabilities (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which have or, if unpaid, might become a Lien upon the property of Borrower (or any part thereof). The Borrower shall have the right, however, to contest in good faith the validity or amount of any such tax, assessment, governmental charge or claim by proper proceedings timely instituted, and may permit the taxes, assessments, governmental charges or claims so contested to remain unpaid during the period of such contest if: (a) the Borrower diligently prosecutes such contest; (b) during the period of such contest the enforcement of any contested item is effectively stayed; (c) the Borrower sets aside on its books adequate reserves with respect to the contested items; and, (d) such contest does not, in the reasonable discretion of the Lender, involve a material risk of the sale, forfeiture or loss of any of the Collateral. The Borrower will promptly pay or cause to be paid any valid, final judgment enforcing any such tax, duty, fee, assessment, other governmental charge or claim and cause the same to be satisfied of record. SECTION 5.09 PERFORMANCE OF OBLIGATIONS. The Borrower will perform all of its material obligations under the terms of each mortgage, indenture, security agreement and other debt instrument by which it is bound and will perform (a) all of its obligations under the terms of the Financing Documents, the PPA and the Agreement of Association in Participation and (b) such of its obligations under the terms of the Implementation Agreements, the non-performance of which is reasonably likely to have a Material Adverse Effect. The Borrower will obtain and maintain in full force and effect at all times the registration of this CFA with the appropriate Governmental Authorities. SECTION 5.10 AVAILABILITY AND TRANSFER OF FOREIGN EXCHANGE. All requisite foreign exchange control approvals, licenses, consents and authorizations, if any, by Nicaragua or any department or agency thereof will be kept current and in full force and effect to assure (a) the ability of the Borrower to make any and all payments to the Borrower contemplated by the Project Documents and (b) and availability of Dollars to enable the Borrower to perform all of its obligations hereunder and under all other Project Documents in accordance with their respective terms. SECTION 5.11 NAME CHANGES; ETC. The Borrower shall not change its name without the prior written consent of the Lender which shall not be unreasonably withheld. The Borrower shall not adopt or change any trade name or its business name without the prior written consent of the Lender which shall not be unreasonably withheld. The Borrower shall execute and deliver to the Lender any additional documents necessary or advisable to reflect any permitted adoption of or change in its name, trade name or fictitious name. SECTION 5.12 CONSOLIDATION, MERGER, SALE OF ASSETS. Without the prior written consent of the Lender, the Borrower will not: (a) wind up, liquidate or abandon its affairs or enter into any transaction of merger or consolidation; (b) convey, sell, lease or otherwise transfer (or agree to do any of the foregoing at any future date) all or any part of its property or assets, except in the ordinary course of business and except sales of equipment which is uneconomic or obsolete or sales of assets that are no longer used by or useful to the Project and which are promptly replaced (if applicable) by substitutes of substantially equivalent utility to the replaced assets; or, (c) purchase or otherwise acquire (in one or a series of related transactions) any part of 27 CREDIT FACILITY AGREEMENT the property or assets of any Person (other than purchases or other acquisitions of inventory or materials or capital expenditures, each in the ordinary course of business). SECTION 5.13 DISTRIBUTIONS; RESTRICTED PAYMENTS. (a) Distributions. Without the prior written consent of the Lender, the Borrower will not return any capital or pay any profits to holders of any Share Capital or authorize or make or incur or assume any obligation to make any other distribution, payment or delivery of property or cash to the Shareholder or the Sponsor as such or by way of payment on account of Subordinated Indebtedness, or otherwise acquire, directly or indirectly, for consideration any ownership interest in the Borrower now or hereafter outstanding, or set aside any funds for any of the foregoing purposes, except if there is no Default and if at the time of declaration and after payment of such dividend, the Borrower meets the requirements of Section 5.34(b). (b) Restricted Payments. Without the prior written consent of the Lender, the Borrower will not (i) make any payment or delivery of property or cash to any Person on account of any subordinated debt service or (ii) redeem, retire, purchase or otherwise acquire, directly or indirectly, for consideration, any third party subordinated indebtedness, or (iii) set aside any funds for any of the foregoing purposes, except in accordance with the Sponsor Project Funding Agreement. SECTION 5.14 LEASES. Without the Lender's prior written consent, the Borrower will not enter into any agreement or arrangements to lease any property or equipment of any kind as lessee, except with respect to which the aggregate lease payments do not exceed the equivalent of US$1,000,000 in any Fiscal Year or $3,000,000 in the aggregate with respect to property other than Capital Expenditures. SECTION 5.15 INDEBTEDNESS. Without the prior written consent of the Lender, the Borrower will not contract, create, incur, assume or suffer to exist any Indebtedness, except for the following types of Indebtedness ("Permitted Indebtedness"): (a) The Loans. Indebtedness of the Borrower incurred under the Financing Documents; (b) Working Capital. Indebtedness for working capital in the normal course of business and pari passu with the Loans, which would not exceed at any one time outstanding the equivalent of an amount equal to the sum of all revenues received by the Borrower for the three month period prior to the date such Indebtedness is incurred. SECTION 5.16 LIENS. Without the prior written consent of the Lender, the Borrower will not, and will not agree to, create, incur, assume or suffer to exist any Lien upon or with respect to any property or assets (real, personal or mixed, tangible or intangible) of the Borrower, whether now owned or hereafter acquired, provided that the provisions of this Section 5.16 shall not prevent the creation, incurrence, assumption or existence of the following Liens (each, a "Permitted Lien"): (a) Liens. Liens for current taxes, assessments and other governmental charges, the payment of which is not at the time required; (b) Liens Hereunder. Liens created pursuant to the Security Documents; and 28 CREDIT FACILITY AGREEMENT (c) Statutory Liens. Mechanics', materialmen's, carrier's and similar Liens securing obligations incurred in the ordinary course of business which (i) are not past due or which are the subject of a Good Faith Contest by the Borrower (unless during the pendency of such contest or as a result thereof the Liens of the Security Documents could reasonably be expected to be materially endangered or any material portion of the Site, or the Project could reasonably be expected to become subject to loss or forfeiture) and (ii) which do not in the aggregate materially detract from the value of the Site or the Project or other assets of the Borrower or materially impair the use thereof; provided that upon the commencement of any proceeding to foreclose or enforce any such Permitted Lien, the Lender may take such action as it reasonably deems necessary to protect the Lender's interests in the Site or the Project including, without limitation, payment of amounts reasonably necessary to release any such Lien, and in such event the Borrower shall reimburse the Lender upon demand for the cost thereof together with interest thereon at a rate per annum equal to the LIBOR Overnight Rate plus 4.50%. SECTION 5.17 GUARANTEES. Without the prior written consent of the Lender, the Borrower will not enter into any Contingent Obligations. SECTION 5.18 SUBSIDIARIES; ADVANCES, INVESTMENTS AND LOANS. Without the prior written consent of the Lender, the Borrower will not form or have any Subsidiaries, lend money or credit or make deposits (other than deposits with the Lender or as provided in Section 5.28 of this Agreement or in relation to the payment for goods and equipment in the ordinary course of business) with or advances (except as specifically required by any Implementation Agreement) to any Person, or purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any other Person, except that the Borrower may instruct the Lender to make Permitted Investments for the account of the Borrower up to amounts available in its current accounts with the Lender's New York Branch; provided, that such Permitted Investments shall mature no later than the Business Day prior to the day on which the Borrower needs the proceeds thereof for payment of Debt Service or for any other permitted use under this Agreement. SECTION 5.19 TRANSACTIONS. The Borrower will not enter into any transaction or series of related transactions with any Person other than in the ordinary course of business on terms at least as favorable to the Borrower as available on an arm's-length basis from third parties and as permitted under the PPA. The Borrower shall remain at all times the "supplier" and the "operator" for purposes of the ENEL Agreements and will not, except in accordance with Sections 4.1.10 and 4.1.11 of the PPA, assign, hire, contract with or otherwise transfer to any Person the rights, duties and responsibilities under the ENEL Agreements. SECTION 5.20 OTHER TRANSACTIONS. Without prior written consent of the Lender, the Borrower will not enter into any partnership, profit-sharing, or royalty agreement or other similar arrangement whereby the Borrower's income or profits are, or might be, shared with any other Person, or enter into any management contract or similar arrangement whereby its business or operations are managed by any other Person, except as permitted under the PPA. SECTION 5.21 MODIFICATIONS OF ORGANIZATION DOCUMENTS; ADDITIONAL AGREEMENTS; ASSIGNMENTS AND MODIFICATIONS OF AGREEMENTS; ETC. 29 (a) No Modifications. The Borrower will not, without the prior written consent of the Lender, (i) amend or modify the Organization Documents of the Borrower, (ii) its filings with the Nicaraguan Foreign Investment Committee in existence as of the date hereof or (iii) change its Fiscal Year. (b) No Amendment or Transfer of Project Documents. Without the prior written consent of the Lender which shall not be unreasonably withheld or delayed, the Borrower shall not, directly or indirectly, terminate, cancel or suspend, or permit or consent to any termination, cancellation or suspension of, or enter into or consent to or permit the assignment of amend or modify the terms of the rights or obligations of any party to, any of the Project Documents. The Borrower shall not, directly or indirectly, amend, modify, supplement or waive, or permit or consent to the amendment, modification, supplement or waiver of, any of the provisions of, or give any consent under, any of the Project Documents without the prior, written consent of the Lender which shall not be unreasonably withheld or delayed. (c) No Assignments of Project Document Rights. Other than the assignment of the Project Documents to the Lender, the Borrower will not assign (except with respect to Permitted Liens) any of its rights or obligations under any Project Document without the prior written consent of the Lender. (d) No PPA Termination Without Lender Consent. The Borrower will not take any action under Section 12.3 of the PPA to require Termination (in terms of the PPA) without the prior written consent of the Lender, which consent shall not be unreasonably withheld or delayed. (e) No Force Majeure Claims Without Lender Consultation. The Borrower shall not claim for itself Force Majeure as provided in Clause XI of the PPA without prior consultation with the Lender. SECTION 5.22 NO OTHER BUSINESS. Without the prior written consent of the Lender, the Borrower will not carry on any business other than in connection with the completion and operation of the Project and will take no action whether by acquisition or otherwise which would constitute or result in any material alteration to the nature of that business or the nature or scope of the Project. SECTION 5.23 ABANDONMENT. The Borrower will not abandon or agree to abandon the Project or place it or agree to place it on a "care and maintenance" basis provided, however, that (a) nothing in this Section 5.23 shall prevent the Borrower from making shut-downs necessary for repairs and maintenance at the Power Plant in accordance with the ENEL Agreements or from placing the Power Plant or any part thereof on a "maintenance" basis during any Force Majeure (not within the control of the Borrower, which Force Majeure prevents the Borrower from rehabilitating, maintaining or operating same); and (b) nothing in this Section 5.23 shall be deemed to waive or limit in any way the right of the Lender to declare an Event of Default as provided in Article 6 hereof. SECTION 5.24 IMPROPER USE. The Borrower will not use, maintain, operate or occupy, or allow the use, maintenance, operation or occupancy of, any portion of the Site or the Project for any purpose: 30 (a) Danger. Which may be dangerous, unless safeguarded as required by Applicable Law (provided, however, that this clause (a) shall not be deemed to prohibit the Borrower from carrying out the Project in accordance with the terms of the PPA and the Drilling Contracts in a reasonable and prudent manner); (b) Violation of Applicable Law. Which violates any Applicable Law in any material respect; (c) Nuisance. Which may constitute a public or private nuisance resulting in a Material Adverse Effect; (d) Effect on Insurance Coverage. Which may make void, voidable, or cancelable or increase the premium of, any insurance (including, but not limited to, the MIGA Contracts) then in force with respect to the Site or the Project or any part thereof unless, in the case of an increase in premium, the Borrower gives proof of payment of such increase; or (e) Other Purposes. Otherwise than for the intended purpose thereof in the rehabilitation, maintenance and operation of the Power Plant. SECTION 5.25 BUSINESS PLAN EXPENDITURES. From and after the Effective Date the Borrower may accelerate expenditures in any Fiscal Year in excess of the projected annual costs set forth in the Business Plan provided such expenditures are conducive to the earlier completion of the Project; the Borrower shall not delay any such expenditures without the concurrence of the Lender's Engineer. SECTION 5.26 ISSUANCE OR TRANSFER OF SHARES. The Borrower will not issue any additional Share Capital or permit or consent to the transfer (by sale, assignment or otherwise) of any Share Capital in the Borrower, except as permitted under the Share Pledge and Sponsor Participation Retention Agreement. SECTION 5.27 AMENDMENT OF BUSINESS PLAN. Other than as provided in Section 5.25, the Borrower will not, directly or indirectly, amend, modify, allocate, re-allocate or supplement or permit or consent to the amendment, modification, allocation, re-allocation or supplement of, any of the provisions of the Business Plan, except with the prior written approval of the Lender. SECTION 5.28 BANK ACCOUNTS. The Borrower shall (a) establish and maintain at all times bank accounts with the Lender's New York Branch, opening such accounts with such documents as the Lender may require; and (b) maintain all its other bank accounts with the Lender, except that the Borrower may maintain bank accounts with balances not exceeding $1,000,000, plus, for a period of 5 Business Days from the receipt thereof by the Borrower, an amount equal to the payments from ENEL, or its equivalent in Cordobas or combination thereof with Banco de Credito Centroamericano S.A. or such other Nicaraguan financial institutions that are approved in advance by the Lender; provided, however, that it shall not be a Default or Event of Default if the balances in the accounts permitted hereunder exceed such permitted amounts solely as a result of the Borrower's inability to exchange or transfer local currency, as a result of disruption in or closure of the foreign exchange market, if and for so long as such inability to convert or transfer continues and if there is not otherwise an Event of Default. 31 CREDIT FACILITY AGREEMENT SECTION 5.29 PRESS RELEASES; ADVERTISING. Neither the Borrower, the Lender nor any Affiliate of the Borrower shall issue or consent to the issuance of any press release or other announcement or advertisement that refers to the provision of financing by the Lender for the Project without the prior written consent of the Borrower, which consent shall not be unreasonably withheld or delayed; except that no consent shall be required where (a) the issuance of such press release, announcement or advertisement is required by Applicable Law or (b) such press release, announcement or advertisement discloses only the names of the parties involved in the provision of financing for the Project, together with a general description of the Project, without disclosing any of the terms of such financing. SECTION 5.30 ADDITIONAL DOCUMENTS; FILINGS AND RECORDINGS. The Borrower shall execute and deliver, from time to time as reasonably requested by the Lender at the Borrower's expense, such other documents as shall be necessary or advisable or that the Lender may reasonably request in connection with the rights and remedies granted or provided for by the Project Documents, as applicable, and to consummate the transactions contemplated therein. The Borrower shall, at its own expense, take all reasonable actions that have been or shall be requested by the Lender or that the Borrower knows are necessary to establish, maintain, protect, perfect and continue the perfection of the first priority security interests of the Lender created by the Security Documents and shall furnish timely notice of the necessity of any such action, together with such instruments, in execution form, and such other information as may be required to enable the Lender to effect any such action. Without limiting the generality of the foregoing, the Borrower shall (a) execute or cause to be executed and shall file or cause to be filed such financing statements, continuation statements, fixture filings and mortgages or deeds of trust in all places necessary or advisable (in the opinion of counsel for the Lender) to establish, maintain and perfect such security interests and in all other places that the Lender shall reasonably request and (b) do everything necessary in the reasonable judgment of the Lender to (i) create and perfect the Security with respect to future assets covered by the Security Documents, (ii) maintain the Security in full force and effect at all times and (iii) preserve and protect the Collateral and protect and enforce its rights and title and the rights and title of the Lender to the Collateral. SECTION 5.31 EMPLOYEES AND EMPLOYEE PLANS. The Borrower shall not adopt, establish, maintain, sponsor, administer, contribute to, participate in, or incur any liability to provide post-retirement welfare benefits, except such liability to provide post-retirement welfare benefits as may be required by Applicable Law, the PPA and the Agreement of Association in Participation. SECTION 5.32 ACCOUNTING CHANGES. The Borrower shall not make any significant change in accounting treatment or reporting, except as permitted by GAAP. SECTION 5.33 DEBT SERVICE RESERVE ACCOUNT. The Borrower will establish no later than the Loan I Closing Date a separate Debt Service Reserve Account, maintained with the Lender's New York Branch, funded in Dollars with respect to each of Loan I and Loan II, on the earlier of (x) the date of the Phase I Completion Certificate or the Phase II Completion Certificate or (y) the last day of the Loan I Availability Period or Loan II Availability Period, as the case may be. The Lender will fund this obligation by drawing on the respective Loan commitments and by crediting the DSRA with the amount required and adding such amount to the outstanding balance of the respective Loan I or Loan II, and with a balance sufficient at all 32 CREDIT FACILITY AGREEMENT times to cover Indebtedness For Borrowed Money in respect of Loan I and Loan II falling due on the first and second Principal Repayment Dates of each respective Loan, and in each case thereafter on the two next successive Principal Repayment Dates. Notwithstanding the above, in the event the Borrower does not have sufficient funds in bank accounts other than the DSRA, the Borrower may utilize balances in the DSRA to make payments as required under Section 2.03 and Section 2.04 of this Agreement on any Principal Repayment Date provided the remaining balance is not less than the amounts required for the next Principal Repayment Date. In such a case, the Borrower must deposit funds to the DSRA within 180 days in an amount sufficient to comply with the requirements of this Section 5.33. SECTION 5.34 FINANCIAL RATIOS. The Borrower shall maintain at all times the following financial ratios: (a) Leverage. A Senior Loan Debt to Borrower's Equity ratio not to exceed 7:3 prior to the Loan II Closing Date and 3:1 thereafter; and (b) Coverage. A DSCR at a minimum level of 1.25:1, determined on and reported to Lender on a quarterly basis. (i) Prior to the Loan II Closing Date (A) During the first four quarters commencing on the Loan I Closing Date the ratio shall be calculated as projected EBITDA during the succeeding four quarters divided by the Debt Service for the successive four quarters beginning on the first Principal Repayment Date, on the basis of the amount outstanding under Loan I on the date of calculation. (B) From a date which is one year after the Loan I Closing Date the ratio shall be calculated as EBITDA during the previous four quarters divided by the Debt Service for the successive four quarters beginning on the first Principal Repayment Date, on the basis of the amount outstanding under Loan I on the date of calculation. (ii) After the Loan II Closing Date: (A) The ratio shall be calculated as EBITDA during the previous four quarters divided by the Debt Service for the succeeding four quarters in respect of Loan I and for the successive four quarters beginning on the first Principal Repayment Date applicable to Loan II and, in the event the Borrower declares a dividend, such dividend is permitted to be distributed under the terms of this Agreement and the Borrower distributes such dividend from Net Cashflow, the Borrower shall have reserved or set aside the payment of an amount from Net Cashflow as is necessary to maintain the DSCR at a minimum level of 1.25:1 after such dividend is distributed. SECTION 5.35 COMPLETION CERTIFICATE. At the conclusion of each of Phase I and Phase II, as determined by the Borrower, which determination in the case of Phase II shall not be made prior to the completion of all geothermal wells for which drilling has begun unless the Lender's Engineer confirms that no Material Adverse Effect will result if such drilling is not completed, the Borrower shall submit to the Lender a Phase I or II Completion Certificate, as appropriate, certifying to the Lender that Phase I or Phase II, respectively, has been completed. 33 CREDIT FACILITY AGREEMENT SECTION 5.36 LENDER'S EXPERTS AND CONSULTANTS. (a) Lender's Engineer. The Lender may appoint an independent engineer or engineering firm to act as the Lender's engineer (the "Lender's Engineer") to observe and report on the drilling and construction works related to Phase II of the Project, to approve each Application for Funding from the Loan II Commitment as appropriate for the value of the work performed or to be performed, and in general to report to the Lender on the progress of the Project; (b) Insurance Consultant. The Lender may appoint an independent Insurance Consultant to advise the Lender regarding the adequacy of all insurance coverage related to the Project and to make recommendations in respect thereto; and (c) Borrower to Reimburse for Costs. All fees, disbursements and all other related costs of the Lender's Engineer and Insurance Consultant shall be reimbursed or paid by the Borrower no later than 30 days from the date of the Borrower's receipt of the relevant invoice. SECTION 5.37 REGULATORY STATUS. The Borrower shall remain continuously exempt from all regulation under PUHCA as a result of being a "foreign utility company" under Section 33 of PUHCA or otherwise. SECTION 5.38 CHILD LABOR AND FORCED LABOR. The Borrower shall refrain from employing Harmful Child Labor and/or using Forced Labor as defined in the MIGA Guarantee. SECTION 5.39 INSURANCE PROCEEDS. The Borrower shall, in accordance with Section 4.2.2.2 of the PPA, apply all insurance proceeds received under the All-Risks property insurance to repair and rebuild the Project. In the event that ENEL fails to present a claim under such All-Risks property insurance to the insurers, the Borrower shall present such claim. In the case of business interruption, insurance proceeds shall be paid to or received by the Lender and held by it to be applied as if received from the Borrower as payment for amounts due on the next Principal Repayment Date and, provided no Event of Default has occurred and is continuing, any remaining amount shall be paid to the Borrower. SECTION 5.40 NOTARIZATION, CONSULARIZATION AND REGISTRATION OF CFA Within thirty (30) calendar days of the date hereof, this Agreement shall be translated into Spanish by an official translator, notarized and consularized as well as delivered for registration with each of the following: (i) Ministerio de Hacienda y Credito Publico, Direccion General de Ingresos, for purposes of the Ley de Impuestos sobre la Renta of Nicaragua; and (ii) Banco Central de Nicaragua, for purposes of the Ley Monetaria of Nicaragua. SECTION 5.41 MIGA PREMIUM PAYMENTS The Borrower will maintain with the Lender's New York Branch a balance in Dollars equal to the premium in respect of the MIGA Guarantee, as notified to the Borrower by either 34 CREDIT FACILITY AGREEMENT MIGA or the Lender, falling due for the next six-month coverage period not less than two weeks prior to the due date. SECTION 5.42 PPA AMENDMENT. The Borrower shall use its reasonable efforts to ensure that an amendment to the PPA substantially in the form attached as Schedule 5.43 has been executed and is in full force and effect within 120 days of the date hereof. Failure to receive such executed amendment shall not constitute a Default or an Event of Default, but, the provision of Section 4.04(d) shall apply. SECTION 5.43 MIGA ARBITRATION. The Borrower shall cooperate with the Lender and take such actions as the Lender may request to enable the Lender to obtain an Award (as such term is defined in the MIGA Guarantee) for purposes of satisfying the provision of Section 17.2 of the MIGA Guarantee, provided that if the Borrowers shall also elect to pursue an Award, the Lender shall consult with the Borrower regarding such actions. ARTICLE 6. EVENTS OF DEFAULT. Each of the following events or conditions set forth in Sections 6.01 through 6.17 (inclusive) shall be an event of default ("Event of Default") hereunder: SECTION 6.01 PAYMENTS. The Borrower shall default in the payment when due of any principal of any Loan or any interest on any Loan or any other amounts owing to the Lender hereunder and such default shall continue unremedied for five (5) or more Business Days. SECTION 6.02 REPRESENTATIONS, ETC. Any representation or warranty confirmed or made in any Project Document by the Borrower or any obligor which is an Affiliate of the Borrower, or in any writing provided by any of them in connection with the execution and delivery of, or in connection with any Application for Funding under this Agreement shall be found to have been incorrect in any material respect when made or deemed to be made and shall continue to be incorrect for a period of thirty (30) days after notice thereof shall have been given to the Borrower by the Lender. SECTION 6.03 COVENANTS. (a) This Agreement. The Borrower shall fail to perform or observe any covenant, term or agreement contained in 5.03 (Maintenance of Property; Insurance), 5.21 (Modifications of Organization Documents; Additional Agreements; Assignments and Modifications of Agreements; Etc.), 5.22 (No Other Business), 5.28 (Bank Accounts), and 5.33 (Debt Service Reserve Account) hereof. (b) Other Agreements. The Borrower, the Sponsor, Ormat Industries Ltd. or any other Affiliate of the Borrower shall fail to perform or observe any other covenant, term or agreement contained in this Agreement or any other Project Document to which it is a party and such failure shall not be remediable or, if remediable, shall continue unremedied for a period of 30 days after the earlier of (i) the date on which such failure shall have first become known to the Borrower, the Sponsor, Ormat Industries Ltd. or other Affiliate of the Borrower, as the case may be, and (ii) the date on which written notice thereof shall have been received by the Borrower, the Sponsor, Ormat Industries Ltd. or other Affiliate of the Borrower, as the case may be, from the Lender; 35 CREDIT FACILITY AGREEMENT provided that if (A) such failure cannot be cured within such 30-day period, (B) such failure, in the reasonable judgment of the Lender, is susceptible of cure, (C) the Borrower, the Sponsor, Ormat Industries Ltd. or other Affiliate of the Borrower, as the case may be, is proceeding with diligence and in good faith to cure such failure, (D) the existence of such failure in the reasonable judgment of the Lender has not had and is not reasonably likely to have a Material Adverse Effect and (E) the Lender shall have received an officer's certificate signed by a Financial Officer of the Borrower, the Sponsor, Ormat Industries Ltd. or other Affiliate of the Borrower, as the case may be, to the effect of clauses (A), (B) and (C) above and stating what action the Borrower is taking to cure such failure, then, such 30-day cure period shall be extended by up to an additional 60 days as shall be necessary for the Borrower, the Sponsor, Ormat Industries Ltd. or other Affiliate of the Borrower, as the case may be, diligently to cure such failure. SECTION 6.04 DEFAULT UNDER OTHER AGREEMENTS. (a) Borrower. Any Indebtedness For Borrowed Money of the Borrower shall be declared or for any reason any Person is entitled to declare it to be due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof taking into account any applicable grace period. (b) ENEL Indebtedness. ENEL shall (i) default in any payment of any Indebtedness For Borrowed Money in an aggregate principal amount exceeding $5 million beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness For Borrowed Money was created or (ii) default in the observance or performance of any material condition or provision of any agreement or condition relating to any Indebtedness For Borrowed Money in an aggregate principal amount exceeding $10 million or contained in any instrument or agreement evidencing, securing or relating thereto, the effect of which default is to cause any such Indebtedness For Borrowed Money to become due prior to its stated maturity. (c) The Sponsor. The Sponsor (i) defaults in any payment of any Indebtedness For Borrowed Money in an aggregate principal amount exceeding $5 million beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness For Borrowed Money was created or (ii) defaults in the observance of performance of any material condition or provision of any agreement or condition relating to any Indebtedness For Borrowed Money in an aggregate principal amount exceeding $10 million or contained in any instrument or agreement evidencing, securing or relating thereto, the effect of which default is to cause any such Indebtedness For Borrowed Money to become due prior to its stated maturity. (d) ENEL Project Obligations. A default shall have occurred in the performance of any material obligation by (i) ENEL or Nicaragua under any of the Project Documents to which such Person is a party and such default shall continue unremedied beyond the period of grace, if any, extended to such Person with respect to such default, as specified in the Project Document under which such obligation was created or (ii) any other party (other than the Persons referred to in clause (i) of this Section 6.04(d)) under any of the Project Documents and the existence of such default in the reasonable judgment of the Lender has had or is reasonably likely to have a Material Adverse Effect and such default has not been cured within 60 days. 36 CREDIT FACILITY AGREEMENT SECTION 6.05 BANKRUPTCY, ETC. There shall have been entered against the Borrower, Ormat Holding Corp., the Sponsor or ENEL a decree or order by a court adjudging the Borrower or such other Person bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Borrower or such Person under any Applicable Law; or appointing a receiver, liquidator, assignee, trustee, sequestrator, special manager or administrator (or other similar official) of the Borrower or such Person or of any substantial part of its property or other assets, or ordering the winding up or liquidation of its affairs and the Borrower or such other Person (w) fails to obtain the dismissal or stay on appeal of any such proceeding or arrangement within forty-five (45) days of the commencement thereof against it or (x) any other procedure for the relief of financially distressed debtors is instituted against it and is not dismissed within forty-five (45) days of such commencement; or the institution by the Borrower or such other Person of proceedings to be adjudicated bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it; or the filing by it of a petition or answer or consent seeking reorganization or debt relief under any Applicable Law; or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, special manager or administrator (or other similar official) of the Borrower or any such other Person or of any substantial part of its property; or the making by it of an assignment or an arrangement for the benefit of creditors; or the admission by it in writing of its inability to pay its debts generally as they become due; or any other event shall have occurred which under any Applicable Law would have an effect analogous to any of those events listed above in this subsection with respect to the Borrower or Ormat Holding Corp., the Sponsor or ENEL; or any corporate action is taken by the Borrower or Ormat Holding Corp., the Sponsor or ENEL for the purpose of effecting any of the foregoing; provided that any reorganization or reconstruction of a company while solvent with the prior consent of the Lender, such consent not to be unreasonably withheld or delayed, shall not be held to constitute any event mentioned in this paragraph; and provided, further, that (a) in connection with any other Person, no Event of Default shall be declared under this Section 6.05 if (y) such Person has fully complied and continues to fully comply with all of its obligations under all Project Documents to which such Person is a party and (z) in the reasonable judgment of the Lender, such Event of Default has not had and is not reasonably likely to have a Material Adverse Effect. SECTION 6.06 PROJECT EVENTS. (a) Eviction. The Borrower shall cease to have the right to access and use the Site; or (b) PPA Termination. Any event shall have occurred which entitles (i) the Borrower to give a notice under Section 12.3 of the PPA, or (ii) ENEL to give a notice under Section 12.2 of the PPA; or (c) Disposition of Interest. The Borrower shall (except as permitted by Section 6.13 hereof) sell or otherwise dispose of any of its interest in the Project. SECTION 6.07 MATERIAL ADVERSE EFFECT. One or more events, conditions or circumstances shall exist or shall have occurred which, in the reasonable judgment of the Lender, is reasonably likely to have a Material Adverse Effect. SECTION 6.08 PROJECT DOCUMENTS; SECURITY DOCUMENTS. 37 CREDIT FACILITY AGREEMENT (a) Failure of Project Document. This Agreement or any of the other Financing Documents or any of the Project Documents, or any material provision hereof or thereof (i) is or becomes invalid, illegal or unenforceable or any party thereto (other than the Lender) shall so assert, unless a Good Faith Contest is instituted and the assertion is withdrawn within 30 days thereof and prior to the next date of Disbursement, or (ii) ceases to be in full force and effect, or shall cease to give the Lender the Collateral, rights, powers and privileges purported to be created thereby, therein or hereby or any party thereto (other than any Lender) shall so assert subject to the last clause of this Section 6.08 (a)(i). (b) Failure of Security Document. Except as permitted by Section 5.16 hereof, the Collateral or any component part thereof for any reason fails to constitute a valid and perfected first priority Lien or ceases to be in full force and effect or the Borrower or the grantor or pledgor thereof shall so assert provided, however, that if and for so long as the Sponsor Project Funding Agreement and the Contingent Guarantee Agreement remain in full force and effect, the cancellation, invalidity or termination of the coverage for Expropriation as provided in Addendum A, Paragraphs 1 and 3 of the MIGA Guarantee shall not be an Event of Default under this Section 6.08(b). SECTION 6.09 OWNERSHIP OF THE BORROWER. The Sponsor shall cease to maintain Control of the Borrower or shall cease to own, directly or indirectly, all of the ownership interests in the Borrower free and clear of all Liens other than as permitted by the Share Pledge and Sponsor Participation Retention Agreement (it being understood that, for purposes of this Section 6.09, if the Sponsor owns ownership interests in the Borrower indirectly, the percentage of its ownership in the Borrower shall be the product of the percentage ownership it has in any intermediate subsidiary or other entity and the percentage ownership which the subsidiary or other entity owning ownership interests in the Borrower directly has in the Borrower). SECTION 6.10 JUDGMENTS. One or more judgments or decrees shall be entered (a) against the Borrower involving in the aggregate a liability (not paid or fully covered by insurance) of $1 million or more; or (b) prior to the date on which the Sponsor shall cease to be an obligor, against the Sponsor or involving in the aggregate a liability (not paid or fully covered by insurance) of $1 million or more with respect to the Sponsor which liability in the reasonable judgment of the Lender has had or is likely to have a Material Adverse Effect; and in any such case all such judgments or decrees shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days after the entry thereof. SECTION 6.11 GOVERNMENTAL ACTION. Any government or Governmental Authority shall have condemned, nationalized, seized, or otherwise expropriated all or any substantial part of the property or other assets of the Borrower or shall have assumed custody or control of such property or other assets or of the business or operations of the Borrower or shall have taken any action for the dissolution or disestablishment of the Borrower or any action that would prevent the Borrower or its officers from carrying on its business or operations or a substantial part thereof. SECTION 6.12 PERMITS. The Borrower, ENEL, or any of their respective Affiliates shall fail to obtain, renew, maintain or comply in all material respects with any Governmental Approval set forth in Schedule 3.11, except as noted thereon, or any license, approval or 38 CREDIT FACILITY AGREEMENT consent referred to in Section 4.02(c); or any such Governmental Approval or license, approval or consent shall be rescinded, terminated, suspended, modified or withheld or shall be determined to be invalid or shall cease to be in full force and effect; or any proceeding shall be commenced by or before any Governmental Authority for the purpose of rescinding, terminating, suspending, modifying or withholding any such Governmental Approval or license, approval or consent and such proceeding is not dismissed within 60 days; and such failure, rescission, determination of invalidity, termination, suspension, modification, withholding, cessation or commencement is reasonably likely to have a Material Adverse Effect. SECTION 6.13 TRANSFER OF COLLATERAL; EVENT OF LOSS; DIMINUTION OF PROPERTY RIGHTS. (a) Transfer; Event of Loss. Title to or any right in all or any part of the Collateral, covered by the Security Documents (other than as permitted pursuant to this Agreement, including Section 5.12 hereof) shall become vested in any party other than the party named as owner and/or holder thereof in the applicable Security Document, whether by operation of law or otherwise, or (iv) there shall have occurred an Event of Loss with respect to which adequate compensation has not been paid, or it is reasonably unlikely that adequate compensation will be paid. (b) Diminution. Except as permitted pursuant to any Financing Document or this Agreement, the Borrower hereafter grants or permits any easement or dedication, files any plat, declaration or restriction or enters any lease or sub-lease concerning the Site, the Collateral or the Power Plant and the effect thereof is determined by the Lender, in its reasonable discretion, to have a Material and Adverse Effect. SECTION 6.14 COMPLETION BY DATE CERTAIN. A determination by the Lender, in each case in its reasonable judgment, that the Project is not reasonably likely to be completed either within the financial budget or on time as established under the Business Plan; provided that no Event of Default shall be declared as a result of any such determination if all of the following conditions are met: (i) within 30 days after notice by the Lender to the Borrower of such determination, the Borrower submits to the Lender a plan, in form and substance acceptable to the Lender, specifying the plan of action the Borrower intends to take to remedy the condition described herein and (ii) the Borrower proceeds diligently in implementing such plan to the Lender's reasonable satisfaction and provides reports periodically as the Lender may request of the status of such implementation and from time to time amends such plan with the Lender's consent (which shall not be unreasonably withheld) so that such plan remains likely to achieve its aims. SECTION 6.15 SPONSOR PROJECT FUNDING AGREEMENT. The failure of the Sponsor to make or cause to be made any subordinated loan or equity contribution or the failure of the Sponsor to pay any amount required to be paid by it under, or otherwise to comply with any of the terms of, the Sponsor Project Funding Agreement. SECTION 6.16 CONTINGENT GUARANTEE AGREEMENT. The failure of Ormat Industries Ltd. to pay any amount required to be paid by it under or otherwise to comply with any of the terms of the Contingent Guarantee Agreement. 39 CREDIT FACILITY AGREEMENT SECTION 6.17 MIGA CONTRACTS. Any of the MIGA Contracts shall not be valid, binding and in full force and effect. SECTION 6.18 REMEDIES. Notwithstanding anything herein or in any Financing Document or elsewhere to the contrary, upon the occurrence of an Event of Default, and at any time thereafter, if such Event of Default is continuing, the Lender, by written notice to the Borrower and the Sponsor, may declare immediately due and payable (i) all or any portion of the principal amounts of the Loans then outstanding, including accrued interest thereon to the date of payment, and (ii) all other amounts owing under this Agreement. Except as expressly provided in this Article 6, presentment, demand, protest, promptness, dishonor and all other notices of any kind are hereby expressly waived. The aforementioned right to accelerate is in addition to and not a substitute for any other rights and remedies, in law or in equity, available to the Lender under this Agreement and other Applicable Laws, including, without limitation or prejudice to the Lender's other rights and remedies, the following: (a) Suspension. The Lender's right to refuse, and the Lender not to be obligated, to make any Disbursements or make any payments from any account, including (but not limited to) the Debt Service Reserve Account; (b) Enforcement of Rights. Exercise any and all rights and remedies available to it under any of the Project Documents. ARTICLE 7. MISCELLANEOUS SECTION 7.01 NOTICES. (a) Procedure. All notices, requests and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by the Borrower by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified below, and (ii) shall be followed promptly by the mailing or delivery of a hard copy original thereof) and mailed, faxed or delivered, to the address or facsimile number specified for notices below; or, as directed to the Borrower or the Lender, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Borrower and the Lender. (b) Effectiveness. All such notices, requests and communications shall, when faxed, be effective when transmitted in legible form by facsimile machine, or if mailed, upon the seventh day after the date deposited into the national mail, or if delivered, upon delivery; except that notices pursuant to Article 2 shall not be effective until actually received by the Lender, and notices, requests and communications received on a day which is not a Business Day, shall be deemed received on the next following Business Day. (c) Lender's Right to Rely. Any agreement of the Lender to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Borrower. The Lender shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Borrower to give such notice and the Lender shall not have any liability to any other Person on account of any action taken or not taken by the Lender in reliance upon such telephonic or facsimile notice. The obligation of the Borrower to repay the Loans shall not be 40 CREDIT FACILITY AGREEMENT affected in any way or to any extent by any failure by the Lender to receive written confirmation of any telephonic or facsimile notice or the receipt by the Lender of a confirmation which is at variance with the terms understood by the Lender to be contained in the telephonic or facsimile notice. (d) Addresses. Addresses: If to the Borrower: ORMAT MOMOTOMBO POWER COMPANY c/o Maples and Calder, Attorneys in Law Ugland House P.O.B. 309, George Town Grand Cayman Cayman Islands, British West Indies Attn: President Tel: 1-345-949-8066 Fax: 1-345-949-8080 and with a copy to: c/o Ormat International, Inc. 980 Greg Street Sparks, Nevada 89431-6039 Attn: President Tel: (775) 356-9029 Fax: (775) 356-9039 If to the Lender: BANK HAPOALIM B.M. Foreign Trade Operations Center, Export Unit 40 Hamasger Street Tel-Aviv 67131, Israel Attn: I. Gottlieb Tel: 011-972-3-714-6613/6616 Fax: 011-972-3-714-6619 Telex: 342342 or 341453 Copy to: BANK HAPOALIM B.M. Head Office/Corporate Banking Division Trade Finance Department 41-45 Rothschild Boulevard P.O. Box 27 Tel-Aviv 61000, Israel 41 CREDIT FACILITY AGREEMENT Attn: E. Arnon Tel: 011-972-3-567-3628/3622 Fax: 011-972-3-567-6572/4548 Telex: 341453 or 342342 SECTION 7.02 ENGLISH LANGUAGE. All documents to be furnished or communications to be given or made under this Agreement, or any other Financing Document shall be in the English language or, if in another language, shall be accompanied by a translation into English certified by a representative of the Borrower, which translation shall be the governing version among the Borrower and the Lender. SECTION 7.03 INDEMNITIES AND EXPENSES. (a) Indemnity Obligation. Subject to Section 7.03(b), whether or not the transactions contemplated hereby are consummated, the Borrower shall indemnify and hold the Lender and each of its respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, claims, suits, costs, charges, expenses and disbursements (including, without limitation, Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans) be imposed on, incurred by or asserted against any such Indemnified Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, any investigation, litigation or proceeding (including any bankruptcy, insolvency proceeding or appellate proceeding) related to or arising out of this Agreement, or any other Project Documents or the Loans or the use of the proceeds thereof or any Environmental Claim relating to the Borrower or the Project or arising out of the use of the Power Plant or Site or any actual or alleged presence of Hazardous Materials on, under or at the Power Plant or Site, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Borrower shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all amounts due under this Agreement. The Lender and each other Indemnified Person shall (1) use its reasonable efforts to, upon its becoming aware of any event which may result in the Borrower being required to perform any of its obligations under this Section 7.03(a), promptly notify the Borrower (provided that failure to so notify shall not mitigate the obligations of the Borrower hereunder), (2) upon request from the Borrower consult the Borrower regarding any step (including any step which may mitigate the effect of such event) it proposes to take in respect of such event, and (3) obtain the prior written consent of the Borrower before entering into any settlement or compromise in relation to any such claims, actions or suits. (b) Expenses. The Borrower shall: (i) subject to the last sentence of this Section 7.03(b) whether or not the transactions contemplated hereby are consummated, pay or reimburse the Lender as soon as practicable but, in any event, within 30 days after demand for all reasonable costs and expenses incurred by the Lender, in connection with the development, preparation, negotiation, delivery, printing, registration, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this 42 CREDIT FACILITY AGREEMENT Agreement, any Financing Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable travel expenses, communication costs, fees and expenses of outside professional or technical advisers or consultants, and including Attorney Costs incurred by the Lender, with respect thereto; and (ii) pay or reimburse the Lender as soon as practicable but, in any event, within 30 days after demand for all reasonable costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Financing Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any bankruptcy or insolvency proceeding or appellate proceeding). In addition, the Borrower shall, whether or not the transactions contemplated hereby are consummated, pay or reimburse the Lender on the each of the Loan I Closing Date and Loan II Closing Date for all accrued and unpaid reasonable costs, fees and expenses to the extent then due and payable on such date of payment (including Attorney Costs, Commitment Fees and any amounts arising from any indemnities) incurred by the Lender, prior to such date in connection with the development, preparation, negotiation, delivery, printing, administration, enforcement and execution of, and any amendment, supplement, waiver or modification to (in each case whether or not consummated), this Agreement, any Financing Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, provided that Attorney Costs shall include such costs to the extent invoiced prior to or on such date of payment. (c) Maximum Amount Permitted under Applicable Law. To the extent that the undertaking in the preceding paragraphs of this Section 7.03 may be unenforceable because it is violative of any law or public policy, the Borrower will contribute the maximum portion that it is permitted to pay and satisfy under Applicable Law to the payment and satisfaction of such undertakings. (d) Late Payment. All sums paid and costs incurred by the Lender in respect to any matter indemnified hereunder shall bear interest at the LIBOR Overnight Rate plus 4.50% from the date so paid until reimbursed by the Borrower, and all such sums and costs shall be added to the debt and be secured by the Security Documents and shall be immediately due and payable on demand. (e) Judgment Currency. If any arbitration award, judgment or order is given or made for the payment of any amount due under this Agreement or any other Project Document and such arbitration award, judgment or order is expressed in a currency other than Dollars, the Borrower shall, subject to this Section 7.03(e), indemnify the Lender against and hold it harmless from all loss and damage incurred by the Lender as a result of any variation in rates of exchange between the date of such arbitration award, judgment or order and the date of payment (or, in the case of partial payments, the date of each partial payment) thereof. This indemnity shall constitute an obligation separate and independent from the other obligations contained in this Agreement or any other Project Document, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by the Lender from time to time, and shall continue in full force and effect notwithstanding any arbitration award, judgment or order for a liquidated sum in respect of an amount due under this Agreement or any other Project Document. 43 CREDIT FACILITY AGREEMENT SECTION 7.04 SURVIVAL. All indemnities set forth herein and the obligations of the Borrower to pay additional costs as set forth in Article 2 hereof shall survive the execution and delivery of this Agreement and the making and repayment of the Loans. SECTION 7.05 GOVERNING LAW; SUBMISSION TO JURISDICTION. (a) Governing Law. THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA WITHOUT REFERENCE TO THE CONFLICTS OF LAWS PROVISIONS THEREOF (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW). (b) Submission to Jurisdiction. Any legal action or proceeding against the Borrower with respect to this Agreement, or any Financing Document may be brought in the courts of the State of New York in the County of New York or of the United States for the Southern District of New York and, by execution and delivery of this Agreement, the Borrower hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The Borrower agrees that a judgment, after exhaustion of all available appeals, in any such action or proceeding shall be conclusive and binding upon the Borrower, and may be enforced in any other jurisdiction, including without limitation Nicaragua, by a suit upon such judgment, a certified copy of which shall be conclusive evidence of the judgment. The Borrower hereby irrevocably designates, appoints and empowers CT Corporation System, on the date hereof, with offices at 111 Eighth Avenue, New York, New York 10011, as its designee, appointee and agent to receive, accept and acknowledge for and on its behalf, and in respect of its property, service of any and all legal process, summons, notices and documents which may be served in any such action or proceeding. If for any reason such designee, appointee and agent shall cease to be available to act as such, the Borrower agrees to designate a new designee, appointee and agent in New York City on the terms and for the purposes of this provision satisfactory to the Lender. The Borrower further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Borrower, at its address set forth in Section 7.01 hereof, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of the Lender to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Borrower in Nicaragua or in any other jurisdiction. (c) Waiver of Procedural Defenses. The Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement, or any other Financing Document brought in the courts referred to in clause (b) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. (d) Waiver of Jury Trial. WITH REGARD TO THIS AGREEMENT, EACH OF THE BORROWER AND THE LENDER HEREBY WAIVE THE RIGHT TO A TRIAL BY JURY, SUCH WAIVER ACKNOWLEDGED HEREBY AS BEING A VOLUNTARY, KNOWING AND INTELLIGENT WAIVER BY EACH PARTY HERETO. 44 CREDIT FACILITY AGREEMENT SECTION 7.06 SUCCESSORS AND ASSIGNS. (a) Benefit of Agreement. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the parties hereto except that the Borrower may not assign or otherwise transfer all or any part of its rights or obligations under this Agreement without obtaining the prior written consent of the Lender. For the avoidance of doubt, any merger, reincorporation, corporate restructuring or other business combination involving any shareholder of any Lender (and any other transaction related to such shareholder which is undertaken in connection with any such transactions) shall not be construed as an assignment or transfer requiring any consent under this Section 7.06(a). (b) Disposition of Indebtedness. Subject to the following restrictions, the Lender may at any time sell, assign, transfer, negotiate, or otherwise dispose of, in whole or in part, its rights and obligations under this Agreement or the Loans and such sale, assignment, negotiation or disposition shall be evidenced by an assignment and acceptance agreement, in form and substance acceptable to the Lender and to the Borrower, appropriately completed and executed by the assigning Lender and the assignee. Such executed assignment and acceptance agreement shall be delivered to the Lender and the Borrower immediately after execution and shall not be effective until all conditions set forth therein and in this Section 7.06 shall have been satisfied. (i) The Lender may assign its rights and obligations under this Agreement and/or the Loans only to a Person approved by the Borrower (which approval in each case shall not be unreasonably withheld) in its sole discretion; provided, that no Borrower approval shall be required in the event of such an assignment by a Lender to an Affiliate of the Lender. (ii) The exercise of such right by the Lender is subject in all cases to the conditions that immediately thereafter the Lender shall have given written notice of any such transfer to the Borrower, and the transferee shall (a) not have, or shall have effectively waived, any right pursuant to Section 2.09 or 2.14 to claim from the Borrower any additional amounts above and beyond those which could have been claimed by the transferor had it continued to own its Loans hereunder and (b) not have any right pursuant to Section 2.09 or 2.14 not possessed by the transferor had it continued to own its Loans hereunder. (c) Succession. From and after the date that the Lender has received an executed assignment and acceptance agreement (in accordance with the terms of Section 7.06(b) and the conditions set forth in such assignment and acceptance agreement have been satisfied, (i) the assignee Lender thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such assignment and acceptance agreement, shall have the rights and obligations of a Lender hereunder and under the other Financing Documents and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Financing Documents have been assigned by it pursuant to such assignment and acceptance agreement, relinquish its rights and be released from its obligations under the Financing Documents. (d) Deemed Amendment. Immediately upon the satisfaction of all other conditions in this Section 7.06 and in such assignment and acceptance agreement, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the assignee Lender and the resulting adjustment of the Total Commitment arising therefrom. 45 CREDIT FACILITY AGREEMENT The Total Commitment allocated to each assignee Lender shall reduce such Total Commitment of the assigning Lender pro tanto. (e) Disposition Acknowledged Upon Notice. The Borrower may treat the Lender as the owner of the Loans until written notice of transfer or assignment shall have been received by it. (f) Participations. Notwithstanding anything to the contrary contained in this Section 7.06, each Lender may grant participations, in whole or in part, in its rights and obligations under this Agreement and the Loans without notice to the Borrower and without restriction; provided that (i) the Lender's obligations under this Agreement shall remain unchanged, (ii) the Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, shall continue to deal solely and directly with the Lender in connection with the Lender's rights and obligations under this Agreement, and the Lender shall retain the sole right to enforce the obligations of the Borrower relating to the Loans of the Lender. SECTION 7.07 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. SECTION 7.08 RIGHT OF SETOFF. In addition to any rights now or hereafter granted under Applicable Law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default, the Lender is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) including, without limitation, the accounts established under Sections 5.28(a) and 5.33, and any other Indebtedness at any time held or owing by the Lender (including without limitation by branches and agencies of the Lender, wherever located), to or for the credit or the account of the Borrower against and on account of the Loans and any other Indebtedness of the Borrower to the Lender, under this Agreement, or any of the other Financing Documents, including, without limitation, all claims of any nature or description arising out of or connected with this Agreement, or any other Financing Document, irrespective of whether or not the Lender shall have made any demand hereunder and although said liabilities or claims, or any of them, shall be contingent or unmatured. SECTION 7.09 NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of the Lender in exercising any right, power or privilege hereunder or any other Financing Document and no course of dealing between the Borrower and the Lender shall impair any such right, power or privilege or operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or any other Financing Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights, powers and remedies herein, or in any other Financing Document expressly provided are cumulative and not exclusive of any rights, powers or remedies which the Lender would otherwise have. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Lender to any other or further action in any circumstances without notice or demand. 46 CREDIT FACILITY AGREEMENT SECTION 7.10 SEVERABILITY. Any provision of this Agreement and any other Financing Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability but that shall not invalidate the remaining provisions of this Agreement or any other Financing Document or affect such provision in any other jurisdiction. SECTION 7.11 CALCULATION. Except as otherwise provided, all accounts, financial determinations and calculations to be made under, or for the purposes of, this Agreement shall be determined in accordance with GAAP, applied on a consistent basis and, except as otherwise required to conform to the definitions contained in Appendix A of this Agreement or any other provisions of this Agreement, shall be calculated from the then most recently issued quarterly financial statements which the Borrower is obligated to furnish to the Lender from time to time, as provided hereunder; provided, however, that (a) if the relevant quarterly financial statements should be in respect of the last quarter of a Fiscal Year then such calculations shall be made from the audited financial statements for the relevant Fiscal Year, and (b) if there should occur any material adverse change in the financial condition or results of operations of the Borrower after the end of the period covered by the relevant financial statements, then such material adverse change shall also be taken into account in calculating the relevant figures. SECTION 7.12 HEADINGS DESCRIPTIVE. The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. SECTION 7.13 AMENDMENT OR WAIVER. Neither this Agreement nor any terms hereof may be changed, waived, discharged or terminated unless, such change, waiver, discharge or termination is in a writing signed by the Lender and the Borrower. SECTION 7.14 DISCLAIMER. The Lender shall not be responsible in any way for the performance of the Project Documents, and no claim with respect to the performance of the Project Documents will affect the obligations of the Borrower under this Agreement or any other Financing Document. SECTION 7.15 PAYMENTS SET ASIDE. To the extent that the Borrower makes a payment to the Lender or the Lender exercises its right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party, in connection with any bankruptcy or insolvency proceeding or otherwise, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred. SECTION 7.16 CONFIDENTIAL INFORMATION. The Lender agrees that it (a) shall hold all non-public information obtained by it pursuant to the requirements of the Financing Documents, which have been identified in writing as non-public information by the Sponsor, in accordance with its customary procedures for handling confidential information of such nature and in accordance with reasonable internal practices, and (b) may make disclosure reasonably required by a potential assignee of the Lender or by a potential participant in the Loans made or to be made by the Lender or of the Collateral in connection with the contemplated assignment or participation if such potential assignee or participant executes an agreement to keep such 47 CREDIT FACILITY AGREEMENT disclosure confidential substantially in accordance with the terms of this clause; provided, however, no confidentiality obligation shall apply to any information that (x) is generally available to the public, (y) was already known to the Lender on a non-confidential basis on the date of receipt, or (z) is subsequently disclosed to the Lender on a non-confidential basis by a third party not having a confidential relationship with the Sponsor with respect to such information. Notwithstanding the foregoing, the Lender shall be free to disclose any such information or data to its attorneys, outside engineers, experts and auditors and shall be free to disclose any such information otherwise (a) to the extent required by Applicable Law or by any Governmental Authority, except as provided in the last sentence of this Section 7.16, it is expressly understood that all obligations and liabilities of the Borrower under this Agreement, and the other Project Documents to which the Borrower is a party and any other related document, agreement or instrument executed by the Borrower are solely obligations of the Borrower, provided, that such limitation of liability shall not apply to any other party hereto if and to the extent that such party commits fraud or misappropriation of earnings, revenues, profits or proceeds from the Borrower or the Project. Notwithstanding anything herein to the contrary, nothing herein shall limit, or be construed or deemed to limit, the liability of any other party under any Project Document to which such is a party in its individual capacity. SECTION 7.17 NO RECOURSE. Except as provided in the last 2 sentences of this Section 7.17 neither the Sponsor nor any Affiliate of the Sponsor (other than the Borrower), nor its or their respective officers, directors, stockholders, controlling persons or employees (each, a "Non-Recourse Party"), shall have any personal liability for any amounts payable by the Borrower hereunder or under any other Project Document or for the performance of any covenant, agreement or obligation of the Borrower, or for the breach of any representation, warranty or covenant of the Borrower under this Agreement or any other Project Document, agreement, undertaking, certificate or other document delivered by or on behalf of the Borrower in connection with this Agreement, and therefore no judgment or recourse shall be sought or enforced against any Non-Recourse Party for the payment or performance of the obligations of the Borrower under any Project Document or any other such agreement, undertaking, certificate or document executed by the Borrower. Except as provided in the last sentence of this Section 7.17, it is expressly understood that all obligations and liabilities of the Borrower under this Agreement and the other Project Documents to which the Borrower is a party and any other related document, agreement or instrument executed by the Borrower are solely obligations of the Borrower, provided, that such limitation of liability shall not apply to a Non-Recourse Party if and to the extent that such Non-Recourse Party commits fraud causing material damage or loss to the Borrower, the Project or the Lender or misappropriates earnings, revenues, profits or proceeds from the Borrower or the Project. Notwithstanding anything herein to the contrary, nothing herein shall limit, or be construed or deemed to limit, the liability of any Non-Recourse Party under any Project Document to which such Non-Recourse party is a party in its individual capacity. 48 CREDIT FACILITY AGREEMENT IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names as of the date set forth below. ORMAT MOMOTOMBO POWER COMPANY, as Borrower By: /s/ Connie Stechman --------------------------------- Name: Connie Stechman Title: Assistant Secretary BANK HAPOALIM B.M., as Lender By: /s/ Ehud Arnon --------------------------------- Name: Ehud Arnon Title: Head of Foreign Trade SCHEDULE 2.02 FORM OF APPLICATION FOR FUNDING APPLICATION FOR FUNDING Date ---------------- Bank Hapoalim B.M. Head Office/Corporate Banking Division Trade Finance Department 41-45 Rothschild Boulevard P.O. Box 27 Tel-Aviv 61000, Israel Attention: E. Arnon Subject: Momotombo Field and Power Plant Rehabilitation (Nicaragua) Loan [I][II](1) Application for Funding No. ----------------- Requested Date of Disbursement ---------------- In accordance with the Credit Facility Agreement dated as of _________, 2000 (the "Agreement"), between Ormat Momotombo Power Company (the "Borrower") and Bank Hapoalim B.M. (the "Lender"), we hereby request the Lender to make a Disbursement on or before ________________________, 20___(2) under the referenced Loan thereby established, in the amount of US$ ______________, of which the amount of US$ _____________ is to be credited to our current account no. ___________ with the Lender's New York Branch, and the amount of US $ _______________ is to be credited to our DSRA No. _______________ with the Lender's New York Branch. The Borrower hereby requests such amount for the purposes specified in Section 2.02(a) of the Agreement. Attached to this Application for Funding is an itemized statement of payments (the "Itemized Statement of Payments") with respect to the amounts requested hereunder. [We enclose therewith the most recent version of the monthly implementation reports, required under Section 5.01(f) of the Agreement, detailing the implementation and progress of the Project.] We hereby certify that: ---------- (1) Insert designation for applicable Loan: Loan I for Application for Funding under Phase I; Loan II for Application for Funding under Phase II. (2) Insert date which is twelve Business Days after the date of this Application for Funding. 50 1. All payments specified in the attached Itemized Statement of Payments have been made or will be made pursuant to the Business Plan, and we have agreed to pay, or we have paid, as the case may be, the exact amounts set forth in the attached Itemized Statement of Payments for the items specified therein. 2. We have or will have received from the Sponsor, not later than two days prior to the date of the Disbursement requested hereunder, an advance in the amount of US$ _______________, which, when added to Borrower's Equity, is sufficient to comply with the terms of Section 5.34(b) of the Agreement. 3. As of the date hereof, the Senior Loan Debt is equal to US$ _____________, the Borrower's Equity is equal to US$ _____________, and the Senior Loan Debt to Borrower's Equity ratio does not exceed [7:3] [3:1].(3) After giving effect to the Disbursement requested hereunder: (a) the Senior Loan Debt shall be equal to US$ ____________; (b) the Borrower's Equity, including all amounts advanced pursuant to paragraph 2 above, shall be equal to US$ _________________; and, (c) the Senior Loan Debt to Borrower's Equity ratio does not exceed [7:3] [3:1].(4) 4. The DSCR at the end of the calendar quarter ended _______ ___, ______ (which date is not more than 180 days prior to the date hereof) was not less than 1.25:1, as provided in and determined in accordance with Section 5.34(b) of the Agreement. 5. As of the date of the Disbursement to be made pursuant to this Application for Funding: (a) Except as provided in the next sentence, each and every one of the representations and warranties made by us in the Agreement (other than the representations made pursuant to Section 3.07(b) therein) and under each Project Document to which we are a party are true and shall remain so on the date of the requested Disbursement. The following representations and warranties are and shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on the date originally made under the Agreement: (i) except as fully reflected in each financial statement delivered prior to the Disbursement pursuant to Sections 5.01(a) and 5.01(b) of the Agreement, there have not been, as of the date of each such financial statement, any liabilities or obligations with respect to the Borrower of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due) which, either individually or in the aggregate, are reasonably likely to have a Material Adverse Effect, and (ii) the Borrower does not know of any reasonable basis for the assertion against the Borrower of any liability or obligation of any nature whatsoever that is not fully reflected in the financial statements delivered pursuant to Sections 5.01 (a) and 5.01 (b) of the Agreement which, either individually or in the aggregate, is reasonably likely to have a Material Adverse Effect. (b) No Event of Default has occurred and is continuing. ---------- (3) The ratio of 7:3 must be valid in respect of a Disbursements under Loan I, and the ratio of 3:1 must be valid in respect of a Disbursement under Loan II. (4) The ratio of 7:3 must be valid in respect of a Disbursements under Loan I, and the ratio of 3:1 must be valid in respect of a Disbursement under Loan II. 51 (c) The Security and Security Documents remain in full force and effect and continue to constitute, in each and every case, a first priority security interest and charge over the Collateral. (d) Each of the Project Documents which has been entered into or which is required to have been entered into at the time of Disbursement continues to remain in full force and effect and no material breach or default has occurred under any such Project Document. No event of Force Majeure under any Project Documents has occurred which has a Material Adverse Effect. (e) No event or events has occurred which have or are reasonably likely to have a Material Adverse Effect. (f) The Insurance Contracts and the Insurance Assignments thereof continue to remain in full force and effect and all premiums and other amounts due to date under each of the Insurance Contracts and the Shareholder's MIGA Guarantee have been paid. (g) We are in compliance in all material respects with all provisions of the ENEL Agreements. 6. [For purposes of Loan II, we have furnished the Lender's Engineer with copies of this Application for Funding, the Itemized Statement of Payments attached hereto and all other documents submitted herewith.] [Pursuant to Section 2.02(a) of the Agreement, this first Application for Funding under Loan I does not include an implementation report, as such would be otherwise required under Section 5.01(f) of said Agreement.] 7. All of the other conditions precedent set forth in Article 4 of the Agreement have been satisfied with respect to the requested Disbursement or shall have been satisfied by the date such Disbursement is made. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned thereto in the Agreement. Very Truly Yours, ORMAT MOMOTOMBO POWER COMPANY BY: ------------------------------------ Name: Title: Enclosures: a. Itemized Statement of Payments b. Evidence of Funding Pursuant to Sponsor Project Funding Agreement 52 [c. Implementation Reports pursuant to Section 5.01(f)] Copies (without enclosures) to: Bank Hapoalim B.M. Ormat International, Inc. Foreign Trade Operations Center 980 Greg Street Export Unit Sparks, Nevada 89431-039 40 Hamasger Street USA Tel-Aviv 67131 Attention: President Israel Attention: I. Gottlieb cc: (Loan II only) Lender's Engineer 53EXHIBIT 1 TO SCHEDULE 2.02 ITEMIZED STATEMENT OF PAYMENTS Page of Date: , 20 ---- ----- ------------ --- Momotombo Field and Power Plant Rehabilitation (Nicaragua) Itemized Statement of Payments Attachment to Application for Funding No. ____, dated as of _____________, 20___ Covering Period from _______________ to _______________, 20___. Amount Paid Amount to be Item Brief Amount of Prior to Paid After No.(5) Description of Items Payment Disbursement Disbursements Remarks ------ -------------------- --------- ------------ ------------- ------- US$ US$ US$ Totals US$ US$ US$ ------------------------------------------------------------ Amount of Borrower's Equity to Date US$ ------------------------------------------------------------ Amount of Borrower's Equity to be advanced pursuant to requested Disbursement(6) US$ ------------------------------------------------------------ Borrower's Equity after requested Disbursement US$ ------------------------------------------------------------ Senior Loan Debt to Borrower's Equity after giving : effect to requested Disbursement ------------------------------------------------------------ Amount of requested Disbursement US$ ------------------------------------------------------------ ---------- (5) Number each item according to the Business Plan, starting with 1. (6) Amount of Disbursement and Borrower's Equity shall be equal to Total Amounts Paid. CREDIT FACILITY AGREEMENTSCHEDULE 3.08 LITIGATION; LABOR DISPUTES NONE 56 CREDIT FACILITY AGREEMENT SCHEDULE 3.11 GOVERNMENTAL APPROVALS PART A - Pursuant to Section 3.11: 1. Registration of the Borrower with the Public Registry. 2. Registration of the Borrower as a "comerciante" with the Public Registry. 3. Registration with the Registro Unico de los Contribuyentes o Numero RUC. 4. Registration with the "Departamento de Rentas" in order to be able to collect the value added tax (IGV). PART B - Pursuant to Section 5.40 within 30 days of the Loan I Closing Date, registration of the CFA with each of the following entities: 1. Banco Central de Nicaragua to assure payment of principal and interest in Dollars. 2. Ministerio de Hacienda y Credito Publico, Direccion General de Ingresos, for exemption from payment of withholding taxes as interest payments. PART C - 1. Registration with the municipality where the Momotombo Geothermal Field is located. This Governmental Approval shall not be available on the Loan I Closing Date. Upon having obtained such Governmental Approval, the exceptions set forth in Sections 3.10 and 3.11 shall cease to apply on such date and thereafter. 2. Approval of the "Proyecto de Impacto Ambiental" under PPA Section 14.2 from Ministerio de Ambiente y Recursos Naturales ("MARENA"). Application for this Governmental Approval has been made to MARENA, and the Borrower expects to receive approval thereof in due course, whereupon the exceptions set forth in Section 3.11 shall cease to apply on such date and thereafter. 57 CREDIT FACILITY AGREEMENT SCHEDULE 4.04 PROVISIONS FOR ALTERNATIVE AMENDMENT TO PPA [IN SPANISH, EXECUTED IN ESCRITURA PUBLICA FORM] 1. CLAUSE XII. CAUSES FOR EARLY TERMINATION OF THE CONTRACT: 12.2 Early termination of the Contract by ENEL, Section 12.2.3: The first part of this section - 12.2.3) (i) - establishes that a cause for early termination of the contract will be a declaration of THE SUPPLIER's bankruptcy or its bankruptcy petition, always and whenever such petition or bankruptcy declaration is not dismissed by a competent tribunal in the matter within a period no greater than sixty (60) calendar days, established as a way to cure this event. In addition, the second part of this same section - 12.2.3) (ii) - establishes also that it is a cause for early termination based on the fact there will have been preceded a suspension of payments petition before a competent tribunal, for suspension of payments or creditors meeting [proceedings]. In order, to allow OMPC to have the same cure period of sixty (60) days utilized for the first part of this clause may be applied as a cure for the second part of this clause for early termination under the contract. Therefore, we consider that this section should be amended as follows: "12.2.3) (ii) ... that there have been submitted a petition before the competent tribunal for suspension of payments or creditors meeting and that such petition or declaration for bankruptcy not have been dismissed by a competent tribunal in the matter within a period no greater than sixty (60) calendar days." 2. CLAUSE XII. CAUSES FOR EARLY TERMINATION OF THE CONTRACT: 12.7 Notice of Early Termination: This clause does not allow Bank Hapoalim B.M. the opportunity to cure any cause for early termination that OMPC may incur. The following text is added to the first paragraph of clause 12.7 in order to provide Bank Hapoalim with the right to cure any cause for early termination: "Nothwithstanding the foregoing, ENEL will provide to creditors notified under Clause 12.6 a period of sixty (60) calendar days, beginning on the date the Notice to Financiers established under Clause 12.6 has been received, to cure any cause for early termination established under Clause 12.2 of the Contract prior to the taking of any action under Clause 12.7." 58 CREDIT FACILITY AGREEMENT SCHEDULE 5.01(D) FORM OF OFFICER'S CERTIFICATE ORMAT MOMOTOMBO POWER COMPANY OFFICER'S CERTIFICATE THIS CERTIFICATE is delivered pursuant to Section 5.01(d) of the Credit Facility Agreement, dated as of September 5, 2000 (as amended, modified or supplemented from time to time, the "Credit Facility Agreement") between Ormat Momotombo Power Company (the "Company") and Bank Hapoalim B.M. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Credit Facility Agreement. The undersigned HEREBY CERTIFIES that, for the period between _______________________, _____________ and ______________________, ________, (s)he has been [title] of the Company and as such is authorized to execute and deliver this Certificate on behalf of the Company and the undersigned HEREBY FURTHER CERTIFIES, in the name and on behalf of the Company, that: 1. Attached hereto are copies of the most recent [audited]/[unaudited] financial statements(7) for the [fiscal year ended]/[period ended] ____________; and 2. Such financial statements are true, complete and correct and no material adverse change has occurred since the date of such financial statement. 3. No Default or Event of Default exists under the Credit Facility Agreement and the representations and warranties of the Company under the Credit Facility Agreement are true and correct as of date hereof. IN WITNESS HEREOF, the undersigned has executed this certificate this ______ day of ______________________. ORMAT MOMOTOMBO POWER COMPANY By: ------------------------------------ Name: Title: Chief Financial Officer ---------- (7) In the case of unaudited financial statements, subject to customary year end adjustments. 59 CREDIT FACILITY AGREEMENT SCHEDULE 5.43 FORM OF ORIGINAL AMENDMENT TO PPA [ORIGINAL TO BE PROVIDED AS AN ESCRITURA PUBLICA] ESCRITURA NUMERO (________).- MODIFICACION A CONTRATO.- En la ciudad de Managua a las ____________ y _____ de la ___ del dia ________________ del ano dos mil.- Ante Mi__________________, Abogado y Notario Publico de la Republica de Nicaragua, con domicilio en esta ciudad y debidamente autorizado para cartular por la EXCELENTISIMA CORTE SUPREMA DE JUSTICIA, durante un quinquenio que vence el dia _________________________________, comparecen los Senores ________________, y el Senor ______________________. Doy fe de conocer personalmente a los comparecientes y de que a mi juicio tienen la capacidad civil legal necesaria para obligarse y contratar y en especial para ejecutar este acto, en el que comparecen en su propio nombre y representation. Hablan los comparecientes en forma conjunta y dicen: PRIMERA (ANTECEDENTES): Que con fecha treinta de Abril de mil novecientos noventa y nueve, mediante escritura publica numero treinta y ocho, otorgada en esta ciudad ante los oficios del Notario VIRGILIO GUARDIAN CASTELLON, se celebro un contrato de Suministro y Compra de Energia del Campo Geotermico Momotombo con la Empresa Nicaraguense de Energia, (ENEL), (P.P.A.-02-97), Contrato cuyo objeto es establecer los terminos, estipulaciones, y demas condiciones bajo los cuales se norman los procedimientos, obligaciones y derechos de ORMAT INTERNATIONAL INC (EL PROVEEDOR) y ENEL en el suministro y compra de energia corregida producto de la conversion de energia geotermica en energia electrica por la Planta, su sistema de coleccion y su correspondiente campo de vapor denominado 61 CREDIT FACILITY AGREEMENTSCHEDULE 5.03 INSURANCE POLICIES --------------------------------------------------------------- COVERAGES NAMED INSURED(S) LOSS PAYEE --------------------------------------------------------------- All Risks, Property Damage and ENEL Borrower Machinery --------------------------------------------------------------- Business Interruption Borrower Lender Lender --------------------------------------------------------------- General Liability ENEL Borrower Lender --------------------------------------------------------------- Employee Compensation; Personal ENEL Borrower Accident --------------------------------------------------------------- 60 CREDIT FACILITY AGREEMENT campo Momotombo, que el PROVEEDOR se obliga a proveer a ENEL y este se obliga a pagar, todo de conformidad con los terminos y las condiciones establecidas en el contrato P.P.A. -02-97, y el al contrato de Asociacion en Participacion suscrito por la Partes. Que conforme con las voces del contrato y especificamente con la clausula diez y ocho (XVIII) de la escritura que lo contiene dicho contrato, el Contrato se puede ceder a una sociedad o corporation debidamente inscrita y autorizada para operar en Nicaragua. Segun la clausula anterior, dicho Contrato fue cedido a ORMAT MOMOTOMBO POWER COMPANY a las dos de la tarde del dia once de mayo de mil novecientos noventa y nueve, mediante ESCRITURA PUBLICA NUMERO TRES (3).- CESION DEL CONTRATO DE SUMINISTRO Y COMPRA DE ENERGIA DEL CAMPO GEOTERMICO MOMOTOMBO ENTRE LA EMPRESA NICARAGUENSE DE ELECTRICIDAD (ENEL) Y ORMAT INTERNATIONAL INC. PPA-02-07.- Dicha cesion fue debidamente notificada a ENEL, a las tres y quince de la tarde del trece de Mayo de mil novecientos noventa y nueve, mediante cedula notarial otorgada por el Licenciado CESAR AROSTEGUI CENTENO y aceptada por el Ingeniero EDGAR QUINTANA ROMERO, en representacion de ENEL, a las dos de la tarde del dia dos de junio de mil novecientos noventa y nueve, mediante ESCRITURA PUBLICA NUMERO CUARENTA Y SEIS (46) ACEPTACION DE CESION DEL CONTRATO DE SUMINISTRO Y COMPRA DE ENERGIA DEL CAMPO GEOTERMICO MOMOTOMBO ENTRE LA EMPRESA NICARAGUENSE DE ENERGIA (ENEL) Y ORMAT INTERNATIONAL INC. PPA-02-07 ante los oficios del Doctor VIRGILIO GURDIAN CASTELLON. Siguen hablando los comparecientes y dicen SEGUNDA (MODIFICACIONES): Que de conformidad con la clausula cuatro punto tres punto tres (4.3.3) del CONTRATO DE SUMINISTRO Y COMPRA DE ENERGIA DEL CAMPO GEOTERMICO MOMOTOMBO ENTRE LA 62 CREDIT FACILITY AGREEMENT EMPRESA NICARAGUENSE DE ENERGIA (ENEL) Y ORMAT INTERNATIONAL INC. PPA-02-07 que establece literalmente que "ENEL acepta colaborar con EL PROVEEDOR y a proveer cualquier ayuda y/o informacion razonable que le fuera solicitada por EL PROVEEDOR para los prestamistas, en relacion con las negociaciones y consentimientos referidos con el otorgamiento de los documentos de financiamiento por EL PROVEEDOR. Entre otros, ENEL se compromete a que las provisiones del Contrato y sus Anexos sean clarificadas y las Partes convienen que podran efectuar modificaciones al Contrato, de mutuo acuerdo, en caso fuera un requerimiento razonable de los prestamistas del EL PROVEEDOR" el prestamista de ORMAT MOMOTOMBO POWER COMPANY, el Hapoalim Bank, ha solicitado que se modifiquen las siguientes clausulas: Clausula once punto cuatro (11.4) OBLIGACIONES PREVIAS DE PAGO NO CONDONADAS; Clausula doce punto dos punto tres ii (12.2.3 ii) CLAUSULA DE TERMINACION ANTICIPADA DEL CONTRATO; Clausula doce punto siete (12.7) CLAUSULA: AVISO DE TERMINACION ANTICIPADA y la Clausula diez y ocho (18) CLAUSULA DE CESION, las que por este instrumento se modifican para que desde este momento en adelante se lean de la siguiente manera: once punto cuatro (11.4) OBLIGACIONES PREVIAS DE PAGO NO CONDONADAS.- Ninguna obligacion de pago que se origine segun este contrato con anterioridad a la fecha de un suceso de Fuerza Mayor o Caso Fortuito sera condonada a causa de tal suceso de Fuerza Mayor o Caso Fortuito. No obstante lo anterior, si la Fuerza Mayor o Caso Fortuito afecta la planta de tal forma que EL PROVEEDOR no pueda suministrar la Energia, ENEL no estara obligada a continuar realizando los pagos por Energia corregida durante los periodos en que se mantengan una situacion de fuerza Mayor o Caso Fortuito. Si la fuerza Mayor o Caso Fortuito LE IMPIDEN A ENEL TOMAR LA ENERGIA EN EL PUNTO DE ENTREGA, PERO no afectan el campo Momotombo de tal forma que EL 63 CREDIT FACILITY AGREEMENT PROVEEDOR pueda suministrar Energia, ENEL estara obligado a pagar por los costos fijos incurridos durante el periodo que dure el evento, lo que se estipulan en un 50% del precio de la Energia. Clausula doce punto dos, punto tres, (12.2.3 I) CLAUSULAS DE TERMINACION ANTICIPADA DEL CONTRATO. La quiebra declarada de EL PROVEEDOR o su peticion de quiebra, siempre y cuando dicha peticion o declaracion de quiebra no sea levantada por el tribunal competente al caso en un periodo no mayor de sesenta (60) dias calendario; (ii) que se haya presentado una peticion ante el tribunal competente de suspencion de pago o concurso de sus acreedores; SIEMPRE Y CUANDO DICHA PETICION NO SEA LEVANTADA POR EL TRIBUNAL COMPETENTE AL CASO DE UN PERIODO NO MAYOR DE SESENTA (60) DIAS CALENDARIO (iii) La liquidacion o disolucion anticipada, a no ser que esta fuera voluntaria con el proposito de fusion o modificacion o transformacion de EL PROVEEDOR y esta sea aceptada de previo por ENEL; (iv) si los bienes de EL PROVEEDOR resultaran embargados y el embargo no es levantado en un periodo no mayor de treinta (30) dias calendario siempre y cuando el embargo afecte la capacidad de EL PROVEEDOR de cumplir con sus obligaciones establecida en este Contrato; (v) si el PROVEEDOR transfiera este Contrato o su participacion en el Contrato de Asociacion Compartida sin acatar las disposiciones de la Clausula XVIII. Clausula doce punto siete (12.7) CLAUSULA AVISO DE TERMINACION ANTICIPADA: Ante la ocurrencia de un caso de incumplimiento de cualquiera de la Partes, la Parte que no incurra en incumplimiento puede, a opcion de ella, tomar cualquiera de las medidas siguientes o ambas (i) terminar el Contrato entregando un Aviso de Terminacion por escrito a la Parte que incurra en incumplimiento, o, (ii) proceder mediante los procesos apropiados ya sean judiciales, administrativos o de otra naturaleza, conforme a la Ley para proteger y hacer valer sus derechos, para recobrar cualquier dano a los que pueda tener derecho y para hacer cumplir sus obligaciones a la parte que incurra 64 CREDIT FACILITY AGREEMENT en incumplimiento, incluyendo el cumplimiento especifico de las obligaciones aqui definidas de la Parte que incumpla. NO OBSTANTE LO ANTERIOR, ENEL OTORGARA A LOS ACREEDORES NOTIFICADOS CONFORME LO ESTABLECIDO EN LA CLAUSULA DOCE PUNTO SEIS (12.6), PARA SUBSANAR CUALQUIERA DE LAS CAUSAS DE DETERMINACIONES ANTICIPADAS ESTABLECIDAS EN LA CLAUSULA DOCE PUNTO DOS (12.2) DEL CONTRATO PREVIO A TOMAR CUALQUIERA DE LAS ACCIONES ESTABLECIDAS EN ESTA CLAUSULA DOCE PUNTO SIETE (12.7). Todo aviso de terminacion que una parte envie a la otra, debe especificar el caso de incumplimiento de EL PROVEEDOR o de ENEL, segun sea el caso, y que motivo el envio del Aviso de Terminacion. Si la causa que motiva el envio de un Aviso de Terminacion Anticipada del Contrato ha sido subsanada o esta en via de serlo, de previo al recibo de dicho aviso, el hecho de subsanar elimina la causa de la terminacion anticipada del Contrato, sin perjuicio de los derechos y obligaciones que correspondan, de conformidad a los terminos de este Contrato, por haberse producido la causa que fue subsanada con anterioridad al recibo del Aviso de Terminacion Anticipada. Clausula diez y ocho (18) CLAUSULA DE CESION.- En general, salvo las excepciones citadas en este Contrato, es entendido entre las Partes que ninguna de ellas podra vender, ceder, o de cualquier otra manera transferir cualquier parte o todo este Contrato, o ninguno de sus respectivos derechos, o delegar cualquier parte o todas sus respectivas obligaciones derivadas del Contrato, en ningun momento, sin la previa autorizacion de la otra parte. Se reconoce y acepta que EL PROVEEDOR tendra el derecho de ceder este Contrato sin la autorizacion de ENEL, a una sociedad o corporacion de propiedad exclusiva de EL PROVEEDOR, debidamente inscrita y autorizada para operar en Nicaragua, en cuyo caso EL PROVEEDOR y el cesionario seran solidariamente responsables de las obligaciones de este Contrato. EL PROVEEDOR debera presentar a ENEL la documentacion que compruebe lo anterior, de previo a la cesion y en cualquier tiempo de la vigencia de este Contrato, asi como el 65 CREDIT FACILITY AGREEMENT documento en que conste la cesion, una vez formalizada la misma. EL PROVEEDOR podra ceder en Garantia los derechos otorgados a su favor en este Contrato a cualquier institucion financiera sin previa autorizacion o consentimiento de ENEL. El otorgamiento de un Derecho de Garantia de conformidad con esta seccion, no se considerara que en el se realizo una cesion o traspaso de este Contrato, ni ningun sujeto o parte garantizada, como tal, sera considerado como cesionario de este Contrato. No obstante, la existencia de alguna Clausula o estipulacion en contrario en este Contrato, cualquier venta de este Contrato, que tenga lugar por la ejecucion judicial de cualquier Derecho de Garantia, o la dacion en pago de este Contrato por incumplimiento de cualquier Derecho de Garantia, sera considerada como una venta, traspaso o cesion, siempre y cuando el nuevo cesionario tenga capacidad financiera y tecnica para asumir las obligaciones contraidas en el mismo. Esta provision no es aplicable a un cesionario para proposito de financiamiento. ENEL tendra derecho de dar por rescindido anticipadamente este Contrato si considera que el nuevo cesionario no tiene la capacidad tecnica y/o financiera para asumir las obligaciones que correspondan al PROVEEDOR de conformidad con este Contrato. ENEL podra realizar cesiones total o parcialmente de este Contrato sin autorizacion de EL PROVEEDOR, cuando estas sean como resultado de la ley, de su reorganizacion interna o por mandato gubernamental o privatizacion, o que este relacionado con la venta o fusion de una parte sustancial de sus propiedades y que no afecten la capacidad de ENEL o de su cesionario o sucesor de cumplir con TODAS las obligaciones de este Contrato. Salvo las excepciones antes citadas es entendido entre las partes que ni EL PROVEEDOR ni ENEL cederan sus derechos ni delegaran sus obligaciones sin el consentimiento escrito de la otra parte. Cualquier cesion o delegacion realizada sin dicho consentimiento sera nula e inexistente. El consentimiento para la cesion no sera negado irrazonablemente. Al ocurrir la cesion aprobada el cedente queda 66 CREDIT FACILITY AGREEMENT exonerado de sus obligaciones bajo este Contrato siempre y cuando el cesionario acepte y asuma por escrito todas las obligaciones contraidas en el mismo. Para constancia de lo acordado, se firma y expide el presente documento, en dos tantos de un mismo tenor, en la ciudad de Managua, Republica de Nicaragua, a los veintiseis dias del mes de Marzo de mil novecientos noventa y nueve. TERCERA (ACEPTACION) Las partes aceptan mutuamente las modificaciones a las clausulas del contrato aqui tomadas las cuales formaran parte integra del Contrato P.P.A. 02-97. Dicha modificaciones no excluyen ni libra de las obligaciones adquiridas con anterioridad a estas modificaciones. Asi se expresaron los comparecientes, bien instruidos por mi, el Notario, acerca del valor, alcance y trascendencia legales de este acto, de su objeto, el de las clausulas generales que aseguran su validez y de las especiales que contiene y envuelven renuncias y estipulaciones implicitas y explicitas. - Y leida que fue por mi, el Notario, integramente la presente escritura a los comparecientes, la encuentran conforme, aprueban, ratifican y firman junto conmigo, el Notario, que doy fe de todo lo relacionado.- 67 CREDIT FACILITY AGREEMENT APPENDIX A [DEFINITIONS] 68 CREDIT FACILITY AGREEMENT APPENDIX A Definitions and Principles of Construction 1. Defined Terms. The following terms shall have the following meanings, except to the extent otherwise defined in this Agreement: "Additional Amount" shall have the meaning specified in Section 2.01(b) of this Agreement. "Affiliate" shall mean, any Person, with respect to any other Person, who exercises Control or as to which some other Person exercises Control with respect to such Person or any other Person directly or indirectly Controlling, Controlled by, or under common Control with that Person. "Agreement of Association in Participation" shall mean that certain Agreement of Association in Participation between the Sponsor and ENEL, dated March 26, 1999, as assigned to the Borrower pursuant to the Assignment and Consent to Assignment of the Agreement of Association in Participation dated May 12, 1999. "Applicable Law" shall mean any statute, law, regulation, ordinance, rule, judgment, rule of common law, order, decree, Governmental Approval, approval, concession, grant, franchise, license, agreement, directive, guideline, policy, requirement, or other governmental restriction or any similar form of decision of, or determination by, or any interpretation or administration of any of the foregoing by, any Governmental Authority, whether in effect as of the date of this Agreement or thereafter and in each case as amended (including, without limitation, any thereof pertaining to land use or zoning restrictions). "Application for Funding" means a written application to the Lender in the form of Schedule 2.02 of this Agreement. "Arrangement Fee" shall have the meaning specified in Section 2.05(b) of this Agreement. "Attorney Costs" shall mean and include all reasonable fees and disbursements of any law firm or other external counsel. "Auditors" shall mean PricewaterhouseCoopers, Nicaragua or such other firm of independent public accountants as the Borrower may, with the consent of the Lender, which consent shall not be unreasonably withheld, from time to time appoint as auditors of the Borrower. "Base Rate" shall mean, for any day, the rate of interest in effect for such day as the Lender's base commercial lending rate for Dollar denominated loans. (The base commercial lending rate is a rate set by the Lender based upon various factors including the Lender's costs and desired return, general economic conditions and other factors.) APPENDIX A "Borrower" shall have the meaning specified in the introductory paragraph of this Agreement. "Borrower's Equity" shall mean the cumulative amount of: (i) shareholder's payments on account of share subscriptions, share premiums and any other capital payments actually made or "paid in" in full to the Borrower by the shareholders of the Borrower; (ii) retained earnings; and (ii) all Subordinated Indebtedness. "Business Day" shall mean any day that is not a Saturday, a Sunday or a day on which commercial banks in New York or Tel Aviv are required or authorized to be closed and; (ii) when used in any respect relating to LIBOR, any day described in clause (i) of this definition that is also a day on which dealings may be carried out in the London inter-bank market. "Business Plan" shall mean the plan for the execution of the Project, including financial projections, forecasts and budgets, prepared by or on behalf of the Borrower included as Annex A to this Agreement, as amended from time to time pursuant to Section 5.27 of this Agreement. "Capital Expenditures" shall mean for any period, all the additions to the Site or to the Power Plant, equipment and other capital expenditures of the Borrower that are (or would be) capitalized and set forth in a consolidated statement of cash flow of the Borrower for such period in accordance with GAAP. "Cayman Islands" shall mean the Cayman Islands, British West Indies. "Central Bank" shall mean Banco Central de Nicaragua or any Governmental Authority of Nicaragua which succeeds to the functions thereof. "CFA" shall mean this Agreement. "CNDC" shall mean the Centro Nacional de Despacho de Carga of Nicaragua. "Collateral" shall mean all the issued and outstanding shares of the Borrower, the Insurance Assignment, the Fiduciary Account Agreement Assignment, the Security Agreement, the Security Assignment Agreement, the Sponsor Project Funding Agreement and the Contingent Guarantee Agreement. "Commitment" shall mean collectively the Loan I Commitment and the Loan II Commitment. "Commitment Fee" shall mean the Loan I Commitment Fee or the Loan II Commitment Fee, as specified in Sections 2.05(a)(i) and 2.05(a)(ii) of this Agreement, or, collectively, the Loan I Commitment Fee and the Loan II Commitment Fee, as the context may require. "Contingent Guarantee Agreement" or "CGA" shall mean that certain contingent guarantee agreement between the Lender and Ormat Industries Ltd. and dated as of the date hereof. 2 APPENDIX A "Contingent Obligation" shall mean, as to any Person, any direct or indirect liability of that Person, whether or not contingent, with or without recourse, (a) with respect to any Indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person (i) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (ii) to advance or provide funds for the payment or discharge of any such primary obligation, or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner or beneficiary of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (iv) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof (each, a "Guaranty Obligation"); (b) with respect to any Surety Instrument issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings or payments; or (c) to purchase any materials, supplies or other property from, or to obtain the services of, another Person if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered. The amount of any Contingent Obligation shall, in the case of Guaranty Obligations, be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof, and in the case of other Contingent Obligations, shall be equal to the maximum reasonably anticipated liability in respect thereof. "Control" shall mean the possession, directly or indirectly of the power to direct, or cause the direction of the affairs, management and policies of a Person, whether through ownership of voting securities or partnership or other ownership interests, by contract or otherwise. "Controlling" and "Controlled" shall have corresponding meanings. "Cordoba" and the letter "C$" shall mean lawful money of Nicaragua. "Cost Overruns" shall mean any increase in the costs as itemized in the Business Plan as of the date hereof. "Credit" shall mean the aggregate principal amount of Loan I and Loan II as provided for pursuant to this Agreement. "Debt Service" shall mean, in relation to any period, the aggregate amount of principal, interest and fees in respect of the Senior Loan Debt falling due during such period. "Debt Service Coverage Ratio" or "DSCR" shall mean the ratio of EBITDA to Debt Service. "Debt Service Reserve Account" or "DSRA" shall mean the Borrower's account established with the Lender to receive deposits of funds from the Borrower as required by Section 5.33 of this Agreement. 3 APPENDIX A "Default" shall mean any event, act or condition which, with notice, lapse of time, or both or the fulfillment of any other requirement provided for in Article 6 of this Agreement, would constitute an Event of Default. "Disbursement" shall mean the disbursements on account of and under the Loans made by the Lender pursuant to Section 2.02 of this Agreement. "Dollars", the sign "$" and the sign "US$" shall each mean the lawful money of the United States. "Drilling Contracts" shall mean (i) that certain International Day Work Drilling Contract between Ormat Momotombo Power Company-Managua Branch, a branch of Borrower, and Perforaciones Intergrales Termicas, S.A., dated February 10, 2000, and (ii) that certain International Day Work Drilling Contract between Ormat Momotombo Power Company-Managua Branch, a branch of the Borrower, and Perforadora Internacionales Termica, S.A., dated May 4, 2000. "EBITDA" shall mean (i) for any financial year, net income less interest income and profits of an extraordinary nature, plus the sum of interest, expenses, taxes depreciation, charges of an extraordinary nature, amortization and all other non-cash charges, as evidenced by the audited financial statements of the Borrower for such financial year, and (ii) for any other period, net income less interest income and profits of an extraordinary nature plus the sum of interest expenses, taxes, depreciation, charges of an extraordinary nature, amortization and all the other non-cash charges, calculated on the same basis as the audited financial accounts and certified as such by the Borrower. "Effective Date" shall have the meaning specified in preamble of this Agreement. "ENEL" shall mean Empresa Nicaraguense de Electricidad. "ENEL Agreements" shall mean the Agreement of Association in Participation, the PPA, the ENEL Agreement Assignments and the Nicaragua Government Support Letter. "ENEL Agreement Assignments" shall mean the Assignment and Consent to Assignment of the Agreement of Association in Participation, among the Borrower, the Sponsor and ENEL (dated May 12, 1999), and the Assignment and Consent to Assignment of the PPA (among the same parties and executed on the same date). "Environmental Claims" shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations or proceedings relating in any way to any Environmental Law or any Governmental Approval issued under any such Environmental Law (hereinafter "Claims"), including without limitation (i) any and all Claims by any Governmental Authority for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and (ii) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. 4 APPENDIX A "Environmental Law" shall mean any Applicable Law relating to the environment, health, safety or Hazardous Materials. "Event of Default" shall have the meaning specified in Article 6 of this Agreement. "Event of Loss" shall mean any of the following events: (i) loss of all or substantially all of the Power Plant or of the Site or the respective use thereof due to destruction, damage beyond economical repair or rendition of the Power Plant or of the Site, as the case may be, permanently unfit for normal use for any reason whatsoever (other than if it is merely not economically feasible to maintain, use or operate), (ii) anything which results in an insurance settlement with respect to the Power Plant or the Site on the basis, with respect to each thereof, of a total loss or constructive total loss and (iii) the condemnation or taking or requisition of title or use, for an indefinite period or a period in excess of four (4) months, by any Governmental Authority which constitutes the taking of all or substantially all of the Power Plant or of the Site, as the case may be. "Fees" shall mean all amounts payable pursuant to or referred to in Sections 2.05 of this Agreement. "Fiduciary Account Agreement" shall mean that certain Fiduciary Account Agreement by and between ENEL, Borrower and Banco de Credito Centroamericano S.A., dated as of May 12, 1999. "Fiduciary Account Agreement Assignment" shall mean that certain assignment of all rights, title and interests in and to the Fiduciary Account Agreement, entered into by the Borrower as assignor in favor of the Lender as assignee, dated as of even date herewith. "Financial Officer" shall mean, (i) with respect to any Person (other than the Borrower), the President, any Vice President, any Assistant Vice President, the Treasurer, any Assistant Treasurer or a Director of such Person, and (ii) with respect to the Borrower, any officer of the Borrower or any financial representative of the Borrower duly appointed by or on behalf of the Borrower. "Financing Documents" shall mean this Agreement, the Sponsor Project Funding Agreement, the Contingent Guarantee Agreement, the MIGA Letter Agreement and the Security Documents. "Fiscal Year" shall mean the accounting year of the Borrower commencing each year on January 1 and ending on the following December 31, or such other accounting period of the Borrower as the Borrower may, with the consent of Lender from time to time designate as the accounting year of the Borrower. "Force Majeure" shall have the meaning specified in the ENEL Agreements. "Front-End Fee" shall have the meaning specified in Section 2.05(c) of this Agreement. 5 APPENDIX A "GAAP" shall mean generally accepted accounting principles in the U.S. consistently applied. "Good Faith Contest" means the contest of an item in good faith by appropriate proceedings timely instituted and diligently pursued, provided; that (i) adequate cash reserves or bonds in an amount reasonably satisfactory to the Lender are established with respect to the contested item, (ii) during the period of such contest, the enforcement of any contested item is effectively stayed and (iii) such contest does not involve any material risk of the sale, forfeiture or loss of any of the Collateral covered by the Security Documents (other than the cash reserved pursuant to clause (i) above). "Governmental Approval" shall mean any action, order, authorization, consent, approval, license, lease, ruling, permit, tariff, rate, certification, exemption, filing or registration by or with any Governmental Authority including, without limitation, any agreements, undertakings, consents and approvals executed or to be issued by Nicaragua (including, without limitation, the Department of Environment and Natural Resources) and any agency thereof. "Governmental Authority" shall mean any nation, government, governmental department, ministry, commission, board, bureau, agency, tribunal, regulatory authority, instrumentality, judicial, legislative or administrative body or entity, domestic or foreign, federal, state or local having jurisdiction over the matter or matters in question. "Hazardous Materials" shall mean (i) any petroleum or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls, and radon gas; (ii) any chemicals, materials or substances defined as or included in the definition of "emissions," "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants," or words of similar import, under any applicable Environmental Law; and (iii) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any Governmental Authority of Nicaragua by reason of its hazardous nature. "Implementation Agreements" shall mean the Drilling Contracts and any other agreements which the Borrower may enter into from time to time to implement the activities of Phase I and Phase II in accordance with the Business Plan. "Indebtedness" shall mean, as to any Person, without duplication, (a) all Indebtedness For Borrowed Money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business on ordinary terms); (c) all non-contingent reimbursement or payment obligations with respect to Surety Instruments; (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of 6 APPENDIX A such property); (f) all obligations with respect to capital leases; (g) all net obligations with respect to swap contracts or hedging arrangements; (h) all indebtedness referred to in clauses (a) through (g) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; and (i) all Guaranty Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (g) above. "Indebtedness For Borrowed Money" shall mean, as to any Person, without duplication, (i) all indebtedness (including principal, interest, fees and charges) of such Person for borrowed money or for the deferred purchase price of property or services (other than any deferral in connection with the provision of credit in the ordinary course of business by any trade creditor or utility), (ii) the available amount of all letters of credit issued for the account of such Person other than letters of credit issued in connection with trade transactions in the ordinary course of business, (iii) all liabilities secured by any Lien on any property owned by such Person, whether or not such liabilities have been assumed by such Person, (iv) the aggregate amount required to be capitalized under leases under which such Person is the lessee and (v) Guarantee Obligations for the Indebtedness For Borrowed Money of other Persons. "Indemnified Liabilities" shall have the meaning specified in Section 7.03 (a) of this Agreement. "Indemnified Person" shall have the meaning specified in Section 7.03 (a) of this Agreement. "Insurance Assignment" shall mean that certain assignment of insurances between the Borrower, as assignor, and the Lender as assignee, dated as of even date herewith. "Insurance Contracts" shall mean the insurance contracts and policies required pursuant to Sections 5.03(a) and 5.03(b) of this Agreement and any additional insurance contracts or policies required under any of the Financing Documents. "Interest Payment Date" shall mean the last day of each Interest Period. "Interest Period" shall mean a three month period commencing on the Effective Date and, in the case of each subsequent, successive Interest Period, the three month period commencing on the last day of the immediately preceding Interest Period but shall also include such lesser period of no less than 15 days commencing on the date of any Disbursement and ending on the next Interest Payment Date. However, if any Disbursement takes place less than 15 days prior to the next Interest Payment Date, the respective Interest Period shall end on the following Interest Payment Date, provided, however, that: (i) any such three month period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day, unless such Business Day falls in another month, in which case such three month period shall end on the immediately preceding Business Day; and (ii) any such three month period which begins on the last Business Day of a month (or on a day for which there is no numerically corresponding day in the month in which such three month period ends) shall end on the last Business Day of a month. 7 APPENDIX A "Interest Rate" shall have the meaning specified in Section 2.03(a) of this Agreement. "Investment Agreement" shall mean that certain foreign investment agreement between the Borrower and the Ministerio de Fomento, Industria y Comercio of Nicaragua, dated August 11, 2000. "Legal Opinions" shall mean the legal opinions to be provided under Section 4.01(c) of this Agreement. "Lender" shall mean Bank Hapoalim B.M. and its successors and/or assigns. "Lender's Engineer" shall have the meaning set forth in Section 5.36(a) of this Agreement. "Lender's Insurance Consultant" shall have the meaning set forth in Section 5.36(b). "Lending Office" shall mean the head office of the Lender or such other office as the Lender may from time to time notify the Borrower. "LIBOR" shall mean, for any Interest Period the rate of interest per annum equal to (i) the rate (rounded upwards, if necessary, to the nearest 1/8th of one percent) which is the offered rate at or about 11:00 a.m. London time two (2) Business Days prior to the commencement of such Interest Period for Dollar deposits for a period equal to such Interest Period which appears on the page "FRBD" on the Reuters Monitor Money Rates Service (or such other page or service as may replace it) and, in the absence of any such replacement page or service, such other page of such other service as the Lender and the Borrower may agree; or (ii) if no such rate appears on such Reuters page or the Lender determines that no rate for a period of comparable duration to the relevant Interest Period appears on such Reuters page or the Lender determines that no such Reuters page or service is available at the relevant time, the arithmetic mean (rounded upwards, if necessary, to the nearest 1/8th of one percent) of the rates per annum as supplied to the Lender at its request, quoted by three reference banks selected by the Lender to leading banks in the London interbank market in the ordinary course of business, at or about 11:00 a.m. London time two (2) Business Days prior to the commencement of such Interest Period for the offering of Dollar deposits to the Lender in an amount comparable to the amount upon which interest is accruing, and for a period comparable to such Interest Period for delivery on the first day of that Interest Period. "LIBOR Overnight Rate" shall mean, as of any date, the rate per annum, equal to (i) the rate (rounded the upwards if necessary, to 1/8th of one percent) which is the offered rate at or about 11:00 a.m. London time on such date for Dollar deposits two (2) Business Days prior to the commencement of such Interest Period for Dollar deposits for a period equal to one day which appears on the page "RMEY" on the Reuters Monitor Money Rates Service (or such other page or service as may replace it) and, in the absence of any such replacement page or service, such other page of such other service as the Lender and the Borrower may agree; or (ii) if no such rate appears on such Reuters page or the Lender determines that no rate for a period of one day appears on such Reuters page or the Lender determines that no such Reuters page or service 8 APPENDIX A is available at the relevant time, the arithmetic mean (rounded upwards, if necessary, to the nearest 1/8th of one percent) of the rates per annum as supplied to the Lender at its request, quoted by three reference banks selected by the Lender to leading banks in the London interbank market in the ordinary course of business, at or about 11:00 a.m. London time on such date for Dollar deposits two (2) Business Days prior to the commencement of such day for the offering of Dollar deposits to the Lender in an amount comparable to the amount upon which interest is accruing, and for a period equal to one day. "Lien" shall mean any mortgage, pledge, hypothecation, assignment, deposit arrangement, trust arrangement, encumbrance, lien (statutory or other), preference, priority, charge or other security interest or agreement or arrangement of any kind or nature whatsoever having the effect of conferring security, including, without limitation, (i) any conditional sale or other title retention agreement, any financing or similar statement or notice filed under any recording or notice statute, and any lease having substantially the same effect as any of the foregoing, and (ii) any designation (except as contemplated by this Agreement) of loss payees or beneficiaries or any similar arrangement under any insurance policy. "Loan" or "Loans" shall mean, individually Loan I or Loan II, as the context may require, and collectively, Loan I and Loan II. "Loan I" shall have the meaning specified in Section 2.01 of this Agreement. "Loan I Availability Period" shall mean the period from the Effective Date until the last day of the 24th consecutive month to occur after the Effective Date. "Loan I Closing Date" shall mean the date on which the Lender has notified the Borrower that all conditions precedent for the effectiveness of Loan I have been satisfied. "Loan I Commitment" shall mean 70% of the Phase I Cost, but in no event greater than $11,435,000. "Loan I Commitment Fee" shall have the meaning specified in Section 2.05(a)(i) of this Agreement. "Loan II" shall have the meaning specified in Section 2.01 of this Agreement. "Loan II Availability Period" shall mean the period from the Loan II Closing Date (but not earlier than the occurrence of the earliest of (a) the acceptance by the Lender of a Phase I Completion Certificate, (b) full disbursement of Loan I, or (c) cancellation of the undisbursed balance of Loan I) through the earliest date of the last day of the 60th consecutive month after the Effective Date or acceptance by the Lender of the Phase II Completion Certificate. "Loan II Closing Date" shall mean the date on which the Lender has notified the Borrower that all conditions precedent for the effectiveness of Loan II have been satisfied. "Loan II Commitment" shall mean the Total Commitment less the Loan I Commitment, but in no event greater than $36,800,000. 9 APPENDIX A "Loan II Commitment Fee" shall have the meaning specified in Section 2.05(a)(ii) of this Agreement. "Maintenance Amount" shall have the meaning specified in Section 2.14(b)(i) of this Agreement. "Maintenance Amount Certification" shall have the meaning specified in Section 2.14(b)(ii) of this Agreement. "Material Adverse Effect" shall mean a material adverse effect on (i) the ability of the Borrower, the Sponsor or ENEL to observe and perform in a timely manner its material obligations under any Project Document to which such Person is a party, (ii) the assets, operations, business, condition (financial or otherwise), of the Borrower, which has an effect on the Borrower's ability to perform its material obligations under the Project Documents or (iii) the rights or remedies of the Lender under this Agreement or under any of the other Financing Documents or on any security interest granted pursuant thereto and the validity thereof or (iv) the validity or enforceability of any of the Project Documents; or (v) the implementation or operation of the Project or the consummation of the transactions contemplated by the Project Documents. "MIGA" shall mean the Multilateral Investment Guarantee Agency. "MIGA Contracts" shall mean, collectively, the MIGA Guarantee and the Shareholder's MIGA Guarantee. "MIGA Guarantee" shall mean the contract of guarantee to be executed prior to the Loan I Closing Date by the Lender and MIGA with respect to the Loans made under this Agreement and identified as MIGA Guarantee No. A726. "MIGA Letter Agreement" shall mean that certain letter agreement regarding certain matters pertaining to payments under MIGA Contracts of Guarantee Nos. A726 and A693, between the Shareholder and the Lender, dated as of even date herewith. "Net Cash Flow" shall mean EBITDA less Capital Expenditures. "Nicaragua" shall mean the Republic of Nicaragua. "Nicaragua Government Support Letter" shall mean that certain support letter issued by the Government of Nicaragua relating to the Momotombo Geothermal Project. "Organization Documents" means, (i) for any corporation, the certificate or articles of incorporation, the memorandum and articles of association, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation related to the Project and the Project Documents, and (ii) for any partnership, the partnership certificate and the partnership agreement pursuant to which such partnership was formed. 10 APPENDIX A "Ormat" shall mean Ormat International, Inc. a Delaware. U.S.A. corporation. "Ormat Holding Corp." shall mean Ormat Holding Corp., a company incorporated in the Cayman Islands and a wholly owned subsidiary of the Sponsor. "Other Taxes" shall mean any and all present or future stamp or documentary taxes or any other transaction, excise or property taxes, charges or similar levies which arise from any payment made under this Agreement or any other Financing Document or from the execution, delivery or registration at, or otherwise with respect to, this Agreement or any other Financing Document, other than any tax imposed on or measured by the net income of the Lender pursuant to the laws of the jurisdiction of its place of incorporation or in which its principal office or the office from which it books the Loans is located. "Permitted Indebtedness" shall have the meaning specified in Section 5.15 of this Agreement. "Permitted Investments" means each of the following Dollar-denominated investments: (i) direct obligations of the United States of America; (ii) obligations fully guaranteed by the United States of America; (iii) certificates of deposit issued by, or bankers' acceptances of, or time deposits or a deposit account with the Lender's New York Branch; (iv) money market mutual funds whose investments other than cash holdings are restricted to the types of investments referred to in clauses (i) and (ii) above. "Permitted Lien" shall have the meaning provided in Section 5.16 of this Agreement. "Person" shall mean any individual, partnership, joint venture, firm, corporation, association, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof. "Phase I" shall mean all of the Borrower's activities associated with the upgrading and rehabilitation of the existing Power Plant, work-overs (rehabilitation) of existing wells, the drilling of at least three new geothermal wells at the Site, construction of associated connecting, gathering, and other facilities, and environmental remediation in accordance with the Project Remediation Program, all as budgeted by the Borrower in the Business Plan. "Phase I Completion Certificate" shall mean the certificate submitted by the Borrower to the Lender upon the completion of Phase I referred to as such in Section 5.35 of this Agreement. "Phase I Cost" shall mean $16,523,000. 11 APPENDIX A "Phase II" shall mean all of the Borrower's activities associated with the drilling of up to 16 geothermal wells and the construction of connecting, gathering and other facilities, as budgeted by the Borrower in the Business Plan. "Phase II Completion Certificate" shall mean the certificate submitted by the Borrower and approved by the Lender's Engineer upon the completion of Phase II referred to as such in Section 5.35 of this Agreement. "Phase II Cost" shall mean $47,791,000. "Power Plant" shall mean the geothermal power plant located on the Site. "PPA" shall mean that certain Agreement for the Supply and Purchase of Energy of the Momotombo Geothermal Field between Sponsor and ENEL, dated March 26, 1999, and cataloged as PPA-02-97, as assigned to the Borrower pursuant to the Assignment and Consent to Assignment of the PPA dated May 12, 1999. "Principal Repayment Date" shall mean the last day of the Interest Period as specified in Section 2.04(a) of this Agreement under Loan I and Section 2.04(b) of this Agreement under Loan II. "Project" shall mean Phase I and Phase II, the Power Plant and the Site. "Project Costs" shall mean all costs of the Borrower up to amounts reflected in the Business Plan to complete the Project in accordance with the Project Documents. "Project Documents" shall mean each of the Financing Documents, the ENEL Agreements and the Fiduciary Account Agreement. "Project Remediation Program" shall mean the program for remediation of environmental conditions at the Site, submitted to ENEL in accordance with Section 14.2 of the PPA. "PUHCA" shall mean the Public Utility Holding Company Act of 1935, as amended. "Quarter" shall mean a calendar quarter of a Fiscal Year. "Same Day Funds" means Dollar funds settled through the New York Clearing House Interbank Payments System or such other funds for payment in Dollars as the Lender shall specify to the Borrower as being customary at the time for the settlement of international transactions in New York City of the type contemplated by this Agreement. "Secured Obligations" shall mean all amounts owing to the Lender pursuant to the terms of any Financing Document, including without limitation (A) the principal of and interest on the Loans and all other obligations and liabilities (including, without limitation, indemnities, Commitment Fee, other Fees incurred under, arising out of or in connection with such Loans, this Agreement or any other Financing Document; and (B) in the event of any proceeding for 12 APPENDIX A collection or enforcement by the Lender of any of the foregoing, after an Event of Default shall have occurred and be continuing, (i) the reasonable expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing or realizing on the Collateral, or of any exercise by the Lender of its rights under any of the Financing Documents, together with Attorney Costs and court costs and (ii) any deferrals, renewals, extensions or refinancings of any of the Loans or of any of the amounts described in the preceding clause(A). "Security" shall mean (i) the Security Documents, (ii) the power or powers of attorney provided for in any of the Security Documents, (iii) the benefits or assignment of benefits under the Insurance Contracts and the ENEL Agreements pursuant thereto or any other Project Document, together with (iv) all rights, powers and remedies of the Lender under the Security Documents as well as such other security, liens, rights, powers and remedies as may be created or granted by the Borrower, Sponsor Parent or Ormat Holding Corp. in favor of the Lender; together with the rights, benefits and remedies of the Lender inherent thereto or provided for herein or therein. "Security Agreement" shall mean that certain security agreement executed by and among the Borrower and the Lender, dated as of even herewith. "Security Assignment Agreement" shall mean that certain assignment of all rights, title and interests in and to the ENEL Agreements, entered into by the Borrower as assignor in favor of the Lender as assignee, dated as of even date herewith. "Security Documents" shall mean the Security Agreement, Insurance Assignment, Share Pledge and Sponsor Participation Retention Agreement, the Security Assignment Agreement and Fiduciary Accounts Agreement Assignment. "Senior Loan Debt" shall mean the Loans to the Borrower. "Share Capital" shall mean all of the shares of all classes of stock of the Borrower, all of which shall be registered shares and not bearer shares. "Share Pledge" shall mean that certain pledge granted by Ormat Holding Corp. in favor of the Lender pursuant to the Share Pledge and Sponsor Participation Retention Agreement with respect to the Share Capital. "Share Pledge and Sponsor Participation Retention Agreement" shall mean that certain agreement by that name, dated as of even date herewith, among the Sponsor, the Shareholder, the Borrower and the Lender. "Shareholder" shall mean Ormat Holding Corp. "Shareholder's MIGA Guarantee" shall mean that certain contract of guarantee No. A693 entered into between Shareholder and MIGA, dated as of April 12, 2000. "Site" shall mean the Momotombo Geothermal Field located at the base of the Momotombo Volcano, approximately eighty (80) kilometers from Managua, Nicaragua. 13 APPENDIX A "Sponsor" shall mean Ormat. "Sponsor Parent" shall mean Ormat Industries Ltd., an Israeli limited liability company. "Sponsor Project Funding Agreement" or "SPF Agreement" shall mean that certain Agreement by that name dated as of even date herewith among the Sponsor, the Borrower and the Lender. "Subordinated Indebtedness" shall mean all Indebtedness owed by the Borrower pursuant to the Sponsor Project Funding Agreement. "Subsidiary" shall mean, as to any Person, (i) any corporation more than fifty percent (50%) of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Affiliate of such Person, (ii) any partnership, association, joint venture or other entity in which such Person and/or one or more Affiliate of such Person has more than a 50% equity interest at the time; and (iii) any corporation, partnership, association, joint venture or other entity which is Controlled, directly or indirectly, by such Person or which is a Subsidiary of another Subsidiary of such Person. "Taxes" shall mean any and all present or future taxes, levies, imposts, deductions, withholdings, duties, compulsory loans, fees, assessments, commissions or other compulsory payments and similar charges, of whatsoever nature howsoever arising, and all liabilities paid with respect thereto imposed by any Governmental Authority or taxing or monetary authority thereof, other than any tax imposed on or measured by the net income of the Lender pursuant to the laws of the jurisdiction of its place of incorporation or in which the principal office or the office from which the Lender books the Loans is located. "Technical Report" shall mean a report from a recognized geothermal engineering or consulting firm acceptable to the Lender and the Borrower addressing engineering, commercial and technical issues of the Project. "Total Commitment" shall mean, collectively, the Loan I Commitment and the Loan II Commitment. "Total Disbursements" shall mean, at any time, the aggregate principal amount of all Disbursements outstanding at such time. "United States" or "U.S." or "U.S.A." shall mean the United States of America. 2. Principles of Construction. All references to "this Agreement" in this Appendix A shall be construed as a reference to the Credit Facility Agreement between Ormat Momotombo Power Company, as borrower, and Bank Hapoalim B.M., as lender, dated as of September 5, 2000. 14 APPENDIX A (a) The meanings set forth for defined terms in this Appendix A or in any Financing Document shall be equally applicable to both the singular and plural forms of the terms defined. (b) All references in any Financing Document to clauses, sections, articles, schedules, annexes and exhibits are to clauses, sections, articles, schedules and exhibits in or to such Financing Document unless otherwise specified therein. The words "hereof," "herein" and "hereunder" and words of similar import when used in a Financing Document shall refer to such Financing Document as a whole and not to any particular provision of such Financing Document. (c) All accounting terms not specifically defined in a Financing Document shall be construed in accordance with United States generally accepted accounting principles in conformity with those used in the preparation of the financial statements referred to in Section 5.01 of this Agreement. (d) References in any Financing Document to any statute, decree or regulation shall be construed as a reference to such statute, law, decree or regulation as re-enacted, redesignated, amended or extended from time to time and references in any Financing Document to any document or agreement shall be deemed to include references to such document or agreement as amended, varied, supplemented or replaced from time to time. (e) References to any representation by any Person or by any officer thereof being to the best of such Person's knowledge shall be deemed to be to the best of such Person's knowledge after due inquiry. (f) If any amount to be determined or measured pursuant to any of the Financing Documents relates to a transaction in a currency other than Dollars, such determination shall be made by converting such currency by reference to the buying spot market rate of exchange on the date of such transaction. (g) References to any Person or Persons shall be construed as a reference to any successors or assigns of such Person or Persons. (h) The headings of the articles, sections and subsections in any Financing Document are included for convenience only and shall not in any way affect the meaning or construction of any provision of such Financing Document. (i) References in any Financing Document or this Appendix A to any Financing Document shall be construed as a reference to such Financing Document, together with all schedules, exhibits and annexes thereto. (j) Any reference in this Agreement to a "month" or a period of one or more "months" means a period beginning in one calendar month and ending in the following calendar month on the day numerically corresponding to the day of the calendar month in which such period started, provided that if such period started on the last day in a calendar month, or if there is no such numerically corresponding day, such period shall end on the last day in the following calendar month (and "month" shall be construed accordingly). 15 APPENDIX A ANNEX A BUSINESS PLAN 69 CREDIT FACILITY AGREEMENT --------------------------------------------------------------------------------ORMAT Momotombo Power Company -------------------------------------------------------------------------------- PROJECT SOURCES AND USES OF FUNDS (US Dollars 000s except as otherwise noted) Year 1999 2000 2001 2002 2003 2004 ---- -------- --------- -------- --------- --------- --------- Operating Months of the Project 6 12 12 12 12 12 Operating Months in Max Capacity 0 0 0 0 0 0 SOURCES: 1 Total Revenues $ 1,960 $ 5,003 $ 7,624 $ 8,685 $ 12,306 $ 16,254 2 Pre Closing Equity $ 1,271 $ 1,441 $ 0 $ 0 $ 0 $ 0 3 Equity 1 $ 0 $ 169 $ 1,771 $ 2,554 $ 0 $ 0 4 Construction Loan 1 Proceeds $ 0 $ 6,724 $ 4,133 $ 578 $ 0 $ 0 5 Equity 2 $ 0 $ 0 $ 0 $ 0 $ 1,963 $ 3,079 6 Construction Loan 2 Proceeds $ 0 $ 0 $ 0 $ 5,513 $ 10,622 $ 9,237 7 Total Sources $ 3,231 $ 13,338 $ 13,529 $ 17,330 $ 24,891 $ 28,570 -------- --------- -------- --------- --------- --------- USE: 8 Project Taking Over and Field & Plant Analysis ($671) ($415) $ 0 $ 0 $ 0 $ 0 9 Phase 1 Management $ 0 ($594) ($648) ($378) $ 0 $ 0 10 Phase 1 Activities $ 0 ($5,545) ($3,896) ($558) $ 0 $ 0 11 Phase 2 Management $ 0 $ 0 $ 0 ($270) ($648) ($648) 12 Phase 2 Activities $ 0 $ 0 $ 0 ($4,149) ($10,207) ($9,096) 13 LEGAL AND CONSULTING FOR CLOSING $ 0 ($675) $ 0 $ 0 $ 0 $ 0 14 LEGAL AND CONSULTING FOR PHASE II $ 0 $ 0 $ 0 ($265) $ 0 $ 0 15 PRE CLOSING COMMITMENT FEE - LOAN 1 $ 0 ($14) $ 0 $ 0 $ 0 $ 0 16 Arrangement Fee - Loan 1 $ 0 ($29) $ 0 $ 0 $ 0 $ 0 17 Front End Fee - Loan 1 $ 0 ($143) $ 0 $ 0 $ 0 $ 0 18 UNDISBURSED COMMITMENT FEE - LOAN 1 $ 0 ($22) ($13) ($1) $ 0 $ 0 19 Interest During Construction - Loan 1 $ 0 ($167) ($823) ($610) $ 0 $ 0 20 Political Risk Insurance During Construction Loan $ 0 ($198) ($198) $ 0 $ 0 $ 0 21 PRE CLOSING COMMITMENT FEE - LOAN 2 $ 0 ($93) ($93) ($47) $ 0 $ 0 22 Arrangement Fee - Loan 2 $ 0 ($92) $ 0 $ 0 $ 0 $ 0 23 Front End Fee - Loan 2 $ 0 ($115) $ 0 ($345) $ 0 $ 0 24 UNDISBURSED COMMITMENT FEE - LOAN 2 $ 0 $ 0 $ 0 ($89) ($133) ($85) 25 Interest During Construction - Loan 2 $ 0 $ 0 $ 0 ($87) ($981) ($1,873) 26 Political Risk Insurance During Construction Loan: $ 0 ($233) ($233) ($615) ($615) ($615) 27 Initial Working Capital ($600) $ 0 $ 0 $ 0 $ 0 $ 0 28 Reserve Fund $ 0 $ 0 $ 0 ($1,231) $ 0 $ 0 29 Net Change in Working Capital Requirements ($186) ($259) ($125) ($131) ($365) ($281) 30 Disbursement from Reserves $ 0 $ 0 $ 0 $ 16 $ 66 $ 66 31 Operating Expenses ($909) ($1,846) ($1,882) ($1,920) ($1,958) ($3,400) 32 Political Risk Insurance Premiums for Equity ($293) ($314) ($342) ($352) ($389) ($426) 33 Political Risk Insurance Premiums for Debt $ 0 $ 0 $ 0 ($216) ($232) ($198) 34 Total Uses Before PR Pem(1) for Debt and Taxes ($2,658) ($10,753) ($8,254) ($11,248) ($15,464) ($16,555) 35 EBITDA $ 572 $ 2,585 $ 5,274 $ 6,082 $ 9,428 $ 12,015 36 Interest Paid on Senior Term Loan 1 $ 0 $ 0 $ 0 ($262) ($968) ($837) 37 Principal Repayment of Senior Loan 1 $ 0 $ 0 $ 0 ($357) ($1,429) ($1,429) 38 Interest Paid on Senior Term Loan 2 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 39 Principal Repayment of Senior Loan 2 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------- --------- -------- --------- --------- --------- 40 Total Debt Service $ 0 $ 0 $ 0 ($620) ($2,397) ($2,266) 41 Nicaraguan Income Taxes Paid ($74) $ 0 $ 0 $ 0 $ 0 $ 0 42 Local Tax on Revenue ($19) ($48) ($73) ($83) ($118) ($156) -------- --------- -------- --------- --------- --------- 43 Total Uses ($2,751) $ (10,801) ($8,328) ($11,951) ($17,979) ($18,977) -------- --------- -------- --------- --------- --------- 44 Cash Available for Distribution $ 480 $ 2,537 $ 5,201 $ 5,379 $ 6,912 $ 9,593 -------- --------- -------- --------- --------- --------- 45 DSCR - End of the Year NA NA NA 2.54 4.16 2.80 46 DSRA $ 0 $ 0 $ 0 $ 1,215 $ 1,149 $ 1,084 Year 2005 2006 2007 2008 2009 2010 ---- --------- --------- --------- --------- --------- --------- Operating Months of the Project 12 12 12 12 12 12 Operating Months in Max Capacity 4 12 12 12 12 12 SOURCES: 1 Total Revenues $ 21,172 $ 23,291 $ 23,729 $ 24,243 $ 24,635 $ 25,084 2 Pre Closing Equity $ 0 3 Equity 1 $ 0 4 Construction Loan 1 Proceeds $ 0 5 Equity 2 $ 4,282 6 Construction Loan 2 Proceeds $ 11,428 7 Total Sources $ 36,882 $ 23,291 $ 23,729 $ 24,243 $ 24,635 $ 25,084 --------- --------- --------- --------- --------- --------- USE: 8 Project Taking Over and Field & Plant Analysis $ 0 9 Phase 1 Management $ 0 10 Phase 1 Activities $ 0 11 Phase 2 Management ($378) 12 Phase 2 Activities ($9,442) 13 LEGAL AND CONSULTING FOR CLOSING $ 0 14 LEGAL AND CONSULTING FOR PHASE II $ 0 15 PRE CLOSING COMMITMENT FEE - LOAN 1 $ 0 16 Arrangement Fee - Loan 1 $ 0 17 Front End Fee - Loan 1 $ 0 18 UNDISBURSED COMMITMENT FEE - LOAN 1 $ 0 19 Interest During Construction - Loan 1 $ 0 20 Political Risk Insurance During Construction Loan $ 0 21 PRE CLOSING COMMITMENT FEE - LOAN 2 $ 0 22 Arrangement Fee - Loan 2 $ 0 23 Front End Fee - Loan 2 $ 0 24 UNDISBURSED COMMITMENT FEE - LOAN 2 ($21) 25 Interest During Construction - Loan 2 ($1,582) 26 Political Risk Insurance During Construction Loan: $ 0 27 Initial Working Capital $ 0 28 Reserve Fund ($4,288) 29 Net Change in Working Capital Requirements ($452) ($34) ($35) ($36) ($36) ($37) 30 Disbursement from Reserves $ 126 $ 307 $ 307 $ 307 $ 307 $ 997 31 Operating Expenses ($4,883) ($4,981) ($5,081) ($5,182) ($5,286) ($5,392) 32 Political Risk Insurance Premiums for Equity ($443) ($414) ($422) ($464) ($499) ($520) 33 Political Risk Insurance Premiums for Debt ($842) ($866) ($721) ($585) ($456) ($331) 34 Total Uses Before PR Pem(1) for Debt and Taxes ($22,206) ($5,987) ($5,952) ($5,959) ($5,970) ($5,283) 35 EBITDA $ 14,677 $ 17,303 $ 17,777 $ 18,283 $ 18,664 $ 19,801 36 Interest Paid on Senior Term Loan 1 ($705) ($574) ($443) ($312) ($180) ($49) 37 Principal Repayment of Senior Loan 1 ($1,429) ($1,429) ($1,429) ($1,429) ($1,429) ($1,072) 38 Interest Paid on Senior Term Loan 2 ($845) ($3,077) ($2,594) ($2,112) ($1,629) ($1,146) 39 Principal Repayment of Senior Loan 2 ($1,314) ($5,257) ($5,257) ($5,257) ($5,257) ($5,257) --------- --------- --------- --------- --------- --------- 40 Total Debt Service ($4,294) ($10,338) ($9,724) ($9,110) ($8,496) ($7,525) 41 Nicaraguan Income Taxes Paid $ 0 ($2,681) ($3,711) ($4,091) ($4,441) ($4,801) 42 Local Tax on Revenue ($203) ($222) ($226) ($231) ($235) ($240) --------- --------- --------- --------- --------- --------- 43 Total Uses ($26,702) ($19,227) ($19,613) ($19,391) ($19,142) ($17,848) --------- --------- --------- --------- --------- --------- 44 Cash Available for Distribution $ 10,180 $ 4,064 $ 4,117 $ 4,852 $ 5,492 $ 7,236 --------- --------- --------- --------- --------- --------- 45 DSCR - End of the Year 1.42 1.78 1.95 2.15 2.48 3.34 46 DSRA $ 5,245 $ 4,939 $ 4,632 $ 4,325 $ 4,018 $ 3,021 Year 2011 2012 2013 2014 Total ---- --------- --------- ---------- --------- ---------- Operating Months of the Project 12 12 12 6 Operating Months in Max Capacity 12 12 12 11 SOURCES: 1 Total Revenues $ 25,535 $ 26,020 $ 26,371 $ 13,316 $ 285,227 2 Pre Closing Equity $ 2,712 3 Equity 1 $ 4,495 4 Construction Loan 1 Proceeds $ 11,435 5 Equity 2 $ 9,325 6 Construction Loan 2 Proceeds $ 36,800 7 Total Sources $ 25,535 $ 26,020 $ 26,371 $ 13,316 $ 349,994 --------- --------- ---------- -------- USE: 8 Project Taking Over and Field & Plant Analysis ($1,086) 9 Phase 1 Management ($1,620) 10 Phase 1 Activities ($9,999) 11 Phase 2 Management ($1,944) 12 Phase 2 Activities ($32,894) 13 LEGAL AND CONSULTING FOR CLOSING ($675) 14 LEGAL AND CONSULTING FOR PHASE II ($265) 15 PRE CLOSING COMMITMENT FEE - LOAN 1 ($14) 16 Arrangement Fee - Loan 1 ($29) 17 Front End Fee - Loan 1 ($143) 18 UNDISBURSED COMMITMENT FEE - LOAN 1 ($35) 19 Interest During Construction - Loan 1 ($1,601) 20 Political Risk Insurance During Construction Loan ($395) 21 PRE CLOSING COMMITMENT FEE - LOAN 2 ($233) 22 Arrangement Fee - Loan 2 ($92) 23 Front End Fee - Loan 2 ($460) 24 UNDISBURSED COMMITMENT FEE - LOAN 2 ($328) 25 Interest During Construction - Loan 2 ($4,523) 26 Political Risk Insurance During Construction Loan: ($2,311) 27 Initial Working Capital ($600) 28 Reserve Fund ($5,519) 29 Net Change in Working Capital Requirements ($38) ($25) ($41) $ 2,080 $ 0 30 Disbursement from Reserves $ 241 $ 2,779 $ 0 $ 600 $ 6,119 31 Operating Expenses ($5,500) ($5,610) ($5,722) ($2,904) ($62,455) 32 Political Risk Insurance Premiums for Equity ($528) ($494) ($404) ($91) ($6,395) 33 Political Risk Insurance Premiums for Debt ($156) ($109) ($0) ($0) ($4,712) 34 Total Uses Before PR Pem(1) for Debt and Taxes ($5,980) ($3,458) ($6,166) ($315) ($132,210) 35 EBITDA $ 19,555 $ 22,562 $ 20,204 $ 13,001 $ 217,783 36 Interest Paid on Senior Term Loan 1 $ 0 $ 0 $ 0 $ 0 ($4,331) 37 Principal Repayment of Senior Loan 1 $ 0 $ 0 $ 0 $ 0 ($11,435) 38 Interest Paid on Senior Term Loan 2 ($664) ($181) ($0) ($0) ($12,247) 39 Principal Repayment of Senior Loan 2 ($5,257) ($3,943) $ 0 $ 0 ($36,800) --------- --------- ---------- -------- 40 Total Debt Service ($5,921) ($4,124) ($0) ($0) ($64,813) 41 Nicaraguan Income Taxes Paid ($4,976) ($5,272) ($5,428) ($2,448) ($37,921) 42 Local Tax on Revenue ($245) ($250) ($254) ($126) ($2,730) --------- --------- ---------- -------- 43 Total Uses ($17,121) ($13,104) ($11,849) ($2,889) ($237,674) --------- --------- ---------- -------- 44 Cash Available for Distribution $ 8,414 $ 12,915 $ 14,522 $ 10,427 $ 112,320 --------- --------- ---------- -------- 45 DSCR - End of the Year 4.74 NA NA NA 46 DSRA $ 2,779 $ 0 $ 0 $ 0 ? ORMAT Momotombo Power Company -------------------------------------------------------------------------------- Sources and Uses of Funds ($000' except when otherwise noted) 1999 -------------------------------------------------------- Q1 Q2 Q3 Q4 Total ------ ------ ---------- ---------- ------------ Sources: Pre Closing Equity $0,000 $0,000 $ 901,950 $ 369,050 $ 1,271,000 Equity 1 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 Loan 1 Proceeds $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 Equity 2 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 Loan 2 Proceeds $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 Total Sources $0,000 $0,000 $ 901,950 $ 369,050 $ 1,271,000 ------ ------ ---------- ---------- ------------ Uses 1 Project Taking Over and Field & Plant Analysis $0,000 $0,000 ($301,950) ($369,050) ($671,000) Rehabilitation Costs 2 Phase 1 Management $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 3 Phase 1 Activities $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 4 Phase 2 Management $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 5 Phase 2 Activities $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 Total Rehabilitation Cost $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 6 Legal and Consulting for Closing $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 7 Legal and Consulting for Phase II $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 8 Pre Closing Commitment Fee - Loan 1 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 9 Arrangement Fee - Loan 1 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 10 Front End Fee - Loan 1 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 11 Undisbursed Commitment Fee - Loan 1 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 12 Interest During Construction - Loan 1 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 13 Political Risk Insurance During Construction - Loan 1 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 14 Pre Closing Commitment Fee - Loan 2 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 15 Arrangement Fee - Loan 2 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 16 Front End Fee - Loan 2 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 17 Undisbursed Commitment Fee - Loan 2 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 18 Interest During Construction - Loan 2 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 19 Political Risk Insurance During Construction - Loan 2 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 20 Initial Working Capital $0,000 $0,000 ($600,000) $ 0,000 ($600,000) 21 Debt Reserve Fund for Loan 1 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 22 Debt Reserve Fund for Loan 2 $0,000 $0,000 $ 0,000 $ 0,000 $ 0,000 Total Uses $0,000 $0,000 ($901,950) ($369,050) ($1,271,000) OK OK OK OK OK 2000 ------------------------------------------------------------------------ Q1 Q2 Q3 Q4 Total ------------ ------------ ------------ ------------ ------------ Sources: Pre Closing Equity $ 1,095,441 $ 1,655,840 ($1,312,910) $ 0,000 $ 1,441,370 Equity 1 $ 0,000 $ 0,000 ($433,538) $ 602,899 $ 169,360 Loan 1 Proceeds $ 0,000 $ 0,000 $ 5,317,274 $ 1,406,763 $ 6,724,038 Equity 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Loan 2 Proceeds $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Total Sources $ 1,095,441 $ 1,655,840 $ 3,570,826 $ 2,009,662 $ 8,334,768 ------------ ------------ ------------ ------------ ------------ Uses 1 Project Taking Over and Field & Plant Analysis ($_______) ($228,250) $ 0,000 $ 0,000 ($415,000) Rehabilitation Costs 2 Phase 1 Management ($108,000) ($162,000) ($162,000) ($ 162,000) ($594,600) 3 Phase 1 Activities ($773,125) ($1,019,688) ($2,280,888) ($1,471,188) ($5,544,688) 4 Phase 2 Management $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 5 Phase 2 Activities $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Total Rehabilitation Cost ($881,125) ($1,181,688) ($2,442,888) ($1,633,188) ($6,138,688) 6 Legal and Consulting for Closing $ 0,000 $ 0,000 ($675,000) $ 0,000 ($675,000) 7 Legal and Consulting for Phase II $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 8 Pre Closing Commitment Fee - Loan 1 ($7,246) ($7,246) $ 0,000 $ 0,000 ($14,492) 9 Arrangement Fee - Loan 1 $ 0,000 $ 0,000 ($28,588) $ 0,000 ($28,588) 10 Front End Fee - Loan 1 $ 0,000 $ 0,000 ($142,038) $ 0,000 ($142,038) 11 Undisbursed Commitment Fee - Loan 1 $ 0,000 $ 0,000 ($14,492) ($7,583) ($22,075) 12 Interest During Construction - Loan 1 $ 0,000 $ 0,000 ($36,832) ($130,235) ($167,037) 13 Political Risk Insurance During Construction - Loan 1 $ 0,000 ($98,850) $ 0,000 ($98,850) ($1_7,699) 14 Pre Closing Commitment Fee - Loan 2 ($23,319) ($23,319) ($23,319) ($23,319) ($_3,278) 15 Arrangement Fee - Loan 2 $ 0,000 $ 0,000 ($92,000) $ 0,000 ($92,000) 16 Front End Fee - Loan 2 $ 0,000 $ 0,000 ($115,000) $ 0,000 ($115,000) 17 Undisbursed Commitment Fee - Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 18 Interest During Construction - Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 19 Political Risk Insurance During Construction - Loan 2 $ 0,000 ($116,487) $ 0,000 ($116,487) ($232,974) 20 Initial Working Capital $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 21 Debt Reserve Fund for Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 22 Debt Reserve Fund for Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Total Uses ($1,098,441) ($1,655,640) ($3,570,826) ($2,009,662) ($8,334,768) ------------ ------------ ------------ ------------ ------------ OK OK OK OK OK 2001 ---------------------------------------------------------------------- Q1 Q2 Q3 Q4 Total ------------ ------------ ------------ ---------- ------------ Sources: Pre Closing Equity $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Equity 1 $ 338,284 $ 791,910 $ 376,246 $ 264,872 $ 1,771,312 Loan 1 Proceeds $ 789,328 $ 1,847,790 $ 877,907 $ 618,035 $ 4,133,060 Equity 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Loan 2 Proceeds $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Total Sources $ 1,127,612 $ 2,639,700 $ 1,254,154 $ 882,907 $ 5,904,372 ------------ ------------ ------------ ---------- ------------ Uses 1 Project Taking Over and Field & Plant Analysis $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Rehabilitation Costs 2 Phase 1 Management ($162,000) ($162,000) ($162,000) ($162,000) ($648,000) 3 Phase 1 Activities ($771,188) ($2,046,938) ($839,063) ($239,063) ($3,896,250) 4 Phase 2 Management $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 5 Phase 2 Activities $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Total Rehabilitation Cost ($933,188) ($2,208,938) ($1,001,063) ($401,063) ($4,544,250) 6 Legal and Consulting for Closing $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 7 Legal and Consulting for Phase II $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 8 Pre Closing Commitment Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 9 Arrangement Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 10 Front End Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 11 Undisbursed Commitment Fee - Loan 1 ($5,293) ($4,238) ($1,918) ($1,327) ($12,821) 12 Interest During Construction - Loan 1 ($165,812) ($187,819) ($227,869) ($241,881) ($823,350) 13 Political Risk Insurance During Construction - Loan 1 $ 0,000 ($98,850) $ 0,000 ($98,850) ($197,690) 14 Pre Closing Commitment Fee - Loan 2 ($23,319) ($23,319) ($23,319) ($23,319) ($______) 15 Arrangement Fee - Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 16 Front End Fee - Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 17 Undisbursed Commitment Fee - Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 18 Interest During Construction - Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 19 Political Risk Insurance During Construction - Loan 2 $ 0,000 ($116,487) $ 0,000 ($116,487) ($232,974) 20 Initial Working Capital $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 21 Debt Reserve Fund for Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 22 Debt Reserve Fund for Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Total Uses ($1,127,612) ($2,639,700) ($1,254,154) ($882,007) ($5,984,372) ------------ ------------ ------------ ---------- ------------ OK OK OK OK OK 2002 --------------------------------------------------------------------- Q1 Q2 Q3 Q4 Total ---------- ---------- ------------ ------------- ------------ Sources: Pre Closing Equity $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Equity 1 $ 204,371 $ 896,166 $ 1,453,776 $ 0,000 $ 2,554,313 Loan 1 Proceeds $ 476,866 $ 101,036 $ 0,000 $ 0,000 $ 577,902 Equity 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Loan 2 Proceeds $ 0,000 $ 0,000 $ 2,235,369 $ 3,277,548 $ 5,512,917 Total Sources $ 681,237 $ 997,202 $ 3,689,146 $ 3,277,548 $ 8,545,133 ---------- ---------- ------------ ------------- ------------ Uses 1 Project Taking Over and Field & Plant Analysis $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Rehabilitation Costs 2 Phase 1 Management ($162,000) ($162,000) ($54,000) $ 0,000 ($378,000) 3 Phase 1 Activities ($239,063) ($239,063) ($79,088) $ 0,000 ($557,613) 4 Phase 2 Management $ 0,000 $ 0,000 ($108,000) ($162,000) ($270,000) 5 Phase 2 Activities $ 0,000 $ 0,000 ($1,459,656) ($2,889,338) ($4,148,896) Total Rehabilitation Cost ($401,063) ($401,063) ($1,701,248) ($2,851,338) ($5,354,708) 6 Legal and Consulting for Closing $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 7 Legal and Consulting for Phase II $ 0,000 $ 0,000 ($265,000) $ 0,000 ($265,000) 8 Pre Closing Commitment Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 9 Arrangement Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 10 Front End Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 11 Undisbursed Commitment Fee - Loan 1 ($_____) $ 0,000 $ 0,000 $ 0,000 ($_,539) 12 Interest During Construction - Loan 1 ($256,316) ($265,294) ($89,693) $ 0,000 ($610,303) 13 Political Risk Insurance During Construction - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 14 Pre Closing Commitment Fee - Loan 2 ($23,310) ($2_,319) $ 0,000 $ 0,000 ($46,639) 15 Arrangement Fee - Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 16 Front End Fee - Loan 2 $ 0,000 $ 0,000 ($345,000) $ 0,000 ($345,000) 17 Undisbursed Commitment Fee - Loan 2 $ 0,000 $ 0,000 ($46,639) ($42,_00) ($89,239) 18 Interest During Construction - Loan 2 $ 0,000 $ 0,000 ($11,172) ($76,084) ($87,257) 19 Political Risk Insurance During Construction - Loan 2 $ 0,000 ($3_7,52_) $ 0,000 ($307,526) ($615,051) 20 Initial Working Capital $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 21 Debt Reserve Fund for Loan 1 $ 0,000 $ 0,000 ($1,231,396) $ 0,000 ($1,231,398) 22 Debt Reserve Fund for Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Total Uses ($681,237) ($997,282) ($3,688,140) ($3,277,___) ($_________) ---------- ---------- ------------ ------------- ------------ OK OK OK OK OK --------------------------------------------------------------------------------2003 --------------------------------------------------------------------- Q1 Q2 Q3 Q4 Total ------------ ------------ ------------ ------------ ------------- Sources: Pre Closing Equity $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Equity 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Loan 1 Proceeds $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Equity 2 $ 0,000 $ 292,692 $ 790,230 $ 880,222 $ 1,963,145 Loan 2 Proceeds $ 2,908,811 $ 2,701,627 $ 2,370,689 $ 2,640,667 $ 10,621,795 Total Sources $ 2,908,811 $ 2,994,319 $ 3,160,919 $ 3,520,890 $ 12,584,939 ------------ ------------ ------------ ------------ ------------- Uses 1 Project Taking Over and Field & Plant Analysis $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Rehabilitation Costs 2 Phase 1 Management $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 3 Phase 1 Activities $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 4 Phase 2 Management ($162,000) ($162,000) ($162,000) ($162,000) ($648,000) 5 Phase 2 Activities ($2,556,004) ($2,272,671) ($2,689,336) ($2,689,336) ($10,207,350) Total Rehabilitation Cost ($2,718,004) ($2,434,671) ($2,851,338) ($2,851,338) ($10,855,350) 6 Legal and Consulting for Closing $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 7 Legal and Consulting for Phase II $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 8 Pre Closing Commitment Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 9 Arrangement Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 10 Front End Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 11 Undisbursed Commitment Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 12 Interest During Construction - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 13 Political Risk Insurance During Construction - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 14 Pre Closing Commitment Fee - Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 15 Arrangement Fee - Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 16 Front End Fee - Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 17 Undisbursed Commitment Fee - Loan 2 ($38,414) ($34,784) ($31,572) ($28,550) ($133,320) 18 Interest During Construction - Loan 2 ($___,3__) ($217,339) ($276,010) ($333,477) ($___,___) 19 Political Risk Insurance During Construction - Loan 2 $ 0,000 ($307,526) $ 0,000 ($307,526) ($615,051) 20 Initial Working Capital $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 21 Debt Reserve Fund for Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 22 Debt Reserve Fund for Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Total Uses ($_,___,___) ($_,___,___) ($_,___,___) ($_,___,___) ($__,___,___) ------------ ------------ ------------ ------------ ------------- OK OK OK OK OK 2004 --------------------------------------------------------------------- Q1 Q2 Q3 Q4 Total ------------ ------------ ------------ ------------ ------------- Sources: Pre Closing Equity $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Equity 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Loan 1 Proceeds $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Equity 2 $ 847,811 $ 564,927 $ 642,213 $ 1,024,112 $ 3,079,063 Loan 2 Proceeds $ 2,543,434 $ 1,694,780 $ 1,926,638 $ 3,072,337 $ 9,237,188 Total Sources $ 3,391,245 $ 2,259,707 $ 2,568,851 $ 4,096,449 $ 12,316,251 ------------ ------------ ------------ ------------ ------------- Uses 1 Project Taking Over and Field & Plant Analysis $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Rehabilitation Costs 2 Phase 1 Management $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 3 Phase 1 Activities $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 4 Phase 2 Management ($162,000) ($162,000) ($162,000) ($162,000) ($648,000) 5 Phase 2 Activities ($2,806,454) ($1,316,013) ($1,901,346) ($_,___,___) ($_,___,___) Total Rehabilitation Cost ($2,970,454) ($1,480,013) ($2,063,345) ($3,230,013) ($9,743,825) 6 Legal and Consulting for Closing $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 7 Legal and Consulting for Phase II $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 8 Pre Closing Commitment Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 9 Arrangement Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 10 Front End Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 11 Undisbursed Commitment Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 12 Interest During Construction - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 13 Political Risk Insurance During Construction - Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 14 Pre Closing Commitment Fee - Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 15 Arrangement Fee - Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 16 Front End Fee - Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 17 Undisbursed Commitment Fee - Loan 2 ($26,184) ($21,885) ($20,436) ($17,205) ($84,712) 18 Interest During Construction - Loan 2 ($395,607) ($450,284) ($__6,__7) ($___,___) ($_,___,663) 19 Political Risk Insurance During Construction - Loan 2 $ 0,000 ($307,526) $ 0,000 ($307,526) ($____,___) 20 Initial Working Capital $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 21 Debt Reserve Fund for Loan 1 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 22 Debt Reserve Fund for Loan 2 $ 0,000 $ 0,000 $ 0,000 $ 0,000 $ 0,000 Total Uses ($3,391,245) ($2,2__,7__) ($2,568,851) ($4,098,___) ($12,316,251) ------------ ------------ ------------ ------------ ------------- OK OK OK OK OK 2005 ------------------------------------------------ ------------- Q1 Q2 Q3 Q4 Total ------------ ------------ ------------ ------ ------------- Sources: Pre Closing Equity $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 Equity 1 $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 Loan 1 Proceeds $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 Equity 2 $ 1,265,095 $ 1,174,721 $ 1,842,582 $0,000 $ 4,282,398 Loan 2 Proceeds $ 3,795,285 $ 3,524,163 $ 4,108,651 $0,000 $ 11,428,100 Total Sources $ 5,060,380 $ 4,698,884 $ 5,951,233 $0,000 $ 15,710,498 ------------ ------------ ------------ ------ ------------- Uses 1 Project Taking Over and Field & Plant Analysis $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 Rehabilitation Costs 2 Phase 1 Management $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 3 Phase 1 Activities $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 4 Phase 2 Management ($162,000) ($162,000) ($84,000) $0,000 ($376,000) 5 Phase 2 Activities ($4,268,013) ($3,818,013) ($_,___,0__) $0,000 ($9,___,___) Total Rehabilitation Cost ($4,430,013) ($3,980,013) ($1,410,004) $0,000 ($9,820,029) 6 Legal and Consulting for Closing $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 7 Legal and Consulting for Phase II $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 8 Pre Closing Commitment Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 9 Arrangement Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 10 Front End Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 11 Undisbursed Commitment Fee - Loan 1 $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 12 Interest During Construction - Loan 1 $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 13 Political Risk Insurance During Construction - Loan 1 $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 14 Pre Closing Commitment Fee - Loan 2 $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 15 Arrangement Fee - Loan 2 $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 16 Front End Fee - Loan 2 $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 17 Undisbursed Commitment Fee - Loan 2 ($13,289) ($7,738) $ 0,000 $0,000 ($__,_27) 18 Interest During Construction - Loan 2 ($6__,___) ($711,134) ($253,562) $0,000 ($1,___,___) 19 Political Risk Insurance During Construction - Loan 2 $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 20 Initial Working Capital $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 21 Debt Reserve Fund for Loan 1 $ 0,000 $ 0,000 $ 0,000 $0,000 $ 0,000 22 Debt Reserve Fund for Loan 2 $ 0,000 $ 0,000 ($4,287,___) $0,000 ($_,___,___) Total Uses ($_,___,3__) ($_,___,___) ($_,___,___) $0,000 ($__,___,___) ------------ ------------ ------------ ------ ------------- OK OK OK OK OK Total Sources/Uses ------------- Sources: Pre Closing Equity $ 2,712,370 Equity 1 $ 4,494,985 Loan 1 Proceeds $ 11,435,000 Equity 2 $ 9,324,606 Loan 2 Proceeds $ 36,800,000 Total Sources $ 64,766,961 ------------- Uses 1 Project Taking Over and Field & Plant Analysis ($1,___,000) Rehabilitation Costs 2 Phase 1 Management ($1,620,000) 3 Phase 1 Activities ($_,___,___) 4 Phase 2 Management ($1,944,000) 5 Phase 2 Activities ($32,___,100) Total Rehabilitation Cost ($46,___,__) 6 Legal and Consulting for Closing ($675,000) 7 Legal and Consulting for Phase II ($___,000) 8 Pre Closing Commitment Fee - Loan 1 ($14,492) 9 Arrangement Fee - Loan 1 ($26,688) 10 Front End Fee - Loan 1 ($142,938) 11 Undisbursed Commitment Fee - Loan 1 ($35,436) 12 Interest During Construction - Loan 1 ($1,600,___) 13 Political Risk Insurance During Construction - Loan 1 ($___,___) 14 Pre Closing Commitment Fee - Loan 2 ($233,194) 15 Arrangement Fee - Loan 2 ($__,000) 16 Front End Fee - Loan 2 ($4__,000) 17 Undisbursed Commitment Fee - Loan 2 ($___,298) 18 Interest During Construction - Loan 2 ($4,622,913) 19 Political Risk Insurance During Construction - Loan 2 ($_,311,101) 20 Initial Working Capital ($600,000) 21 Debt Reserve Fund for Loan 1 ($1,231,396) 22 Debt Reserve Fund for Loan 2 ($4,287,667) Total Uses ($__,___,___) ------------- OK -------------------------------------------------------------------------------- Page No. 1
EXHIBIT 10.1.4 -------------------------------------------------------------------------------- CREDIT AGREEMENT dated as of December 31, 2002 among ORMESA LLC, as Borrower UNITED CAPITAL, a division of Hudson United Bank, as Administrative Agent and Collateral Agent and The Lenders party to this Agreement from time to time ------------------------------------------------------------------------------ TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS AND INTERPRETIVE MATTERS...................................................................1 1.01 Certain Defined Terms..........................................................................1 1.02 Classes and Types of Loans.....................................................................1 1.03 Rules of Interpretation........................................................................1 1.04 Accounting Terms...............................................................................3 ARTICLE II COMMITMENTS...........................................................................................4 2.01 Loans..........................................................................................4 2.02 Borrowings.....................................................................................5 2.03 Reduction of Commitments.......................................................................6 2.04 Fees...........................................................................................6 2.05 Lending Offices................................................................................7 2.06 Several Obligations; Remedies Independent......................................................7 2.07 Notes..........................................................................................7 ARTICLE III PAYMENTS OF PRINCIPAL AND INTEREST...................................................................9 3.01 Repayment of Loans.............................................................................9 3.02 Interest......................................................................................10 3.03 Optional Prepayments..........................................................................12 3.04 Mandatory Prepayments; Etc....................................................................12 3.05 Prepayment Mechanics..........................................................................13 ARTICLE IV PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC......................................................14 4.01 Payments......................................................................................14 4.02 Pro Rata Treatment............................................................................16 4.03 Computations..................................................................................16 4.04 Minimum Amounts...............................................................................16 4.05 Notices.......................................................................................17 4.06 Non-Receipt of Funds by the Administrative Agent..............................................18 4.07 Sharing of Payments; Etc......................................................................18 ARTICLE V YIELD PROTECTION; ETC.................................................................................20 5.01 Additional Costs..............................................................................20 5.02 Limitation on Eurodollar Loans................................................................22 5.03 Illegality....................................................................................23 5.04 Treatment of Affected Loans...................................................................23 5.05 Compensation..................................................................................24 5.06 Taxes.........................................................................................24 5.07 Mitigation Obligations; Prepayments; Replacement of Lenders...................................27 ARTICLE VI CONDITIONS PRECEDENT.................................................................................29 6.01 Initial Term Loans............................................................................29 6.02 Additional Term Loans.........................................................................37 ARTICLE VII REPRESENTATIONS AND WARRANTIES......................................................................39 7.01 Existence.....................................................................................39 7.02 Financial Condition...........................................................................39 7.03 Action........................................................................................40 7.04 No Breach.....................................................................................41 7.05 Government Approvals; Government Rules........................................................41 7.06 Proceedings...................................................................................42 7.07 Environmental Matters.........................................................................43 7.08 Taxes.........................................................................................43 7.09 Tax Status....................................................................................44 7.10 ERISA.........................................................................................44 7.11 Nature of Business............................................................................44 7.12 Title; Security Documents.....................................................................44 7.13 Subsidiaries..................................................................................45 7.14 Utility Regulation............................................................................46 7.15 Financing Documents; Project Documents; Non-Material Project Contracts; Licenses, Etc.........46 7.16 Utility Services..............................................................................48 7.17 Disclosure....................................................................................48 7.18 Use of Proceeds...............................................................................48 7.19 Fees..........................................................................................48 7.20 Indebtedness..................................................................................49 7.21 Investments...................................................................................49 7.22 No Force Majeure..............................................................................49 7.23 Assets........................................................................................49 ARTICLE VIII COVENANTS..........................................................................................49 8.01 Financial Statements and Other Information....................................................49 8.02 Maintenance of Existence; Etc.................................................................51 8.03 Compliance with Government Rules; Etc.........................................................52 8.04 Environmental Compliance......................................................................52 8.05 Insurance; Events of Loss.....................................................................53 8.06 Proceedings...................................................................................57 8.07 Taxes.........................................................................................57 8.08 Books and Records.............................................................................57 8.09 Use of Proceeds...............................................................................57 8.10 Maintenance of Liens..........................................................................57 8.11 [Intentionally Omitted].......................................................................58 8.12 Prohibition of Fundamental Changes............................................................58 8.13 Restricted Payments...........................................................................58 8.14 Liens.........................................................................................59 8.15 Investments...................................................................................59 8.16 Hedging Arrangements..........................................................................59 8.17 Indebtedness..................................................................................60 8.18 Transactions with Affiliates..................................................................60 8.19 Nature of Business............................................................................60 8.20 Maintenance of Properties.....................................................................60 8.21 [Intentionally Omitted].......................................................................61 8.22 Project Documents; Etc........................................................................61 8.23 Annual Operating Plans and Budgets; Operating Statements......................................63 8.24 Speculative Activities........................................................................66 8.25 Status........................................................................................67 8.26 Updated Surveys and Title Policy Following Upgrade Project....................................67 8.27 Accounts......................................................................................68 8.28 No Subsidiaries...............................................................................68 8.29 SCE Consent...................................................................................68 ARTICLE IX EVENTS OF DEFAULT....................................................................................68 9.01 Events of Default.............................................................................68 9.02 Rights upon an Event of Default...............................................................73 ARTICLE X THE AGENTS............................................................................................73 10.01 Appointment, Powers and Immunities............................................................73 10.02 Reliance by Agents............................................................................75 10.03 Defaults......................................................................................75 10.04 Rights as a Lender............................................................................76 10.05 Indemnification...............................................................................76 10.06 Non-Reliance on Agents and Other Lenders......................................................76 10.07 Failure to Act................................................................................77 10.08 Resignation or Removal of Agents..............................................................77 10.09 Consents......................................................................................78 10.10 Collateral Agent..............................................................................78 ARTICLE XI MISCELLANEOUS........................................................................................79 11.01 Waiver........................................................................................79 11.02 Notices.......................................................................................79 11.03 Expenses; Etc.................................................................................79 11.04 Amendments; Etc...............................................................................82 11.05 Successors and Assigns........................................................................83 11.06 Assignments and Participations................................................................83 11.07 Marshalling; Recapture........................................................................85 11.08 Confidentiality...............................................................................85 11.09 Non-Recourse..................................................................................86 11.10 Survival......................................................................................87 11.11 Counterparts; Integration; Effectiveness......................................................87 11.12 NO THIRD PARTY BENEFICIARIES IN RELATION TO DISBURSEMENTS.....................................87 11.13 GOVERNING LAW; SUBMISSION TO JURISDICTION, ETC................................................88 11.14 WAIVER OF JURY TRIAL..........................................................................88 11.15 SPECIAL EXCULPATION...........................................................................88 11.16 Service of Process............................................................................89 11.17 Service of Process............................................................................89 11.18 Severability..................................................................................89 SCHEDULES SCHEDULE I Definitions SCHEDULE II Applicable Lending Offices SCHEDULE III Commitments SCHEDULE IV Insurance SCHEDULE V Filing Jurisdictions SCHEDULE VI Government Approvals SCHEDULE VII Deferred Government Approvals SCHEDULE VIII Environmental Claims SCHEDULE IX Upgrade Acceptance Test Parameters EXHIBITS EXHIBIT A-1 Form of Initial Term Loan Note EXHIBIT A-2 Form of Additional Term Loan Note EXHIBIT B-1 Form of Borrower Security Agreement EXHIBIT B-2 Form of Borrower Equity Interest Pledge EXHIBIT C Form of Depositary Agreement EXHIBIT D Form of Notice of Borrowing EXHIBIT E Form of Conversion/Continuation Notice EXHIBIT F Form of Distribution Certificate CREDIT AGREEMENT (this "AGREEMENT") dated as of December 31, 2002 among ORMESA LLC, a limited liability company duly formed and validly existing under the laws of the State of Delaware (the "BORROWER"), each of the lenders that is a signatory hereto or which, pursuant to Section 11.06(b), shall become a "Lender" hereunder (individually, a "LENDER" and, collectively, the "LENDERS"), UNITED CAPITAL, a division of Hudson United Bank, a New Jersey banking corporation ("UNITED"), not in its individual capacity, but solely as administrative agent for the Lenders (in such capacity, the "ADMINISTRATIVE AGENT"), and UNITED, not in its individual capacity, but solely as collateral agent for the benefit of the Secured Parties (in such capacity, the "COLLATERAL AGENT"). WHEREAS, the Borrower directly owns 100% of the assets comprising each Project and has requested that the Lenders make Loans to it in an aggregate principal amount not exceeding $27,500,000 in order to enable the Borrower to: (a) fund the Debt Service Reserve Account as provided herein; (b) fund certain of its working capital needs in connection with the operation of each Project; (c) pay costs associated with the transactions contemplated by the Financing Documents; and (d) make a distribution to the Sponsor; WHEREAS, the Lenders are prepared to make the Loans upon the terms and conditions hereof; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND INTERPRETIVE MATTERS 1.01 CERTAIN DEFINED TERMS. Unless otherwise specified herein, capitalized terms used in this Agreement shall have the meanings assigned to such terms in Schedule I. Capitalized terms and other terms used in this Agreement shall be interpreted in accordance with Sections 1.02, 1.03 and 1.04, as applicable. 1.02 CLASSES AND TYPES OF LOANS. Loans hereunder are distinguished by "Class" and by "Type". The "CLASS" of a Loan refers to whether such Loan is an Initial Term Loan or an Additional Term Loan, each of which constitutes a Class of Loans. Commitments to make Loans and Notes evidencing Loans may be correspondingly referred to hereunder by the Class of Loan to which such Commitment or Note, as applicable, relates. The "TYPE" of a Loan refers to whether such Loan is a Prime Rate Loan or a Eurodollar Loan, each of which constitutes a Type of Loan. Loans may be identified by both Class and Type. 1.03 RULES OF INTERPRETATION. Unless the context of this Agreement otherwise requires: (a) words of any gender include each other gender;-2- (b) words using the singular or plural form also include the plural or singular form, respectively; (c) any reference to any Person in any capacity includes a reference to its successors and assigns in such capacity to the extent such succession or assignment is permitted or not prohibited hereunder and, in the case of any Government Authority, any Person succeeding to its functions and capacities; (d) the terms "hereof", "herein", "hereby", "hereto" and similar words refer to this entire Agreement and not any particular Section, Schedule, Exhibit or other subdivision of this Agreement; (e) references to "Section", "Schedule" or "Exhibit" are to such subdivisions contained in or annexed to this Agreement; (f) the words "include" and "including" shall be deemed to be followed by "without limitation" or "but not limited to", whether or not they are followed by such phrases or words of like import; (g) references to any statute or statutory provision shall be construed as a reference to the same as it may have been, or may from time to time be, amended, modified or re-enacted; (h) references to any agreement or document (including this Agreement) shall (unless otherwise expressly provided) be construed as a reference to such agreement or document as amended, modified, novated or supplemented (to the extent such amendment, modification, novation or supplement is permitted or not prohibited by the terms of such agreement or document, this Agreement and any other Financing Document) and in effect from time to time and shall (unless otherwise expressly provided) include a reference to any document that amends, modifies, novates or supplements it, or is entered into, made or given pursuant to or in accordance with its terms; (i) "this Agreement" and words of similar import shall mean this Agreement, together with all Schedules and Exhibits; (j) the headings and table of contents contained in this Agreement are inserted for convenience of reference only and shall not affect the interpretation of this Agreement; (k) references to days shall refer to calendar days, unless Business Days are expressly specified; references to weeks, months or years shall be to calendar weeks, months or years, respectively, unless expressly specified otherwise; and -3- (l) to the extent capitalized terms used in this Agreement are defined by reference to any other Transaction Document (or by reference in such Transaction Document to any other Transaction Document), for purposes of this Agreement, such terms shall continue to have their original definitions notwithstanding any termination or expiration of such agreements, except to the extent the parties hereto agree to the contrary. 1.04 ACCOUNTING TERMS. (a) Accounting Principles, Etc. Except as otherwise expressly provided in this Agreement, all accounting terms used herein or in any other Financing Document shall be interpreted, and all financial statements, certificates and reports as to financial accounting matters required to be delivered hereunder or thereunder, shall (unless otherwise notified as provided in Section 1.04(b)) be prepared or made in accordance with the Accounting Principles of the relevant Person to which such terms, financial statements, certificates and/or reports relate, applied on a basis consistent with those used in the preparation of the latest financial statements of such Person furnished hereunder or thereunder, as the case may be, except for such changes as are required by such Accounting Principles. (b) Accounting Variations. In respect of any relevant period, the Borrower shall, except to the extent already required by the relevant Accounting Principles, deliver (or cause the relevant other Person to deliver) to the Administrative Agent, at the same time as the delivery of any financial statement for that period under Section 8.01, a description in reasonable detail of any material variation (and the consequence thereof) between the application of the Accounting Principles employed in the preparation of such statement and the application of the Accounting Principles employed in the preparation of the financial statements for the immediately preceding period. (c) Fiscal Periods. To enable the ready and consistent determination of compliance with this Agreement, the Borrower shall not change the last day of its fiscal year from December 31 of each year, or the last days of the first three fiscal quarters in each of its fiscal years from March 31, June 30 and September 30 of each year, respectively, except to the extent required by any Government Rule. The Borrower shall notify the Administrative Agent promptly upon becoming aware of such proposed Government Rule requirement of the nature and the effective date of such proposed change. Promptly after the delivery of such notice, the Borrower and the Administrative Agent (acting at the direction or with the consent of the Majority Lenders) shall negotiate in good faith any amendments to the provisions of the Financing Documents that may be necessary to give fair effect to the intention of such provisions. -4- ARTICLE II COMMITMENTS 2.01 LOANS. (a) Initial Term Loan Facility. Each Lender severally agrees, on the terms and conditions of this Agreement, to make a loan (collectively, the "INITIAL TERM LOANS") to the Borrower in Dollars on the Closing Date in an aggregate principal amount equal to the amount of the Initial Term Loan Commitment of such Lender; provided that: (i) there shall be no more than one borrowing of Initial Term Loans; and (ii) in no event shall the aggregate principal amount of all Initial Term Loans at any one time outstanding exceed the aggregate amount of the Initial Term Loan Commitments as in effect from time to time. Amounts prepaid or repaid in respect of the Initial Term Loans may not be reborrowed. (b) Additional Term Loan Facility. Each Lender severally agrees, on the terms and conditions of this Agreement, to make a loan (collectively, the "ADDITIONAL TERM LOANS") to the Borrower in Dollars during the Additional Term Loan Availability Period in an aggregate principal amount at any one time outstanding up to, but not exceeding, the amount of the Additional Term Loan Commitment of such Lender as in effect from time to time; provided that: (i) there shall be no more than one borrowing of Additional Term Loans; and (ii) in no event shall the aggregate principal amount of all Additional Term Loans at any one time outstanding exceed the aggregate amount of the Additional Term Loan Commitments as in effect from time to time. Amounts prepaid or repaid in respect of the Additional Term Loans may not be reborrowed. (c) Terms Applicable to All Loans; Conversions and Continuations. (i) Borrowings of Loans shall be made and Continued solely in the form of Eurodollar Loans; provided that the Borrower may, subject to all other applicable terms and conditions of this Agreement (including Section 5.04): (A) Subject to its prior delivery to the Administrative Agent of a Conversion/Continuation Notice, convert any Loans that are Eurodollar Loans into Prime Rate Loans as provided in Sections 5.02 and 5.04; (B) in any other circumstance where the Borrower and the Administrative Agent concur that, taking account of the expected timing of repayment of any such Loan and the duration of the Interest Periods available for selection by the Borrower, Converting such Loan into a Prime Rate -5- Loan will enable the Borrower to avoid breakage costs pursuant to Section 5.05, make such Conversion; and (C) borrow Loans initially as Prime Rate Loans with the consent of the Administrative Agent (not to be unreasonably withheld or delayed) as and to the extent necessary to synchronize the Interest Period of such Loans with other outstanding Loans that are Eurodollar Loans; provided that the Borrower shall, subject to its prior delivery to the Administrative Agent of a Conversion/Continuation Notice, Convert such Prime Rate Loans to Eurodollar Loans as soon as possible to achieve synchronization of such Loans. (ii) Borrowings of Loans may be made initially in the form of Prime Rate Loans if the Borrower is unable to provide sufficient advance notice pursuant to Section 4.05 of the borrowing of such Loans as Eurodollar Loans; provided that such Loans shall be Converted as soon as practicable after the initial borrowing thereof into Eurodollar Loans (unless the Borrower and the Administrative Agent concur that, taking account of the expected timing of repayment of any such Loan and the duration of the Interest Periods available for selection by the Borrower if such Loan were so Converted, the Conversion of such Loan into a Eurodollar Loan will likely subject the Borrower to additional costs pursuant to Section 5.05). (iii) Following the occurrence of any Default or Event of Default, the Administrative Agent may suspend the right of the Borrower to Continue any Loans as, or to Convert any Loans into, Eurodollar Loans. (iv) In connection with any Conversion hereunder, and notwithstanding anything to the contrary contained in this Agreement, a Lender may (in its sole discretion, subject to Section 5.07(a)) change its Applicable Lending Office with respect to the Loan so Converted. (d) Limit on Eurodollar Loans. Only one Interest Period in respect ofEurodollar Loans may be outstanding at any one time. 2.02 BORROWINGS. The Borrower shall give the Administrative Agent (which shall promptly notify the Lenders) notice of each borrowing hereunder as provided in Section 4.05 pursuant to a Notice of Borrowing. Not later than 11:00 a.m., New York time, on the date specified for each borrowing hereunder, each Lender shall make available the amount of the Loan to be made by it on such date to the Administrative Agent at its -6- Principal Office, in immediately available funds, for the account of the Borrower. The aggregate principal amount of the Initial Term Loan Commitment shall, subject to the terms and conditions of this Agreement, be made available to the Borrower by the Administrative Agent's depositing the same in immediately available funds to such accounts as agreed between the Borrower and the Administrative Agent; provided that an amount equal to $724,000 of the proceeds of the Initial Term Loans shall, pursuant to said agreement between the Borrower and the Administrative Agent, be deposited to the Revenue Account.2.03 REDUCTION OF COMMITMENTS. (a) Optional Reduction of Additional Term Loan Commitments. Subject to Section 2.03(b), the Borrower may at any time reduce the aggregate unused amount of the Additional Term Loan Commitments that are surplus to the needs of the Borrower; provided that: (i) the Borrower shall give notice of each such reduction as provided in Section 4.05; and (ii) each partial reduction shall be in an aggregate amount at least equal to $500,000 and in integral multiples of $500,000 in excess thereof. (b) No Reinstatement. Any Commitments reduced pursuant to paragraph (a) above shall for all purposes hereof be terminated and may not be reinstated. (c) Termination of Commitments. Unless previously terminated, the Commitments of each Class shall terminate at 5:00 p.m., New York time, on the last day of the Initial Term Loan Availability Period or Additional Term Loan Availability Period, as the case may be. 2.04 FEES. (a) Up-Front Fee. On the Closing Date the Borrower shall pay to the Administrative Agent, for the account of each Lender, an up-front fee in an amount equal to 2.00% of the sum of such Lender's Commitments; provided, however, that such fee payable to United, as Lender, shall be reduced by an amount equal to $50,000. (b) Commitment Fees. The Borrower shall pay to the Administrative Agent, for the account of each Lender, a commitment fee on the daily average unused amount of such Lender's Commitments for the period from (and including) the Execution Date through (and including): (i) in the case of the Initial Term Loan Commitments, the earliest of (A) the Closing Date, (B) the day on which the Initial Term Loan Commitments are reduced to zero or terminated, and (C) the last day of the Initial Term Loan Availability Period and, (ii) in the case of the Additional Term Loan Commitments, the earliest of (A) the Second Closing Date, (B) the day on which the Additional Term Loan Commitments are reduced to zero or terminated, and (C) the last day of the Additional Term Loan Availability Period, in each case in the amount of 0.375% per annum. -7- (c) Commitment Fees Generally. All accrued commitment fees payable pursuant to Section 2.04(b) shall be payable in arrears on each Quarterly Date and, with respect to the Commitments of any Class, on the earliest to occur of the date on which of the Commitments of such Class expire, the date the Commitments of such Class are terminated or reduced to zero, and the Final Maturity Date. (d) Administrative Agency Fees. Commencing on the first anniversary ofthe Closing Date, and annually on each subsequent anniversary thereafter, the Borrower shall pay to the Administrative Agent, for the account of the Administrative Agent, an annual agency fee in an amount equal to $25,000. The Administrative Agent shall not be required to refund any fee it has already received. 2.05 LENDING OFFICES. The Loans of each Type made by each Lender shall be made and maintained at such Lender's Applicable Lending Office for Loans of such Type. 2.06 SEVERAL OBLIGATIONS; REMEDIES INDEPENDENT. The obligations of the Lenders hereunder are several and not joint. The failure of any Lender to make any Loan to be made by it, or any payment required to be made by it hereunder, on the date specified therefor shall not relieve any other Lender of its obligation to make its Loan, or its payment, on such date. Neither any Lender nor any Agent shall be responsible for the failure of any other Lender to make a Loan, or a payment, to be made by such other Lender. 2.07 NOTES. (a) Initial Term Loan Notes. The Initial Term Loan of each Lender shall be evidenced by a single promissory note of the Borrower (each, an "INITIAL TERM LOAN NOTE") substantially in the form of Exhibit A-1, dated the Closing Date, payable to such Lender in a principal amount equal to the amount of its Initial Term Loan Commitment as in effect on the Closing Date and otherwise duly completed. (b) Additional Term Loan Notes. The Additional Term Loan of each Lender shall be evidenced by a single promissory note of the Borrower (each, an "ADDITIONAL TERM LOAN NOTE") substantially in the form of Exhibit A-2, dated the Closing Date, payable to such Lender in a principal amount equal to the amount of its Additional Term Loan Commitment as in effect on the Closing Date and otherwise duly completed. (c) Loan Records. Each Lender shall maintain in accordance with its usual practice records evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. The Administrative Agent shall maintain records in which it shall record: (i) the amount of each Loan made hereunder, the Class and Type thereof and each Interest Period therefor; (ii) the amount of any principal or interest due and -8- payable or to become due and payable from the Borrower to each Lender hereunder; and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender's share thereof. The entries made in the records maintained pursuant to this paragraph (c) shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such records or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (d) Subdivision. No Lender shall be entitled to have any of its Notes subdivided, by exchange for promissory notes of lesser denominations or otherwise, except in connection with a permitted assignment of all or any portion of such Lender's related Commitment, related Loan and related Notes pursuant to Section 11.06(b).-9- ARTICLE III PAYMENTS OF PRINCIPAL AND INTEREST 3.01 REPAYMENT OF LOANS. The Borrower hereby promises to pay to the Administrative Agent for the account of each Lender the outstanding principal of such Lender's Loan in twenty (20) consecutive quarterly installments payable commencing on the first Quarterly Date following the Closing Date, on the next eighteen succeeding Quarterly Dates and on the Final Maturity Date, each such installment in the amount set forth below (a) if prior to the Second Closing Date, under the heading "Initial Term Loan Principal Payment" and (b) if on or after the Second Closing Date, under the heading "Initial and Additional Term Loan Principal Payment", in each case opposite the reference to such Quarterly Date, less any portion of any such Initial Term Loans prepaid in accordance with Sections 3.03 and 3.04: INITIAL AND ADDITIONAL TERM INITIAL TERM LOAN LOAN PRINCIPAL PAYMENT DATE PRINCIPAL PAYMENT PAYMENT March 31, 2003 $ 698,000 $ 698,000 June 30, 2003 $ 434,000 $ 434,000 September 30, 2003 $1,696,000 $1,696,000 December 31, 2003 $1,698,700 $1,698,700 March 31, 2004 $ 594,171 $ 869,000 June 30, 2004 $ 369,596 $ 540,550 September 30, 2004 $1,446,369 $2,115,375 December 31, 2004 $1,446,369 $2,115,375 March 31, 2005 $ 649,177 $ 950,000 June 30, 2005 $ 403,856 $ 591,000 September 30, 2005 $1,579,208 $2,311,000 December 31, 2005 $1,579,209 $2,311,000 March 31, 2006 $ 709,544 $1,039,000 June 30, 2006 $ 441,161 $ 646,000 September 30, 2006 $1,726,399 $2,528,000 December 31, 2006 $1,726,399 $2,528,000 March 31, 2007 $ 446,306 $ 683,000 June 30, 2007 $ 277,062 $ 424,000 September 30, 2007 $1,085,379 $1,661,000 December 31, 2007 $ 993,095 $1,661,000 -10- Notwithstanding anything to the contrary herein, to the extent not otherwise repaid in full prior to the Final Maturity Date, the Borrower unconditionally promises to pay to the Administrative Agent for the account of each Lender the outstanding principal amount of the Loans made by such Lender, and such Loans shall mature, on the Final Maturity Date. 3.02 INTEREST. (a) General. The Borrower hereby promises to pay to the Administrative Agent for the account of each Lender, interest on the unpaid principal amount of each Loan made by such Lender for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (i) during such periods as such Loan is a Prime Rate Loan, the Prime Rate (as in effect from time to time) plus the Applicable Margin; and (ii) during such periods as such Loan is a Eurodollar Loan, for each Interest Period relating thereto, the Eurodollar Rate for such Loan for such Interest Period plus the Applicable Margin. (b) Default Interest. Notwithstanding the foregoing, the Borrower hereby promises to pay to the Administrative Agent for the account of each Lender interest at the applicable Post-Default Rate on any principal of any Loan made by such Lender, and on any other amount payable by the Borrower hereunder or under any Note held by such Lender, to or for the account of such Lender, which shall not be paid in full when due (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. (c) Payment. Accrued interest on each Loan shall be payable: (i) in the case of a Prime Rate Loan, quarterly on the Quarterly Dates; (ii) in the case of a Eurodollar Loan, on the last day of each Interest Period therefor; and (iii) in the case of any Loan, upon the payment or prepayment thereof or the Conversion of such Loan to a Loan of another Type (but only on the principal amount so paid, prepaid or Converted). Interest payable at the Post-Default Rate as provided in Section 3.02(b) shall be payable from time to time on demand (or, if no demand is made during any month, on the last day of such month).-11- (d) Determination of Interest Rate. Promptly after the determination of any interest rate provided for herein or any change therein, the Administrative Agent shall give notice thereof to the Lenders to which such interest is payable and to the Borrower. -12- 3.03 OPTIONAL PREPAYMENTS. (a) Subject to Section 4.04, the Borrower shall have the right to prepay any Loans, at any time and from time to time following the second anniversary of the Closing Date; provided that: (a) the Borrower shall give the Administrative Agent and the Collateral Agent notice of each such prepayment, as provided in Section 4.05 (and, upon the date specified in any such notice of prepayment, the amount to be prepaid shall become due and payable hereunder); and (b) Eurodollar Loans may be prepaid only on the last day of the Interest Period for such Loans unless the Borrower pays all applicable breakage costs pursuant to Section 5.05 at the time of such prepayment. (b) Simultaneously with any optional prepayment, in whole or in part, of the principal of any Loans pursuant to the foregoing clause (a) (other than any prepayment made pursuant to the final sentence of Section 5.07(a)) or any mandatory prepayment pursuant to Sections 3.04(b) or 3.04(c), the Borrower agrees to pay to the Administrative Agent for the account of each Lender a prepayment commission in respect of each such prepayment in an amount equal to that percentage of the principal amount of the Loans so prepaid set forth below opposite the period in which such prepayment occurs: Period in Which Prepayment is Made Prepayment Commission ---------------------------------- --------------------- From and including the second anniversary 2.00% of the Closing Date through and including the day prior to the third anniversary of the Closing Date From and including the third anniversary 1.00% of the Closing Date through and including the day prior to the fourth anniversary of the Closing Date From and including the fourth anniversary 0.00% of the Closing Date through and including the Final Maturity Date 3.04 MANDATORY PREPAYMENTS; ETC. The Borrower shall make the following mandatory payments in the amounts and at the times set out below, in each case, except as otherwise provided in Section 3.03(b), without any commission, premium or penalty:-13- (a) Event of Loss. (i) If a Project is declared a Total Loss by its insurers, then on the later of the date of actual receipt of Loss Proceeds with respect thereto and the date of such declaration; and (ii) not later than the date specified for prepayment in accordance with Section 8.05(d) with respect to: (A) any Event of Loss (or upon such earlier date as the Borrower shall have determined not to Restore the related Affected Property); or (B) any period during which any of the conditions of the Restoration under Section 8.05(d) shall have ceased to be satisfied, in each case, the Borrower shall prepay the Loans in an amount equal to 100% of the Loss Proceeds with respect to such Event of Loss (less the amount expended on the Restoration of the related Affected Property as permitted by, and as expended in accordance with, Section 8.05(d)). Nothing in this paragraph (a) shall be deemed to limit any obligation of the Borrower to deposit (or cause to be deposited) in the Restoration Sub-Account the Loss Proceeds in respect of any Event of Loss. (b) Project Documents. If any Project Document at any time is amended or terminated by any party thereto and in a manner that could reasonably be expected to result in a Material Adverse Effect and generate a current cash payment to the Borrower, then the Borrower shall, promptly upon receipt of such payment, prepay the Loans in an amount equal to the proceeds of such payment. (c) Certain Asset Sales. If the Borrower at any time shall transfer, assign, sell or otherwise dispose of any material asset or Property pertaining to any Project, other than in accordance with Section 8.12 hereof, then the Borrower shall, promptly upon receipt of the proceeds of any payment relating to such transaction, prepay the Loans in an amount equal to the proceeds of such payment. (d) Cash Sweeps. If, as of any Quarterly Date, the Borrower shall fail to comply with Section 8.13(iii) hereof, the Borrower shall, at its sole option as provided in Section 4.1(e) of the Depositary Agreement, prepay the Loans in the amounts set out in, and otherwise in accordance with, such Section 4.1(e). 3.05 Prepayment Mechanics. All prepayments described in Sections 3.03 and 3.04 (other than any prepayment made pursuant to the final sentence of Section 5.07(a) which prepayment shall be applied in accordance with such Section 5.07(a)) shall be applied to the Initial Term Loans and the Additional Term Loans pro rata, and in the inverse order of the maturities of the installments of the Loans then outstanding. Amounts prepaid may -14- not be reborrowed. Any prepayment made or required to be made pursuant to Sections 3.03 or 3.04 shall be made together with all accrued but unpaid interest thereon and all other amounts (including, without limitation, any amounts due pursuant to Article V) then due from the Borrower hereunder. ARTICLE IV PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC. 4.01 PAYMENTS. (a) General. Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Borrower under this Agreement and the Notes and, except to the extent otherwise provided therein, all payments to be made by the Borrower under any other Financing Document, shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Administrative Agent at its Principal Office, or to such account as the Administrative Agent may specify in writing to the Borrower, not later than 1:00 p.m., New York time, on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). (b) Application of Payments. The Borrower shall, at the time of making each payment under this Agreement or any Note for the account of any Lender, specify to the Administrative Agent (which shall so notify the intended recipient(s) thereof) the Loans or other amounts owing by the Borrower hereunder to which such payment is to be applied. In the event that the Borrower fails to so specify, or if an Event of Default has occurred and is continuing, the Administrative Agent may distribute such payment to the Lenders for application in such manner as the Administrative Agent or the Majority Lenders, subject to Section 4.02, may reasonably determine to be appropriate. (c) Forwarding of Payments by Administrative Agent. Each payment received by the Administrative Agent under this Agreement or any Note for the account of any Lender or the Collateral Agent or the Depositary Bank shall be paid by the Administrative Agent promptly to such Person, in immediately available funds, for the account of such Lender's Applicable Lending Office for the Loan or other obligation in respect of which such payment is made or for the account of the Collateral Agent or the Depositary Bank, as applicable. (d) Extensions to Next Business Day. If the due date of any payment under this Agreement or any Note would otherwise fall on a day that is not a Business Day, such date shall instead be extended to the first Business Day thereafter, and interest shall be payable for any principal so extended for the period of such-15- extension, unless such Business Day shall fall in a subsequent calendar month, in which case such payment shall be due on the immediately preceding Business Day. -16- 4.02 PRO RATA TREATMENT. Except to the extent otherwise provided herein: (a) each borrowing of Loans from the Lenders under Section 2.01 shall be made from the relevant Lenders, each payment of commitment fees under Section 2.04 in respect of Commitments shall be made for the account of the relevant Lenders, and each termination or reduction of the amount of the Commitments under Section 2.03 shall be applied to the respective Commitments, pro rata according to the amounts of their respective Commitments; (b) the making of Loans shall be made pro rata among the relevant Lenders according to the amounts of their respective Commitments; (c) except to the extent indicated in Section 4.07(b) and except for prepayments made pursuant to the final sentence of Section 5.07(a), each payment or prepayment of principal of Loans by the Borrower shall be made for the account of the relevant Lenders pro rata in accordance with the respective unpaid principal amounts of the Loans held by them; provided that if immediately prior to giving effect to any such payment in respect of any Loan the outstanding principal amount of the Loans shall not be held by the Lenders pro rata in accordance with their respective Commitments in effect at the time such Loans were made (by reason of a failure of a Lender to make a Loan hereunder in the circumstances described in the penultimate paragraph of Section 11.04), then such payment shall be applied to the Loans in such manner as shall result, as nearly as is practicable, in the outstanding principal amount of the Loans being held by the Lenders pro rata in accordance with their respective Commitments; and (d) each payment of interest on Loans by the Borrower shall be made for the account of the relevant Lenders pro rata in accordance with the amounts of interest on such Loans then due and payable to the respective Lenders. 4.03 COMPUTATIONS. Interest on Eurodollar Loans and on other obligations of the Borrower or the Lenders that are computed on the basis of the Federal Funds Rate shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. Interest on Prime Rate Loans, on other obligations of the Borrower or the Lenders that are computed on the basis of the Prime Rate and commitment fees payable in accordance with Section 2.04 shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. 4.04 MINIMUM AMOUNTS. Except for mandatory prepayments pursuant to Section 3.04 and the borrowing of Additional Term Loans, each borrowing and partial prepayment of principal of Loans shall be in an amount at least equal to $500,000 and in multiples of $100,000 in excess thereof. Borrowings or prepayments of Loans of different Types or, in the case of Eurodollar Loans, having different Interest Periods, at the same time -17- hereunder shall be deemed separate borrowings and prepayments for purposes of the foregoing, one for each Type or Interest Period. 4.05 NOTICES. (a) Certain Notices. (i) Notices by the Borrower to the Administrative Agent (and, as applicable, the Collateral Agent) of optional terminations or reductions of the Commitments, borrowings of Loans, optional prepayments of Loans, Continuations of Eurodollar Loans and Conversions of Loans shall be irrevocable and shall be effective only if received by the Administrative Agent (and, as applicable, the Collateral Agent) not later than 11:00 a.m., New York time, on the number of Business Days prior to the date of the relevant termination, reduction, borrowing, prepayment, Continuation or Conversion or the first day of such Interest Period specified below:Number of Business Days Notice Prior ---------------------------------------------------------------- ------------- Optional termination or reduction of the Commitments; optional 5 prepayment of Loans Borrowing of, Continuation of, or Conversion into Eurodollar Loans 3 Borrowing of or Conversion into, Prime Rate Loans 1 (ii) Each such notice of optional termination or reduction of Commitments shall specify the amount of such Commitments to be terminated or reduced. (iii) Each such notice of borrowing, Conversion, Continuation or optional prepayment shall specify the Class and Type of Loans to be borrowed, Converted, Continued or prepaid, the amount (subject to Section 4.04) of each Loan to be borrowed, Converted, Continued or prepaid, and the date of borrowing, Conversion, Continuation or optional prepayment (which shall be a Business Day). (iv) Each such notice of Conversion shall contain a certification of an Authorized Officer of the Borrower that the requirements of-18- Section 2.01(c) have been satisfied with respect to such Conversion. (v) The Administrative Agent shall promptly notify the Lenders of the contents of each such notice. In the event that the Borrower fails to select the Type of Loan, within the time period and otherwise as provided in this Section 4.05, such Loan will be made or Continued, as applicable, as a Eurodollar Loan having an Interest Period of three months. 4.06 NON-RECEIPT OF FUNDS BY THE ADMINISTRATIVE AGENT(a). Unless the Administrative Agent shall have been notified by the Borrower prior to the date on which the Borrower is to make payment to the Administrative Agent for the account of one or more of the Lenders hereunder (each such payment being herein called the "REQUIRED PAYMENT"), which notice shall be effective upon receipt, that the Borrower does not intend to make the Required Payment to the Administrative Agent, the Administrative Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date. If the Borrower has not in fact made the Required Payment to the Administrative Agent, the recipient(s) of such payment shall, on demand, repay to the Administrative Agent the amount made available by the Administrative Agent pursuant to the previous sentence, together with interest thereon in respect of each day during the period commencing on the date (the "ADVANCE DATE") such amount was so made available by the Administrative Agent until the date the Administrative Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such day. 4.07 SHARING OF PAYMENTS; ETC. (a) Right of Set-Off. The Borrower agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim a Lender may otherwise have, each Lender shall be entitled, at its option, to offset balances held by it for the account of the Borrower at any of its offices, in Dollars or in any other currency, against any principal of or interest on any of such Lender's Loans, or any other amount payable to such Lender hereunder, that is not paid when due (regardless of whether such balances are then due to the Borrower), in which case it shall promptly notify the Borrower and the Administrative Agent thereof; provided that such Lender's failure to give such notice shall not affect the validity thereof. (b) Sharing. If any Lender shall obtain from the Borrower payment of any principal of or interest on any Loan owing to it or payment of any other amount under this Agreement or any Note held by it or any other Financing Document through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise (other than: (i) from the Administrative Agent as provided herein; or (ii) in connection with any reimbursement or indemnification under Section 11.03 -19- or any similar provision of any other Financing Document to which less than all of the Lenders are entitled under the terms hereof or thereof, as the case may be; or (iii) in connection with any assignment or participation pursuant to Section 11.06 or any replacement of any Lender pursuant to Article V) and, as a result of such payment, such Lender shall have received a greater percentage of the principal of or interest on the Loans or such other amounts then due hereunder or thereunder to such Lender than the percentage received by any other Lender(s) who were also entitled to receive such payments, it shall promptly purchase from such other Lenders participations in (or, if and to the extent specified by such Lender, direct interests in) the Loans or such other amounts, respectively, owing to such other Lenders (or in interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Lenders shall share the benefit of such excess payment (net of any expenses that may be incurred by such Lender in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of and/or interest on the Loans or such other amounts, respectively, owing to each of the Lenders; provided that if at the time of such payment, the outstanding principal amount of the Loans shall not be held by the Lenders pro rata in accordance with their respective Commitments in effect at the time such Loans were made (by reason of a failure of a Lender to make a Loan hereunder in the circumstances described in the penultimate paragraph of Section 11.04), then such purchases of participations and/or direct interests shall be made in such manner as will result, as nearly as is practicable, in the outstanding principal amount of the Loans being held by the Lenders pro rata according to the amounts of such Commitments. To such end all the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. (c) Consent by the Borrower. The Borrower agrees that any Lender so purchasing such a participation (or direct interest) may exercise all rights of set-off, banker's liens, counterclaims or similar rights with respect to such participation as fully as if such Lender were a direct holder of Loans or other amounts (as the case may be) owing to such Lender in the amount of such participation. (d) Rights of Lenders; Bankruptcy. Nothing contained in this Section 4.07 shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Borrower. If, under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a set-off to which this Section 4.07 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section 4.07 to share in the benefits of any recovery on such secured claim.-20- ARTICLE V YIELD PROTECTION; ETC. 5.01 ADDITIONAL COSTS. (a) Costs of Making or Maintaining Eurodollar Loans. The Borrower shall pay directly to each Lender from time to time such amounts as such Lender may determine to be necessary to compensate it for any costs that such Lender determines are attributable to its making or maintaining of any Eurodollar Loans or its obligation to make any Eurodollar Loans hereunder, or any reduction in any amount receivable by such Lender hereunder in respect of any of such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "ADDITIONAL COSTS"), resulting from any Regulatory Change that: (i) shall subject any Lender (or its Applicable Lending Office for any of such Loans) to any tax, duty or other charge in respect of such Loans or changes the basis of taxation of any amounts payable to such Lender under this Agreement or the Notes in respect of such Loans (other than taxes imposed on or measured by the overall net income of such Lender or of its Applicable Lending Office for such Loans by the jurisdiction in which such Lender has its principal office or such Applicable Lending Office); (ii) imposes or modifies any reserve, special deposit or similar requirements (other than the Reserve Requirement utilized in the determination of the Eurodollar Rate for any Interest Period for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Lender (including any of such Loans or any deposits referred to in the definition of "Eurodollar Base Rate"), or any Commitment of such Lender to make any such Loans hereunder; or (iii) imposes any other condition affecting this Agreement or the Notes (or any of such extensions of credit or liabilities) or its Commitments. If any Lender requests compensation from the Borrower under this paragraph (a), the Borrower may, by notice to such Lender (with a copy to the Administrative Agent), suspend the obligation of such Lender to make or Continue Eurodollar Loans or to Convert Prime Rate Loans into Eurodollar Loans, until the Regulatory Change giving rise to such request ceases to be in effect (in which case the -21- provisions of Section 5.04 shall apply); provided that such suspension shall not affect the right of such Lender to receive the compensation so requested. (b) Election by Lender to Suspend Obligations. Without limiting the effect of the provisions of paragraph (a) above, in the event that, by reason of any Regulatory Change, any Lender either: (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Lender that includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Lender that includes Eurodollar Loans; or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets that it may hold, then, if such Lender so elects by notice to the Borrower (with a copy to the Administrative Agent), the obligation of such Lender to make or Continue, or Convert Prime Rate Loans into, Eurodollar Loans hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 5.04 shall apply). (c) Capital Costs. Without limiting the effect of the foregoing provisions of this Section 5.01 (but without duplication), the Borrower shall pay directly to each Lender from time to time on request such amounts as such Lender may determine to be necessary to compensate such Lender (or, without duplication, the parent company of such Lender) for any costs that it determines are attributable to the maintenance by such Lender (or any Applicable Lending Office or such parent company) of capital in respect of its Commitments or Loans, pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law) of any court, Government Authority or monetary authority: (i) following any Regulatory Change; or (ii) implementing any risk-based capital guideline or other requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) heretofore issued but not implemented, or hereafter issued, by any Government Authority or supervisory authority implementing at the national level the Basle Accord (including the Final Risk-Based Capital Guidelines of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 208, Appendix A; 12 C.F.R. Part 225, Appendix A) and the Final Risk-Based Capital Guidelines of the -22- Office of the Comptroller of the Currency (12 C.F.R. Part 3, Appendix A)). Such compensation shall include an amount equal to any reduction of the rate of return on assets or equity of such Lender (or any Applicable Lending Office or such parent company) to a level below that which such Lender (or any Applicable Lending Office or such parent company) could have achieved but for such law, regulation, interpretation, directive or request. (d) Notification and Certification. Each Lender shall notify the Borrower of any event occurring after the date of this Agreement that will entitle such Lender to compensation under paragraph (a) or (c) above as promptly as practicable after such Lender obtains actual knowledge thereof. Each Lender will furnish to the Borrower a certificate setting out in reasonable detail the basis and amount of each request by such Lender for compensation under paragraph (a) or (c) above. Determinations and allocations by any Lender, for purposes of this Section 5.01, of the effect of any Regulatory Change pursuant to paragraph (a) or (b) above, or of the effect of capital maintained pursuant to paragraph (c) above, on its costs or rate of return of maintaining Loans or its obligation to make Loans, or on amounts receivable by it in respect of Loans, and of the amounts required to compensate such Lender under this Section 5.01, shall be conclusive absent manifest error. (e) Delay in Requests. Failure or delay on the part of any Lender to demand compensation pursuant to this Section 5.01 shall not constitute a waiver of such Lender's right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender pursuant to this Section 5.01 for any increased costs or reductions incurred more than 60 days prior to the date that such Lender notifies the Borrower of the Regulatory Change giving rise to such increased costs or reductions and of such Lender's intention to claim compensation therefor; provided, further, that, if the Regulatory Change giving rise to such increased costs or reductions is retroactive, then the 60-day period referred to above shall be extended to include the period of retroactive effect thereof. 5.02 LIMITATION ON EURODOLLAR LOANS. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any Eurodollar Base Rate for any Interest Period: (a) the Administrative Agent determines, which determination shall be conclusive absent manifest error, that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Base Rate" are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for Eurodollar Loans as provided herein; or (b) the Majority Lenders determine, which determination shall be conclusive absent manifest error, and notify the Administrative Agent that the relevant rates of -23-interest referred to in the definition of "Eurodollar Base Rate", upon the basis of which the rate of interest for Eurodollar Loans for such Interest Period is to be determined, are not likely to adequately cover the cost to such Lenders of making or maintaining such Eurodollar Loans for such Interest Period, then the Administrative Agent shall give the Borrower and each Lender prompt notice thereof, and so long as such condition remains in effect, the obligation of the Lenders to make additional Eurodollar Loans, Continue existing Eurodollar Loans or Convert Prime Rate Loans into Eurodollar Loans shall be suspended, in which case the provisions of Section 5.04 shall be applicable. 5.03 ILLEGALITY. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful or any central bank or other Government Authority asserts that it is unlawful for any Lender or its Applicable Lending Office to honor its obligation to make or maintain Eurodollar Loans hereunder, and, in the opinion of such Lender (as stated in writing), the designation of a different Applicable Lending Office would either not avoid such unlawfulness or would be disadvantageous to such Lender, then such Lender shall promptly notify the Borrower thereof in writing (with a copy to the Administrative Agent) and such Lender's obligation to make or Continue, or to Convert Prime Rate Loans into, Eurodollar Loans shall be suspended until such time as such Lender may again make and maintain Eurodollar Loans (in which case the provisions of Section 5.04 shall be applicable). 5.04 TREATMENT OF AFFECTED LOANS. If the obligation of any Lender to make or Continue, or to Convert Prime Rate Loans into, Eurodollar Loans shall be suspended pursuant to Section 5.01, 5.02 or 5.03 (the "AFFECTED LOANS"), such Lender's Affected Loans shall be automatically Converted into Prime Rate Loans on the last day(s) of the then-current Interest Period(s) for the Affected Loans (or, in the case of a Conversion required by Section 5.01(b) or 5.03, on such earlier date as such Lender may certify to the Borrower with a copy to the Administrative Agent as being the last permissible date for such Conversion under, or by reason of, the relevant Regulatory Change or circumstances described under Section 5.03, such certification to be conclusive absent manifest error) and, unless and until such Lender gives notice as provided below that the circumstances specified in Section 5.01, 5.02 or 5.03 which gave rise to such Conversion no longer exist: (a) to the extent that such Lender's Affected Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Lender's Eurodollar Loans shall be applied instead to its Prime Rate Loans; and (b) all Loans that would otherwise be made by such Lender as Eurodollar Loans shall be made instead as Prime Rate Loans. If such Lender gives notice to the Borrower with a copy to the Administrative Agent that the circumstances specified in Section 5.01, 5.02 or 5.03 that gave rise to the Conversion -24-of such Lender's Eurodollar Loans of any Class pursuant to this Section 5.04 no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist): (i) at a time when Eurodollar Loans made by other Lenders are outstanding, each of such Lender's Prime Rate Loans shall be automatically Converted to Eurodollar Loans, on the first day of the next succeeding Interest Period for, and having the same Interest Period as, such outstanding Eurodollar Loans and to the extent necessary so that, after giving effect thereto, all Prime Rate Loans and Eurodollar Loans are allocated among the Lenders ratably (as to principal amounts, Types and Interest Periods) as nearly as possible in accordance with their respective Commitments; and (ii) at any other time, the Borrower may thereafter provide to the Administrative Agent a notice of Conversion, in accordance with Section 4.05, of such Lender's Prime Rate Loans to Eurodollar Loans. 5.05 COMPENSATION. The Borrower shall pay to the Administrative Agent for the account of each Lender, upon the request of such Lender through the Administrative Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate such Lender for any loss, cost or expense that such Lender reasonably determines is attributable to: (a) any payment, prepayment or Conversion of a Eurodollar Loan made by such Lender for any reason (including the acceleration of the Loans pursuant to Section 9.02) on a date other than the last day of an Interest Period for such Loan; or (b) any failure by the Borrower for any reason (including the failure of any of the conditions precedent specified in Article VI to be satisfied) to borrow a Eurodollar Loan from such Lender on the date for such borrowing specified in the relevant Notice of Borrowing given pursuant to Section 2.02. Without limiting the effect of the preceding sentence, such compensation shall include an amount equal to the excess, if any, of: (i) the amount of interest that otherwise would have accrued on the principal amount so paid, prepaid, Converted or not borrowed for the period from the date of such payment, prepayment, Conversion or failure to borrow to the last day of the then-current Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan which would have commenced on the date specified for such borrowing) at the applicable rate of interest for such Loan provided for herein; over (ii) the amount of interest that otherwise would have accrued on such principal amount at a rate per annum equal to the interest component of the amount such Lender would have bid in the London interbank market for Dollar deposits of the Reference Banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by such Lender). 5.06 TAXES. (a) General. All payments to be made hereunder and under the Notes and any other Financing Document by the Borrower shall be made free and clear of and without -25- deduction for or on account of, any Taxes (other than Taxes imposed on either Agent or any Lender by the jurisdiction in which such Person is organized or has its principal office or, in the case of any Lender, by the jurisdiction in which its Applicable Lending Office is organized or located or, in each case, any political subdivision or taxing authority thereof or therein or otherwise imposed by any taxing authority upon, or measured by, income or assets as a result of the organization or location of such Lender in such taxing authority's jurisdiction (unless such organization or location is attributable to the execution of, or the exercise of any rights or remedies under or in connection with, the Transaction Documents)) (such Taxes being herein referred to as the "APPLICABLE TAXES"). If any Applicable Taxes are imposed and required to be withheld from any amount payable by the Borrower hereunder or under the Notes or any other Financing Document, the Borrower shall (subject to the second sentence of Section 5.06(c)) be obligated to: (i) pay such additional amount so that the Agents and the Lenders, as applicable, shall receive a net amount (after giving effect to the payment of such additional amount and to the deduction of all Applicable Taxes) equal to the amount due hereunder; (ii) pay such Applicable Taxes to the appropriate taxing authority for the account of the Administrative Agent, for the benefit of the Agents and the Lenders, as applicable; and (iii) as promptly as possible thereafter, send to the Administrative Agent a certified copy of any original official receipt showing payment thereof, together with such additional documentary evidence as the Administrative Agent or such other Agent or Lender (as applicable) may from time to time reasonably require. If the Borrower fails to pay any Applicable Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall be obligated to indemnify each Agent and each Lender for any incremental Taxes, as well as interest and penalties that may become payable by such Agent or such Lender as a result of such failure. The obligations of the Borrower under this Section 5.06(a) shall survive the termination of the Commitments and the repayment of the Loans. (b) Evidence of Payment. Within 30 days after paying any amount to either Agent or any Lender from which it is required by law to make any deduction or withholding, and within 30 days after it is required by law to remit such deduction or withholding to any relevant taxing or other authority, the Borrower shall deliver to the Administrative Agent, for delivery to such Person, evidence reasonably satisfactory to such Person of such deduction, withholding or payment (as the case may be). (c) Foreign Lenders. Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with-26- respect to payments by the Borrower under this Agreement, the Notes or any other Financing Document shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times reasonably requested by the Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. For any period during which a Foreign Lender has failed to provide the Borrower with the appropriate documentation as required by the preceding sentence, the Borrower shall not be obligated to pay, and such Foreign Lender shall not be entitled to receive, additional amounts under Section 5.06(a) with respect to Applicable Taxes imposed by the United States to the extent that such additional amounts would not have arisen but for such failure of such Foreign Lender. If a Foreign Lender that is otherwise exempt from or subject to a reduced rate of withholding tax becomes subject to Applicable Taxes, or a higher amount thereof, because of its failure to deliver documentation described in the first sentence of this paragraph (c), the Borrower shall take such steps as such Foreign Lender shall reasonably request to assist such Foreign Lender to recover such Applicable Taxes. (d) Tax Refunds. If an Agent or a Lender receives a refund of, or in respect of, any Applicable Taxes with respect to which the Borrower has paid additional amounts pursuant to Section 5.06(a) and (i) either: (A) such refund (as received by such Agent or such Lender) is specifically referable to such Applicable Taxes; or (B) such Agent or such Lender determines (in its sole discretion) that such refund is in respect of, such Applicable Taxes; and (ii) such Agent's or such Lender's (as applicable) tax affairs for its tax year in respect of which such refund was obtained have been finally settled, then in each case such Agent or such Lender shall, to the extent it can do so without prejudice to the retention of such refund, pay to the Borrower an amount equal to such refund (but only to the extent of additional amounts paid by the Borrower under Section 5.06(a) with respect to the Applicable Taxes giving rise to such refund), net of all out-of-pocket expenses and Taxes incurred by such Agent or such Lender with respect thereto and without interest (other than any interest paid by the relevant Government Authority with respect to such refund). Any such payment by any Agent or any Lender shall be applied toward payments of amounts then owed by the Borrower under this Agreement if, at the time of such payment, an Event of Default has occurred and is continuing. The Borrower shall indemnify each Agent and each Lender on an after-tax basis for any Taxes that are imposed on such Person as a result of the disallowance, unavailability, recapture or reduction of any such refund, as to which such Person has already made payment in full to the Borrower as required by this paragraph (d). Nothing herein shall oblige any Agent or any Lender to disclose any of the tax returns, books or other records of such Person, nor shall anything herein interfere with the right of any Agent or any Lender to arrange its tax and -27- commercial affairs and its dealings with its various customers in whatever manner it thinks fit. In particular, no Agent or Lender shall be under any obligation to claim credit, relief, remission or repayment from or against its corporate profits or similar tax liability in respect of the amount of any Tax, deduction or withholding as aforesaid in priority to any other claims, reliefs, credits or deductions available to it or that it determines in its sole discretion to be inadvisable. 5.07 MITIGATION OBLIGATIONS; PREPAYMENTS; REPLACEMENT OF LENDERS. (a) Designation of a Different Lending Office; Prepayments. If any Lender requests compensation under Section 5.01 or 5.06, or if the Borrower is required to pay any additional amount to any Lender or any Government Authority for the account of any Lender pursuant to Section 5.06, then such Lender shall use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office for the Loans of such Lender affected by such event or to assign its rights and obligations therein to another of its offices, branches or Affiliates, if, in the sole opinion of such Lender, such designation or assignment: (i) would eliminate or reduce amounts payable pursuant to Section 5.01 or 5.06, as the case may be, in the future; and (ii) would not be disadvantageous to such Lender; provided that such Lender shall have no obligation to designate an Applicable Lending Office located in the United States if such Lender's Applicable Lending Office is not then located in the United States. The Borrower shall pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. In the event any such Lender requesting compensation is unable or, for any reason, declines to so designate a different Applicable Lending Office of its Loans, the Borrower shall have the right to prepay such Lender in whole or in part pursuant to the terms of Section 3.03(a) and Section 3.05, and such prepayment shall be exclusive of the prepayment commission described in Section 3.03(b). (b) Replacement of Lenders. If any Lender requests compensation under Section 5.01 or 5.06, or if the Borrower is required to pay any additional amount to any Lender or any Government Authority for the account of any Lender pursuant to Section 5.06, or if any Lender exercises its rights under Section 5.03, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate (in accordance with and subject to the restrictions contained in Section 11.06), without recourse and without compensation or payment of any type other than amounts referred to in clause (i) below, all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that: (i) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case -28- of all other amounts); and (ii) such assignment will: (A) result in a reduction in such compensation or payments; or (B) effect the availability of Eurodollar Loans, as applicable. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply. -29- ARTICLE VI CONDITIONS PRECEDENT 6.01 INITIAL TERM LOANS. The obligation of any Lender to make its Initial Loan Term Loan hereunder is subject to the receipt by the Administrative Agent of each of the documents and the satisfaction of the conditions precedent set out in this Section 6.01, each of which shall be satisfactory to the Lenders in form, scope and substance. (a) Certain Financing Documents. Each of the following Financing Documents, each such document to be duly executed and delivered by each of the intended parties thereto: (i) this Agreement; (ii) each of the Initial Term Loan Notes; and (iii) the Consent and Agreement of each of the Operator and Imperial Irrigation District relating to the Project Documents to which such Project Party is a party or by which it is otherwise bound, except as otherwise agreed in writing by the Administrative Agent on or prior to the Closing Date. (b) Security Documents. Each of the following Security Documents, each such document to be duly executed and delivered by each of the intended parties thereto: (i) the Borrower Security Agreement; (ii) the Borrower Equity Interest Pledge; (iii) the Deed of Trust; and (iv) the Depositary Agreement. (c) Project Documents. A copy (which, in the case of the Project Documents referred to in clauses (v), (viii), (ix) and (x) below, may be in electronic, CD-ROM format), certified by an Authorized Officer of the Borrower to be true, correct and complete, of each of the following Project Documents, each such document to be duly executed and delivered by each of the intended parties thereto: (i) each PPA; (ii) each Plant Connection Agreement;-30- (iii) the O&M Contract; (iv) each Transmission Services Agreement; (v) each Real Property Document; (vi) the Water Supply Agreement; (vii) the Energy Services Agreement; (viii) each Acquisition Document; (ix) each Restructuring Document; (x) each Merger Document; (xi) the Funding and Construction Agreement; and (xii) the Unit Agreement. (d) Limited Liability Company Documents. A certificate of the Secretary or Assistant Secretary of the Borrower or of its managing member, dated as of the Closing Date, certifying: (A) that attached thereto is a true, correct and complete copy of the Charter Documents (including the LLC Agreement) of the Borrower as in effect on the date of such certificate; (B) that attached thereto is a true, correct and complete copy of resolutions duly adopted by the managers or member of the Borrower, authorizing the execution, delivery and performance of the Financing Documents to which the Borrower is or is intended to be a party, and that such resolutions have not been modified, rescinded or amended and are in full force and effect; and (C) as to the incumbency and specimen signature of each officer of the Borrower executing each of the Financing Documents, to which the Borrower is or is intended to be a party and each other document to be delivered by the Borrower from time to time in connection therewith (and each Financing Party may conclusively rely on such certificate until it receives notice in writing to the contrary from the Borrower). (e) Officers' Certificates. A certificate of an Authorized Officer of the Borrower, dated as of the Closing Date, certifying that: (A) the representations and warranties of the Borrower contained in Article VII and the material representations and warranties of the Borrower in each other Transaction Document to which it is a party are true and correct in all material respects as if made on and as of such date (or, if stated to have been made solely as of an earlier date, were true and correct as of such date); (B) the Borrower is in compliance with all of its covenants and obligations under each of the Financing Documents to which it is a party, and is in compliance in all material respects with all of its covenants and obligations under each of the Project Documents to which it is a -31- party; (C) all Transaction Documents are in full force and effect; and (D) no Default or Event of Default has occurred and is continuing on such date, in each case, both immediately prior to the initial extension of credit hereunder and after giving effect thereto and to the intended use thereof. (f) Real Property Documents; Title Insurance; Survey. (i) Title Insurance. A title policy or policies issued by the relevant Title Company or Title Companies which is in ALTA, extended coverage, Lender's Fee Policy form 1970 (revised 10/17/84) or such other form approved by the Lenders, or a binding marked commitment to issue such policy or policies, in form, scope and substance satisfactory to the Lenders, insuring the Collateral Agent for the benefit of the Secured Parties, in an amount satisfactory to the Lenders, that the Borrower is lawfully seized and possessed of a valid and subsisting leasehold interest in the Leasehold Properties and estate or interest in the ROW and the Site Licenses, as the case may be, in the Project and that such interests are free and clear of all defects and encumbrances except those approved by the Lenders. Each Title Policy shall contain: (A) full coverage against Mechanics' Liens (filed and inchoate); (B) a reference to the relevant Initial Survey with no survey exceptions except those theretofore approved by the Lenders; and (C) such affirmative insurance and endorsements as the Lenders may require. (ii) Initial Survey. An as-built survey of the Site current to within 90 days of the Closing Date (each such survey, an "INITIAL SURVEY"), which survey shall: (A) be a current "as-built" metes and bounds survey of the Site, including easements that benefit such Site; (B) be made in accordance with the "Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys" jointly established and adopted by ALTA, ACSM and NSPS in 1999 with all measurements made in accordance with the "Minimum Angle, Distance and Closure -32- Requirements for Survey Measurements Which Control Land Boundaries for ALTA/ACSM Land Title Surveys"; (C) be prepared by a surveyor satisfactory to the Lenders; (D) contain "Optional Survey Responsibilities and Specifications" 2, 3, 8, 10 and 16 as specified on Table A to the "Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys"; and (E) contain a certification from said surveyor satisfactory to the Lenders. (iii) Fees. Evidence that the Borrower shall have paid to each Title Company all of its expenses and premiums in connection with the issuance of the Title Policy and in addition shall have paid to each Title Company an amount equal to the relevant recording and stamp taxes payable in connection with recording the Deed of Trust in the appropriate county land offices. (g) Financial Statements. The most recent unaudited quarterly financial statements (consolidated as appropriate) of the Borrower, prepared in accordance with the relevant Accounting Principles, together with a certificate from an Authorized Officer of the Borrower stating that: (A) no material adverse change in its consolidated assets, liabilities and operations or financial condition has occurred from those set out in such most recent financial statements; and (B) such financial statements fairly present in all material respects the financial condition of the Borrower. (h) Government Actions. (i) Government Approvals. Copies, certified by an Authorized Officer of the Borrower to be true, correct and complete, of all Government Approvals referred to in Schedule VI (other than those listed on Schedule VII or otherwise designated on such Schedule VII as unavailable), all of which shall be in form and substance satisfactory to the Lenders, together with a certificate from an Authorized Officer of the Borrower stating that all such Government Approvals, other than those listed on Schedule VII, are in full force and effect. (ii) Status. Evidence in form and substance satisfactory to the Lenders that each of the Projects is a QF. -33- (i) Independent Engineer's Report and Certificate. A report of the Independent Engineer, dated as of a recent date and in form, scope and substance satisfactory to the Lenders addressing (among other matters reviewed at the request of the Lenders as determined in their sole discretion): (i) the historical and projected operating and maintenance costs; (ii) the historic operation of the Project, including capacity ratings and actual energy production; (iii) the capability of the Resource, including (A) a review of Resource temperature, well production and operation and maintenance costs associated with the production and injection wells; (B) the historic production and injection volumes and temperature; (C) the ability of the Resource to continually provide sufficient temperatures and volumes of geothermal fluid to maintain the Project's electricity production and costs as set forth in the Closing Pro Forma; (D) the expected degradation of the Resource during the period beginning on the Closing Date and ending on the Final Maturity Date; (E) a review of the Resource management and well drilling plans, and the capabilities of the Operator to operate and maintain the Resource; (F) a review of the costs associated with management, maintenance, and development of the Resource to maintain temperature and production; and (G) the expected useful life of the Resource as currently used and as anticipated to be used following the Upgrade Project; (iv) the assumptions, formulae, methodologies and structure of the Closing Pro Forma; (v) the technical and economic ability and feasibility of the Project to produce and transmit the capacity and energy, and generate Project Cash Flow, in accordance with the Closing Pro Forma; (vi) the technical ability and feasibility of the Project to supply capacity and energy and otherwise fulfill its obligations under the PPAs; (vii) the projected availability of the Project; (viii) the Borrower's ability to perform under the Project Documents; (ix) the adequacy of the Plant Connection Agreements, the Transmission Services Agreements, and all other arrangements relating to interconnection; (x) the adequacy of the O&M Contract and the reasonableness of the costs and expenses of the Operator for performing services under the O&M Contract; (xi) the existence of skilled third party operators capable of performing such services at a comparable cost to the fees paid to the Operator under the O&M Contract; (xii) any environmental matters at or in relation to the Site, including (A) the Borrower's and the Project's compliance with all applicable Government Rules, including all Environmental Laws and all applicable Government Rules relating to health and safety; (B) whether the Borrower or the Project is subject to any federal, state or local investigation regarding any actual or potential remedial action or involving any actual or potential expenditure in excess of $100,000 in the aggregate with respect to any Environmental Law or in response to any Release; and (C) whether the Borrower or the Project has any contingent liability in excess of $100,000 in the aggregate in connection with any Release; (xiii) the adequacy of the plans relating to the Upgrade Project and an opinion that the expectations of the Upgrade Project are obtainable within the cost and time frame anticipated; and (xiv) any other technical or regulatory issue that may arise in -34- connection with the Independent Engineer's review of the Project on behalf of the Lenders. (j) Closing Pro Forma. The Closing Pro Forma. (k) Insurance. (i) Acceptable Insurance Broker Certificate. A certificate of an Acceptable Insurance Broker as to the Borrower's compliance with Section 8.05(a) and Schedule IV, such certificate to be in form and substance satisfactory to the Administrative Agent. (ii) Compliance Certificate. A certificate of an Authorized Officer of the Borrower, dated as of the Closing Date, certifying that insurance complying with Section 8.05(a) and Schedule IV, covering the risks referred to therein, has been obtained and is in full force and effect and, as of the date thereof, no notice of cancellation has been issued thereunder. (iii) Insurance Advisor's Report. A report of the Insurance Advisor, dated as of a recent date and satisfactory in form, scope and substance: (A) addressing (among other matters reviewed at the request of the Lenders as determined in their sole discretion): (I) the adequacy of the insurance required by Section 8.05 and Schedule IV and confirming that such insurance and reinsurance provides adequate cover for the Project and adequately protects the interests of the Agents and the Lenders; and (II) the comparability of such insurance with insurance maintained with respect to similar projects by prudent power producers; and (B) confirming that insurance complying with Section 8.05 and Schedule IV, covering the risks referred to therein: (I) is reasonably likely to remain available through the Final Maturity Date; and (II) has been obtained and is in full force and effect and as of the date thereof, no notice of cancellation has been issued thereunder. (l) Filings, Registrations and Recordings; Fees and Taxes. (i) Financing Statements. Acknowledgment copies of all financing statements under the Uniform Commercial Code (and copies of Uniform Commercial Code search reports and tax lien, judgment and litigation search reports) with respect to the Borrower, in each jurisdiction (and, to the extent applicable, county land offices) listed under the name of such Person on Schedule V and in each other jurisdiction in which such financing statements are necessary or, in the opinion of special counsel to the Lenders, desirable to -35- perfect the Liens created by the Security Documents (including Liens in fixtures created by the Deed of Trust and all other instruments to be recorded or filed or delivered in connection with the Security Documents). (ii) Recordation. Evidence satisfactory to the Administrative Agent that the Security Documents have been duly recorded and filed in all places wherein such recording and filing are necessary to perfect the interests of the Administrative Agent in and to the Collateral covered thereby. (iii) Fees and Taxes. Evidence that all filing, recordation, subscription and inscription fees and all recording and other similar fees, and all recording, stamp and other taxes and other expenses related to such filings, registrations and recordings necessary for the consummation of the transactions contemplated by this Agreement and the other Financing Documents have been paid in full by or on behalf of the Borrower or otherwise provided for. (iv) Other Action. Evidence satisfactory to the Administrative Agent that all other action necessary in order to effectively establish, create and perfect the Liens, charges and security interests contemplated by the Security Documents shall have been duly taken or made and remains in full force and effect. (m) No Proceedings. (i) As of the Closing Date there is no: (I) injunction, writ, preliminary restraining order or any order of any nature issued by any Government Authority, arbitral tribunal or other body directing that any of the transactions provided for herein or in the other Transaction Documents not be consummated as herein or therein provided; or (II) litigation, proceeding or, to the Borrower's knowledge, investigation, of or before any Government Authority, arbitral tribunal or other body pending or, to the Borrower's knowledge, threatened with respect to or affecting any Project, this Agreement or any other Transaction Document or any of the transactions contemplated hereby or thereby. (ii) A certificate of an Authorized Officer of the Borrower, dated as of the Closing Date, certifying as to such effect. (n) No Material Adverse Change. -36- (i) As of the Closing Date, there has been no Material Adverse Effect since November 7, 2002, and no act, event or circumstance affecting the Borrower has arisen since such date that could reasonably be expected to result in a Material Adverse Effect. (ii) A certificate of an Authorized Officer of the Borrower, dated as of the Closing Date, certifying as to such effect. (o) Opinions of Counsel. The following opinions of counsel, each acceptable in form and substance to the Agents and the Lenders: (i) An opinion of Chadbourne & Parke LLP, as special New York counsel to the Borrower and the Sponsor, and addressing certain New York State and Federal law matters; (ii) An opinion of David Chanover, special California counsel to the Borrower; and (iii) An opinion of Morris, Nichols, Arsht & Tunnell, as special Delaware counsel to the Borrower and the Sponsor and addressing certain general Delaware corporate, limited liability Company, and Uniform Commercial Code matters. (p) Fees and Expenses. Evidence that the Borrower shall have paid in full, on or before the Closing Date, all fees and expenses then due under or pursuant to this Agreement. (q) Establishment and Funding of the Accounts. Each of the Accounts shall have been established as of the Closing Date in accordance with the terms of the Depositary Agreement. The Debt Service Reserve Account shall have on deposit a credit balance of immediately available funds in an amount not less than the Debt Service Reserve Required Amount, provided that the initial funding of the Debt Service Reserve Account may be made with the proceeds of the Initial Term Loans. (r) Borrower's LLC Agreement. The Borrower's LLC Agreement shall be in form and substance satisfactory to the Administrative Agent. (s) No Default. Immediately before and after giving effect to such proposed Loan, no Default or Event of Default shall have occurred and be continuing and no Default would result therefrom. (t) Representations and Warranties. Immediately before and after giving effect to such proposed extension of credit, all representations of the Borrower and the Sponsor contained in the Financing Documents shall be true and correct on and as -37- of the Closing Date in all material respects as if made on and as of such date except for any such representations and warranties that were initially stated to have been made solely as of an earlier date, in which case such representations shall have been true and correct in all material respects as of such earlier date. (u) Absence of Material Adverse Effect. Immediately before and after giving effect to such proposed extension of credit, no Material Adverse Effect shall have occurred and be continuing or would result therefrom. (v) Government Approvals. All Government Approvals that are necessary for each Project as of the Closing Date shall have been obtained on or prior to the Closing Date and shall be in full force and effect and not subject to appeal. (w) Notice of Borrowing. The Borrower shall have delivered to the Administrative Agent (with a copy to the Collateral Agent) a Notice of Borrowing with respect to Initial Term Loans in an amount equal to the aggregate Initial Term Loan Commitments. (x) Payment Instructions. Evidence that the Borrower shall have irrevocably instructed in writing each of SCE and Imperial Irrigation District to make all payments owing to the Borrower under any Project Document to which either SCE or Imperial Irrigation District is party to the Depositary Bank for deposit into the Revenue Account. 6.02 ADDITIONAL TERM LOANS. The obligation of any Lender to make its Additional Term Loan is subject to the receipt by the Administrative Agent of the documents and the satisfaction of the conditions precedent set out below on the date of such Loan, each of which shall be in form and substance satisfactory to the Administrative Agent and the Majority Lenders. (a) No Default. Immediately before and after giving effect to such proposed extension of credit, no Default or Event of Default shall have occurred and be continuing and no Default would result therefrom. (b) Representations and Warranties. Immediately before and after giving effect to such proposed extension of credit, all representations of the Borrower and the Sponsor contained in the Financing Documents shall be true and correct on and as of the date of such Additional Term Loan in all material respects as if made on and as of such date except for any such representations and warranties that were initially stated to have been made solely as of an earlier date, in which case such representations shall have been true and correct in all material respects as of such earlier date.-38- (c) Absence of Material Adverse Effect. Immediately before and after giving effect to such proposed extension of credit, no Material Adverse Effect shall have occurred and be continuing or would result therefrom. (d) Government Approvals. All Government Approvals that are necessary for the then current stage of the Development of each Project shall have been obtained on or prior to the date of such extension of credit and shall be in full force and effect and not subject to appeal. (e) Upgrade Acceptance Test. The Project has successfully passed the Upgrade Acceptance Test on or before December 31, 2003. (f) Upgrade Pro Forma. The Upgrade Pro Forma, containing assumptions and otherwise in form and substance satisfactory to the Lenders and the Independent Engineer, taking into account the effect of the Upgrade Project on the Projects' performance, and demonstrating an annual Debt Service Coverage Ratio of at least 1.5:1. (g) Independent Engineer's Upgrade Report; Defective Tower Repair. An update to the report of the Independent Engineer that was delivered on the Closing Date, confirming that the Upgrade Acceptance Test has been satisfied in all material respects in form and substance satisfactory to the Lenders, and a certificate of an Authorized Officer of the Borrower, dated no later than July 1, 2003 certifying that the Tower Repairs have been substantially completed and that, as a result, the cooling towers subject thereof are, as of such date, in good working order and condition in accordance with generally accepted prudent utility practices. (h) Title Policy Endorsement. An endorsement to the Title Policy to the date of such extension of credit, in the form approved by the Administrative Agent and setting out no additional exceptions (including survey exceptions). (i) Notice of Borrowing. The Borrower shall have delivered to the Administrative Agent (with a copy to the Collateral Agent) a Notice of Borrowing with respect to Additional Term Loans in an amount not exceeding the present value, as calculated by the Administrative Agent, discounted at ten percent (10%), of two-thirds (2/3) of Additional Project Cash Flow, as set forth in the Upgrade Pro Forma, for the period from the date the Project passes the Upgrade Acceptance Test to the Final Maturity Date, but not to exceed the aggregate Additional Term Loan Commitments. (j) Other. Such other statements, certificates, documents and information with respect to any Project or matters contemplated by this Agreement as either Agent or the Majority Lenders may reasonably request. -39- ARTICLE VII REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lenders and each Agent that: 7.01 EXISTENCE. The Borrower is duly organized or formed, validly existing and in good standing under the laws of the State of Delaware. The Borrower is duly qualified to do business and is in good standing in the State of California. The Borrower is duly qualified to do business and is in good standing in all other places where necessary in light of the business it conducts and the Property it owns and intends to conduct and own and in light of the transactions contemplated by this Agreement and the other Transaction Documents, except where the failure to so qualify or be in good standing could not reasonably be expected to have a Material Adverse Effect. No filing, recording, publishing or other act that has not been made or done is necessary in connection with the existence or good standing of the Borrower or the conduct of its business. 7.02 FINANCIAL CONDITION. (a) Financial Statements. The financial statements delivered to the Administrative Agent pursuant to Section 8.01, and any related statements of income, owner's equity and cash flows: (i) fairly present, in all material respects, the financial condition of the Borrower as of the date delivered and the results of its operations for the period covered thereby (subject, in the case of any quarterly financial statements to normal year-end audit adjustments); and (ii) have been prepared in accordance with the Accounting Principles applicable to such Person. (b) No Material Contingent Liabilities. As of the date of the relevant balance sheet included in such financial statements, the Borrower has no contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments or any other liabilities or obligations of a nature required to be reflected in a balance sheet for the period to which such financial statements relate that were not disclosed in such balance sheet and, either individually or in the aggregate would be material to the Borrower. (c) No Material Adverse Change. The Borrower knows of no reasonable basis existing as of the date of its most recent balance sheet in accordance with Section 8.01 for the assertion against it of any liability or obligation of a nature required to be reflected in a balance sheet that is not fully reflected in its most recent balance sheet. Since the date of delivery of such balance sheet, there has been no material adverse change in the financial condition, operations or business of the Borrower from that set out in such financial statements as at such date.-40- 7.03 ACTION. (a) Borrower. The Borrower has full limited liability company power, authority and legal right to execute and deliver the Transaction Documents to which it is or is intended to be a party and to perform its obligations thereunder. The execution, delivery and performance by the Borrower of each of the Transaction Documents to which it is or is intended to be a party and the consummation of the transactions contemplated thereby have been duly authorized by all necessary limited liability company action on its part. Each of the Transaction Documents to which the Borrower is a party has been duly executed and delivered by or on behalf of such Person and constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms, except as the enforceability thereof may be limited by: (i) applicable bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally; and (ii) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). (b) Other Major Project Parties. (i) Each of the other Major Project Parties has full corporate, limited liability company or partnership power, authority and legal right to execute and deliver each of the Transaction Documents to which it is or is intended to be a party and to perform its obligations thereunder; (ii) the execution, delivery and performance by each other Major Project Party of each of the Transaction Documents to which it is or is intended to be a party and the consummation of the transactions contemplated thereby have been duly authorized by all necessary corporate, limited liability company or partnership action on the part of such other Major Project Party; and (iii) each of the Transaction Documents to which any other Major Project Party is a party has been duly executed and delivered by such other Major Project Party and constitutes the legal, valid and binding obligation of such other Project Party enforceable against such other Major Project Party in accordance with its terms, except as the enforceability thereof may be limited by: (A) applicable bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally; and (B) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity);-41- provided that these representations shall be made only to the knowledge of the Borrower with respect to any other Major Project Party that is not an Affiliate of the Borrower. 7.04 NO BREACH. (a) Execution, Etc. of Transaction Documents. The execution, delivery and performance by the Borrower of each of the Transaction Documents to which it is or is intended to be a party and the consummation of the transactions contemplated thereby do not and will not: (i) require any consent or approval of any Person that has not been obtained (except for consents from the BLM, SCE and for certain consents by third parties to the right of the Collateral Agent on behalf of the Secured Parties under the Security Documents to step into, cure defaults under or substitute a counterparty to, certain Project Documents) and each such consent and approval that has been obtained is in full force and effect; (ii) violate any material Government Rule or material Government Approval applicable to any Project; (iii) conflict with, result in a breach of or constitute a default under: (A) the Borrower's Charter Documents or any corporate, limited liability company action or any resolution of the member of the Borrower; or (B) any Project Document other than with respect to the Consents described in clause (i) above that have not been obtained or any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower is a party or by which it or its Property may be bound or affected in any material respect; or (iv) result in, or create any Lien (other than a Permitted Lien) upon or with respect to any of the properties now owned or hereafter acquired by the Borrower. (b) No Breach. The Borrower is not in violation of any Government Rule or Government Approval that could reasonably be expected to result in a Material Adverse Effect. The Borrower is not in breach of or default under any indenture, loan or credit agreement or any other agreement, lease or instrument referred to in paragraph (a)(iii) above, except such breaches or defaults that, in the aggregate could not reasonably be expected to result in a Material Adverse Effect. 7.05 GOVERNMENT APPROVALS; GOVERNMENT RULES. (a) Borrower. All Government Approvals necessary under Government Rules to be obtained by or on behalf of the Borrower on or prior to the Closing Date are set out in Schedules VI and, except for those Government Approvals set out in Schedule VII which are not currently required for any Project, have been duly obtained, were validly issued, are in full force and effect, are not subject to appeal, are held in the name, or on behalf of, such Person and are free from conditions or requirements compliance with which could reasonably be expected to result in a Material Adverse Effect or which such Person does not reasonably expect to be able to satisfy on or prior to the time when necessary. -42- (b) Other Major Project Parties. To the Borrower's knowledge: (i) each other Major Project Party has obtained all Government Approvals necessary under Government Rules that are required to be obtained on or prior to the Closing Date in order for such other Major Project Party to perform its obligations under the Transaction Documents to which it is or is intended to be a party, other than those Government Approvals not currently required for any Project; and (ii) such Government Approvals are in full force and effect, are not subject to appeal, are held in the name of such other Major Project Party and are free from conditions or requirements compliance with which could reasonably be expected to result in a Material Adverse Effect or which the Borrower does not reasonably expect such other Major Project Party to be able to satisfy on or prior to the time when necessary. (c) No Material Omission. The information set out in each application and all other written materials submitted by the Borrower (and to the Borrower's knowledge, each other Major Project Party) to the applicable Government Authority in connection with each of its Government Approvals is accurate and complete in all material respects as of the date submitted to such Government Authority and does not omit to state any material fact necessary to make such information not misleading. (d) Future Government Approvals. The Borrower has no reason to believe that any Government Approvals that have not been obtained by it or any other Major Project Party as of the date of this Agreement, but which will be required in the future, will not be obtained in due course on or prior to the time when necessary and will be free from any condition or requirement, compliance with which could reasonably be expected to have a Material Adverse Effect. (e) Compliance of Upgrade Project. The Upgrade Project, if constructed in accordance with the Plans and Specifications therefor and otherwise Developed as contemplated by the Project Documents, will conform to and comply, in all material respects, with all covenants, conditions, restrictions and reservations in the Government Approvals applicable thereto and all Government Rules. (f) Copies Provided to Administrative Agent. In accordance with Section 6.01(h), the Administrative Agent has received a certified copy of each Government Approval heretofore obtained. 7.06 PROCEEDINGS. There is no action, suit or proceeding at law or in equity or by or before any Government Authority, arbitral tribunal or other body now pending or, to the knowledge of the Borrower, threatened against or affecting it, any of its Property (including any Project) or, to the knowledge of the Borrower, any other Major Project Party, that could reasonably be expected to result in a Material Adverse Effect. No winding up, dissolution or similar process is pending or threatened against the Borrower or (to the knowledge of the Borrower) any other Major Project Party except, after the-43- Closing Date, to the extent such process, if adversely determined, could not reasonably be expected to result in an Event of Default. 7.07 ENVIRONMENTAL MATTERS. (a) Environmental Claims. Except as described in Part A of Schedule VIII, to the knowledge of the Borrower, there are no facts, circumstances, conditions or occurrences regarding any Project that could reasonably be expected to form the basis of an Environmental Claim arising with respect to any Project or against such Project, the Borrower or, in connection with its involvement in any Project, any other Environmental Party, that individually or in the aggregate could reasonably be expected to result in a Material Adverse Effect. (b) Threatened Environmental Claims. Except as set out in Part B of Schedule VIII, there are no pending or, to the knowledge of the Borrower no past or, threatened Environmental Claims arising with respect to any Project or against such Project, the Borrower or, in connection with its involvement in the Development of any Project, any other Environmental Party, that individually or in the aggregate could reasonably be expected to result in a Material Adverse Effect. (c) Hazardous Materials. Except as set out in Part C of Schedule VIII, to the Borrower's knowledge no Hazardous Materials have been Used or Released at, on, under or from any Project in an amount or concentration that is not otherwise in compliance with applicable Environmental Law and that individually or in the aggregate could reasonably be expected to result in a Material Adverse Effect. (d) Other Materials. There are not now and, to the knowledge of the Borrower, never have been any underground storage tanks located at any Project. There is no asbestos contained in, forming part of, or contaminating any part of any Project, and no polychlorinated biphenyls are used, stored, located at or contaminate any part of any Project. (e) Investigations. There have been no environmental investigations, studies, audits, reviews or other analyses conducted by or that are in the possession of the Borrower (or, with respect to such investigations, studies, audits, reviews and other analysis conducted prior to April 15, 2002, known by the Borrower to be in its possession) in relation to any Project that have not been provided to the Administrative Agent and the Lenders. 7.08 TAXES. The Borrower has filed or caused to be filed all tax returns that are required by applicable law to be filed, and has paid all Taxes shown to be due and payable on said returns or on any assessments made against the Borrower or any of its Property and all other Taxes imposed on the Borrower by any Government Authority (other than Taxes the payment of which are not yet due or that are being Contested) except, in each case, where such failure could not reasonably be expected to have a Material Adverse Effect.-44- No Liens for Taxes (other than Permitted Liens) against the Borrower or any of its Property exist and no claims are being asserted against the Borrower or any of its Property with respect to any Taxes. The aggregate amount of sales, excise or property taxes imposed or reasonably expected to be imposed on the Borrower or any of its Property does not exceed the amounts provided therefor in the Closing Pro Forma. The charges, accruals and reserves on its books in respect of Taxes are, in the opinion of the Borrower, adequate. 7.09 TAX STATUS. (a) For Federal and state income tax purposes, the Borrower is disregarded as an entity separate from its owner. (b) Neither the execution and delivery of this Agreement, the other Transaction Documents or the Non-Material Project Contracts nor the consummation of any of the transactions contemplated hereby or thereby shall affect the classification of the Borrower as set out in paragraph (a) above. 7.10 ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, materially exceed the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, materially exceed the fair market value of the assets of all such underfunded Plans. 7.11 NATURE OF BUSINESS. The Borrower has not engaged in any business other than the Development of the Projects and with respect to the SIGC Lease. Neither the business nor any Properties of the Borrower are or have been affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or other casualty (whether or not covered by insurance) that could reasonably be expected to have a Material Adverse Effect. 7.12 TITLE; SECURITY DOCUMENTS. (a) Title. The Borrower owns and has good, legal and marketable title to the Collateral purported to be covered by the Security Documents to which it is a party, except for that portion of the Collateral which is Real Property, in which the Borrower has a valid estate or interest, and all such interests of the Borrower are free and clear of all Liens other than Permitted Liens.-45- (i) The Borrower is lawfully possessed of a valid and subsisting estate in and to the Real Property and rights to the Real Property described in the Deed of Trust free and clear of all Liens other than the Liens granted to the Collateral Agent for the benefit of the Secured Parties under the Security Documents and: (A) as at the Closing Date, exceptions shown on the Title Policy delivered on the Closing Date in relation thereto; and (B) Permitted Liens. (ii) The Borrower enjoys peaceful and undisturbed possession of, all of its Properties (subject only to the Permitted Liens described above) that are necessary for the Projects. (b) Security Documents. The provisions of the Security Documents are effective to create, in favor of the Collateral Agent for the benefit of the Secured Parties, a legal, valid and enforceable Lien on and security interest in all of the Collateral purported to be covered thereby in accordance with state law and as permitted pursuant to the rules and regulations of the BLM. All necessary and appropriate recordings and filings have been made, or are being made concurrently herewith, in all necessary and appropriate public offices (including in the jurisdictions set out in Schedule V), and all other necessary and appropriate action has been, or is concurrently herewith being, taken, so that, subject to the rules and regulations of the BLM, each such Security Document creates, or as to after-acquired property will create, to the extent set forth in such Security Document, a perfected Lien on and security interest in all right, title, estate and interest in the Collateral covered thereby, prior and superior to all other Liens other than Permitted Liens. Except as otherwise agreed by the Lenders, all necessary and appropriate consents to the creation, perfection and enforcement of such Liens have been obtained from each of the parties to the Project Documents except for the BLM and SCE. Subject to the rules and regulations of the BLM, no mortgage or financing statement or other instrument or recordation covering all or any part of the Collateral purported to be covered by the Security Documents is on file in any recording office, except such as may have been filed in favor of the Collateral Agent for the benefit of the Secured Parties or in respect of any Permitted Lien. 7.13 SUBSIDIARIES. (a) No Subsidiaries. The Borrower has no subsidiaries. (b) Ownership Interests in Borrower. There are no ownership interests in the Borrower other than the 100% member interest held by the Sponsor. -46- 7.14 UTILITY REGULATION. (a) Holding Company. The Borrower is not a "public-utility company" or a "holding company", or an "affiliate" of a "holding company" or of a "public-utility company", or a "subsidiary company" of a "holding company", within the meaning of PUHCA nor is Borrower subject to regulation under PUHCA. None of the Projects is a "public-utility company" or a "holding company", or an "affiliate" of a "holding company" or of a "public-utility company", or a "subsidiary company" of a "holding company" within the meaning of PUHCA. (b) Status. Each of the Projects is a QF. The Borrower is not, nor will any of the Secured Parties (solely as a result of its execution, delivery or performance of this Agreement or the other Financing Documents or the transactions contemplated thereby, other than the exercise of remedies under the Security Documents except to the extent that, following such exercise of remedies, the Borrower will remain as the owner of the Projects, and the Operator will remain as the operator thereof) be, subject to regulation as a "public-utility company", a "holding company" or a "subsidiary company" or an "affiliate" of any of the foregoing, under PUHCA. (c) Public Utility. Except as set out on Schedule VII and provided in the Government Approvals identified therein, the Borrower is not, nor will any of the Secured Parties be (solely as a result of its execution, delivery or performance of this Agreement or the other Financing Documents or the transactions contemplated thereby, other than the exercise of remedies under the Security Documents except to the extent that, following such exercise of remedies, the Borrower will remain as the owner of the relevant Projects, and the Operator will remain as the operator thereof), subject to regulation: (i) respecting the rates of electric utilities or material financial and organizational regulation of electric utilities under the FPA or the applicable Government Rules of the State of California other than, solely with respect to the Secured Parties' exercise of remedies under the Security Documents, Section 203 of the FPA; or (ii) otherwise as a gas or other regulated utility, however denominated, under applicable Government Rules of the United States of America or the State of California. (d) Investment Company. The Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940 or an "investment advisor" within the meaning of the Investment Company Act of 1940. 7.15 FINANCING DOCUMENTS; PROJECT DOCUMENTS; NON-MATERIAL PROJECT CONTRACTS; LICENSES, ETC. (a) Financing Documents; Project Documents; Non-Material Project Contracts. The Financing Documents, Project Documents and the Non-Material Project Contracts constitute and include all contracts and agreements relating to the Projects. As at-47- the Closing Date, all Project Documents are set out in the definition thereof in Schedule I. There are no material services, materials or rights (other than Government Approvals) required for any Project other than those granted by, or to be provided to the Borrower pursuant to, the Project Documents. The Borrower has no reason to believe that any services, materials or rights (other than Government Approvals) that have not been obtained as of the date of this Agreement, but that will be required for a future stage of the Development of any Project (including, without limitation, the Upgrade Project), will not be obtained in due course on or prior to the commencement of the appropriate stage of Development of such Project and will not contain any condition or requirement compliance with which could reasonably be expected to have a Material Adverse Effect. (b) Copies of Documents. The Administrative Agent has received a copy (certified by the Borrower) of each Project Document, in accordance with Section 6.01(c), in each case as in effect on the date of delivery and each amendment, modification or supplement thereto. (c) No Amendment. Since their certification and delivery in accordance with Section 6.01(c) and except as permitted pursuant to Section 8.22, none of the Project Documents has been amended, modified or supplemented or has been Impaired and all of the Project Documents are in full force and effect in all material respects. All conditions precedent to the obligations of the respective parties under the Project Documents have been satisfied or waived except for such conditions precedent that need not and cannot be satisfied until a later stage of Development of the relevant Project, and the Borrower has no reason to believe that any such condition precedent cannot be satisfied on or prior to the commencement of the appropriate stage of Development of such Project. (d) Representations and Warranties. All material representations, warranties and other factual statements made by the Borrower and, to the knowledge of the Borrower, made by each other Person in the Project Documents are true and correct in all material respects (or, if stated to have been made solely as of an earlier date, were true and correct as of such date) and do not omit to state any material fact necessary to make such representations, warranties and other factual statements not misleading. (e) No Default. The Borrower is not in default in the performance of any covenant or obligation set out in any Project Document in a manner that could reasonably be expected to result in a Material Adverse Effect. To the knowledge of the Borrower, no other party to any Project Document is in default in the performance of any covenant or obligation set out therein in a manner that could reasonably be expected to result in a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. -48- (f) Licenses. All material permits, licenses, trademarks, patents or agreements with respect to the usage of technology or other property (other than those constituting Government Approvals) that are necessary for each Project have been obtained, are final and are in full force and effect in all material respects and any such permits, licenses, trademarks, patents or agreements not currently necessary for each Project can reasonably be expected to be obtained when needed, free from conditions or requirements, compliance with which could reasonably be expected to result in a Material Adverse Effect. 7.16 UTILITY SERVICES. All utility services necessary for the Development of each Project, including, as necessary, water supply, storm and sanitary sewer, electric and telephone services and facilities, are available to such Project. 7.17 DISCLOSURE. All factual information in writing (taken as a whole) furnished by the Borrower or any Affiliate of the Borrower on its behalf, whether in print or electronic form, to any Financing Party was true and accurate in all material respects: on the dates as of which such information was furnished, and was not incomplete by omitting to state any material fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided; provided, however, that, except as otherwise expressly provided in this Agreement, the Borrower's sole representation with respect to projections, estimates or other expressions of view as to future circumstances shall be that such projections, estimates or other expressions of view as to future circumstances: (i) were prepared in good faith and with due care; (ii) fairly present in all material respects the Borrower's expectations as to the matters covered thereby as of their respective date(s) of delivery; (iii) were based on reasonable assumptions as to all factual and legal matters material to the estimates therein as of their respective date(s) of delivery; (iv) were in all material respects consistent with the provisions of the Transaction Documents as of their respective date(s) of delivery; and (v) contain no statements or conclusions that are based upon or include information known to the Borrower to be misleading or that fail to take into account material information regarding the matters reported therein as of their respective date(s) of delivery. There are in existence no documents or agreements that have not been disclosed to the Lenders that are material in the context of the Transaction Documents or that have the effect of varying any of the Transaction Documents or the Projects. There is no fact known to the Borrower that has not been disclosed in writing to the Lenders and that has had, or that could reasonably be expected in the future to have, a Material Adverse Effect. 7.18 USE OF PROCEEDS. The proceeds of each Loan will be used solely in accordance with, and solely for the purposes contemplated by, Section 8.09. No part of the proceeds of any Loan hereunder will be used for the purpose, whether immediate, incidental or ultimate, of buying or carrying any Margin Stock or to extend credit to others for such purpose. 7.19 FEES. On the Closing Date, except with respect to the financial advisor to the Borrower in connection with the transactions contemplated hereby, the Borrower does not have any-49- obligation to any Person in respect of any finder's, broker's, investment banking, legal or accounting or other similar fee (including any fee payable to engineers, environmental consultants, fuel consultants or similar experts) in connection with any of the transactions contemplated by the Transaction Documents for services rendered more than 60 days prior to the Closing Date other than fees payable to Lenders or fees specifically contemplated in the Closing Pro Forma. 7.20 INDEBTEDNESS. The Borrower is not directly or indirectly liable with respect to any Indebtedness outstanding as of the Closing Date other than Permitted Indebtedness. 7.21 INVESTMENTS. The Borrower has no Investments except Permitted Investments. 7.22 NO FORCE MAJEURE. No event, condition or circumstance has occurred on the basis of which the Borrower has either given a notice of "force majeure" or received such notice from any other Person that could reasonably be expected to entitle the Borrower or such notifying Person to excuse, defer or suspend the performance of any of the material obligations of the Borrower or such notifying Person under any Transaction Document to which it is a party on the basis of "force majeure." 7.23 ASSETS. The Borrower owns, leases and otherwise has full legal right to use all Real Property, subject to the rules and regulations of the BLM, buildings, machinery, equipment and other assets, whether tangible or intangible, that are necessary or useful for the conduct of its business as presently conducted and as proposed to be conducted through the Final Maturity Date. On and as of the Closing Date, each such asset is, except for the assets to be repaired and/or upgraded as part of the Upgrade Project and the Tower Repairs, free from defects (patent and latent), is in good operating condition and repair (subject to normal wear and tear), and is suitable for the purposes for which it is presently used and as proposed to be used through the Final Maturity Date. Since April 15, 2002, each such asset, except for the assets to be repaired and/or upgraded as part of the Upgrade Project and the Tower Repairs, has been maintained in accordance with prudent and good industry practice.ARTICLE VIII COVENANTS The Borrower covenants and agrees with the Lenders and the Agents that until the Termination Date: 8.01 FINANCIAL STATEMENTS AND OTHER INFORMATION. The Borrower shall deliver to the Administrative Agent (in sufficient copies for distribution to each of the Lenders): (a) as soon as available and in any event within 60 days after the end of each quarterly fiscal period of each fiscal year of the Borrower, unaudited statements-50- of income, owners' equity and cash flows of the Borrower, for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related unaudited balance sheet as at the end of such period, setting out in each case in comparative form the corresponding figures for the corresponding period in the preceding fiscal year, accompanied by any material accounting variation report required by Section 1.04(b) and a certificate of a senior financial officer of the Borrower, which certificate shall state that said financial statements fairly present in all material respects the financial condition and results of operations of the Borrower, in accordance with the Accounting Principles applicable to the Borrower as at the end of, and for, such period (subject to normal year-end audit adjustments); (b) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, audited statements of income, owners' equity and cash flows of the Borrower for such year and the related audited balance sheets as at the end of such year, setting out in each case in comparative form the corresponding figures for the preceding fiscal year, and accompanied by any material accounting variation report required by Section 1.04(b) and an opinion thereon of independent certified public accountants of recognized standing reasonably acceptable to the Lenders, which opinion shall state that said financial statements fairly present in all material respects the financial condition and results of operations of the Borrower as at the end of, and for, such fiscal year in accordance with the Accounting Principles applicable to the Borrower, and a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default or Event of Default (which certificate may be limited to the extent required by accounting rules or guidelines or customary accounting practice); (c) promptly upon their becoming available, copies of all registration statements and regular periodic reports, if any, that the Borrower shall have filed with the Securities and Exchange Commission or any national securities exchange; (d) prompt written notice of receipt by the Borrower of written notice of the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower in an aggregate amount that could reasonably be expected to result in a Default or have a Material Adverse Effect; (e) promptly after the Borrower knows or has reason to believe that any Default or Event of Default has occurred, a notice of such event describing the same in reasonable detail and, together with such notice or as soon thereafter as practicable, a description of the action that the Borrower has taken or proposes to take with respect thereto; -51- (f) promptly after the Borrower knows or has reason to believe that any fact, event, circumstance, condition or occurrence has occurred that results in, or could reasonably be expected to result in, a Material Adverse Effect, a notice of such fact, event, circumstance, condition or occurrence describing the same in reasonable detail and, together with such notice or as soon thereafter as practicable, a description of the action that the Borrower has taken or proposes to take with respect thereto; (g) promptly after the Borrower knows or has reason to believe that any event, circumstance or condition in the nature of force majeure has occurred which could reasonably be expected to result in a materially adverse change from the Closing Pro Forma or, if the Second Closing Date has occurred, the Upgrade Pro Form, a notice of such event, describing the same in reasonable detail and, together with such notice or as soon thereafter as practicable, a description of the action that the Borrower has taken or proposes to take with respect thereto; (h) promptly upon their becoming available, copies of all material notices or material documents received by the Borrower pursuant to any Project Document (including any notice or other document relating to a failure by the Borrower to perform any of its covenants or obligations under such Project Document); (i) promptly upon their becoming available, copies of all material periodic reports received from the Operator and other material notices relating to any Project received from any Project Party; (j) the notices required by Section 8.06; (k) as soon as practicable as they are available, copies of each insurance policy relating to the Projects, together with a certificate of an Authorized Officer of the Borrower, dated as of the date of such delivery, certifying that the policies comply with Section 8.05(a) and Schedule IV, cover the risks referred to therein, are in full and effect, as of the date of such delivery, no notice of cancellation has been issued thereunder, and that all premiums then due and payable thereon have been paid; and (l) from time to time such other information regarding the financial condition, operations, business or prospects of the Borrower (including any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as any Lender (through the Administrative Agent) or Agent may reasonably request. 8.02 MAINTENANCE OF EXISTENCE; ETC.The Borrower shall: (a) preserve and maintain its legal existence; (b) preserve and maintain its good standing and all material licenses, rights, privileges and franchises necessary for the proper operation of each Project and its qualification to do business; and (c) conduct its business in an orderly, efficient and-52- regular manner, unless the failure to so comply could not reasonably be expected to result in a Material Adverse Effect. 8.03 COMPLIANCE WITH GOVERNMENT RULES; ETC. (a) Compliance with Government Rules. The Borrower shall comply with all applicable Government Rules and from time to time obtain, maintain, comply with and renew all Government Approvals as shall now or hereafter be necessary under applicable Government Rules (except any thereof the non-compliance with or non-renewal of which could not reasonably be expected to result in a Material Adverse Effect). The Borrower shall promptly upon receipt or publication furnish a copy (certified by the Borrower or, if available, the applicable Government Authority) of each such Government Approval to the Administrative Agent. (b) No Amendment. Except as provided in Section 8.22(b)(vi), the Borrower shall not petition, request or take any legal or administrative action that seeks to amend, supplement or modify any Government Approval unless: (i) the Borrower theretofore shall have furnished to the Administrative Agent and the Lenders a detailed description of the proposed amendment, supplement or modification and the actions that the Borrower proposes to take with respect thereto; and (ii) such amendment, supplement or modification could not reasonably be expected to result in a Material Adverse Effect. The Borrower shall promptly upon receipt or publication thereof furnish a copy (certified by the Borrower or the applicable Government Authority) of each amendment, supplement or modification to any Government Approval to the Administrative Agent. (c) QF Status. The Borrower shall maintain the status of the Projects as QFs. 8.04 ENVIRONMENTAL COMPLIANCE. (a) No Use or Release. The Borrower shall not Use or Release, or permit the Use or Release of, Hazardous Materials at any Project other than in compliance with all applicable Environmental Laws and where such Use or Release could not reasonably be expected to result in a Material Adverse Effect. (b) Investigation. The Borrower shall conduct and complete any investigation, study, sampling and testing and undertake any cleanup, removal, remedial or other action necessary to remove and clean up all Hazardous Materials Released at, on, in, under or from any Project, to the extent required by and consistent with the requirements of all applicable Environmental Laws except where failure to conduct or complete such clean-up, removal, remedial or other action could not reasonably be expected to result in a Material Adverse Effect. (c) Environmental Claim. The Borrower shall deliver to the Administrative Agent and each Lender: -53- (i) promptly upon obtaining knowledge of: (A) any fact, circumstance, condition or occurrence that could form the basis of an Environmental Claim arising with respect to any Project or against such Project, the Borrower or, in connection with its involvement in any Project, any other Environmental Party, in each case, which could reasonably be expected to have a Material Adverse Effect; or (B) any pending or threatened material Environmental Claim arising with respect to any Project or against such Project, the Borrower or, in connection with its involvement in any Project, any other Environmental Party, a notice thereof describing the same in reasonable detail and, together with such notice or as soon thereafter as practicable, a description of the action that the Borrower has taken or proposes to take with respect thereto and, thereafter, from time to time such detailed reports with respect thereto as the Administrative Agent or any Lender (through the Administrative Agent) may reasonably request; and (ii) promptly upon their becoming available, copies of all material written communications with any Government Authority relating to any violation or alleged violation of any Environmental Law or any Environmental Claim relating to any Project. 8.05 INSURANCE; EVENTS OF LOSS. (a) Insurance Maintained by the Borrower. The Borrower shall keep its present and future properties and business insured as required by and in accordance with the terms and conditions described in Schedule IV. (b) Compromise, Adjustment or Settlement. The Administrative Agent shall be entitled at its option to participate in any compromise, adjustment or settlement in connection with any Event of Loss under any policy or policies of insurance or any proceeding with respect to any condemnation (including a Condemnation) or other taking of Property of the Borrower in excess of $1,000,000. The Borrower shall, within five Business Days after request therefor, reimburse the Administrative Agent for all reasonable out-of-pocket expenses (including reasonable attorneys' and experts' fees) incurred by the Administrative Agent in connection with such participation. The Borrower shall not make any compromise, adjustment or settlement in connection with any such claim without the approval of the Administrative Agent, which approval shall not unreasonably be withheld, conditioned or delayed. The Borrower shall diligently pursue all claims and rights to compensation against all relevant insurers and/or Government Authorities, as applicable, in respect of any Event of Loss. (c) Loss Proceeds. In the event that the Borrower receives any amount of Loss Proceeds in respect of any Event of Loss, the Borrower shall deposit the amount -54- of such Loss Proceeds in the Restoration Sub-Account. In the event that the Borrower receives any amount of proceeds of business interruption insurance and other payments received for interruption of operations in respect of any Event of Loss, the Borrower shall deposit the amount of such proceeds in the Revenue Account. In the event that the amount of such Loss Proceeds with respect to any Event of Loss is $2,500,000 or less, such amounts shall be made available to the Borrower for the purpose of Restoring the Affected Property and shall be applied by the Borrower to the payment of the cost of the Restoration of the Affected Property. In the event that the amount of such Loss Proceeds with respect to any Event of Loss is greater than $2,500,000, such amounts shall be made available to the Borrower from time to time in accordance with paragraph (d) and shall be applied by the Borrower to the payment of the cost of the Restoration of the Affected Property. In the event that the relevant Event of Loss has caused a Project to be declared a total loss by its insurers, the Loss Proceeds with respect to such Event of Loss shall be promptly applied by the Administrative Agent in accordance with Section 3.04. (d) Restoration. Amounts to be made available to the Borrower from the Restoration Sub-Account to be applied to the Restoration of Affected Property following any Event of Loss ("RESTORATION WORK") shall be remitted to the Borrower by the Administrative Agent, in the event that the amount of Loss Proceeds with respect to such Event of Loss is greater than $2,500,000, subject to the satisfaction of the following conditions: (i) in the event that the amount of Loss Proceeds with respect to such Event of Loss is less than or equal to $5,000,000, the Borrower has delivered to the Administrative Agent plans and specifications for the Restoration Work, including reasonable estimates of the costs and time required to complete such Restoration Work ("RESTORATION PLANS") and has certified in writing to the Administrative Agent that the conditions set out in paragraphs (ii)(B), (C), (E) and (F) below have been satisfied; and (ii) in the event that the amount of Loss Proceeds with respect to such Event of Loss is greater than $5,000,000: (A) the Borrower shall have delivered the relevant Restoration Plan to the Administrative Agent and the Independent Engineer; (B) the Restoration Plans provide for Restoration Work that is technically feasible and will, upon completion thereof, result in the Project being at least equal in value, general -55- utility and levels of performance as the Project prior to the Event of Loss; (C) the Restoration Plans provide for the Restoration Work to be completed within the period covered by business interruption insurance, plus any additional period agreed between the Borrower and the Administrative Agent (after consultation with the Independent Engineer) for a cost not to exceed the relevant Loss Proceeds plus any necessary additional funds ("ADDITIONAL RESTORATION FUNDS") to be contributed towards such Restoration from: (I) amounts then on deposit in the Revenue Account that are distributable in accordance with Section 8.13, which amounts shall be transferred to the Restoration Sub-Account; or (II) cash actually deposited into the Restoration Sub-Account by a Person other than the Borrower; (D) the Independent Engineer shall have delivered to the Administrative Agent and the Lenders a certificate to the effect that the amount of Loss Proceeds with respect to such Event of Loss that has been deposited in the Restoration Sub-Account together with any Additional Restoration Funds, business interruption insurance proceeds relating thereto and any projected revenues from the Project are sufficient to Restore the Affected Property and to pay all Operation and Maintenance Expenses and all maintenance expenditures for such affected Project and Debt Service, in each case during the period of time that is required, in the opinion of the Independent Engineer, to Restore the Affected Property (the "RECONSTRUCTION PERIOD"); (E) no Event of Default could reasonably be expected to occur during Restoration as a consequence of Restoration Work, assuming that Restoration Work on such Project proceeds in accordance with the Restoration Plan; (F) the Property constituting the Restoration Work shall be subject to the Lien of the Security Documents (whether by amendment to the Security Documents or otherwise) free and clear of all Liens other than Permitted Liens; and (G) Each request by the Borrower for a disbursement of funds from the Restoration Sub-Account shall be made on 10 days' prior written notice to the Administrative Agent, -56- Collateral Agent and the Depositary Bank and shall be accompanied by: (I) a certificate of each of an Authorized Officer of the Borrower and the Independent Engineer that: (1) all of the Restoration Work completed has been done substantially in compliance with the Restoration Plan therefor; (2) the sum requested is required to pay, or to reimburse the Borrower for, costs incurred in connection with such Restoration Work (giving a brief description of the services and materials provided in connection with such Restoration Work); (3) the sum requested, when added to all Loss Proceeds and Additional Restoration Funds with respect to the relevant Event of Loss previously paid out by the Depositary Bank, does not exceed the cost of the Restoration Work done as of the date of such certificate; and (4) the amount of Loss Proceeds with respect to the relevant Event of Loss remaining in the Restoration Sub-Account, together with any remaining Additional Restoration Funds, will be sufficient to complete the Restoration Work (giving an estimate of the cost of such completion in such reasonable detail as the Administrative Agent may reasonably request); (II) a certificate of an Authorized Officer of the Borrower certifying that no Default or Event of Default shall have occurred and is continuing at such date; and (III) partial lien waivers executed by each contractor and major subcontractor involved in the Restoration Work that shall cover all labor, materials (including equipment and fixtures of all kinds), supplies or services done, performed or furnished at, for or to the relevant Project in connection with the Restoration Work performed to the date of such payment. Once such Restoration Work is complete (such completion to be evidenced by a certificate of the Borrower delivered to the Administrative Agent, the Collateral Agent and the Depositary Bank), any remaining relevant Loss Proceeds shall be applied as set out in Section 4.3 of the Depositary Agreement. If the Borrower shall at any time abandon the Restoration Work or otherwise fail to pursue the Restoration Work substantially in accordance with the Restoration Plans, then, to the extent that such Loss Proceeds shall not otherwise have been remitted as aforesaid to the Borrower, such Loss Proceeds shall promptly (at the direction of the Majority Lenders) be applied by the Administrative Agent in accordance with Section 3.04(a). Anything to the contrary in this Section 8.05 notwithstanding, if as the result of such Event of Loss or Restoration Work an Event of Default shall have occurred and be continuing, the Administrative Agent -57- may instruct the Depositary Bank to apply any amount of such Loss Proceeds in the Restoration Sub-Account in accordance with Section 3.05. 8.06 PROCEEDINGS. The Borrower shall, promptly upon: (a) obtaining knowledge of any action, suit or proceeding at law or in equity by or before any Government Authority, arbitral tribunal or other body pending or threatened against or otherwise affecting the Borrower or any other Major Project Party or any of such Person's Property, any Transaction Document, any Project or the Collateral, in each case that could reasonably be expected to result in a Material Adverse Effect; or (b) becoming aware of any other circumstance, act or condition (including the adoption, amendment or repeal of any Government Rule or the Impairment of any Government Approval or notice (whether formal or informal, written or oral) of the failure to comply with the terms and conditions of any Government Approval) that could reasonably be expected to result in a Material Adverse Effect, in each case, furnish to the Administrative Agent a notice of such event describing the same in reasonable detail and, together with such notice or as soon thereafter as practicable, a description of the action that the Borrower or such other Major Project Party has taken and, with respect to the Borrower, proposes to take with respect thereto. 8.07 TAXES. The Borrower shall pay and discharge all Taxes imposed on it or on its income or profits or on any of its Property or on any Transaction Document prior to the date on which penalties attach thereto and prepare and file Tax returns on or before their due date. 8.08 BOOKS AND RECORDS. The Borrower shall keep proper books of record and accounts in accordance with Accounting Principles applicable to it and permit representatives of either Agent, upon reasonable notice, to visit and inspect its properties, to examine, copy or make excerpts from its books, records and documents and to discuss its affairs, finances and accounts with its principal officers during normal business hours and at such intervals as either Agent may reasonably request. The Borrower shall notify the Agents of any change in its independent accountants. The Independent Engineer shall have the right to inspect any Project in order to perform its obligations under the Financing Documents, including, to witness and verify any acceptance tests and to discuss the Borrower's affairs with its principal officers and engineers, all at such reasonable times and at such intervals as the Independent Engineer may reasonably request. The Borrower shall at all times maintain and preserve a complete set of Plans and Specifications for each Project (and any Restoration Plans with respect to such Project) at such Project's Site, available for inspection by the Independent Engineer (in order to perform its obligations under the Financing Documents), the Agents and any Lender. 8.09 USE OF PROCEEDS. The Borrower shall utilize the proceeds of the Loans as provided in the second paragraph of this Agreement. 8.10 MAINTENANCE OF LIENS. The Borrower shall maintain and preserve the Liens created by the Security Documents and the priority thereof and shall from time to time execute or-58- cause to be executed any and all further instruments (including financing statements, continuation statements and similar statements with respect to any Security Document) reasonably requested by the Collateral Agent for such purposes. The Borrower shall promptly discharge, at the Borrower's cost and expense, any Lien (other than Permitted Liens) on the Collateral. 8.11 [INTENTIONALLY OMITTED]. 8.12 PROHIBITION OF FUNDAMENTAL CHANGES. (a) Merger or Consolidation. The Borrower shall not merge into or consolidate with, or acquire all or any substantial part of the assets or any class of stock or other ownership interests of, any other Person without the prior written consent of the Majority Lenders. The Borrower shall not convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, any assets except sales of (without duplication) (A) electrical energy or capacity or ancillary services pursuant to a PPA or otherwise in the ordinary course of its business; (B) assets in the ordinary course of its business, the proceeds of which do not in any year exceed the aggregate sum of $250,000 as to all Projects; and (C) assets made redundant by the Upgrade Project. (b) No Acquisition. The Borrower shall not purchase or acquire any assets other than: (i) the purchase of assets reasonably required for the repair of the Defective Towers, and the Upgrade Project, in each case, in accordance with the respective plans therefor; (ii) the purchase of assets reasonably required in connection with Restoration of the Project in accordance with Section 8.05(d); (iii) the purchase of assets in the ordinary course of business as reasonably required in connection with the Project in accordance with the Project Documents and the Non-Material Project Contracts and as contemplated by the Closing Pro Forma or, if the Second Closing Date has occurred, the Upgrade Pro Forma; and (iv) Permitted Investments. 8.13 RESTRICTED PAYMENTS(a). The Borrower shall not, directly or indirectly, declare or make any other Restricted Payment unless each of the following conditions is satisfied both immediately before and after the date of payment thereof: (i) the date of payment of such Restricted Payment shall be on or within 30 days after a Quarterly Date; provided that, if the Borrower has been precluded from making any Restricted Payment within such 30-day period solely as a consequence of the condition set out in paragraph (ii) below being unsatisfied during such period and such condition is subsequently satisfied, the Borrower may make such Restricted Payment on any date (the "EXTENDED-59- RESTRICTED PAYMENT DATE") within 10 days after the date such condition is first satisfied as long as all other conditions of this Section 8.13 are satisfied on and as of such Extended Restricted Payment Date; (ii) no Default (other than any Default that (i) provides a cure period therefor of not less than 30 days, (ii) is reasonably capable of being remedied during such 30-day period, (iii) as to which the Borrower is diligently prosecuting or pursuing such remedy, and (iv) following the occurrence of which not more than 30 days have elapsed), or an Event of Default shall have occurred and shall be continuing or would result from the making of such Restricted Payment; (iii) for any Quarterly Date on or prior to March 31, 2004, the Projected Debt Service Coverage Ratio shall be at least 1.20:1, and for any corresponding Quarterly Date thereafter, the Debt Service Coverage Ratio for the relevant Historical Computation Period shall be at least 1.20:1; (iv) the balance on deposit in the Debt Service Reserve Account shall, on the date of payment of such Restricted Payment after giving effect thereto, be at least equal to the Debt Service Reserve Required Amount; (v) the Restricted Payment shall only be made from and to the extent of Distributable Cash (as defined in the Depositary Agreement); and (vi) each of the Administrative Agent and the Depositary Bank has received: (i) at least 10 days prior to the corresponding Quarterly Date and, if applicable, Extended Restricted Payment Date, a Distribution Certificate substantially in the form of Exhibit G. If any of the foregoing conditions to distribution are not satisfied, the relevant monies shall be applied as set out in Section 4.1 of the Depositary Agreement. 8.14 LIENS. The Borrower shall not create, incur, assume or suffer to exist any Lien on any of the Collateral or any of the other Property of the Borrower except Permitted Liens. 8.15 INVESTMENTS. The Borrower shall not make any Investments except Permitted Investments. 8.16 HEDGING ARRANGEMENTS. The Borrower shall, not later than 30 days following the Closing Date, enter into and at all times thereafter maintain in full force and effect one or-60- more Interest Rate Cap Agreements providing for the payment to the Borrower of an amount equal to the excess of the Eurodollar Rate minus (b) six percent (6%), and otherwise on terms reasonably acceptable to the Administrative Agent and the Borrower, with one or more hedge providers reasonably acceptable to the Administrative Agent and the Borrower, and in a notional equivalent amount at least equal to 60% of the principal amount of all Loans outstanding on any Quarterly Date prior to the Final Maturity Date. 8.17 INDEBTEDNESS. The Borrower shall not, directly or indirectly, create, incur, assume or otherwise be or become liable with respect to any Indebtedness except Permitted Indebtedness. 8.18 TRANSACTIONS WITH AFFILIATES. Except as expressly permitted by this Agreement, the Borrower shall not, directly or indirectly, enter into any transaction directly or indirectly with or for the benefit of an Affiliate other than transactions that: (a) are in the ordinary course of business, including, without limitation, the Upgrade Project; (b) are on terms and conditions at least as favorable to the Borrower as would be obtainable at the time in a comparable "arm's-length" transaction with a Person other than an Affiliate; (c) would not result in any Default hereunder; and (d) are not otherwise prohibited hereunder. 8.19 NATURE OF BUSINESS. The Borrower shall not engage in any business other than the operation of the Projects as contemplated by the applicable Project Documents and Non-Material Project Contracts and as contemplated by the SIGC Lease. 8.20 MAINTENANCE OF PROPERTIES. (a) Properties. The Borrower shall maintain and preserve all of its Properties necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted, and in accordance with generally accepted prudent utility practices (and all other standards and requirements, to the extent more stringent, set out in any Project Document). (b) Restoration. The Borrower shall Restore any of its Property now or hereafter the subject of an Event of Loss (whether or not insured against or insurable) except any of its Property that has been the subject of an Event of Loss that the Borrower determines in good faith (and, in relation to any Event of Loss for which the amount of the Loss Proceeds exceeds $2,000,000, with the approval of the Majority Lenders) not to be necessary to the conduct of its business. (c) No Removal. The Borrower shall not permit all or any portion of any Project to be removed from such Project's Site (except in the ordinary course of business with respect to maintenance of components of such Project that is required to be conducted off of such Project's Site), demolished or materially altered; provided that spare parts and similar individual items of equipment may be moved from one Project to another Project as the Borrower may reasonably believe necessary.-61- 8.21 [INTENTIONALLY OMITTED] 8.22 PROJECT DOCUMENTS; ETC. (a) Project Documents. The Borrower shall, unless prior written consent is obtained from the Majority Lenders: (i) perform and observe in all material respects all of its material covenants and obligations contained in each of the Project Documents to which it is a party; and (ii) except as permitted by Section 8.22(b): (A) take all reasonable and necessary action to prevent the termination or cancellation of any Project Documents in accordance with the terms thereof or otherwise; and (B) enforce against the relevant Project Party each material covenant or obligation of such Project Document in accordance with its terms, unless the failure to so comply could not reasonably be expected to result in a Material Adverse Effect. Anything in the foregoing to the contrary notwithstanding, the Borrower shall pay, or cause to be paid, when due, all claims for labor, material, supplies or services (under the Project Documents or otherwise) that, if unpaid, could by law result in a Mechanics' Lien; provided that: (A) in the event that, in accordance with the provisions of the relevant Project Document, any such claim may be paid in installments or may be deferred (whether or not interest shall accrue on the unpaid balance thereof), the Borrower may pay such claim in installments (together with accrued interest on the unpaid balance thereof, if any) as the same become due or prior to the end of such period of deferral; and (B) the Borrower shall have the right to contest the validity or amount of such claim. (b) No Cancellation, Assignment, Etc. The Borrower shall not, without the prior written consent of the Majority Lenders: (i) cancel or terminate any Project Document to which it is a party or consent to or accept any cancellation or termination thereof; (ii) sell, assign (other than pursuant to the Security Documents) or otherwise dispose of (by operation of law or otherwise) any part of its interest in any Project Document, except as permitted by Section 8.12; (iii) waive any default under, or material breach of, any Project Document or waive, fail to enforce, forgive, compromise, settle, adjust or release any material right, interest or entitlement, howsoever arising, under or in respect of any Project Document or in any way vary, or agree to the variation of, any material provision of such Project Document or of the performance of any material covenant or obligation by any other Person under any Project Document;-62- (iv) exercise any "price reopener" or quantity adjustment provisions or similar contractual adjustment provisions (whether or not such provisions relate to price or quantity) under any Project Document or act upon any "price reopener" or quantity adjustment provisions or any such similar contractual adjustment provisions under any Project Document exercised by any other Project Party (except, in each case, upon instructions of the Majority Lenders (after Expert Consultation)); (v) petition, request or take any other legal or administrative action that seeks, or may reasonably be expected, to Impair any Project Document or amend, modify or supplement any Project Document; or (vi) amend, supplement or modify any Project Document (in each case as in effect on the Closing Date (or if executed subsequently, its execution date) other than as contemplated by the Energy Services Agreement and as thereafter amended, supplemented or modified in accordance with this paragraph (b)) in any material respect. (c) Additional Project Documents. The Borrower shall not enter into any Additional Project Document (other than Interest Rate Cap Agreements) without the prior approval of the Majority Lenders (such consent not to be unreasonably withheld or delayed) unless: (i) the terms of such Additional Project Document are in accordance with the terms of the then-current Annual Operating Plan and Budget; (ii) entering into such Additional Project Document could not reasonably be expected to have a Material Adverse Effect; (iii) the terms and conditions of such Additional Project Document are consistent with the Financing Documents; and (iv) the Borrower shall take (or cause to be taken) all action necessary to create and perfect the Lien and security interests of the Secured Parties thereon (including execution of all Ancillary Documents). (d) Restrictions. The Borrower shall not enter into any contract or agreement (other than the Financing Documents and any Project Document related to the Upgrade Project) or take any other action that, directly or indirectly, restricts its ability to: (i) enter into amendments, modifications, supplements or waivers of any of the Transaction Documents; (ii) sell, transfer or otherwise dispose of its assets other than in the ordinary course of its business; (iii) create, incur, assume or suffer to exist any Lien upon any of its Property other than Permitted Liens; (iv) create, incur, assume, suffer to exist or otherwise become liable with respect to any Indebtedness other than Permitted Indebtedness; or (v) declare or make any Restricted Payment except in accordance with Section 8.13. (e) Delivery of Documents. Promptly after the execution and delivery thereof, the Borrower shall furnish each Agent and the Lenders with: (i) copies (certified by -63- the Borrower) of: (A) all amendments, supplements, change orders or modifications of any Project Document to which such Person is a party; and (B) all Additional Project Documents to which it is a party; and (ii) all Ancillary Documents to which it is a party relating to any Additional Project Document. (f) Fees Under O&M Contract. The Borrower and the Operator shall not, without the prior written consent of the Majority Lenders, permit "Extraordinary Operation Expenses" under and as defined in the O&M Contract to exceed $750,000 in any fiscal year of the Borrower. 8.23 ANNUAL OPERATING PLANS AND BUDGETS; OPERATING STATEMENTS. (a) Annual Operating Plan and Budget. (i) Scope of Annual Operating Plan and Budget. The Borrower shall prepare and submit to the Administrative Agent (with sufficient copies to permit distribution to each Lender and the Independent Engineer), as and when required by this Agreement, a consolidated annual operating plan and budget for the Borrower for the upcoming Operating Year, including operating and maintenance programs, capital expenditure programs, and budgeted statements of income and sources and uses of cash and balance sheets (the "ANNUAL OPERATING PLAN AND BUDGET"). The Annual Operating Plan and Budget shall be accompanied by a statement of a financial officer of the Borrower to the effect that, to the best of such officer's knowledge, such budget is a reasonable estimate for the period covered thereby and is in compliance with the requirements of this Section 8.23(a). (ii) Contents. Each Annual Operating Plan and Budget shall contain reasonable estimates of Project Revenues (broken out by source), Operation and Maintenance Expenses, Extraordinary Operation Expenses (as defined in the O&M Contract (including a monthly breakdown thereof), capital expenditures, projected working capital requirements of the Borrower and production goals, including detailed assumptions regarding the dispatch of each Project and power prices, in each case, for each calendar month covered by such Annual Operating Plan and Budget, based on the reasonable projections at such time. Such projections shall be based on all facts and circumstances then existing and known to the Borrower and that reflect a reasonable estimate of its future results for the upcoming Operating Year and, in the case of its net income, the next succeeding three (3) Operating Years. Each Annual Operating Plan and Budget shall also address each Project's interface requirements in relation to local utilities, -64- proposed staffing levels and safety, regulatory and environmental compliance programs. Each Annual Operating Plan and Budget shall be prepared in good faith on the basis of written assumptions stated therein which the Borrower believes to be reasonable as to all factual and legal matters material to such estimates. (iii) Form of Annual Operating Plan and Budget. Unless otherwise consented to by the Administrative Agent, which consent shall not be unreasonably withheld, conditioned or delayed, each Annual Operating Plan and Budget from year to year shall be based on the same format as the "Data Import" worksheet that is a part of the Closing Pro Forma and be maintained on the same basis and provide sufficient detail to permit a meaningful comparison to previous years. (iv) At least 45 (but no more than 90) days prior to the end of each Operating Year, the Borrower shall prepare and submit to the Administrative Agent a draft Annual Operating Plan and Budget for the upcoming Operating Year. (v) Effectiveness and Approval of Annual Operating Plans and Budgets. Subject to the following sentence, a draft Annual Operating Plan and Budget shall become effective on the first day of the relevant Operating Year. In relation to any draft Annual Operating Plan and Budget delivered pursuant to paragraph (iv) above in relation to a new Operating Year, if: (A) expenses for the Operating Year covered thereby for any Project exceed those set out for such Project in the then-current Annual Operating Plan and Budget by more than 10% on a consolidated basis; or (B) actual expenditures for any Project in respect of Operation and Maintenance Expenses in the then-current Operating Year met the conditions set out in paragraph (b)(i)(B) below, in each case: (I) the Borrower shall notify the Administrative Agent thereof when submitting the draft Annual Operating Plan and Budget pursuant to paragraph (a)(iv) above or (b) below; and (II) Majority Lender approval of such draft Annual Operating Plan and Budget shall be required, which approval shall not unreasonably be withheld, conditioned or delayed. If the Administrative Agent does not inform the Borrower of the Majority Lenders' disapproval of the submitted Annual Operating Plan and Budget within 30 days after submission thereof to the Administrative Agent, such Annual Operating Plan and Budget shall be deemed approved by the Majority Lenders. If the Majority Lenders do not approve an Annual Operating Plan and Budget, the Administrative Agent shall -65- advise the Borrower of the items that are disapproved and the reason for such disapproval. If all or any portion of an Annual Operating Plan and Budget is disapproved, the Borrower shall adhere to all approved aspects of such Annual Operating Plan and Budget. With respect to those aspects of any Annual Operating Plan and Budget that are not approved, the Annual Operating Plan and Budget for the preceding Operating Year (if applicable), adjusted (in relation to budgeted expenditures) for inflation in a manner mutually acceptable to the Borrower and the Administrative Agent (after Expert Consultation), shall be applicable thereto (and shall for all purposes hereof be deemed to be part of the approved Annual Operating Plan and Budget for such Operating Year) until such time as such aspects of the Annual Operating Plan and Budget therefor have been approved by the Majority Lenders. (vi) O&M Contract Consistency. The Borrower shall ensure that any budget or other applicable projection under the O&M Contract is consistent with the Annual Operating Plan and Budget hereunder (as modified from time to time hereunder). (b) Operation and Maintenance Expenses. (i) The Borrower shall not at any time during any Operating Year make expenditures for any Project in respect of any Operation and Maintenance Expenses for such Project in excess of: (A) in the case of any line item or category of the proposed Annual Operating Plan and Budget which is not approved by the Majority Lenders (and until such time as such amounts are so approved), the amounts applicable thereto pursuant to the second paragraph of paragraph (a)(v) above for the period from the beginning of such Operating Year to the end of the current month thereof; (B) in respect of all other such Operation and Maintenance Expenses, any amount which would cause the aggregate amount of such other expenditures to exceed $250,000; or (C) solely in respect of the "Compromise Payment" under and as defined in the Energy Services Agreement, an aggregate amount exceeding $724,000; in the case of (A) and (B), without having first proposed an amendment to the then-current Annual Operating Plan and Budget and the Majority -66- Lenders having approved such amendment in accordance with paragraph (ii) below; provided, however, that no such approval shall be required for the "Compromise Payment" referred to in the foregoing clause (C) or for Emergency Operating Costs up to $1,000,000 per Project in any Operating Year (prorated on the basis of a 365-day year for any Operating Year which is less than a full calendar year). (ii) If at any time during any Operating Year: (A) Operation and Maintenance Expenses to be paid by the Borrower during the balance of such Operating Year exceed or could reasonably be expected to exceed the allowance provisions of paragraph (i) above; or (B) the Borrower believes such costs for the balance of such year will exceed such allowance provisions, in each case, the Borrower shall propose an amendment to the then-current Annual Operating Plan and Budget (with copies thereof delivered to the Administrative Agent and the Independent Engineer). Such amendment shall become effective on the date that such proposal is approved by the Majority Lenders. At the time the Borrower submits such proposal, the Borrower shall certify the purpose of such amendment and that such amendment is reasonably necessary or desirable for the operation and maintenance of the Projects. If the Majority Lenders do not approve a proposed amendment, the Administrative Agent shall advise the Borrower of the items that are disapproved and the reason for such disapproval. If all or any portion of a proposed amendment is disapproved, the Borrower shall adhere to the Operation and Maintenance Expenses included in the approved Annual Operating Plan and Budget (subject to the allowance provisions of paragraph (i) above). (c) O&M Contract Operating Reports. The Borrower shall furnish to the Administrative Agent a copy of each Quarterly Operations Reports received by it pursuant to the terms of the O&M Contract which include: (i) technical performance of the Projects, including production, (ii) an accident incident report, (iii) safety and environmental compliance status, (iv) equipment operational status, (v) a summary of all major maintenance performed in the preceding quarter and that planned for the coming quarter, including a summary of Major Corrective Maintenance Work (as defined in the O&M Contract) performed in the preceding quarter, (vi) any other known conditions which may adversely affect the technical or financial performance of the Projects, and (vii) the incurrence or payment of any "Extraordinary Operation Expenses" under and as defined in the O&M Contract. 8.24 SPECULATIVE ACTIVITIES. Trust Estate, other-67- The Borrower shall not engage in any speculative activities. Nothing in this Section 8.24 shall prohibit the Borrower from entering into the Interest Rate Cap Agreements. 8.25 STATUS. (a) The Borrower shall take, or cause to be taken, all action required to maintain the status of each of the Projects as a QF. (b) The Borrower shall not take or permit any Affiliate to take, any action that would cause the Borrower: (i) to become regulated as a public utility under: (A) the FPA in a manner different than that contemplated by its Government Approvals set out on Schedule VI or any of its future Government Approvals regarding the rates of public utilities granted by FERC, such future Government Approvals not to be sought without the prior written consent of the Majority Lenders; or (B) any other material utility regulation under any Government Rule (excluding the FPA and the Government Rules promulgated thereunder), other than as set out on Schedule VI; or (ii) to become subject to any material utility regulation under any Government Rule, other than as set out on Schedule VI. (c) Neither the Borrower nor any of its Affiliates shall take, or permit to be taken, any action that would cause the Borrower to be an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. 8.26 UPDATED SURVEYS AND TITLE POLICY FOLLOWING UPGRADE PROJECT. (a) Surveys. The Administrative Agent shall have received, no later than 100 days following completion of the Upgrade Project, a survey of the Site certified to the Borrower, the relevant Title Company and the Administrative Agent, updated, with respect to all relevant requirements and information required for the Initial Surveys under Section 6.01(f)(ii), to within 60 days of the date of receipt by the Administrative Agent. (b) Title Policy. Promptly and in any event within 100 days after completion of the Upgrade Project, the Borrower shall cause the relevant Title Company to deliver to the Administrative Agent: (i) an endorsement of the Title Policy issued in connection with such Project deleting from the Title Policy: (A) any exception in connection with pending disbursements; (B) any exception with respect to unrecorded mechanics' and materialmen's liens; and (C) any exception with respect to survey matters; and (ii) an abstractor's certificate or other title evidence showing no Liens or other exceptions to the title of the Deed of -68- than Permitted Liens and those previously approved in writing by the Administrative Agent. 8.27 ACCOUNTS. The Borrower shall not establish or maintain any account other than (a) the Accounts established and maintained pursuant to the Depositary Agreement and (b) any account that does not hold Project Revenues. 8.28 NO SUBSIDIARIES. The Borrower shall not form, establish, acquire or suffer to exist any Subsidiaries of the Borrower. 8.29 SCE CONSENT. The Borrower shall use commercially reasonable efforts to obtain and deliver to the Administrative Agent, on or prior to the date 60 days following the Closing Date, an agreement among the Borrower, SCE and the Collateral Agent providing for the consent by SCE to the collateral assignment by the Borrower to the Collateral Agent of the Borrower's rights under each PPA. ARTICLE IX EVENTS OF DEFAULT 9.01 EVENTS OF DEFAULT. Each of the following events shall be and constitute an "EVENT OF DEFAULT": (a) The Borrower shall default in the payment when due hereunder of any principal of or interest on any Loan and such default shall continue unremedied for a period of three (3) Business Days after such amount first became due. (b) The Borrower shall default in the payment when due of any amount payable by it hereunder or under any other Financing Document (other than amounts described in paragraph (a) above) and such default shall continue unremedied for a period of 30 days after such amount first became due. (c) Any material representation, warranty or statement confirmed or made by the Borrower, the Sponsor or any other Major Project Party under any Financing Document or contained in any certificate, statement, notice or other document provided to any Financing Party under or pursuant to any Financing Document shall have been incorrect or misleading in any material respect when made or deemed to be made or (except if stated to have been made solely as of an earlier date) repeated. (d) The Borrower shall default in the performance of any of its obligations under any of: (i) Section 8.02(a); (solely in relation to the maintenance of its existence); 8.03(a) (in relation to the first sentence thereof);-69- 8.03(b) (solely in relation to the first sentence thereof); 8.03(c); 8.04(a); 8.04(b); 8.04(c); 8.05(a); 8.05(b) (other than in relation to the provisions of the second sentence thereof); 8.05(d) (solely in relation to the provisions of the first and second sentences thereof); 8.07; 8.09; 8.12; 8.13 (and such default shall continue for a period of five (5) consecutive Business Days); 8.15 (and such default shall continue for a period of five (5) consecutive Business Days); 8.16; 8.17; 8.19; 8.22(b); 8.22(c); 8.22(d); 8.24; 8.25; 8.26; 8.27; or 8.28; or any other provision of any Financing Document and such continues for more than thirty (30) consecutive days after the Borrower should reasonably become aware of such default; (ii) Section 4.01(a), (b),(c) and(g); 4.02 (provided, that solely if the Borrower has no knowledge of the existence of any financing statement referred to therein, no Event of Default shall occur until the date 30 days after the filing of such financing statement); 4.04(a), 4.09, or 4.15 of the Borrower Security Agreement; (iii) Section 1.2, 1.3, 1.6, 1.7, 1.8, 1.9, 1.14 or 1.18 of the Deed of Trust; or (iv) Sections 3.1(a), 3.1(b) or 4.3 of the Depositary Agreement. (e) The Sponsor shall default in the performance of any of its obligations under Sections 4.01(a), 4.02, 4.03, 4.05, 4.06, 4.07, 4.09 or 4.10 of the Pledge Agreement; or any other provision of the Pledge Agreement and such continues for more than thirty (30) consecutive days after the Borrower should reasonably become aware of such default. (f) The Borrower or any other Major Project Party shall default in the performance of any material covenant or undertaking contained in any Project Document other than any obligation for the payment of money, which default continues beyond the shorter of the applicable period of grace specified therefor in such document or (i) ten (10) days, in the case of a payment default, or (ii) 30 days, in the case of any other default provided that, if such other default (x) is not capable of being remedied with diligent effort within such 30-day period, and (y) is reasonably capable of being remedied and the Borrower is diligently prosecuting or pursuing such remedy, such other default shall not give rise to an Event of Default unless such other default shall continue unremedied for a period of ninety (90) days after an Authorized Officer of the Borrower becomes aware or reasonably should have become aware of such other default. (g) The Borrower or the Sponsor shall: (i) admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; (ii) apply for or consent to the appointment of, or the taking of possession by, a receiver, -70- custodian, trustee or liquidator of itself or of all or a substantial part of its Property; (iii) make a general assignment for the benefit of its creditors; (iv) commence a voluntary case under the Bankruptcy Code; (v) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or readjustment of debts; (vi) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code; or (vii) take any corporate, limited liability company or partnership action for the purpose of effecting any of the foregoing. (h) (i) A proceeding or case shall be commenced against the Borrower or the Sponsor, in each case without the application or consent of such Person, in any court of competent jurisdiction, seeking: (A) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts; (B) the appointment of a trustee, receiver, custodian, liquidator or the like of such Person or of all or any substantial part of its Property; or (C) similar relief in respect of such Person under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and, in each case, such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 90 or more days; or (ii) an order for relief against such Person shall be entered in an involuntary case under the Bankruptcy Code. (i) Prior to the completion of its duties under all Transaction Documents to which it is a party, any of SCE, the Operator or Imperial Irrigation District shall: (i) admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; (ii) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its Property; (iii) make a general assignment for the benefit of its creditors; (iv) commence a voluntary case under the Bankruptcy Code; (v) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or readjustment of debts; (vi) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code; or (vii) take any corporate or partnership action for the purpose of effecting any of the foregoing. (j) (i) Prior to the completion of its duties under all Transaction Documents to which it is a party, a proceeding or case shall be commenced against any of SCE, the Operator or Imperial Irrigation District, without the application or consent of such Person, in any court of competent jurisdiction, seeking: (A) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts; (B) the appointment of a trustee, receiver, custodian, liquidator or the like of such Person or of all or any substantial part of its Property; or (C) similar relief in respect of such Person under any law relating to bankruptcy, insolvency, -71- reorganization, winding-up, or composition or adjustment of debts, and, in each case, such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 90 or more days; or (ii) an order for relief against such Person shall be entered in an involuntary case under the Bankruptcy Code. (k) Any Person referred to in paragraph (g) or (h) above shall be terminated or dissolved (as a matter of Government Rule or otherwise), or proceedings shall be commenced by any Person seeking the termination or dissolution of any Person referred to in paragraph (g) or (h) above and such proceedings shall continue undismissed or unstayed for a period of 90 or more days (or such shorter period of time which such Person has pursuant to Government Rule to cause the dismissal of such proceeding or stay the effectiveness of any such order, judgment or decree). (l) A judgment or judgments for the payment of money is rendered by one or more Government Authorities against the Borrower in an aggregate amount (less any amount that applicable insurers have acknowledged liability for) exceeding $500,000 in the aggregate, and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 45 days from the date of entry thereof, and such Person shall not, within said period of 45 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal, or any action shall be taken by a judgment creditor to attach or levy upon any assets of such Person to enforce any such judgment. (m) An ERISA Event shall have occurred that, in the opinion of the Administrative Agent, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect. (n) (i) Any Environmental Claim arising with respect to the Development of any Project shall have been asserted against such Project, the Borrower or the Operator or, in connection with its involvement with the Development of a Project, any other Environmental Party which, if adversely determined, could reasonably be expected to have a Material Adverse Effect; or (ii) any Release or Use of any Hazardous Materials at, on, under or from such Project shall have occurred which could reasonably be expected to have a Material Adverse Effect. (o) Any Indebtedness of the Borrower in excess of $500,000 is not paid when due (after giving effect to any grace period applicable thereto), becomes due and payable by reason of any default or event of default with respect thereto (howsoever described), or could under the terms of the documentation evidencing such Indebtedness (after giving effect to any grace period applicable thereto) -72- become due and payable by reason of any default or event of default with respect thereto (howsoever described). (p) (i) The Borrower, the Sponsor, SCE, the Operator or Imperial Irrigation District shall fail to obtain, renew, maintain or comply with all Government Approvals as shall now or hereafter be necessary or desirable; or (ii) any Government Approval related to any Project shall be Impaired or shall cease to be in full force and effect; or (iii) any action, suit, proceeding or investigation shall be commenced by or before any Government Authority that could reasonably to expected to result in the Impairment of any such Government Approval and such action, suit, proceeding or investigation is not dismissed or terminated within 90 days and, in each such case, such failure, Impairment, cessation or commencement could reasonably be expected to have a Material Adverse Effect. (q) (i) Except as expressly contemplated pursuant to paragraph (u) below, any material provision of any Transaction Document shall at any time for any reason cease to be valid and binding or in full force and effect; or (ii) except as expressly contemplated pursuant to paragraph (u) below, any Transaction Document shall be Impaired in whole or part; or (iii) the validity or enforceability of any Transaction Document shall be contested by any party thereto (other than either Agent or the Lenders) or any Government Authority; or (iv) the Borrower, the Sponsor, SCE, the Operator or Imperial Irrigation District shall deny that it has any or further liability or obligation under any Transaction Document and, in each such case, such cessation, Impairment, contest or denial could reasonably be expected to have a Material Adverse Effect. (r) Any Security Document shall cease to be in full force and effect or to be effective to grant a perfected Lien to the Collateral Agent for the benefit of the Secured Parties, on any part of the Collateral described therein having value in excess of $100,000 in the aggregate with the priority purported to be created thereby subject to the rules and regulations of the BLM. (s) Any Material Adverse Effect shall occur and be continuing. (t) One or more judgments or decrees is entered against the Borrower in the form of an injunction or other similar relief requiring suspension or abandonment of the Development of any Project (or a material portion thereof) for a continuous period of at least 90 days, and such judgment or decree is not vacated, discharged or stayed or bonded pending appeal within 90 days (or any shorter appeal period as is available under applicable Government Rules from the date of entry thereof). (u) The Borrower or the Operator ceases to carry on or suspends all or substantially all of its activities in connection with the Development of a Project or otherwise abandons or permits the abandonment of its Project, in each case for a period of 45 days or more, other than where the cessation or suspension is for bona fide -73- operational reasons or due to an event of force majeure and the Borrower is using commercially reasonable efforts to commence or recommence such construction or operation. (v) The Tower Repairs fail to be substantially completed on or prior to July 1, 2003. 9.02 RIGHTS UPON AN EVENT OF DEFAULT. Upon the occurrence and during the continuation of an Event of Default: (a) the Administrative Agent may, and, upon request of the Majority Lenders, shall, by notice to the Borrower and the Collateral Agent, terminate the Commitments and/or declare the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Borrower hereunder and under the Notes (including, without limitation, any amounts payable under Section 5.05 or 5.06) to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower; and (b) in the case of the occurrence of an Event of Default referred to in paragraph (g) or (h) above with respect to the Borrower, the Commitments shall automatically be terminated and the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Borrower hereunder and under the Notes (including any amounts payable under Section 5.05 or 5.06) shall automatically become immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower. Notwithstanding anything else provided herein, upon the occurrence and during the continuance of an Event of Default, the Collateral Agent may exercise any and all remedies available to it under law or equity and any Lender may exercise any right of set-off available to it. Without limiting the foregoing, remedies under any Security Document may only be exercised by the Collateral Agent, although any Secured Party shall have the right (but not the obligation) to cure any default under a Security Document subject to the rules and regulations of the BLM. ARTICLE X THE AGENTS 10.01 APPOINTMENT, POWERS AND IMMUNITIES. Each Lender hereby appoints and authorizes each of the Administrative Agent and the Collateral Agent to act as its agent hereunder and under the other Financing Documents to which such Agent is or becomes a party with such powers as are specifically delegated to such Agent by the terms of this-74- Agreement and of such other Financing Documents, together with such other powers as are reasonably incidental thereto. Each Agent (which term as used in this sentence and in Section 10.05 and the first sentence of Section 10.06 shall include reference to its Affiliates and its own and its Affiliates' officers, directors, employees, representatives, attorneys and agents): (a) shall have no duties or responsibilities except those expressly set out in this Agreement and in the other Financing Documents to which such Agent is or becomes a party, and shall not by reason of this Agreement or any such other Financing Document be a trustee for any Lender or subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing; (b) shall not be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement or in any other Financing Document, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Financing Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Financing Document or any other document referred to or provided for herein or therein, or for the validity or sufficiency of the security afforded hereby or thereby, or for any failure by the Borrower or any other Person to perform any of its obligations hereunder or thereunder; (c) shall not, except (in the case of the Collateral Agent) to the extent expressly instructed by the Majority Lenders with respect to collateral security under the Security Documents, be required to initiate or conduct any litigation or collection proceedings hereunder or with respect hereto or under, or with respect to, any other Financing Document; (d) shall not be liable or responsible for any action taken, suffered or omitted to be taken by it hereunder or under, or with respect to, any other Financing Document or under any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own gross negligence or willful misconduct as finally determined by a court of competent jurisdiction; and (e) shall not be required to take any action which is contrary to the Financing Documents or applicable Government Rules. Each Agent may employ agents, experts and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents, experts or attorneys-in-fact selected by it in good faith. The Administrative Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until a notice of the assignment or transfer thereof shall have been filed with the Administrative -75- Agent, together with the consent of the Borrower to such assignment or transfer (to the extent provided in Section 11.06(b)). 10.02 RELIANCE BY AGENTS. Each Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any certification, notice or other written communication (including any thereof by telex, telegram or cable) reasonably believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by such Agent. Each Agent may also rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. As to any matters not expressly provided for by this Agreement or any other Financing Document to which an Agent is intended to be a party, such Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or thereunder in accordance with instructions given by the Majority Lenders or all of the Lenders as is required in such circumstance, and such instructions of such Lenders and any action taken, suffered or omitted or failure to act pursuant thereto shall be binding on all of the Lenders. Without limiting the foregoing, each Agent shall be entitled to advice of counsel and other professionals concerning all matters of trust and its duty hereunder, but no Agent shall be answerable or responsible for the professional malpractice of any attorney-at-law or certified public accountant or for the acts or omissions of any other professional in connection with the rendering of professional advice in accordance with the terms of this Agreement, if such attorney-at-law, certified public accountant or other professional was selected by such Agent with due care. 10.03 DEFAULTS. Each Agent shall be deemed not to have knowledge or notice of the occurrence of a Default (other than, in the case of the Administrative Agent, the non-payment of principal of or interest on Loans or of commitment fees payable to the Administrative Agent and, in the case of each Agent, fees payable to it under Financing Documents) unless such Agent has received notice from a Lender or the Borrower specifying such Default and stating that such notice is a "Notice of Default". In the event that any Agent receives such a notice of the occurrence of a Default, such Agent shall give prompt notice thereof to the Lenders (and, in the case of the Administrative Agent, shall give each Lender prompt notice of each such non-payment) and the other Agent. Each Agent shall (subject to Section 10.07) take such action with respect to such Default as shall be directed by the Majority Lenders or, if provided herein, all of the Lenders, as applicable; provided that, unless and until such Agent shall have received such directions, such Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the Lenders except to the extent that this Agreement expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of the Majority Lenders or all of the Lenders, as applicable. shall be required to-76- 10.04 RIGHTS AS A LENDER. With respect to its Commitments and the Loans made by it, United (and any successor acting as Administrative Agent or Collateral Agent) in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Administrative Agent or the Collateral Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include United in its individual capacity. United (and any successor acting as Administrative Agent or Collateral Agent, as applicable) and its Affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with the Borrower (and any of its Affiliates) as if it were not acting as the Administrative Agent or the Collateral Agent, as applicable, and United (and any successor acting as Administrative Agent or Collateral Agent, as applicable) and its Affiliates may accept fees and other consideration from the Borrower (and any of its Affiliates) for services in connection with this Agreement or otherwise without having to account for the same to the Lenders. 10.05 INDEMNIFICATION. The Lenders agree to indemnify each Agent (to the extent not reimbursed under Section 11.03, but without limiting the obligations of the Borrower under Section 11.03) ratably in accordance with the aggregate principal amount of the Loans held by the Lenders (or, if no Loans are at the time outstanding, ratably in accordance with their respective Commitments), for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, fines, claims, demands, settlements, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against such Agent (including by any Lender) arising out of or by reason of any investigation or in any way relating to or arising out of this Agreement or any other Transaction Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (including the costs and expenses which the Borrower is obligated to pay under Section 11.03, but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents; provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct (as finally determined by a court of competent jurisdiction) of the party to be indemnified. The obligations of the Lenders under this Section 10.05 shall survive the termination of this Agreement, the repayment of the Loans or the earlier resignation or removal of either Agent. 10.06 NON-RELIANCE ON AGENTS AND OTHER LENDERS. Each Lender agrees that it has, independently and without reliance on either Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrower and its Affiliates and its own decision to enter into this Agreement and that it will, independently and without reliance upon either Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any other Transaction Document. No Agent -77- keep itself informed as to the performance or observance by the Borrower or any other Person of this Agreement or any other Transaction Document or any other document referred to or provided for herein or therein or to inspect the Properties or books of the Borrower or such other Person. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by an Agent hereunder or under the Financing Documents, such Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Borrower (or any Affiliate thereof) which may come into the possession of such Agent or any of its Affiliates. 10.07 FAILURE TO ACT. Except for action expressly required of an Agent hereunder and under the other Financing Documents to which such Agent is or becomes a party, such Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction from the Lenders of their indemnification obligations under Section 10.05 against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. No provision of this Agreement shall require the Collateral Agent to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Each Agent shall be entitled to interest (calculated on a per annum basis) on all amounts advanced by it hereunder in its discretion at the Federal Funds Rate. Each Agent shall at any time be entitled to cease taking any action if it no longer deems any indemnity or undertaking from the Lenders to be sufficient. 10.08 RESIGNATION OR REMOVAL OF AGENTS. Subject to the appointment and acceptance of a successor Agent as provided below, an Agent may resign at any time by giving notice thereof to the Lenders and the Borrower, and an Agent may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint, with the consent of the Borrower (unless a Default or Event of Default has occurred and is continuing), such consent not to be unreasonably withheld or delayed, a successor Agent. If no successor Agent shall have been so appointed by the Majority Lenders and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Agent, then the retiring Agent, at its discretion, may, on behalf of the Lenders, appoint a successor Agent, which shall be a bank which has an office in New York, New York with capital, surplus and undivided profits of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article X and Section 11.03 shall continue in effect for its benefit in respect of any actions taken,-78- suffered or omitted to be taken by it while it was acting as such Agent. Each Agent agrees not to resign solely as a result of the occurrence and continuance of a Default or an Event of Default. 10.09 CONSENTS. Except as otherwise provided in Section 11.04, each Agent may, with the prior written consent of the Majority Lenders (but not otherwise), consent to any modification, supplement or waiver under any Transaction Document; provided that, without the prior written consent of each Lender, the Collateral Agent shall not (except as provided herein or in the Security Documents) release any Collateral or otherwise terminate any Lien under any Security Document, or agree to additional obligations being secured by the Collateral (unless the Lien for such additional obligations shall be junior to the Lien in favor of the other obligations secured by such Security Document and is otherwise permitted hereunder) or alter the relative priorities of the obligations entitled to the benefits of the Liens created under the Security Documents with respect to any of the Collateral, except that no such consent shall be required, and the Collateral Agent is hereby authorized, to release any Lien covering the Borrower's Property that is the subject of a disposition of Property permitted under this Agreement or under the relevant Security Document or to which the Lenders have consented. 10.10 COLLATERAL AGENT. The Collateral Agent shall: (a) forward promptly after receipt thereof (and use its best efforts to forward within five Business Days of such receipt): (i) to each Secured Party a copy of each document furnished to such Agent for such Secured Party under this Agreement, and any other Financing Documents to which such Agent is a party; and (ii) to the Administrative Agent any notice delivered to the Collateral Agent pursuant to any Consent and Agreement; (b) have the right, but not the obligation, to: (i) refuse any item for credit to any Account except as required by the terms of the Financing Documents; (ii) refuse to honor any request for transfer in relation to any Account that is not consistent with the Financing Documents; (iii) charge to any Account all applicable charges; and (iv) pay fees, interest and other charges owing by the Borrower as provided herein and in the other Transaction Documents; (c) except as otherwise provided herein and in the Depositary Agreement (including by the provision of standing instructions therein), and subject to the provisions of Section 10.07, take all actions and make all determinations with respect to the Collateral and the Security Documents, including as to the advisability of taking additional steps to perfect, or cause the perfection of, any security interest, as directed in writing by the Administrative Agent; and (d) have the right at any time to seek clarification and instructions concerning the administration of the Financing Documents from the Administrative Agent, legal-79- counsel or any court of competent jurisdiction and shall be fully protected in relying upon such instructions. ARTICLE XI MISCELLANEOUS 11.01 WAIVER. No failure on the part of either Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement, any Note or any other Financing Document shall operate as a waiver thereof, and no single or partial exercise of any right, power or privilege under this Agreement, any Note or any other Financing Document shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 11.02 NOTICES. All notices, requests and other communications provided for herein and under the Financing Documents (including any modifications of, or waivers or consents under, this Agreement) shall be given or made in writing (including by telecopy) delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopier with confirmation of receipt received or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid; provided, however, that if such transmission or delivery does not occur by 4:00 p.m. recipient's time, then such transmission or delivery shall be deemed to occur on the next Business Day. 11.03 EXPENSES; ETC. (a) Expenses. The Borrower shall pay or reimburse each of the Lenders and each Agent for paying: (i) all reasonable out-of-pocket costs and expenses of the Agents (including the reasonable fees and expenses of: (A) Bingham McCutchen LLP, special counsel to the Lenders; (B) the Independent Engineer; (C) the Insurance Advisor; (D) such other counsel or experts engaged by the Administrative Agent at the request of the Majority Lenders (and, except during the occurrence and continuation of a Default, with the consent of the Borrower, such consent not to be unreasonably withheld or delayed) from time to time; and (E) counsel engaged by the Collateral Agent from time to time with (except during the occurrence and continuation of a Default) the consent of the Borrower, such-80- consent not to be unreasonably withheld or delayed), in each case in connection with: (I) the negotiation, preparation, execution and delivery of this Agreement and the other Transaction Documents and the extension of credit hereunder; or (II) any amendment, modification or waiver of any of the terms of this Agreement or any other Transaction Document; (ii) all reasonable costs and expenses of the Lenders and each Agent (including reasonable counsels' fees and expenses and reasonable experts' fees and expenses) in connection with: (A) any Default and any enforcement or collection proceedings resulting therefrom or in connection with the negotiation of any restructuring or "work-out" (whether or not consummated) of the obligations of the Borrower under this Agreement or the obligations of any Project Party under any other Transaction Document; and (B) the enforcement of this Section 11.03; (iii) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any Government Authority in respect of this Agreement or any other Transaction Document or any other document referred to herein or therein and all costs, expenses, taxes, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any Lien contemplated by this Agreement or any other Financing Document or any other document referred to herein or therein; and (iv) all costs, expenses and other charges in respect of title insurance procured with respect to the Liens created pursuant to the Deed of Trust. In relation to payments referred to under clause (iii) above, within 30 days after paying such amount, the Borrower shall deliver to the Administrative Agent, evidence reasonably satisfactory to the Administrative Agent of such payment. (b) Indemnity. The Borrower shall indemnify each Agent, each Lender, their respective Affiliates and their respective shareholders, officers, directors, employees, representatives, attorneys and agents (each, an "INDEMNITEE") from, and shall hold each of them harmless against, any and all losses, liabilities, claims, damages, expenses, obligations, penalties, fines, demands, settlements, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever (including the reasonable fees and expenses of counsel and consultants for each Indemnitee in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnitee shall be designated a party thereto, but excluding any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or -81- disbursements incurred solely by reason of the gross negligence or willful misconduct of such Indemnitee) that may at any time (including at any time following the Termination Date) be imposed on, asserted against or incurred by any Indemnitee as a result of, or arising out of, or in any way related to or by reason of: (i) any of the transactions contemplated hereby or by any other Transaction Document or the execution, delivery or performance of this Agreement or any other Transaction Document; (ii) the extensions of credit hereunder or the actual or proposed use by the Borrower of any of the extensions of credit hereunder or the grant to the Collateral Agent for the benefit of, or to any of, the Secured Parties of any Lien on the Collateral or on any other Property of the Borrower, the Sponsor or any ownership interest in the Borrower; (iii) the exercise by the Collateral Agent or the other Secured Parties of their rights and remedies (including foreclosure) under any agreements creating any such Lien; and (iv) any Environmental Law (including any Lien filed against any Project by or in favor of any Government Authority) as a result of the past, present or future operations of the Borrower, the Sponsor (as it relates to the Projects) or the Operator (or any predecessor in interest to any such person), or the past, present or future condition of any site or facility owned, operated or leased at any time by the Borrower, the Sponsor or the Operator (or any such predecessor in interest to any such person), or any Release or Use or threatened Release of any Hazardous Materials at any such site or facility, that is not otherwise in accordance with applicable Environmental Law, including any such Release or Use or threatened Release which shall occur during any period when such Indemnitee shall be in possession of any such site or facility following the exercise by either Agent or any other Secured Party of any of its rights and remedies hereunder or under any Financing Document or any other Transaction Document. (c) Records. Each relevant Financing Party shall maintain in accordance with its usual practice records evidencing the amounts payable by the Borrower under this Section 11.03; provided that the failure of any Financing Party to maintain such records shall not in any manner affect the obligation of the Borrower to make such payments. -82- 11.04 AMENDMENTS; ETC. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be amended or modified only by an instrument in writing signed by each of the Borrower, the Administrative Agent, the Collateral Agent and the Majority Lenders, or by each of the Borrower and the Collateral Agent and the Administrative Agent acting with the consent of the Majority Lenders, and any provision of this Agreement may be waived by the Majority Lenders or by the Administrative Agent acting with the consent of the Majority Lenders; provided that: (a) no amendment, modification or waiver shall, unless by an instrument signed by all of the Lenders or by the Administrative Agent acting with the consent of all of the Lenders: (i) increase or extend the term, or extend the time or waive any requirement for the reduction or termination, of the Commitments; (ii) extend the date fixed for the payment of principal of or interest on any Loan or any fee hereunder; (iii) reduce the amount of any such payment of principal; (iv) reduce the rate at which interest is payable thereon or any fee is payable hereunder; (v) alter the rights or obligations of the Borrower to prepay Loans; (vi) alter the manner in which payments or prepayments of principal, interest or other amounts hereunder shall be applied among the Lenders or Types or Classes of Loans; (vii) alter the terms of this Section 11.04; (viii) amend the definition of the term "Majority Lenders" or modify in any other manner the number or percentage of the Lenders required to make any determinations or waive any rights hereunder or to modify any provision hereof; (ix) waive any of the conditions precedent set out in Section 6.01; or (x) release all or any material portion of the Collateral; and (b) any amendment, modification, waiver or supplement of the rights or duties of either Agent hereunder shall require the consent of such Agent. Anything in this Agreement to the contrary notwithstanding, if at any time when the conditions precedent set out in Article VI to any extension of credit hereunder are, in the opinion of the Majority Lenders, satisfied, any Lender shall fail to fulfill its obligations to make such extension of credit, then, for so long as such failure shall continue, such Lender shall (unless the Majority Lenders, determined as if such Lender were not a "Lender" hereunder, shall otherwise consent in writing) be deemed for all purposes relating to amendments, modifications, waivers or consents under this Agreement or any other Financing Document (including under this Section 11.04 and under Section 10.09) to have no Loans or Commitments, shall not be treated as a "Lender" hereunder when performing the computation of Majority Lenders, and shall have no rights under the preceding paragraph of this Section 11.04. Anything in this Agreement to the contrary notwithstanding, no waiver or modification of any provision of this Agreement that has the effect (either immediately or at some later time) of enabling the Borrower to satisfy a condition precedent to the making of a Loan of any Class shall be effective against the Lenders making Loans of such Class for purposes of the Commitments of such Class unless the Majority Lenders making Loans of such Class shall have concurred with such waiver or modification, and no waiver or-83- modification of any provision of this Agreement or any other Financing Document that could reasonably be expected to adversely affect the Lenders making Loans of any Class in a manner that does not affect all Classes equally shall be effective against the Lenders making Loans of such Class unless the Majority Lenders making Loans of such Class shall have concurred with such waiver or modification. 11.05 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.06 ASSIGNMENTS AND PARTICIPATIONS. (a) Borrower. The Borrower may not assign its rights or obligations hereunder or under the Notes without the prior consent of all of the Lenders and the Administrative Agent. (b) Lenders. Subject to the terms of clause (g) below, each Lender may assign any of its Loans, its Notes and its Commitments (but only with the consent of, in the case of an outstanding Commitment, the Administrative Agent, not to be unreasonably withheld) to an Eligible Assignee; provided that: (i) no such consent by the Administrative Agent shall be required in the case of any assignment to another Lender or an Affiliate (or Approved Fund) of a Lender; (ii) except in the case of an assignment to a Lender or an Affiliate (or Approved Fund) of a Lender or an assignment of the entire remaining amount of the assigning Lender's Commitments, any such partial assignment shall be in an amount at least equal to $5,000,000; and (iii) each assignment by a Lender of its Commitment, Loans or Note of a particular Class shall be made in such a manner so that the same portion of its Commitment, Loans and Note of such Class is assigned to the respective assignee. Upon execution and delivery by the assignee to the Borrower and the Administrative Agent of an instrument in writing pursuant to which such assignee agrees to become a "Lender" hereunder (if not already a Lender) having the Commitments and Loans specified in such instrument, and upon consent thereto by the Administrative Agent, to the extent required above, the assignee shall have, to the extent of such assignment (unless otherwise provided in such assignment with the consent of the Administrative Agent, to the extent required above), the obligations, rights and benefits of a Lender hereunder holding the Commitments and Loans (or portions thereof) assigned to it (in addition to the Commitments and Loans, if any, theretofore held by such assignee) and the assigning Lender shall, to the extent of such assignment, be released from the Commitments (or portion thereof) so assigned. Upon each such assignment (other than such an assignment by United), the assigning Lender shall pay the Administrative Agent an assignment fee of $3,000.-84- In furtherance of the foregoing, on the date of any such assignment pursuant to this Section 11.06(b), the Borrower shall deliver to the assigning Lender and the assignee Lender, in exchange for the Notes theretofore delivered by the Borrower to the assigning Lender, appropriately completed Notes, dated the effective date of such assignment, payable to such assigning Lender and to such assignee, in an aggregate amount equal to their respective Commitments after giving effect to such assignment, and otherwise duly completed. [Intentionally omitted.] (c) Participants. A Lender may sell or agree to sell to one or more other Persons a participation in all or any part of any Loan held by it, or in its Commitments (provided that partial participations shall be in an amount at least equal to $5,000,000 or the entire remaining amount of the assigning Lender's Loans and Commitments, whichever is the lesser). Each purchaser of a participation (a "PARTICIPANT") shall be entitled to the rights and benefits of the provisions of Section 8.01(m) with respect to its participation in such Loans and Commitments as if (and the Borrower shall be directly obligated to such Participant under such provision as if) such Participant were a "Lender" for purposes of said Section, but, except as otherwise provided in Section 4.07(c), shall not have any other rights or benefits under this Agreement or any Note or any other Financing Document (the Participant's rights against such Lender in respect of such participation to be those set out in the agreements executed by such Lender in favor of the Participant). All amounts payable by the Borrower to any Lender under Article V in respect of Loans and its Commitments, shall be determined as if such Lender had not sold or agreed to sell any participations in such Loans and Commitments, and as if such Lender were funding each of such Loans and Commitments in the same way that it is funding the portion of such Loans and Commitments in which no participations have been sold. In no event shall a Lender that sells a participation agree with the Participant to take or refrain from taking any action hereunder or under any other Financing Document, except that such Lender may agree with the Participant that it will not, without the consent of the Participant, agree to: (i) increase or extend the term, or extend the time or waive any requirement for the reduction or termination, of such Lender's Commitment; (ii) extend the date fixed for the payment of principal of or interest on the related Loans or any portion of any fee hereunder payable to the Participant; (iii) reduce the amount of any such payment of principal; (iv) reduce the rate at which interest is payable thereon, or any fee hereunder payable to the Participant, to a level below the rate at which the Participant is entitled to receive such interest or fee; (v) alter the rights or obligations of the Borrower to prepay the related Loans; or (vi) consent to any modification or waiver hereof or of any Financing Document to the extent that the same, under Section 10.09 or 11.04, requires the consent of each Lender. -85- Notwithstanding anything else provided herein, no Person purchasing a participation in accordance with the terms hereof shall be considered a "Lender" for any purposes of the Financing Documents by reason of the purchase of such participation. (d) Assignment to Federal Reserve Bank. Anything in this Section 11.06 to the contrary notwithstanding, any Lender may (without notice to the Borrower, either Agent or any other Lender, and without payment of any fee) assign and pledge all or any portion of its Loans and its Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Lender from its obligations hereunder. (e) Information. A Lender may furnish any information concerning the Borrower in the possession of such Lender from time to time to assignees and participants (including prospective assignees and participants), subject, however, to the provisions of Section 11.08. (f) Assignment to Borrower. Anything in this Section 11.06 to the contrary notwithstanding, no Lender may assign or participate any interest in any Loan held by it hereunder to the Borrower or any of its Affiliates without the prior consent of each Lender. (g) United. Notwithstanding anything to the contrary in this Section 11.06, United shall not assign any interest in any Commitment or Loan such that at any time it shall cease to own less than 50.1% of the aggregate principal amount of the Loans from time to time outstanding. 11.07 MARSHALLING; RECAPTURE. None of the Administrative Agent, the Collateral Agent, or any Lender shall be under any obligation to marshal any assets in favor of the Borrower or any other party or against or in payment of any or all of the Secured Obligations. To the extent either Agent or any Lender receives any payment by or on behalf of the Borrower, which payment or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to the Borrower or its estate, trustee, receiver, custodian or any other party under any bankruptcy or insolvency law, state or Federal law, common law or equitable cause, then to the extent of such payment or repayment, the obligation or part thereof that has been paid, reduced or satisfied by the amount so repaid shall be reinstated by the amount so repaid and shall be included within the liabilities of the Borrower to such Agent or such Lender as of the date such initial payment, reduction or satisfaction occurred. 11.08 CONFIDENTIALITY. Each Lender and each Agent agrees (on behalf of itself and each of its Affiliates, directors, officers, employees and representatives) to keep confidential, any non-public information supplied to it by the Borrower pursuant to this Agreement that is-86- identified by the Borrower as being confidential at the time the same is delivered to such Lender or such Agent; provided that nothing herein shall limit the disclosure of any such information: (i) to the extent required by any Government Rule or judicial process; provided that, unless prohibited by applicable Government Rules or not reasonably practicable: (A) notice shall be given to the Borrower of such request; and (B) such Lender or such Agent, as applicable, shall reasonably cooperate with the Borrower to the extent the Borrower may seek to challenge such requirement, so long as the Borrower pays all costs of such challenge and the disclosing party determines that such challenge would not adversely affect it; (ii) to counsel for any of the Lenders or either Agent; (iii) to banking, securities exchange or other regulatory or supervisory authorities, auditors or accountants; (iv) to either Agent or any other Lender; (v) in connection with the exercise of any remedies hereunder or under any of the Financing Documents or any suit, action or proceeding relating to this Agreement or any other Financing Document or the enforcement of rights hereunder or thereunder; (vi) to the Independent Engineer, the Insurance Advisor or to other experts engaged by either Agent or any Lender in connection with this Agreement and the transactions contemplated hereby; (vii) to the extent that such information is required to be disclosed to a Government Authority in connection with a tax audit or dispute; (viii) in connection with any Default and any enforcement or collection proceedings resulting therefrom or in connection with the negotiation of any restructuring or "work-out" (whether or not consummated) of the obligations of the Borrower under this Agreement or the obligations of the Borrower, the Sponsor, the Operator or other Project Party under any other Transaction Document; or (ix) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to the respective Lender and the Borrower a confidentiality agreement pursuant to which it agrees to comply with the requirements of this Section 11.08. Notwithstanding the foregoing provisions of this Section 11.08(b), the foregoing obligation of confidentiality shall not apply to any such information that: (A) was known to any Lender or either Agent prior to the time it received such confidential information from the Borrower or its Affiliates pursuant to the Transaction Documents; or (B) becomes part of the public domain independently of any act of any Lender or either Agent not permitted hereunder (through publication or otherwise); or (C) is received by any Lender or either Agent, as applicable, without restriction as to its disclosure or use, from a Person other than the Borrower or its Affiliates; provided that such Lender or such Agent, as applicable has no actual knowledge that such source is disclosing such information to such Lender or such Agent, as applicable, in violation of a confidentiality agreement with respect to such information. 11.09 NON-RECOURSE. No recourse shall be had for the payment of any obligations under any Loan or upon any other obligation, covenant or agreement under this Agreement or any other Financing Document, against the Sponsor or any Affiliate thereof, any incorporator, direct or indirect stockholder, member, partner, officer, director, as such, whether past, present or future of the Sponsor or the Borrower or any Affiliate thereof or of any successor corporation thereto (either directly or through the Sponsor or the Borrower or a-87- successor corporation) (each hereinafter, a "NON-RECOURSE PERSON"), whether by virtue of any constitutional provision, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise. It is expressly agreed and understood that: (a) this Agreement and each other Financing Document are solely limited liability company obligations of the Borrower, and that no personal liability whatsoever shall attach to, or be incurred by, any Non-Recourse Person, either directly or indirectly through the Borrower or any successor Person, because of the indebtedness thereby authorized or under or by reason of any of the obligations, covenants or agreements contained in this Agreement or any of the Financing Documents or to be implied herefrom or therefrom; and (b) any claim of or relating to such personal liability is hereby expressly waived and released as a condition of, and as part of the consideration for, the execution of this Agreement and each other Financing Document. Notwithstanding the foregoing, nothing in this Section 11.09 shall impair or in any way limit any liabilities or obligations of: (i) the Sponsor under or pursuant to its obligations as set forth in the Borrower Equity Interest Pledge; or (ii) any Non-Recourse Party for fraud or willful misconduct. 11.10 SURVIVAL. The obligations of the Borrower under Sections 5.01, 5.05, 5.06 and 11.03, the obligations of the Lenders under Section 10.05 and the obligations of the Borrower and the Lenders under the penultimate sentence of Section 10.08 and under Section 11.08 shall survive after the Termination Date. In addition, each representation and warranty made, or deemed to be made by a notice of any Disbursement, herein or pursuant hereto shall survive the making of such representation and warranty, and no Lender shall be deemed to have waived, by reason of making any Disbursement hereunder, any Default that may arise by reason of such representation or warranty proving to have been false or misleading, notwithstanding that such Lender or either Agent may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading at the time such Disbursement was made. 11.11 COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any party hereto may execute this Agreement by signing any such counterpart. This Agreement and the other Financing Documents constitute the entire agreement and understanding among the parties hereto with respect to matters covered by this Agreement and the other Financing Documents and supersede any and all prior agreements and understandings, written or oral, relating to the subject matter hereof. This Agreement shall become effective at such time as the Administrative Agent shall have received counterparts hereof signed by all of the intended parties hereto. 11.12 NO THIRD PARTY BENEFICIARIES IN RELATION TO DISBURSEMENTS. THE AGREEMENT OF THE LENDERS TO MAKE THE LOANS TO THE-88- BORROWER, ON THE TERMS AND CONDITIONS SET OUT IN THIS AGREEMENT, ARE SOLELY FOR THE BENEFIT OF THE BORROWER, AND NO OTHER PERSON (INCLUDING ANY AFFILIATE OF THE BORROWER, OR ANY PROJECT PARTY, CONTRACTOR, SUBCONTRACTOR, SUPPLIER, WORKMAN, CARRIER, WAREHOUSEMAN OR MATERIALMAN FURNISHING LABOR, SUPPLIES, GOODS OR SERVICES TO OR FOR THE BENEFIT OF ANY PROJECT) SHALL HAVE ANY RIGHTS HEREUNDER OR UNDER ANY OTHER FINANCING DOCUMENT AS AGAINST EITHER AGENT OR ANY LENDER OR WITH RESPECT TO ANY EXTENSION OF CREDIT CONTEMPLATED HEREBY. 11.13 GOVERNING LAW; SUBMISSION TO JURISDICTION, ETC. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. EACH PARTY HERETO HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK COUNTY (INCLUDING ANY APPELLATE DIVISION THEREOF), AND OF ANY OTHER APPELLATE COURT IN THE STATE OF NEW YORK, FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (OTHER THAN ENFORCEMENT OF THE DEED OF TRUST). EACH PARTY HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 11.14 WAIVER OF JURY TRIAL. EACH OF THE BORROWER, EACH AGENT AND EACH OF THE LENDERS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 11.15 SPECIAL EXCULPATION. NO CLAIM MAY BE MADE BY THE BORROWER, ANY OF ITS AFFILIATES, ANY PARTY TO THIS AGREEMENT OR THE AFFILIATES, SHAREHOLDERS, DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS OR AGENTS OF ANY OF THEM AGAINST EITHER AGENT OR ANY LENDER OR THE AFFILIATES, SHAREHOLDERS, DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS OR AGENTS OF ANY OF THEM FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR PUNITIVE LOSS OR DAMAGES IN RESPECT OF ANY CLAIM FOR BREACH OF CONTRACT OR ANY OTHER THEORY OF LIABILITY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, OR ANY ACT,-89- OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, AND THE BORROWER HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM FOR ANY SUCH DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO EXIST IN ITS FAVOR. 11.16 SERVICE OF PROCESS. Each party hereto hereby irrevocably consents to the service of process in any suit, action or proceeding in such courts by the mailing thereof by any of the other parties hereto by registered or certified mail, postage prepaid, to the "Address for Notices" specified below its name on the signature pages hereof. 11.17 SERVICE OF PROCESS. Nothing herein shall in any way be deemed to limit the ability of any party hereto to serve any writs, process or summonses in any other manner permitted by applicable law or to obtain jurisdiction over any other party hereto in such jurisdiction, and in such manner, as may be permitted by applicable law. 11.18 SEVERABILITY. Any provision of this Agreement or the other Financing Documents that is prohibited or unenforceable in any particular jurisdiction shall, as to that jurisdiction, be ineffective to the extent of that prohibition or unenforceability without invalidating the remaining provisions of this Agreement or the other Financing Documents, and any such prohibition or unenforceability in any particular jurisdiction shall not invalidate or render unenforceable that provision in any other jurisdiction. [SIGNATURE PAGES FOLLOW]IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. BORROWER -------- ORMESA LLC By: ORMAT FUNDING CORP., its Sole Member and Controlling Manager By: /s/ Connie Stechman ------------------------------------------ Name: Connie Stechman Title: Director, Chief Financial Officer and Assistant Secretary Address for Notices: Ormesa LLC 980 Greg Street Sparks, Nevada 89431 Telephone No.: (775) 356-9029 Facsimile No.: (775) 356-9039 Attention: President Schedule I to the Credit Agreement I-2 LENDERS ------- UNITED CAPITAL, a division of Hudson United Bank By: /s/ Jerome P. Peters, Jr. ----------------------------------------- Name: Jerome P. Peters, Jr. Title: Senior Vice President Address for Notices: United Capital, a division of Hudson United Bank 87 Post Road East Westport, Connecticut 06880 Telephone No.: (203) 291-6600 Facsimile No.: (203) 291-6652 Attention: Mr. Jerome P. Peters, Jr. Schedule I to the Credit Agreement I-3 ADMINISTRATIVE AGENT -------------------- UNITED CAPITAL, a division of Hudson United Bank, not in its individual capacity but solely as Administrative Agent By: /s/ Jerome P. Peters, Jr. ----------------------------------------- Name: Jerome P. Peters, Jr. Title: Senior Vice President Address for Notices: United Capital, a division of Hudson United Bank 87 Post Road East Westport, Connecticut 06880 Telephone No.: (203) 291-6600 Facsimile No.: (203) 291-6632 Attention: Mr. Jerome P. Peters, Jr. Schedule I to the Credit Agreement I-4 COLLATERAL AGENT ---------------- UNITED CAPITAL, a division of Hudson United Bank, not in its individual capacity but solely as Collateral Agent By: /s/ Jerome P. Peters, Jr. ----------------------------------------- Name: Jerome P. Peters, Jr. Title: Senior Vice President Address for Notices: United Capital, a division of Hudson United Bank 87 Post Road East Westport, Connecticut 06880 Telephone No.: (203) 291-6600 Facsimile No.: (203) 291-6632 Attention: Mr. Jerome P. Peters, Jr. Schedule I to the Credit Agreement SCHEDULE I DEFINITIONS "ACCEPTABLE INSURANCE BROKER" shall mean a nationally or internationally recognized, independent insurance broker satisfactory to the Administrative Agent. "ACCOUNTING PRINCIPLES" shall mean, with respect to any Person at any date, the generally accepted accounting principles and standards then in effect in such Person's jurisdiction of incorporation or formation, in all cases, consistently applied. "ACCOUNTS" shall have the meaning assigned to such term in the Depositary Agreement. "ACQUISITION DOCUMENTS" shall mean those documents delivered to the Collateral Agent by the Borrower on four cd-roms labeled (i) "Acquisition of Ormesa I and GEM Geothermal Power Facilities by Ormat", (ii) "Acquisition of Ormesa Geothermal II Power Facilities by Ormat", (iii) "Acquisition of Ormesa II Geothermal Project by Ormat" and (iv) "Acquisition of Ormesa Geothermal Trust by Ormat", including the Sale and Purchase Agreements and all other documents contained therein. "ADDITIONAL COSTS" shall have the meaning assigned to such term in Section 5.01(a). "ADDITIONAL PROJECT DOCUMENT" shall mean any contract or agreement relating to any Project (other than Non-Material Project Contracts) entered into by the Borrower subsequent to the Closing Date. "ADDITIONAL RESTORATION FUNDS" shall have the meaning assigned to such term in Section 8.05(d)(ii)(C). "ADDITIONAL TERM LOAN AVAILABILITY PERIOD" shall mean the period from and including the Closing Date through (and including) December 31, 2003. "ADDITIONAL TERM LOAN COMMITMENT" shall mean for each Lender, the obligation of such Lender to make an Additional Term Loan in an aggregate principal amount at any one time outstanding equal to the amount set out opposite such Lender's name in Schedule III under the heading "Additional Term Loan Commitment" (as the same may be adjusted from time to time pursuant to Section 2.03 or as a consequence of an assignment in accordance with Section 11.06(b)). The initial aggregate amount of the Additional Term Loan Commitments available to the Borrower at any time shall not exceed $7,500,000. "ADDITIONAL TERM LOAN FACILITY" shall mean the credit facility to be provided pursuant to Section 2.0l(b). "ADDITIONAL TERM LOAN NOTE" shall have the meaning assigned to such term in Section 2.07(b). "ADDITIONAL TERM LOANS" shall have the meaning assigned to such term in Section 2.0l(b). Schedule I to the Credit Agreement I-2 "ADMINISTRATIVE AGENT" shall have the meaning assigned to such term in the opening paragraph of this Agreement. "ADVANCE DATE" shall have the meaning assigned to such term in Section 4.06. "AFFECTED LOANS" shall have the meaning assigned to such term in Section 5.04. "AFFECTED PROPERTY" shall mean, with respect to any Event of Loss, any Project Property lost, destroyed, damaged, condemned (including through a Condemnation) or otherwise taken as a result of such Event of Loss. "AFFILIATE" shall mean, as to any Person, any other Person that directly or indirectly controls, or is under common control with, or is controlled by, such first Person. As used in this definition, "CONTROL" (including, with its correlative meanings, "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), provided that, in any event, any Person that owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or 10% or more of the partnership, limited liability company or other ownership interests of any other Person will be deemed to control such corporation or other Person. The term "AFFILIATED" shall have a correlative meaning. "AGENT" shall mean either of the Administrative Agent or the Collateral Agent. "AGREEMENT" shall have the meaning assigned to such term in the opening paragraph of this Agreement. "ANCILLARY DOCUMENTS" shall mean, with respect to each Additional Project Document entered into by the Borrower subsequent to the Closing Date: (a) each security agreement or instrument (which may consist of an amendment to a Security Document), together with all recorded financing statements and other filings, necessary or desirable to grant to the Collateral Agent for the benefit of the Secured Parties a first priority perfected Lien in such Additional Project Document and all property interests received by the Borrower in connection therewith; (b) a Consent and Agreement from each party (other than the Borrower) to such Additional Project Document; (c) evidence of the authorization of the Borrower and the other parties to such Additional Project Document to execute, deliver and perform such Additional Project Document; (d) evidence that all Government Approvals necessary for the execution, delivery and performance of such Additional Project Document have been duly obtained, were validly issued, are in full force and effect and are not subject to appeal; and (e) such other certificates, documents and information with respect to such Additional Project Document as either Agent or any Lender may reasonably request, all in form and substance reasonably satisfactory to the Administrative Agent. "ANNUAL OPERATING PLAN AND BUDGET" shall have the meaning assigned to such term in Section 8.23(a). Schedule I to the Credit Agreement I-3 "APPLICABLE LENDING OFFICE" shall mean, for each Lender party hereto on the Closing Date and for each Type of Loan, the "Lending Office" of such Lender (or of an Affiliate of such Lender) designated for such Type of Loan in Schedule II and for each Lender which may become a party hereto after the Closing Date, the "Lending Office" of such Lender (or of an affiliate of such Lender) designated for such Type of Loan in the instrument referred to in Section 11.06(b); provided that any Lender may from time to time change its "Applicable Lending Office" for any Type of Loan by delivering notice of such change to the Agents and the Borrower; and provided, further, that the Borrower shall not be responsible for any costs or expenses in connection with any change of an Applicable Lending Office that was not consented to in writing by the Borrower in its discretion. "APPLICABLE MARGIN" shall mean, with respect to any Loan that is a Eurodollar Loan, a rate per annum equal to 5.00%; and with respect to any Loan that is a Prime Rate Loan, a rate per annum equal to 2.15%. "APPLICABLE TAXES" shall have the meaning assigned to such term in Section 5.06(a). "APPROVED FUND" shall mean, with respect to any Lender that is a fund that invests in commercial loans, any other fund that invests in commercial loans and is managed or advised by the same investment advisor as such Lender or by an Affiliate of such investment advisor. "AUTHORIZED OFFICER" shall mean, (a) with respect to any Person that is a corporation, the President, Vice President, Treasurer, Controller, Assistant Treasurer, Secretary or Assistant Secretary of such Person; (b) with respect to any Person that is a partnership, the President, Vice President, Treasurer, Controller, Assistant Treasurer, Secretary or Assistant Secretary of the managing general partner of such Person; and (c) with respect to any Person that is a limited liability company, the President, Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary of such Person or of the managing member of such Person. "BANKRUPTCY CODE" shall mean Title II of the United States Code entitled "Bankruptcy" or any successor statute, and all rules promulgated thereunder. "BASLE ACCORD" shall mean the proposals for a risk-based capital framework described by the Basle Committee on Banking Regulation and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988. "BLM" shall mean the United States Department of the Interior, Bureau of Land Management. "BLM LEASES" shall mean the following leases between BLM and the Borrower: CACA 964, CACA 966, CACA 1903, CACA 6217, CACA 6218, CACA 17568, CACA 25081, and CACA 6219. "BORROWER" shall have the meaning assigned to such term in the opening paragraph of this Agreement. Schedule I to the Credit Agreement I-4 "BORROWER EQUITY INTEREST PLEDGE" shall mean the Pledge Agreement executed by the Sponsor in favor of the Collateral Agent for the benefit of the Secured Parties, substantially in the form of Exhibit B-2. "BORROWER SECURITY AGREEMENT" shall mean the Borrower Security Agreement executed by the Borrower in favor of the Collateral Agent for the benefit of the Secured Parties, substantially in the form of Exhibit B-l. "BUSINESS DAY" shall mean any day on which commercial banks are not authorized or required to close in New York City and, if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, a Conversion of or into, a Continuation of, or an Interest Period for, a Eurodollar Loan or a notice by the Borrower with respect to any such borrowing, payment, prepayment, Conversion or Interest Period, which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "CAPITAL LEASE OBLIGATIONS" shall mean, for any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) Property of such Person to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under the relevant Accounting Principles with respect to such Person (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board) and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with the relevant Accounting Principles with respect to such Person (including such Statement No. 13). "CHARTER DOCUMENTS" shall mean, with respect to any Person, the articles of incorporation, bylaws, limited liability company agreements, partnership agreements or such other documents or instruments that are required to be registered or lodged in the place of incorporation, formation or organization of such Person and which establish the legal existence of such Person. "CLASS" shall have the meaning assigned to such term in Section 1.02. "CLOSING DATE" shall mean the date on which: (a) all of the conditions set out in Section 6.01 shall have been satisfied or waived by the Lenders; and (b) the initial extension of credit hereunder shall occur. "CLOSING PRO FORMA" shall mean pro forma cash flow projections for the Borrower certified by an Authorized Officer of the Borrower, together with a detailed statement of the assumptions underlying such projections, in form, scope and substance satisfactory to the Independent Engineer and demonstrating, without consideration of the Upgrade Project or any borrowing of the Additional Term Loan Facility, that the Borrower's Debt Service Coverage Ratio for each year during such period is not less than 1.50:1. "CODE" shall mean the Internal Revenue Code of 1986, any successor statute, and all rules and regulations promulgated thereunder. Schedule I to the Credit Agreement I-5 "COLLATERAL" shall mean, collectively, the "Collateral" as defined in each Security Document and all other collateral of whatsoever nature purported to be subject to the Lien of any Security Document. "COLLATERAL AGENT" shall have the meaning assigned to such term in the opening paragraph of this Agreement. "COMMITMENT FEES" shall mean, collectively, the fees payable to the Administrative Agent pursuant to Section 2.04(a), (b) and (d). "COMMITMENTS" shall mean, at any time for any Lender, such Lender's Initial Term Loan Commitment and Additional Term Loan Commitment. "CONDEMNATION" shall mean any taking, seizure, condemnation, confiscation or requisition, including severance damage, by eminent domain or by inverse condemnation or for any public or quasi-public use under any Government Rule or any conveyance in anticipation thereof. "CONDEMNATION PROCEEDS" shall mean all compensation, awards, damages and other payments or relief arising out of any Condemnation or any part thereof. "CONSENT AND AGREEMENT" shall mean each agreement among a Project Party and the Collateral Agent, providing for the consent by such Project Party to the collateral assignment by the Borrower to the Collateral Agent of the Borrower's rights under each Project Document between the Borrower and such Project Party. "CONTEST" shall mean with respect to any Person, with respect to any Taxes or any Lien imposed on Property of such Person (or the related underlying claim for labor, material, supplies or services) by any Government Authority for Taxes or any Mechanics' Lien (each, a "SUBJECT CLAIM"), a contest of the amount, validity or application, in whole or in part, of such Subject Claim pursued in good faith and by appropriate legal, administrative or other proceedings diligently conducted so long as: (a) prior to commencing such contest, such Person shall have advised the Administrative Agent of the Subject Claim and the nature of the contest; (b) reserves have been established with respect to Subject Claim in the amount required by and otherwise in accordance with any relevant Accounting Principles; (c) during the period of such contest, the enforcement of such Subject Claim is effectively stayed and any Lien arising thereby shall be effectively removed of record by the posting of a surety bond or similar instrument permitted hereunder by a reputable surety company or, with the consent of the Majority Lenders (not to be unreasonably withheld, conditioned or delayed), the posting of security satisfactory to the Majority Lenders, in either case in an amount sufficient to assure the discharge of the Subject Claim and any actual or proposed deficiency, additional charge, penalty or expense arising from or incurred as a result of such contest; (d) neither such Person, its officers, nor any Financing Party could be exposed to any risk of criminal liability or civil liability as a result of such contest; and (e) such contest and any resultant failure to pay such Subject Claim under the circumstances described above could not otherwise reasonably be expected to have a Material Adverse Effect or result in the loss or forfeiture of any Property of such Person. The term "CONTEST" used as a verb shall have a correlative meaning. Schedule I to the Credit Agreement 1-6 "CONTINUE", "CONTINUATION" and "CONTINUED" shall refer to the continuation pursuant to Section 2.0l(c) of a Eurodollar Loan as a Eurodollar Loan from one Interest Period to the next Interest Period. "CONVERSION/CONTINUATION NOTICE" shall mean a conversion or continuation notice substantially in the form of Exhibit E hereto and duly completed and executed by the Borrower. "CONVERT", "CONVERSION" and "CONVERTED" shall refer to a conversion of Loans of one Type into Loans of another Type. "DEBT SERVICE" shall mean, for any period, the sum, computed without duplication, of the following: (a) all amounts payable by the Borrower to the Lenders in respect of principal of Indebtedness during such period; plus (b) all amounts payable by the Borrower to the Lenders in respect of Interest Expense for such period; plus (c) all fees payable in accordance with Section 2.04; plus (d) all other amounts payable by the Borrower during such period to the Secured Parties (in each case, upon the payment date thereof, by acceleration or otherwise). "DEBT SERVICE COVERAGE RATIO" shall mean, for any period, the quotient of: (a) Project Cash Flow for such period; divided by (b) Debt Service (other than prepayments of Loans pursuant to Sections 3.03 and 3.04) payable during such period. "DEBT SERVICE RESERVE ACCOUNT" shall have the meaning assigned to such term in the Depositary Agreement. "DEBT SERVICE RESERVE REQUIRED AMOUNT" shall mean, as of any date of determination, the amount that is equal to one-third (1/3) of the aggregate scheduled Debt Service for the next twelve-month period (or such shorter period as shall end on the Final Maturity Date). "DEED OF TRUST" shall mean that certain leasehold deed of trust executed by the Borrower in favor of the Collateral Agent as of the Closing Date and encumbering the Projects to secure the payment of the Secured Obligations. "DEFAULT" shall mean an event that, after giving of notice, lapse of time or the fulfillment of any contingency (or any combination of the foregoing), would become an Event of Default. "DEPOSITARY AGREEMENT" shall mean the Depositary Agreement among the Administrative Agent, the Collateral Agent, Wealth Management, a division of Hudson United Bank, as Depositary Bank, and the Borrower, substantially in the form of Exhibit C. "DEPOSITARY BANK" shall have the meaning assigned to such term in the Depositary Agreement. "DEVELOP" and "DEVELOPMENT" shall mean, with respect to any Project, the acquisition, ownership, leasing, occupation, construction, testing, repair, operation, maintenance and use of such Project and the financing of such Project. "DISBURSEMENT" shall mean the making of any Loan pursuant to the Initial Term Loan Facility or the Additional Term Loan Facility. Schedule I to the Credit Agreement I-7 "DISTRIBUTION CERTIFICATE" shall mean a Distribution Certificate and related attachments and certifications, substantially in the form of Exhibit G, executed by an Authorized Officer of the Borrower, and otherwise duly completed. "DISTRIBUTION DATE" shall mean any Quarterly Date or Extended Restricted Payment Date on which the Borrower is permitted, in accordance with the Financing Documents, to make equity distributions. "DOLLARS" and "$" shall mean lawful money of the United States. "ELIGIBLE ASSIGNEE" means: (a) any Lender or any Affiliate or Approved Fund of a Lender; and (b) any bank, institutional investor or other financial institution having combined capital and surplus in excess of $100,000,000; provided that neither such entity nor any of its Subsidiaries is an Affiliate of the Borrower. "EMERGENCY OPERATING COSTS" shall mean those amounts required to be expended in order to prevent or mitigate the consequences of an event or circumstance that was unforeseeable at the time of the Borrower's delivery of the then-current Annual Operating Plan and Budget and that, in the good-faith judgment of the Operator and/or the Borrower, requires the taking of immediate measures to prevent or mitigate an emergency situation. "ENERGY SERVICES AGREEMENT" shall mean the Energy Services Agreement, substantially in the form of the draft thereof dated as of December 20, 2002, to be entered into between the Borrower and Imperial Irrigation District pursuant to the Memorandum of Understanding dated as of November 21, 2002 by and between the Borrower and Imperial Irrigation District that will replace the Interim Distribution Service Agreement dated March 8, 1999 between the Borrower and Imperial Irrigation District. "ENVIRONMENTAL CLAIM" shall mean, with respect to any Person, any notice, claim, administrative, regulatory or judicial action, suit, judgment, demand or other communication by any other Person alleging or asserting such first Person's liability for investigatory costs, clean-up costs, governmental response costs, damages to natural resources or other Property of such second Person, personal injuries, fines or penalties or seeking injunctive relief, in each case arising out of, based on or resulting from: (a) the presence, Use or Release into the environment of any Hazardous Material at any location, whether or not owned by such first Person that is not otherwise in compliance with applicable Environmental Laws; or (b) any fact, circumstance, condition or occurrence forming the basis of any violation, or alleged violation, of any Environmental Law. The term "Environmental Claim" shall include any claim by any Government Authority for enforcement, clean-up, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and any claim by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from the presence of Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. Schedule I to the Credit Agreement I-8 "ENVIRONMENTAL LAWS" shall mean any and all Government Rules to the extent relating to the environment or human health, or the Release or threatened Release of Hazardous Materials into the environment including ambient air, soil, surface water, groundwater, wetlands, land or subsurface strata or otherwise relating to the Use of Hazardous Materials, whether now or hereafter in effect. "ENVIRONMENTAL PARTY" shall mean the Borrower, the Operator, or any other Person involved in the development, construction, operation or maintenance of any Project (other than any Financing Party) and any officer, director, employee or agent of any of the foregoing in his or her capacity as such. "ERISA" means the Employee Retirement Income Security Act of 1974, any successor statute, and all rules and regulations promulgated thereunder. "ERISA AFFILIATE" means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code, or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA EVENT" means: (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any ERISA Affiliate of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower or any ERISA Affiliate of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "EURODOLLAR BASE RATE" shall mean, with respect to any Eurodollar Loan for any Interest Period therefor, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such service, or any successor to or substitute for such service, providing rate quotations comparable to those currently provided on such page of such service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to Dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for the offering of Dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the Eurodollar Base Rate for such Interest Period shall be the arithmetic mean (rounded upwards, if necessary, to the Schedule I to the Credit Agreement I-9 nearest 1/100 of 1%) of the respective rates per annum quoted by each Reference Bank at approximately 11:00 a.m. London time (or as soon thereafter as practicable) on the date two Business Days prior to the first day of such Interest Period for the offering by such Reference Bank to leading banks in the London interbank market of Dollar deposits having a term comparable to such Interest Period and in an amount comparable to the principal amount of such Eurodollar Loan for such Interest Period. "EURODOLLAR LOANS" shall mean Loans that bear interest at rates determined on the basis of the Eurodollar Rate. "EURODOLLAR RATE" shall mean, for any Eurodollar Loan for any Interest Period therefor, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Administrative Agent to be equal to (a) the Eurodollar Base Rate for such Loan for such Interest Period divided by (b) 1 minus the Reserve Requirement for such Loan for such Interest Period. "EVENT OF DEFAULT" shall have the meaning assigned to such term in Section 9.01. "EVENT OF LOSS" shall mean, with respect to any Property of the Borrower, any loss of, destruction of or damage to, or any condemnation (including a Condemnation) or other taking of, such Property. "EXECUTION DATE" shall mean the date on which this Agreement shall have been signed by all of the parties intended to be a party hereto. "EXPERT CONSULTATION" shall mean, with respect to any matter, such consultation (which may be oral or in writing) with the Independent Engineer, the Insurance Advisor, legal counsel or such other expert advisors as may be engaged in connection with such matter as either Agent (or the Majority Lenders through such Agent) shall deem appropriate under the particular circumstances. "EXTENDED RESTRICTED PAYMENT DATE" shall have the meaning assigned to such term in Section 8.13(a). "FEDERAL FUNDS RATE" shall mean, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that: (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day; and (b) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average rate charged to United on such day on such transactions as determined by the Administrative Agent. "FERC" shall mean the Federal Energy Regulatory Commission. "FINAL MATURITY DATE" shall mean the fifth anniversary of the Closing Date. Schedule 1 to the Credit Agreement I-10 "FINANCING DOCUMENTS" shall mean this Agreement, the Notes, the Security Documents, each Consent and Agreement and each Interest Rate Cap Agreement. "FINANCING PARTY" shall mean any Lender, the Depositary Bank, the Collateral Agent or the Administrative Agent. "FOREIGN LENDER" shall mean any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "FPA" shall mean the Federal Power Act and the rules and regulations promulgated thereunder. "FUNDING AND CONSTRUCTION AGREEMENT" shall mean the Funding and Construction Agreement (Heber-Mirage Transmission Line), dated as of June 29, 1987, between the Borrower, Imperial Irrigation District, and the other Participants named therein. "GEM 2 PROJECT" shall mean the nominal 20.5 MW geothermal power plant, employing double flash design, located at East Mesa, Imperial County, California. The GEM 2 Project has been mothballed and is not currently operating. "GEM 3 PROJECT" shall mean the nominal 20.5 MW geothermal power, employing double flash design, plant located at East Mesa, Imperial County, California. "GOVERNMENT APPROVAL" shall mean: (a) any authorization, consent, approval, license, lease, ruling, permit, tariff, rate, certification, exemption, filing, variance, claim, order, judgment, decree, sanction or publication of, by or with; (b) any notice to; (c) any declaration of or with; or (d) any registration by or with, or any other action or deemed action by or on behalf of, any Government Authority or (e) to the extent any such Government Approval materially references such application, any application therefor for in each case relating to: (i) the due execution and delivery of, and the performance by each intended party (other than the Financing Parties) of its obligations and the exercise of its rights under, each Transaction Document to which it is (or is intended to be) a party; or (ii) the Development of any Project as contemplated by the Transaction Documents. "GOVERNMENT AUTHORITY" shall mean any federal, state, municipal, local, territorial, or other governmental department, commission, board, bureau, agency, regulatory authority, instrumentality, judicial or administrative body, domestic or foreign. "GOVERNMENT RULE" shall mean any statute, law, regulation, ordinance, rule, judgment, order, decree, permit, concession, grant, franchise, license, agreement, directive or rule of common law, requirement of, or other governmental restriction or any similar form of decision of or determination by, or any interpretation or administration of any of the foregoing by, any Government Authority, whether now or hereafter in effect. "GUARANTEE" shall mean a guarantee, an indemnity obligation in respect of guarantees or performance bonds, an endorsement, a contingent agreement to purchase or to furnish funds for Schedule I to the Credit Agreement I-11 the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, or an agreement to assure a creditor against loss with respect to, any Indebtedness, other obligations, net worth, working capital or earnings of any Person, or a guarantee of the payment of dividends or other distributions upon the stock or equity interests of any Person, or an agreement to purchase, sell or lease (as lessee or lessor) Property of any Person, products, materials, supplies or services primarily for the purpose of enabling a debtor to make payment of his, her or its obligations or an agreement to assure a creditor against loss, and including causing a bank or other financial institution to issue a letter of credit or other similar instrument for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary course of business. The terms "GUARANTEE" and "GUARANTEED" used as verbs shall have correlative meanings. "HAZARDOUS MATERIAL" shall mean: (a) any petroleum or petroleum products, flammable materials, explosives, radioactive materials, asbestos that is friable, urea formaldehyde foam insulation and equipment that contains dielectric fluid containing polychlorinated biphenyls; (b) any materials or substances which are defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous wastes", "restricted hazardous wastes", "toxic substances", "toxic pollutants", "contaminants", "pollutants" or words of similar import under any Environmental Law; and (c) any other material or substance, exposure to which is prohibited, limited or regulated as such under any Environmental Law including the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., or any similar state statute. "HISTORICAL COMPUTATION PERIOD" shall mean, on any Distribution Date, the period of four consecutive complete fiscal quarters of the Borrower ending on or immediately prior to such Distribution Date. "IMPAIRMENT" shall mean, with respect to any Transaction Document or Government Approval, the rescission, termination, cancellation, repeal, invalidity, suspension (other than by reason of events of force majeure to the extent suspension by reason of events of force majeure is expressly permitted by such Transaction Document or Government Approval), injunction, inability to satisfy stated conditions or amendment, modification or supplementation (other than, in the case of a Project Document, any such amendment, modification or supplementation effected in accordance with Section 8.22 and, in the case of a Government Approval, any such amendment, modification or supplementation effected in accordance with Section 8.03(b)) of such Transaction Document or Government Approval in whole or in part. The verb "IMPAIR" shall have a correlative meaning. "IMPERIAL IRRIGATION DISTRICT" shall mean the Imperial Irrigation District, an irrigation district organized under the Water Code of the State of California. "INDEBTEDNESS" shall mean, for any Person without duplication: (a) indebtedness created, issued or incurred by such Person for borrowed money (whether by loan or the issuance and sale of debt securities or the sale of Property of such Person to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property of such Person from such Schedule I to the Credit Agreement I-12 Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of Property of such Person or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable within 120 days of the date the respective goods are delivered or the respective services are rendered; (c) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective indebtedness so secured has been assumed by such Person; (d) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for the account of such Person; (e) obligations of such Person in respect of surety bonds or similar instruments; (f) Capital Lease Obligations of such Person; (g) any Guarantee issued or provided by such Person; and (h) Indebtedness of others Guaranteed by such Person. "INDEMNITEE" shall have the meaning assigned to such term in Section 11.03(b). "INDEPENDENT ENGINEER" shall mean Harris Group Inc., and/or such other Person as the Administrative Agent may engage on behalf of the Lenders to act as Independent Engineer for the purposes of this Agreement. "INITIAL SURVEY" shall have the meaning assigned to such term in Section 6.01(f)(ii). "INITIAL TERM LOAN AVAILABILITY PERIOD" shall mean the period from (and including) the Closing Date through (and including) February 28, 2003. "INITIAL TERM LOAN COMMITMENT" shall mean, for each Lender, the obligation of such Lender to make Initial Term Loans up to an aggregate principal amount at any one time outstanding equal to the amount set out opposite such Lender's name in Schedule III under the heading "Initial Term Loan Commitment" (as the same may be adjusted from time to time pursuant to Section 2.03 or as a consequence of an assignment in accordance with Section 11.06(b)). The maximum aggregate amount of the Initial Term Loan Commitments of the Lenders available to the Borrower at any time shall not exceed $20,000,000. "INITIAL TERM LOAN FACILITY" shall mean the credit facility to be provided pursuant to Section 2.01 (a). "INITIAL TERM LOAN NOTE" shall have the meaning assigned to such term in Section 2.07(a). "INITIAL TERM LOANS" shall have the meaning assigned to such term in Section 2.01 (a). "INSURANCE ADVISOR" shall mean Hudson Insurance Services, Inc. and/or such other Person as the Administrative Agent may engage on behalf of the Lenders to act as Insurance Advisor for the purposes of this Agreement. "INTEREST EXPENSE" shall mean, for any period, the sum of the following: (a) all interest in respect of Indebtedness accrued or capitalized during such period (whether or not actually paid during such period); plus (b) the net amounts payable (or minus the net amounts receivable) under Interest Rate Cap Agreements accrued during such period (whether or not actually paid or received during such period). Schedule I to the Credit Agreement I-13 "INTEREST PERIOD" shall mean, in respect of any Eurodollar Loan, each period commencing on the date such Eurodollar Loan is made or Converted from a Loan of another Type or (in the event of a Continuation) the last day of the next preceding Interest Period for such Loan, and ending on the numerically corresponding day in the third calendar month thereafter, except that each Interest Period that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (a) no Interest Period may end after the Final Maturity Date; (b) each Interest Period that would otherwise end on a day that is not a Business Day shall end on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next succeeding calendar month, on the immediately preceding Business Day); and (c) notwithstanding clause (a) above, no Interest Period shall have a duration of less than one month and, if the Interest Period for any Eurodollar Loan would otherwise be a shorter period, such Loan shall not be available hereunder. "INTEREST RATE CAP AGREEMENT" shall mean any interest rate cap agreement or similar arrangement providing for the transfer or mitigation of interest risks either generally or under specific contingencies in a manner satisfactory to the Majority Lenders, which is entered into by the Borrower pursuant to Section 8.16. "INVESTMENT" shall mean, for any Person: (a) the acquisition (whether for cash, Property of such Person, services or securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition (including any "short sale" or any sale of any securities at a time when such securities are not owned by the Person entering into such short sale); (b) the making of any deposit with, or advance, loan or other extension of credit to, any other Person (including the purchase of Property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such Property to such Person, but excluding any such advance, loan or extension of credit having a term not exceeding 90 days representing the purchase price of inventory or supplies sold in the ordinary course of business); (c) the entering into of any Guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person; and (d) the entering into of any Interest Rate Cap Agreement. "LEASEHOLD PROPERTIES" shall mean the land and premises described as "Property" on Exhibit A to the Deed of Trust. "LENDERS" shall have the meaning assigned to such term in the opening paragraph of this Agreement. "LIEN" shall mean, with respect to any Property of any Person, any mortgage, lien, pledge, charge, lease, easement, servitude, right of others or security interest or encumbrance of any kind in respect of such Property. For purposes of this Agreement and the other Financing Documents, any Person shall be deemed to own subject to a Lien any Property that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement (other than an operating lease) relating to such Property. Schedule I to the Credit Agreement I-14 "LLC AGREEMENT" shall mean the Second Amended and Restated Limited Liability Company Agreement of the Borrower, dated as of December 27, 2002, executed by the Sponsor and the Borrower. "LOANS" shall mean the loans made by the Lenders to the Borrower pursuant to Section 2.01. "LOSS PROCEEDS" shall mean, with respect to any Event of Loss, insurance proceeds, condemnation awards (including Condemnation Proceeds) or other compensation, awards, damages and other payments or relief (exclusive, in each case, of the proceeds of liability insurance and business interruption insurance and other payments for interruption of operations) with respect to any Event of Loss, less any expenses reasonably incurred by Borrower in collecting such amounts. "MAJOR PROJECT PARTY" shall mean the Borrower, the Operator, the Imperial Irrigation District, SCE and any counterparty to any other Project Document. "MAJORITY LENDERS" shall mean, subject to the penultimate paragraph of Section 11.04, as of any date of determination prior to the Closing Date, the Lenders holding at least 50.1% of the aggregate Commitments, and as of any date of determination thereafter, the Lenders holding at least 50.1% of the aggregate principal amount of Loans then outstanding. "MARGIN STOCK" shall mean margin stock within the meaning of Regulation U and Regulation X. "MATERIAL ADVERSE EFFECT" shall mean, a material adverse effect on: (a) the business, operations, Property, assets or condition (financial or otherwise), liabilities, or capitalization of the Borrower; (b) the ability of the Borrower, the Operator, SCE or the Imperial Irrigation District to perform its respective material obligations under any Transaction Document to which it is a party; (c) the validity or enforceability of any Transaction Document in its entirety or with respect to any material provision thereof (including, in the case of any Security Document, any Lien in favor of the Collateral Agent for the benefit of the Secured Parties thereunder); (d) the timely payment of the principal of or interest on the Loans; or (e) the ability of the Projects to maintain their QF status under PURPA. "MECHANICS' LIENS" shall mean carriers', warehousemen's, mechanics', workmen's, materialmen's, construction or other like statutory Liens (other than Liens described in paragraphs (a) and (b) of the definition of "Permitted Liens"). "MERGER DOCUMENTS" shall mean (i) the Agreement and Plan of Merger by and among the Borrower, GEM Resources LLC, a Delaware limited liability company, Ormesa Geothermal, Ormesa Geothermal II, and OrResource, a California general partnership, dated as of Schedule I to the Credit Agreement I-15 December 16,2002 and (iii) the Statement of Merger filed with the Secretary of State of the State of California on December 16,2002. "MOODY'S" means Moody's Investors Service, Inc. "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NON-MATERIAL PROJECT CONTRACTS" shall mean any contracts or agreements entered into by the Borrower in the ordinary course of business in connection with any Project under which the Borrower shall have obligations not in excess of $2,000,000 under any such agreement, excluding, however: (a) any contract or agreement providing for non-monetary obligations of the Borrower the performance or non-performance of which could reasonably be expected to have a Material Adverse Effect; and (b) any contract or agreement providing for: (i) the conveyance to the Borrower of Real Property or rights therein (including leasehold interests, easements or licenses) that are integral to such Project; or (ii) the acquisition by the Borrower of other Property, or the delivery to the Borrower of services, that are integral to such Project; with respect to contracts or agreements to which the Borrower is a party, any contracts or agreements relating to Permitted Indebtedness of the type described in clause (h) of the definition thereof at any time the aggregate amount of all such Permitted Indebtedness (measured as equivalent to the total contingent liability of the Borrower assumed under all such contracts and agreements) would exceed $2,000,000. For purposes of this definition, indemnity or similar obligations of the Borrower subject to a maximum dollar amount shall be computed at such amount, and all other indemnity or similar obligations of the Borrower shall be computed at the amount thereof which could, at the time such agreement is entered into, reasonably be expected to become due and payable. Notwithstanding the foregoing, contracts or agreements customarily used in connection with the acquisition of Permitted Investments described in paragraphs (a), (b), (c) and (d) of the definition of "Permitted Investments" shall be deemed to be Non-Material Project Contracts. "NON-RECOURSE PERSON" shall have the meaning assigned to such term in Section 11.09. "NOTES" shall mean, collectively, the Initial Term Loan Notes and the Additional Term Loan Notes. "NOTICE OF BORROWING" shall mean a notice of borrowing of Loans hereunder substantially in the form of Exhibit D hereto and duly completed and executed by the Borrower. "O&M CONTRACT" shall mean the Operations and Maintenance Agreement dated as of April 15, 2002, between the Operator and the Borrower and any other contract or agreement between the Borrower and any other Person whereby such other Person agrees to operate and/or maintain a Project on behalf of the Borrower. "OECS" shall mean modular Ormat Energy Converters, organic Rankine cycle modular power plants utilizing geothermal fluid and sweetwater to vaporize organic motive fluid to generate electricity. Schedule I to the Credit Agreement I-16 "OGII PROJECT" shall mean the nominal 18.5 MW geothermal power plant utilizing 20 OECs and employing binary technology located at East Mesa, Imperial County, California. "OGI PPA" shall mean the Power Purchase Contract dated July 18, 1984 between the Borrower and SCE, as amended by (i) Amendment No. 1 thereto dated December 23, 1988, (ii) Agreement Addressing Renewable Energy Pricing and Payment Issues between the Borrower and SCE dated as of June 19, 2001, and identified by SCE as QFID No. 3010, and (iii) Amendment No. 1 to Agreement Addressing Renewable Energy Pricing and Payment Issues, dated November 29, 2001. "OGII PPA" shall mean the Power Purchase Contract dated June 13, 1984 between the Borrower and SCE, as amended by (i) an Agreement Addressing Renewable Energy Pricing and Payment Issues between the Borrower and SCE dated as of June 19, 2001, and identified by SCE as QFID No. 3012, and (ii) Amendment No. 1 to Agreement Addressing Renewable Energy Pricing and Payment Issues, dated November 29, 2001. "OPERATING YEAR" shall mean the period commencing on the Closing Date and ending on December 31, 2003 and each successive 12-month period thereafter. "OPERATION AND MAINTENANCE EXPENSES" shall mean, for any period, the sum of the following for each Project, computed without duplication: (a) expenses of administering and operating such Project and of maintaining it in good repair and operating condition payable during such period, including, without duplication, amounts payable during such period under the O&M Agreement; plus (b) direct operating and maintenance costs of such Project payable during such period; plus (c) insurance costs payable during such period; plus (d) sales and excise taxes payable by or on behalf of the Borrower with respect to the sale of electrical energy during such period; plus (e) property taxes payable by or on behalf of the Borrower during such period; plus (f) franchise taxes payable by or on behalf of the Borrower during such period; plus (g) costs and fees attendant to obtaining and maintaining in effect the Government Approvals payable during such period; plus (h) reasonable legal, accounting and other professional fees attendant to any of the foregoing items payable during such period; plus (i) federal and state income taxes payable by or on behalf of the Borrower during such period; plus (j) electrical start-up costs and interconnection fees. Operation and Maintenance Expenses shall exclude, to the extent otherwise included, any depreciation or other non-cash expense during or for such period. "OPERATOR" shall mean Ormat Nevada Inc., a Delaware corporation, and/or any successor operator of any Project. "ORMESA I PROJECT" shall mean the nominal 24 MW geothermal power plant employing binary technology located at East Mesa, Imperial County, California. "ORMESA IE PROJECT" shall mean the nominal 10 MW geothermal power plant employing binary technology located at East Mesa, Imperial County, California. "ORMESA IH PROJECT" shall mean the nominal 10 MW geothermal power plant employing binary technology located at East Mesa, Imperial County, California. Schedule I to the Credit Agreement I-17 "OTHER MATERIAL PROJECT CONTRACT" shall mean any contract or agreement relating to the Development of any Project to which, on and as of the Closing Date, the Borrower is party, other than: (a) any Non-Material Project Contracts; and (b) any Financing Documents. "PARTICIPANT" shall have the meaning assigned to such term in Section 11.06(c). "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERMITTED INDEBTEDNESS" shall mean: (a) Indebtedness under this Agreement; (b) Indebtedness of the type described in paragraph (b) of the definition of "Indebtedness" in respect of current accounts and other amounts payable under Project Documents or Non-Material Project Contracts in the ordinary course of business, but only to the extent such amounts are incurred in connection with any Project, including any Upgrade Project (and only to the extent such Indebtedness is contemplated in the then-current Annual Operating Plan and Budget in relation to such Project); (c) any Interest Rate Cap Agreement; and (d) Indebtedness owed by the Borrower to the Sponsor in an aggregate principal amount not exceeding $35,000,000 under the Subordinated Promissory Note dated December 31, 2002 made by the Borrower in favor of the Sponsor. "PERMITTED INVESTMENTS" of any Person shall mean: (a) direct obligations of the United States, or of any agency thereof, or obligations guaranteed as to principal and interest by the United States or any agency thereof, maturing in not more than 90 days from the date of acquisition thereof by such Person; (b) time deposits or certificates of deposit issued by any Lender or any other bank or trust company that is organized under the laws of the United States or any state thereof and has capital, surplus and undivided profits of at least $500,000,000 and outstanding senior unsecured long-term debt which is rated "AA" or better by S&P and "Aa2" or better by Moody's (or an equivalent rating by another nationally recognized statistical rating organization of similar standing if neither such corporation is in the business of rating unsecured bank indebtedness), maturing in not more than 90 days from the date of acquisition thereof by such Person; (c) commercial paper rated (on the date of acquisition thereof by such Person) "A-l" or "P-l" by S&P and Moody's, respectively (or an equivalent rating by another nationally recognized statistical rating organization of similar standing if neither of such corporations is then in the business of rating commercial paper), maturing in not more than 90 days from the date of acquisition thereof by such Person; Schedule I to the Credit Agreement I-18 (d) repurchase agreements with any Lender or any other bank or trust company that is organized under the laws of the United States or any state thereof and has capital, surplus and undivided profits of at least $500,000,000 and outstanding senior unsecured long-term debt which is rated "AA" or better by S&P and "Aa2" or better by Moody's (or an equivalent rating by another nationally recognized statistical rating organization of similar standing if neither such corporation is in the business of rating unsecured bank indebtedness), with maturities not in excess of 30 days relating to securities referred to in paragraph (a) above; (e) investments in mutual and money market funds organized under the laws of the United States of America or any state thereof, in each case sponsored by a securities broker dealer of recognized national standing, with a consistent dollar value and whose investments are limited to investments described in any one or more of the foregoing clauses having a rating of "AA" or "A-l" or better by S&P or "Aa2" or "P-l" or better by Moody's; (f) for purposes of Sections 7.21, 8.12 and 8.15, the Project Documents and the Non-Material Project Contracts to the extent the same constitute Investments; and (g) for purposes of Sections 7.21, 8.12 and 8.15, the Interest Rate Cap Agreements entered into by the Borrower in accordance with Section 8.16. "PERMITTED LIENS" shall mean: (a) Liens under worker's compensation, unemployment insurance or other social security legislation (other than ERISA) and Liens to secure other statutory obligations, in each case for which appropriate reserves have been made; (b) Liens imposed by any Government Authority for Taxes that are not yet due or that are being Contested; (c) Mechanics' Liens arising in the ordinary course of business or incident to the construction, improvement or Restoration of a Project in respect of obligations which are not yet due or which are being Contested and which do not in the aggregate exceed $250,000; (d) minor defects, easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, licenses, restrictions on the use of property or minor imperfections in title that do not materially impair the property affected thereby for the purpose for which title was acquired or interfere with the Development of any Project and that individually or in the aggregate could not reasonably be expected to result in a Material Adverse Effect; (e) Liens created pursuant to this Agreement and the Security Documents or otherwise in favor of a Financing Party; Schedule I to the Credit Agreement I-19 (f) Liens to secure obligations incurred in the ordinary course of business (excluding any obligation to repay borrowed money) under the Project Documents to which it is a party and for which appropriate reserves have been made; (g) Liens resulting from any money judgment, writ or warrant of attachment in an aggregate amount not exceeding $50,000; (h) leases entered into by the Borrower with any Person (other than an Affiliate of the Borrower) in the ordinary course of business; provided that: (i) annual payments under such leases do not exceed $50,000 in the aggregate at any time; (ii) such leases do not individually or in the aggregate interfere with the Development of such Project; and (iii) such leases individually or in the aggregate could not reasonably be expected to result in a Material Adverse Effect; (i) those matters listed as exceptions to title (except California mechanics' liens but including Mechanics' Liens referred to clause (c) above) as set out in the Title Policy as of the Closing Date; (j) any interests or estates now or hereafter permitted by the BLM in accordance with its rules and regulations; and (k) Liens of any judgment rendered or claim filed in connection with any Project, which the Borrower or others on its behalf are contesting diligently and in good faith by appropriate proceedings, for which adequate reserves have been established in accordance with applicable Accounting Principles and which do not in the aggregate exceed $100,000. "PERMITTED TRANSFEREE" shall mean (A) any Affiliate of the transferor or (B) any third-party transferee that, in each case, (i) is a financial institution or another entity experienced in the ownership or operation of renewable power generation facilities, (ii) shall have agreed that the transferred Collateral shall remain subject to the Lien of the Borrower Equity Interest Pledge and (iii) shall have executed and delivered such instruments and documents that are, in the reasonable opinion of the Collateral Agent, necessary to carry out the purposes of the Borrower Equity Interest Pledge. "PERSON" shall mean any individual, firm, corporation, company, limited liability company, voluntary association, partnership, joint venture, trust, unincorporated organization, Government Authority, committee, department authority or any other body, whether incorporated or unincorporated. "PLAN" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. Schedule I to the Credit Agreement I-20 "PLANS AND SPECIFICATIONS" shall mean, for any Project, the drawings, plans, specifications, operating and maintenance manuals, and other similar data and documentation describing the technical parameters of such Project. "PLANT" shall mean, for any Project, the electrical generating plant consisting of electrical generating components, the electrical interconnection, associated materials and environmental control equipment and ancillary structures, equipment and systems. "PLANT CONNECTION AGREEMENTS" means, collectively, (a) the Plant Connection Agreement dated as of October 1, 1985, between the Borrower and Imperial Irrigation District for the Ormesa I Project, providing, among other things, for the connection of such Project to Imperial Irrigation District's electric system for the delivery by the Borrower of the electrical output of such Project to Imperial Irrigation District for the account of SCE, (b) the Plant Connection Agreement dated as of October 21, 1988, between the Borrower and Imperial Irrigation District for the Ormesa IH Project, providing, among other things, for the connection of such Project to Imperial Irrigation District's electric system for the delivery by the Borrower of the electrical output of such Project to Imperial Irrigation District for the account of SCE, (c) the Plant Connection Agreement dated as of October 3, 1989, between the Borrower and Imperial Irrigation District for the Ormesa IH Project, providing, among other things, for the connection of such Project to Imperial Irrigation District's electric system for the delivery by the Borrower of the electrical output of such Project to Imperial Irrigation District for the account of SCE, (d) the Plant Connection Agreement dated as of May 26, 1987, between the Borrower and Imperial Irrigation District for the OGII Project, providing, among other things, for the connection of such Project to Imperial Irrigation District's electric system for the delivery by the Borrower of the electrical output of such Project to Imperial Irrigation District for the account of SCE, (e) the Plant Connection Agreement dated as of March 21, 1989, between the Borrower and Imperial Irrigation District for the GEM 2 Project, providing, among other things, for the connection of such Project to Imperial Irrigation District's electric system for the delivery by the Borrower of the electrical output of such Project to Imperial Irrigation District for the account of SCE, and (f) the Plant Connection Agreement dated as of March 21, 1989, between the Borrower and Imperial Irrigation District for the GEM 3 Project, providing, among other things, for the connection of such Project to Imperial Irrigation District's electric system for the delivery by the Borrower of the electrical output of such Project to Imperial Irrigation District for the account of SCE. "POST-DEFAULT RATE" shall mean, in respect of any principal of any Loan or any other amount under this Agreement, any Note, or any other Financing Document that is not paid when due (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to: (a) in the case of overdue principal of any Loan, 2% plus the interest rate otherwise applicable to such Loan; or (b) in the case of any other amount, the Prime Rate plus the Applicable Margin plus 2%. "PPAS" shall mean the OGI PPA and the OGII PPA. "PRIME RATE" shall mean, for any day, the prime commercial lending rate most recently published in The Wall Street Journal. Schedule I to the Credit Agreement I-21 "PRIME RATE LOANS" shall mean Loans which bear interest at rates determined upon the basis of the Prime Rate. "PRINCIPAL OFFICE" shall mean the principal office of the Administrative Agent presently located at Mahwah, New Jersey. "PROJECT" shall mean each of the Ormesa I Project, the Ormesa IE Project, the Ormesa IH Project, the OGII Project, the GEM 2 Project, the GEM 3 Project and the Resource, which, in each case, shall include the Plant and Site of such Project. "PROJECT CASH FLOW" shall mean, without duplication, for any period, the excess (if any) of: (a) Project Revenues for such period (exclusive of extraordinary or non-recurring items; over (b) the aggregate Operation and Maintenance Expenses for such period. "PROJECT DOCUMENTS" shall mean, without duplication, the PPAs, the Plant Connection Agreements (as each may be modified by, and to the extent not terminated by, the Energy Services Agreement), the O&M Contract, the Unit Agreement, the Transmission Services Agreements (as each may be modified by, and to the extent not terminated by, the Energy Services Agreement), the Real Property Documents, the Water Supply Agreement, the Funding and Construction Agreement, when entered into by the parties thereto and in full force and effect, the Energy Services Agreement, the SIGC Lease, the Acquisition Documents, the Restructuring Documents, the Merger Documents, the LLC Agreement, the Charter Documents of the Borrower and, to the extent not included above, any Other Material Project Contract and, to the extent not included above and not constituting a Non-Material Project Contract, each Additional Project Document. "PROJECTED DEBT SERVICE COVERAGE RATIO" shall mean, on any Distribution Date, the quotient of (a) Project Cash Flow divided by (b) Debt Service scheduled to be payable, in each case as reflected in the Closing Pro Forma and, in each case, for the period of four consecutive complete fiscal quarters of the Borrower ending on the fourth Quarterly Date next succeeding such Distribution Date. "PROJECT PARTY" shall mean each Person (other than any Agent or any Lender) from time to time party to or otherwise bound by a Project Document. "PROJECT REVENUES" shall mean, for any period (without duplication), all cash revenues received by or on behalf of the Borrower during such period from: (a) the sale of electrical energy, capacity or other ancillary services from any Project; (b) all interest earned with respect to such period on Permitted Investments held in the Accounts; (c) excess amounts transferred to the Revenue Account from the Debt Service Reserve Account in accordance with the Depositary Agreement during such period; (d) amounts received by the Borrower from Project Parties constituting the refund of deposits during such period; and (e) all other income, howsoever earned, or revenue howsoever generated or proceeds of any nature whatsoever received by or on behalf of the Borrower during such period. Project Revenues shall exclude, to the extent included: (i) proceeds of Permitted Indebtedness, and (ii) contributions to the Borrower's capital. Schedule I to the Credit Agreement I-22 "PROPERTY" shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible and the Real Property. "PUHCA" shall mean the Public Utility Holding Company Act of 1935, any successor statute and the rules and regulations promulgated thereunder. "PURCHASE ORDER" shall mean one or more purchase orders or other arrangements executed or made by the Borrower to provide for the goods and services necessary to effect the Tower Repairs. "PURPA" shall mean the Public Utility Regulatory Policies Act of 1978, any successor statute and the rules and regulations promulgated thereunder. "QF" shall mean qualified small power production facilities under PURPA. "QUARTERLY DATES" shall mean the last day of March, June, September and December in each year, the first of which shall be the first such day after the Closing Date. "QUARTERLY PERIOD" shall mean any period commencing on a Quarterly Date and ending on the day immediately preceding the next succeeding Quarterly Date. "REAL PROPERTY" shall mean the land described in the BLM Leases, the Site Licenses and the ROWS. "REAL PROPERTY DOCUMENTS" shall mean the BLM Leases, the Site Licenses, the ROWs, and all documents and agreements in the possession of the Borrower related thereto. "RECONSTRUCTION PERIOD" shall have the meaning assigned to such term in Section 8.05(d)(ii)(D). "REFERENCE BANKS" shall mean JP Morgan Chase and Citibank, N.A. (or their Applicable Lending Offices, as the case may be), as any of the same may be replaced by the Administrative Agent (in consultation with the Borrower). "REGULATION D, REGULATION U AND REGULATION X" shall mean, respectively, Regulation D, Regulation U and Regulation X of the Board of Governors of the Federal Reserve System. "REGULATORY CHANGE" shall mean, with respect to any Lender, any change after the Execution Date in United States Federal, state or foreign law or regulations (including Regulation D) or the adoption or making after such date of any interpretation, directive or request applying to a class of banks including such Lender of or under any United States Federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "RELEASE" shall mean, with respect to any Hazardous Material, any release, spill, emission, emanation, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or Schedule I to the Credit Agreement I-23 migration of such Hazardous Material into the environment, including the movement of such Hazardous Material through ambient air, soil, surface water, groundwater, wetlands, land or subsurface strata. "REQUIRED PAYMENT" shall have the meaning assigned to such term in Section 4.06. "RESERVE REQUIREMENT" shall mean, for any Interest Period for any Eurodollar Loan, the average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required under Regulation D to be maintained during such Interest Period by member banks of the Federal Reserve System in New York City with deposits exceeding one billion Dollars against "Eurocurrency liabilities" (as such term is used in Regulation D) in an amount of $100,000 or more. Without limiting the effect of the foregoing, the Reserve Requirement shall include any other reserves required to be maintained by such member banks by reason of any Regulatory Change with respect to: (a) any category of liabilities which includes deposits by reference to which the Eurodollar Base Rate is to be determined as provided in the definition of "Eurodollar Base Rate"; or (b) any category of extensions of credit or other assets which includes Eurodollar Loans. "RESOURCE" shall mean the geothermal resource for the Project known as the East Mesa Field geothermal resource reservoir and well field located adjacent to the southeast corner of the Imperial Valley, California, approximately 20 miles east of El Centro, California. "RESTORATION PLANS" shall have the meaning given to that term in Section 8.05(d)(i). "RESTORATION SUB-ACCOUNT" shall have the meaning given to that term in the Depositary Agreement. "RESTORATION WORK" shall have the meaning assigned to such term in Section 8.05(d). "RESTORE" shall mean, for any Affected Property, to rebuild, repair, restore or replace such Affected Property. The term "RESTORATION" shall have a correlative meaning. "RESTRICTED PAYMENT" shall mean: (a) (i) any dividend or distribution (in cash, Property or obligations) on, or any other payment or distribution on account of, or any payment for, or any purchase, redemption, retirement or other acquisition, directly or indirectly of, any limited liability company interests of the Borrower; (ii) any option or warrant for the purchase or acquisition of any such limited liability company interests; or (iii) the setting apart of any money for a sinking or other analogous fund for any of the foregoing; and (b) (i) any payment (in cash, Property or obligations) with respect to principal or interest on, or any other payment or distribution on account of, or any payment for, the purchase, redemption, retirement or other acquisition of, subordinated Indebtedness of the Borrower; or (ii) the setting apart of any money for a sinking or other analogous fund for any of the foregoing. Schedule I to the Credit Agreement I-24 "RESTRUCTURING DOCUMENTS" shall mean those documents delivered to the Collateral Agent by the Borrower on a cd-rom labeled "Restructuring Subsequent to Acquisition of Ormesa and GEM Interests by Ormat", including the Certificates of Transfer, Bills of Sale, Assignments, and all other documents contained therein. "REVENUE ACCOUNT" shall have the meaning assigned to such term in the Depositary Agreement. "ROWS" shall mean the following rights-of-way held by the Borrower and granted by BLM: CACA 25634, CACA 26346, CACA 17188, CACA 22562, CACA 22563, CACA 22567, CACA 25544, CACA 25633, CACA 26355, CACA 26356, and CACA 20267. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "SCE" shall mean Southern California Edison Company, a California corporation. "SECOND CLOSING DATE" shall mean the date on which (a) all of the conditions set out in Section 6.02 shall have been satisfied or waived by the Lenders; and (b) the Borrower shall have borrowed the Additional Term Loan. "SECURED OBLIGATIONS" shall mean, as at any date, the sum, computed without duplication, of the following: (a) the aggregate outstanding principal amount of the Loans plus accrued interest thereon; plus (b) all other amounts from time to time payable to the Secured Parties under the Financing Documents plus accrued interest thereon. For purposes hereof, it is understood that any Secured Obligations to any Person arising under an agreement entered into at a time such Person (or an affiliate thereof) is party to this Agreement as a "Lender" shall continue to constitute Secured Obligations, notwithstanding that such Person (or its Affiliate) has ceased to be a "Lender" party thereto (by assigning all of its Commitments, Loans, and other interests therein) at the time a claim is to be made in respect of such Secured Obligations. "SECURED PARTIES" shall mean the Administrative Agent, the Collateral Agent, the Depositary Bank and the Lenders. "SECURITY DOCUMENTS" shall mean the Borrower Security Agreement, the Borrower Equity Interest Pledge, the Deed of Trust, the Depositary Agreement, any security agreement or instrument referred to in paragraph (a) of the definition of "Ancillary Documents" and all Uniform Commercial Code financing statements required by this Agreement and/or any of the foregoing documents, and any such Ancillary Document, to be filed with respect to the Liens created pursuant thereto on personal property or any fixtures of the Borrower. "SIGC" shall mean Second Imperial Geothermal Company. "SIGC LEASE" shall mean the Lease Agreement, effective October 30, 2002, by and between the Borrower and SIGC. "SITE" shall mean, for any Project, the ROWs, the Site Licenses and any Leasehold Properties relating to such Project. Schedule I to the Credit Agreement I-25 "SITE LICENSES" shall mean the following site licenses granted by BLM: CACA 17129, CACA 22405, CACA 24678, CACA 20172, and CACA 22079. "SPONSOR" shall mean Ormat Funding Corp., a Delaware corporation. "SUBSIDIARY" shall mean, for any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "TAX" shall mean any present or future tax, assessment, fee, excise, impost, duty, governmental charge or levy of any kind imposed directly or indirectly by or on behalf of any Government Authority. "TERMINATION DATE" shall mean the date on which: (a) the Secured Parties shall have received final and indefeasible payment in full of all of the Secured Obligations and all other amounts owing to the Secured Parties under the Financing Documents (and provision for payment reasonably satisfactory to each Agent of all amounts reasonably expected to become due and owing to the Secured Parties pursuant to Sections 2.04, 5.01, 5.05, 5.06, and 11.03, and similar provisions in the other Financing Documents, shall have been made); and (b) the Commitments shall have terminated, expired or been reduced to zero. "TITLE COMPANY" shall mean First American Title Insurance Company, a California corporation. "TITLE POLICY" shall mean the policy of title insurance issued on the Closing Date by the Title Company to the Collateral Agent for the benefit of the Secured Parties pursuant to Section 6.01(f)(i). "TOTAL LOSS" shall mean, in relation to any insured property, any of the following: (a) the complete destruction of such insured property; (b) the destruction of such insured property such that there remains no substantial remnant thereof which a prudent owner, uninsured, desiring to restore such insured property to its original condition would utilize as the basis of such restoration; (c) the destruction of such insured property irretrievably beyond repair; or (d) the destruction of such insured property such that the insured may claim the whole amount of the relevant insurance policy covering such insured property upon abandoning such insured property to the insurance underwriters therefor. "TOWER REPAIRS" shall mean the structural repairs of, and replacement of the cooling towers of the Ormesa I Project, the OGII Project and the Ormesa IE Project to restore performance of such cooling towers to good working order in accordance with generally prudent utility practice. "TRANSACTION DOCUMENTS" shall mean the Financing Documents and the Project Documents. Schedule I to the Credit Agreement I-26 "TRANSMISSION SERVICES AGREEMENTS" shall mean, collectively, (a) the Transmission Services Agreement dated as of October 3, 1989 between the Borrower and Imperial Irrigation District for the Ormesa I Project, the Ormesa IE Project and the Ormesa IH Project; (b) the Transmission Services Agreement for Alternative Resources dated as of September 26, 1985 between SCE and Imperial Irrigation District for the OGII Project, as amended by Plant Amendment No. 1 dated as of August 25, 1987; (c) the Transmission Services Agreement dated as of March 21, 1989 between the Borrower and Imperial Irrigation District for the GEM 2 Project; (d) the Transmission Services Agreement dated as of March 21, 1989 between the Borrower and Imperial Irrigation District for the GEM 3 Project; (e) the Interim Distribution Service Agreement dated March 8, 1999 between Imperial Irrigation District and the Borrower; (f) the Memorandum of Understanding dated November 21, 2002 between Imperial Irrigation District and the Borrower; and (g) the Funding and Construction Agreement dated June 29, 1987 among Imperial Irrigation District, the Borrower and various other parties "TYPE" shall have the meaning assigned to such term in Section 1.02. "UNIFORM COMMERCIAL CODE" shall mean the Uniform Commercial Code as in effect from time to time in the State of New York and in any other jurisdiction the laws of which control the creation or perfection of security interests under the Security Documents. "UNIT AGREEMENT" shall mean that certain Unit Agreement for Exploration, Development and Operation of the East Mesa Unit Area County of Imperial, State of California, No. 14-08-0001-20927, dated as of July 30, 1984 by and between Republic-1975 Geothermal Energy Program and Republic 1977B Geothermal Energy Drilling Program and Republic Geothermal, Inc., as Unit Operator. "UNITED" shall have the meaning assigned to such term in the opening paragraph of this Agreement. "UNITED STATES" and "U.S." shall mean the United States of America. "UPGRADE ACCEPTANCE TEST" shall mean the test, the parameters of which are set forth as Schedule IX. "UPGRADE PRO FORMA" shall mean pro forma cash flow projections for the Borrower updating the Closing Pro Forma, entitled "Updated Ormesa United Capital Proposal" and dated December 18, 2002. "UPGRADE PROJECT" shall mean the Borrower's planned capital expenditure program to upgrade the Project. "USE" shall mean, with respect to any Hazardous Material and with respect to any Person, the generation, manufacture, processing, distribution, handling, use, treatment, recycling or storage of such Hazardous Material or transportation to or from the Property of such Person of such Hazardous Material. Schedule I to the Credit Agreement I-27 "WATER SUPPLY AGREEMENT" shall mean the Amended and Restated Water Supply Agreement dated as of March 6, 1990 between the Borrower and the Imperial Irrigation District. "WITHDRAWAL LIABILITY" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. Schedule I to the Credit Agreement a division of Hudson United Bank $20,000,000 $7,500,000Schedule II to Credit Agreement Applicable Lending Offices Lender Applicable Lending Office ------ ------------------------- United Capital, a division of Hudson United Bank 87 Post Road East Westport, Connecticut 06880 Schedule III to Credit Agreement Commitments Initial Term Additional Term Loan Commitment Loan Commitment --------------- --------------- United Capital, Schedule IV to Credit Agreement INSURANCE At all times commencing on the Closing Date, the Borrower will be required to maintain, or cause to be maintained, insurance for the Projects for coverages and in amounts similar to that insurance maintained by other owners of similar projects as determined by the Insurance Consultant. The insurance coverage shall include: 1. Liability insurance for all risks in an amount not less than $5,000,000. 2. Property insurance to cover all risks in an amount not less than the full replacement cost of the Project with customarily related business interruption protection. 3. General Liability, Automobile Liability and Excess/Umbrella Liability, General Liability limits of US $1,000,000/US $2,000,000, the Automobile Liability limit designated as US $1,000,000 and the Excess/Umbrella Liability coverage limit is US $5,000,000. 4. Material property damage limit of US $50,000,000 covering all real and personal property, subject to certain terms, conditions and exclusions on an "All Risk" of direct physical loss or damage including earthquake (subject to a US $5,000,000 limit). The Collateral Agent shall be named as loss payee for the property insurance (in respect of insurance proceeds in excess of $1,000,000) and shall be named as additional insured for the liability insurance. Notification of the renewal terms and conditions will be provided 30 days in advance of the renewal dates. Schedule V to Credit Agreement FILING JURISDICTION 1. Imperial County, California 2. Delaware Secretary of State Schedule VI to Credit Agreement GOVERNMENT APPROVALS BUREAU OF LAND MANAGEMENT LEASES AND RIGHTS OF WAY IDENTIFIED AS LEASE NO.: CACA 964 (Lease) CACA 966 (Lease) CACA 1903 (Lease) CACA 6217 (Lease) CACA 6218 (Lease) CACA 6219 (Lease) CACA 25081 (Lease) CACA 17568 (Lease) CACA 17188 (ROW) CACA 20267 (ROW) CACA 25544 (ROW) CACA 22562 (ROW) CACA 22563 (ROW) CACA 22567 (ROW) CACA 25633 (ROW) CACA 25634 (ROW) CACA 26346 (ROW) CACA 26355 (ROW) CACA 26356 (ROW) AIR PERMITS ISSUED BY THE IMPERIAL COUNTY AIR POLLUTION CONTROL DISTRICT AND THE U.S. ENVIRONMENTAL PROTECTION AGENCY OGI PTO 1716D Geothermal (Plant & 21 Wells) PTO 2570A Petroleum Storage (Gas Tank) OGIE PTO 1942E Geothermal Power Plant PTO 2371A Geothermal Wells / 7 OGII PTO 1883B Geothermal Power Plant & Wells PTO 2424A Misc. (Sand Blasting) PTO 2755A Combustion (Electric Gen. and Fire Pump) OGIH PTO 2047B Geothermal Power Plant PTO 2370C Geothermal Wells / 8 GEM PTO 2002E Geothermal Power Plant PTO 2132D Geothermal Wells (39 Wells) Permit No. V-2002 PEM-2- IMPERIAL COUNTY AIR POLLUTION CONTROL DISTRICT (ICAPCD) PERMITS TO OPERATE (PTO): OGI, Plant and 21 Geothermal Wells PTO 1716E OGIE, plant and 7 Geothermal wells PTO 1942F OGII, plant and 14 Geothermal wells PTO 1883D OGIH, plant and 8 Geothermal wells PTO 2047C GEM, plant and 39 Geothermal wells PTO 2002F GEM Title V Operating Permit Number V-2002 CALIFORNIA REGIONAL WATER BOARD WASTE DISCHARGE ORDERS (WDO) OGI 00-103 7A132035403 OGIE 00-102 7A132035404 OGII 00-090 7A132035301 OGIH 00-085 7A132035401 GEM 00-101 7A132040013 BUREAU OF LAND MANAGEMENT SITE LICENSES OGI CACA 17129 OGII CACA 20172 OGIE CACA 22405 OGIH CACA 24678 GEM CACA 22079 FEDERAL COMMUNICATIONS COMMISSION OGII Radio Station License Number 9904D125452 Call Sign: WPNY538-3- IMPERIAL COUNTY PUBLIC HEALTH SERVICE (DIVISION OF ENVIRONMENTAL HEALTH) Surface Water Treatment Permit (Potable Water System) OGII Permit # 4S-8660-02 U.S. ENVIRONMENTAL PROTECTION AGENCY (USEPA) REGION 9: OGI RCRA EPA ID Number CA0000138271 OGII RCRA EPA ID Number CAD983613449 GEM RCRA EPA ID Number CAR000045096 CALIFORNIA BOARD OF EQUALIZATION (BOE) HAZARDOUS WASTE GENERATOR ACCOUNT: OGI HA EF 36-057873 OGII HA EF 38-057602 GEM HA EF 36-051259 IMPERIAL COUNTY DEPARTMENT OF PLANNING COMMISSION CONDITIONAL USE PERMITS (CUP): OGI & OGIE Aug 14, 1988 (No Number) Conditional Use Permit (CUP) approved and issued for five Groundwater Wells to be utilized for cooling tower makeup. OGII April 8, 1985 No. 711-85 Conditional Use Permit (CUP) Approved and issued for three Groundwater Wells to be utilized for cooling tower makeup.Schedule VII to Credit Agreement Deferred Government Approvals Authority to Construct (ATC) Permit - Issued by the Imperial County Air Pollution Control District (ICAPCD). An application for issuance of an ATC has been submitted. Building Permits for all phases of construction - Issued by the Imperial County Planning Department. Approvals are awarded on a continuous basis. Environmental Assessment (EA). The Imperial County Planning Department is the local lead agency for the California Environmental Quality Act (CEQA). The EA concentrates on the Biological and Archeological parameters and is expected to be done by Jan. 2003. Schedule VIII to Credit Agreement ENVIRONMENTAL CLAIMS PART A - ENVIRONMENTAL CLAIMS: On November 12, 2002, the California Regional Water Quality Control Board issued a "Notice to Comply" as a result of an inspection of the Projects conducted on October 23, 2002. Three (3) non-Compliance issues with the Ormesa Waste Discharge Requirements were noted, as listed below (the status of each is included as a parenthetical statement at the end): 1. Ormesa Geothermal I (West Cooling Tower) - West Wall of the concrete basin has substantial cracking and appears to be falling apart. Repairs to the concrete basin are required to be completed by February 15, 2003. (The contract to repair the wall is about to be let for completion of the repairs before the required date.) 2. Cooling Tower Basin solids - Piles of solids from cleanout of cooling tower basins were noted at well pads 16-30, 15-32, 18-5, and the containment basin west of OGIH. Proper disposal of these solids is required before December 31, 2002. (Samples have been collected and tested, and authorization to dispose has been received from the California Regional Water Quality Control Board. However, written authorization from the Imperial County Health Department has not yet been received. The California Regional Water Quality Control Board has agreed to extend the required disposal date because of the delay in receiving the written authorization from the Imperial County Health Department to dispose of the wastes.) 3. North Wall of pond at GEM 2&3 - Staff noted an area in need of repair to liner and concrete in the upper wall on the north side. Repairs to the liner and concrete are required before November 30, 2002. (Repairs were completed on November 25, 2002.) PART B - THREATENED ENVIRONMENTAL CLAIMS: FPL Energy Operating Services, Inc. (FPLE) received a letter, dated August 1, 2000, from the Imperial County District Attorney's office indicating that a request to initiate legal action regarding the handling of the Ormesa IE Project cooling tower fill and wood debris waste in June and July of 1999 had been filed by the U.S. Department of the Interior, Bureau of Land Management (BLM), and suggested that FPLE schedule an appointment to discuss any additional information FPLE may want to submit. Two meetings were held between the District Attorney's office and FPLE, and FPLE believes that the BLM and the Imperial County District Attorney's office no longer intends to pursue the matter, although no specific resolution to the matter was documented. PART C - HAZARDOUS MATERIALS: Cotton-wound steel-core filters were historically used by the Ormesa I, Ormesa II, Ormesa IE and Ormesa IH projects since the commencement of operation (in December of 1986, 1987, 1988 and 1989, respectively) to remove fine sand, produced from the geothermal fluid production wells, from the geothermal fluid prior to injection into the geothermal fluid injection wells. Waste injection filters were routinely disposed of off-site as common, non-hazardous industrial waste in a local municipal waste landfill. In late 1992, a sample of the injection filters was tested and determined to be a California (non-RCRA) hazardous waste because of the concentrations of some heavy metals, which normally occur only in low concentrations in the East Mesa geothermal fluids used by these Ormesa Geothermal projects. All litigation concerning this issue was settled prior to the acquisition of the East Mesa projects by FPLE (in 1994 the projects settled with the Imperial County District Attorney; the California Environmental Protection Agency, Department of Toxic Substance Control; and the California Regional Water Quality Board, Colorado River Basin Region, and in 1996 the projects settled with the local municipal waste landfill into which the filters were disposed). These Ormesa Geothermal have not used filters to remove sand from the geothermal injection fluid prior to injection since late 1992. None of the waste geothermal fluid injection filters were disposed of on-site. 2 Schedule IX to Credit Agreement UPGRADE ACCEPTANCE TEST PARAMETERS These parameters are to outline the methods to be used to update the report of the Independent Engineer that was delivered on the Closing Date, which update shall be delivered pursuant to Schedule 6.2(g) of the Credit Agreement. The Upgrade Acceptance Test is to demonstrate that the Projects are collectively capable of generating net energy sales of 445,000 MWh per year. The Upgrade Acceptance Test is to be conducted over a continuous period of 168 hours (7 days) with all Project systems in normal operating configurations for continuous, long-term operation with a normal complement of operating personnel. Criterion for successful completion of the Upgrade Acceptance Test shall be that during the 168-hour period the Project generate 8,535 MWh for sale to SCE, corrected for ambient conditions and net of all Project auxiliary loads and line losses. A detailed Upgrade Acceptance Test protocol, including appropriate ambient correction factors, measurement points, etc., is to be developed by the Borrower and approved by the Independent Engineer within 30 days prior to commencement of the test. Exhibit A-1 to Credit Agreement FORM OF INITIAL TERM LOAN NOTE $ , 2002 --------------- --------- ---- New York, New York FOR VALUE RECEIVED, the undersigned, ORMESA LLC, a Delaware limited liability company (the "Borrower"), hereby unconditionally promises to pay to the order of UNITED CAPITAL, a division of Hudson United Bank, a New Jersey banking corporation (the "Lender"), in lawful money of the United States of America and in immediately available funds, the principal amount of ____________________________________ ($_______________) or, if less, the unpaid principal amount of the Initial Term Loan made by the Lender pursuant to Section 2.01(a) of the Credit Agreement hereinafter defined. The principal amount shall be paid in the amounts and on the dates specified in Section 3.01 of the Credit Agreement. The Borrower further agrees to pay interest in like money on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in Section 3.02 of such Credit Agreement. The holder of this Note is authorized to endorse on the schedules annexed hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof the date, Type and amount of the Loan, the date and amount of each payment or prepayment of principal with respect thereto, each conversion of all or a portion thereof to another Type, and each continuation of all or a portion thereof as the same Type. Each such endorsement shall constitute prima facie evidence of the accuracy of the information endorsed. The failure to make any such endorsement shall not affect the obligations of the Borrower in respect of such Loan. This Note (a) is an Initial Term Loan Note referred to in the Credit Agreement dated as of December 31, 2002 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the Lender, the other banks and financial institutions from time to time parties thereto as lenders, and United Capital, a division of Hudson United Bank, a New Jersey banking corporation, not in its individual capacity, but solely as administrative agent and collateral agent; (b) is subject to the provisions of the Credit Agreement; and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Credit Agreement. This Note is secured as provided in the Security Documents. Reference is hereby made to the Security Documents for a description of assets in which a security interest has been granted, the nature and extent of the security, the terms and conditions upon which the security interests were granted and the rights of the holder of this Note in respect thereof. Upon the occurrence of any one or more of the Events of Default, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided in the Credit Agreement. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind, except as specifically provided for in the Credit Agreement. Initial Term Loan Note Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. Initial Term Loan Note ORMESA LLC ---------------------------------------- By ORMAT FUNDING CORP., Its Sole Member and Control Manager By: ------------------------------------ Name: Title: Initial Term Loan Note Exhibit A-2 to Credit Agreement FORM OF ADDITIONAL TERM LOAN NOTE [$7,500,000.00] ____________, 200_ New York, New York FOR VALUE RECEIVED, the undersigned, ORMESA LLC, a Delaware limited liability company (the "Borrower"), hereby unconditionally promises to pay to the order of [__________________________________] (the "Lender"), in lawful money of the United States of America and in immediately available funds, the principal amount of [SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000.00)], or, if less, the unpaid principal amount of the Additional Term Loan made by the Lender pursuant to Section 2.01(b) of the Credit Agreement hereinafter defined. The principal amount shall be paid in the amounts and on the dates specified in Section 3.01 of the Credit Agreement. The Borrower further agrees to pay interest in like money on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in Section 3.02 of such Credit Agreement. The holder of this Note is authorized to endorse on the schedules annexed hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof the date, Type and amount of the Loan, the date and amount of each payment or prepayment of principal with respect thereto, each conversion of all or a portion thereof to another Type, and each continuation of all or a portion thereof as the same Type. Each such endorsement shall constitute prima facie evidence of the accuracy of the information endorsed. The failure to make any such endorsement shall not affect the obligations of the Borrower in respect of such Loan. This Note (a) is an Additional Term Loan Note referred to in the Credit Agreement dated as of December 31, 2002 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the Lender, the other banks and financial institutions from time to time parties thereto as lenders, and United Capital, a division of Hudson United Bank, a New Jersey banking corporation, not in its individual capacity, but solely as administrative agent and collateral agent; (b) is subject to the provisions of the Credit Agreement; and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Credit Agreement. This Note is secured as provided in the Security Documents. Reference is hereby made to the Security Documents for a description of assets in which a security interest has been granted, the nature and extent of the security, the terms and conditions upon which the security interests were granted and the rights of the holder of this Note in respect thereof. Upon the occurrence of any one or more of the Events of Default, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided in the Credit Agreement. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind, except as specifically provided for in the Credit Agreement. Promissory Note Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. ORMESA LLC By ORMAT FUNDING CORP., Its Sole Member and Control Manager By: --------------------------------- Name: Title: Exhibit A-2 to Credit Agreement PROMISSORY NOTE [$7,500,000.00] ___________, 200_ New York, New York FOR VALUE RECEIVED, the undersigned, ORMESA LLC, a Delaware limited liability company (the "Borrower"), hereby unconditionally promises to pay to the order of [_______________________________________] (the "Lender"), in lawful money of the United States of America and in immediately available funds, the principal amount of [SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000.00)], or, if less, the unpaid principal amount of the Additional Term Loan made by the Lender pursuant to Section 2.0l(b) of the Credit Agreement hereinafter defined. The principal amount shall be paid in the amounts and on the dates specified in Section 3.01 of the Credit Agreement. The Borrower further agrees to pay interest in like money on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in Section 3.02 of such Credit Agreement. The holder of this Note is authorized to endorse on the schedules annexed hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof the date, Type and amount of the Loan, the date and amount of each payment or prepayment of principal with respect thereto, each conversion of all or a portion thereof to another Type, and each continuation of all or a portion thereof as the same Type. Each such endorsement shall constitute prima facie evidence of the accuracy of the information endorsed. The failure to make any such endorsement shall not affect the obligations of the Borrower in respect of such Loan. This Note (a) is an Additional Term Loan Note referred to in the Credit Agreement dated as of December 31, 2002 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the Lender, the other banks and financial institutions from time to time parties thereto as lenders, and United Capital, a division of Hudson United Bank, a New Jersey banking corporation, not in its individual capacity, but solely as administrative agent and collateral agent; (b) is subject to the provisions of the Credit Agreement; and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Credit Agreement. This Note is secured as provided in the Security Documents. Reference is hereby made to the Security Documents for a description of assets in which a security interest has been granted, the nature and extent of the security, the terms and conditions upon which the security interests were granted and the rights of the holder of this Note in respect thereof. Upon the occurrence of any one or more of the Events of Default, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided in the Credit Agreement. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind, except as specifically provided for in the Credit Agreement. Promissory Note Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. ORMESA LLC By ORMAT FUNDING CORP., Its Sole Member and Control Manager By: --------------------------------- Name: Title: Exhibit B-l to Credit Agreement FORM OF BORROWER SECURITY AGREEMENT This BORROWER SECURITY AGREEMENT (this "AGREEMENT"), dated as of ______ __, 2002, between ORMESA LLC, a Delaware limited liability company (the "BORROWER"), and UNITED CAPITAL, a division of Hudson United Bank, a New Jersey banking corporation ("UNITED"), not in its individual capacity, but solely as collateral agent for the Lenders and other Secured Parties under and as defined in the Credit Agreement referred to below (in such capacity, together with its successors in such capacity, the "COLLATERAL AGENT"). WHEREAS, pursuant to that certain Credit Agreement, dated as of December 31, 2002 (as amended, modified, supplemented and in effect from time to time, the "CREDIT AGREEMENT"), among the Borrower, the Lenders party thereto from time to time, United, not in its individual capacity, but solely as administrative agent for such Lenders, and the Collateral Agent, the Lenders have agreed to make loans to the Borrower for the purpose of financing certain costs of acquiring, improving and operating various geothermal power plant facilities and related expenses; WHEREAS, it is a condition to the obligations of the Lenders and the other Secured Parties under the Credit Agreement that the Borrower shall have executed and delivered this Agreement and granted the Liens provided for herein; and WHEREAS, to induce the Lenders and the other Secured Parties to enter into the Credit Agreement and to induce certain of the Secured Parties to make loans to the Borrower, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower has agreed to pledge and grant a security interest in the Collateral (as defined below) as security for the Secured Obligations (as defined in the Credit Agreement). Accordingly, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.01 DEFINITIONS. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to them in Schedule I to the Credit Agreement. All terms used herein which are not defined herein or in the Credit Agreement and are defined in the Uniform Commercial Code (as such term is defined below) shall have the meanings therein stated. In addition, capitalized terms used in the preamble hereto shall have the respective meanings given thereto, and the following terms shall have the following meanings under this Agreement: "ACCOUNTS RECEIVABLE" shall have the meaning assigned to such term in Article III(5). "ARTICLE 9" shall mean Article 9 of the Uniform Commercial Code, as revised and in effect on and after July 1, 2001. "ASSIGNED AGREEMENT(S)" shall have the meaning assigned to such term in Article III(2). "COLLATERAL" shall have the meaning assigned to such term in Article III. "COPYRIGHT COLLATERAL" shall mean all Copyrights, whether now owned or hereafter acquired by the Borrower, including each Copyright identified in Annex 2. Borrower Security Agreement -2- "COPYRIGHTS" shall mean all copyrights, copyright registrations and applications for copyright registrations, including, without limitation, all renewals and extensions thereof, the right to recover for all past, present and future infringements thereof, and all other rights of any kind whatsoever accruing thereunder or pertaining thereto. "EQUIPMENT" shall have the meaning assigned to such term in Article III(9). "INSTRUMENTS" shall have the meaning assigned to such term in Article III(6). "INTELLECTUAL PROPERTY" shall mean, collectively, all Copyright Collateral, all Patent Collateral and all Trademark Collateral, together with: (a) all inventions, processes, production methods, proprietary information, know-how and trade secrets; (b) all licenses or user or other agreements granted to the Borrower with respect to any of the foregoing, in each case whether now or hereafter owned or used including, without limitation, the contracts, licenses or other agreements with respect to the Copyright Collateral, the Patent Collateral or the Trademark Collateral, listed in Annex 5; (c) all information, customer lists, identification of suppliers, data, plans, blueprints, specifications, designs, drawings, recorded knowledge, surveys, engineering reports, test reports, manuals, materials standards, processing standards, performance standards, catalogs, computer and automatic machinery software and programs; (d) all field repair data, sales data and other information relating to sales or service of products now or hereafter manufactured; (e) all accounting information and all media in which or on which any information or knowledge or data or records may be recorded or stored and all computer programs used for the compilation or printout of such information, knowledge, records or data; and (f) all causes of action, claims and warranties now or hereafter owned or acquired by the Borrower in respect of any of the items listed above. "INVENTORY" shall have the meaning assigned to such term in Article III(7). "MOTOR VEHICLES" shall mean motor vehicles, tractors, trailers and other like property, whether or not the title thereto is governed by a certificate of title or ownership. "PATENT COLLATERAL" shall mean all Patents, whether now owned or hereafter acquired by the Borrower, including each Patent identified in Annex 3. "PATENTS" shall mean all patents and patent applications, including, without limitation, the inventions and improvements described and claimed therein together with the reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof, all income, royalties, damages and payments now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past or future infringements thereof, the right to sue for past, present and future infringements, thereof, and all rights corresponding thereto throughout the world. "RECORDS" shall have the meaning assigned to such term in Section 2.07. "TRADEMARK COLLATERAL" shall mean all Trademarks, whether now owned or hereafter acquired by the Borrower, including each Trademark identified in Annex 4. Notwithstanding the foregoing, the Trademark Collateral does not and shall not include any Trademark that would be rendered invalid, abandoned, void or unenforceable by reason of its being included as part of the Trademark Collateral. "TRADEMARKS" shall mean all trade names, trademarks and service marks, logos, trademark and service mark registrations, and applications for trademark and service mark registrations, including, without limitation, all renewals of trademark and service mark registrations, all rights corresponding thereto throughout the world, the right to recover for all past, present and future infringements thereof, all other rights Borrower Security Agreement -3- of any kind whatsoever accruing thereunder or pertaining thereto, together, in each case, with the product lines and goodwill of the business connected with the use of, and symbolized by, each such trade name, trademark and service mark. 1.02 INTERPRETATION. The principles of interpretation set out in Article I of the Credit Agreement shall apply equally to this Agreement mutatis mutandis. ARTICLE II REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Agent and Secured Parties that: 2.01 CREDIT AGREEMENT REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of the Borrower contained in Article VII of the Credit Agreement is incorporated herein by reference and made a part hereof as if fully set out in this Agreement for the benefit of the Collateral Agent and the Borrower shall be deemed to have made each such representation and warranty as of each date provided for in the Credit Agreement. 2.02 COPYRIGHTS, PATENTS AND TRADEMARKS. Annexes 2, 3 and 4, respectively, set out a complete and correct list of all Copyrights, Patents and Trademarks owned by the Borrower on the date hereof. Except pursuant to licenses and other user agreements entered into by the Borrower in the ordinary course of business that are listed in Annex 5, the Borrower owns and possesses the right to use, and has done nothing to authorize or enable any other Person to use, any Copyright, Patent or Trademark listed in Annexes 2, 3 and 4. All registrations listed in Annexes 2, 3 and 4 are valid and in full force and effect. Except as may be set out in Annex 5, the Borrower owns and possesses the right to use all Copyrights, Patents and Trademarks. 2.03 LICENSES. Annex 5 sets out a complete and correct list of all licenses and other user agreements existing with respect to the Intellectual Property on the date hereof. 2.04 NO VIOLATIONS IN RESPECT OF COPYRIGHTS, PATENTS AND TRADEMARKS. To the Borrower's knowledge: (i) except as set out in Annex 5, there is no violation by others of any right of the Borrower with respect to any Copyright, Patent or Trademark listed in Annexes 2, 3 and 4, respectively; and (ii) the Borrower is not infringing in any respect upon any Copyright, Patent or Trademark of any other Person; and no proceedings have been instituted or are pending against the Borrower or, to the Borrower's knowledge, threatened, and no claim against the Borrower has been received by the Borrower, alleging any such violation, except as may be set out in Annex 5. 2.05 TRADEMARK COLLATERAL. The Borrower does not own any Trademarks registered in the United States of America to which the last sentence of the definition of Trademark Collateral applies. 2.06 INVENTORY AND EQUIPMENT. All existing Inventory and Equipment: (a) is located at the Borrower's Address for Notices set out beneath its name on the signature pages hereto or at one of the locations identified in Annex 6 or in transit from one of such locations to another; and (b) is in the Borrower's exclusive control on the date hereof. 2.07 RECORDS. The place of business or, if there is more than one place of business, the chief executive office of the Borrower is located at the Borrower's Address for Notices set out on the signature Borrower Security Agreement -4- page hereto, and the Borrower has no books and records concerning the Collateral (hereinafter, collectively called the "RECORDS") at any location other than at such address or at one of the locations identified in Annex 6 or in transit from one of such locations to another. 2.08 INSTRUMENTS. The Borrower has delivered to the Collateral Agent, without exception, all Collateral that consists of Instruments, which Collateral is listed on Annex 7 hereto. Annex 7 correctly and completely sets forth all obligors of such Instruments and their respective aggregate principal amounts. 2.09 CHANGES IN CIRCUMSTANCES. The Borrower has not, within the period of four months prior to the date hereof: (a) changed its location (as determined pursuant to Section 9-307 of Article 9); (b) changed its name; or (c) become a "new debtor" (as defined in Section 9-102(a)(56) of Article 9) with respect to a security agreement previously entered into by any other Person. 2.10 OTHER ASSETS. All assets of each Project not described in Sections 2.02 through 2.08 are located at the Borrower's Address for Notices set out beneath its name on the signature pages hereto or at one of the locations identified in Annex 6 or in transit from one of such locations to another. All such assets are under the exclusive control of the Borrower. The Borrower will not change the location of any such assets without 30 days' prior written notice to the Collateral Agent. 2.11 ASSIGNED AGREEMENTS. All copies of the Assigned Agreements delivered by the Borrower to the Collateral Agent are true, correct and complete copies thereof, and such Assigned Agreements have not been amended, modified or otherwise changed in any respect, except for such amendments, modifications and changes which are attached to the Assigned Agreements so delivered. Borrower has obtained all consents and approvals necessary for the assignment of the Assigned Agreements, except from the BLM and SCE. 2.12 GENERAL. (a) None of the Collateral constitutes, or is the proceeds of, "FARM PRODUCTS" as defined in Section 9-102(a)(34) of the UCC. (b) Other than BLM, none of the account debtors or other persons obligated on any of the Collateral is a governmental authority covered by the Federal Assignment of Claims Act or like federal, state or local statute or rule in respect of such Collateral. (c) The Borrower holds no commercial tort claims. (d) The Borrower has at all times operated its business in compliance in all material respects with all applicable provisions of the federal Fair Labor Standards Act, as amended, and with all applicable provisions of federal, state and local statutes and ordinances dealing with the control, shipment, storage or disposal of hazardous materials or substances. ARTICLE III COLLATERAL As collateral security for the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the Secured Obligations now existing or hereafter arising, the Borrower hereby pledges and grants to the Collateral Agent, for the benefit of the Secured Parties as hereinafter provided, and subject to the rules and regulations of the BLM, a lien on and security interest in, all of the Borrower Security Agreement -5- Borrower's right, title and interest in, to and under the following, whether now owned by the Borrower or hereafter acquired and whether now existing or hereafter coming into existence and wherever located (all being collectively referred to herein as "COLLATERAL"): 1. the assets of the Projects, including all rights of access to and inspection and use of all books and records of the Projects (including computer software and computer software programs), all payments (including fees) or distributions, whether in cash, property or otherwise, at any time owing or payable to the Borrower in its capacity as owner of the Projects and all other rights, interests, property or claims to which the Borrower may be entitled in its capacity as owner of the Projects; 2. except to the extent expressly prohibited by the terms thereof, the agreements, contracts and documents listed in Annex 1 (including all exhibits and schedules thereto), as each such agreement, contract and document may be amended, supplemented or modified and in effect from time to time (such agreements, contracts and documents, being, individually, an "ASSIGNED AGREEMENTS" and collectively, the "ASSIGNED AGREEMENTS"), including: (i) all rights of the Borrower to receive moneys due and to become due under or pursuant to the Assigned Agreements; (ii) all rights of the Borrower to receive proceeds of any insurance, bond, indemnity, warranty or guaranty with respect to the Assigned Agreements; (iii) all claims of the Borrower for damages arising out of or for breach of or default under the Assigned Agreements; and (iv) all rights of the Borrower to terminate, amend, supplement, modify or waive performance under the Assigned Agreements, to perform thereunder and to compel performance and otherwise to exercise all remedies thereunder; 3. all Government Approvals now or hereafter held in the name, or for the benefit of the Borrower (provided, that any Government Approval which by its terms or by operation of law would become void, voidable, terminable or revocable if mortgaged, pledged or assigned hereunder or if a security interest therein were granted hereunder is expressly excepted and excluded from the Lien and terms of this Agreement to the extent necessary so as to avoid such voidness, avoidability, terminability or revocability); 4. all Accounts and all balances therein and all instruments, certificates and notes in respect of Permitted Investments held or maintained from time to time therein, and all interest and other property from time to time receivable in respect thereof; 5. all general intangibles (including payment intangibles and software) and accounts (each as defined in the Uniform Commercial Code) of the Borrower constituting any right to the payment of money, including all moneys due and to become due to the Borrower in respect of any loans or advances or for Inventory or Equipment or other goods sold or leased or for services rendered, all deposit accounts (including all Accounts established pursuant to the Depositary Agreement), all moneys due and to become due to the Borrower under any Guarantee (including a letter of credit) and all Tax refunds (such accounts, general intangibles and moneys due and to become due, and Tax refunds, being herein called collectively "ACCOUNTS RECEIVABLE"); 6. all instruments, chattel paper (whether tangible or electronic) (each as defined in the Uniform Commercial Code) or letters of credit of the Borrower evidencing, representing, arising from or existing in respect of, relating to, securing or otherwise supporting the payment of, any of the Accounts Receivable, including promissory notes, drafts, bills of exchange and trade acceptances (herein collectively called "INSTRUMENTS") and all interest, cash, instruments and other Property from time to time received, receivable or otherwise distributed in respect of or in exchange for any of the Instruments; Borrower Security Agreement -6- 7. all inventory (as defined in the Uniform Commercial Code) of the Borrower, including Motor Vehicles held by the Borrower for lease, fuel, tires and other spare parts, all goods obtained by the Borrower in exchange for such inventory, and any products made or processed from such inventory, including all substances, if any, commingled therewith or added thereto (herein collectively called "INVENTORY"); 8. all Intellectual Property and all other accounts or general intangibles of the Borrower not constituting Intellectual Property or Accounts Receivable; 9. all equipment (as defined in the Uniform Commercial Code) of the Borrower, including all Motor Vehicles owned by the Borrower (herein collectively called "EQUIPMENT"); 10. each contract and other agreement of the Borrower relating to the sale or other disposition of Inventory or Equipment; 11. all documents (as defined in the Uniform Commercial Code) or other receipts of the Borrower covering, evidencing or representing Inventory or Equipment; 12. all rights, claims (including insurance claims) and benefits of the Borrower against any Person arising out of, relating to or in connection with Inventory or Equipment, including any such rights, claims or benefits against any Person storing or transporting such Inventory or Equipment; and 13. all other tangible and intangible personal property and fixtures of the Borrower, including all cash, products, offspring, rents, revenues, issues, profits, royalties, income, benefits, accessions, letter-of-credit rights, supporting obligations, additions, substitutions and replacements of and to any and all of the foregoing, including all proceeds and products of and to any of the property of the Borrower described in the preceding paragraphs of this Article III (including, without limitation, any proceeds of insurance thereon (whether or not the Collateral Agent is loss payee thereof), and any indemnity, warranty or guarantee, payable by any reason of loss or damage to or otherwise with respect to any of the foregoing, and all causes of action, claims and warranties now or hereafter held by the Borrower in respect of any of the items listed above) and, to the extent related to any property described in such paragraphs or such proceeds, products and accessions, all books, correspondence, credit files, records, invoices and other papers, including all tapes, cards, computer runs and other papers and documents in the possession or under the control of the Borrower or any computer bureau or service company from time to time acting for the Borrower; provided, however, (a) any distributions, payments or releases (whether in the form of cash, instruments or otherwise) properly made by or to the Borrower pursuant to Section 8.13 of the Credit Agreement shall automatically be released from the Lien granted hereunder and shall no longer be part of the Collateral upon the making of such distribution, payment or release and (b) any sale, transfer or other disposition of the Collateral permitted by Section 8.12(a) of the Credit Agreement shall automatically be released from the Lien granted hereunder and shall no longer be part of the Collateral upon consummation of such sale, transfer or other disposition. Borrower Security Agreement -7- ARTICLE IV CERTAIN ASSURANCES; REMEDIES In furtherance of the grant of the pledge and security interest pursuant to Article III, the Borrower agrees with each Secured Party as follows: 4.01 DELIVERY AND OTHER PERFECTION. The Borrower shall: (a) if any of the Collateral required to be pledged and delivered by the Borrower under Article III is received by the Borrower, forthwith: (i) transfer and deliver to the Collateral Agent for the benefit of the Secured Parties such Collateral so received by the Borrower, all of which thereafter shall be held by the Collateral Agent, pursuant to the terms of this Agreement, as part of the Collateral; and/or (ii) take such other action as the Collateral Agent shall deem necessary or appropriate to duly record the Lien created hereunder in such Collateral; (b) deliver and pledge to the Collateral Agent any and all Instruments, endorsed and/or accompanied by instruments of assignment and transfer in such form and substance as the Collateral Agent may request; provided, that so long as no Event of Default shall have occurred and be continuing, the Borrower may retain for collection in the ordinary course any Instruments received by the Borrower in the ordinary course of business and the Collateral Agent shall, promptly upon request of the Borrower, make appropriate arrangements for making any Instrument pledged by the Borrower and held by the Collateral Agent available to the Borrower for purposes of presentation, collection or renewal (any such arrangement to be effected, to the extent requested by the Collateral Agent, against trust receipt or like document); (c) give, execute, deliver, file and/or record any financing statement, continuation statement, notice, instrument, document, agreement or other papers that may be necessary or desirable (in the reasonable judgment of the Collateral Agent): (i) to create, preserve, perfect or validate the pledge and security interest granted pursuant hereto; or (ii) to enable the Collateral Agent to exercise and enforce its rights hereunder with respect to such pledge and security interest, including, without limitation, upon the occurrence and during the continuance of any Event of Default, causing any or all of the Collateral to be transferred of record into the name of the Collateral Agent or its nominee (and the Collateral Agent agrees that if any Collateral is transferred into its name or the name of its nominee, the Collateral Agent will thereafter promptly give to the Borrower copies of any notices and communications received by it with respect to the Collateral pledged by the Borrower hereunder); provided, that notices to account debtors in respect of any Accounts Receivable or Instruments shall be subject to the provisions of paragraph (g) below; (d) without limiting the obligations of the Borrower under Section 4.04(d), promptly notify the Collateral Agent upon the acquisition after the date hereof by the Borrower of any Equipment covered by a certificate of title or ownership having a value in excess of $500,000 in the aggregate, and upon the request of the Collateral Agent, cause the Collateral Agent to be listed as the lienholder on such certificate of title or ownership and within 60 days of the acquisition thereof deliver evidence of the same to the Collateral Agent; (e) keep full and accurate Records, and stamp or otherwise mark such Records in such manner as the Collateral Agent may reasonably require in order to reflect the pledge and security interest granted by this Agreement; Borrower Security Agreement -8- (f) (i) upon reasonable prior notice, at any time during normal business hours, permit representatives of the Collateral Agent to inspect and make abstracts from the Records; and (ii) upon the occurrence and during the continuance of any Event of Default, permit representatives of the Collateral Agent to be present at the Borrower's place of business to receive copies of all communications and remittances relating to the Collateral; (g) upon the occurrence and during the continuance of any Event of Default, upon request of the Collateral Agent, promptly notify (and the Borrower hereby authorizes the Collateral Agent so to notify) each account debtor in respect of any Accounts Receivable or Instruments that such Collateral has been assigned to the Collateral Agent hereunder, and that any payments due or to become due in respect of such Collateral are to be made directly to the Collateral Agent, with a copy of such notice to the Collateral Agent; (h) furnish to the Collateral Agent from time to time (but, unless any Event of Default shall have occurred and be continuing, no more frequently than annually) statements and schedules further identifying and describing the Copyright Collateral, the Patent Collateral and the Trademark Collateral, respectively, and such other reports in connection with the Copyright Collateral, the Patent Collateral and the Trademark Collateral as the Collateral Agent may reasonably request, all in reasonable detail; (i) promptly upon request of the Collateral Agent, following receipt by the Collateral Agent of any statements, schedules or reports pursuant to clause (h) above, modify this Agreement by amending Annexes 2, 3 and/or 4, as the case may be, to include any Copyright, Patent or Trademark that becomes part of the Collateral under this Agreement, and deliver any such amended Annexes to the Collateral Agent; (j) for each deposit account (including, without limitation, the Accounts) that the Borrower, now or at any time hereafter, opens or maintains, at the Collateral Agent's request and option, pursuant to an agreement in form and substance reasonably satisfactory to the Collateral Agent, either (a) cause the bank to agree to comply, without further consent of the Borrower, at any time with instructions from the Collateral Agent to such bank directing the disposition of funds from time to time credited to such deposit account, or (b) arrange for the Collateral Agent to become the customer of the bank with respect to the deposit account, with the Borrower being permitted, only with the consent of the Collateral Agent, to exercise rights to withdraw funds from such deposit account; provided, the provisions of this paragraph shall not apply to (i) a deposit account for which the Collateral Agent is the bank and is in automatic control, and (ii) any deposit accounts specially and exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of the Borrower's salaried employees. To the extent that the Borrower shall have any cash, funds or sums of money in its possession constituting Project Revenues, all such cash, funds or sums of money shall be paid directly to the Collateral Agent or the Depositary Bank for deposit into the appropriate Account in accordance with the terms of the Credit Agreement and the Depositary Agreement; (k) if any Collateral is, now or at any time hereafter, in the possession of a bailee, promptly notify the Collateral Agent thereof and, at the Collateral Agent's request and option, promptly obtain an acknowledgement from the bailee, in form and substance satisfactory to the Collateral Agent, that the bailee holds such Collateral for the benefit of the Collateral Agent and such bailee's agreement to comply, without further consent of the Borrower, at any time with instructions of the Collateral Agent as to such Collateral; (l) if the Borrower, now or at any time hereafter, holds or acquires an interest in any electronic chattel paper or any "transferable record," as that term is defined in Section 201 of the federal Electronic Signatures in Global and National Commerce Act, or in Section 16 of the Uniform Borrower Security Agreement -9- Electronic Transactions Act as in effect in any relevant jurisdiction, promptly notify the Collateral Agent thereof and, at the request and option of the Collateral Agent, take such action as the Collateral Agent may reasonably request to vest in the Collateral Agent control, under Section 9-105 of the Uniform Commercial Code, of such electronic chattel paper or control under Section 201 of the federal Electronic Signatures in Global and National Commerce Act or, as the case may be, Section 16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record; provided that the Collateral Agent and the Secured Parties agree that the Collateral Agent will arrange, pursuant to procedures satisfactory to the Collateral Agent and so long as such procedures will not result in the Collateral Agent's loss of control, for the Borrower to make alterations to the electronic chattel paper or transferable record permitted under the Uniform Commercial Code or, as the case may be, Section 201 of the federal Electronic Signatures in Global and National Commerce Act or Section 16 of the Uniform Electronic Transactions Act, for a party in control to make without loss of control, unless an Event of Default has occurred and is continuing or would occur after taking into account any action by the Borrower with respect to such electronic chattel paper or transferable record; (m) if the Borrower is, now or at any time hereafter, a beneficiary under a letter of credit with a face value in excess of $250,000, promptly notify the Collateral Agent thereof and, at the request and option of the Collateral Agent, pursuant to an agreement in form and substance reasonably satisfactory to the Collateral Agent, either (a) arrange for the issuer and any confirmer of such letter of credit to consent to an assignment to the Collateral Agent of the proceeds of the letter of credit, or (b) arrange for the Collateral Agent to become the transferee beneficiary of the letter of credit, with the Collateral Agent agreeing, in each case, that the proceeds of the letter of credit are to be applied as provided in the Credit Agreement; and (n) take any and all other actions as the Collateral Agent may reasonably determine to be necessary or useful for the attachment, perfection and first priority of, and the ability of the Collateral Agent to enforce, the Collateral Agent's security interest in any and all of the Collateral, including, without limitation, (i) complying with any provision of any statute, regulation or treaty of the United States as to any Collateral if compliance with such provision is a condition to attachment, perfection or priority of, or ability of the Collateral Agent to enforce, the Collateral Agent's security interest in such Collateral, (ii) obtaining governmental and other third party waivers, consents and approvals, in form and substance reasonably satisfactory to the Collateral Agent, including, without limitation, any consent of any licensor, lessor or other person obligated on Collateral, (iii) obtaining waivers from mortgagees and landlords in form and substance reasonably satisfactory to the Collateral Agent, and (iv) taking all actions under any earlier versions of the Uniform Commercial Code or under any other law, as reasonably determined by the Collateral Agent to be applicable under the Uniform Commercial Code or in any other jurisdiction, including any foreign jurisdiction. 4.02 OTHER FINANCING STATEMENTS AND LIENS. Except for Permitted Liens, without the prior written consent of the Collateral Agent, the Borrower shall not file or suffer to be on file, or authorize or permit to be filed or to be on file, in any jurisdiction, any financing statement or like instrument with respect to the Collateral in which the Collateral Agent is not named as the sole secured party for the benefit of the Secured Parties. 4.03 PRESERVATION OF RIGHTS. The Collateral Agent shall not be required to take any steps to preserve any rights against prior parties to any of the Collateral. 4.04 SPECIAL PROVISIONS RELATING TO CERTAIN COLLATERAL. Borrower Security Agreement -10- (a) Adverse Claims. The Borrower shall defend, all at its own cost and expense, the Borrower's title and the existence, perfection and first priority (subject to any Permitted Liens) of the Collateral Agent's security interest in the Collateral against all adverse claims. (b) Distributions to Collateral Agent. If any Event of Default shall have occurred and be continuing, and whether or not the Collateral Agent or any other Secured Party exercises any available right to declare any Secured Obligation due and payable or seeks or pursues any other relief or remedy available to it under applicable law or under this Agreement or any other Transaction Document or any other agreement relating to such Secured Obligation, all distributions on and other payments in respect of the Collateral shall be paid directly to the Collateral Agent and retained by it as part of the Collateral, subject to the terms of this Agreement, and, if the Collateral Agent shall so request, the Borrower agrees to execute and deliver to the Collateral Agent appropriate additional distribution and other orders and documents to that end; provided, that if such Event of Default is waived or cured, any such distribution or other payment theretofore paid to the Collateral Agent shall, upon request of the Borrower (except to the extent theretofore applied to the Secured Obligations in accordance with the Credit Agreement), be returned by the Collateral Agent to the Borrower. (c) Assigned Agreements. (i) Anything herein to the contrary notwithstanding, the Borrower shall remain liable to perform all of its duties and obligations under each of the Assigned Agreements and in respect of the Collateral to the same extent as if this Agreement had not been executed. The exercise by the Collateral Agent or any other Secured Party of any of the rights and remedies hereunder shall not release the Borrower from any of its duties or obligations under any of the Assigned Agreements or in respect of the Collateral. Neither the Collateral Agent nor any other Secured Parry shall have any obligation or liability under any of the Assigned Agreements or otherwise in respect of the Collateral by reason of this Agreement or be obligated to perform any of the obligations or duties of the Borrower under any of the Assigned Agreements or otherwise in respect of the Collateral or to take any action to collect or enforce any claim for payment or any other right assigned hereunder. (ii) If the Borrower fails to perform any agreement contained herein or in any of the Assigned Agreements, the Collateral Agent may (but shall not be obligated to) cause the performance of such agreement, subject to the rules and regulations of the BLM, and the reasonable fees, costs and expenses (including reasonable attorneys' fees and expenses) of the Collateral Agent incurred in connection therewith shall, in accordance with Section 4.15, be payable by or on behalf of the Borrower and shall be Secured Obligations to the Collateral Agent secured under Article III. (d) Motor Vehicles. At any time after the occurrence and during the continuance of an Event of Default, the Borrower shall, upon the request of the Collateral Agent, deliver to the Collateral Agent originals of the certificates of title or ownership for the Motor Vehicles owned by it with the Collateral Agent listed as lienholder and take such other action as the Collateral Agent shall reasonably deem necessary or desirable to perfect the security interest created hereunder in all such Motor Vehicles. Borrower Security Agreement -11- (e) Intellectual Property. (i) For the purpose of enabling the Collateral Agent to exercise rights and remedies under Section 4.07 at such time as the Collateral Agent shall be lawfully entitled to exercise such rights and remedies, and for no other purpose, the Borrower hereby grants to the Collateral Agent, to the extent assignable, an irrevocable, non-exclusive license (exercisable without payment of royalty or other compensation to the Borrower) to use, assign, license or sublicense any of the Intellectual Property now owned or hereafter acquired by the Borrower, wherever the same may be located, including in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout thereof. (ii) Notwithstanding anything contained herein to the contrary, but subject to the provisions of Section 8.12 of the Credit Agreement that limit the rights of the Borrower to dispose of its property, so long as no Event of Default shall have occurred and be continuing, the Borrower will be permitted to exploit, use, enjoy, protect, license, sublicense, assign, sell, dispose of or take other actions with respect to the Intellectual Property in the ordinary course of the business of the Borrower. In furtherance of the foregoing, unless an Event of Default shall have occurred and be continuing the Collateral Agent shall from time to time, upon the request and at the sole cost and expense of the Borrower, execute and deliver any instruments, certificates or other documents, in the form so requested, that the Borrower shall have certified are appropriate (in its judgment) to allow it to take any action permitted above (including relinquishment of the license provided pursuant to clause (i) immediately above as to any specific Intellectual Property). Further, upon the Termination Date, the Collateral Agent shall transfer to the Borrower the license granted pursuant to clause (i) immediately above. The exercise of rights and remedies under Section 4.07 by the Collateral Agent shall not terminate the rights of the holders of any licenses or sublicenses theretofore granted by the Borrower in accordance with the first sentence of this clause (ii). 4.05 CUSTODY AND PRESERVATION. The Collateral Agent's obligation to use reasonable care in the custody and preservation of Collateral shall be satisfied if it uses the same care as it uses in the custody and preservation of its own Property. 4.06 RIGHTS OF SECURED PARTIES. The Collateral Agent or any other Secured Party may (but shall not be obligated to) pay or secure payment of any Tax or other claim that may be secured by or result in a Lien on any Collateral. The Collateral Agent or any other Secured Party may (but shall not be obligated to) do or cause to be done any other thing that is necessary or desirable to preserve, protect or maintain the Collateral or, after an Event of Default has occurred and for so long as it shall be continuing, to enhance its value. The Collateral Agent shall have no obligation to any Person to act or refrain from acting or exercising any of its rights under this Agreement; provided, however, that anything to the contrary contained herein notwithstanding, the Collateral Agent shall be liable for its own gross negligence or willful misconduct. The Borrower Security Agreement -12- Borrower, in accordance with Section 4.15, shall immediately reimburse the Collateral Agent or any other Secured Party for any reasonable payment or expense (including reasonable attorneys' fees and expenses) that the Collateral Agent or such other Secured Party may incur pursuant to this Section 4.06. 4.07 EVENTS OF DEFAULT ETC. During the period during which an Event of Default shall have occurred and be continuing: (a) the Collateral Agent shall have the rights and remedies with respect to this Agreement as more particularly provided herein or in the Credit Agreement; (b) the Borrower shall, at the request of the Collateral Agent, assemble Collateral owned by it that is movable (and not otherwise in the possession of the Collateral Agent), if any, at such place or places, reasonably convenient to both the Collateral Agent and the Borrower, as designated in such request; (c) subject to applicable law and to the extent permitted by the BLM, the Collateral Agent may (but shall not be obligated to), without notice to the Borrower and at such times as the Collateral Agent in its sole judgment may determine, exercise any or all of the Borrower's rights in, to and under, or in any way connected to the Collateral and the Collateral Agent shall otherwise have and may (but shall not be obligated to) exercise all of the rights, powers, privileges and remedies with respect to the Collateral of a secured party under the Uniform Commercial Code (whether or not said Code is in effect in the jurisdiction where the rights, powers, privileges and remedies are asserted) and such additional rights, powers, privileges and remedies to which a secured party is entitled under the laws in effect in any jurisdiction where any rights, powers, privileges and remedies hereunder may be asserted, including, without limitation, the right, to the maximum extent permitted by applicable law, to exercise all voting, consensual and other powers of ownership pertaining to the Collateral as if the Collateral Agent were the sole and absolute owner thereof (and the Borrower agrees to take all such action as may be appropriate to give effect to such right); (d) the Collateral Agent may (but shall not be obligated to) make any reasonable compromise or settlement it reasonably deems desirable with respect to any of the Collateral and may (but shall not be obligated to) extend the time of payment, arrange for payment in installments, or otherwise modify the terms, of all or any part of the Collateral; (e) the Collateral Agent may (but shall not be obligated to), in its name or in the name of the Borrower or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral; and (f) subject to applicable law and to the extent permitted by the BLM, the Collateral Agent may (but shall not be obligated to), upon 10 Business Days' prior written notice to the Borrower of the time and place, with respect to the Collateral or any part thereof which shall then be or shall thereafter come into the possession, custody or control of the Collateral Agent, any other Secured Party or any of their respective agents, sell, lease, assign or otherwise dispose of all or any part of such Collateral, at such place or places as the Collateral Agent deems reasonable, and for cash or for credit or for future delivery (without thereby assuming any credit risk), at public or private sale, without demand of performance or notice of intention to effect any such disposition or of the time or place thereof (except such notice as is required above or by applicable statute and cannot be waived). The Collateral Agent or any other Secured Party or anyone else may be the purchaser, lessee, assignee or recipient of any or all of the Collateral so disposed of at any public sale (or, to the maximum extent permitted by applicable law, at any private sale) and thereafter hold the same absolutely, free from any claim or right of whatsoever Borrower Security Agreement -13- kind, including any right or equity of redemption (statutory or otherwise), of the Borrower, any such demand, notice and right or equity being hereby expressly waived and released to the maximum extent permitted by applicable law. Subject to applicable law and to the extent permitted by the BLM, the Collateral Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the sale may be so adjourned. The proceeds of each collection, sale or other disposition under this Section 4.07 shall be applied in accordance with Section 4.11. The Borrower recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws, the Collateral Agent may be compelled, subject to the notice provision as provided in paragraph (f) of this Section 4.07, with respect to any sale of all or any part of the Collateral constituting a security (as such term is defined in the Securities Act of 1933), to limit purchasers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof. The Borrower acknowledges that any such private sale may be at prices and on terms less favorable to the Collateral Agent than those obtainable through a public sale without such restrictions, and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Collateral Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit the Borrower or the issuer thereof to register it for public sale. 4.08 DEFICIENCY. If the proceeds of sale, collection or other realization of or upon the Collateral by virtue of the exercise of remedies under Section 4.07 are insufficient to cover the costs and expenses of such realization and the payment in full of the Secured Obligations, the Collateral Agent shall retain all rights and remedies under the Transaction Documents, and the Borrower shall remain liable, with respect to any deficiency to the extent the Borrower is obligated under this Agreement. 4.09 REMOVALS, ETC. Without at least 30 days' prior written notice to the Collateral Agent, the Borrower shall not: (a) maintain any of its Records at any office, or permit any Inventory, Equipment or assets of the Projects to be located anywhere, other than at the Borrower's Address for Notices set out beneath its name on the signature pages hereto or at one of the locations identified in Annex 6 or in transit from one of such locations to another; (b) maintain its chief executive office at any place other than at the Borrower's Address for Notices set out beneath its name on the signature pages hereto; (c) change its corporate name, or the name under which it does business, from the name shown on the signature pages hereto; or (d) change the jurisdiction in which it is organized from that in which it is organized on the date hereof. The signature page hereto correctly specifies the place of business of the Borrower or, if the Borrower had more than one place of business, the location of the chief executive office of the Borrower, in each case during the period of four months ending on December 31, 2002. 4.10 PRIVATE SALE. The Collateral Agent and the other Secured Parties shall incur no liability as a result of the sale of the Collateral, or any part thereof, at any private sale pursuant to Section 4.07 conducted in a commercially reasonable manner. Subject to and without limitation of the preceding sentence, the Borrower hereby waives any claims against the Collateral Agent or any other Secured Party arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale to an unrelated third party was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Secured Obligations, even if the Collateral Agent accepts the first offer received and does not offer the Collateral to more than one offeree. Borrower Security Agreement -14- 4.11 APPLICATION OF PROCEEDS. (a) Application of Proceeds. Except as otherwise herein expressly provided, the proceeds of any collection, sale or other realization of all or any part of the Collateral pursuant hereto, and any other cash at the time held by the Collateral Agent under this Agreement, shall be applied by the Depositary Bank at the direction of the Collateral Agent to the Secured Obligations in accordance with Article IV of the Depositary Agreement. (b) Borrower Remains Obligated. No sale or other disposition of all or any part of the Collateral pursuant to Section 4.07 shall be deemed to relieve the Borrower of its obligations under any Transaction Document to which it is a party except to the extent the proceeds thereof are applied to the payment of such obligations. (c) Proceeds. As used in this Article IV, "PROCEEDS" of Collateral means cash, securities and other property realized in respect of, and distributions in kind of, Collateral, including any thereof received under any reorganization, liquidation or adjustment of debt of the Borrower or any issuer of or obligor on any of the Collateral. 4.12 ATTORNEY-IN-FACT. Without limiting any rights or powers granted by this Agreement to the Collateral Agent while no Event of Default has occurred and is continuing, upon the occurrence and during the continuance of any Event of Default, the Collateral Agent is hereby appointed the attorney-in-fact of the Borrower for the purpose of carrying out the provisions of this Article IV and taking any action and executing any instruments which the Collateral Agent may deem necessary or desirable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, so long as the Collateral Agent shall be entitled under this Article IV to make collections in respect of the Collateral, the Collateral Agent shall have the right and power to receive, endorse and collect all checks made payable to the order of the Borrower representing any payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. 4.13 PERFECTION. Prior to or on the Closing Date, the Borrower shall: (a) file such financing statements and other documents in the offices set out on Annex 8 in order to perfect the security interests granted by Article III to the extent such security interests may be perfected by such filings; (b) cause the Collateral Agent (to the extent requested by the Collateral Agent) to be listed as the lienholder on all certificates of title or ownership relating to Motor Vehicles owned by the Borrower; and (c) stamp or mark the books of the Borrower to record the Liens granted hereunder. Copies of any such financing statement or amendment thereto shall promptly be delivered to the Collateral Agent. The Borrower hereby authorizes the Collateral Agent to cause the filing of one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of the Borrower where permitted by applicable law. Copies of any such statement or amendment thereto shall promptly be delivered to the Borrower. 4.14 TERMINATION. (a) Upon any distribution or transfer of any Collateral in accordance with Section 8.12 or 8.13 of the Credit Agreement, the Collateral Agent shall, upon the written request of (and at the sole cost and expense of) the Borrower, promptly execute and deliver to the Borrower such Uniform Commercial Code termination statements and such other documentation as shall be reasonably requested by the Borrower to evidence the termination and release of the Liens on such Collateral. Borrower Security Agreement -15- (b) Upon the Termination Date, the security interest created by this Agreement shall terminate and all rights to the Collateral shall revert to the Borrower, and the Collateral Agent shall (at the written request and sole cost and expense of the Borrower) promptly cause to be transferred and delivered, against receipt but without any recourse, warranty or representation whatsoever, any remaining Collateral and money received in respect thereof, to or on the order of the Borrower and to be released and cancelled all licenses and rights referred to in Section 4.04. The Collateral Agent shall also (at the written request and sole cost and expense of the Borrower) promptly execute and deliver to the Borrower upon such termination such Uniform Commercial Code termination statements, certificates for terminating the Liens on the Motor Vehicles and such other documentation as shall be reasonably requested by the Borrower to effect the termination and release of the Liens on the Collateral. Without limiting the generality of the foregoing, the Collateral Agent shall, within 30 days of its receipt of a request from the Borrower at any time following the Termination Date, and at the expense of the Borrower, (i) pay to the Borrower or deposit into a deposit account in the Borrower's name the balance on deposit in any Account that is a deposit account, (ii) send to the Depositary Bank an authenticated statement that releases the Depositary Bank from any further obligation to comply with entitlement orders originated by the Collateral Agent with respect to any Account that is a securities account, (iii) communicate the authoritative copy of any electronic chattel paper constituting part of the Collateral to the Borrower or its designated custodian, (iv) send to each Person having an unfulfilled obligation to pay or deliver to the Collateral Agent proceeds arising from any letter of credit right constituting Collateral an authenticated release from any further obligation to pay or deliver to the Collateral Agent proceeds arising from any such letter of credit right, and (v) execute and deliver to the Borrower statements terminating any Consent and Agreement then in effect. 4.15 EXPENSES. (a) Subject to, and without duplication of amounts described in, Section 11.03 of the Credit Agreement, the Borrower agrees promptly to pay to the Collateral Agent all reasonable fees and out-of-pocket expenses (including reasonable fees and expenses for legal services) of, or incident to, the enforcement of any of the provisions of this Article IV, or the exercise by experts, agents or attorneys selected by the Collateral Agent in good faith of any rights or privileges of the Borrower in respect of the Collateral, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Collateral, and for the care of the Collateral and defending or asserting rights and claims of the Collateral Agent and the other Secured Parties in respect thereof, by litigation or otherwise, in each case in accordance with the terms of this Agreement, and all such reasonable fees and expenses, together with interest thereon at the applicable Post-Default Rate, shall be Secured Obligations of the Collateral Agent secured under Article III. (b) The terms, conditions, covenants and agreements to be observed or performed by the Borrower under this Agreement shall be observed or performed by it at its sole cost and expense. 4.16 FURTHER ASSURANCES. The Borrower agrees that, at any time and from time to time, at its sole cost and expense, it shall promptly execute and deliver all further agreements, instruments, documents and certificates and take all further action that, in the reasonable judgment of the Collateral Agent, may be necessary or desirable in order to fully effect the purposes of this Agreement (including the delivery of possession of any Collateral that hereafter comes into existence or is acquired in the future by the Collateral Agent as pledgee for the benefit of the Secured Parties) and to enable the Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to the Collateral or any part thereof. Borrower Security Agreement -16- 4.17 RELEASE OF MOTOR VEHICLES. So long as no Event of Default shall have occurred and be continuing, at the written request and, in accordance with Section 4.15, sole cost and expense of the Borrower, the Collateral Agent shall execute and deliver to the Borrower such instruments as the Borrower shall reasonably request to remove the notation of the Collateral Agent as lienholder on any certificate of title for any Motor Vehicle; provided, that any such instruments shall be delivered, and the release shall be effective, only upon receipt by the Collateral Agent of a certificate from the Borrower stating that the Motor Vehicle the lien on which is to be released is to be sold or has suffered a casualty loss (with title thereto passing to the casualty insurance company therefor in settlement of the claim for such loss) and that the sale or casualty proceeds thereon shall first have been delivered to the Collateral Agent. ARTICLE V MISCELLANEOUS 5.01 COLLATERAL AGENT'S RIGHT TO PERFORM ON BORROWER'S BEHALF. If the Borrower shall fail to observe or perform any of the terms, conditions, covenants and agreements to be observed or performed by it under this Agreement, the Collateral Agent may (but shall not be obligated to), upon reasonable notice to the Borrower, do the same or cause it to be done or performed or observed by experts, agents or attorneys selected by the Collateral Agent in good faith at the sole cost and expense of the Borrower, either in its name or in the name and on behalf of the Borrower, and the Borrower hereby authorizes the Collateral Agent so to do. 5.02 WAIVERS OF RIGHTS INHIBITING ENFORCEMENT. The Borrower waives, to the maximum extent permitted by applicable law: (a) any claim that, as to any part of the Collateral, a public sale, should the Collateral Agent elect so to proceed, is, in and of itself, not a commercially reasonable method of sale for the Collateral; (b) the right to assert in any action or proceeding between it and the Collateral Agent any offsets that it may have; (c) except as otherwise provided in this Agreement, NOTICE OR JUDICIAL HEARING IN CONNECTION WITH THE COLLATERAL AGENTS TAKING POSSESSION OR DISPOSITION OF ANY OF THE COLLATERAL INCLUDING ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT THAT THE BORROWER WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, AND ALL OTHER REQUIREMENTS AS TO THE TIME, PLACE AND TERMS OF SALE OR OTHER REQUIREMENTS WITH RESPECT TO THE ENFORCEMENT OF THE COLLATERAL AGENT'S RIGHTS HEREUNDER; (d) all rights of redemption, appraisement, valuation, stay and extension or moratorium; and (e) all other rights the exercise of which would, directly or indirectly, prevent, delay or inhibit the enforcement of any of the rights or remedies of the Collateral Agent and the other Secured Parties under this Agreement or the absolute sale of the Collateral, now or hereafter in force under any applicable law, and the Borrower, for itself and all who may claim under it, Borrower Security Agreement -17- insofar as it or they now or hereafter lawfully may, hereby waive the benefit of all such laws and rights. 5.03 NO WAIVER; REMEDIES CUMULATIVE. No failure on the part of the Collateral Agent, any other Secured Party or any of such Person's agents to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or remedy hereunder shall operate as a waiver thereof. No single or partial exercise by the Collateral Agent, any other Secured Party or any of such Person's agents of any right, power or remedy hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The rights, powers and remedies herein or in any other Transaction Document expressly provided are cumulative and not exclusive of any rights, powers or remedies which either Collateral Agent or any other Secured Party would otherwise have. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of either Collateral Agent or any other Secured Party to any other or further action in any circumstances without notice or demand, except to the extent notice is expressly required by this Agreement or any other Financing Document. 5.04 NOTICES. All notices, requests and other communications provided for herein (including, without limitation, any modifications of, or waivers or consents under, this Agreement) shall be given or made in writing in the manner set out in Section 11.02 of the Credit Agreement Unless otherwise so changed in accordance with the Credit Agreement by a party hereto, all notices, requests and other communications to such party shall be sent to the address of such party set out on the signature pages hereto. 5.05 AMENDMENTS, ETC. This Agreement may be amended, supplemented, modified or waived only by an instrument in writing duly executed by the Borrower and the Collateral Agent. Any such amendment, supplement, modification or waiver shall be binding upon the Collateral Agent and each Lender, each holder of any of the Secured Obligations and the Borrower. Any waiver shall be effective only in the specific instance and for the specified purpose for which it was given. 5.06 EXPENSES. The parties hereto agree that all costs and expenses covered by Section 11.03 of the Credit Agreement shall be Secured Obligations entitled to the benefits of the collateral security provided pursuant to Article III. 5.07 SUCCESSORS AND ASSIGNS. This Agreement shall: (a) remain in full force and effect until the termination hereof pursuant to Section 4.14; and (b) be binding upon and inure to the benefit of the respective successors and permitted assigns of the Borrower and the Collateral Agent, the Lenders and each holder of any of the Secured Obligations; provided, however, that the Borrower shall not assign or transfer its rights hereunder without the prior written consent of the Collateral Agent. 5.08 SURVIVAL, ETC. The obligations of the Borrower under Section 4.15 shall survive after termination of this Agreement or the resignation or the removal of the Collateral Agent. In addition, the representations and warranties of the Borrower set out in this Agreement or contained in any documents delivered to the Collateral Agent or any other Secured Party pursuant to this Agreement shall be considered to have been relied upon by the Secured Parties in entering into the Credit Agreement and the relevant Financing Documents and making each Loan, notwithstanding any investigation on their respective parts. 5.09 COUNTERPARTS; EFFECTIVENESS. This Agreement may be executed in any number of counterparts, all of which when taken together shall constitute one and the same instrument and either of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement and the other Financing Documents constitute the entire agreement and understanding among the parties hereto with respect to matters covered by this Agreement and the other Financing Documents and supersede any and all Borrower Security Agreement -18- prior agreements and understandings, written or oral, relating to the subject matter hereof. This Agreement shall become effective at such time as the Collateral Agent shall have received counterparts hereof signed by all of the intended parties hereto. 5.10 AGENTS, ETC. The Collateral Agent may employ agents, experts and attorneys-in-fact in connection herewith and shall not be responsible for the negligence or misconduct of any such agents, experts or attorneys-in-fact selected by it in good faith. 5.11 SEVERABILITY. If any provision hereof is invalid or unenforceable in any jurisdiction, then, to the fullest extent permitted by applicable law: (a) the other provisions hereof shall remain in full force and effect in such jurisdiction in order to carry out the intentions of the parties hereto as nearly as may be possible; and (b) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. 5.12 HEADINGS. Headings appearing herein are used solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 5.13 LIMITATION OF LIABILITY. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, NEITHER THE COLLATERAL AGENT NOR ANY OTHER SECURED PARTY SHALL HAVE LIABILITY WITH RESPECT TO, AND THE BORROWER HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR: (a) ANY LOSS OR DAMAGE SUSTAINED BY THE BORROWER, OR ANY LOSS, DAMAGE, DEPRECIATION OR OTHER DIMINUTION IN THE VALUE OF ANY COLLATERAL, THAT MAY OCCUR AS A RESULT OF, IN CONNECTION WITH, OR THAT IS IN ANY WAY RELATED TO, ANY EXERCISE OF ANY RIGHT OR REMEDY UNDER THIS AGREEMENT EXCEPT FOR ANY SUCH LOSS, DAMAGE, DEPRECIATION OR DIMINUTION TO THE EXTENT THAT THE SAME IS THE RESULT OF ACTS OR OMISSIONS ON THE PART OF SUCH SECURED PARTY CONSTITUTING WILLFUL MISCONDUCT OR GROSS NEGLIGENCE; OR (b) ANY SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES SUFFERED BY THE BORROWER IN CONNECTION WITH ANY CLAIM RELATED TO THIS AGREEMENT. 5.14 SECURITY INTEREST ABSOLUTE. To the maximum extent permitted by applicable law and subject to the rules and regulations of the BLM, the rights and remedies of the Collateral Agent hereunder, the Liens created hereby, and the obligations of the Borrower under this Agreement are absolute, irrevocable and unconditional and will remain in full force and effect without regard to, and will not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever (other than termination pursuant to Section 4.14), including: (a) any renewal, extension, amendment, or modification of, or addition or supplement to or deletion from, any of the Transaction Documents or any other instrument or agreement referred to therein, or any assignment or transfer of any thereof; (b) any waiver of, consent to or departure from, extension, indulgence or other action or inaction under or in respect of any of the Secured Obligations, this Agreement, any other Transaction Document or other instrument or agreement relating thereto, or any exercise or non-exercise of any right, remedy, power or privilege under or in respect of the Secured Obligations, Borrower Security Agreement -19- this Agreement, any other Transaction Document or any such other instrument or agreement relating thereto; (c) any furnishing of any additional security for the Secured Obligations or any part thereof to the Collateral Agent or any other person or any acceptance thereof by the Collateral Agent or any other person or any substitution, sale, exchange, release, surrender or realization of or upon any such security by the Collateral Agent or any other person or the failure to create, preserve, validate, perfect or protect any other Lien granted to, or purported to be granted to, or in favor of, the Collateral Agent or any other Secured Party; (d) any invalidity, irregularity or unenforceability of all or any part of the Secured Obligations, any other Transaction Document or any other agreement or instrument relating thereto or any security therefor; (e) the acceleration of the maturity of any of the Secured Obligations or any other modification of the time of payment thereof; or (f) any other event or circumstance whatsoever which might otherwise constitute a legal or equitable discharge of a surety or a guarantor, it being the intent of this Section 5.14 that the obligations of the Borrower hereunder shall be absolute, irrevocable and unconditional under any and all circumstances. 5.15 REINSTATEMENT. This Agreement and the Lien created hereunder shall automatically be reinstated if and to the extent that for any reason any payment by or on behalf of the Borrower in respect of the Secured Obligations is rescinded or must otherwise be restored by any holder of the Secured Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and the Borrower shall indemnify the Collateral Agent, each other Secured Party and its respective employees, officers and agents on demand for all reasonable fees, costs and expenses (including, without limitation, reasonable fees, costs and expenses of counsel) incurred by the Collateral Agent, such other Secured Party or its respective employees, officers or agents in connection with such reinstatement, rescission or restoration. 5.16 NO THIRD PARTY BENEFICIARIES. THE AGREEMENTS OF THE PARTIES HERETO ARE SOLELY FOR THE BENEFIT OF THE BORROWER, THE COLLATERAL AGENT AND THE OTHER SECURED PARTIES, AND NO PERSON (OTHER THAN THE PARTIES HERETO, THE OTHER SECURED PARTIES AND THEIR SUCCESSORS AND ASSIGNS PERMITTED HEREUNDER) SHALL HAVE ANY RIGHTS HEREUNDER. 5.17 GOVERNING LAW; SUBMISSION TO JURISDICTION, ETC. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. EACH OF THE BORROWER AND THE COLLATERAL AGENT HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK COUNTY (INCLUDING ITS APPELLATE DIVISION), AND OF ANY OTHER APPELLATE COURT IN THE STATE OF NEW YORK, FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH OF THE COLLATERAL AGENT AND THE BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. Borrower Security Agreement -20- 5.18 WAIVER OF JURY TRIAL. THE BORROWER AND THE COLLATERAL AGENT HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 5.19 SERVICE OF PROCESS. Nothing herein shall in any way be deemed to limit the ability of the Financing Parties or the Borrower to serve any writs, process or summonses in any other manner permitted by applicable law or to obtain jurisdiction over the Borrower or the Collateral Agent, as applicable, in such jurisdiction, and in such manner, as may be permitted by applicable law. 5.20 AUTHORITY OF THE COLLATERAL AGENT. The Borrower acknowledges and agrees that the rights and responsibilities of the Collateral Agent under this Agreement with respect to any action taken, or determination or request made, by the Collateral Agent or the exercise or non-exercise by the Collateral Agent of any power, right or remedy provided for or resulting or arising out of this Agreement shall, as between the Collateral Agent and the Secured Parties, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Collateral Agent and the Borrower, the Collateral Agent shall be conclusively presumed to be acting as the Collateral Agent for the Secured Parties with full and valid authority so to act or refrain from acting, and the Borrower shall be under no obligation or entitlement to make any inquiry respecting such authority. 5.21 LIMITATION OF RECOURSE. The obligations of the Borrower under this Agreement shall be obligations of the Borrower only and neither the Collateral Agent nor any Secured Party shall have any claim against or recourse to (whether by operation of law or otherwise) any Non-Recourse Person (other than claims against and recourse to the Sponsor with respect to its obligations under the Borrower Equity Interest Pledge) in respect of such obligations of the Borrower. Notwithstanding the foregoing, nothing in this Section 5.21 shall impair or in any way limit any liabilities or obligations of (a) the Sponsor under or pursuant to its obligations as set forth in the Borrower Equity Pledge, or (b) any Non-Recourse Party for fraud or willful misconduct. Borrower Security Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. ORMESA LLC BY: ORMAT FUNDING CORP., ITS SOLE MEMBER AND CONTROL MANAGER By: ------------------------------------------ Name: Title: Address for Notices: 980 Greg Street Sparks, NV 89431 Attn: President Telephone: (775) 356-9029 Telecopy: (775) 356-9039 UNITED CAPITAL, a division of Hudson United Bank, not in its individual capacity, but solely as Collateral Agent By: ------------------------------------------ Name: Title: Address for Notices: 87 Post Road East Westport, CT 06880 Telecopier No.: (203) 291-6652 Telephone No.: (203) 291-6639 Attention: Jerry Peters, Senior Vice President Borrower Security Agreement ANNEX 1 Assigned Agreements 1. each PPA 2. the O&M Contract 3. each Plant Connection Agreement 4. the Energy Services Agreement, upon execution and delivery thereof 5. the Water Supply Agreement 6. each BLM Lease 7. each Site License 8. each ROW 9. the LLC Agreement 10. the Unit Agreement 11. each Transmission Service Agreement 12. the Funding and Construction Agreement 13. the Purchase Order Borrower Security Agreement ANNEX 2 List of Copyrights, Copyright Registrations and Applications for Copyright Registrations NONE Borrower Security Agreement ANNEX 3 List of Patents and Patent Applications NONE Borrower Security Agreement ANNEX 4 List of Trade Names, Trademarks, Service Marks, Trademark and Service Mark Registrations and Applications for Trademark and Service Mark Registrations NONE Borrower Security Agreement ANNEX 5 List of Contracts, Licenses and Other Agreements NONE Borrower Security Agreement ANNEX 6 Locations 3300 East Evan Hewes Highway Holtville, CA 92250 Borrower Security Agreement ANNEX 7 Instruments NONE Borrower Security Agreement ANNEX 8 Filing Locations Secretary of State of the State of Delaware Imperial County, California Borrower Security Agreement Exhibit B-2 to Credit Agreement FORM OF BORROWER PLEDGE AGREEMENT This PLEDGE AGREEMENT (this "AGREEMENT"), dated as of __________ ___, 2002, between ORMAT FUNDING CORP., a Delaware corporation (the "PLEDGOR"), and UNITED CAPITAL, a division of Hudson United Bank, a New Jersey banking corporation ("UNITED"), not in its individual capacity, but solely as Collateral Agent for the Lenders and other Secured Parties under and as defined in the Credit Agreement referred to below (in such capacity, together with its successors in such capacity, the "COLLATERAL AGENT"). WHEREAS, pursuant to the Credit Agreement, dated as of December 31, 2002 (as amended, modified and supplemented and in effect from time to time, the "CREDIT AGREEMENT"), among Ormesa LLC, a Delaware limited liability company (the "BORROWER"), the lenders party thereto from time to time (the "LENDERS"), United, not in its individual capacity, but solely as administrative agent for such Lenders, and the Collateral Agent, the Lenders have agreed to make loans and extend other credit to the Borrower for the purpose of financing certain costs of acquiring, improving and operating various geothermal power plant facilities and related expenses; WHEREAS, the Borrower is a direct, wholly-owned subsidiary of the Pledgor; WHEREAS, it is a condition to the obligations of the Lenders and the other Secured Parties under the Credit Agreement that the Pledgor shall have executed and delivered this Agreement and granted the Liens provided for herein; and WHEREAS, to induce the Lenders and the other Secured Parties to enter into the Credit Agreement and to induce the Lenders to make loans to the Borrower, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor has agreed to pledge and grant a security interest in the Collateral (as defined below) as security for the Secured Obligations (as defined in the Credit Agreement). Accordingly, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND INTERPRETATION 1.01 DEFINITIONS. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to them in Schedule I to the Credit Agreement. All terms used herein which are not defined herein or in the Credit Agreement and are defined in the Uniform Commercial Code (as such term is defined below) shall have the meanings therein stated. In addition, capitalized terms used in the preamble hereto shall have the respective meanings given thereto and the following terms shall have the following meanings under this Agreement. "ARTICLE 9" shall mean Article 9 of the Uniform Commercial Code of the State of New York, as revised and in effect on and after July 1, 2001. "BORROWER INSOLVENCY EVENT" shall mean the insolvency, bankruptcy or reorganization of the Borrower or any other event described in Section 9.01 (g) or (h) of the Credit Agreement with respect to the Borrower. "BORROWER INSOLVENCY PROCEEDINGS" shall have the meaning assigned to such term in Section 4.05. Pledge Agreement "COLLATERAL" shall have the meaning assigned to such term in Article III. "OWNERSHIP COLLATERAL" shall have the meaning assigned to such term in Article III(c). "PLEDGED INTERESTS" shall have the meaning assigned to such term in Article III(a). "RECORDS" shall have the meaning assigned to such term in Section 2.01. 1.02 INTERPRETATION. The principles of interpretation set out in Article I of the Credit Agreement shall apply equally to this Agreement mutatis mutandis. ARTICLE II REPRESENTATIONS AND WARRANTIES The Pledgor represents and warrants to the Secured Parties that: 2.01 RECORDS. The place of business or, if there is more than one place of business, the chief executive office of the Pledgor is located at the Pledgor's Address for Notices set out on the signature page hereto, and the Pledgor has no books and records concerning the Collateral (hereinafter, collectively called the "Records") at any location other man at such address. 2.02 LEGAL TITLE. The Pledgor is the sole legal and beneficial owner of the Collateral free and clear of all Liens (other than Permitted Liens and the pledge and security interest granted to the Collateral Agent hereunder for the benefit of the Secured Parties, which pledge and security interest shall, following a filing described in Section 5.13 hereof, constitute a first priority perfected pledge and security interest in and to all of the Collateral) and no right or option to acquire all or any part of the Collateral exists in favor of any other Person. The Pledgor has not agreed to secure any Indebtedness by any Lien upon and does not have outstanding any obligation to create Liens on, or with respect to, any Collateral (other than Permitted Liens and the Liens granted to the Collateral Agent hereunder for the benefit of the Secured Parties). All filings and other actions necessary to create, preserve, validate, perfect and protect such pledge and security interest and the priority thereof have been duly made or taken (other than any such filings or other actions permitted to be made or taken after the Closing Date in accordance with this Agreement and the other Financing Documents). 2.03 PLEDGED INTERESTS. The Pledged Interests identified in Annex 1 are, and all other Pledged Interests in which the Pledgor shall hereafter grant a security interest pursuant to Article III will be, duly authorized, validly existing, fully paid and non-assessable and none of such Pledged Interests is or will be subject to any contractual restriction, or any restriction under the Charter Documents of the Borrower, upon the transfer of such Pledged Interests (except for any such restriction contained herein or in the other, Financing Documents). 2.04 ANNEX 1. The Pledged Interests identified in Annex 1 constitute all of the membership interests or other ownership interests of any class or character of the Borrower beneficially owned by the Pledgor on the date hereof (whether or not registered in the name of the Pledgor), and constitute one hundred percent (100%) of the membership or other ownership interests of the Borrower. Annex 1 correctly identifies, as at the date hereof, the registered owner of such Pledged Interests and the respective percentage of membership interests comprising such Pledged Interests. Pledge Agreement 2.05 CORPORATE STATUS. The Pledgor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 2.06 DUE AUTHORIZATION, LEGALITY AND ENFORCEABILITY. The Pledgor has full corporate power, authority and legal right to execute and deliver the Transaction Documents to which it is a party and to perform its obligations thereunder. The execution, delivery and performance by the Pledgor of each of the Transaction Documents to which it is or is intended to be a party and the consummation of the transactions contemplated thereby have been duly authorized by all necessary corporate action on its part. Each of the Transaction Documents to which the Pledgor is a party has been duly executed and delivered by or on behalf of the Pledgor and constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms, except as the enforceability thereof may be limited by, (i) applicable bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally; and (ii) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). 2.07 NO CONSENT, BREACH, ETC. The execution, delivery and performance by the Pledgor of each Transaction Document to which it is or is intended to be a party do not and will not: (a) require any consent or approval of any Person that has not been obtained and each such consent and approval that has been obtained is in full force and effect; (b) violate any Government Rule or Government Approval applicable to it; (c) conflict with, result in a breach of or constitute a default under (A) its Charter Documents or any corporate action, or any resolution of the board of directors, or (B) any Project Document or any indenture or loan or credit agreement or any other agreement, lease or instrument to which it is a party or by which it or its Property may be bound or affected in any material respect; or (d) result in, or create any Lien (other than a Permitted Lien) upon or with respect to any of the Collateral now owned or hereafter acquired by the Pledgor. The Pledgor is not in violation of any Government Rule or Government Approval applicable to it or any of its Properties, except where such violation could not reasonably be expected to result in a Material Adverse Effect. The Pledgor is not in breach of or default under any indenture, loan or credit agreement or any other agreement, lease or instrument referred to in clause (c) of this Section 2.08, except such breaches or defaults that, in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. 2.08 GOVERNMENT APPROVALS. The Pledgor possesses all Government Approvals necessary under Government Rules for it to own its Properties and conduct its business, and no Government Approval by, and no filing (other than the filing described in Section 5.13) with, any Government Authority is required for the execution, delivery and performance of its obligations under this Agreement and each other Transaction Document to which it is a party or the validity and enforceability of such obligations. 2.09 NO PROCEEDINGS. There is no action, suit or proceeding at law or in equity or by or before any Government Authority, arbitral tribunal or other body now pending or, to the best knowledge of the Pledgor, threatened against or affecting the Pledgor or its Property, that could reasonably be expected to result in a Material Adverse Effect. 2.10 INVESTMENT COMPANY ACT. The Pledgor is not an "investment company" or a company "controlled" by an "investment company" or an "investment advisor", within the meaning of the Investment Company Act of 1940. 2.11 REGULATION OF PLEDGOR. The Pledgor is not, and is not subject to regulation as, a "public-utility company", an "electric utility company", a "holding company" or as an "affiliate" or a "subsidiary company" of any of the foregoing under PUHCA, and is not subject to regulation as a "public utility" under the Federal Power Act, as amended, or under state law with respect to rates, financial or organizational regulation. Pledge Agreement 2.12 TAXES. The Pledgor has filed or caused to be filed all tax returns that are required by applicable law to be filed, and has paid all Taxes shown to be due and payable on said returns or on any assessments made against it or any of its Property and all other Taxes, imposed on it by any Government Authority (other than Taxes the payment of which is not yet due or that are being Contested) except, in each case, where such failure could not reasonably be expected to have a Material Adverse Effect. No Liens for Taxes (other than Permitted Liens) against the Pledgor or any of its Property exist and no claims are being asserted against the Pledgor or any of its Property with respect to any Taxes. 2.13 CERTIFICATED SECURITIES. No portion of the Collateral is represented by certificates or instruments. 2.14 CHANGES IN CIRCUMSTANCES. The Pledgor has not, within the period of four months prior to the date hereof: (a) changed its location (as determined pursuant to Section 9-307 of Article 9); (b) changed its name; or (c) become a "new debtor" (as defined in Section 9-102(a)(56) of Article 9) with respect to a security agreement previously entered into by any other Person. ARTICLE III THE PLEDGE As collateral security for the prompt payment and performance in full when due (whether at stated maturity, by acceleration or otherwise) of the Secured Obligations now existing or hereafter arising, the Pledgor hereby pledges and grants to the Collateral Agent for the benefit of the Secured Parties as hereinafter provided, a lien on and security interest in, all of the Pledger's right, title and interest in, to and under the following, whether now owned by the Pledgor or hereafter acquired and whether now existing or hereafter coming into existence and wherever located (all being collectively referred to herein as "COLLATERAL"): (a) the membership interests of the Borrower identified in Annex 1 and all other ownership interests of whatever class or character of the Borrower, now owned or hereafter acquired by the Pledgor, in each case together with all certificates, if any, evidencing the same (collectively, the "PLEDGED INTERESTS"); (b) all certificates, shares, securities, moneys, membership interests, stock or other Property representing a dividend or distribution on any of the Pledged Interests or other Ownership Collateral, or representing a distribution or return of capital upon or in respect of any of the Pledged Interests or other Ownership Collateral, or resulting from a split-up, revision, reclassification or other like change of any of the Pledged Interests or other Ownership Collateral or otherwise received in exchange therefor, and any subscription warrants, rights or options issued to the holders of, or otherwise in respect of, any of the Pledged Interests or other Ownership Collateral; (c) without prejudice to Section 8.02, 8.12 or 8.25 of the Credit Agreement and without affecting the obligations of the Pledgor or the Borrower under any provision prohibiting such action under any Financing Document or any other Transaction Document, in the event of any consolidation or merger in which the Borrower is not the surviving entity: (i) all ownership interests of any class or character of the successor entity (unless such successor entity is the Borrower itself) formed by or resulting from such consolidation or merger received in consideration of, or in exchange for, the Collateral described in paragraphs (a) and (b) above; and (ii) all other consideration (including, without limitation, all personal property, tangible or intangible) received in exchange Pledge Agreement for such Collateral (the Pledged Interests, together with all other certificates, shares, securities, moneys, membership interests, stock or other Property as may from time to time be pledged hereunder pursuant to paragraph (a) or (b) above and this paragraph (c) and the proceeds of and to any such property and, to the extent related to any such property or such proceeds, all books, correspondence, credit files, records, invoices and other papers, being herein collectively called the "OWNERSHIP COLLATERAL"); (d) (i) all of Pledgor's right, title and interest (x) under the LLC Agreement, including all voting and management rights and all rights to grant and withhold consents and approvals, and (y) regarding access to and inspection and use of all books and records, including computer software and computer software programs, of the Borrower, and (ii) all other rights, interests, property or claims to which the Pledgor may be entitled in its capacity as member of the Borrower; and (e) all proceeds of any of the foregoing; provided, however, any distributions, payments or releases (whether in the form of cash, instruments or otherwise) properly made by the Borrower to the Pledgor pursuant to Section 8.13 of the Credit Agreement shall automatically be released from the Lien granted hereunder and shall no longer be part of the Collateral upon the making of such distribution, payment or release. ARTICLE IV COVENANTS In furtherance of the grant of the pledge and security interest pursuant to Article III, the Pledgor hereby agrees with each Secured Party and the Collateral Agent as follows: 4.01 PRESERVATION OF CORPORATE EXISTENCE, ETC. The Pledgor shall (a) preserve and maintain its legal existence, (b) preserve and maintain its good standing and all of its material licenses, rights, privileges and franchises necessary for the maintenance of its existence and qualification to do business, and (c) conduct of its business in an orderly, efficient and regular manner, unless the failure to so comply could not reasonably be expected to result in a Material Adverse Effect. 4.02 NO DISSOLUTION. The Pledgor shall not cause or consent to any dissolution or termination of the Borrower, nor shall the Pledgor join in or consent to any election to dissolve or terminate the Borrower. 4.03 LIENS. Except for any Liens arising under this Agreement, the Pledgor will not secure or agree to secure any Indebtedness by any Lien upon, or have outstanding at any time any Lien or obligation to create Liens on or with respect to, any Collateral. 4.04 NOTICES. The Pledgor shall promptly upon: (a) obtaining knowledge of any action, suit or proceeding at law or in equity by or before any Government Authority, arbitral tribunal or other body pending or threatened against or otherwise affecting the Pledgor that could reasonably be expected to result in a Material Adverse Effect; (b) becoming aware of any other circumstance, act or condition (including the adoption, amendment or repeal of any Government Rule or the Impairment of any Government Approval or notice affecting the Pledgor (whether formal or informal, written or oral) of the failure to comply with the terms and conditions of any Government Approval) that could reasonably be expected to result in a Material Adverse Effect; or (c) knowing or having reason to believe that any Default or Event of Default relating to the Pledgor has occurred, in each case, furnish to the Collateral Agent a notice of such event describing the Pledge Agreement same in reasonable detail and, together with such notice or as soon thereafter as practicable, a written description of the action that the Pledgor has taken or proposes to take with respect thereto. 4.05 BANKRUPTCY PROCEEDINGS. To the maximum extent permitted by applicable law, the Pledgor hereby agrees that it shall not: (a) institute, take, cause to be taken, or consent to, any action (whether as member or otherwise) intended to result in the institution against the Borrower of any proceedings (whether of a legal or equitable nature or otherwise) which may lead to a Borrower Insolvency Event (such proceedings, "BORROWER INSOLVENCY PROCEEDINGS"); (b) consent to the taking by the Borrower of any action which would result in the commencement of any Borrower Insolvency Proceedings; or (c) to the extent it is entitled or lawfully able to do so, fail to timely controvert, or to cause the Borrower to timely controvert, any Borrower Insolvency Proceedings. 4.06 TRANSFERS. The Pledgor shall not create or consent to the creation of any other membership or ownership interest in the Borrower without the prior written consent of the Collateral Agent. Except pursuant to the exercise by the Collateral Agent of any of its rights hereunder or as otherwise expressly permitted herein, the Pledgor shall not sell, assign, transfer or otherwise dispose of all or any portion of its ownership interest (whether voting or economic) in the Borrower (whether any such ownership interest is owned by the Pledgor on the date of this Agreement or is acquired by the Pledgor at any time after the date hereof) or sell, assign, transfer, exchange or otherwise dispose of all or any part of the other Collateral (or any interest therein), in each case, unless each of the following conditions is satisfied at all times immediately prior to and after giving effect to such proposed sale or transfer: (i) no Default or Event of Default shall have occurred and is then continuing; (ii) the proposed purchaser or transferee is a Permitted Transferee; (iii) the Pledgor will at all times continue to directly own at least fifty-one percent (51%) of the membership or other ownership interests of the Borrower; (iv) there shall not at any time be more than three Permitted Transferees holding the membership or other ownership interests of the Borrower; (v) the Pledgor will at all times be the managing member of the Borrower or the owner of at least fifty-one percent (51%) of the membership or other ownership interests in the managing member of the Borrower; (vi) all such Collateral so sold or transferred will at all times remain subject to the Lien granted hereunder notwithstanding such sale or transfer, and such proposed purchaser or transferee shall have executed and delivered to the Collateral Agent documentation to that effect satisfactory to the Collateral Agent, including without limitation (A) a pledge agreement substantially in the form of this Agreement, (B) written acknowledgement of such continuing Lien and (C) appropriate Uniform Commercial Code financing statements; (vii) all Uniform Commercial Code financing statements determined by the Collateral Agent to be necessary or desirable to maintain and preserve such continuing Lien against such proposed purchaser or transferee shall have been filed in all locations determined by the Collateral Agent to be necessary or desirable for such purpose, and such proposed purchaser or transferee shall have taken all other action requested by the Collateral Agent in connection therewith; and Pledge Agreement (viii) all reasonable fees and expenses of the Collateral Agent and its counsel in connection with any such proposed sale or transfer shall be reimbursed by the Pledgor on demand. 4.07 CERTAIN DISTRIBUTIONS. Section 8.13 of the Credit Agreement contains a covenant of the Borrower with respect to the making by the Borrower of Restricted Payments. The Pledgor hereby agrees that if it or any of its Affiliates receives a Restricted Payment in contravention of Section 8.13, then the Pledgor shall hold, or cause to be held, such Restricted Payment (or an amount equal thereto) in trust for the Secured Parties, and promptly pay the same, or cause the same to be paid over, to the Collateral Agent. 4.08 COMPLIANCE WITH GOVERNMENT RULES, ETC. The Pledgor shall comply with all applicable Government Rules and shall from time to time obtain, maintain, comply with and renew, all Government Approvals necessary for it to perform its obligations under the Transaction Documents to which it is a party (except any thereof the non-compliance with or non-renewal of which could not reasonably be expected to result in a Material Adverse Effect. The Pledgor shall promptly upon receipt or publication furnish a copy of each such Government Approval to the Collateral Agent. 4.09 TAXES. The Pledgor shall pay and discharge all Taxes imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto and prepare and file Tax returns on or before their due date; provided, that the Pledgor shall have the right to Contest the validity or amount of any such Tax. 4.10 REGULATORY STATUS. The Pledger: (a) shall take, or cause to be taken, all action required to cause the representations and warranties set out in Sections 2.11 and 2.12 to be and remain, at all times, true and correct; and (b) shall not take, or permit to be taken, any action which could cause the representations and warranties set out in Sections 2.11 or 2.12 to cease to be true and correct. 4.11 SUBORDINATED PROMISSORY NOTE. The Pledgor will not amend, modify or otherwise change, or consent to any amendment, modification or other change to, that certain Subordinated Promissory Note dated as of December 31, 2002 by Borrower in favor of Pledgor, without the prior written consent of the Collateral Agent (not to be unreasonably withheld). ARTICLE V CERTAIN ASSURANCES; REMEDIES In furtherance of the grant of the pledge and security interest pursuant to Article III, the Pledgor agrees with each Secured Party as follows: 5.01 DELIVERY AND OTHER PERFECTION. The Pledgor shall: (a) if any of the Pledged Interests, other Collateral, securities, participations, interests, moneys or other Property required to be pledged by the Pledgor under Article III is received by the Pledgor, forthwith: (i) transfer and deliver to the Collateral Agent for the benefit of the Secured Parties, such Collateral so received by the Pledgor, all of which thereafter shall be held by the Collateral Agent, pursuant to the terms of this Agreement, as part of the Collateral; and/or (ii) take such other action as the Collateral Agent shall deem necessary or appropriate to duly record the Lien created hereunder in such Collateral; Pledge Agreement (b) give, execute, deliver, file and/or record any Uniform Commercial Code financing statement, continuation statement, notice, instrument, document, agreement or other papers mat may be necessary or desirable (in the reasonable judgment of the Collateral Agent): (i) to create, preserve, perfect or validate the pledge and security interest granted pursuant hereto; or (ii) to enable the Collateral Agent to exercise and enforce its rights hereunder with respect to such pledge and security interest, including, without limitation, upon the occurrence or during the continuation of an Event of Default, causing any or all of the Collateral to be transferred of record into the name of the Collateral Agent or its nominee (and the Collateral Agent agrees that if any Collateral is transferred into its name or the name of its nominee, the Collateral Agent will thereafter promptly give to the Pledgor copies of any notices and communications received by it with respect to the Collateral pledged by the Pledgor hereunder). Without limiting the generality of the foregoing, the Pledgor shall, if any Collateral shall be evidenced by a promissory note or other instrument, deliver and pledge to the Collateral Agent such note or instrument duly endorsed or accompanied by duly executed instruments of transfer or assignment, all in such form and substance as will allow the Collateral Agent to realize upon the Collateral pursuant to Section 5.07; (c) keep full and accurate Records, and stamp or otherwise mark such Records in such manner as the Collateral Agent may reasonably require in order to reflect the pledge and security interest granted by this Agreement; and (d) (i) upon reasonable prior notice, at any time during normal business hours, permit representatives of the Collateral Agent to inspect and make abstracts from the Records, and promptly forward to the Collateral Agent copies of any notices or communications received by the Pledgor with respect to the Collateral that could reasonably be expected to impair the Lien granted to the Collateral Agent hereunder; and (ii) upon the occurrence and during the continuance of any Event of Default, permit representatives of the Collateral Agent to be present at the Pledgor's place of business to receive copies of all communications and remittances relating to the Collateral. 5.02 OTHER FINANCING STATEMENTS AND LIENS. Except for Permitted Liens, without the prior written consent of the Collateral Agent, the Pledgor shall not file or suffer to be on file, or authorize or permit to be filed or to be on file, in any jurisdiction, any Uniform Commercial Code financing statement or like instrument with respect to the Collateral in which the Collateral Agent is not named as the sole secured party for the benefit of the Secured Parties. 5.03 PRESERVATION OF RIGHTS. The Collateral Agent shall not be required to take any steps to preserve any rights against prior parties to any of the Collateral. 5.04 SPECIAL PROVISIONS RELATING TO CERTAIN COLLATERAL. (a) Ownership Collateral. Except as otherwise permitted hereunder or pursuant to the Credit Agreement, the Pledgor shall cause the Ownership Collateral to constitute at all times 100% of the membership or other ownership interests of any class or character of the Borrower then outstanding. Until the termination of the pledge and the security interest created hereby pursuant to Section 5.14, the Pledgor shall not enter into any voting trust, grant any proxies or enter into any other commitment, understanding or arrangement with respect to the Ownership Collateral (including without limitation the ability to vote, transfer or receive dividends in respect of, the Ownership Collateral), except for the pledge and security interest in favor of the Collateral Agent provided for herein. Pledge Agreement (b) Powers of Ownership. So long as no Event of Default shall have occurred and be continuing, the Pledgor shall have the right to exercise all voting, consensual and other powers of ownership pertaining to the Ownership Collateral for all purposes not inconsistent with the terms of this Agreement, the Credit Agreement, any other Transaction Document or any other instrument or agreement referred to herein or therein; provided, that the Pledgor agrees that it will not vote the Ownership Collateral in any manner that is inconsistent with the terms of this Agreement, the Credit Agreement, any other Transaction Document or any such other instrument or agreement; and the Collateral Agent shall execute and deliver to the Pledgor, or cause to be executed and delivered to the Pledgor, all such proxies (if the Ownership Collateral shall be registered in the name of the Collateral Agent), powers of attorney, dividend and other orders, and all such instruments, without recourse, as the Pledgor may reasonably request for the purpose of enabling the Pledgor to exercise the rights and powers that it is entitled to exercise pursuant to this Section 5.04(b). (c) Restricted Payments. Without limiting Section 4.07, the Pledgor shall not receive or retain any dividends or distributions on the Ownership Collateral except to the extent permitted under Section 8.13 of the Credit Agreement. (d) Adverse Claims. The Pledgor shall defend, all at its own cost and expense, the Pledgor's title and the existence, perfection and first priority (subject to any Permitted Liens) of the Collateral Agent's security interest in the Collateral against all adverse claims. (e) Distributions to Collateral Agent. If any Event of Default shall have occurred and be continuing, and whether or not the Collateral Agent or any other Secured Party exercises any available right to declare any Secured Obligation due and payable or seeks or pursues any other relief or remedy available to it under applicable law or under this Agreement or any other Transaction Document or any other agreement relating to such Secured Obligation, the Pledgor shall direct that all distributions on and other payments in respect of the Collateral shall be paid directly to the Collateral Agent and retained by it as part of the Collateral, subject to the terms of this Agreement, and, if the Collateral Agent shall so request, the Pledgor agrees to execute and deliver to the Collateral Agent appropriate additional distribution and other orders and documents to that end; provided, that if such Event of Default is waived or cured, any such distribution or other payment theretofore paid to the Collateral Agent shall, upon request of the Pledgor (except to the extent theretofore applied to the discharge of the Secured Obligations in accordance with the Credit Agreement), be returned promptly by the Collateral Agent to the Pledgor. 5.05 CUSTODY AND PRESERVATION. The Collateral Agent's obligation to use reasonable care in the custody and preservation of Collateral shall be satisfied if it uses the same care as it uses in the custody and preservation of its own Property. 5.06 RIGHTS OF SECURED PARTIES. The Collateral Agent or any other Secured Party may (but shall not be obligated to) pay or secure payment of any Tax or other claim that may be secured by or result in a Lien on any Collateral. The Collateral Agent or any other Secured Party may (but shall not be obligated to) do or cause to be done any other thing that is necessary or desirable to preserve, protect or maintain the Collateral or, after an Event of Default has occurred and for so long as it shall be continuing, to enhance its value. The Collateral Agent shall have no obligation to any Person to act or refrain from acting or exercising any of its rights under this Agreement; provided, however, that anything to the contrary contained herein notwithstanding, the Collateral Agent shall be liable for its own gross negligence or willful misconduct. The Pledgor, in accordance with Section 5.15, shall immediately reimburse the Collateral Agent or any other Pledge Agreement Secured Party for any reasonable payment or expense (including reasonable attorneys' fees and expenses) that the Collateral Agent or such other Secured Party may incur pursuant to this Section 5.06. 5.07 EVENTS OF DEFAULT, ETC. During the period during which an Event of Default shall have occurred and be continuing: (a) the Collateral Agent shall have the rights and remedies with respect to this Agreement as more particularly provided herein or in the Credit Agreement; (b) the Pledgor shall, at the request of the Collateral Agent, assemble Collateral owned by it that is movable (and not otherwise in the possession of the Collateral Agent), if any, at such place or places, reasonably convenient to both the Collateral Agent and the Pledgor, as designated in such request; (c) subject to applicable law, the Collateral Agent may (but shall not be obligated to), without notice to the Pledgor and at such times as the Collateral Agent in its sole judgment may determine, exercise any or all of the Pledger's rights in, to and under, or in any way connected to the Collateral and the Collateral Agent shall otherwise have and may (but shall not be obligated to) exercise all of the rights, powers, privileges and remedies with respect to the Collateral of a secured party under the Uniform Commercial Code (whether or not said Code is in effect in the jurisdiction where the rights, powers, privileges and remedies are asserted) and such additional rights, powers, privileges and remedies to which a secured party is entitled under the laws in effect in any jurisdiction where any rights, powers, privileges and remedies hereunder may be asserted, including, without limitation, the right, to the maximum extent permitted by applicable law, to exercise all voting, consensual and other powers of ownership pertaining to the Collateral as if the Collateral Agent were the sole and absolute owner thereof (and the Pledgor agrees to take all such action as may be appropriate to give effect to such right); (d) the Collateral Agent may (but shall not be obligated to) make any reasonable compromise or settlement it reasonably deems desirable with respect to any of the Collateral and may (but shall not be obligated to) extend the time of payment, arrange for payment in installments, or otherwise modify the terms, of all or any part of the Collateral; (e) the Collateral Agent may (but shall not be obligated to), in its name or in the name of the Pledgor or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral; and (f) subject to applicable law, the Collateral Agent may (but shall not be obligated to), upon 10 Business Days' prior written notice to the Pledgor of the time and place, with respect to the Collateral or any part thereof which shall then be or shall thereafter come into the possession, custody or control of the Collateral Agent, any other Secured Party or any of their respective agents, sell, lease, assign or otherwise dispose of all or any part of such Collateral, at such place or places as the Collateral Agent deems reasonable, and for cash or for credit or for future delivery (without thereby assuming any credit risk), at public or private sale, without demand of performance or notice of intention to effect any such disposition or of the time or place thereof (except such notice as is required above or by applicable statute and cannot be waived). The Collateral Agent, any other Secured Party, the Pledgor or anyone else may be the purchaser, lessee, assignee or recipient of any or all of the Collateral so disposed of at any public sale (or, to the maximum extent permitted by applicable law, at any private sale) and thereafter hold the same absolutely, Pledge Agreement free from any claim or right of whatsoever kind, including any right or equity of redemption (statutory or otherwise), of the Pledgor, any such demand, notice and right or equity being hereby expressly waived and released to the maximum extent permitted by applicable law. Subject to applicable law, the Collateral Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the sale may be so adjourned. The proceeds of each collection, sale or other disposition under this Section 5.07 shall be applied in accordance with Section 5.11. The Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws, the Collateral Agent may be compelled, subject to the notice provision as provided in paragraph (f) of this Section 5.07, with respect to any sale of all or any part of the Collateral constituting a security (as such term is defined in the Securities Act of 1933), to limit purchasers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges that any such private sale may be at prices and on terms less favorable to the Collateral Agent than those obtainable through a public sale without such restrictions, and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Collateral Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit the Pledgor or the issuer thereof to register it for public sale. 5.08 DEFICIENCY. If the proceeds of sale, collection or other realization of or upon the Collateral by virtue of the exercise of remedies under Section 5.07 are insufficient to cover the costs and expenses of such realization and the payment in full of the Secured Obligations, the Collateral Agent shall retain all rights and remedies under the Transaction Documents, and the Pledgor shall remain liable, with respect to any deficiency to the extent the Pledgor is obligated under this Agreement. 5.09 REMOVALS, ETC. Without at least 30 days' prior written notice to the Collateral Agent, the Pledgor shall not: (a) maintain any of its Records at any office other than at the Pledger's Address for Notices set out beneath its name on the signature pages hereto; (b) maintain its chief executive office at any place other than at the Pledger's Address for Notices set out beneath its name on the signature pages hereto; (c) change its corporate name, or the name under which it does business, from the name shown on the signature pages hereto; or (d) change the jurisdiction in which it is organized from that in which it is organized on the date hereof. The signature page hereto correctly specifies the place of business of the Pledgor or, if the Pledgor had more than one place of business, the location of the chief executive office of the Pledgor, in each case during the period of four months ending on December 31, 2002. 5.10 PRIVATE SALE. The Collateral Agent and the other Secured Parties shall incur no liability as a result of the sale of the Collateral, or any part thereof, at any private sale pursuant to Section 5.07 conducted in a commercially reasonable manner. Subject to and without limitation of the preceding sentence, the Pledgor hereby waives any claims against the Collateral Agent or any other Secured Party arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale to an unrelated third party was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Secured Obligations, even if the Collateral Agent accepts the first offer received and does not offer the Collateral to more than one offeree. 5.11 APPLICATION OF PROCEEDS. Pledge Agreement (a) Application of Proceeds. Except as otherwise herein expressly provided, the proceeds of any collection, sale or other realization of all or any part of the Collateral pursuant hereto, and any other cash at the time held by the Collateral Agent under this Agreement, shall be applied by the Collateral Agent to the Secured Obligations in accordance with Article IV of the Depositary Agreement. (b) Pledgor Remains Obligated. No sale or other disposition of all or any part of the Collateral pursuant to Section 5.07 shall be deemed to relieve the Pledgor of its obligations under any Transaction Document to which it is a party except to the extent the proceeds thereof are applied to the payment of such obligations. (c) Proceeds. As used in this Article V, "PROCEEDS" of Collateral means cash, securities and other property realized in respect of, and distributions in kind of, Collateral, including any thereof received under any reorganization, liquidation or adjustment of debt of the Pledgor or any issuer of or obligor on any of the Collateral. 5.12 ATTORNEY-IN-FACT. Without limiting any rights or powers granted by this Agreement to the Collateral Agent while no Event of Default has occurred and is continuing, upon the occurrence and during the continuance of any Event of Default, the Collateral Agent is hereby appointed the attorney-in-fact of the Pledgor for the purpose of carrying out the provisions of this Article V and taking any action and executing any instruments which the Collateral Agent may deem necessary or desirable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, so long as the Collateral Agent shall be entitled under this Article V to make collections in respect of the Collateral, the Collateral Agent shall have the right and power to receive, endorse and collect all checks made payable to the order of the Pledgor representing any dividend, payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. 5.13 PERFECTION. Prior to or on the Closing Date, the Pledgor shall: (a) file such Uniform Commercial Code financing statements and other documents in the offices set out on Annex 2 in order to perfect the security interests granted by Article III, to the extent such security interests can be perfected by such filing; (b) register the pledge of any applicable Collateral for purposes of Article 8 of the Uniform Commercial Code; and (c) cause the Borrower to stamp or mark the books of the Borrower to record the Liens granted hereunder. Copies of any such Uniform Commercial Code financing statement or amendment thereto shall promptly be delivered to the Collateral Agent. The Pledgor hereby authorizes the Collateral Agent to cause the filing of one or more Uniform Commercial Code financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of the Pledgor where permitted by applicable law. Copies of any such statement or amendment thereto shall promptly be delivered to the Pledgor. 5.14 TERMINATION. (a) Upon any transfer of any Collateral in accordance with Section 8.12 or 8.13 of the Credit Agreement or Section 4.06 or 4.07, the Collateral Agent shall, upon the written request of (and at the sole cost and expense of) the Pledgor, promptly execute and deliver to the Pledgor such Uniform Commercial Code termination statements and such other documentation as shall be reasonably requested by the Pledgor to evidence the termination and release of the Liens on such Collateral. (b) Upon the Termination Date, the security interest created by this Agreement shall terminate and all rights to the Collateral shall revert to the Pledgor, and the Collateral Agent shall (at the written request and sole cost and expense of the Pledgor) promptly Pledge Agreement cause to be transferred and delivered, against receipt but without any recourse, warranty or representation whatsoever, any remaining Collateral and money received in respect thereof, to or on the order of the Pledgor. The Collateral Agent shall also (at the written request and sole cost and expense of the Pledgor) promptly execute and deliver to the Pledgor upon such termination such Uniform Commercial Code termination statements and such other documentation as shall be reasonably requested by the Pledgor to effect the termination and release of the Liens on the Collateral. 5.15 EXPENSES. (a) Subject to, and without duplication of amounts described in, Section 11.03 of the Credit Agreement, the Pledgor agrees promptly to pay to the Collateral Agent to the extent not paid by or recovered from the Borrower all reasonable fees and out-of-pocket expenses (including reasonable fees and expenses for legal services) of, or incident to, the enforcement of any of the provisions of this Article V, or the exercise by experts, agents or attorneys selected by the Collateral Agent in good faith of any rights or privileges of the Pledgor in respect of the Collateral, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Collateral, and for the care of the Collateral and defending or asserting rights and claims of the Collateral Agent and the other Secured Parties in respect thereof, by litigation or otherwise, in each case in accordance with the terms of this Agreement, and all such reasonable fees and expenses, together with interest thereon at the applicable Post-Default Rate, shall be Secured Obligations of the Collateral Agent secured under Article III. (b) The terms, conditions, covenants and agreements to be observed or performed by the Pledgor under this Agreement shall be observed or performed by it at its sole cost and expense. 5.16 FURTHER ASSURANCES. The Pledgor agrees that, at any time and from time to time, at its sole cost and expense, it shall promptly execute and deliver all further agreements, instruments, documents and certificates and take all further action that, in the reasonable judgment of the Collateral Agent, may be necessary or desirable in order to fully effect the purposes of this Agreement (including the delivery of possession of any Collateral that hereafter comes into existence or is acquired in the future by the Collateral Agent as pledgee for the benefit of the Secured Parties) and to enable the Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to the Collateral or any part thereof. ARTICLE VI MISCELLANEOUS 6.01 COLLATERAL AGENT'S RIGHT TO PERFORM ON PLEDGOR'S BEHALF. If the Pledgor shall fail to observe or perform any of the terms, conditions, covenants and agreements to be observed or performed by it under this Agreement, the Collateral Agent may (but shall not be obligated to), upon reasonable notice to the Pledgor, do the same or cause it to be done or performed or observed by experts, agents or attorneys selected by the Collateral Agent in good faith at the sole cost and expense of the Pledgor, either in its name or in the name and on behalf of the Pledgor, and the Pledgor hereby authorizes the Collateral Agent so to do. 6.02 WAIVERS OF RIGHTS INHIBITING ENFORCEMENT. The Pledgor waives, to the maximum extent permitted by applicable law: Pledge Agreement (a) any claim that, as to any part of the Collateral, a public sale, should the Collateral Agent elect so to proceed, is, in and of itself, not a commercially reasonable method of sale for the Collateral; (b) the right to assert in any action or proceeding between it and the Collateral Agent any offsets that it may have; (c) except as otherwise provided in this Agreement, NOTICE OR JUDICIAL HEARING IN CONNECTION WITH THE COLLATERAL AGENT'S TAKING POSSESSION OR DISPOSITION OF ANY OF THE COLLATERAL INCLUDING ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT THAT THE PLEDGOR WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, AND ALL OTHER REQUIREMENTS AS TO THE TIME, PLACE AND TERMS OF SALE OR OTHER REQUIREMENTS WITH RESPECT TO THE ENFORCEMENT OF THE COLLATERAL AGENT'S RTGHTS HEREUNDER; (d) all rights of redemption, appraisement, valuation, stay and extension or moratorium; and (e) all other rights the exercise of which would, directly or indirectly, prevent, delay or inhibit the enforcement of any of the rights or remedies of the Collateral Agent and the other Secured Parties under this Agreement or the absolute sale of the Collateral, now or hereafter in force under any applicable law, and the Pledgor, for itself and all who may claim under it, insofar as it or they now or hereafter lawfully may, hereby waive the benefit of all such laws and rights. 6.03 NO WAIVER; REMEDIES CUMULATIVE. No failure on the part of the Collateral Agent, any other Secured Party or any of such Person's agents to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or remedy hereunder shall operate as a waiver thereof. No single or partial exercise by the Collateral Agent, any other Secured Party or any of such Person's agents of any right, power or remedy hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The rights, powers and remedies herein or in any other Transaction Document expressly provided are cumulative and not exclusive of any rights, powers or remedies which either Collateral Agent or any other Secured Party would otherwise have. No notice to or demand on the Pledgor in any case shall entitle the Pledgor to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of either the Collateral Agent or any other Secured Party to any other or further action in any circumstances without notice or demand, except to the extent notice is expressly required by this Agreement or any other Financing Document. 6.04 NOTICES. All notices, requests and other communications provided for herein (including, without limitation, any modifications of, or waivers or consents under, this Agreement) shall be given or made in writing in the manner set out in Section 11.02 of the Credit Agreement. Unless otherwise so changed in accordance with the Credit Agreement by a party hereto, all notices, requests and other communications to such party shall be sent to the address of such party set out on the signature pages hereto. 6.05 AMENDMENTS, ETC. This Agreement may be amended, supplemented, modified or waived only by an instrument in writing duly executed by the Pledgor and the Collateral Agent. Any such amendment, supplement, modification or waiver shall be binding upon the Collateral Agent and each Lender, each holder of any of the Secured Obligations and the Pledgor. Any waiver shall be effective only in the specific instance and for the specified purpose for which it was given. Pledge Agreement 6.06 EXPENSES. The parties hereto agree that all costs and expenses covered by Section 11.03 of the Credit Agreement shall be Secured Obligations entitled to the benefits of the collateral security provided pursuant to Article III. 6.07 SUCCESSORS AND ASSIGNS. This Agreement shall: (a) remain in full force and effect until the termination hereof pursuant to Section 5.14; and (b) be binding upon and inure to the benefit of the respective successors and permitted assigns of the Pledgor and the Collateral Agent, the Lenders and each holder of any of the Secured Obligations; provided, however, that the Pledgor shall not assign or transfer its rights hereunder without the prior written consent of the Collateral Agent. 6.08 SURVIVAL, ETC. The obligations of the Pledgor under Section 5.15 shall survive after termination of this Agreement or the resignation or the removal of the Collateral Agent. In addition, the representations and warranties of the Pledgor set out in this Agreement or contained in any documents delivered to the Collateral Agent or any other Secured Party pursuant to this Agreement shall be considered to have been relied upon by the Secured Parties in entering into the Credit Agreement and the relevant Financing Documents and making each Loan, notwithstanding any investigation on their respective parts. 6.09 COUNTERPARTS; EFFECTIVENESS. This Agreement may be executed in any number of counterparts, all of which when taken together shall constitute one and the same instrument and either of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement and the other Financing Documents constitute the entire agreement and understanding among the parties hereto with respect to matters covered by this Agreement and the other Financing Documents and supersede any and all prior agreements and understandings, written or oral, relating to the subject matter hereof. This Agreement shall become effective at such time as the Collateral Agent shall have received counterparts hereof signed by all of the intended parties hereto. 6.10 AGENTS, ETC. The Collateral Agent may employ agents, experts and attorneys-in-fact in connection herewith and shall not be responsible for the negligence or misconduct of any such agents, experts or attorneys-in-fact selected by it in good faith. 6.11 SEVERABILITY. If any provision hereof is invalid or unenforceable in any jurisdiction, then, to the fullest extent permitted by applicable law: (a) the other provisions hereof shall remain in full force and effect in such jurisdiction in order to carry out the intentions of the parties hereto as nearly as may be possible; and (b) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. 6.12 HEADINGS. Headings appearing herein are used solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 6.13 LIMITATION OF LIABILITY. (a) The liability of the Pledgor for the payment and performance of the Secured Obligations shall be limited as and to the extent provided under Section 11.09 of the Credit Agreement. (b) TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, NEITHER THE COLLATERAL AGENT NOR ANY OTHER SECURED PARTY SHALL HAVE LIABILITY WITH RESPECT TO, AND THE PLEDGOR HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR: Pledge Agreement (i) ANY LOSS OR DAMAGE SUSTAINED BY THE PLEDGOR, OR ANY LOSS, DAMAGE, DEPRECIATION OR OTHER DIMINUTION IN THE VALUE OF ANY COLLATERAL, THAT MAY OCCUR AS A RESULT OF, IN CONNECTION WITH, OR THAT IS IN ANY WAY RELATED TO, ANY EXERCISE OF ANY RIGHT OR REMEDY UNDER THIS AGREEMENT EXCEPT FOR ANY SUCH LOSS, DAMAGE, DEPRECIATION OR DIMINUTION TO THE EXTENT THAT THE SAME IS THE RESULT OF ACTS OR OMISSIONS ON THE PART OF SUCH SECURED PARTY CONSTITUTING WILLFUL MISCONDUCT OR GROSS NEGLIGENCE; OR (ii) ANY SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES SUFFERED BY THE PLEDGOR IN CONNECTION WITH ANY CLAIM RELATED TO THIS AGREEMENT. 6.14 SECURITY INTEREST ABSOLUTE. To the maximum extent permitted by applicable law, the rights and remedies of the Collateral Agent hereunder, the Liens created hereby, and the obligations of the Pledgor under this Agreement are absolute, irrevocable and unconditional and will remain in full force and effect without regard to, and will not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever (other than termination pursuant to Section 5.14), including: (a) any renewal, extension, amendment, or modification of, or addition or supplement to or deletion from, any of the Transaction Documents or any other instrument or agreement referred to therein, or any assignment or transfer of any thereof; (b) any waiver of, consent to or departure from, extension, indulgence or other action or inaction under or in respect of any of the Secured Obligations, this Agreement, any other Transaction Document or other instrument or agreement relating thereto, or any exercise or non-exercise of any right, remedy, power or privilege under or in respect of the Secured Obligations, this Agreement, any other Transaction Document or any such other instrument or agreement relating thereto; (c) any furnishing of any additional security for the Secured Obligations or any part thereof to the Collateral Agent or any other person or any acceptance thereof by the Collateral Agent or any other person or any substitution, sale, exchange, release, surrender or realization of or upon any such security by the Collateral Agent or any other person or the failure to create, preserve, validate, perfect or protect any other Lien granted to, or purported to be granted to, or in favor of, the Collateral Agent or any other Secured Party; (d) any invalidity, irregularity or unenforceability of all or any part of the Secured Obligations, any other Transaction Document or any other agreement or instrument relating thereto or any security therefor; (e) the acceleration of the maturity of any of the Secured Obligations or any other modification of the time of payment thereof; or (f) any other event or circumstance whatsoever which might otherwise constitute a legal or equitable discharge of a surety or a guarantor, it being the intent of this Section 6.14 that the obligations of the Pledgor hereunder shall be absolute, irrevocable and unconditional under any and all circumstances. Pledge Agreement 6.15 SUBROGATION. The Pledgor shall not exercise, and hereby irrevocably defers the exercise of, any claim, right or remedy that it may now have or may hereafter acquire against the Borrower arising under or in connection with this Agreement, including, without limitation, any claim, right or remedy of subrogation, contribution, reimbursement, exoneration, indemnification or participation arising under contract, by applicable law or otherwise in any claim, right or remedy of the Collateral Agent or the other Secured Parties against the Borrower or any other Person or any Collateral which the Collateral Agent or any other Secured Party may now have or may hereafter acquire, until the indefeasible payment and satisfaction in full of all Secured Obligations and the expiration and termination of the Commitments. If, notwithstanding the preceding sentence, any amount shall be paid to the Pledgor on account of such subrogation rights at any time when any of the Secured Obligations shall not have been paid in full, such amount shall be held by the Pledgor in trust for the Collateral Agent and the other Secured Parties, segregated from other funds of the Pledgor and be turned over to the Collateral Agent in the exact form received by the Pledgor (duly endorsed by the Pledgor to the Collateral Agent, if required), to be applied against the Secured Obligations, whether matured or unmatured, in accordance with the Financing Documents. 6.16 REINSTATEMENT. This Agreement and the Lien created hereunder shall automatically be reinstated if and to the extent that for any reason any payment by or on behalf of the Borrower in respect of the Secured Obligations is rescinded or must otherwise be restored by any holder of the Secured Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and the Pledgor shall indemnify the Collateral Agent, each other Secured Party and its respective employees, officers and agents on demand for all reasonable fees, costs and expenses (including, without limitation, reasonable fees, costs and expenses of counsel) incurred by the Collateral Agent, such other Secured Party or its respective employees, officers or agents in connection with such reinstatement, rescission or restoration. 6.17 NO THIRD PARTY BENEFICIARIES. THE AGREEMENTS OF THE PARTIES HERETO ARE SOLELY FOR THE BENEFIT OF THE PLEDGOR, THE COLLATERAL AGENT AND THE OTHER SECURED PARTIES, AND NO PERSON (OTHER THAN THE PARTIES HERETO, THE OTHER SECURED PARTIES AND THEIR SUCCESSORS AND ASSIGNS PERMITTED HEREUNDER) SHALL HAVE ANY RIGHTS HEREUNDER. 6.18 GOVERNING LAW; SUBMISSION TO JURISDICTION, ETC. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. EACH OF THE PLEDGOR AND THE COLLATERAL AGENT HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK COUNTY (INCLUDING ITS APPELLATE DIVISION), AND OF ANY OTHER APPELLATE COURT IN THE STATE OF NEW YORK, FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH OF THE PLEDGOR AND THE COLLATERAL AGENT IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 6.19 WAIVER OF JURY TRIAL. EACH OF THE PLEDGOR AND THE COLLATERAL AGENT HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Pledge Agreement 6.20 SERVICE OF PROCESS. The Pledgor hereby irrevocably consents to the service of process in any suit, action or proceeding in such courts by the mailing thereof by any of the other parties hereto by registered or certified mail, postage prepaid, to the Address for Notices specified below its name on the signature pages hereof. Nothing herein shall in any way be deemed to limit the ability of the Financing Parties or the Pledgor to serve any writs, process or summonses in any other manner permitted by applicable law or to obtain jurisdiction over the Pledgor or the Collateral Agent, as applicable, in such jurisdiction, and in such manner, as may be permitted by applicable law. 6.21 AUTHORITY OF THE COLLATERAL AGENT. The Pledgor acknowledges and agrees that the rights and responsibilities of the Collateral Agent under this Agreement with respect to any action taken, or determination or request made, by the Collateral Agent or the exercise or non-exercise by the Collateral Agent of any power, right or remedy provided for or resulting or arising out of this Agreement shall, as between the Collateral Agent and the Secured Parties, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Collateral Agent and the Pledgor, the Collateral Agent shall be conclusively presumed to be acting as the Collateral Agent for the Secured Parties with full and valid authority so to act or refrain from acting, and the Pledgor shall be under no obligation or entitlement to make any inquiry respecting such authority. Pledge Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. ORMAT FUNDING CORP. By: ------------------------------------ Name: Title: Address for Notices: 980 Greg Street Sparks, NV 89431 Attn: President Telephone: (775) 356-9029 Telecopy: (775) 356-9039 Pledge Agreement S-23 UNITED CAPITAL, a division of Hudson United Bank, not in its individual capacity, but solely as Collateral Agent By: ------------------------------------ Name: Title: Address for Notices: 87 Post Road East Westport, CT 06880 Telecopier No.: (203) 291-6652 Telephone No.: (203) 291-6639 Attention: Jerry Peters, Senior Vice President Borrower Equity Interest Pledge Agreement ANNEX 1 PLEDGED INTERESTS One Hundred Percent (100%) of the membership or other ownership interests of Ormesa LLC, all of which are currently owned by Ormat Funding Corp. Pledge Agreement ANNEX 2 FILING LOCATIONS 1. Secretary of State of the State of Delaware Pledge Agreement Exhibit C to Credit Agreement FORM OF DEPOSITARY AGREEMENT This DEPOSITARY AGREEMENT dated as of December 31, 2002 (this "AGREEMENT"), among ORMESA LLC, a Delaware limited liability company (the "BORROWER"), UNITED CAPITAL, a division of Hudson United Bank ("UNITED"), not in its individual capacity, but solely as administrative agent for the Lenders under and as defined in the Credit Agreement referred to below (in such capacity, the "ADMINISTRATIVE AGENT"), UNITED, not in its individual capacity, but solely as collateral agent for the benefit of the Secured Parties under and as defined in the Credit Agreement referred to below (in such capacity, the "COLLATERAL AGENT"), and WEALTH MANAGEMENT, a division of Hudson United Bank, a New Jersey banking corporation, not in its individual capacity, but solely as the "securities intermediary" in accordance with Article 8 of the Uniform Commercial Code (as defined below) and as a "bank" with respect to any "deposit accounts" (each as defined in the Uniform Commercial Code) in which a security interest may be granted under the Uniform Commercial Code and herein for the benefit of the Collateral Agent and the Secured Parties under and as defined in the Credit Agreement referred to below (the "DEPOSITARY BANK"). RECITALS WHEREAS, pursuant to that certain Credit Agreement, dated as of December 31, 2002 (as amended, modified, supplemented and in effect from time to time, the "CREDIT AGREEMENT"), among the Borrower, the Lenders party thereto from time to time, the Administrative Agent, and the Collateral Agent, the Lenders have agreed to make certain loans to the Borrower; WHEREAS, the Depositary Bank is willing to serve as the depositary bank for the benefit of the Collateral Agent and the Secured Parties on the terms and subject to the conditions of this Agreement; WHEREAS, it is a condition to the obligations of the Lenders and the other Secured Parties under the Credit Agreement that the Borrower shall have executed and delivered this Agreement; WHEREAS, to induce the Lenders and the other Secured Parties to enter into the Credit Agreement and to induce certain of the Secured Parties to make loans to the Borrower, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower has agreed to execute and deliver this Agreement. -2- Accordingly, the parties hereto agree as follows: ARTICLE I. DEFINITIONS SECTION 1.1. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to them in Schedule I to the Credit Agreement. All terms used herein which are not defined herein or in the Credit Agreement and are defined in the Uniform Commercial Code (as such term is defined below) shall have the meanings therein stated. In addition, capitalized terms used in the preamble and recitals hereto shall have the respective meanings given thereto, and the following terms shall have the following meanings under this Agreement: "ACCOUNTS" shall mean the Revenue Account, and the Debt Service Reserve Account. "DEBT SERVICE RESERVE ACCOUNT" shall have the meaning assigned to such term in Section 2.2(c). "DISTRIBUTABLE CASH" shall have the meaning assigned to such term in Section 4.1(b). "MONTHLY DATE" shall mean the last Business Day of each calendar month following the Closing Date. "RESTORATION SUB-ACCOUNT" shall have the meaning assigned to such term in Section 2.2(e). "REVENUE ACCOUNT" shall have the meaning assigned to such term in Section 2.2(a), and shall include the Restoration Sub-Account. "WITHDRAWAL APPROVAL NOTICE" shall have the meaning assigned to such term in Section 4.1(d)(ii). SECTION 1.2. INTERPRETATION. The rules of interpretation set out in Section 1.03 of the Credit Agreement shall apply equally to this Agreement mutatis mutandis. -3- ARTICLE II. APPOINTMENT OF DEPOSITARY BANK; CREATION OF THE ACCOUNTS SECTION 2.1. APPOINTMENT OF DEPOSITARY BANK. The Depositary Bank is appointed to act as depositary bank and disbursement agent hereunder and agrees to act as such, to accept all cash, payments and other amounts delivered to or held by it pursuant to the terms of this Agreement or any other Financing Document and to distribute all such funds and perform all of its other obligations in accordance with this Agreement. The Depositary Bank shall hold and safeguard the Accounts and shall treat the cash, instruments and securities in the Accounts as funds, instruments and securities pledged by the Borrower to the Collateral Agent to be held in the custody of the Depositary Bank, as agent solely for the benefit of the Collateral Agent and Secured Parties, in trust and in accordance with the provisions of this Agreement. SECTION 2.2. CREATION OF ACCOUNTS. On or prior to the Closing Date, the Borrower shall establish with the Depositary Bank at its corporate trust office in Westport, Connecticut the following special and segregated interest bearing accounts, which shall be in the name of the Collateral Agent for the benefit of the Secured Parties maintained at all times until the termination of this Agreement: (a) an account entitled "Ormesa Revenue Account" with account number 2080000692834, ABA no. 061 000 227, account name Reliance Trust, Attn. Gwen Fore, FBO Ormesa PRA 2897400272 (the "REVENUE ACCOUNT"); (b) an account entitled "Ormesa Debt Service Reserve Account" with account number 2080000692834, ABA no. 061 000 227, account name Reliance Trust, Attn. Gwen Fore, FBO Ormesa DSRA 2897400281 (the "DEBT SERVICE RESERVE ACCOUNT"); and (c) a sub-account of the Revenue Account entitled "Ormesa Restoration Sub-Account" with account number 2080000692834, ABA no. 061 000 227, account name Reliance Trust, Attn. Gwen Fore, FBO Ormesa Restoration Sub-Account 2897400316 (the "RESTORATION SUB-ACCOUNT"). Each Account shall be subject to debit or withdrawal solely by the Depositary Bank as provided in this Agreement and no Person shall have any control over or right of withdrawal from the Accounts except as provided in this Agreement. Each Account shall -4- constitute a part of the Collateral and shall not constitute payment of the Secured Obligations until applied as provided in this Agreement. SECTION 2.3. SECURITY INTEREST. As collateral security for the prompt and complete payment and performance when due of all of the Secured Obligations, the Borrower has granted to the Collateral Agent, pursuant to the Borrower Security Agreement, a first priority Lien in and to (a) the Accounts and (b) all cash, investments and securities at any time on deposit in the Accounts, including all income or gain earned thereon and all proceeds thereof. ARTICLE III. DEPOSITS INTO THE REVENUE ACCOUNT SECTION 3.1. DEPOSITS. (a) The Borrower agrees, and confirms to the Collateral Agent that it has instructed all of its Affiliates, SCE, SIGC and Imperial Irrigation District that all Project Revenues (and any other cash or other revenues received by it other than distributions previously made in accordance with this Agreement) shall be paid directly to the Depositary Bank for deposit in the Revenue Account. In the event that, notwithstanding the foregoing, any such payment is remitted directly to the Borrower, the Borrower shall promptly (but in any event within five 5) Business Days of receipt thereof) deliver such payment to the Depositary Bank for deposit in the Revenue Account. (b) The Borrower has directed and confirms to the Collateral Agent that it has so instructed all of its Affiliates to direct, all insurers with whom the Borrower or any of its Affiliates maintains the insurance required by Section 8.05 of the Credit Agreement that all insurance proceeds other than Loss Proceeds in respect of any Event of Loss, which shall be applied in accordance with Section 4.3) payable to Borrower or any of its Affiliates in connection with all insurance required by said Section 8.05 shall be paid directly to the Collateral Agent, as loss payee, for transfer to the Depositary Bank and deposit in the Revenue Account. In the event that, notwithstanding the foregoing, any such proceeds are remitted directly to the Borrower, the Sponsor or any of their respective Affiliates and such party is not entitled to retain such insurance proceeds pursuant to Section 8.05 of the Credit Agreement, then such party shall promptly (but in any event within five 5) Business Days of receipt thereof) deliver such proceeds to the Depositary Bank for deposit in the Revenue Account. (c) The Depositary Bank shall only be required to accept such monies as are delivered to it for deposit into the Accounts and shall not be required to monitor the amount of such deposits or pursue the collection of such sums from any Person. -5- ARTICLE IV. DEPOSITS INTO AND DISTRIBUTIONS FROM ACCOUNTS SECTION 4.1. WITHDRAWALS FROM THE REVENUE ACCOUNT. (a) Distributions from Revenue Account on Monthly Dates. On each Monthly Date prior to the Termination Date (other than any Monthly Date that also is a Quarterly Date and such Quarterly Date's corresponding Business Day, on which distributions shall be made solely in accordance with Section 4.1(b) instead of this Section 4.1 (a)), the Depositary Bank shall distribute funds from the Revenue Account (including all income earned and gains from investments in Permitted Investments pursuant to Section 5.5) and apply the same at the times, in the amounts and in the following priorities: FIRST: subject to the provisions of Section 4.1(g), withdraw and transfer to the Operator an amount, as set forth in a Withdrawal Approval Notice, equal to the cumulative amount of Operation and Maintenance Expenses scheduled to be payable by or on behalf of the Borrower in the then-current calendar year through and including the next succeeding calendar month (i) in accordance with the then-current Annual Operating Plan and Budget (as such amount may be adjusted by the Borrower in accordance with Section 8.23(b) of the Credit Agreement), less all amounts previously withdrawn as Operation and Maintenance Expenses in the then-current calendar year, and (ii) solely on the initial two Monthly Dates following the Closing Date, in respect of the "Compromise Payment" under and as defined in the Energy Services Agreement, provided that the amount of such "Compromise Payment", together with all amounts previously withdrawn and transferred in respect of such "Compromise Payment", shall not exceed $724,000 in the aggregate; and SECOND: after making the withdrawal and transfer, if any, specified in priority FIRST above, and subject to the provisions of Section 4.1(g), withdraw and transfer to the Operator an amount, as set forth in a Withdrawal Approval Notice, equal to the cumulative amount of capital expenditures scheduled to be payable by or on behalf of the Borrower in the then-current calendar year through and including the next succeeding calendar month in accordance with the then-current Annual Operating Plan and Budget (as such amount may be adjusted by the Borrower in accordance with Section 8.23(b) of the Credit Agreement), less all amounts previously withdrawn for capital expenditures in the then-current calendar year. -6- (b) Distributions from Revenue Account on Quarterly Dates. On each Quarterly Date falling after the Closing Date and on or prior to the Termination Date (or, if any such Quarterly Date is not a Business Day, the Business Day next succeeding such Quarterly Date, unless such next succeeding Business Day falls in the subsequent calendar month, in which case the effective Business Day corresponding to such Quarterly Date shall be the Business Day immediately preceding such Quarterly Date), the Depositary Bank shall distribute funds from the Revenue Account (including all income earned and gains from investments in Permitted Investments pursuant to Section 5.5) and apply the same at the times, in the amounts and in the following priorities: FIRST: subject to the provisions of Section 4.1 (g), withdraw and transfer to the Operator an amount, as set forth in a Withdrawal Approval Notice, equal to the cumulative amount of Operation and Maintenance Expenses scheduled to be payable by or on behalf of the Borrower in the then-current calendar year through and including the next succeeding calendar month (i) in accordance with the then-current Annual Operating Plan and Budget (as such amount may be adjusted by the Borrower in accordance with Section 8.23(b) of the Credit Agreement), less all amounts previously withdrawn as Operation and Maintenance Expenses in the then-current calendar year; SECOND: after making the withdrawal, if any, specified in priority FIRST above, withdraw and transfer to the Administrative Agent, the Collateral Agent and the Depositary Bank an amount equal to any fee or expense then due and owing to such Person (including in respect of the making of any Permitted Investment) by Borrower hereunder or under any other Financing Document, as set forth in a Withdrawal Approval Notice; THIRD: after making the withdrawal, if any, specified in priority SECOND above, withdraw and transfer to the Administrative Agent for the account of each Lender an amount equal to the amount of interest then due on the Loans held by such Lender and the amount of all fees owed to such Lender, each as set forth in a Withdrawal Approval Notice; FOURTH: after making the withdrawal specified in priority THIRD above, (i) withdraw and transfer to the Administrative Agent for the account of each Lender an amount equal to the principal amount then due on the Loans held by such Lender; and (ii) with respect to any additional principal due on such Loans as required by any mandatory prepayment then due under Section 3.04(d) of the Credit Agreement, withdraw and transfer to the Administrative Agent for the account of each Lender an -7- amount equal to such additional principal due on such Loans, in each case as set forth in a Withdrawal Approval Notice; FIFTH: after making the withdrawal specified in priority FOURTH above, deposit into the Debt Service Reserve Account an amount equal to the difference between the Debt Service Reserve Required Amount on such date and the then-current balance of the Debt Service Reserve Account, as set forth in a Withdrawal Approval Notice; SIXTH: after making the withdrawal, if any, specified in priority FIFTH above, and subject to the provisions of Section 4.1(g), withdraw and transfer to the Operator an amount, as set forth in a Withdrawal Approval Notice, equal to the cumulative amount of capital expenditures scheduled to be payable by or on behalf of the Borrower in the then-current calendar year through and including the next succeeding calendar month in accordance with the then-current Annual Operating Plan and Budget (as such amount may be adjusted by the Borrower in accordance with Section 8.23(b) of the Credit Agreement), less all amounts previously withdrawn for capital expenditures in the then-current calendar year; and SEVENTH: after making the withdrawal, if any, specified in priority SIXTH above, and subject to the restrictions and provisions of Sections 4.1(d), 4.1(e) and 4.1(g), withdraw and transfer to the Borrower, the Sponsor or such other Person as directed by the Borrower all or any portion of any funds remaining in the Revenue Account ("DISTRIBUTABLE CASH"). (c) Revenue Account Has Insufficient Funds for Principal. Interest and Fees Payment. In the event funds available in the Revenue Account are insufficient to make the payments set forth in priorities THIRD and FOURTH of Section 4.1(b), the Collateral Agent will direct the Depositary Bank in writing (with a copy to the Borrower) to withdraw funds from the Debt Service Reserve Account and apply the same towards the payment of such priorities THIRD and FOURTH and thereafter the Debt Service Reserve Account shall be replenished pursuant to the operation of priority FIFTH of Section 4.1(b). (d) Distributions from Revenue Account. No payment pursuant to priority SEVENTH of Section 4.1(b) will be permitted unless: -8- (i) The Borrower has delivered a duly executed Distribution Certificate to the Administrative Agent no fewer than three (3) Business Days prior to the date such withdrawal is scheduled to be made; and (ii) The Collateral Agent has confirmed to the Depositary Bank and the Borrower (A) the accuracy of the information set forth in such Distribution Certificate, (B) that all conditions to such payment set forth in Section 8.13 of the Credit Agreement have been satisfied, and (C) that no Default (other than any Default that (i) provides a cure period therefor of not more than 30 days, (ii) is reasonably capable of being remedied during such 30-day period, (iii) as to which the Borrower is diligently prosecuting or pursuing such remedy, and (iv) following the occurrence of which not more than 30 days have elapsed) or Event of Default has occurred and is continuing or will occur as a result of the Depositary Bank's allowing such withdrawal, by the Collateral Agent's delivery to the Depositary Bank of such Distribution Certificate and a written notice from the Collateral Agent authorizing the Depositary Bank to permit such withdrawal (which may take the form of the Collateral Agent's countersignature on a Distribution Certificate) (A "WITHDRAWAL APPROVAL NOTICE") at least one (1) Business Day prior to the date such withdrawal is scheduled to be made. (e) Failure to Meet Minimum Debt Service Coverage Ratio. If, as of any Quarterly Date, the Borrower shall fail to comply with Section 8.13(iii) of the Credit Agreement, then on such Quarterly Date (or corresponding Business Day, if such Quarterly Date is not A Business Day), the Borrower shall, in its related Distribution Certificate, instruct the Collateral Agent who in turn will instruct the Depositary Bank either (i) to fund the Debt Service Reserve Account via priority SEVENTH of Section 4.1(b) (and in lieu of priority SEVENTH as set forth in Section 4.1(b)) in an amount equal to the credit balance of the Revenue Account on such date, or (ii) to apply the credit balance of the Revenue Account on such date to prepay the Loans pursuant to Section 3.04(d) of the Credit Agreement via priority SEVENTH of Section 4.1(b) (and in lieu of priority SEVENTH as set forth in Section 4.1(b)). Such funding of the Debt Service Reserve Account or, alternatively, prepayment of the Loans, shall be required on each succeeding Quarterly Date (or corresponding Business Day) until such time as Borrower has demonstrated its compliance with Section 8.13(iii) of the Credit Agreement. (f) No failure of the Borrower to deliver a Distribution Certificate to the Administrative Agent will restrict or otherwise affect the Collateral Agent's right to cause the Depositary Bank to withdraw and transfer funds pursuant to (i) priorities FIRST through SIXTH of Section 4.1 (b), or (ii) Section 4.1(e)(i) or 4.1(e)(ii), as the Collateral Agent shall select. -9- (g) Notwithstanding anything to the contrary in Section 4.1(a) or (b), the Borrower shall be permitted to specify in any Distribution Certificate a Business Day, which shall be not more than 10 days after the Monthly Date or Quarterly Date to which such Distribution Certificate pertains, on which payments (i) to the Operator pursuant to priorities FIRST or SECOND of Section 4.1(a) or priorities FIRST or SIXTH of Section 4.1(b) shall be made to the Operator and (ii) to the Borrower, the Sponsor or such other Person as directed by the Borrower pursuant to priority SEVENTH of Section 4.1(b) shall be made to the Borrower, the Sponsor or such other Person, and the Depositary Bank shall make any such payments to the Operator or to the Borrower, the Sponsor or such other Person as directed by the Borrower on any such later Business Day so specified in such Distribution Certificate. SECTION 4.2. DEBT SERVICE RESERVE ACCOUNT. (a) Initial Funding of Debt Service Reserve Account. On the Closing Date, proceeds of the Initial Term Loans shall be used to fund the Debt Service Reserve Account in an amount equal to the Debt Service Reserve Required Amount on such date. (b) Funding of Debt Service Reserve Account on Each Quarterly Date. On the Quarterly Date next succeeding the Closing Date (or, pursuant to Section 4.1, the corresponding Business Day) and on each subsequent Quarterly Date (or corresponding Business Day) thereafter, the Debt Service Reserve Account shall be funded via priority FIFTH of Section 4.1(b) in an amount equal to the difference between the Debt Service Reserve Required Amount on such date and the then-current balance of the Debt Service Reserve Account; provided, however, that additional deposits to the Debt Service Reserve Account may from time to time be made pursuant to Section 4.1(e). (c) Excess Required Balance in Debt Service Reserve Account. If on any Quarterly Date (or corresponding Business Day), the funds on deposit in the Debt Service Reserve Account (including any gain realized from investments in Permitted Investments pursuant to Section 5.5) exceed the Debt Service Reserve Required Amount, subject to the prior written approval of the Collateral Agent (which shall be given so long as no Default or Event of Default has occurred and is continuing), the Borrower may direct the Depositary Bank in writing to withdraw and transfer to the Revenue Account or, so long as the Borrower is in compliance with its obligations under Section 8.13 of the Credit Agreement, to the Borrower or as directed by the Borrower, all or a portion of such excess funds. SECTION 4.3. Restoration Sub-Account. The Borrower agrees that in the event that it receives any amount of Loss Proceeds in respect of any Event of Loss, within five (5) Business Days it shall deposit the amount of such Loss Proceeds in the Restoration Sub- -10- Account. Distributions from the Restoration Sub-Account shall be requested by the Borrower, and made by the Depositary Bank to the Borrower, solely in accordance with Sections 8.05(c) and 8.05(d) of the Credit Agreement, except that Loss Proceeds remaining in the Restoration Sub-Account upon completion of Restoration Work relating thereto shall be transferred promptly to to the Revenue Account ARTICLE V. ACCOUNTS GENERALLY SECTION 5.1. BENEFIT OF ACCOUNTS. All right, title and interest in and to the Accounts and the funds in the Accounts and any interest accrued on such funds shall be collaterally assigned to the Collateral Agent in accordance with the terms of the Borrower Security Agreement until the Termination Date. Funds shall be distributed from the Accounts only in accordance with this Agreement and funds deposited in the Accounts shall be applied as provided in this Agreement and the other Financing Documents, as applicable. Notwithstanding the foregoing, no Agent nor any Lender shall be liable for any tax, assessment, fee or other governmental or other charge or claim on or arising out of the Accounts or any interest or earnings thereon, all of which shall be for the account of Borrower. SECTION 5.2. BOOKS OF ACCOUNT; STATEMENTS. (a) The Depositary Bank shall maintain books of account on a cash basis and record therein all deposits into and transfers to and from the Accounts and all investment transactions effected by the Depositary Bank, all in accordance with its normal recordkeeping practices. The Depositary Bank shall make such books of account available during normal business hours for inspection and audit by the Administrative Agent, the Collateral Agent, the Borrower and their respective representatives. (b) Not later than the tenth Business Day of each month during the term of this Agreement, the Depositary Bank shall deliver to each of the other parties hereto a rollforward statement setting forth the beginning balance of each Account and the transactions comprising the additions into and withdrawals out of each Account during the preceding month which shall total to the amounts held in each Account at the close of business on the last day of such preceding month. SECTION 5.3. ACCOUNTS GENERALLY. (a) Except as expressly set forth in this Agreement, the Borrower shall not have any right of withdrawal in respect of any of the Accounts, and the Borrower shall -11- not make, attempt to make or consent to the making of any withdrawal or transfer from any Account except in strict adherence to this Agreement. (b) The Collateral Agent shall have sole signatory authority with respect to directing the Depositary Bank to make withdrawals from the Accounts. Those persons who are authorized to sign with respect to the Accounts shall be designated by the Collateral Agent from time to time by written notice to the Depositary Bank. (c) It shall be sufficient, for purposes of this Agreement, that the Depositary Bank has received a Withdrawal Approval Notice signed by an individual designated by the Collateral Agent as provided in Section 5.3(b), and the Depositary Bank shall not require any further evidence of authorization prior to making any disbursement hereunder. (d) Subject to (i) the timely receipt of a Withdrawal Approval Notice (which, for purposes of this Agreement, shall mean not later than 3:00 p.m. (New York City time) on the Business Day preceding the requested date of payment or action), (ii) the availability of cash in the applicable Account, (iii) the Federal wire transfer system functioning in a normal fashion and (iv) other circumstances beyond the control of the Depositary Bank, the Depositary Bank shall make any payment required hereunder pursuant to any Withdrawal Approval Notice (except transfers between Accounts and between Accounts and other accounts) by means of wire transfer of immediately available funds to the address of the payee set forth in such Withdrawal Approval Notice prior to 11:00 a.m. (New York City time) on the date specified herein for such payment, or by such other means of payment, to such other address or at such later time as may be specified by such payee. SECTION 5.4. LIMITATION ON DEPOSITARY BANK'S OBLIGATIONS. The Depositary Bank has no obligation to the Borrower, the Sponsor or any third party to make any payment (or authorize any withdrawal with respect thereto) for which the appropriate Account does not contain adequate funds. SECTION 5.5. PERMITTED INVESTMENTS. All funds paid to or retained by the Depositary Bank in Accounts shall, until paid or applied as provided herein, be invested by the Depositary Bank at the written authorization and direction of the Borrower from time to time and at the risk and expense of the Borrower in Permitted Investments (and in the absence of a written authorization and direction from the Borrower, in U.S. Government money market mutual funds); provided, that upon the occurrence and during the continuance of an Event of Default, such funds shall be so invested in Permitted Investments at the Collateral Agent's direction and at the risk and expense of the Borrower. All gains (including interest received) realized as the result of any such -12- investment (net of all fees, commissions and other expenses, if any, incurred in connection with such investment) shall be deposited into the applicable Account. The Depositary Bank will have no liability for any loss resulting from any Permitted Investment other than by reason of its willful misconduct, gross negligence or bad faith. The Depositary Bank may sell any Permitted Investment (without regard to its maturity date, but in accordance with Section 8.2) whenever the Depositary Bank in its sole discretion deems it necessary to make any distribution required by this Agreement and the Depositary Bank will not be liable to any Person for any loss suffered because of any such sale, other than by reason of its willful misconduct, gross negligence or bad faith. SECTION 5.6. DEPOSITS IRREVOCABLE. All deposits made into any Account, absent manifest error, shall be irrevocable and such deposits and all instruments or security held in such Account and all interest thereon shall be held in trust by the Depositary Bank and applied solely as provided herein. SECTION 5.7. EVENTS OF DEFAULTS; MANDATORY PREPAYMENTS. Notwithstanding any other provision contained in this Agreement, upon receipt by the Depositary Bank of a written notice from the Collateral Agent stating that a Default or an Event of Default has occurred and is continuing or that a mandatory prepayment is required (upon which notice the Depositary Bank shall be entitled to rely without independent investigation), the Depositary Bank shall (x) in the case of a Default or an Event of Default, thereafter transfer and distribute cash from the Accounts only upon the express written instructions of, and in accordance with the priorities established by, the Collateral Agent in its sole discretion, until notified in writing by the Collateral Agent that such Default or Event of Default has been waived or cured or (y) in the case of a mandatory prepayment, pay an amount equal to the amount of such mandatory prepayment to the Administrative Agent for payment to the Lenders in accordance with the Credit Agreement. Any notice provided under this Section 5.7 shall be provided to the Borrower. ARTICLE VI. REPRESENTATIONS, WARRANTIES AND COVENANTS SECTION 6.1. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEPOSITARY BANK. The Depositary Bank represents and warrants to the Administrative Agent, the Collateral Agent and the Borrower as follows: (a) Existence. The Depositary Bank is a New Jersey banking corporation duly organized, validly existing and in good standing under the laws of New Jersey. -13- (b) Power and Authorization; Enforceable Obligations. (i) The Depositary Bank has full power and authority and the legal right to conduct its business as now conducted and as proposed to be conducted by it, to execute, deliver and perform this Agreement and to take all actions necessary to complete the transactions contemplated by this Agreement. The Depositary Bank has taken all necessary action to authorize the transactions contemplated hereby on the terms and conditions of this Agreement and to authorize the execution, delivery and performance of this Agreement. (ii) This Agreement has been duly executed and delivered by the Depositary Bank and constitutes the legal, valid and binding obligation of the Depositary Bank, enforceable against the Depositary Bank in accordance with its terms, except as enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally or by limitation upon the availability of equitable remedies. (c) No Legal Bar. The execution, delivery and performance of this Agreement by the Depositary Bank will not, to the best of the Depositary Bank's knowledge, (i) violate any applicable law of the State of New York, the State of New Jersey or the United States of America governing the banking and trust powers of the Depositary Bank or (ii) result in a breach of any provision of any security issued by the Depositary Bank or of any indenture, mortgage, deed of trust, lease, contract, undertaking, agreement or instrument to which the Depositary Bank is a party or by which it or any of its property is bound or to which it or any of its property is subject. The execution, delivery and performance of this Agreement will not result in, or require the creation or imposition of any lien on any of the properties or revenues of the Depositary Bank pursuant to any applicable law or any indenture, mortgage, deed of trust, lease, contract, undertaking, agreement or instrument to which the Depositary Bank is a party or by which it or any of its property is bound or to which it or any of its property is subject. No approval or consent of any Person is required in connection with the execution, delivery and performance by the Depositary Bank of this Agreement, except such approvals or consents as have been duly obtained and are in full force and effect. (d) Government Approvals. To the best of the Depositary Bank's knowledge, no Government Approval of any Government Authority of the State of New York, the State of New Jersey or the United States of America governing -14- the banking and trust powers of the Depositary Bank, except for such Government Approvals as have been obtained and are in full force and effect and are not subject to appeal or judicial or other governmental review, are required to be obtained by the Depositary Bank in connection with the execution, delivery and performance of this Agreement or the taking of any action by any party contemplated hereby. (e) The Accounts are and will be maintained by the Depositary Bank as "securities accounts" (as defined in the Uniform Commercial Code) to the extent "financial assets" (as defined in the Uniform Commercial Code) are deposited in or credited to the Accounts. The Depositary Bank will treat each item of property (including cash and investment property) held by it in or credited to the Accounts as a "financial asset" to the extent such property can be treated as a "financial asset" under the Uniform Commercial Code. The Depositary Bank will treat and identify the Collateral Agent as the "entitlement holder" (as defined in the Uniform Commercial Code) with respect to the Accounts and all financial assets credited thereto. No financial asset deposited in or credited to the Accounts shall be registered in the name of, payable to the order of, or specially endorsed to any Person other than the Collateral Agent, unless endorsed to the Depositary Bank or in blank. The Collateral Agent, acting for the benefit of the Secured Parties, will have control of all security entitlements with respect to financial assets credited to the Accounts. The Depositary Bank will comply strictly with all "entitlement orders" (as defined in the Uniform Commercial Code) originated by the Collateral Agent in accordance with the terms of the Financing Documents without further consent by the Borrower or any other Person. The Depositary Bank will not comply or agree to comply with any entitlement order with respect to the Accounts or any financial assets credited thereto given by any Person other than the Collateral Agent. The Depositary Bank is a "securities intermediary" (as defined in the Uniform Commercial Code) and will act in such capacity. The Depositary Bank is not a "clearing corporation" (as defined in the Uniform Commercial Code). (f) In the event that the Accounts are not considered "securities accounts" (as defined in the Uniform Commercial Code) under applicable law, the Accounts shall be deemed to be "deposit accounts" (as defined in the Uniform Commercial Code) to the extent a security interest can be granted and perfected under the Uniform Commercial Code in the Accounts as deposit accounts, which the Collateral Agent shall maintain with the Depositary Bank acting not as a securities intermediary but as a "bank" (as defined in the Uniform Commercial Code). The Collateral Agent, acting on behalf of the Secured Parties, shall be -15- deemed the customer of the Depositary Bank for purposes of the Accounts and as such shall be entitled to all the rights that customers of banks have under applicable law with respect to deposit accounts, including the right to withdraw funds from, or close, the Accounts (which rights shall be exercised in accordance with the terms of the Financing Documents). The Depositary Bank shall not have title to the funds on deposit in the Accounts and shall credit the Accounts with all receipts of interest, dividends, and other income received on the property held in the Accounts. The Depositary Bank shall administer and manage the Accounts in strict compliance with all the terms applicable to the Accounts pursuant to the terms of this Agreement, and shall be subject to and comply with all the obligations that the Depositary Bank owes to the Collateral Agent and the Secured Parties with respect to the Accounts, including all subordination obligations, pursuant to the terms of this Agreement. (g) In the event that the Accounts are not considered "securities accounts" or "deposit accounts" (each as defined in the Uniform Commercial Code) under applicable law or a security interest cannot be granted and perfected in the Accounts under the Uniform Commercial Code, then the Accounts and all property deposited therein shall be deemed to be under the exclusive dominion and control of the Secured Parties, which the Secured Parties maintain through the Collateral Agent and the Depositary Bank, as their agents for such purpose, and the Collateral Agent and the Depositary Bank will act and will be deemed to be acting as the Secured Parties' agents in respect of the Accounts for the purpose of maintaining such exclusive dominion and control for the purpose of the creation and perfection of security interests in favor of the Secured Parties. (h) Except for the claims and interest of the Collateral Agent, the Secured Parties and the Borrower in the Accounts, no officer of the Depositary Bank with direct responsibility for administering this Agreement has actual knowledge of any claim to, or interest in, the Accounts or any monies or any other property deposited therein or credited thereto. If an officer of the Depositary Bank with direct responsibility for administering this Agreement obtains actual knowledge that any Person has asserted any lien, encumbrance or adverse claim against the Accounts or in any monies or any other property deposited therein or credited thereto, the Depositary Bank will promptly notify the Collateral Agent and the Borrower thereof. -16- ARTICLE VII. DEPOSITARY BANK GENERALLY SECTION 7.1. ACCEPTANCE. The acceptance by the Depositary Bank of its duties hereunder is subject to the following terms and conditions, which the parties to this Agreement agree shall govern and control with respect to the rights, duties, liabilities and immunities of the Depositary Bank: (a) the Depositary Bank will not be responsible or liable in any manner whatsoever for the sufficiency, correctness, genuineness or validity of the amounts deposited with or held by it; (b) the Depositary Bank will not be liable for any error of judgment or for any act done or step taken or omitted except in the case of its gross negligence, willful misconduct or bad faith; (c) the Depositary Bank may consult with and obtain advice from counsel and other skilled Persons (at the reasonable expense of the Borrower) in the event of any dispute or question as to the construction of any provision hereof and shall be fully protected in taking or not taking any action in good faith in reliance on such advice; (d) the Depositary Bank will not be charged with knowledge of any agreement other than this Agreement and Schedule I to the Credit Agreement, and shall have no duties as Depositary Bank except those expressly set forth herein and in any modification or amendment hereof; provided, that no such modification or amendment will affect its duties unless it has given its written consent thereto; (e) the Depositary Bank may engage or be interested in any financial or other transaction with any party hereto and may act on, or as depository, trustee or agent for, any committee or body of holders of obligations of such persons as freely as if it were not Depositary Bank; (f) the Depositary Bank is not obligated to take any action that in its reasonable judgment would involve it in expense or liability unless it has been furnished with reasonable indemnity (it being understood and agreed that the general indemnity of the Collateral Agent will constitute a reasonable indemnity); (g) the Depositary Bank will not take instructions from any Person except those given in accordance with this Agreement; and -17- (h) the Depositary Bank will be protected in acting upon any written notice, certificate, instruction, request or other paper or document as to the due execution thereof and the validity and effectiveness of the provisions thereof and as to the truth of any information therein contained, which Depositary Bank, in good faith, reasonably believes to be genuine. SECTION 7.2. FEES OF DEPOSITARY BANK. The Borrower shall pay the Depositary Bank the following fees (and no others): (a) An annual fee of $4,500 payable on the Closing Date and on each anniversary of the Closing Date occurring on or prior to the Termination Date. In the event the Termination Date should occur prior to an anniversary of the Closing Date, the annual fee for the final year shall be refunded to the Borrower on a per-quarter basis, with any portion of a quarter counted as a full quarter. (b) A termination fee in the amount of $1,500 payable upon notice of the Depositary Bank's termination as Depositary Bank prior to the Termination Date. (c) The services to be provided by the Depositary Bank including the sweeping of interest and dividends daily, and the provision of mutual funds for trust accounts; the mutual fund provider may reimburse the Depositary Bank or United up to one-quarter of one percent (0.25%) of the funds invested in consideration of it performing administrative services, provided that the Borrower shall not incur any expense or fee as a result of the foregoing. SECTION 7.3. REPLACEMENT OR RESIGNATION OF DEPOSITARY BANK. (a) The Depositary Bank may at any time resign by giving notice to each other party to this Agreement, such resignation to be effective upon the appointment of a successor Depositary Bank as hereinafter provided. If a successor Depositary Bank is not appointed within thirty (30) days after the giving of written notice of such resignation, the Depositary Bank may apply to any court of competent jurisdiction to appoint a successor Depositary Bank to act until such time, if any, as a successor is appointed as herein provided. (b) The Collateral Agent may remove the Depositary Bank at any time by giving notice to each other party to this Agreement, such removal to be effective upon the appointment of a successor Depositary Bank as hereinafter provided. -18- (c) In the event of any resignation or removal of the Depositary Bank, a successor Depositary Bank, which shall be a bank or trust company organized under the laws of the United States of America or of any state thereof, shall be appointed by the Collateral Agent and be reasonably acceptable to the Borrower and the Depositary Bank shall return all unearned prepaid compensation. Any such successor Depositary Bank shall deliver to each party to this Agreement a written instrument accepting such appointment hereunder and thereupon such successor Depositary Bank shall succeed to all the rights and duties of the Depositary Bank hereunder and shall be entitled to receive the Accounts from the predecessor Depositary Bank. (d) Any Person into which the Depositary Bank may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Depositary Bank shall be a party, or any Person to which substantially all of the corporate trust business of the Depositary Bank may be transferred, shall be the Depositary Bank under this Agreement without further act. SECTION 7.4. INDEMNITY. Whether or not the transactions contemplated hereby are consummated, the Borrower shall, subject to the provisions of this Section 7.4, indemnify, pay and hold the Depositary Bank and the officers, directors, employees, agents, affiliates, and attorneys of the Depositary Bank (collectively, the "INDEMNITEES") harmless from and against any and all out-of-pocket liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including without limitation reasonable attorneys' fees and costs of the Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Indemnitees are designated a party thereto) that are imposed on, incurred by or asserted against any Indemnitee, in any manner relating to or arising out of this Agreement or the other Financing Documents or the exercise of any right or remedy hereunder or under any other Financing Document (collectively, the "INDEMNIFIED LIABILITIES"); provided, that the Borrower shall not have any obligation to any Indemnitee if a court of competent jurisdiction renders a judgment, final and not subject to appeal or review, that such Indemnified Liabilities arise from the gross negligence or willful misconduct of such Indemnitee. The Borrower shall pay or reimburse each Indemnitee for all reasonable out-of-pocket costs and expenses (including without limitation reasonable attorneys' fees and expenses) incurred by such Indemnitee in the defense of any claim arising out of any Indemnified Liability at the time such costs and expenses are incurred and such Indemnitee has given the Borrower written notice thereof. The foregoing indemnity will remain operative and in full force and effect regardless of the termination of this -19- Agreement, the consummation of the transactions contemplated by the Financing Documents, the repayment of the Secured Obligations, the invalidity or unenforceability of any term or provision of this Agreement or any other Financing Document, or the content or accuracy of any representation or warranty made by the Borrower in any Financing Document. To the extent that the undertaking to indemnify, pay and hold harmless set forth in this Section 7.4 may be unenforceable because it violates any law or public policy, the Borrower shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by the Indemnitees or any of them. ARTICLE VIII. DISPUTES; DETERMINATIONS SECTION 8.1. DISPUTES. In the event of any dispute as to any amount to be transferred or paid pursuant to this Agreement, the Depositary Bank is authorized and directed to retain in its possession, without liability to any Person, the disputed amount until such dispute has been settled by agreement of the other parties hereto or by legal proceedings, but the Depositary Bank is under no duty whatsoever to institute or defend any such proceeding; provided, that the Depositary Bank has no right to retain any amount necessary to pay when due principal, fees or interest payable to the Collateral Agent or any Secured Party in accordance with this Agreement (under the circumstances contemplated by Section 4.1(b) or otherwise). The Depositary Bank has the right to interplead the parties to a dispute in any court of competent jurisdiction and to ask such court to determine the respective rights of such parties with respect to this Agreement. SECTION 8.2. CASH AVAILABLE. In determining the amount of funds on deposit in an Account at any time, the Depositary Bank will treat as cash available the net amount that the Depositary Bank would receive on such day if it liquidated all the securities then on deposit in such Account (at then-prevailing market prices and assuming normal sales expenses). The Depositary Bank will use its best efforts to sell securities without a loss in order that actual cash is available on each date on which a transfer or payment is to be made pursuant to this Agreement. ARTICLE IX. MISCELLANEOUS SECTION 9.1. NO WAIVER; REMEDIES CUMULATIVE. No failure on the part of any party hereto or any of such Person's agents to exercise, and no delay in exercising, and no course of dealing with respect to, any right, power or remedy hereunder shall operate as a waiver thereof. No single or partial exercise by any party hereto or any of such Person's agents of any right, power or remedy hereunder shall preclude any other or further -20- exercise thereof or the exercise of any other right, power or remedy. The rights, powers and remedies herein expressly provided are cumulative and not exclusive of any rights, powers or remedies which any party hereto would otherwise have. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of any other party hereto to any other or further action in any circumstances without notice or demand, except to the extent notice is expressly required by this Agreement or any other Financing Document. SECTION 9.2. NOTICES. All notices, requests and other communications provided for herein (including any modifications of, or waivers or consents under, this Agreement) shall be given or made in writing (including by telecopy) delivered to the intended recipient at the address set forth below or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopier with confirmation of receipt received or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid; provided, however, that if such transmission or delivery does not occur by 4:00 p.m. recipient's time, then such transmission or delivery shall be deemed to occur on the next Business Day. For Borrower: Ormesa LLC 980 Greg Street Sparks, Nevada 89431 Attention: President Telephone: (775) 356-9029 Facsimile: (775) 356-9039 For Administrative Agent and Collateral Agent: United Capital, a division of Hudson United Bank 87 Post Road East Westport, Connecticut 06880 Attention: Mr. Jerome P. Peters, Jr. Telephone: (203) 291-6600 Facsimile: (203) 291-6632 -21- For Depositary Bank: Wealth Management, a division of Hudson United Bank 90 Post Road East Westport, CT 06880 Attention: James N. Donaldson, Senior Vice President Telephone: (203) 291-6705 Facsimile: (203) 291-6709 SECTION 9.3. AMENDMENTS, ETC. This Agreement may be amended, supplemented, modified or waived only by an instrument in writing duly executed by each of the parties hereto. Any such amendment, supplement, modification or waiver shall be binding upon the Depositary Bank, the Collateral Agent, each Secured Party, each holder of any of the Secured Obligations and the Borrower. Any waiver shall be effective only in the specific instance and for the specified purpose for which it was given. SECTION 9.4. SUCCESSORS AND ASSIGNS. This Agreement shall: (a) remain in full force and effect until the termination hereof pursuant to Section 9.14; and (b) be binding upon and inure to the benefit of the respective successors and permitted assigns of the parties hereto; provided, however, that the Borrower shall not assign or transfer its rights hereunder without the prior written consent of the Collateral Agent. SECTION 9.5. COUNTERPARTS; EFFECTIVENESS. This Agreement may be executed in any number of counterparts, all of which when taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement and the other Financing Documents constitute the entire agreement and understanding among the parties hereto with respect to matters covered by this Agreement and the other Financing Documents and supersede any and all prior agreements and understandings, written or oral, relating to the subject matter hereof. This Agreement shall become effective at such time as the Collateral Agent shall have received counterparts hereof signed by all of the intended parties hereto. SECTION 9.6. SEVERABILITY. If any provision hereof is invalid or unenforceable in any jurisdiction, then, to the fullest extent permitted by applicable law: (a) the other provisions hereof shall remain in full force and effect in such jurisdiction in order to carry out the intentions of the parties hereto as nearly as may be possible; and (b) the invalidity -22- or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. SECTION 9.7. HEADINGS. Headings appearing herein are used solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. SECTION 9.8. NO THIRD PARTY BENEFICIARIES. THE AGREEMENTS OF THE PARTIES HERETO ARE SOLELY FOR THE BENEFIT OF THE BORROWER, THE DEPOSITARY BANK, THE COLLATERAL AGENT AND THE OTHER SECURED PARTIES, AND NO PERSON (OTHER THAN THE PARTIES HERETO, THE OTHER SECURED PARTIES AND THEIR SUCCESSORS AND ASSIGNS PERMITTED HEREUNDER) SHALL HAVE ANY RIGHTS HEREUNDER. SECTION 9.9. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. Notwithstanding anything to the contrary herein, the State of New York is and shall continue to be for so long as this Agreement shall be in effect the Depositary Bank's jurisdiction (within the meaning of Section 8-110(e) of the Uniform Commercial Code) in its capacity as the "securities intermediary" with respect to all securities accounts and (within the meaning of Section 9-304 of the Uniform Commercial Code) in its capacity as the "bank" with respect to all deposit accounts established and maintained by the Depositary Bank in the name of the Collateral Agent. SECTION 9.10. SUBMISSION TO JURISDICTION, ETC. EACH PARTY HERETO HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK COUNTY (INCLUDING ITS APPELLATE DIVISION), AND OF ANY OTHER APPELLATE COURT IN THE STATE OF NEW YORK, FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. -23- SECTION 9.11. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 9.12. SERVICE OF PROCESS. Nothing herein shall in any way be deemed to limit the ability of any party hereto to serve any writs, process or summonses in any other manner permitted by applicable law or to obtain jurisdiction over any other party hereto in such jurisdiction, and in such manner, as may be permitted by applicable law. SECTION 9.13. LIMITATION OF RECOURSE. The obligations of the Borrower under this Agreement shall be obligations of the Borrower only and none of the Depositary Bank, the Collateral Agent or any Secured Party shall have any claim against or recourse to (whether by operation of law or otherwise) any Non-Recourse Person (other than claims against and recourse to the Sponsor with respect to its obligations under the Borrower Equity Interest Pledge) in respect of such obligations of the Borrower. Notwithstanding the foregoing, nothing in this Section 9.13 shall impair or in any way limit any liabilities or obligations of (a) the Sponsor under or pursuant to its obligations as set forth in the Borrower Equity Pledge, or (b) any Non-Recourse Party for fraud or willful misconduct. SECTION 9.14. TERMINATION. This Agreement and the lien granted pursuant to Section 7.2 will automatically terminate upon the Termination Date. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, this Agreement has been duly executed on the date and year first above written. UNITED CAPITAL, a division of Hudson United Bank, as Administrative Agent and Collateral Agent By ------------------------------------- Name: Jerome P. Peters, Jr. Title: Senior Vice President ORMESA LLC, as Borrower BY ORMAT FUNDING CORP., its Sole Member and Control Manager BY ------------------------------------- Name: Title: WEALTH MANAGEMENT, a division of Hudson United Bank, as Depositary Bank By ------------------------------------- Name: ------------------------------- Title: ------------------------------ Exhibit D to Credit Agreement FORM OF NOTICE OF BORROWING United Capital, a division of Hudson United Bank 87 Post Road East Westport, CT 06880 Re: Notice of Borrowing Ladies and Gentlemen: Reference is hereby made to Section [6.01(v)/6.02(i)] of the Credit Agreement, dated as of December 31, 2002 (the "CREDIT AGREEMENT"), among Ormesa LLC (the "BORROWER"), the several banks and other financial institutions party thereto from time to time and United Capital, a division of Hudson United Bank, not in its individual capacity, but solely as administrative agent and collateral agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings given to them in the Credit Agreement. The Borrower hereby requests that an [Initial Term/Additional Term] Loan be made in an aggregate principal amount equal to [$20,000,000.00][$7,500,000.00] on ___________, 200__ (the "BORROWING DATE").+ Such Loan will be a [Prime Rate Loan/Eurodollar Loan]. The undersigned hereby certifies that all conditions contained in Section [6.01/6.02] of the Credit Agreement have been or will be satisfied or waived on the Borrowing Date. The undersigned hereby further certifies as follows: (a) Immediately before and after giving effect to the borrowing requested hereby, the representations of the Borrower and the Sponsor contained in the Financing Documents shall be true and correct on and as of the Borrowing Date in all material respects as if made on and as of such date except for any such representations and warranties that were initially stated to have been made solely as of an earlier date, in which case such representations shall have been true and correct in all material respects as of such earlier date. (b) Immediately before and after giving effect to the borrowing requested hereby, no Default or Event of Default shall have occurred and be continuing and no Default will result therefrom. (c) Immediately before and after giving effect to the borrowing requested hereby, no Material Adverse Effect shall have occurred and be continuing or will result therefrom. ---------- + In connection with the Additional Term Loan only, this Notice must be delivered to the Administrative Agent by 11:00 a.m., New York time, at least 3 (with respect to Eurodollar Loans) or 1 (with respect to Prime Rate Loans) Business Day(s) prior to the proposed Borrowing Date. -2- (d) All Government Approvals that are necessary for each Project as of the Borrowing Date shall have been obtained and shall be in full force and effect and not subject to appeal. The Borrower agrees that if prior to the time of the borrowing requested hereby any matter certified to herein by the Borrower is not true and correct at such time as if then made, the Borrower will immediately so notify the Administrative Agent. Except to the extent, if any, that prior to the time of the borrowing requested hereby the Administrative Agent shall receive written notice to the contrary from the Borrower, each matter certified to herein shall be deemed once again to be certified as true and correct at the Borrowing Date as if then made. Please wire transfer the proceeds of the Loan requested hereby in accordance with the payment instructions attached as Schedule A hereto. Borrowing Certificate -3- The Borrower has caused this Notice of Borrowing to be executed and delivered by its duly authorized signatory this ___ day of ____________, 200_. ORMESA LLC By: ORMAT FUNDING CORP., its Sole Member and Control Manager By: ------------------------------------ Name: Title: Borrowing Certificate SCHEDULE A Please remit funds to: Amount: $ ___________ Institution: Account Name: Account No.: ABA No.: Amount: $ ___________ Institution: Account Name: Account No.: ABA No.: Amount: $ ___________ Institution: Account Name: Account No.: ABA No.: Exhibit E to Credit Agreement FORM OF DISTRIBUTION CERTIFICATE United Capital a division of Hudson United Bank 87 Post Road East Westport, Connecticut 06680 Wealth Management a division of Hudson United Bank 87 Post Road East Westport, Connecticut 06680 Re: Distribution Certificate Ladies and Gentlemen: Reference is hereby made to Section 8.13(vi) of the Credit Agreement dated as of December 31, 2002 (the "CREDIT AGREEMENT"), among Ormesa LLC (the "BORROWER"), the several banks and other financial institutions party thereto from time to time and United Capital, a division of Hudson United Bank, not in its individual capacity, but solely as administrative agent (the "ADMINISTRATIVE AGENT") and collateral agent (the "COLLATERAL AGENT"), and to Section 4.1 of the Depositary Agreement dated as of December 31, 2002 (the "DEPOSITARY AGREEMENT") among the Borrower, the Administrative Agent, the Collateral Agent and Wealth Management, a division of Hudson United Bank, as depositary bank (the "DEPOSITARY BANK"). Capitalized terms used herein and not otherwise defined herein shall have the meanings given to them in the Credit Agreement. The Borrower hereby requests that the transfers from the Accounts described in the attached Distribution Request be made by the Depositary Bank on ______________, 20___ (the "PAYMENT DATE")*, other than the transfers described on lines 4.00, .5.00, 6.00, 11.00 and 12.00, which are requested to be made on _____________, 20__.+ The undersigned hereby certifies that immediately before and after giving effect to the payments requested hereby, no Default (other than any Default that (i) provides a cure period therefor of not less than 30 days, (ii) is reasonably capable of being remedied during such 30-day period and (iii) as to which the Borrower is diligently prosecuting or pursuing such remedy, and ---------- * This Certificate must be delivered to the Administrative Agent and the Depositary Bank at least 10 days prior to the proposed Payment Date for any request that contemplates a Restricted Payment or at least 3 Business Days prior to the proposed Payment Date for any request that does not contemplate a Restricted Payment. + Such date shall not be more than 10 days after the Monthly Date or Quarterly Date to which this Distribution Certificate relates. -2- (iv) following the occurrence of which not more than 30 days have elapsed) or an Event of Default shall have occurred and be continuing or would result therefrom. [In connection with a Restricted Payment (including, without limitation, a payment pursuant to 4.1(b) SEVENTH of the Depositary Agreement), the undersigned hereby further certifies as follows: + (a) [The Payment Date is within 30 days after a Quarterly Date/The Borrower was unable to make a Restricted Payment within 30 days after a Quarterly Date because Section 8.13(ii) of the Credit Agreement was unsatisfied; the provisions of Section 8.13(ii), as well as the other provisions of Section 8.13 of the Credit Agreement, are satisfied and the Payment Date is within 10 days after such conditions of Section 8.13 of the Credit Agreement were first satisfied]; (b) Immediately before and after giving effect to such Restricted Payment, for any corresponding Quarterly Date on or prior to March 31, 2004, the Projected Debt Service Coverage Ratio shall be at least 1.20:1, and for any corresponding Quarterly Date thereafter, the Debt Service Coverage Ratio for the relevant Historical Computation Period is at least 1.20:1; (c) Immediately before and after giving effect to such Restricted Payment, the balance on deposit in the Debt Service Reserve Account is at least equal to the Debt Service Reserve Required Amount; and (d) the Restricted Payment is only made from and to the extent of Distributable Cash (as defined in the Depositary Agreement).] [the remainder of this page intentionally left blank] ---------- + These certifications are only necessary with respect to Restricted Payments (including, without limitation, payments pursuant to Section 4.1(b) SEVENTH of the Depositary Agreement). -3- The Borrower has caused this Distribution Certificate to be executed and delivered by its duly authorized signatory this _____ day of ________, 20 __. ORMESA LLC By ORMAT FUNDING CORP., its Sole Member and Control Manager By: ------------------------------------ Name: Title: -4- ORMESA LLC FORM OF DISTRIBUTION REQUEST [DATE] REVENUE DEBT SERVICE RESERVE ACCOUNT ACCOUNT -------------------- ---------------------- BALANCE PRIOR TO THIS REQUEST ____________________ ______________________ 1.00 Power sales ____________________ ______________________ 2.00 Interest income ____________________ ______________________ 3.00 Other income ____________________ ______________________ MONTHLY DISTRIBUTIONS: Section 4.1(a) FIRST 4.00 Operation and Maintenance Expenses ____________________ ______________________ Section 4.1(a) SECOND 5.00 Capital Expenditures ____________________ ______________________ QUARTERLY DISTRIBUTIONS: Section 4.1(b) FIRST 6.00 Operation and Maintenance Expenses ____________________ ______________________ Section 4.1(b) SECOND ____________________ ______________________ 7.00 Fees and Expenses for Administrative Agent, ____________________ ______________________ Collateral Agent and Depositary Bank ____________________ ______________________ Section 4.1(b) THIRD 8.00 Lender Interest and Fees ____________________ ______________________ Section 4.1(b) FOURTH 9.00 Lender Principal and Additional Principal ____________________ ______________________ Section 4.1(b) FIFTH 10.00 Debt Service Reserve Account ____________________ ______________________ Section 4.1(b) SIXTH 11.00 Capital Expenditures Section 4.1(b) SEVENTH 12.00 Distributable Cash ____________________ ______________________ TOTAL TRANSFERS IN/(OUT) ____________________ ______________________ BALANCE SUBSEQUENT TO THIS REQUEST ==================== ====================== WIRE TO UNITED [7,8,9] WIRE TO OPERATOR [4,5,6,11] WIRE TO DEBT SERVICE RESERVE ACCOUNT [10] WIRE TO BORROWER, SPONSOR, OR OTHER SUCH PERSON [12] SUBMITTED BY: ________________________ APPROVED BY: ____________________ DATE OF SUBMISSION ___________________ DATE OF APPROVAL ________________ to Credit Agreement FORM OF CONVERSION/CONTINUATION NOTICE , 200 -------- ---- - United Capital, a division of Hudson United Bank 87 Post Road East Westport, CT 06880 Re: Notice of Conversion/Continuation Gentlemen and Ladies: This [Conversion/Continuation] Notice (this "NOTICE") is delivered to you pursuant to Section 4.05 of the Credit Agreement dated as of December 31, 2002 (the "CREDIT AGREEMENT"), among Ormesa LLC (the "BORROWER"), the several banks and other financial institutions party thereto from time to time and United Capital, a division of Hudson United Bank, not in its individual capacity, but solely as administrative agent and collateral agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings given to them in the Credit Agreement. The Borrower hereby requests that on____________________, 20___, the outstanding principal amount identified below of the Loans issued under the Credit Agreement; (1) which are [Initial Term Loans/Additional Term Loans] and (2) which are presently [Eurodollar Loans/Prime Rate Loans] with an Interest Period ending on____________________, 200_, (3) be [converted/continued] as, (4) [Eurodollar Loans/Prime Rate Loans] having an Interest Period of [__________]. The principal amount to be so [converted/continued] is $_______________ [The undersigned hereby certifies that the requirements of Section 2.01(c) have been satisfied with respect to this conversion.]Exhibit F -2- The Borrower has caused this Notice to be executed and delivered by its duly authorized signatory this___day of______________, 20__. ORMESA LLC By: ORMAT FUNDING CORP., its Sole Member and Control Manager By: ------------------------------------ Name: Title:
Exhibit 10.1.5 This CREDIT AGREEMENT, dated as of December 18, 2003 (this "Agreement"), is entered into among ORCAL GEOTHERMAL INC., a corporation organized under the laws of the State of Delaware, as borrower ("Borrower"), THE FINANCIAL INSTITUTIONS LISTED ON EXHIBIT H OR WHO LATER BECOME A PARTY HERETO, as banks (the financial institutions party to this Agreement being collectively referred to as the "Banks") and BEAL BANK, S.S.B., as administrative agent for the Banks (in such capacity, "Administrative Agent"). RECITALS A. Borrower intends to acquire directly or indirectly certain Persons which directly or indirectly own, lease, use and operate the Projects referred to herein, consisting of (a) an approximately 52 MW geothermal electric power project located in Heber, California and owned by HGC, (b) a geothermal fluid facility located in Heber, California and owned by HFC, (c) an approximately 40 MW geothermal electric power project (comprised of three geothermal plants) located near Mammoth Lakes, California and owned by Mammoth Lakes and (d) an approximately 48 MW geothermal electric power project located in Heber, California and leased by SIGC pursuant to the GE Lease, and, in connection therewith, Borrower has requested that the Banks provide a portion of the financing for the Acquisition; and B. The Banks are willing to provide such financing upon the terms and subject to the conditions set forth herein and in the other Credit Documents. AGREEMENT NOW, THEREFORE, in consideration of the agreements herein and in the other Credit Documents and in reliance upon the representations and warranties set forth herein and therein, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 DEFINITIONS. Except as otherwise expressly provided, capitalized terms used in this Agreement (including its exhibits and schedules) shall have the meanings given to such terms in Exhibit A. 1.2 RULES OF INTERPRETATION. Except as otherwise expressly provided, the rules of interpretation set forth in Exhibit A shall apply to this Agreement and the other Credit Documents. ARTICLE 2 THE CREDIT FACILITIES 2.1 LOAN FACILITIES. 2.1.1 Senior Credit Facility. (a) Availability. Subject to the terms and conditions set forth in this Agreement and in reliance upon the representations and warranties of Borrower set forth herein, each Bank severally agrees to advance to Borrower on the Closing Date such loans as Borrower may request pursuant to this Section 2.1.1 (individually, a "Loan" and, collectively, the "Loans"), in an aggregate principal amount which does not exceed such Bank's Senior Loan Commitment. Nothing in this clause (a) shall in any respect impair Beal Bank, S.S.B.'s obligations under Section 9.12. (b) Notice of Borrowing. Borrower shall request Loans by delivering to Administrative Agent a written notice in the form of Exhibit C-1, appropriately completed (a "Notice of Borrowing"), which contains or specifies, among other things: (i) the portion of the requested Loan which shall bear interest as provided in (A) Section 2.1.1(c)(i) (individually, a "Base Rate Loan" and, collectively, the "Base Rate Loans") or (B) Section 2.1.1(c)(ii) (individually, a "LIBOR Loan" and, collectively, the "LIBOR Loans"); (ii) the aggregate principal amount of the requested Loan, which shall be in the minimum amount of $1,000,000 or an integral multiple of $100,000 in excess thereof; (iii) the proposed date of the requested Loan (which shall be a Banking Day and the Closing Date); (iv) in the case of any requested Loan to be made as a LIBOR Loan, the initial Interest Period requested therefor (which shall, subject to Section 2.1.2(a), be twelve months); and (v) a certification by Borrower that, as of the date such requested Loan is proposed to be made, the Loan proposed to be made on such date does not exceed $154,500,000. Borrower shall give the Notice of Borrowing to Administrative Agent so as to provide not less than the Minimum Notice Period applicable to Loans of the Type requested. Any Notice of Borrowing may be modified or revoked by Borrower through the Banking Day immediately prior to the Closing Date, and shall thereafter be irrevocable. Each Notice of Borrowing shall be delivered in any manner permitted by Section 10.1 to Administrative Agent at the office, to the facsimile number or to the electronic mail address and during the hours specified in Section 10.1. 2 (c) Interest. Subject to Section 2.4.3, Borrower shall pay interest on the unpaid principal amount of each Loan from the date of Borrowing of such Loan until the maturity or prepayment thereof at the following rates per annum: (i) With respect to the principal portion of such Loan which is, and during such periods as such Loan is, a Base Rate Loan, at a rate per annum equal to the Base Rate (such rate to change from time to time as the Base Rate shall change) plus 4.375%; provided that such 4.375% interest rate margin shall be increased by 0.50% on the eighth anniversary of the Closing Date. (ii) With respect to the principal portion of such Loan which is, and during such periods as such Loan is, a LIBOR Loan, at a rate per annum, at all times during each Interest Period for such LIBOR Loan, equal to the greater of (A) the Adjusted LIBO Rate for such Interest Period and (B) 2.00%, in each case plus 5.125%; provided that such 5.125% interest rate margin shall be increased by 0.50% on the eighth anniversary of the Closing Date. (d) Principal Payments. Borrower shall repay to Administrative Agent, for the account of each Bank, the aggregate unpaid principal amount of the Loan made by such Bank in installments payable on each Principal Repayment Date in accordance with the repayment schedule set forth on Exhibit I, with any remaining unpaid principal, interest, fees and costs due and payable on the Maturity Date. Borrower may not re-borrow the principal amount of any Loan so repaid. 2.1.2 Interest Provisions Relating to All Loans. (a) Applicable Interest Rate. Subject to Section 2.4.3, the applicable basis for determining the rate of interest with respect to any Loan shall be selected by Borrower initially at the time a Notice of Borrowing is given pursuant to Section 2.1.1. The basis for determining the interest rate with respect to any Loan may be changed from time to time as specified in a Notice of Conversion of Loan Type delivered pursuant to Section 2.1.5. If on any day a Loan is outstanding with respect to which notice has not been delivered to Administrative Agent in accordance with the terms of this Agreement specifying the applicable basis for determining the rate of interest, then for that day such Loan shall bear interest determined by reference to the Base Rate. Upon the occurrence and during the continuation of any Event of Default, the Banks shall not be obligated to make any LIBOR Loans with an Interest Period greater than one month. (b) Interest Payment Dates. Borrower shall pay accrued interest on the unpaid principal amount of each Loan (i) in the case of each Base Rate Loan, on the last Banking Day of each calendar quarter, (ii) in the case of each LIBOR Loan, on the last Banking Day of the calendar month in which the three-month anniversary of the first day of the applicable Interest Period in which such LIBOR Loan is outstanding occurs, and (iii) in all cases, upon repayment or prepayment (to the extent thereof and including any optional prepayments or Mandatory Prepayments), upon conversion from one Type of Loan to another Type of Loan and at maturity (whether by acceleration or otherwise); provided, however, that Borrower's first scheduled interest payment hereunder shall occur on March 31, 2004. 3 (c) LIBOR Loan Interest Periods. --------------------------- (i) Subject to Section 2.1.2(a), each Interest Period for LIBOR Loans shall be twelve months. Notwithstanding anything to the contrary in the preceding sentence, (A) any Interest Period which would otherwise end on a day which is not a Banking Day shall be extended to the next succeeding Banking Day unless such next Banking Day falls in another calendar month, in which case such Interest Period shall end on the immediately preceding Banking Day; (B) any Interest Period which begins on the last Banking Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Banking Day of a calendar month; and (C) any Interest Period which would otherwise end after the Maturity Date shall end on the Maturity Date. (ii) Borrower may contact Administrative Agent at any time prior to the end of an Interest Period for a quotation of Interest Rates in effect at such time for given Interest Periods and Administrative Agent shall promptly provide such quotation. Borrower may select an Interest Period telephonically or by electronic mail within the time periods specified in Section 2.1.5, which selection shall be irrevocable on and after commencement of the applicable Minimum Notice Period. Borrower shall confirm such telephonic or electronic mail notice to Administrative Agent by facsimile on the day such notice is given by delivery to Administrative Agent of a written notice in substantially the form of Exhibit C-2, appropriately completed (a "Confirmation of Interest Period Selection"). If Borrower fails to notify Administrative Agent of the next Interest Period for any LIBOR Loans in accordance with this Section 2.1.2(c)(ii) then, subject to Section 2.1.2(a), such Loans shall automatically be renewed as LIBOR Loans with an Interest Period of twelve months on the last day of the current Interest Period therefor. Administrative Agent shall as soon as practicable (and, in any case, within two Banking Days after delivery of the Confirmation of Interest Period Selection) notify Borrower of each determination of the Interest Rate applicable to each Loan. (d) Interest Computations. All computations of interest on Base Rate Loans shall be based upon a year of 365 days or, in the case of a leap year, 366 days, shall be payable for the actual days elapsed (including the first day but excluding the last day), and shall be adjusted in accordance with any changes in the Base Rate to take effect on the beginning of the day of such change in the Base Rate. All computations of interest on LIBOR Loans shall be based upon a year of 360 days and shall be payable for the actual days elapsed (including the first day but excluding the last day). Borrower agrees that all computations by Administrative Agent of interest shall be conclusive and binding in the absence of manifest error. 2.1.3 Promissory Notes. The obligation of Borrower to repay the Loans made by a Bank and to pay interest thereon at the rates provided herein shall, upon the written request of such Bank, be evidenced by promissory notes in the form of Exhibit B-1 (individually, a "Note" and, collectively, the "Notes") payable to the order of such requesting Bank and in the principal amount of such Bank's Senior Loan Commitment or outstanding Loan balance, as the case may be. Borrower authorizes each such requesting Bank to record on the schedule annexed to such Bank's Note or Notes, the date and amount of each Loan made by such requesting Bank, and each payment or prepayment of principal thereunder and agrees that all such notations shall 4 constitute prima facie evidence of the matters noted; provided that in the event of any inconsistency between the records or books of Administrative Agent and any Bank's records or Notes, the records of Administrative Agent shall be conclusive and binding in the absence of manifest error. Borrower further authorizes each such requesting Bank to attach to and make a part of such requesting Bank's Note or Notes continuations of the schedule attached thereto as necessary. No failure to make any such notations, nor any errors in making any such notations, shall affect the validity of Borrower's obligations to repay the full unpaid principal amount of the Loans or the duties of Borrower hereunder or thereunder. Upon the payment in full in cash of the aggregate principal amount of, and all accrued and unpaid interest on, the Loans, and upon the request of Borrower, the Banks holding such Notes shall promptly mark the applicable Notes cancelled and return such cancelled Notes to Borrower. 2.1.4 Loan Funding. (a) Notice. Each Notice of Borrowing and Notice of Conversion of Loan Type shall be delivered to Administrative Agent in accordance with Sections 2.1.1(b) and 2.1.5, respectively. Administrative Agent shall promptly notify each Bank of the contents of each Notice of Borrowing and Notice of Conversion of Loan Type. (b) Pro Rata Loans. All Loans shall be made on a pro rata basis by the Banks in accordance with their respective Proportionate Shares of such Loans, with each Borrowing to consist of a Loan by each Bank equal to such Bank's Proportionate Share of such Loans. (c) Bank Funding. Each Bank shall, before noon (12:00 p.m.) on the date of each Borrowing, make available to Administrative Agent by wire transfer of immediately available funds in Dollars to the account of Administrative Agent most recently designated by it for such purpose, such Bank's Proportionate Share of the Loan to be made on such date. The failure of any Bank to make the Loan to be made by it as part of any Borrowing shall not relieve any other Bank of its obligation hereunder to make its Loan on the date of such Loan. Except as provided in Section 9.12, no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on the date of any Borrowing. (d) Failure of Bank to Fund. Without limiting the obligations of Beal Bank, S.S.B. under Section 9.12, unless Administrative Agent shall have been notified by any Bank prior to the applicable date of a Borrowing that such Bank does not intend to make available to Administrative Agent the amount of such Bank's Proportionate Share of the Loan requested on such date, Administrative Agent may assume that such Bank has made such amount available to Administrative Agent on such date in accordance with the prior paragraph and Administrative Agent may, in its sole discretion and in reliance upon such assumption, make available to Borrower a corresponding amount on such date. If such amount is not in fact made available to Administrative Agent by such Bank, Administrative Agent shall be entitled to recover such amount on demand (and, in any event, within two Banking Days from the applicable date of such Borrowing) from such Bank together with interest thereon, for each day from the applicable date of such Borrowing until the date such amount is paid to Administrative Agent, at the Federal Funds Rate for the first two Banking Days after such date. If such Bank pays such amount to Administrative Agent, then such amount shall constitute such Bank's Proportionate Share of 5 such Loan included in such Loan. Nothing in this Section 2.1.4(d) shall be deemed to relieve any Bank from its obligation to fulfill its obligations hereunder or to prejudice any rights that Borrower may have against any Bank as a result of any default by such Bank hereunder. (e) Funding Account. No later than noon (12:00 p.m.) on the date specified in the Notice of Borrowing, if the applicable conditions precedent listed in Section 3.1 have been satisfied or waived in accordance with the terms thereof and, subject to Section 2.1.4(d), to the extent Administrative Agent shall have received the appropriate funds from the Banks, Administrative Agent shall make available to Borrower the Loans requested in such Notice of Borrowing in Dollars and in immediately available funds, at Administrative Agent's New York Branch, and shall deposit or cause to be deposited the proceeds of such Loans into the Funding Account. 2.1.5 Conversion of Loans. Borrower may convert Loans (or portions thereof) from one Type of Loans to another Type of Loans; provided, however, that (i) any conversion of LIBOR Loans into Base Rate Loans shall be made on, and only on, the first day after the last day of an Interest Period for such LIBOR Loans and (ii) Loans shall be converted only in amounts of $1,000,000 and increments of $500,000 in excess thereof. Borrower shall request such a conversion by delivering to Administrative Agent a written notice in the form of Exhibit C-3, appropriately completed (a "Notice of Conversion of Loan Type"), which contains or specifies, among other things: (a) the Loans, or portions thereof, which are to be converted; (b) the Type of Loans into which such Loans, or portions thereof, are to be converted; (c) if such Loans are to be converted into LIBOR Loans, the initial Interest Period selected by Borrower for such Loans (which Interest Period, subject to Section 2.1.2(a), shall be twelve months as provided in Section 2.1.2(c)); (d) the proposed date of the requested conversion (which shall be a Banking Day and otherwise in accordance with this Section 2.1.5); and (e) a certification by Borrower that no Event of Default has occurred and is continuing. Borrower shall so deliver each Notice of Conversion of Loan Type so as to provide at least the applicable Minimum Notice Period. Any Notice of Conversion of Loan Type may be modified or revoked by Borrower through the Banking Day immediately prior to the Minimum Notice Period, and shall thereafter be irrevocable. Each Notice of Conversion of Loan Type shall be delivered in any manner permitted by Section 10.1 to Administrative Agent at the office, to the facsimile number or to the electronic mail address and as otherwise specified in Section 10.1. Administrative Agent shall promptly notify each Bank of the contents of each Notice of Conversion of Loan Type. 6 2.1.6 Prepayments. (a) Terms of All Prepayments. ------------------------ (i) Upon the prepayment of any Loan (whether such prepayment is an optional prepayment under Section 2.1.6(b) or a Mandatory Prepayment), Borrower shall pay to Administrative Agent for the account of the Bank which made such Loan, (A) all accrued interest to the date of such prepayment on the amount of such Loan prepaid, (B) all accrued fees to the date of such prepayment relating to the amount of such Loan being prepaid, (C) any applicable Make-Whole Premiums, and (D) if such prepayment is the prepayment of a LIBOR Loan on a day other than the last day of an Interest Period for such LIBOR Loan, all Liquidation Costs incurred by such Bank as a result of such prepayment (pursuant to the terms of Section 2.6). (ii) Notwithstanding the foregoing, but only in respect of any Mandatory Prepayment, Borrower shall have the right, by giving five Banking Days' notice to Administrative Agent, in lieu of prepaying a LIBOR Loan on a day other than the last day of an Interest Period for such LIBOR Loan, to deposit or cause Administrative Agent to deposit into an account to be held by Depositary Agent (which account shall be subjected to the Lien of the Collateral Documents in a manner reasonably satisfactory to Administrative Agent) an amount equal to the LIBOR Loans to be prepaid. Such funds shall be held in such account until the expiration of the Interest Period applicable to the LIBOR Loan to be prepaid at which time the amount deposited in such account shall be used to prepay such LIBOR Loan and any interest accrued on such amount shall be deposited into the Revenue Account. The deposit of amounts into such account shall not constitute a prepayment of Loans and all Loans to be prepaid using the proceeds from such account shall continue to accrue interest at the then applicable interest rate for such Loans until actually prepaid. All amounts in such account shall only be invested in Permitted Investments as directed by and at the expense and risk of Borrower. (iii) Except as otherwise specifically set forth herein, all prepayments of Loans shall be applied to reduce the remaining payments required under Section 2.1.1(d) in inverse order of maturity. Borrower may not re-borrow the principal amount of any Loan which is prepaid. (b) Optional Prepayments. -------------------- (i) On or before the third anniversary of the Closing Date, Borrower may not prepay all or any part of the outstanding Loans. (ii) After the third anniversary of the Closing Date, Borrower may prepay all or any part of the outstanding Loans, at any time, on giving at least 30-Banking Days' notice to Administrative Agent, provided that, (A) each such prepayment equals or exceeds $1,000,000 or integral multiples of $100,000 in excess thereof and, (B) each such prepayment shall be made at a prepayment premium (the "Make-Whole Premium") equal to (I) after the third anniversary of the Closing Date and on or prior to the fourth anniversary of the Closing Date, 103% of the amount of such outstanding Loans, (II) after the fourth anniversary of the Closing 7 Date and on or prior to the fifth anniversary of the Closing Date, 102.5% of the amount of such outstanding Loans, (III) after the fifth anniversary of the Closing Date and on or prior to the sixth anniversary of the Closing Date, 102% of the amount of such outstanding Loans, (IV) after the sixth anniversary of the Closing Date and on or prior to the seventh anniversary of the Closing Date, 101.5% of the amount of such outstanding Loans, (V) after the seventh anniversary of the Closing Date and on or prior to the eighth anniversary of the Closing Date, 101% of the amount of such outstanding Loans, (VI) after the eighth anniversary of the Closing Date and on or prior to the ninth anniversary of the Closing Date, 100.5% of the amount of such outstanding Loans, and (VII) thereafter, 100% of the amount of such outstanding Loans. (iii) Notwithstanding the foregoing Sections 2.1.6(b)(i) and (ii), if the Banks do not provide the Lease Financing for reasons other than that Borrower is not in full compliance with the provisions of Section 5 of the Fee Letter, then Borrower may prepay, without premium or penalty, all (but not part) of the outstanding Loans, at any time, on giving at least 30-Banking Days' notice to Administrative Agent (provided that if Borrower shall have delivered the Release Notice pursuant to Section 3.3, the Borrower shall not have any such right to prepay such Loans under this clause (iii)). (c) Mandatory Prepayments. Borrower shall prepay (or cause to be prepaid) Loans (i) to the extent required by Sections 3.7.4(b) and (c) of the Depositary Agreement, Section 7.2 of this Agreement or any other provision of this Agreement or any other Credit Document which requires such prepayment or (ii) to the extent of (A) 100% of the cash proceeds of the issuance of any new equity securities of Borrower or any of its Subsidiaries (other than any equity securities issued by Borrower pursuant to Section 2.2 of the Sponsor Guaranty), (B) 100% of any debt (other than Permitted Debt) issued by Borrower or any of its Subsidiaries and (C) 100% of proceeds of asset sales of Borrower or any of its Subsidiaries (other than sales permitted by Section 6.3 and exclusive of sales of electrical energy and renewable energy credits in accordance with the terms of the Credit Documents) (any such prepayment pursuant to this Section 2.1.6(c), a "Mandatory Prepayment"). If the Loans are accelerated (whether voluntarily, involuntarily or by operation of law) upon the occurrence or during the continuation of any Event of Default occurring under Section 7.1.1, 7.1.2, 7.1.9 or 7.1.11 or otherwise as a result of a willful breach by Borrower of any of its obligations under Section 5.2, 5.17, 5.18, 6.1, 6.3 or 6.8 that results in an Event of Default, Borrower shall repay all of the outstanding Loans at a price equal to (I) on or before the third anniversary of the Closing Date, 105% of the amount of such outstanding Loans and (II) after the third anniversary of the Closing Date, the applicable Make-Whole Premium. 2.1.7 Register. Administrative Agent shall maintain, at its address referred to in Section 10.1, a register for the recordation of the names and addresses of the Banks and the Commitments and Loans of each Bank from time to time (the "Register"). The Register shall be available for inspection by Borrower or any Bank at any reasonable time and from time to time upon reasonable prior notice. Administrative Agent shall record in the Register (i) the Commitments and the Loans from time to time of each Bank, (ii) the interest rates applicable to all Loans and the effective dates of all changes thereto, (iii) the Interest Period for each LIBOR Loan, (iv) the date and amount of any principal or interest due and payable or to become due and 8 payable from Borrower to each Bank hereunder, (v) each repayment or prepayment in respect of the principal amount of the Loans of each Bank, (vi) the amount of any sum received by Administrative Agent hereunder for the account of the Banks and each Bank's share thereof, and (vii) such other information as Administrative Agent may determine is necessary or appropriate for the administering of the Loans and this Agreement. Any such recording shall be conclusive and binding in the absence of manifest error; provided that neither the failure to make any such recordation, nor any error in such recordation, shall affect any Bank's Commitment or Borrower's Obligations in respect of any applicable Loans or otherwise; and provided further that in the event of any inconsistency between the Register and any Bank's records, the Register shall govern absent manifest error. 2.2 TOTAL SENIOR LOAN COMMITMENTS. Notwithstanding anything that may be construed to the contrary in this Agreement, the aggregate principal amount of all Loans made by the Banks shall not exceed $154,500,000 (such amount, the "Total Senior Loan Commitment"). 2.3 FEES. Borrower shall pay to Administrative Agent solely for Administrative Agent's account the fees and other amounts described in the Fee Letter. 2.4 OTHER PAYMENT TERMS. 2.4.1 Place and Manner. Except as otherwise expressly provided in the Fee Letter or any other provision contained in any of the Credit Documents, Borrower shall make all payments due to any Bank or Administrative Agent hereunder to Administrative Agent, for the account of such Bank or Administrative Agent (as the case may be), to the account in the name of OrCal Geothermal Inc., Account No. 01-20016024, at Federal Home Loan Bank of Dallas, ABA No. 111040195, or such other account as Administrative Agent shall notify Borrower in writing from time to time, in Dollars and in immediately available funds not later than 12:00 noon on the date on which such payment is due. Any payment made after such time on any day shall be deemed received on the Banking Day immediately after the date such payment is received. Administrative Agent shall disburse to each Bank each such payment received by Administrative Agent for such Bank, such disbursement to occur on the day such payment is received if received by 12:00 noon or if otherwise reasonably possible, or otherwise on the next Banking Day. 2.4.2 Date. Whenever any payment due hereunder shall fall due on a day other than a Banking Day, such payment shall be made on the next succeeding Banking Day, and such extension of time shall be included in the computation of interest or fees, as the case may be, without duplication of any interest or fees so paid in the next subsequent calculation of interest or fees payable. 2.4.3 Default Interest. Notwithstanding anything to the contrary herein, upon the occurrence and during the continuation of any Event of Default under Section 7.1.1, the outstanding principal amount of all Loans and, to the extent permitted by applicable Legal Requirements, any accrued but unpaid interest payments thereon and any accrued but unpaid fees and other amounts hereunder, shall thereafter bear interest (including post-petition interest in any proceeding under applicable Bankruptcy Laws) payable upon demand at a rate that is (a) 2% per annum in excess of the interest rate then otherwise payable under this Agreement with respect to the applicable Loans or (b) in the case of any such fees and other amounts, at a rate that is 2% per 9 annum in excess of the interest rate then otherwise payable under this Agreement for Base Rate Loans (the "Default Rate"); provided that, in the case of LIBOR Loans, upon the expiration of the Interest Period in effect at the time any such increase in interest rate is effective, such LIBOR Loans shall thereupon become Base Rate Loans and shall thereafter bear interest payable upon demand at a rate that is 2% per annum in excess of the interest rate then otherwise payable under this Agreement for Base Rate Loans. 2.4.4 Net of Taxes, Etc. (a) Taxes. Subject to each Bank's compliance with Section 2.4.6, any and all payments to or for the benefit of Administrative Agent or any Bank by Borrower hereunder or under any other Credit Document shall be made free and clear of and without deduction, setoff or counterclaim of any kind whatsoever and in such amounts as may be necessary in order that all such payments, after deduction for or on account of any present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto (excluding income and franchise taxes, which include taxes imposed on or measured by the net income, net profits or capital of Administrative Agent or such Bank by any jurisdiction or any political subdivision or taxing authority thereof or therein as a result of a connection between such Bank and such jurisdiction or political subdivision, unless such connection results solely from such Bank's executing, delivering or performing its obligations or receiving a payment under, or enforcing, this Agreement or any Note) (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"), shall be equal to the amounts otherwise specified to be paid under this Agreement and the other Credit Documents. If Borrower shall be required by applicable Legal Requirements to withhold or deduct any Taxes from or in respect of any sum payable hereunder or under any other Credit Document to Administrative Agent or any Bank, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.4.4), Administrative Agent or such Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) Borrower shall make such deductions and (iii) Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable Legal Requirements. In addition, Borrower agrees to pay any present or future stamp, recording or documentary taxes and any other excise or property taxes, charges or similar levies (not including income or franchise taxes) that arise under the laws of the United States of America, the State of New York or the State of California from any payment made hereunder or under any other Credit Document or from the execution or delivery or otherwise with respect to this Agreement or any other Credit Document (hereinafter referred to as "Other Taxes"). (b) Tax Indemnity. Borrower shall indemnify each Bank for and hold it harmless against the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.4.4) paid by any Bank, or any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted; provided that 10 Borrower shall not be obligated to indemnify any Bank for any penalties, interest or expenses relating to Taxes or Other Taxes arising from such Bank's gross negligence or willful misconduct. Each Bank agrees to give written notice to Borrower of the assertion of any claim against such Bank relating to such Taxes or Other Taxes as promptly as is practicable after being notified of such assertion, and in no event later than 90 days after the principal officer of such Bank responsible for administering this Agreement obtains knowledge thereof; provided that any Bank's failure to notify Borrower of such assertion within such 90 day period shall not relieve Borrower of its obligation under this Section 2.4.4 with respect to Taxes or Other Taxes, penalties, interest or expenses arising prior to the end of such period, but shall relieve Borrower of its obligations under this Section 2.4.4 with respect to Taxes or Other Taxes, penalties, interest or expenses between the end of such period and such time as Borrower receives notice from such Bank as provided herein. Payments by Borrower pursuant to this indemnification shall be made within 30 days from the date such Bank makes written demand therefor (submitted through Administrative Agent), which demand shall be accompanied by a certificate describing in reasonable detail the basis thereof. (c) Notice. Within 30 days after the date of any payment of Taxes by Borrower, Borrower shall furnish to Administrative Agent, at its address referred to in Section 10.1, the original or a certified copy of a receipt evidencing payment thereof or, if such receipt is not obtainable, other evidence of such payment by Borrower reasonably satisfactory to Administrative Agent. Borrower shall compensate each Bank for all reasonable losses and expenses sustained by such Bank as a result of any failure by Borrower to so furnish such copy of such receipt. (d) Conduit Financing. Notwithstanding anything to the contrary contained in this Section 2.4.4, if a Bank is a conduit entity participating in a conduit financing arrangement (as defined in Section 7701(l) of the Code and the Treasury Regulations issued thereunder) with respect to any payments made by Borrower under this Agreement and under any Credit Document, Borrower shall not be obligated to pay additional amounts to such Bank pursuant to this Section 2.4.4 to the extent that the amount of taxes in the United States exceeds the amount that would have otherwise been payable were such Bank not a conduit entity participating in a conduit financing arrangement. (e) Reimbursement by Banks. If any Bank receives an indemnification payment pursuant to Section 2.4.4(b) and if such Bank is able, in its sole opinion, to apply or otherwise take advantage of any refund or tax credit arising out of or in conjunction with any Taxes or Other Taxes which give rise to such indemnification, such Bank shall, to the extent that in its sole opinion it can do so without prejudice to the retention of the amount of such refund or credit and without any other adverse tax consequences for such Bank, reimburse to Borrower at such time as such tax refund or credit shall have actually been received or utilized by such Bank such amount as the Bank shall, in its sole opinion, have determined to be attributable to the relevant Taxes or Other Taxes and as will leave such Bank in no better or worse position than it would have been in if the payment of such Taxes or Other Taxes had not been required. Nothing in this Section 2.4.4(e) shall oblige any Bank to disclose to Borrower or any other person any information regarding its tax affairs or tax computations, or shall interfere with Bank's absolute 11 discretion to arrange its tax affairs in whatever manner it thinks fit. In particular, no Bank shall be under any obligation to claim relief from its corporate profits or similar tax liability in credits or deductions available to it and, if it does claim, the extent, order and manner in which it does so shall be at its absolute discretion. (f) Survival of Obligations. The obligations of Borrower under this Section 2.4.4 shall survive the termination of this Agreement and the repayment of the Obligations. 2.4.5 Application of Payments. Except as otherwise expressly provided herein or in the other Credit Documents, payments made under this Agreement or the other Credit Documents and other amounts received by Administrative Agent, Depositary Agent or the Banks under this Agreement or the other Credit Documents shall first be applied to any fees, costs, charges or expenses payable to Administrative Agent, Depositary Agent or the Banks, next to any accrued but unpaid interest then due and owing, and then to outstanding principal then due and owing or otherwise to be prepaid, in each case hereunder or under the other Credit Documents (in each case, such application to be made on a pro rata basis among such applicable Persons). 2.4.6 Withholding Exemption Certificates. Each Bank upon becoming a Bank and each Person to which any Bank grants a participation (or otherwise transfers its interest in this Agreement) upon the granting of such participation (or the occurrence of such other transfer) will deliver to Administrative Agent and Borrower either (a) if such Bank or Person is a corporation established under the laws of the United States or any political subdivision thereof, an executed copy of a United States Internal Revenue Service Form W-9, or (b) if such Bank or Person is not a corporation established under the laws of the United States or any political subdivision thereof, a duly completed and executed non-bank certificate in the form of Exhibit J hereto, if applicable, and two duly completed copies of United States Internal Revenue Service Form W-8BEN or W-8ECI or successor applicable form, as the case may be (certifying therein an entitlement to a reduction in, or an exemption from, United States withholding taxes). Each Bank or Person which delivers to Borrower and Administrative Agent a Form W-8BEN or W-8ECI pursuant to the preceding sentence shall deliver to Borrower and Administrative Agent two copies of each Form W-8BEN or W-8ECI, or successor applicable forms, or other manner of certification or procedure, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms previously delivered by it to Borrower, and such extensions or renewals thereof as may reasonably be requested by Borrower, certifying in the case of a Form W-8BEN or W-8ECI that such Bank is entitled to receive payments under this Agreement without deduction or withholding (or at a reduced rate of withholding under any applicable tax treaty) of any United States federal income taxes, unless in any such cases an event (including any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent a Bank from duly completing and delivering any such form with respect to it and such Bank advises Borrower that it is not capable of receiving payments without any deduction or withholding (or at a reduced rate of withholding) of United States federal income tax, and in the case of Form W-8BEN or W- 12 8ECI, establishing an exemption from United States backup withholding tax. Borrower shall not be obligated, however, to pay any additional amounts in respect of United States federal income tax pursuant to Section 2.4.4 (or make an indemnification payment pursuant to Section 2.4.4) to any Bank (including any entity to which any Bank sells, assigns, grants a participation in, or otherwise transfers its rights under this Agreement, any Note or any other Credit Document) if the obligation to pay such additional amounts (or such indemnification) would not have arisen but for a failure of such Bank to comply with its obligations under this Section 2.4.6. 2.5 PRO RATA TREATMENT. 2.5.1 Borrowings, Etc. Except as otherwise provided herein, (a) each Borrowing consisting of Loans shall be made or allocated among the Banks pro rata according to their respective Proportionate Shares of such Loans and (b) each payment of principal of and interest on Loans shall be made or shared among the Banks holding such Loans pro rata according to the respective unpaid principal amounts of such Loans held by such Banks. 2.5.2 Sharing of Payments, Etc. If any Bank shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of setoff, or otherwise) on account of Loans owed to it, in excess of its Proportionate Share of payments on account of such Loans obtained by all Banks entitled to such payments, such Bank shall forthwith purchase from the other Banks such participation in the Loans, as the case may be, as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Bank, such purchase from such Bank shall be rescinded and each other Bank shall repay to the purchasing Bank the purchase price to the extent of such recovery together with an amount equal to such other Bank's Proportionate Share (according to the proportion of (a) the amount of such other Bank's required repayment to (b) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. Borrower agrees that any Bank so purchasing a participation from another Bank pursuant to this Section 2.5.2 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of setoff) with respect to such participation as fully as if such Bank were the direct creditor of Borrower in the amount of such participation. 2.6 CHANGE OF CIRCUMSTANCES. 2.6.1 Inability to Determine Rates. If, on or before the first day of any Interest Period for any LIBOR Loans, (a) Administrative Agent determines that the Adjusted LIBO Rate for such Interest Period cannot be adequately and reasonably determined due to the unavailability of funds in or other circumstances affecting the London interbank market, or (b) Banks holding aggregate Proportionate Shares of 33-1/3% or more of the Loans shall advise Administrative Agent that (i) the rates of interest for such LIBOR Loans do not adequately and fairly reflect the cost to such Banks of making or maintaining such Loans or (ii) deposits in Dollars in the London interbank market are not available to such Banks (as conclusively certified by each such Bank in good faith in writing to Administrative Agent and to Borrower) in the ordinary course of business in sufficient amounts to make and/or maintain their LIBOR Loans, then Administrative Agent shall immediately give notice of such condition to Borrower. After 13 the giving of any such notice and until Administrative Agent shall otherwise notify Borrower that the circumstances giving rise to such condition no longer exist (which Administrative Agent shall deliver to Borrower promptly, and in any event within 2 Banking Days, after the cessation of such circumstances), Borrower's right to request from the applicable affected Banks the making of or conversion to, and the applicable affected Banks' obligations to make or convert to, LIBOR Loans shall be suspended; provided, however, that Borrower shall have the right in such event to request the making of or conversion to, and the applicable affected Banks shall be obligated to make or convert to, LIBOR Loans with an Interest Period that is 1, 3, 6 or 9 months (as selected by such Banks) if the circumstances giving rise to the conditions described in this Section 2.6.1 are not applicable to LIBOR Loans with such shorter Interest Period. Any LIBOR Loans outstanding at the commencement of any such suspension shall be converted at the end of the then current Interest Period for such Loans into Base Rate Loans unless such suspension has then ended. 2.6.2 Illegality. If, after the date of this Agreement, the adoption of any Governmental Rule, any change in any Governmental Rule or the application or requirements thereof (whether such change occurs in accordance with the terms of such Governmental Rule as enacted, as a result of amendment, or otherwise), any change in the interpretation or administration of any Governmental Rule by any Governmental Instrumentality, or compliance by any Bank or Borrower with any request or directive (whether or not having the force of law, but if not having the force of law, being of a type with which a Bank customarily complies) of any Governmental Instrumentality (a "Change of Law") shall make it unlawful or impossible for any Bank to make or maintain any LIBOR Loan, then such Bank shall immediately notify Administrative Agent and Borrower of such Change of Law. Upon receipt of such notice, (a) Borrower's right to request the making of or conversion to, and such Bank's obligations to make or convert to, LIBOR Loans shall be suspended for so long as such condition shall exist, and (b) Borrower shall, at the request of such Bank, at Borrower's option either (i) pursuant to Section 2.1.5, convert any then outstanding LIBOR Loans into Base Rate Loans at the end of the current Interest Periods for such Loans, or (ii) immediately repay pursuant to Section 2.1.6 or convert LIBOR Loans of the affected Type into Base Rate Loans if such Bank shall notify Borrower that such Bank may not lawfully continue to fund and maintain such Loans. Any conversion or prepayment of LIBOR Loans made pursuant to the preceding sentence prior to the last day of an Interest Period for such Loans shall be deemed a prepayment thereof for purposes of Section 2.7 (but not for purposes of Section 2.1.6(b)). 2.6.3 Increased Costs. If, after the date of this Agreement, any Change of Law: (a) shall subject any Bank to any tax, duty or other charge with respect to any LIBOR Loan or Commitment in respect thereof, or shall change the basis of taxation of payments by Borrower to any Bank on such a Loan or with respect to any such Commitment (except for Taxes, Other Taxes or changes in the rate of taxation on the overall net income of any Bank); or (b) shall impose, modify or hold applicable any reserve, special deposit or similar requirement (without duplication of any reserve requirement included within the applicable Interest Rate through the definition of "Reserve Requirement") against assets held by, 14 deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by any Bank for any LIBOR Loan; or (c) shall impose on any Bank any other condition directly related to any LIBOR Loan or Commitment in respect thereof; and the effect of any of the foregoing is to increase the cost to such Bank of making, issuing, creating, renewing, participating in (subject to the limitations in Section 9.13) or maintaining any such LIBOR Loan or Commitment in respect thereof or to reduce any amount receivable by such Bank hereunder, then Borrower shall from time to time, within thirty days after demand by such Bank, pay to such Bank additional amounts sufficient to reimburse such Bank for such increased costs or to compensate such Bank for such reduced amounts. A certificate setting forth in reasonable detail the amount of such increased costs or reduced amounts and the basis for determination of such amount, submitted by such Bank to Borrower, shall, in the absence of manifest error, be conclusive and binding on Borrower for purposes of this Agreement. 2.6.4 Capital Requirements. If any Bank determines that (a) any Change of Law after the date of this Agreement increases the amount of capital required or expected to be maintained by such Bank, or the Lending Office of such Bank or any Person controlling such Bank (a "Capital Adequacy Requirement"), and (b) the amount of capital maintained by such Bank or such Person which is attributable to or based upon the Loans, the Commitments or this Agreement must be increased as a result of such Capital Adequacy Requirement (taking into account such Bank's or such Person's policies with respect to capital adequacy), then Borrower shall pay to such Bank or such Person, within thirty days after delivery of demand by such Bank or such Person, such amounts as such Bank or such Person shall reasonably determine are necessary to compensate such Bank or such Person for the increased costs to such Bank or such Person of such increased capital. A certificate of such Bank or such Person, setting forth in reasonable detail the computation of any such increased costs, delivered to Borrower by such Bank or such Person shall, in the absence of manifest error, be conclusive and binding on Borrower for purposes of this Agreement. 2.6.5 Notice; Participating Banks' Rights. Each Bank shall notify Borrower of any event occurring after the date of this Agreement that will entitle such Bank to compensation pursuant to this Section 2.6, as promptly as practicable, and in no event later than 90 days after the principal officer of such Bank responsible for administering this Agreement obtains knowledge thereof; provided that any Bank's failure to notify Borrower within such 90 day period shall not relieve Borrower of its obligation under this Section 2.6 with respect to claims arising prior to the end of such period, but shall relieve Borrower of its obligations under this Section 2.6 with respect to the time between the end of such period and such time as Borrower receives notice from the indemnitee as provided herein. No Person purchasing from a Bank a participation in any Loan (as opposed to an assignment) shall be entitled to any payment from or on behalf of Borrower pursuant to Section 2.4.4, Section 2.6.3 or Section 2.6.4 which would be in excess of the applicable proportionate amount (based on the portion of the Loan in which such Person is participating) which would then be payable to such Bank if such Bank had not sold a participation in that portion of the Loan. 15 2.7 FUNDING LOSSES. If Borrower shall (a) repay or prepay any LIBOR Loans on any day other than the last day of an Interest Period for such Loans (whether an optional prepayment or a Mandatory Prepayment), (b) fail to borrow any LIBOR Loans in accordance with a Notice of Borrowing delivered to Administrative Agent (whether as a result of the failure to satisfy any applicable conditions or otherwise) after such Notice of Loan Borrowing has become irrevocable, (c) fail to convert any Loans into LIBOR Loans in accordance with a Notice of Conversion of Loan Type delivered to Administrative Agent (whether as a result of the failure to satisfy any applicable conditions or otherwise) after such Notice of Conversion of Loan Type has become irrevocable, (d) fail to continue a LIBOR Loan in accordance with a Confirmation of Interest Period Selection delivered to Administrative Agent, or (e) fail to make any prepayment in accordance with any notice of prepayment delivered to Administrative Agent, then Borrower shall, within ten Banking Days after demand by any Bank, reimburse such Bank for all reasonable costs and losses incurred by such Bank as a result of such repayment, prepayment or failure ("Liquidation Costs"). Borrower understands that such costs and losses may include losses incurred by a Bank as a result of funding and other contracts entered into by such Bank to fund LIBOR Loans (other than non-receipt of the margin applicable to such LIBOR Loans). Each Bank demanding payment under this Section 2.7 shall deliver to Borrower a certificate setting forth in reasonable detail the basis for and the amount of costs and losses for which demand is made. Such a certificate so delivered to Borrower shall, in the absence of manifest error, be conclusive and binding as to the amount of such loss for purposes of this Agreement. 2.8 ALTERNATE OFFICE. 2.8.1 To the extent reasonably possible, each Bank shall designate an alternative Lending Office with respect to its LIBOR Loans and otherwise take any reasonable actions to reduce any liability of Borrower to any Bank under Section 2.4.4, 2.6.3, 2.6.4 or 2.7, or to avoid the unavailability of any Type of Loans under Section 2.6.1 or 2.6.2 so long as (in the case of the designation of an alternative Lending Office) such Bank, in its sole discretion, determines that (a) such designation is not disadvantageous to such Bank and (b) such actions would eliminate or reduce liability to such Bank. Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Bank in connection with any such designation or actions within ten Banking Days of demand thereof to Borrower. 2.8.2 Upon written notice to Administrative Agent, any Bank may designate a Lending Office other than the Lending Office most recently designated to Administrative Agent and may assign all of its interests under the Credit Documents and its Notes (if any) to such Lending Office; provided that such designation and assignment do not at the time of such designation and assignment increase the reasonably foreseeable liability of Borrower under Section 2.4.4, 2.6.3 or 2.6.4 or make an Interest Rate option unavailable pursuant to Section 2.6.1 or 2.6.2. 2.9 REPLACEMENT OF BANK IN RESPECT OF INCREASED COSTS. 2.9.1 Within fifteen days after receipt by Borrower of (a) written notice and demand from any Bank (an "Affected Bank") for payment of additional amounts or increased costs as provided in Section 2.4.4, 2.6.3 or 2.6.4, (b) notice that such Bank is suspending its 16 obligation to make or convert to LIBOR Loans with an Interest Period of twelve months as provided in Section 2.6.1, or (c) notice that it is unlawful for such Bank to make LIBOR Loans as provided in Section 2.6.2, Borrower may, at its option, notify Administrative Agent and such Affected Bank of its intention to replace the Affected Bank. So long as no Event of Default shall have occurred and be continuing, Borrower may obtain, at Borrower's expense, one or more replacement Banks (each, a "Replacement Bank") for the Affected Bank, which Replacement Banks shall be reasonably satisfactory to Administrative Agent. If Borrower obtains a Replacement Bank within 90 days following notice of its intention to do so, the Affected Bank must sell and assign its Loans to such Replacement Banks for an aggregate amount equal to the principal balance of all Loans held by the Affected Bank and all accrued interest and fees with respect thereto through the date of such sale; provided, however, that Borrower shall have reimbursed such Affected Bank for the additional amounts, increased costs, and any other amounts that it is entitled to receive under this Agreement through the date of such sale and assignment. 2.9.2 Notwithstanding the foregoing, Borrower shall not have the right to obtain a Replacement Bank if the Affected Bank rescinds its demand for increased costs or additional amounts within fifteen days following its receipt of Borrower's notice of intention to replace such Affected Bank. If Borrower gives a notice of intention to replace and does not so replace such Affected Bank within 90 days thereafter, Borrower's rights relating to any previously incurred increased costs or additional amounts under this Section 2.9 shall terminate and Borrower shall promptly pay all increased costs or additional amounts previously demanded by such Affected Bank pursuant to Sections 2.4.4, 2.6.1, 2.6.3 or 2.6.4. ARTICLE 3 CONDITIONS PRECEDENT 3.1 CONDITIONS PRECEDENT TO THE CLOSING DATE. The obligation of each Bank to make the Loans under this Agreement is subject to the prior satisfaction of each of the following conditions (unless waived in writing by Administrative Agent with the consent of the Banks) on or before December 31, 2003 (the date such conditions precedent are so satisfied or waived being referred to as the "Closing Date"): 3.1.1 Resolutions. Delivery to Administrative Agent of a copy of one or more resolutions or other authorizations, in form and substance reasonably satisfactory to Administrative Agent, of Ormat Technologies, Sponsor, Borrower, OrHeber 1, ORNI and OrMammoth certified by a Responsible Officer of each such Loan Party as being in full force and effect on the Closing Date, authorizing, as applicable and among other things, the Loans, the granting of the Liens under the Collateral Documents, the contribution (in the case of Sponsor) of Equity Funds and/or Subordinated Loans to Borrower, and the execution, delivery and performance (in the case of OrHeber 1 and OrMammoth) of the Acquisition Agreement and (in the case of all such Loan Parties) the relevant Credit Documents to which each such Loan Party is a party. 3.1.2 Incumbency. Delivery to Administrative Agent of a certificate from Sponsor, Borrower, OrHeber 1, ORNI and OrMammoth signed by the appropriate authorized 17 officer of such Loan Party and dated as of the Closing Date, as to the incumbency of the natural Persons authorized to execute and deliver the Credit Documents to which such Loan Party is a party. 3.1.3 Formation Documents. Delivery to Administrative Agent of (a) copies of the certificate of incorporation of Sponsor, Borrower, OrHeber 1, OrHeber 2, OrHeber 3, ORNI and OrMammoth, certified by the Secretary of State of Delaware, and (b) copies of the bylaws of each such Loan Party, certified by an officer of such Loan Party as being true, correct and complete on the Closing Date. 3.1.4 Good Standing Certificates. Delivery to Administrative Agent of certificates issued by (a) the Secretary of State of Delaware, for each of Ormat Technologies, Sponsor, Borrower, OrHeber 1, OrHeber 2, OrHeber 3, ORNI and OrMammoth, and (b) the Secretary of the State of California, for Borrower, in each case (i) dated no more than ten days prior to the Closing Date and (ii) certifying that the applicable party is in good standing and is qualified to do business in, and has paid all franchise taxes or similar taxes due to, such states. 3.1.5 Third Party and Bankruptcy Court Approvals. Administrative Agent shall have received copies of any approval or consents required from (a) any Person under Section 7 of the Acquisition Agreement and (b) GECC in connection with the acquisition by Borrower, OrHeber 1, ORNI, OrHeber 2 and OrHeber 3 of their respective ownership interests in SIGC, HGC and HFC as such ownership interests are set forth in Section 4.2.2, rather than as set forth in the Acquisition Agreement, the Confirmation Plan or the Seller Plan of Reorganization. The Bankruptcy Court shall have entered the Confirmation Order, the Confirmation Order shall not have been amended, modified, vacated or stayed in any manner and shall have become final and non-appealable. All of the conditions precedent to the occurrence of the effective date under the Seller Plan of Reorganization shall have occurred (provided that no condition to the occurrence of such effective date shall have been waived without the consent of the Banks), other than any condition related to the consummation of the Acquisition. 3.1.6 Credit Documents. Delivery to Administrative Agent of executed originals of this Agreement, the Notes, the Depositary Agreement, the Security Agreements referred to in clauses (a), (d) and (e) of the definition thereof, the Pledge Agreements referred to in clauses (a), (b) (c) and (e) of the definition thereof, the Escrow Agreement, the Fee Letter, the Subordination Agreements, the Sponsor Guaranty, the Subsidiary Guaranties referred to in clauses (c) and (d) of the definition thereof and the Ormat Industries Letter, all of which shall have been duly authorized, executed and delivered by the parties thereto. 3.1.7 Certificates of Sponsor and Borrower. Delivery to Administrative Agent of (a) a certificate, dated as of the Closing Date, duly executed by a Responsible Officer of Borrower, in substantially the form of Exhibit F-1, which certificate shall state that (i) all conditions precedent to the occurrence of the Closing Date shall have been satisfied, (ii) all conditions (other than the payment of the purchase price) to the consummation of the Acquisition in accordance with the terms and provisions of the Acquisition Agreement have been satisfied without waiver or amendment (unless agreed to by the Banks), (iii) Borrower has complied with all of the terms and provisions of, and representations and warranties contained in, the 19 Commitment Letter, (iv) immediately prior to and after the Closing Date and the consummation of the Acquisition, Borrower, OrHeber 1 and OrMammoth is and will be Solvent, and (v) the Projections, the Initial Operating Budget and the Initial Capital Expenditures Budget were prepared in good faith based on reasonable assumptions and (b) a certificate, dated as of the Closing Date, duly executed by a Responsible Officer of Sponsor, in substantially the form of Exhibit F-2, which certificate shall state that all of the representations and warranties set forth in the Sponsor Guaranty are true and correct. 3.1.8 Legal Opinions. Delivery to Administrative Agent of opinions of counsel to Ormat Technologies, Sponsor, Borrower, OrHeber 1, ORNI and OrMammoth, in each case in form and substance reasonably satisfactory to the Banks. 3.1.9 Insurance. Insurance complying with terms and conditions set forth in Exhibit K shall be in full force and effect and Administrative Agent shall have received (a) a certificate from Borrower's insurance broker(s), dated as of a date which is no earlier than three days prior to the Closing Date, (i) identifying underwriters, type of insurance, insurance limits and policy terms, in each case substantially in the manner typically described in certificates of this nature, (ii) describing the insurance obtained and (iii) stating that such insurance is in full force and effect and that all premiums then due thereon have been paid and that, in the opinion of such broker(s), such insurance complies with the terms and conditions set forth in the Credit Documents, and (b) certified copies of all policies evidencing such insurance (or a binder, commitment or certificates signed by the insurer or a broker authorized to bind the insurer), each in form and substance reasonably satisfactory to Administrative Agent. 3.1.10 Conditions under Acquisition Agreement. The transactions described in the Acquisition Agreement (other than the payment of the purchase price) which are to occur on or prior to the Closing Date shall have been consummated without amendment or waiver (that have not been agreed to by the Banks) in accordance with the terms and provisions of the Acquisition Agreement. 3.1.11 Funding of Equity; Funds Flow. Sponsor shall have contributed $27,425,603.92 in Equity Funds and/or Subordinated Loans to Borrower, and Sponsor and Borrower shall have caused such contributions to be deposited in the Funding Account. Administrative Agent, Sponsor and Borrower shall have entered into the Funds Flow Memorandum, which shall provide, among other things, that Administrative Agent will disburse all amounts on deposit in the Funding Account (including such Equity Funds and/or Subordinated Loans and the Loan proceeds), other than agreed-upon amounts reserved for the payment of certain fees and expenses and working capital purposes, to the Sellers under the Acquisition Agreement upon (a) the satisfaction of each of the conditions precedent set forth in this Article 3 and (b) the consent of the Banks and Borrower. 3.1.12 Permits. Each of the material discretionary Permits necessary for the performance of Borrower's, OrHeber 1's, OrHeber 2's, OrHeber 3's, ORNI's and OrMammoth's obligations under the Acquisition Agreement and the Credit Documents as of the Closing Date (a) shall have been duly obtained, except for such renewals, transfers, reissuance, or modifications of existing permits that can reasonably be obtained in the normal course, (b) shall 19 be in full force and effect, (c) shall not be subject to any current legal proceeding, and (d) shall not be subject to any Unsatisfied Condition that could reasonably be expected to result in material modification or revocation of such Permit, and all applicable appeal periods with respect to such Permit shall have expired. Each such Permit shall not be subject to any restriction, condition, limitation or other provision which could reasonably be expected to have a Material Adverse Effect or result in any of the Projects being operated in a manner substantially inconsistent with the assumptions underlying the Projections. 3.1.13 Absence of Litigation. No action, suit, proceeding or investigation shall have been instituted or threatened in writing against any Loan Party (other than those described in Schedule 4.18 to the Acquisition Agreement and actions, suits, proceedings or investigations against Ormat Technologies) that (a) contests the Acquisition or any of the transactions under the Credit Documents or (b) could reasonably be expected to have a Material Adverse Effect. No action, suit, proceeding or investigation shall have been instituted or threatened in writing against any other Major Project Participant that could reasonably be expected to have a Material Adverse Effect. 3.1.14 Payment of Fees. All taxes, fees and other costs payable in connection with the execution, delivery, recordation and filing of the Credit Documents shall have been paid in full or, as approved by Administrative Agent, provided for. Administrative Agent shall have deducted out of the proceeds of the Loans all outstanding amounts due, as of the Closing Date, and owing to (a) the Banks or Administrative Agent under any fee letter or other agreement or pursuant to Section 2.3, (b) the Banks' attorneys and consultants and the Title Insurer for all services rendered and billed prior to the Closing Date and (c) the Depositary Agent under the Depositary Agreement. 3.1.15 UCC Reports. Delivery to Administrative Agent of a UCC report of a date no less recent than five Banking Days before the Closing Date for each of the jurisdictions in which the UCC-1 financing statements and the fixture filings are intended to be filed in respect of the Collateral, showing that upon due filing or recordation (assuming such filing or recordation occurred on the date of such respective reports), as the case may be, and after giving effect to the Acquisition, the Liens created under the Collateral Documents will be prior to all other Liens on the Collateral (except for the GECC Liens, the mechanics' liens referred to in item No. 7 to Schedule 4.10 of the Acquisition Agreement and any Liens on the Uninsured Real Property Interests or the real property that is subject thereto) which are perfected by filing or recording. 3.1.16 No Material Adverse Change. Since November 14, 2003, no Material Adverse Effect (under and as defined in the Acquisition Agreement) has occurred and is continuing. 3.1.17 Perfection of Liens. All actions necessary or desirable to perfect the Liens of the Collateral Documents to which Sponsor, Borrower, OrHeber 1, ORNI and OrMammoth are a party as of the Closing Date shall have been taken (including (a) the delivery of certificated securities of Borrower, OrHeber 1 and OrMammoth, together with executed, 20 undated transfer documents and (b) the filing of UCC-1 financing statements naming the applicable Loan Party as the debtor and Administrative Agent as the secured party). 3.1.18 Establishment of Accounts. The Operating Accounts and the Accounts required to be established as of the Closing Date under the Depositary Agreement shall have been established to the satisfaction of the Banks. 3.1.19 Representations and Warranties. Each representation and warranty of Sponsor, Borrower, OrHeber 1, ORNI and OrMammoth under the Credit Documents shall be true and correct as of the Closing Date. 3.1.20 No Default. No Event of Default or Potential Event of Default shall have occurred and be continuing as of the Closing Date, or will result from the Acquisition and the consummation of the transactions contemplated by Section 3.2. 3.1.21 BLM Notice. Delivery to Administrative Agent of a copy of one or more notices from Borrower to the United States Bureau of Land Management and any other applicable Persons with respect to the change in ownership of the Project Companies and Borrower's intention to replace certain bonds described in Schedule 4.10 to the Acquisition Agreement. 3.1.22 Notice of Borrowing. Delivery to Administrative Agent of a properly completed Notice of Borrowing. 3.1.23 Process Agents. Delivery to Administrative Agent of evidence that each of Sponsor, Borrower, OrHeber 1, ORNI and OrMammoth has appointed CT Corporation System as its respective agent for service of process in the State of New York. 3.1.24 Escrow. Execution and delivery to Administrative Agent of an Escrow Agreement (the "Escrow Agreement"), in substantially the form of Exhibit C-4, among Sponsor, Borrower, Administrative Agent and Chicago Title Company. 3.2 TRANSACTIONS TO OCCUR AT CLOSING. No later than 5:00 p.m. (New York City time) on the Closing Date, Borrower shall cause each of the following to occur (the satisfaction of each of the following being referred to as the "Close of Escrow"): 3.2.1 Acquisition. Consummation of the Acquisition in accordance with the terms of (and without any waivers or amendments unless agreed to by the Banks to) the Acquisition Agreement. 3.2.2 Resolutions. Delivery to Administrative Agent of a copy of one or more resolutions or other authorizations of each Loan Party (other than Ormat Technologies, Sponsor, Borrower, OrHeber 1, OrHeber 2, OrHeber 3, ORNI, OrMammoth, Mammoth Lakes and SIGC) certified by an officer of each such Loan Party as being in full force and effect on the Closing Date, authorizing, as applicable and among other things, the granting of the Liens under the 21 Collateral Documents and the execution, delivery and performance of the Credit Documents to which such Loan Party is a party. 3.2.3 Incumbency. Delivery to Administrative Agent of a certificate from each Loan Party (other than Ormat Technologies, Sponsor, Borrower, OrHeber 1, OrHeber 2, OrHeber 3, ORNI, OrMammoth, Mammoth Lakes and SIGC) signed by the appropriate authorized officer of each such Loan Party and dated as of the Closing Date, as to the incumbency of the natural Persons authorized to execute and deliver the Credit Documents to which such Loan Party is a party. 3.2.4 Formation Documents. Delivery to Administrative Agent of the Governing Documents of each Loan Party (other than Ormat Technologies, Sponsor, Borrower, OrHeber 1, OrHeber 2, OrHeber 3, ORNI and OrMammoth), certified by an officer of such Loan Party as being true, correct and complete on the Closing Date. 3.2.5 Good Standing Certificates. Delivery to Administrative Agent of certificates issued by the secretary of state of the state in which each Loan Party (other than Ormat Technologies, Sponsor, Borrower, OrHeber 1, OrHeber 2, OrHeber 3, ORNI and OrMammoth) is formed or incorporated, as applicable, (a) dated no more than ten days prior to the Closing Date and (b) certifying that such Loan Party is in good standing and is qualified to do business in, and has paid all franchise taxes or similar taxes due to, such states. 3.2.6 Credit Documents and Major Project Documents. Delivery to Administrative Agent of (a) executed originals of each Credit Document to be executed by any Loan Party on the Closing Date, other than (i) those Credit Documents delivered under Section 3.1.6 above and (ii) Consents, and (b) a certified list of, and true, correct and complete copies of, each Major Project Document in effect as of the Closing Date, and, in each case, all of which shall have been duly authorized, executed and delivered by the parties thereto. 3.2.7 Certificate of Officer. Delivery to Administrative Agent of a certificate, dated as of the Closing Date and in substantially the form of Exhibit F-3, duly executed by a Responsible Officer of each Loan Party (other than Ormat Technologies, Sponsor, Mammoth Lakes, OrHeber 2, OrHeber 3, ORNI and SIGC) which certificate shall, among other things, state that (a) neither such Loan Party nor, to such Loan Party's knowledge, any other party to any Major Project Document is or, but for the passage of time or giving of notice or both will be, in breach of any material obligation thereunder, (b) all conditions precedent to the performance of such Loan Party, and, to such Loan Party's knowledge, all conditions precedent to the performance of the other parties under the Major Project Documents then required to have been performed shall have been satisfied, (c) immediately prior to and at the Close of Escrow, each of the Guarantors is Solvent and (d) all conditions precedent set forth in this Section shall have been satisfied. 3.2.8 Legal Opinions. Delivery to Administrative Agent of opinions of counsel to the Loan Parties and Affiliates thereof (if any) (other than Ormat Technologies, Sponsor and Borrower) which are parties to any Major Project Document, in each case in form and substance reasonably satisfactory to the Banks. 22 3.2.9 Utilities. All potable water, sewer, telephone, electric and all other utility services necessary for the leasing, ownership and operation of the Projects shall have been contracted for. 3.2.10 Permits. Each of the material discretionary Permits necessary for the performance of the applicable Loan Party's (other than Ormat Technologies') or the applicable Major Project Participant's obligations under the Credit Documents or the Major Project Documents as of the Closing Date (a) shall have been duly obtained, except for such renewals, transfers, reissuance, or modifications of existing permits that can reasonably be obtained in the normal course, (b) shall be in full force and effect, (c) shall not be subject to any current legal proceeding, and (d) shall not be subject to any Unsatisfied Condition that could reasonably be expected to result in material modification or revocation of such Permit, and all applicable appeal periods with respect to such Permit shall have expired. Each such Permit shall not be subject to any restriction, condition, limitation or other provision which could reasonably be expected to have a Material Adverse Effect or result in any of the Projects being operated in a manner substantially inconsistent with the assumptions underlying the Projections. 3.2.11 Perfection of Liens. All actions necessary or desirable to perfect the Liens of the Collateral Documents to which OrHeber 1, OrMammoth, HFC and HGC are a party as of the Closing Date shall have been taken (including the filing of UCC-1 financing statements naming HFC and HGC (as the case may be) as the debtor and Administrative Agent as the secured party). 3.2.12 ALTA Title Policy. (a) Subject to clause (c) of this Section 3.2.12, delivery to Administrative Agent of a lender's ALTA extended coverage policy of title insurance, together with such endorsements thereto as are reasonably required by the Banks (which shall include, but not be limited to, a tie-in endorsement for all such policies), or the commitment of Title Insurer to issue such a policy, dated as of the Closing Date, in the amount of $125,000,000, issued by Title Insurer in form and substance substantially similar to the owner's ALTA policy of title insurance provided to Borrower under the Acquisition Agreement, insuring (or agreeing to insure) that: (i) each of HFC and HGC has a good, marketable and insurable leasehold, easement and/or fee interest in the material real property interests comprising the applicable Project, in each case free and clear of Liens, encumbrances or other exceptions to title, other than the Title Exceptions; and (ii) each Deed of Trust creates (or will create when recorded) a valid first-priority Lien on HFC's or HGC's (as the case may be) interest in the applicable Mortgaged Property, free and clear of all Liens, encumbrances and exceptions to title whatsoever, other than the Title Exceptions. (b) The Banks shall have determined that each title policy or title commitment referred to in clause (a) above shall be in all material respects the same as the title policies referred to in Schedule 7.9 to the Acquisition Agreement; provided, however, that any additional 23 exceptions to title contained in such Bank's policy or commitment shall be permitted only if they do not violate the Real Property Standard. (c) The ALTA policy of title insurance set forth in Section 3.2.12(a) shall (i) not provide coverage to Administrative Agent for any real property interests located in Mono County, California, (ii) not contain an exception for mechanics' or materialmen's liens, except for (A) the mechanic's liens described in item No. 7 to Schedule 4.10 of the Acquisition Agreement, (B) any other mechanics' and materialmen's liens that do not violate the Real Property Standard and (C) the mechanics' and materialmen's lien exceptions and exclusions set forth in the policy jacket and (iii) be permitted to contain one or more exceptions for matters that would be shown by an ALTA survey. 3.2.13 Real Estate Rights. Each Project Company shall have obtained and shall hold all leasehold or other possessory rights in real estate, together with necessary real property Permits and access rights necessary for (a) performance in full of each such Project Company's obligations under the Credit Documents and Major Project Documents to which such Project Company is a party, and (b) the leasing, ownership and operation of the Projects in accordance with the Projections; in each case except to the extent that any such missing leases, possessory rights, real property Permits or access rights do not violate the Real Property Standard. 3.2.14 Request for Notice. Requests for Notice shall have been recorded in favor of Administrative Agent with respect to any Major Project Documents that are subject to recorded underlying Liens. 3.2.15 Regulatory Status. (a) Each Project is, and has been since it commenced commercial operation, (i) a QF, and (ii) exempt from all provisions of the FPA except Sections 1-18, 202(c), 210-214, 305(c) and such provisions of Part III of the FPA as may be necessary for FERC actions to enforce the foregoing; and (b) each Project's FERC Form 556 most recently filed with FERC contains current and accurate ownership and operating characteristics of the Project. 3.2.16 Representations and Warranties. Each representation and warranty of each Loan Party under the Credit Documents shall be true and correct. 3.2.17 No Default. No Event of Default or Potential Event of Default shall have occurred and be continuing, or will result from the Acquisition and the consummation of the transactions contemplated by this Section 3.2. 3.2.18 Process Agents. Delivery to Administrative Agent of evidence that each Loan Party (other than Ormat Technologies, Sponsor, Borrower, OrHeber 1, OrHeber 2, OrHeber 3, ORNI, OrMammoth, SIGC and Mammoth Lakes) has appointed CT Corporation System as its respective agent for service of process in the State of New York in respect of each Credit Document to which such Person is a party which is governed by the laws of the State of New York. 24 3.2.19 Close of Escrow. Concurrently with the payment of the purchase price with respect to the condition precedent set forth in Section 3.2.1, the termination of the escrow under the Escrow Agreement shall occur and all documents and closing deliverables contained in such escrow shall be released from such escrow. 3.3 MAMMOTH COLLATERAL RELEASE 3.3.1 Upon the written request of Borrower, Administrative Agent, on the behalf of Secured Parties, (a) shall return to Borrower all Pledged Equity Interests (as defined in the Pledge Agreements described in clause (c) of the definition thereof) of OrMammoth free and clear of the Liens imposed by the applicable Pledge Agreements, (b) shall execute and deliver to Borrower and OrMammoth such documents and instruments (including UCC-3 termination statements), in each case as may be reasonably necessary to release the Liens granted to Administrative Agent, for the benefit of Secured Parties, in respect of the Collateral directly relating to OrMammoth and the Mammoth Project, and (c) shall execute and deliver to Borrower and OrMammoth such documents and instruments as may be reasonably necessary to release OrMammoth from its obligations under the applicable Subsidiary Guaranty, the Depositary Agreement and the other Credit Documents to which such Loan Party is a party, provided that either the Mammoth Prepayment Conditions or the GE Buyout Conditions are satisfied (the satisfaction of either the Mammoth Prepayment Conditions or the GE Buyout Conditions and the related release of Collateral described in this Section 3.3.1 being referred to as the "Mammoth Collateral Release"). 3.3.2 Upon the satisfaction of the Mammoth Prepayment Conditions, then (a) Administrative Agent shall undertake each of the actions specified in Section 3.3.1, and (b) the amounts on deposit in the Funding Account shall be held in the Funding Account until the earlier to occur of (i) the satisfaction of the GE Buyout Conditions and (ii) the date Borrower delivers a notice (the "Release Notice") to Administrative Agent requesting that the funds on deposit in the Funding Account be applied to the prepayment of the Loans pursuant to this Section and Section 2.1.6(a)(i) (other than clauses (C) and (D) thereof) (it being acknowledged and agreed that, from and after the date of the delivery of the Release Notice (the "Release Date"), Beal Bank, S.S.B. shall be released from all of its obligations under the Credit Documents (including the Fee Letter) to provide any financing relating to the Lease Buyout or any other Lease Solution). Subject to Section 3.3.3, if the satisfaction of the GE Buyout Conditions occurs on or before the Release Date, then the amounts on deposit in the Funding Account shall be transferred to Sponsor free and clear of the Liens imposed by the Collateral Documents. Subject to Section 3.3.3, if the satisfaction of the GE Buyout Conditions does not occur on or before the Release Date, then the amounts on deposit in the Funding Account shall be transferred to Administrative Agent and applied to the prepayment of the Loans pursuant to Section 2.1.6(a)(i) (other than clauses (C) and (D) thereof). 3.3.3 Each of the parties hereto acknowledges and agrees that (a) the deposit of amounts into the Funding Account pursuant to Section 3.3.2 and otherwise in connection with the Mammoth Collateral Release shall not constitute a prepayment of Loans until such time (if ever) such amounts are transferred to Administrative Agent and applied to the prepayment of the Loans pursuant to Section 2.1.6(a)(i) (other than clauses (C) and (D) thereof), and (b) all Loans 25 to be prepaid or transferred to Sponsor using amounts from the Funding Account shall continue to accrue interest at the then-applicable interest rate for such Loans until actually prepaid. Without limiting the foregoing, if such amounts are transferred to Sponsor, then (i) the corresponding amount of Loans (i.e., $28,900,000) shall at all times (including during such times as such amounts are on deposit in the Funding Account) be deemed to be outstanding under the Credit Agreement and (ii) interest on such amounts shall be due and payable in accordance with the provisions of Section 2.1.2. 3.3.4 Each of the parties hereto acknowledges and agrees that, upon the release of OrMammoth from its obligations under the applicable Subsidiary Guaranty, the Depositary Agreement and the other Credit Documents to which such Loan Party is a party and the release of the Collateral directly relating to OrMammoth and the Mammoth Project pursuant to this Section 3.3 and notwithstanding anything to the contrary contained in any of the Credit Documents, (a) OrMammoth shall be deemed not to be a "Loan Party", "Non-Guarantor" or "Guarantor", (b) the Mammoth Project shall be deemed not to be a "Project", (c) each of OrMammoth and Mammoth Lakes shall be deemed to be a "Nonrecourse Person", (d) Mammoth Lakes shall be deemed not to be a "Project Company", (e) "Project Revenues" shall be deemed not to include any income, cash, receipts or proceeds generated by OrMammoth, Mammoth Lakes or the Mammoth Project, (f) each Project Document solely related to the Mammoth Project shall be deemed not to be a "Project Document" or "Major Project Document", (g) each of the Loan Parties shall be released from all of their respective obligations under the Credit Documents with respect to OrMammoth, Mammoth Lakes and the Mammoth Project (including any covenants or defaults directly related to OrMammoth, Mammoth Lakes, the Mammoth Project or the Collateral being released as part of the Mammoth Collateral Release), other than the Loan Parties' (excluding OrMammoth) obligations under Sections 5.24, 7.1.5, 7.1.13 and 10.4 of the Credit Agreement, and (h) on or before the second Banking Day following the Mammoth Collateral Release, Borrower shall take all actions necessary to cause OrMammoth and Mammoth Lakes not to be direct or indirect subsidiaries of Borrower, any Guarantor or any Non-Guarantor. 3.3.5 Concurrent with and as a condition to the Mammoth Collateral Release, OrMammoth shall execute and deliver to Administrative Agent a release (in form and substance reasonably satisfactory to Administrative Agent), pursuant to which OrMammoth shall release each Secured Party from any and all claims which OrMammoth may have against any of the Secured Parties arising from the Operative Documents and the transactions contemplated thereby. ARTICLE 4 REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to and in favor of Administrative Agent and the Banks (a) to the extent they relate to any Loan Party (other than Ormat Technologies, the Non-Guarantors (other than ORNI) and the Project Companies), as of the Closing Date (unless such representation and warranty expressly relates solely to another time) both prior to and immediately after the consummation of the Acquisition and (b) to the extent they relate to any of each Non-Guarantor (other than ORNI) and each Project Company, 26 as of the Closing Date (unless such representation and warranty expressly relates solely to another time) but immediately after giving effect to the consummation of the Acquisition, all of which shall survive the Closing Date, the Close of Escrow and the making of the Loans: 4.1 EXISTENCE. Borrower, each Guarantor and each Non-Guarantor are organized or formed and validly existing under the laws of the jurisdiction of its incorporation or formation (as applicable) and are qualified to do business in such jurisdiction and in each other jurisdiction in which the conduct of their business requires such qualification (including, with respect to Borrower, the State of California). 4.2 OWNERSHIP OF THE LOAN PARTIES. 4.2.1 The equity interests in Borrower, each Guarantor and each Non-Guarantor are duly authorized, validly issued and fully paid and nonassessable and, as of the Closing Date, none of such equity interests consists of margin stock. 4.2.2 The capital structure of the Loan Parties (other than Ormat Technologies) is accurately set forth on Exhibit L, and each of the following is true and correct: (a) Sponsor directly owns all of the equity interests in Borrower. (b) Borrower directly owns all of the equity interests in OrHeber 1, all of the equity interests in OrMammoth, a 50% general partnership interest in HFC and a 50% general partnership interest in HGC. (c) OrHeber 1 directly owns a 50% general partnership interest in HFC, a 50% general partnership interest in HGC and all of the membership interests in ORNI. (d) ORNI directly owns all of the equity interests in OrHeber 2 and all of the equity interests in OrHeber 3. (e) OrHeber 2 directly owns a 99.998% general partnership interest in SIGC. (f) OrHeber 3 directly owns a 0.002% limited partnership interest in SIGC. (g) OrMammoth directly owns a 1% limited partnership interest in Mammoth Lakes and a 49% general partnership interest in Mammoth Lakes. (h) There no options, warrants, convertible securities or other rights to acquire any equity interests in Borrower, any Guarantor or any Non-Guarantor. (i) Borrower does not have any direct or indirect Subsidiaries, other than the Guarantors and Non-Guarantors. 4.3 POWER AND AUTHORIZATION. Each of Borrower, each Guarantor and each Non-Guarantor has full power and authority to conduct its business as contemplated by the Operative Documents. The Credit Documents and the Project Documents to which Borrower, each 27 Guarantor and each Non-Guarantor is a party have been duly authorized, executed and delivered by each such Loan Party. 4.4 NO CONFLICT. The execution, delivery and performance by each of Borrower, each Guarantor and each Non-Guarantor of the Credit Documents and Major Project Documents to which it is a party and the consummation of the transactions contemplated by the Credit Documents and the Major Project Documents do not and will not (a) violate any provision of (i) any Legal Requirement applicable to Borrower, any of the Guarantors or any of the Non-Guarantors, as the case may be, (ii) the Governing Documents of Borrower, any of the Guarantors or any of the Non-Guarantors, as the case may be, or (iii) any order, judgment or decree of any court or agency or Governmental Instrumentality binding on Borrower, any of the Guarantors or any of the Non-Guarantors, (b) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of Borrower, any of the Guarantors or any of the Non-Guarantors, (c) result in or require the creation or imposition of any Lien upon any of the properties or assets of Borrower, any of the Guarantors or any of the Non-Guarantors (other than any Liens created under any of the Credit Documents in favor of Administrative Agent on behalf of the Secured Parties), or (d) require any approval of any Person, except for such approvals or consents which will be obtained on or before the Closing Date and disclosed in writing to the Banks. 4.5 ENFORCEABLE OBLIGATIONS. Each Credit Document and Major Project Document to which Borrower, any of the Guarantors or any of the Non-Guarantors is a party constitutes a legal, valid and binding obligation of such Loan Party, as the case may be, enforceable against such Loan Party in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors' rights or by the effect of general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.6 COMPLIANCE WITH LAW. None of Borrower, any of the Guarantors or any of the Non-Guarantors (a) is in violation of any applicable Legal Requirements in any material respect or (b) is subject to or in default in any material respect with respect to any final judgments, writs, injunctions, decrees, rules or regulations of any court or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. 4.7 CONDUCT OF BUSINESS. The only business conducted by Borrower, OrHeber 1, OrHeber 2, OrHeber 3, ORNI and OrMammoth is the ownership of those Loan Parties which they directly own, as described in Section 4.2.2. To the knowledge of Borrower, the only business conducted by any of the Guarantors or Non-Guarantors is the business of directly or indirectly owning, operating, leasing, maintaining and using the Projects. Neither Borrower nor any Project Company is a party to or bound by any material contract other than the Credit Documents and the Major Project Documents to which it is a party. The Guarantors and Non-Guarantors (other than the Project Companies) are parties only to those agreements set forth on Exhibit G-5. 28 4.8 INVESTMENT COMPANY ACT. None of Borrower, any of the Guarantors or any of the Non-Guarantors is an "investment company" or a "company controlled by an investment company", within the meaning of the Investment Company Act of 1940, as amended. 4.9 ERISA. There are no ERISA Plans for any Loan Party (other than Ormat Technologies) or any ERISA Affiliate. 4.10 HAZARDOUS SUBSTANCES. 4.10.1 Except as set forth in Exhibit G-4: (a) with respect to each Site, none of Borrower, any of the Guarantors or any of the Non-Guarantors is or, to Borrower's, each Guarantor's and each Non-Guarantor's knowledge, has in the past been in violation of any Hazardous Substance Law which violation could reasonably be expected to result in a material liability to such Loan Party or its properties and assets or in an inability of such Loan Party to perform its obligations under the Operative Documents; (b) none of Borrower, any of the Guarantors, or any of the Non-Guarantors nor, to Borrower's, each Guarantor's and each Non-Guarantor's knowledge, any other Person has used, Released, generated, manufactured, produced or stored in, on, under, or about any Site, or Released or arranged for the disposal at any other location of any Hazardous Substances in any form, circumstance or condition that could reasonably be expected to subject any Secured Party to liability, or Borrower, any of the Guarantors, or any of the Non-Guarantors to material liability, under any Hazardous Substance Law; (c) to Borrower's, each Guarantor's and each Non-Guarantor's knowledge, there are no underground tanks, whether operative or temporarily or permanently closed, located on any Site that could reasonably be expected to subject any Secured Party to liability, or Borrower, any of the Guarantors, or any of the Non-Guarantors to material liability, under any Hazardous Substance Law; (d) there are no Hazardous Substances used, stored or present at or on any Site except in material compliance with Hazardous Substance Laws and other Legal Requirements or as disclosed in the Environmental Reports; (e) to Borrower's, each Guarantor's and each Non-Guarantor's knowledge, there are no Hazardous Substances that could reasonably be expected to migrate onto any Site that could reasonably be expected to impose on Borrower, any of the Guarantors, or any of the Non-Guarantors a material liability, except as disclosed in the Environmental Reports; and (f) to Borrower's, each Guarantor's and each Non-Guarantor's knowledge there neither is nor has been any condition, circumstance, action, activity or event that could reasonably be expected to be, or result in, a material violation by Borrower of any Hazardous Substance Law, or to result in liability of any Secured Party or material liability of Borrower, any of the Guarantors, or any of the Non-Guarantors under any Hazardous Substance Law. 4.10.2 Except as set forth on Exhibit G-4, (a) as of the Closing Date, there is no pending or, to Borrower's, each Guarantor's and each Non-Guarantor's knowledge, threatened in writing, judicial or administrative action or proceeding seeking to impose material liability against Borrower or any Guarantor or Non-Guarantor by any Governmental Instrumentality (including the California Public Utilities Commission, U.S. Army Corps of Engineers and U.S. Environmental Protection Agency) or any other Person which is not a Governmental Instrumentality with respect to the presence or Release of Hazardous Substances in, on, from or to any Site and, (b) thereafter, there is no pending or, to Borrower's, each Guarantor's and each 29 Non-Guarantor's knowledge, threatened in writing, judicial or administrative action or proceeding by any Governmental Instrumentality (including the California Public Utilities Commission, U.S. Army Corps of Engineers and U.S. Environmental Protection Agency) or any non-governmental third party with respect to the presence or Release of Hazardous Substances in, on, from or to any Site which could reasonably be expected to have a Material Adverse Effect. 4.10.3 Except as set forth on Exhibit G-4 or in the Environmental Reports, to Borrower's, each Guarantor's and each Non-Guarantor's knowledge, there are no past violations that have not been finally resolved or existing violations of any Hazardous Substances Laws with respect to any Site, which violations could reasonably be expected to result in a material liability of Borrower, any of the Guarantors, or any of the Non-Guarantors. 4.11 LITIGATION. 4.11.1 No action, suit, proceeding or investigation has been instituted or, to Borrower's, each Guarantor's and each Non-Guarantor's knowledge, threatened in writing against any Loan Party (other than Ormat Technologies), other than (i) those described in Schedule 4.18 to the Acquisition Agreement or (ii) those that could not reasonably be expected to have a Material Adverse Effect. 4.11.2 None of Borrower, any Guarantor or any Non-Guarantor has any knowledge of (a) any action, suit, proceeding or investigation that has been instituted or threatened in writing against any Major Project Participant, or by which any of them or their properties are bound, which could reasonably be expected to have a Material Adverse Effect, (b) any proceeding or investigation that has been instituted by the FERC which could reasonably be expected to result in the revocation of any Project's QF status or any other determination that one or more of the Projects has failed to comply with FERC's regulations relating to QFs, or (c) any order, judgment or decree has been issued or proposed to be issued by any Governmental Instrumentality that, as a result of the leasing, ownership or operation of any of the Projects, the sale of electricity therefrom or the entering into of any Credit Document or Project Document or any transaction contemplated thereby, could reasonably be expected to cause or deem the Banks, Administrative Agent, Borrower or any Affiliate of any of them to be subject to, or not exempted from, regulation under PUHCA or the FPA, or subject to laws or regulations of the State of California respecting the rates or the financial or organizational regulation of electric utilities. 4.11.3 No action, suit or proceeding before or by any court, arbitrator or other Governmental Instrumentality is pending to which any Loan Party is a party or to which its business, assets or property is subject and, to Borrower's, each Guarantor's and each Non-Guarantor's knowledge, no such action, suit or proceeding is threatened to which any such Loan Party or its business, assets or property would be subject that, in either case, questions the validity of any of the Credit Documents. 4.12 LABOR DISPUTES AND ACTS OF GOD. Neither the business nor the properties of any of the Project Companies or, to Borrower's, each Guarantor's and each Non-Guarantor's knowledge, any Major Project Participant are currently affected by any fire, explosion, accident, 30 strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), which could reasonably be expected to have a Material Adverse Effect. 4.13 DISCLOSURE. No information or documentation furnished by any of the Loan Parties to Administrative Agent or the Banks or to any consultant submitting a report to Administrative Agent or the Banks contained (at the time of delivery thereof) any untrue statement of a material fact or omitted (at the time of delivery thereof) to state a material fact necessary in order to make the statements contained herein or therein not misleading under the circumstances in which they were made at the time such statements were made (other than (a) the Projections, (b) the Operating Budget, (c) the Capital Expenditures Budget, (d) any information that was corrected or updated in writing by Borrower to the Banks prior to the Closing Date, and (e) any information which was provided by Borrower to any of the Banks' consultants prior to the Closing Date and which contains "forward looking statements"). To the knowledge of Borrower, no information which was provided by Borrower to any of the Banks' consultants prior to the Closing Date and which contains "forward looking statements" contained (at the time of delivery thereof) any untrue statement of a material fact or omitted (at the time of delivery thereof) to state a material fact necessary in order to make the statements contained herein or therein not misleading under the circumstances in which they were made at the time such statements were made. There is no fact known to Borrower, any Guarantor or any Non-Guarantor which has had or could reasonably be expected to have a Material Adverse Effect which has not been disclosed in writing to Administrative Agent and the Banks by or on behalf of Borrower on or prior to the Closing Date in connection with the transactions contemplated hereby. 4.14 TAXES. 4.14.1 Each of Borrower, each Guarantor and each Non-Guarantor has timely filed all federal, state and local tax returns and reports that it is required to file, and has paid all taxes, material assessments, utility charges, fees and other governmental charges it is required to pay to the extent due (other than those taxes that it is contesting in good faith and by appropriate proceedings). None of Borrower, any Guarantor's or any Non-Guarantor has received any written notice proposing tax assessment against any such Loan Party which could reasonably be expected to have a Material Adverse Effect. To the extent any taxes, assessments, charges and fees are being contested, the applicable Loan Party (other than Ormat Technologies) has established reserves that are adequate for the payment thereof in conformity with GAAP. 4.14.2 To Borrower's, each Guarantor's and each Non-Guarantor's knowledge, (a) at all times since its formation, each Project Company has been an entity that is disregarded as separate from its owner for federal income tax purposes and (b) no IRS Form 8832 has ever been filed with respect to any Project Company to treat such Project Company as other than a disregarded entity. 4.14.3 None of Borrower, any Guarantor and any Non-Guarantor has any liability for the taxes of any Person (other than itself) (i) under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law), (ii) as a transferee or 31 successor, (iii) by contract, or (iv) otherwise, other than those liabilities which are being assumed by (through indemnification of OrHeber 1, OrHeber 2, OrHeber 3 and OrMammoth or otherwise) Covanta under the Acquisition Agreement. 4.14.4 Borrower does not intend to treat the Loans (including the incurrence thereof) as being a "reportable transaction" (within the meaning of Treasury Regulation Section 1.6011-4). 4.15 OWNERSHIP OF PROPERTY; LIENS; MATERIAL REAL PROPERTY INTERESTS. Borrower, each Guarantor and each Non-Guarantor have, as applicable, (a) good, marketable and insurable easement, fee and/or leasehold interest in each of the Material Real Property Interests, free and clear of all Liens (other than the Title Exceptions) and (b) good, marketable and valid title to all other Collateral, free and clear of all Liens (other than Permitted Liens). With respect to each Project, the Title Exceptions do not, in the aggregate, materially and adversely affect the value, operations or use of such Project. Exhibit G-6 contains an accurate and complete list of all of the Project Companies' material real property interests (including fee, leasehold and easement interests). 4.16 GOVERNMENTAL REGULATION. None of the Loan Parties, Administrative Agent, or any Bank, nor any Affiliate of any of them will (solely as a result of the ownership, leasing or operation of the Projects, the sale of electricity, capacity or ancillary services therefrom or the entering into any Credit Document or Project Document or any transaction contemplated thereby) be subject to, or not exempt from, regulation under the FPA or PUHCA or under state laws and regulations respecting the rates or the financial or organizational regulation of electric utilities, except that each Project Company will be subject to Sections 1-18, 21-30, 202(c), 210-214 and 305(c) of the FPA and such provisions of Part III of the FPA as may be necessary for FERC actions to enforce the foregoing. Except to the extent provided in the preceding clause, none of Borrower, any Guarantor or any Non-Guarantor will be deemed by any Governmental Instrumentality to be subject to financial, organizational or rate regulation as an "electric utility", "electric corporation", "electrical company", "public utility", or "public utility holding company" or any similar Person under any applicable Governmental Rule. 4.17 MARGIN STOCK. None of Borrower, any Guarantor or any Non-Guarantor is engaged principally, or as one of its principal activities, in the business of extending credit for the purpose of "buying", "carrying" or "purchasing" margin stock (each as defined in Regulations T, U or X of the Federal Reserve Board), and no part of the proceeds of the Loans will be used by any Loan Party for the purpose of "buying", "carrying" or "purchasing" any such margin stock or for any other purpose which violates the provisions of the regulations of the Federal Reserve Board. 4.18 BUDGETS; PROJECTIONS. Borrower has prepared the Capital Expenditures Budget, the Operating Budget and the Projections and is responsible for developing the assumptions on which such Capital Expenditures Budget, Operating Budget and the Projections are based; and such Capital Expenditures Budget, Operating Budget and the Projections (a) are based on reasonable assumptions (including as to all legal and factual matters material to the estimates set forth therein) and (b) are consistent in all material respects with the provisions of 32 the Major Project Documents in effect as of the Closing Date. 4.19 FINANCIAL STATEMENTS. In the case of each financial statement of (a) Ormat Technologies for the calendar year ending on December 31, 2002, (b) Sponsor for the quarterly period ending on March 31, 2003 and (c) Sponsor for the quarterly period ending on September 30, 2003, each such financial statement and information has been prepared in conformity with GAAP and fairly presents, in all material respects, the financial position (on a consolidated and, where applicable, consolidating basis) of such Loan Party, described in such financial statements as at the respective dates thereof and the results of operations and cash flows (on a consolidated and, where applicable, consolidating basis) of such Loan Party, described therein for each of the periods then ended, subject, in the case of any such unaudited financial statements, to changes resulting from audit and normal year-end adjustments and the absence of footnote disclosure. 4.20 NO DEFAULT. None of Borrower, any Guarantor or any Non-Guarantor is in default under any Major Project Document as of the Closing Date, except with respect to defaults that may be claimed by any landowner set forth on Exhibit N who (a) has submitted claims to the Bankruptcy Court relating to the SIGC Project, the HFC Project or the HGC Project, and (b) has not entered into a settlement agreement with respect to such claims (each such landowner, an "Outstanding Non-Royalty Claimant"). No Potential Event of Default or Event of Default has occurred and is continuing. 4.21 ORGANIZATION ID NUMBER. The organizational identification numbers of the Loan Parties (other than Ormat Technologies) set forth on Exhibit M are true and correct. 4.22 INTELLECTUAL PROPERTY. Borrower, each Guarantor and each Non-Guarantor own or possess all Permits, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that are necessary for the operation of its business, without known conflict with the rights of others. 4.23 CERTAIN FEES. No broker's or finder's fee or commission will be payable with respect to the transactions contemplated by the Credit Documents, other than (a) fees payable to Administrative Agent, the Banks or any of their respective Affiliates and (b) fees payable by Sponsor to Marathon Capital, LLC. 4.24 COLLATERAL. The Liens granted to Administrative Agent (for the benefit of the Secured Parties) pursuant to the Collateral Documents (a) constitute as to personal property included in the Collateral a valid lien, subject, with respect to any proceeds, to the limitations set forth in Section 9-315 of the UCC and (b) constitute as to the Mortgaged Property included in the Collateral a valid Lien on the Mortgaged Property; provided, however, that the Non-Material Real Property Interests shall be subject to the Real Property Standard for purposes of this Section 4.24(b). The security interest granted to Administrative Agent (for the benefit of the Secured Parties) pursuant to the Collateral Documents in the Collateral consisting of personal property (other than the Operating Accounts and all amounts deposited therein or credited thereto) will be perfected (i) with respect to any property that can be perfected solely by filing, to the extent Article 9 of the UCC applies thereto, upon the filing of financing statements in the filing offices identified in Exhibit D-6, (ii) with respect to any property that can be perfected by 33 control (subject to Section 6.14), upon execution of the Depositary Agreement, and (iii) with respect to any property (if any) that can be perfected by possession, upon Administrative Agent receiving possession thereof, and in each case such security interest will be, as to Collateral perfected under the UCC or otherwise as aforesaid, superior and prior to the rights of all third Persons now existing or hereafter arising whether by way of mortgage, Lien, security interests, encumbrance, assignment or otherwise, except (A) with respect to the Collateral described in clause (i) of this Section 4.24, the Permitted Liens described in clauses (a) and (e) of the definition of "Permitted Liens" and, to the extent required by Governmental Rule, those matters described in clauses (b), (c) and (g) of the definition of "Permitted Liens" and (B) with respect to the Collateral described in clauses (ii) and (iii) of this Section 4.24, the Permitted Liens described in clause (a) of the definition of "Permitted Liens" and, to the extent required by Governmental Rule, those matters described in clause (b) of the definition of "Permitted Liens". Except to the extent possession of portions of the Collateral is required for perfection, all such action as is necessary has been taken to establish and perfect Administrative Agent's rights in and to the Collateral in existence on the Closing Date to the extent Administrative Agent's security interest can be perfected by filing, including any recording, filing, registration, giving of notice or other similar action; provided, however, that the Non-Material Real Property Interests shall be subject to the Real Property Standard for purposes of this sentence. Subject to the requirements contained in the UCC with respect to the filing of continuation statements, no filing, recordation, re-filing or re-recording other than those listed on Exhibit D-6 hereto is necessary to perfect and maintain the perfection of the interest, title or Liens of the Collateral Documents, and on the Closing Date all such filings or recordings will have been made to the extent Administrative Agent's security interest can be perfected by filing. Borrower has properly delivered or caused to be delivered, or provided control, to Administrative Agent or Depositary Agent all Collateral that permits perfection of the Lien and security interest described above by possession or control. 4.25 SUFFICIENCY OF PROJECT DOCUMENTS. Other than those that can be reasonably expected to be commercially available when and as required, the services to be performed, the materials to be supplied and the real property interests, the easements and other rights granted, or to be granted, pursuant to the Major Project Documents in effect as of the Closing Date comprise all of the material services, materials and property interests required to lease, own and operate the Projects in accordance with the terms of the Credit Documents and the Major Project Documents. 4.26 UTILITY SERVICES. All utility services necessary for operation of each Project for its intended purposes are available at such Project. 4.27 REAL PROPERTY RIGHTS. Each Project Company possesses all necessary easements, rights of way, licenses, agreements and other rights for (a) the contiguous interconnection and utilization of all interconnection facilities (including geothermal resource production and injection pipelines) and (b) the operation of the Projects in accordance with the Projections. 4.28 PROPER SUBDIVISION. Each Material Real Property Interest has been subdivided or entitled to exception therefrom, and for all purposes each Material Real Property Interest may 34 be mortgaged, conveyed and otherwise dealt with as separate legal lots or parcels. 4.29 FLOOD ZONE DISCLOSURE. No material portion of the Collateral includes improvements that are located in an area that has been identified by the Federal Emergency Management Agency as an area having special flood or mudslide hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968, as amended. 4.30 QF STATUS. Each Project is, and has been since it commenced commercial operation, (a) a QF, and (b) exempt from all provisions of the FPA. Each Project's FERC Form 556 most recently filed with FERC contains current and accurate ownership and operating characteristics of such Project, except for updated information that is to be included in the filings contemplated by Section 5.19.1. 4.31 ACQUISITION AGREEMENT. The representations and warranties of each applicable Loan Party contained in the Acquisition Agreement are true and correct in all material respects. 4.32 SOLVENCY.(a) Borrower, each Guarantor and each Non-Guarantor is Solvent. 4.33 GEOTHERMAL RESOURCES. To the knowledge of Borrower, the geothermal resources available to the Project Companies under the applicable Project Documents are sufficient to operate each Project in accordance with the terms of the Power Purchase Agreements and the Credit Documents and in a manner consistent with the Projections. 4.34 OPERATOR EXPERIENCE. Sponsor has substantial experience in the operation and maintenance of comparable geothermal electric generating facilities and geothermal fields (including associated equipment) and is fully qualified to operate and maintain the Projects in accordance with the terms of the Power Purchase Agreements and the Credit Documents and in a manner consistent with the Projections. ARTICLE 5 AFFIRMATIVE COVENANTS Borrower covenants and agrees that until the repayment in full in cash of all Obligations (other than those contingent Obligations that are intended to survive the termination of this Agreement or the other applicable Credit Documents), Borrower shall, and shall cause each of the Guarantors and the Non-Guarantors, as applicable, to: 5.1 USE OF PROCEEDS. Use the proceeds of the Loans only (a) to fund the Acquisition and (b) to pay related fees and expenses of Borrower, in each case as provided in the Funds Flow Memorandum. 5.2 PAYMENT OF OBLIGATIONS. Pay all of Borrower's, each Guarantor's and each Non-Guarantor's respective obligations due under the Project Documents as and when due and payable, except (a) such as may be contested in good faith or as to which a bona fide dispute may exist (provided that adequate reserves have been established in conformity with GAAP), and 35 (b) Borrower's and the Project Companies' trade payables which shall be paid in the ordinary course of business. 5.3 WARRANTY OF TITLE. Maintain (a) good, marketable and insurable fee, easement and/or leasehold interests in each Material Real Property Interest, as applicable, and (b) good, legal and valid title to all of its other respective material properties and assets (other than properties and assets disposed of in the ordinary course of business or otherwise disposed of in accordance with Section 6.3), in each case free and clear of all Liens (other than Permitted Liens). Borrower, the Guarantors and the Non-Guarantors shall warrant and defend, as applicable, title to and right of possession and use of each Project, and the validity and priority of the Liens of the Secured Parties on the Collateral. 5.4 NOTICES; REPORTS. Promptly, upon acquiring notice or giving notice (except as otherwise specified below), as the case may be, or obtaining knowledge thereof, give written notice (with copies of any underlying notices, papers, files or related documentation) to Administrative Agent of: 5.4.1 any litigation pending or, to Borrower's, each Guarantor's and each Non-Guarantor's knowledge, threatened in writing against Borrower, any Guarantor or any Non-Guarantor involving claims against such Loan Party or a Project in excess of $500,000 individually or $1,000,000 in the aggregate per calendar year or involving any injunctive, declaratory or other equitable relief, such notice to include, if requested in writing by Administrative Agent, copies of all papers filed in such litigation and to be given monthly if any such papers have been filed since the last notice given; 5.4.2 any dispute or disputes for which written notice has been received by Borrower, any Guarantor or any Non-Guarantor which may exist between such Loan Party and any Governmental Instrumentality and which involve (a) claims against Borrower, any Guarantor or any Non-Guarantor which exceed $500,000 individually or $1,000,000 in the aggregate per calendar year, (b) injunctive or declaratory relief, or (c) revocation, modification, failure to renew or the like of any material discretionary Permits necessary for the performance of any Loan Party's (other than Ormat Technologies') or Major Project Participant's obligations under the Credit Documents or the Major Project Documents; 5.4.3 any Event of Default or Potential Event of Default; 5.4.4 any casualty, damage or loss, whether or not insured, through fire, theft, other hazard or casualty, or any act or omission of (a) Borrower, any Guarantor, any Non-Guarantor, or any of their employees, agents, contractors, consultants or representatives in excess of $500,000 for any one casualty or loss or $1,000,000 in the aggregate in any calendar year, or (b) to Borrower's, each Guarantor's and each Non-Guarantor's knowledge, any other Person if such casualty, damage or loss could reasonably be expected to have a Material Adverse Effect; 5.4.5 any cancellation, suspension or material change in the terms, coverage or amounts of any insurance described in Exhibit K; 36 5.4.6 any contractual obligations incurred by Borrower, any Guarantor or any Non-Guarantor exceeding $500,000 per year in the aggregate for a Project, not including any obligations incurred pursuant to the Operative Documents or any obligation contemplated in the then-current Capital Expenditures Budget or the then-current Operating Budget; 5.4.7 any intentional withholding of compensation to, or any right to withhold compensation claimed by, any Major Project Participant, other than retention provided by the express terms of any such contracts; 5.4.8 any (a) termination (other than expiration in accordance with its terms and any applicable Consent) or material default of which Borrower, any Guarantor or any Non-Guarantor has knowledge or written notice thereof under any Major Project Document and (b) material Project Document Modification (with copies of all such Project Document Modifications whether or not requiring approval of Administrative Agent or the Required Banks pursuant to Section 6.12); 5.4.9 any written claim of events of force majeure (including claims therefor regardless of whether Borrower believes such claim has merit) and, to the extent requested in writing by Administrative Agent, copies of invoices or statements which are reasonably available to Borrower, any Guarantor or any Non-Guarantor under any Major Project Document, certified by an authorized representative of Borrower, together with a copy of any supporting documentation, schedule, data or affidavit delivered under such Major Project Document; 5.4.10 any (a) material noncompliance with any Hazardous Substance Law or any material Release of Hazardous Substances on or from each Site that has resulted or could reasonably be expected to result in personal injury or material property damage or to have a Material Adverse Effect, (b) pending or, to Borrower's, each Guarantor's and each Non-Guarantor's knowledge, threatened in writing, Environmental Claim against Borrower or, to Borrower's, each Guarantor's and each Non-Guarantor's knowledge, any of its Affiliates, contractors, lessees or any other Persons, arising in connection with their occupying or conducting operations on or at any Project or any Site which, if adversely determined, could reasonably be expected to have a Material Adverse Effect, or (c) underground tank, whether operative or temporarily or permanently closed, located on any Site; 5.4.11 promptly, but in no event later than 10 Banking Days prior to any Lease Solution, notice thereof, which notice shall describe, in reasonable detail, the nature of such Lease Solution; 5.4.12 promptly, but in no event later than 10 Banking Days prior to any change in or transfer of ownership interests in Borrower, any Guarantor, any Non-Guarantor or any Project (including a Mammoth Ownership Event), notice thereof, which notice shall identify any transferee of such ownership interest and the nature of such transferee's interest or shall describe, in reasonable detail, such other change or transfer; provided that Borrower shall not be obligated to notify Administrative Agent of any change in the Constellation Entities' interest in Mammoth Lakes or a transfer by the Constellation Entities of any of their ownership interest in Mammoth 37 Lakes if such changes or transfer was to an Affiliate of the Constellation Entities, in each case until 30 days after it has knowledge of the occurrence of such change or transfer. 5.4.13 initiation of any condemnation proceedings involving any Project, any Site or any material portion thereof; 5.4.14 promptly, but in no event later than fifteen Banking Days after Borrower has knowledge of the execution and delivery thereof, a copy of each Additional Project Document; 5.4.15 promptly, but in no event later than 30 days after the receipt thereof by Borrower, copies of (a) any material discretionary Permits necessary for the performance of the any Loan Party's (other than Ormat Technologies') obligations under the Credit Documents or the Major Project Documents obtained by such Loan Party after the Closing Date, (b) any amendment, supplement or other modification to any material discretionary Permits necessary for the performance of the any Loan Party's (other than Ormat Technologies') or Major Project Participant's obligations under the Credit Documents or the Major Project Documents after the Closing Date and (c) all material notices relating to any Project received by Borrower, any Guarantor or any Non-Guarantor from, or delivered by any such Loan Party to, any Governmental Instrumentality; 5.4.16 promptly, but in no event later than five days after occurrence thereof, notice of (a) the scheduling of any outage with an anticipated duration in excess of ten days, (b) any outage (scheduled or otherwise) with a duration in excess of ten days, and (c) any de-rating or change in the rating of any Project; and 5.4.17 (a) within ten days after the occurrence of a Reportable Event with respect to any ERISA Plan; (b) promptly, but in no event later than fifteen days, after the withdrawal of any Loan Party (other than Ormat Technologies) or any ERISA Affiliate from a Multiemployer Plan; (c) promptly, but in no event later than five days, after the PBGC institutes any proceedings to terminate any ERISA Plan or takes action to appoint a trustee of any ERISA Plan under Section 4042 of ERISA; (d) promptly, but in no event later than ten days, after the occurrence of any event which could give rise to a Lien in favor of the IRS or the PBGC under any ERISA Plan; (e) promptly, but in no event later than 30 days, after any Loan Party (other than Ormat Technologist) or any ERISA Affiliate has knowledge that any ERISA Plan that is a Multiemployer Plan is in reorganization, is insolvent or intends to terminate under Section 4041A of ERISA and (f) promptly, but in no event later than ten days after, the date any Loan Party (other than Ormat Technologies) or any ERISA Affiliate shall apply for a minimum funding waiver under Section 412 of the Code with respect to an ERISA Plan, a description thereof and copies of documents and materials related thereto. 5.5 FINANCIAL STATEMENTS. 5.5.1 Deliver or cause to be delivered to Administrative Agent, in form and detail reasonably satisfactory to Administrative Agent (except where GAAP is specifically required): 38 (a) as soon as practicable and in any event within 60 days after the end of (i) each quarterly accounting period of each Guarantor's and each Non-Guarantor's fiscal year and (ii) each of the first three quarterly accounting periods of Borrower's fiscal year (in each case commencing with the fiscal quarter ending March 31, 2004), unaudited quarterly financial statements of Borrower, the Guarantors and the Non-Guarantors as of the last day of such quarterly period and the related statements of income, cash flow, and shareholders' or members' equity (as applicable) for such quarterly period and (in the case of second and third quarterly periods) for the portion of the fiscal year ending with the last day of such quarterly period, setting forth in each case (but only with respect to periods occurring during or after the 2005 fiscal year) in comparative form corresponding unaudited figures from the preceding fiscal year (it being acknowledged that such requirement may be satisfied by the delivery of the appropriate report or Form 10-Q filed with the United States Securities Exchange Commission), all prepared in accordance with GAAP (subject to changes resulting from audit and normal year-end adjustments and the absence of footnote disclosure); and (b) as soon as practicable and in any event within 120 days after the close of each applicable fiscal year, audited consolidated financial statements of Borrower (it being acknowledged that such requirement may be satisfied by the delivery of the appropriate report or Form 10-K filed with the United States Securities Exchange Commission). Such financial statements shall include a balance sheet as of the close of such year, an income and expense statement, reconciliation of capital accounts (where applicable) and a statement of cash flow (it being acknowledged that such requirement may be satisfied by the delivery of the appropriate report or Form 10-K filed with the United States Securities Exchange Commission), all prepared in accordance with GAAP and certified by an independent certified public accountant selected by the Person whose financial statements are being prepared. Such certificate shall not be qualified or limited because of restricted or limited examination by such accountant of any material portion of the records of Borrower. 5.5.2 Cause to be delivered, along with such financial statements of Borrower, the Guarantors and the Non-Guarantors that are required to be provided pursuant to Section 5.5.1, a certificate signed by a Responsible Officer of such Loan Party certifying that (a) such Responsible Officer has made or caused to be made a review of the transactions and financial condition of such Loan Party during the relevant fiscal period and that such review has not, to such Responsible Officer's knowledge, disclosed the existence of any event or condition which constitutes an Event of Default or Potential Event of Default, or if any such event or condition existed or exists, the nature thereof and the corrective actions that such Loan Party has taken or proposes to take with respect thereto, (b) such Loan Party is in compliance with all applicable material provisions of each Credit Document to which such Loan Party is a party or, if such is not the case, stating the nature of such non-compliance and the corrective actions which such Loan Party has taken or proposes to take with respect thereto, and (c) such financial statements are true and correct in all material respects and that no material adverse change in the consolidated assets, liabilities, operations, or financial condition of such Loan Party has occurred since the date of the immediately preceding financial statements provided to Administrative Agent or, if a material adverse change has occurred, the nature of such change. 39 5.6 BOOKS, RECORDS, ACCESS. 5.6.1 Maintain, or cause to be maintained, adequate books, accounts and records with respect to Borrower and the Projects. 5.6.2 Subject to requirements of Governmental Rules, safety requirements and existing confidentiality restrictions imposed upon any Loan Party (other than Ormat Technologies) by any other Person, permit employees or agents of Administrative Agent and Independent Engineer at any reasonable times and upon reasonable prior notice to inspect all of their respective properties, to examine or audit all of their respective books, accounts and records and make copies and memoranda thereof, and to communicate with their auditors outside their presence (it being acknowledged that Administrative Agent shall endeavor to notify Borrower of any such communications with auditors prior to such communications). 5.7 COMPLIANCE WITH LAW. Promptly comply, or cause compliance, in all material respects with all Legal Requirements (including Legal Requirements and applicable Permits relating to pollution control, environmental protection, equal employment opportunity or employee benefit plans, ERISA Plans and employee safety, with respect to any Project Company or any Project), and make such alterations to the Projects and the Sites as may be required for such compliance; provided, however, that nothing in this Section 5.7 shall prohibit Borrower from challenging or defending any claim or proceeding asserting that such noncompliance may exist. 5.8 EXISTENCE; CONDUCT OF BUSINESS. Except as otherwise expressly permitted under this Agreement, (a) maintain and preserve its existence and all material rights, privileges and franchises necessary in the normal conduct of its business, (b) subject to Section 5.2, perform (to the extent not excused by force majeure events or the nonperformance of the other party and not subject to a good faith dispute) all of its material contractual obligations under the Major Project Documents to which it is party or by which it is bound, (c) maintain all of its Permits and use reasonable efforts to cause all Major Project Participants to maintain all of their respective Permits related to the Projects, except to the extent that any such failure to maintain could not reasonably be expected to have a Material Adverse Effect, and (d) obtain all Permits necessary for the operation of the Projects in accordance with the Power Purchase Agreements and the Credit Documents and in a manner consistent with the Projections. 5.9 EXEMPTION FROM REGULATION. Take or cause to be taken all necessary or appropriate actions so that (a) each Project will be a QF and (b) each Loan Party (other than Ormat Technologies) and each Project shall not be subject to, or shall be exempt from, financial or organizational regulation as a "public utility company" or "public utility holding company" under PUHCA, the FPA or financial, organizational or rate regulation as a public utility under the laws of the State of California. 5.10 OPERATION OF THE PROJECTS. 40 5.10.1 Cause the Project Companies to keep each Project in good operating condition consistent with the standard of care set forth in the Major Project Documents and all applicable Permits, and make all repairs necessary to keep each such Project in such condition. 5.10.2 Cause the Project Companies to operate each Project in a manner consistent with Prudent Utility Practices and in compliance with the terms of the Power Purchase Agreements. 5.10.3 At any time after June 30, 2004, if the Lease Buyout shall not have occurred, at the request of Administrative Agent, (a) cause Sponsor to assign the SIGC O&M Agreement to a wholly-owned Subsidiary of Borrower and an Affiliate of OrHeber 1, (b) transfer or cause to be transferred all of the employees of Sponsor who operate, administer and maintain the SIGC Project to such newly formed wholly-owned Subsidiary of Borrower, (c) grant or cause to be granted to Administrative Agent (for the benefit of the Secured Parties) a first-priority perfected Lien on the ownership interests and assets of such newly formed wholly-owned Subsidiary of Borrower, and (d) provide or cause to be provided to Administrative Agent with respect to such transactions and such newly formed wholly-owned Subsidiary of Borrower, to the satisfaction of Administrative Agent, (i) assignment and transfer documents, (ii) Consents as described in Section 5.13.2, (iii) each of the documents described in Sections 3.1.1, 3.1.3 and 3.1.4 and (iv) opinions of counsel as described in Section 3.1.8. 5.11 BUDGETS. 5.11.1 On or before 90 days prior to the beginning of each calendar year (other than 2004), adopt an operating plan and a budget, detailed by month, of anticipated Project Revenues, such budget to include scheduled debt service, proposed dividend distributions, proposed Major Maintenance, proposed reserves and all anticipated O&M Costs (including reasonable allowance for contingencies) applicable to each Project for the ensuing calendar year (each such annual operating plan and budget, including the Initial Operating Budget, an "Operating Budget"). There shall be one Operating Budget for the Mammoth Project and, at the election of Borrower, there shall be one or more Operating Budgets for the SIGC Project, the HGC Project and the HFC Project. Each Operating Budget shall be subject to the approval of Administrative Agent only if (a) the aggregate amount of anticipated O&M Costs exceeds by 15% or is less by 20% of the amount proposed to be expended by the applicable Loan Parties (other than Ormat Technologies) for all such items during the applicable calendar year (as set forth in the Projections), or (b) the aggregate amount of actual O&M Costs (i) for the prior three-years (or, if applicable, partial years) exceeds by 10% or (ii) for the prior three-years (or, if applicable, partial years) is less than 85%, in each case of the amount proposed (as set forth in the Projections) to be expended by the applicable Loan Parties (other than Ormat Technologies) for all such items during such prior years. Each Project Company shall operate and maintain each Project within amounts for (A) any line-item set forth in the Operating Budget not to exceed 120% (on a year-to-date basis) and (B) all line-items set forth in the Operating Budget not to exceed (I) during the first six months of the applicable calendar year, 115% (on a year-to-date basis) and (II) during the last six months of the applicable calendar year, 110% (on a year-to-date basis). 41 5.11.2 On or before 90 days prior to the beginning of each calendar year (other than 2004), adopt a capital expenditures plan and a budget, detailed by quarter, of anticipated capital expenditures (including reasonable allowance for contingencies) applicable to each Project for the ensuing calendar year (each such annual capital expenditures, including the Initial Capital Expenditures Budget, a "Capital Expenditures Budget"). There shall be one Capital Expenditures Budget for the Mammoth Project and, at the election of Borrower, there shall be one or more Capital Expenditures Budgets for the SIGC Project, the HGC Project and the HFC Project. Each Capital Expenditures Budget shall be subject to the approval of Administrative Agent only if (a) the aggregate amount of anticipated capital expenditures exceeds by 15% or is less by 20% of the amount proposed to be expended by the applicable Loan Parties (other than Ormat Technologies) for all such items during the applicable calendar year (as set forth in the Projections), or (b) the aggregate amount of actual capital expenditures (i) for the prior three-years (or, if applicable, partial years) exceeds by 10% or (ii) for the prior three-years (or, if applicable, partial years) is less than 85%, in each case of the amount proposed (as set forth in the Projections) to be expended by the applicable Loan Parties (other than Ormat Technologies) for all such items during such prior years. Each Project Company shall perform capital expenditures for each Project within amounts for (A) any line-item set forth in the Capital Expenditures Budget not to exceed 120% (on a year-to-date basis) and (B) all line-items set forth in the Capital Expenditures Budget not to exceed (I) during the first six months of the applicable calendar year, 115% (on a year-to-date basis) and (II) during the last six months of the applicable calendar year, 110% (on a year-to-date basis). 5.12 PRESERVATION OF RIGHTS; FURTHER ASSURANCES. 5.12.1 Maintain in full force and effect, perform (subject to Section 5.2) the obligations of Borrower, each Guarantor and each Non-Guarantor under, preserve, protect and defend the material rights of Borrower, each Guarantor and each Non-Guarantor under and take all reasonable action necessary to prevent termination (except by expiration in accordance with its terms) of each and every Major Project Document, including (where Borrower, a Guarantor or a Non-Guarantor, as applicable, in the exercise of its business judgment deems it proper) prosecution of suits to enforce any material right of such Loan Party thereunder and enforcement of any material claims with respect thereto; provided, however, that upon the occurrence and during the continuance of an Event of Default if Administrative Agent requests that certain actions be taken and the applicable Loan Party (other than Ormat Technologies) fails to take the requested actions within five Banking Days, Administrative Agent may enforce in its own name or in such Loan Party's name, such rights of such Loan Party in the manner and to the extent provided in the Security Agreements and the other Credit Documents. 5.12.2 From time to time, execute, acknowledge, record, register, deliver and/or file all such notices, statements, instruments and other documents (including any memorandum of lease or other agreement, financing statement, continuation statement, certificate of title or estoppel certificate), relating to the Loans stating the interest and charges then due and any known Events of Default or Potential Events of Default, and take such other steps as may be necessary or advisable to render fully valid and enforceable under all applicable laws the rights, liens and priorities of the Secured Parties with respect to all Collateral and other security from 42 time to time furnished under this Agreement and the other Credit Documents or intended to be so furnished, in each case in such form and at such times as shall be reasonably requested by Administrative Agent, and pay all reasonable fees and expenses (including reasonable attorneys' fees) incident to compliance with this Section 5.12.2. 5.12.3 If Borrower, any Guarantor or any Non-Guarantor that previously has executed and delivered a Deed of Trust shall at any time acquire any real property or leasehold or other interest in real property not covered by any such Deed of Trust, then promptly upon such acquisition, execute, deliver and record a supplement to the applicable Deed of Trust, reasonably satisfactory in form and substance to Administrative Agent, subjecting the real property or leasehold or other interests to the Lien created by such Deed of Trust. If reasonably requested by Administrative Agent, Borrower shall obtain an appropriate title insurance policy endorsement or supplement, as applicable, insuring the Lien of the Secured Parties in such additional property, subject only to Permitted Liens and other exceptions to title approved by Administrative Agent. 5.12.4 Upon the request of Administrative Agent, execute and deliver all documents as shall be necessary or that Administrative Agent shall reasonably request in connection with the rights and remedies of Administrative Agent and the Banks under the Operative Documents, and perform, such other reasonable acts as may be necessary to carry out the intent of this Agreement and the other Credit Documents. 5.12.5 Take such action, including the execution and filing of all such documents and instruments, as may be necessary to effect and continue the appointment of CT Corporation System as its agent for service of process in full force and effect, or if necessary by reason of any fact or condition relating to such agent, to replace such agent (but only after having given notice and evidence thereof to Administrative Agent). 5.13 POST-CLOSING CONSENTS. 5.13.1 On or before the date which is 60 days after the Closing Date or, in respect of Major Project Documents related to the SIGC Project, on or before March 31, 2004, cause each applicable Project Company and each applicable Major Project Participant in respect of the Major Project Documents described in Exhibit E-2, respectively, to enter into (a) a Consent in substantially the form of Exhibit E-1 or (b) in the case of the Major Project Documents to which Edison or IID is a counterparty, a Consent substantially in the form customarily provided by such Persons in substantially similar circumstances. 5.13.2 With respect to any Additional Project Document entered into by HGC, HFC, Mammoth Lakes (at any time after a Mammoth Ownership Event) or SIGC (at any time after a Lease Buyout), cause the applicable counterparty to execute and deliver to Administrative Agent (a) a Consent in substantially the form of Exhibit E-1 or (b) in the case of any Additional Project Document to which Edison or IID is a counterparty, a Consent substantially in the form customarily provided by such Persons in substantially similar circumstances. 5.14 INSURANCE. Maintain in effect at all times the types of insurance set forth on Exhibit K, in the amounts and on the terms and conditions specified therein, with insurance companies 43 rated "A-" or better, with a minimum size rating of "IX", by Best's Insurance Guide and Key Ratings (or an equivalent rating by another nationally recognized insurance rating agency of similar standing if Best's Insurance Guide and Key Ratings shall no longer be published). 5.15 TAXES. Timely file all federal, state and local tax returns and reports that it is required to file, and pay all taxes, material assessments, utility charges, fees and other governmental charges it is required to pay to the extent due. The applicable Loan Party may contest in good faith any such taxes, assessments and other charges and, in such event, may permit the taxes, assessments or other charges so contested to remain unpaid during any period, including appeals, when such Loan Party is in good faith contesting the same, so long as (a) reserves to the extent required by GAAP have been established in an amount sufficient to pay any such taxes, assessments or other charges, accrued interest thereon and potential penalties or other costs relating thereto, or other adequate provision for the payment thereof shall have been made and maintained at all times during such contest, (b) enforcement of the contested tax, assessment or other charge is effectively stayed for the entire duration of such contest, and (c) any tax, assessment or other charge determined to be due, together with any interest or penalties thereon, is promptly paid after resolution of such contest. 5.16 EMINENT DOMAIN. If an event of eminent domain shall occur, (a) diligently pursue all its rights to compensation against the relevant Governmental Instrumentality, (b) not, without the written consent of the Required Banks, compromise or settle any claim against such Governmental Instrumentality, and (c) pay or apply all eminent domain proceeds in accordance with the Depositary Agreement. Borrower, the Guarantors and the Non-Guarantors consent to, and agree not to object to or otherwise impede or impair, the participation of Administrative Agent in any eminent domain proceedings, and such Loan Party shall from time to time deliver to Administrative Agent all documents and instruments requested by it to permit such participation. 5.17 GE LEASE SOLUTION. Use its best efforts to (a) extend the term of the GE Lease until a date no earlier than the Maturity Date on terms and conditions satisfactory to the Required Banks, in their respective reasonable business judgment (it being acknowledged and agreed that the Required Banks may not approve any such extension or terms if the annual rent or lease payment under the GE Lease is an amount in excess of (i) 0.50 multiplied by (ii) the difference between (A) the projected Project Revenues generated by SIGC and (B) the projected amount of SIGC's O&M Costs (excluding any such rent or lease payments); or (b) purchase the SIGC Project from GECC (a "Lease Buyout") on terms and conditions reasonably acceptable to the Required Banks (it being acknowledged and agreed that the Required Banks may not approve any such purchase if the purchase price is to be paid by Borrower, any Guarantor or any Non-Guarantor, unless the funds used to pay such purchase price are Equity Funds and/or Subordinated Loans and are supplied to Borrower, the applicable Guarantor or the applicable Non-Guarantor by Sponsor or are raised by the Loan Parties in a financing contemplated by Section 5 of the Fee Letter). Upon any such Lease Buyout, the Loan Parties (other than Ormat Technologies and Sponsor) shall concurrently take all actions necessary to (i) grant Administrative Agent, for the benefit of the Secured Parties, a first-priority perfected Lien on the 44 assets of SIGC, ORNI, OrHeber 2 and OrHeber 3 (subject to any Permitted Liens), pursuant to (A) a Deed of Trust, in substantially the form of Exhibit D-1 (with respect to SIGC only) and (B) a Security Agreement, in substantially the form of Exhibit D-2; (ii) pledge all of the ownership interests in SIGC, OrHeber 2 and OrHeber 3 to Administrative Agent, for the benefit of the Secured Parties, pursuant to a Pledge Agreement in substantially the form of Exhibit D-3, (iii) provide a guaranty by SIGC, ORNI, OrHeber 2 and OrHeber 3 of the Obligations of the other Loan Parties (other than Ormat Technologies and Sponsor) under the Credit Documents, in substantially the form of Exhibit D-5, and (iv) provide to Administrative Agent the following documents related to such Lease Buyout: (A) executed copies of the purchase documents, (B) Consents as described in Section 5.13.2, (C) each of the documents described in Section 3.1.1 relevant to the Lease Buyout, (D) opinions of counsel as described in Section 3.1.8 and (E) title insurance policies (with a survey exception) and surveys (which surveys shall be completed within the Applicable Post-Closing Period) substantially similar to those described in Section 5.20. The successful consummation of a transaction described in clause (a) or (b) above shall be referred to herein as the "Lease Solution". If the Lease Solution is not implemented, then SIGC shall properly exercise its initial three-year renewal option under the GE Lease on or before September 30, 2004. No Loan Party shall exercise any other renewal option or purchase option under the GE Lease. Administrative Agent, the Banks and Borrower hereby acknowledge that the purchase of the SIGC Project from Owner Participant pursuant to the terms of the Purchase Agreement, dated as of November 14, 2003, by and between Ormat Technologies and Owner Participant (without giving effect to any amendments or waivers thereto which have not been approved in writing by Administrative Agent) shall be deemed to be, upon the successful consummation of the acquisition contemplated thereby, a Lease Buyout and a Lease Solution. 5.18 MAMMOTH LAKES SECURITY. Upon any Mammoth Ownership Event, concurrently take all actions necessary to (a) grant Administrative Agent, for the benefit of the Secured Parties, a first-priority perfected Lien on the assets of Mammoth Lakes (subject to any Permitted Liens), pursuant to (i) a Deed of Trust, in substantially the form of Exhibit D-1 and (ii) a Security Agreement, in substantially the form of Exhibit D-2, (b) pledge all of the ownership interests in Mammoth Lakes to Administrative Agent, for the benefit of the Secured Parties, pursuant to a Pledge Agreement in substantially the form of Exhibit D-3, (c) provide a guaranty by Mammoth Lakes of the obligations of the other Loan Parties (other than Ormat Technologies and Sponsor) under the Credit Documents, in substantially the form of Exhibit D-5 and (d) provide to Administrative Agent the following documents related to such Mammoth Ownership Event: (A) executed copies of the purchase or transfer documents, (B) Consents as described in Section 5.13.2, (C) each of the documents described in Sections 3.1.1 and 3.1.3 (including the partnership agreement of Mammoth Lakes), (D) opinions of counsel as described in Section 3.1.8 and (E) title insurance policies (with a survey exception) and surveys (which surveys shall be completed within the Applicable Post-Closing Period) substantially similar to those described in Section 5.20. 5.19 FERC MATTERS. 5.19.1 Cause each applicable Project Company to prepare and file with FERC, within 20 Banking Days of the Closing Date, a self-certification using FERC Form 556 updating 45 the Project's prior certification or self-certification, as applicable, to include any changes that have occurred as a result of the Acquisition. Each such self-certification shall comply with all applicable FERC rules and regulations. 5.19.2 Cause each applicable Project Company to receive all necessary approvals under the law (including applicable FERC rules and regulations) before selling any electrical energy to any Person other than Edison. 5.20 POST-CLOSING REAL ESTATE MATTERS. Within the Applicable Post-Closing Period, provide to Administrative Agent updated ALTA surveys and updated ALTA lender's title insurance policies (reflecting such updated surveys) that cover all of the real property interests held by the Project Companies (based on each Project as it exists as of the Closing Date) (such provision by Borrower, the "Post-Closing Title Work"); provided, that (a) no such surveys or title insurance policies shall be provided with respect to those interests (and the real property associated therewith) that Administrative Agent determines do not require surveying and (b) no lender's title insurance policies shall be provided for any real property interests located in Mono County, California. Such updated surveys and title insurance policies shall demonstrate that the Project Companies have all material real property interests necessary to operate the Projects in accordance with the Projections, and shall not show any material title exceptions or Liens that could reasonably be expected to have a Material Adverse Effect (other than the Title Exceptions and the Liens created under the Collateral Documents) which were not disclosed on the surveys delivered prior to November 14, 2003 or the title policies or commitments delivered as of the Closing Date. 5.21 MINIMUM MWH. If any of the Projects fails to generate in any year 97% or more of the anticipated megawatt-hours (determined by reference to the Projections), at Borrower's cost, promptly deliver to Administrative Agent an updated GeothermEx Report. 5.22 CAPITAL EXPENDITURES. With respect to the capital expenditures anticipated to be made during the 2004 and 2005 calendar years (as set forth in the GeothermEx Report, the Independent Engineer's Report and the Projections), cause each applicable Project Company to make all such capital expenditures and in all material respects complete such capital expenditure projects in the manner and in the time provided for in the GeothermEx Report, the Independent Engineer's Report and the Projections; provided, however, that with respect to the Mammoth Project, Mammoth Lakes shall not be obligated to undertake such capital expenditures unless and to the extent that the Constellation Entities shall have approved such capital expenditures as and to the extent required under the Governing Documents of Mammoth Lakes. Borrower, OrMammoth and Mammoth Lakes shall use their respective commercially reasonable efforts to cause the Constellation Entities to grant all approvals necessary under the Governing Documents of Mammoth Lakes to undertake and complete such capital expenditures. 5.23 CALCULATIONS. In no event later than fifteen Banking Days after each Principal Repayment Date, calculate and deliver to Administrative Agent (a) the Average Debt Service Coverage Ratio for the twelve-month period immediately preceding such Principal Repayment Date and, for each Principal Repayment Date on or before December 31, 2004, the Blended Debt Service Coverage Ratio for such Principal Repayment Date, (b) Borrower's then-current forecast 46 of cash flow and (c) each Project's actual megawatt-hours for the applicable prior quarter or year. The calculations hereunder shall be used in determining (i) the application and distribution of funds pursuant to Section 6.19 of this Agreement and Sections 3.1.2(b) and 3.6.2 of the Depositary Agreement and (ii) compliance with Sections 5.21 and 7.1.17 of this Agreement. 5.24 INDEMNIFICATION. 5.24.1 Indemnify, defend and hold harmless Administrative Agent and each Bank, and in their capacities as such, their respective officers, directors, shareholders, controlling Persons, employees and agents (collectively, the "Indemnitees") from and against and reimburse the Indemnitees for: (a) any and all claims, obligations, liabilities, losses, damages, injuries (to Person, property, or natural resources), penalties, actions, suits, judgments, costs and expenses (including reasonable attorney's fees) of whatever kind or nature, whether or not well founded, meritorious or unmeritorious, demanded, asserted or claimed against any such Indemnitee (collectively, "Subject Claims") in any way relating to, or arising out of or in connection with this Agreement or the other Operative Documents to which it is a party, except for claims by a Loan Party against an Indemnitee that are in whole or in part successful; (b) any and all Subject Claims arising in connection with the Release or presence of any Hazardous Substances at any Project, whether foreseeable or unforeseeable, including all costs of removal, investigation, remediation and disposal of such Hazardous Substances, all reasonable costs required to be incurred in (i) determining whether any Project is in compliance and (ii) causing any Project to be in compliance, with all applicable Legal Requirements, all reasonable costs associated with claims for damages to Persons or property, and reasonable attorneys' and consultants' fees and court costs; and (c) any and all Subject Claims in any way relating to, or arising out of or in connection with any claims, suits or liabilities against any Loan Party to the extent related to any of the Projects or the transactions contemplated by the Operative Documents. 5.24.2 The foregoing indemnities shall not apply with respect to an Indemnitee to the extent arising as a result of the gross negligence or willful misconduct of such Indemnitee, but shall continue to apply to other Indemnitees. 5.24.3 The provisions of this Section 5.24 shall survive foreclosure of the Collateral Documents and satisfaction or discharge of the Obligations, and shall be in addition to any other rights and remedies of Administrative Agent and any Bank. 5.24.4 In case any action, suit or proceeding shall be brought against any Indemnitee, such Indemnitee shall notify Borrower of the commencement thereof, and Borrower shall be entitled, at Sponsor's expense, acting through counsel reasonably acceptable to such Indemnitee, to participate in the defense thereof. 47 5.24.5 Any Indemnitee shall be entitled to compromise or settle such Subject Claim. 5.24.6 Upon payment of any Subject Claim by Borrower pursuant to this Section 5.24 or other similar indemnity provisions contained herein to or on behalf of an Indemnitee, Borrower, without any further action, shall be subrogated to any and all claims that such Indemnitee may have relating thereto, and such Indemnitee shall cooperate with Borrower and Borrower's insurance carrier and give such further assurances as are necessary or advisable to enable Borrower vigorously to pursue such claims. 5.24.7 Any amounts payable by Borrower pursuant to this Section 5.24 shall be regularly payable within 10 Banking Days after Borrower receives an invoice for such amounts from any applicable Indemnitee, and if not paid within such 10 Banking Day period shall bear interest at the lesser of (a) the Default Rate and (b) the maximum rate payable under applicable Legal Requirements. The obligations of Borrower under this Section 5.24 shall be deemed to be part of the Obligations. 5.24.8 Notwithstanding anything to the contrary set forth herein, Borrower shall not, in connection with any one legal proceeding or claim, or separate but related proceedings or claims arising out of the same general allegations or circumstances, in which the interests of the Indemnitees do not materially differ, be liable to the Indemnitees (or any of them) under any of the provisions set forth in this Section 5.24 for the fees and expenses of more than one separate firm of attorneys (which firm shall be selected by the affected Indemnitees, or upon failure to so select, by Administrative Agent). 5.24.9 If, for any reason whatsoever, the indemnification provided under this Section 5.24 is unavailable to any Indemnitee or is insufficient to hold it harmless to the extent provided in this Section 5.24, then provided such payment is not prohibited by or contrary to any applicable Legal Requirement or public policy, Borrower shall contribute to the amount paid or payable by such Indemnitee as a result of the Subject Claim in such proportion as is appropriate to reflect the relative economic interests of Borrower and its Affiliates on the one hand, and such Indemnitee on the other hand, in the matters contemplated by this Agreement as well as the relative fault of Borrower (and its Affiliates) and such Indemnitee with respect to such Subject Claim, and any other relevant equitable considerations. 5.24.10 Nothing in this Section 5.24 shall constitute a release by Borrower of any claims that it has as a result of a breach or a default by any of the Secured Parties of their respective obligations under this Agreement or any other Credit Document. ARTICLE 6 NEGATIVE COVENANTS Borrower covenants and agrees that until the repayment in full in cash of all Obligations (other than those contingent Obligations that are intended to survive the termination of this Agreement and the other applicable Credit Documents) Borrower shall not, and shall cause each Guarantor and Non-Guarantor, as applicable, not to: 48 6.1 INDEBTEDNESS. Create, incur or suffer to exist any Debt of Borrower, the Guarantors and the Non-Guarantors, other than Permitted Debt in an aggregate amount (other than the Loans) not to exceed at any time 8% of the aggregate of (a) the amount of the Total Senior Loan Commitment and (b) if applicable, the Lease Financing. 6.2 LIENS. Create, assume or suffer to exist any Lien, securing a charge or obligation on any Project or on any of the Collateral or of any Loan Party (other than Sponsor and Ormat Technologies), real or personal, whether now owned or hereafter acquired, except Permitted Liens. 6.3 SALE OR LEASE OF ASSETS. Sell, lease, assign, transfer or otherwise dispose of assets, whether now owned or hereafter acquired, except (a) in the ordinary course of its business and as contemplated by the Project Documents, (b) to the extent that such asset is unnecessary, worn out or no longer useful or usable in connection with the operation or maintenance of the applicable Project, (c) any asset with a fair market value not in excess of $100,000, or, in any one calendar year, assets with an aggregate fair market value not in excess of $500,000, and, in each case, at fair market value; provided that, in the case of clause (a), (b) or (c), no such sale, lease, assignment, transfer or other disposition shall be permitted if such sale, lease, assignment, transfer or other disposition could reasonably be expected to have a Material Adverse Effect. Upon any such sale, lease, assignment, transfer or other disposition of any such assets, all Liens in favor of any Secured Party, including the Liens created pursuant to the Collateral Documents, relating to such asset shall be released. 6.4 CHANGE IN BUSINESS. Change the nature of its business or expand its business beyond the business contemplated by the Operative Documents and the Lease Financing. Borrower shall conduct no business, hold no assets and have no liabilities, other than (a) its ownership interests in OrHeber 1, OrHeber 2, OrHeber 3, ORNI, OrMammoth, SIGC, HGC and HFC and (b) its rights, liabilities and obligations under its Governing Documents, the Lease Financing and the Credit Documents to which it is a party. Each of OrHeber 1 OrHeber 2, OrHeber 3, ORNI and OrMammoth shall conduct no business, hold no assets and have no liabilities, other than (i) its ownership interests in the applicable Guarantor or Non-Guarantor and (ii) its liabilities under its Governing Documents, the Acquisition Agreement, the agreements set forth on Exhibit G-5, and the Credit Documents to which it is a party. Each Project Company shall conduct no business, hold no assets and have no liabilities, other than in connection with the business of operating and using its applicable Project. 6.5 CHANGE OF NAME. Change its name, principal place of business, organizational identification number or jurisdiction of incorporation or formation, as applicable, without giving Administrative Agent at least 45 days' prior written notice. 6.6 INVESTMENTS. Make any investments (whether by purchase of stocks, bonds, notes or other securities, loan, extension of credit, advance or otherwise) other than (a) Permitted Investments, (b) the Lease Buyout and (c) the Mammoth Ownership Event; provided that, for purposes of this Section 6.6, capital expenditures provided for in the then-current Capital Expenditures Budget shall not constitute investments. 49 6.7 FORMATION OF SUBSIDIARIES. Create any new Subsidiary or become a joint venturer in any joint venture. 6.8 FUNDAMENTAL CHANGES. Enter into any merger, consolidation or amalgamation, or liquidate, dissolve or wind up or terminate itself (other than a Permitted Reorganization). 6.9 TRANSACTIONS WITH AFFILIATES. 6.9.1 Enter into any transaction or series of transactions relating to any Project with or for the benefit of an Affiliate without the prior written approval of the Required Banks, other than (a) the Project Documents in effect on the Closing Date, and the transactions permitted thereby, (b) any employment, noncompetition or confidentiality agreement entered into by such Loan Party with any of its employees, officers or directors in the ordinary course of business, (c) the Project Documents entered into by any Project Company and any such Affiliate for the purpose of providing the applicable Project with electrical energy to service its internal power requirements (provided that (i) the IID is obligated to provide such power requirements in the event that such Affiliate cannot serve such power requirements and (ii) such Project Document is materially more favorable to such Project Company than any Project Document which would be obtainable for a comparable transaction with the IID), (d) transactions with a fair market value not in excess of $500,000 in any one calendar year which are no less favorable to such Project Company than would be obtainable for a comparable transaction in arms-length dealings with an unrelated third party, and (e) as otherwise expressly permitted or contemplated by the Credit Documents. Notwithstanding anything to the contrary contained in this Section 6.9.1, the applicable Project Company may enter into any Project Document with respect to the capital expenditures to be performed during the 2004 or 2005 calendar year in the manner described in the GeothermEx Report or the Independent Engineer's Report without the consent of Administrative Agent or any of the other Banks. 6.9.2 Enter into any operation and maintenance agreements (including any O&M Agreement) or engineering, procurement or construction contracts relating to any Project pursuant to which such Project Company is obligated to pay such Affiliate (including any Operator) any profits or bonuses. 6.10 CERTAIN RESTRICTIONS ON CHANGES TO GOVERNING DOCUMENTS. Amend, supplement, give any consent under or otherwise modify its Governing Documents in a manner which is inconsistent with or violates the terms of, or could reasonably be expected to prevent compliance with any of the terms of, any Credit Document or any Major Project Document or could reasonably be expected to result in a Material Adverse Effect. 6.11 REGULATIONS. Directly or indirectly apply any part of the proceeds of any Loan, any Equity Funds, and any Subordinated Loans received by Borrower or other funds or revenues received by any Subsidiary thereof to the "buying", "carrying" or "purchasing" of any margin stock within the meaning of Regulations T, U or X of the Federal Reserve Board, or any regulations, interpretations or rulings thereunder. 50 6.12 AMENDMENT OF PROJECT DOCUMENTS. 6.12.1 Terminate (other than in accordance with its terms), amend, supplement or otherwise modify (except for any amendments to the Material Real Property Documents, to the extent that such amendments are in the form attached as Exhibit B to that certain Settlement Agreement dated October 6, 2003, among HGC, HFC, SIGC, Covanta and each of the other parties thereto), or grant any waivers or consents under, or agree to any contract variation or discretionary or other change that requires the consent or agreement of such Loan Party (each, a "Project Document Modification") under any Major Project Documents, including the GE Lease and the Power Purchase Agreements. 6.12.2 Agree to any Project Document Modification under any Project Document other than a Major Project Document unless such Project Document Modification (a) could not reasonably be expected to have a Material Adverse Effect, (b) is not reasonably likely to materially impair or reduce the maximum capacity, value, efficiency, utility, output, performance, reliability, durability or availability of the applicable Project, or materially increase O&M Costs, or materially decrease Project Revenues, and (c) is not otherwise prohibited under the Credit Documents. 6.13 ASSIGNMENT. 6.13.1 Assign its rights under any of the Credit Documents or under any Major Project Document to any Person (other than in connection with a Permitted Reorganization). 6.13.2 Consent to the assignment of any obligations under any Major Project Document by any counterparty thereto (other than any assignment made (a) by GECC to SIGC in connection with the Lease Buyout, (b) by Sponsor of the SIGC O&M Agreement pursuant to Section 5.10.3 or (c) by any counterparty to a Material Real Property Document). 6.14 ACCOUNTS. Maintain, establish or use any account other than the Accounts; provided that (a) SIGC may maintain each account which it is required to maintain under the GE Lease (provided, further, that, upon the termination of the GE Lease, all amounts on deposit in the accounts maintained under the GE Lease and which are released to SIGC shall be transferred to the Revenue Account), (b) Mammoth Lakes may maintain each account which it is required to maintain under its Governing Documents or that is existing on the Closing Date (provided, further, that, upon any Mammoth Ownership Event, all amounts on deposit in such accounts shall be transferred to the Revenue Account), and (c) each of OrHeber, OrMammoth and Borrower may maintain a checking account (an "Operating Account") with a maximum aggregate balance not to exceed $60,000. 6.15 HAZARDOUS MATERIALS. Release into the environment any Hazardous Substances in violation of any Hazardous Substance Laws, Legal Requirements or the Project's Permits, except for (a) temporary unplanned exceedences not allowed under any Project's Permits, which temporary unplanned exceedences could not reasonably be expected to have a Material Adverse Effect and which a Loan Party is diligently and in good faith attempting to correct and (b) unintentional violations with respect to which (i) the Release is not continuing or 51 reasonably likely to re-occur and is not reasonably susceptible to prevention or cure, (ii) there are no unsatisfied reporting and/or remediation requirements under applicable Hazardous Substance Laws, Legal Requirements or applicable Permits, (iii) no non-monetary penalties or sanctions have been imposed or are reasonably likely to be imposed (except for the remediation of such violation) under applicable Hazardous Substance Laws, Legal Requirements or applicable Permits, and (iv) the Release could not reasonably be expected to materially impair the value of any Site or any other Collateral, and could not otherwise reasonably be expected to have a Material Adverse Effect. 6.16 ADDITIONAL PROJECT DOCUMENTS. Enter into, or become a party to, any Additional Project Document without the consent of Administrative Agent, which consent shall not unreasonably be withheld, conditioned or delayed. Notwithstanding anything to the contrary contained in this Section 6.16, the applicable Project Company may enter into any Project Document with respect to the capital expenditures to be performed during the 2004 or 2005 calendar year in the manner described in the GeothermEx Report or the Independent Engineer's Report without the consent of Administrative Agent or any of the other Banks. 6.17 REAL PROPERTY ACQUISITIONS. Acquire or lease any real property or other interest in real property (excluding the acquisition (but not the exercise) of any options to acquire any such interests in real property) other than the real property interests acquired prior to the Closing Date, unless Borrower shall have delivered to Administrative Agent a "Phase I" environmental report with respect to such real property and, if a "Phase II" environmental review is warranted (as reasonably determined by Administrative Agent upon its review of such "Phase I" environmental report), a "Phase II" environmental report, in each case, along with a corresponding reliance letter from the consultant issuing such report(s), confirming, in form and substance reasonably satisfactory to Administrative Agent, either that no Hazardous Substances were found in, on or under such real property of a nature or in concentrations that could reasonably be expected to impose on the Loan Parties a material environmental liability (other than Ormat Technologies or Sponsor). 6.18 ERISA. Maintain, contribute to, or become obligated to contribute to, or become subject to any liability under or relating to any ERISA Plan. 6.19 DIVIDENDS. Declare or make any distribution or dividend, unless the following conditions have been satisfied (the "Restricted Payments Conditions"): (a) such dividend or distribution is on a date occurring within 45 days after the immediately preceding Principal Repayment Date; (b) no Event of Default or Potential Event of Default has occurred and is continuing as of the date of such applicable dividend or distribution, and such dividend or distribution would not cause an Event of Default or Potential Event of Default; (c) with respect to each such dividend or distribution which is on a date occurring prior to December 31, 2004, (i) the Blended Debt Service Coverage Ratio is greater than or equal to 1.25 to 1, and (ii) the Average Debt Service Coverage Ratio for each quarterly 52 period immediately preceding or ending on the applicable Principal Repayment Date (but after the Closing Date) is greater than or equal to the projected Average Debt Service Coverage Ratio for each such quarterly period (as set forth in the Projections); (d) with respect to each such dividend or distribution which is on a date occurring on or after December 31, 2004, the Average Debt Service Coverage Ratio for the four-quarter period immediately preceding the applicable Principal Repayment Date is greater than or equal to 1.25 to 1; and (e) Borrower's forecast of cash flow, delivered to Administrative Agent pursuant to Section 5.23 and approved by Administrative Agent in its sole discretion, does not indicate an inability to amortize the Loans (due to technical reasons and/or contractual issues). Notwithstanding the foregoing, nothing in this Section 6.19 shall prohibit (i) distributions or dividends by the Guarantors or Non-Guarantors to Borrower or (ii) distributions or dividends by Borrower to Sponsor pursuant to Section 2.2 of the Sponsor Guaranty. 6.20 POWER SALES. 6.20.1 With respect to Borrower, any Guarantor or any Non-Guarantor (other than the Project Companies), sell any electrical energy, capacity or ancillary services to any Person other than sales of renewable energy credits. 6.20.2 With respect to any Project Company, sell any electrical energy, capacity or ancillary services to any Person, other than to Edison under the Power Purchase Agreements and sales of renewable energy credits. 6.21 CAPITAL EXPENDITURES; GEOTHERMAL RESOURCE DEVELOPMENT. Without the prior written consent of the Required Banks (which consent may be withheld in their respective sole discretion), cause any Loan Party to take any action (including the making of capital expenditures) for the purpose of (a) expanding any of the geothermal fields which currently service any of the Projects, (b) developing new geothermal resources at or contiguous to any of the Sites (including the Mammoth Lakes and HFC geothermal fields) or (c) drilling new wells of any type at any of the Sites (including the Mammoth Lakes and HFC geothermal fields); provided that no such consent shall be required for any such actions related to the Projects which are to be performed during the 2004 or 2005 calendar year in the manner described in the GeothermEx Report and the Independent Engineer's Report. The parties hereby acknowledge that no such consent shall be required for geothermal field maintenance (including pumps, well-workovers, replacement wells and make-up wells) unless such maintenance could reasonably be expected to have a Material Adverse Effect. 6.22 INTEREST RATE AGREEMENTS. Secure any of its obligations under any Interest Rate Agreement with any portion of the Collateral. ARTICLE 7 EVENTS OF DEFAULT; REMEDIES 53 7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an event of default (each, an "Event of Default") hereunder: 7.1.1 Failure to Make Payments. Any Loan Party shall fail to perform in accordance with the terms of this Agreement or any other Credit Document its obligation (if any) to pay (a) any principal on any Loan on the date that such sum is due, (b) any interest on any Loan within three days after the date such sum is due, (c) any scheduled fee, cost, charge, Make-Whole Premium, or sum due hereunder or under any other Credit Documents within three days of the date that such sum is due, or (d) any other fee, cost, charge or other sum due under this Agreement or the other Credit Documents within five days after written notice that such sum is due. 7.1.2 Bankruptcy; Insolvency. Any Loan Party (other than Ormat Technologies) or any other Major Project Participant (so long as such Major Project Participant shall have outstanding or unperformed obligations (other than warranty obligations) under the Operative Document to which it is a party) shall become subject to a Bankruptcy Event; provided that, solely with respect to a Bankruptcy Event with respect to a Major Project Participant other than any Loan Party (other than Ormat Technologies), no Event of Default shall occur as a result of such Bankruptcy Event if Borrower is attempting to obtain a Replacement Obligor for the affected party and does so within 30 days thereof. 7.1.3 Defaults Under Other Indebtedness. Borrower, any Guarantor, any Non-Guarantor or, prior to the termination of the Sponsor Guaranty pursuant to the terms hereof and thereof, Sponsor shall default for a period beyond any applicable grace period (a) in the payment of any principal, interest or other amount due under any agreement involving Debt and the outstanding principal amount or amounts payable under any such agreement equals or exceeds (i) in the case of Borrower or any Project Company, $1,000,000 in the aggregate, (ii) in the case of any Guarantor or Non-Guarantor that is not a Project Company, $100,000 in the aggregate and (iii) in the case of Sponsor, $5,000,000 in the aggregate, or (b) in the performance of any obligation due under any agreement involving Debt if in the case of this clause (b), pursuant to such default, the holder of the obligation concerned has the right to accelerate the maturity of any Debt evidenced thereby which equals or exceeds (i) in the case of Borrower or any Project Company, $1,000,000 in the aggregate, (ii) in the case of any Guarantor or Non-Guarantor that is not a Project Company, $100,000 in the aggregate and (iii) in the case of Sponsor, $5,000,000 in the aggregate. 7.1.4 Judgments. (a) A final judgment or judgments shall be entered against (i) Sponsor, at any time prior to the termination of the Sponsor Guaranty pursuant to the terms hereof and thereof, in the amount of $5,000,000 or more individually or (ii) Borrower, any Guarantor or any Non-Guarantor in the amount of $1,000,000 or more individually or in the aggregate or involving injunctive relief requiring suspension or abandonment of the operation of a Project (other than, in each case, (A) a judgment which is fully covered by insurance, discharged, bonded pending appeal or satisfied within 60 days after its entry, or (B) a judgment, the execution of which is 54 effectively stayed within 60 days after its entry but only for 60 days after the date on which such stay is terminated or expires). (b) Any order, judgment or decree shall be entered against any Loan Party (other than Ormat Technologies) decreeing the dissolution or split up of such Person and such order shall remain undischarged or unstayed for a period in excess of 30 days. 7.1.5 ERISA. If any Loan Party (other than Ormat Technologies) or any ERISA Affiliate should establish, maintain, contribute to or become obligated to contribute to any ERISA Plan and (a) a Reportable Event shall have occurred with respect to any ERISA Plan and, within 30 days after the reporting of such Reportable Event to Administrative Agent by Borrower (or Administrative Agent otherwise obtaining knowledge of such event) and the furnishing of such information as Administrative Agent may reasonably request with respect thereto, Administrative Agent shall have notified Borrower in writing that (i) Administrative Agent or Majority Banks has made a determination that, on the basis of such Reportable Event, there are reasonable grounds for the termination of such ERISA Plan by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer such ERISA Plan and (ii) as a result thereof, an Event of Default exists hereunder; or (b) a trustee shall be appointed by a United States District Court to administer any ERISA Plan; or (c) the PBGC shall institute proceedings to terminate any ERISA Plan; or (d) a complete or partial withdrawal by any Loan Party (other than Ormat Technologies) or any ERISA Affiliate from any Multiemployer Plan shall have occurred and, within 30 days after the reporting of any such occurrence to Administrative Agent by Borrower (or Administrative Agent otherwise obtaining knowledge of such event) and the furnishing of such information as Administrative Agent or Majority Banks may reasonably request with respect thereto, Administrative Agent shall have notified Borrower in writing that Administrative Agent has made a determination that, on the basis of such occurrence, an Event of Default exists hereunder; provided that before any event shall constitute an Event of Default under this Section 7.1.5, the events described in this Section 7.1.5 must, individually or together, result in total liability to Borrower, any applicable Loan Party (other than Ormat Technologies) and all ERISA Affiliates in excess of $5,000,000. 7.1.6 Breach of Terms of Agreement. (a) Defaults Without Cure Periods. (i) Any Loan Party shall fail to perform or observe any of the covenants set forth in Section 5.1, 5.8(a), 5.12.2, 5.14, 5.17 or 5.18 or Article 6 of this Agreement; or (ii) Sponsor shall fail to perform or observe any of the covenants set forth in Article 2 or Section 4.1 or 4.6 of the Sponsor Guaranty. (b) Defaults With Fifteen Day Cure Periods. Borrower shall fail to perform or observe any of the covenants set forth in Section 5.6.2 of this Agreement or Sponsor shall fail to perform or observe any of the covenants set forth in Section 4.7 or 4.8 of the Sponsor Guaranty, and such failure shall continue unremedied for a period of fifteen days after such Loan Party becomes aware thereof or receives written notice thereof from Administrative Agent. (c) Other Defaults. Any Loan Party shall fail to perform or observe any of the covenants set forth hereunder or any other Credit Document not otherwise specifically provided 55 for in Section 7.1.6(a), Section 7.1.6(b) or elsewhere in this Article 7, and such failure shall otherwise continue unremedied for a period of 30 days after such Loan Party becomes aware thereof or receives written notice thereof from Administrative Agent; provided, however, that, if (i) such failure cannot be cured within such 30 day period, (ii) such failure is capable of being cured, (iii) such Loan Party is proceeding with diligence and in good faith to cure such failure, (iv) the existence of such failure has not had and could not, after considering the nature of the cure, be reasonably expected to have a Material Adverse Effect, and (v) Administrative Agent shall have received an officer's certificate signed by a Responsible Officer to the effect of clauses (i), (ii), (iii) and (iv) above and stating what action such Loan Party is taking to cure such failure, then such 30 day cure period shall be extended to such date, not to exceed a total of 90 days, as shall be necessary for such Loan Party diligently to cure such failure. 7.1.7 Loss of Collateral. Any substantial portion of the Collateral is damaged, seized or appropriated without appropriate insurance proceeds (subject to the underlying deductible) or without fair value being paid therefor so as to allow replacement of such Collateral and/or prepayment of Loans and to allow the Loan Parties (other than Ormat Technologies) to continue satisfying their respective obligations hereunder and under the other Operative Documents. 7.1.8 Regulatory Status. (a) Any Loan Party (other than Ormat Technologies) shall suffer an Adverse PUHCA Event or shall otherwise become subject to, or not exempt from financial, organizational or rate regulation as a "holding company" or a "subsidiary company" of a "holding company" under PUHCA, as a "public utility" or "electric utility" under the FPA, or as a public utility under the laws of the State of California. (b) Any of the Projects shall cease to be a QF. 7.1.9 Abandonment. Any Project shall be abandoned or operation thereof shall be suspended for a period of more than 30 consecutive days for any reason (other than force majeure); provided that a forced outage or scheduled outage of a Project shall not constitute abandonment or suspension of the Project, so long as the applicable Project Company is diligently attempting to end such outage and such outage does not result in a default under any Major Project Document. 7.1.10 Unenforceability of Credit Documents. (a) Any material provision of any Credit Document shall cease to be in full force and effect (other than by reason of a release of Collateral thereunder in accordance with the terms of the Credit Documents, the satisfaction in full of the obligations of the Loan Parties under the Credit Documents or any other termination of a Credit Document in accordance with the terms thereof) or any Credit Document shall be declared null and void by a Governmental Instrumentality. 56 (b) Subject to Section 3.3, Administrative Agent shall not have a valid and perfected Lien in the Collateral. Subject to Section 3.3, Administrative Agent shall not have a valid and perfected first priority Lien in the Collateral (subject to (i) with respect to the Collateral described in Section 4.24(i), the Permitted Liens described in clauses (a) and (e) of the definition of "Permitted Liens" and, to the extent required by Governmental Rule, those matters described in clauses (b), (c) and (g) of the definition of "Permitted Liens", (ii) with respect to the Collateral described in Sections 4.24(ii) and 4.24(iii), the Permitted Liens described in clause (a) of the definition of "Permitted Liens" and, to the extent required by Governmental Rule, those matters described in clause (b) of the definition of "Permitted Liens" and (iii) with respect to the Uninsured Real Property Interests, those matters described in clause (j) of the definition of "Permitted Liens"). (c) Any Loan Party shall contest the validity or enforceability of any Credit Document in writing or deny in writing that it has any further liability prior to the payment in full of all obligations of the Loan Parties under the Credit Documents. 7.1.11 Change of Control. (a) Any of the following shall occur: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Borrower, any Guarantor or any Non-Guarantor to any Person or group of related Persons, together with any Affiliates thereof; (ii) the holders of the ownership interests of any Loan Party (other than Ormat Technologies) shall approve any plan or proposal for the liquidation or dissolution of any Loan Party (other than Ormat Technologies); (iii) Sponsor shall cease to directly own 100% of the voting and economic interests in Borrower; (iv) Borrower shall cease to directly own 100% of the voting and economic interests in OrHeber 1, 100% of the voting and economic interests in OrMammoth, 50% of the voting and economic interests in HFC and 50% of the voting and economic interests in HGC; (v) OrHeber 1 shall cease to directly own 50% of the voting and economic interests in HFC, 50% of the voting and economic interests in HGC and 100% of the voting and economic interests in ORNI; (vi) ORNI shall cease to directly own 100% of the voting and economic interests in OrHeber 2 and 100% of the voting and economic interests in OrHeber 3; (vii) OrHeber 2 shall cease to directly own 99.998% of the voting and economic interests in ORNI; (viii) OrHeber 3 shall cease to directly own 0.002% of the voting and economic interests in SIGC; or (ix) OrMammoth shall cease to directly own 100% of the voting and economic interests in Mammoth Lakes. (b) Notwithstanding the provisions of Section 7.1.11(a), (i) the Loan Parties shall be permitted to undertake a Permitted Reorganization on or before December 31, 2004, and (ii) Sponsor shall be permitted to undertake a Permitted Sponsor Sale. 7.1.12 Loss of or Failure to Obtain Necessary Permits. (a) Borrower, any Guarantor or any Non-Guarantor shall fail to obtain any Permit necessary for the ownership, leasing, maintenance or operation of any Project and such failure could reasonably be expected to have a Material Adverse Effect. 57 (b) Any Permit necessary for ownership, leasing, maintenance or operation of any Project shall be materially modified, revoked, canceled or not renewed by a Governmental Instrumentality (or otherwise ceases to be in full force and effect) and such modification, revocation, cancellation or non-renewal could reasonably be expected to have a Material Adverse Effect. 7.1.13 Misstatements; Omissions. Any representation or warranty made or deemed made by any Loan Party in any Credit Document to which such Loan Party is a party, shall be untrue or misleading in any material respect as of the time made; provided that, in respect of unintentional misrepresentations which are capable of being remedied and are made or deemed made after the Closing Date, any such unintentional misrepresentation shall not be deemed to be an Event of Default if such misrepresentation is corrected within 30 days of the occurrence thereof. 7.1.14 Project Document Defaults. (a) Any Project Document shall cease to be valid and binding and in full force and effect; provided that any such event will not constitute an Event of Default if the applicable Project Company is attempting to replace such Project Document with the consent of the Required Banks and does so within 60 days of such event; provided, further, that an Event of Default shall occur under this paragraph only if the failure of such Project Document to remain valid and binding and in full force and effect could reasonably be expected to have a Material Adverse Effect. (b) Any Project Document shall terminate or be terminated or canceled prior to its stated expiration date or any Project Company shall be in default (after the giving of any applicable notice and the expiration of any applicable grace period) under any of the Project Documents; provided that a default under or termination or cancellation of any Project Document shall constitute an Event of Default only if (a) such default or termination could reasonably be expected to have a Material Adverse Effect or (b) such default could result in a Major Project Document being terminated by the applicable counterparty within five Banking Days. (c) Any Major Project Participant shall be in default (after the giving of any applicable notice and the expiration of any applicable grace period) under any of the Major Project Documents; provided that a default under any Project Document shall constitute an Event of Default only if such default or termination could reasonably be expected to have a Material Adverse Effect. 7.1.15 Failure to Close Escrow. The Close of Escrow shall not have occurred on or before 5:00 p.m. (New York City time) on the Closing Date. 7.1.16 Failure to Meet Minimum Debt Service Coverage Ratio. The Average Debt Service Coverage Ratio for the twelve-month period immediately preceding the applicable Principal Repayment Date is less than 1.00 to 1, and any funds on deposit in the Debt Service 58 Reserve Account shall have been applied to the payment of fees, interest or principal on the Loans. 7.1.17 Failure to Meet Projections. (a) (i) The Projects (taken as a whole) shall generate in any year less than 90% of the anticipated megawatt-hours (as set forth in the Projections) for such year, and (ii) the Projects (taken as a whole) shall have generated in the preceding three years (on average) less than 95% of the anticipated megawatt-hours (as set forth in the Projections) for such years. (b) The Projects (taken as a whole) shall generate in any year less than 90% of the anticipated megawatt-hours (as set forth in the Projections) for such year; provided that such failure shall not be an Event of Default if (i) the Projects (taken as a whole) shall have generated in the preceding three years (on average) at least 95% of the anticipated megawatt-hours (as set forth in the Projections) for such years and (ii) within fifteen days of the end of such year, Borrower shall have provided Administrative Agent with a report describing (A) the actions Borrower and the applicable Project Companies are taking and have taken to correct and remedy such operating performance shortfalls, (B) the date by which such corrective actions will be completed (which date shall be on or before June 30 of the year after the year in which such failure arose), and (C) the causes of such operating performance shortfalls (it being acknowledged and agreed that (I) Administrative Agent may consult with consultants of its choosing, at the expense of Borrower, in respect of its evaluation of such report and (II) Administrative Agent shall have no approval rights with respect to such report); provided further that, if the Projects (taken as a whole) shall fail to generate 95% or more of the anticipated megawatt-hours (as set forth in the Projections) in each of the next two quarters following the end of the earlier of (x) June 30 of the relevant year and (y) the quarter during which such corrective actions have been fully implemented, then an Event of Default shall be deemed to have occurred. 7.1.18 Post-Closing Title Work. At the expiration of the Applicable Post-Closing Period, (a) the Non-Material Real Property Interests shall not be part of the Mortgaged Property or (b) the Liens granted to Administrative Agent (for the benefit of the Secured Parties) pursuant to the Collateral Documents shall not constitute as to the Non-Material Real Property Interests a valid and perfected Lien on such Non-Material Real Property Interests. 7.2 REMEDIES. Upon the occurrence and during the continuation of any Event of Default, Administrative Agent and the Banks may, at the election of the Majority Banks, without further notice of default, presentment or demand for payment, protest or notice of non-payment or dishonor, or other notices or demands of any kind, all such notices and demands (other than notices required by the Credit Documents) being waived, exercise any or all of the following rights and remedies, in any combination or order that the Majority Banks may elect, in addition to such other rights or remedies as the Secured Parties may have hereunder, under the Collateral Documents or at law or in equity: 7.2.1 No Further Loans. Refuse, and Administrative Agent, and the Banks shall not be obligated, to continue any Loans, make any additional Loans, or make any payments, or 59 permit the making of payments, from any Account or other funds held by Administrative Agent under the Credit Documents or on behalf of any Loan Party (other than Ormat Technologies). 7.2.2 Cure by Agents. Without any obligation to do so, make disbursements or Loans to or on behalf of any Loan Party (other than Ormat Technologies) or disburse amounts from the Revenue Account to cure (a) any Event of Default hereunder and (b) any default and render any performance under any Project Document as the Majority Banks in their sole discretion may consider necessary or appropriate, whether to preserve and protect the Collateral or the Secured Parties' interests therein or for any other reason. All sums so expended, together with interest on such total amount at the Default Rate (but in no event shall the rate exceed the maximum lawful rate), shall be repaid by Borrower to Administrative Agent, as the case may be, on demand and shall be secured by the Credit Documents, notwithstanding that such expenditures may, together with amounts advanced under this Agreement, exceed the aggregate amount of the Total Senior Loan Commitment. 7.2.3 Acceleration. Declare and make all or a portion of the sums of accrued and outstanding principal and accrued but unpaid interest remaining under this Agreement, together with all unpaid fees, costs (including Liquidation Costs) and charges due hereunder or under any other Credit Document, immediately due and payable and require Borrower immediately, without presentment, demand, protest or other notice of any kind (other than notices required by the Credit Documents or by applicable Legal Requirements), all of which Borrower hereby expressly waives, to pay Administrative Agent or the Secured Parties an amount in immediately available funds equal to the aggregate amount of any outstanding Obligations; provided that, in the event of an Event of Default occurring under Section 7.1.2 with respect to any Loan Party, all such amounts shall become immediately due and payable without further act of Administrative Agent or the Secured Parties. 7.2.4 Cash Collateral. Apply or execute upon any amounts on deposit in any Account or any moneys of any Loan Party (other than Ormat Technologies) on deposit with Administrative Agent or any Secured Party in the manner provided in the UCC and other relevant statutes and decisions and interpretations thereunder with respect to cash collateral. Without limiting the foregoing, Administrative Agent shall have all rights and powers with respect to the Accounts and the contents of the Accounts as it has with respect to any other Collateral and may apply, or cause the application of, such amounts to the payment of interest, principal, fees, costs, charges or other amounts due or payable to Administrative Agent, Depositary Agent or the Secured Parties with respect to the Loans in such order as the Required Banks may elect in their sole discretion. Until such time as the Majority Banks so elect to exercise such rights and powers, amounts in the Revenue Account shall be applied as provided in Section 2.2(b) of the Depositary Agreement. Borrower shall not have any rights or powers with respect to such amounts except as expressly provided in this Section 7.2.4. 7.2.5 Possession of Projects. Enter into possession of any Project and perform any and all work and labor necessary to operate and maintain any such Projects, and all sums expended by Administrative Agent in so doing, together with interest on such total amount at the Default Rate, shall be repaid by Borrower to Administrative Agent upon demand and shall be secured by the Credit Documents, notwithstanding that such expenditures may, together with 60 amounts advanced under this Agreement, exceed the aggregate amount of the Total Senior Loan Commitment. 7.2.6 Remedies Under Credit Documents. Exercise, and direct Administrative Agent to exercise, any and all rights and remedies available to it under any of the Credit Documents, including judicial or non-judicial foreclosure or public or private sale of any of the Collateral pursuant to the Collateral Documents. ARTICLE 8 SCOPE OF LIABILITY Except as expressly set forth in this Article 8, notwithstanding anything in this Agreement or the other Credit Documents to the contrary, the Banks shall have no claims with respect to the transactions contemplated by the Operative Documents against Sponsor or any of its Affiliates (other than Borrower, the Guarantors and the Non-Guarantors), or any of Sponsor's or Sponsor's Affiliates' shareholders (other than Borrower, the Guarantors and the Non-Guarantors), partners (other than Borrower, the Guarantors and the Non-Guarantors), members (other than Borrower, the Guarantors and the Non-Guarantors), officers, agents, managers, directors or employees (collectively, the "Nonrecourse Persons"). The Banks' recourse against the Nonrecourse Persons shall be limited to the Collateral (including the Projects, all Project Revenues, all Loan proceeds, Insurance Proceeds, Eminent Domain Proceeds, and all income or revenues of the foregoing) as and to the extent provided herein and in the Collateral Documents; provided that the foregoing provision of this Article 8 shall not (a) constitute a waiver, release or discharge of any of the indebtedness, or of any of the terms, covenants, conditions, or provisions of this Agreement or any other Credit Document and the same shall continue (but without personal liability to the Nonrecourse Persons) until fully paid, discharged, observed, or performed; (b) limit or restrict the right of Administrative Agent or any Secured Party (or any assignee, beneficiary or successor to any of them) to name Borrower or any other Person as a defendant in any action or suit for a judicial foreclosure or for the exercise of any other remedy under or with respect to this Agreement or any other Collateral Document or Credit Document, or for injunction or specific performance, so long as no judgment in the nature of a deficiency judgment shall be enforced against any Nonrecourse Person, except as set forth in this Article 8; (c) in any way limit or restrict any right or remedy of Administrative Agent or any Secured Party (or any assignee or beneficiary thereof or successor thereto) with respect to, and each of the Nonrecourse Persons shall remain fully liable to the extent that it would otherwise be liable for its own actions with respect to, any fraud, willful breaches of covenants, willful misrepresentation, common law waste or misappropriation of Project Revenues, Loan proceeds, Insurance Proceeds, Eminent Domain Proceeds or any other earnings, revenues, rents, issues, profits or proceeds from or of the Collateral, that should or would have been paid as provided herein or paid or delivered to Administrative Agent or any Secured Party (or any assignee or beneficiary thereof or successor thereto) towards any payment required under this Agreement or any other Credit Document; (d) affect or diminish or constitute a waiver, release or discharge of any specific written obligation, covenant, or agreement in respect of the transactions contemplated by the Operative Documents made by any of the Nonrecourse Persons or any security granted by the Nonrecourse Persons in support of the obligations of such Persons under 61 any Collateral Document (or as security for the obligations of Borrower), any Subsidiary Guaranty or the Sponsor Guaranty; and (e) limit the liability of any Person who is a party to any Project Document or has issued any certificate or other statement in connection therewith with respect to such liability as may arise by reason of the terms and conditions of such Project Document, certificate or statement (but subject to any limitation of liability in such Project Document) under relating solely to such liability of such Person as may arise under such referenced agreement, certificate or statement. The Banks shall have full recourse against Borrower, the Guarantors and the Non-Guarantors for all of their respective obligations under the Credit Documents. Notwithstanding anything to the contrary contained in any of the Credit Documents, no employee, officer, authorized representative, or director of any Loan Party (including Ormat Technologies, Sponsor, Borrower, the Guarantors and the Non-Guarantors) shall have any personal liability (as distinct from any corporate, partnership or limited liability company liability that any Loan Party may have under any of the Credit Documents as and to the extent that such liability is a result of such Loan Party being a "Loan Party") arising under or in connection with this Agreement, any other Credit Document or any transaction contemplated hereby or thereby. The limitations on recourse set forth in this Article 8 shall survive the termination of this Agreement and the indefeasible payment in full in cash and performance in full of the Obligations hereunder and under the other Operative Documents. ARTICLE 9 AGENTS; SUBSTITUTION 9.1 APPOINTMENT, POWERS AND IMMUNITIES. 9.1.1 Each Bank hereby appoints and authorizes Administrative Agent to act as its agent and collateral agent hereunder and under the other Credit Documents, in each case with such powers as are expressly delegated to Administrative Agent by the terms of this Agreement and the other Credit Documents, together with such other powers as are reasonably incidental thereto. Administrative Agent shall not have any duties or responsibilities except those expressly set forth in this Agreement or in any other Credit Document, or be a trustee or a fiduciary for any Secured Party. Notwithstanding anything to the contrary contained herein, Administrative Agent shall not be required to take any action which is contrary to this Agreement or any other Credit Documents or any Legal Requirement or exposes Administrative Agent to any liability. Each of Administrative Agent, the Banks and any of their respective Affiliates shall not be responsible to any other Secured Party for (i) any recitals, statements, representations or warranties made by Borrower or its Affiliates contained in this Agreement, the other Credit Documents or in any certificate or other document referred to or provided for in, or received by Administrative Agent or any Secured Party under this Agreement or any other Credit Document, (ii) the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, the other Credit Documents, any Notes or any other document referred to or provided for herein, or (iii) any failure by Borrower or its Affiliates to perform their respective obligations hereunder or thereunder. Administrative Agent may employ agents and attorneys-in-fact, and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. 62 9.1.2 Administrative Agent and its directors, officers, employees or agents shall not be responsible for any action taken or omitted to be taken by it or them hereunder or under any other Credit Document or in connection herewith or therewith, except for its own gross negligence or willful misconduct. Without limiting the generality of the foregoing, (a) Administrative Agent may treat the payee of any Note as the holder thereof until Administrative Agent receives written notice of the permitted assignment or transfer thereof in accordance with the requirements of the Credit Documents, including Section 9.14 of this Agreement, signed by such payee and in form satisfactory to Administrative Agent; (b) Administrative Agent may consult with legal counsel, independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (c) Administrative Agent does not make any warranty or representation to any Secured Party for any statements, warranties or representations made in or in connection with any Operative Document; (d) Administrative Agent shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any Operative Document on the part of any party thereto, to inspect the property (including the books and records) of Borrower or any other Person or to ascertain or determine whether a Material Adverse Effect exists or is continuing; and (e) Administrative Agent shall not be responsible to any Secured Party for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of any Operative Document or any other instrument or document furnished pursuant hereto. Except as otherwise provided under this Agreement and the other Credit Documents, Administrative Agent shall take such action with respect to the Credit Documents as shall be directed by the Required Banks or Majority Banks, as applicable in accordance with the terms of the Credit Documents. 9.2 RELIANCE. Administrative Agent shall be entitled to rely upon any certificate, notice or other document (including any cable, telegram, facsimile, electronic mail or telex) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by it. As to any other matters not expressly provided for by this Agreement, Administrative Agent shall not be required to take any action or exercise any discretion, but shall be required to act or to refrain from acting upon instructions of the Required Banks or, where expressly provided, the Majority Banks or all Banks (except that Administrative Agent shall not be required to take any action which exposes Administrative Agent to personal liability or which is contrary to this Agreement, any other Credit Document or any Legal Requirement). Administrative Agent shall in all cases (including when any action by Administrative Agent alone is authorized hereunder, if Administrative Agent elects in its sole discretion to obtain instructions from the Required Banks) be fully protected in acting, or in refraining from acting, hereunder or under any other Credit Document in accordance with the instructions of the Required Banks (or, where so expressly stated, the Majority Banks or all Banks), and such instructions of the Required Banks (or Majority Banks or all Banks, where applicable) and any action taken or failure to act pursuant thereto shall be binding on all of the Secured Parties. 63 9.3 NON-RELIANCE. Each Bank represents that it has, independently and without reliance on Administrative Agent, or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of the financial condition and affairs of the Loan Parties and its own decision to enter into this Agreement and agrees that it will, independently and without reliance upon Administrative Agent, or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own appraisals and decisions in taking or not taking action under this Agreement. Each of Administrative Agent and any Bank shall not be required to keep informed as to the performance or observance by any Loan Party or its Affiliates under this Agreement or any other document referred to or provided for herein or to make inquiry of, or to inspect the properties or books of any Loan Party or its Affiliates. 9.4 DEFAULTS; MATERIAL ADVERSE EFFECT. Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Potential Event of Default, Event of Default or Material Adverse Effect, unless such Person has received a notice from a Bank or Borrower, referring to this Agreement, describing such Potential Event of Default, Event of Default or Material Adverse Effect and indicating that such notice is a notice of the occurrence of such Potential Event of Default, Event of Default or Material Adverse Effect (as the case may be). If Administrative Agent receives such a notice of the occurrence of a Potential Event of Default, Event of Default or Material Adverse Effect, Administrative Agent shall give notice thereof to the Banks. Administrative Agent shall take such action with respect to such Potential Event of Default, Event of Default or Material Adverse Effect as is provided in Article 3, Article 7 or the terms of the Credit Documents, or if not provided for in Article 3, Article 7 or such Credit Documents, as Administrative Agent shall be reasonably directed by the Majority Banks; provided, however, that unless and until Administrative Agent shall have received such directions, Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Potential Event of Default, Event of Default or Material Adverse Effect as it shall deem advisable in the best interest of the Banks. 9.5 INDEMNIFICATION. Without limiting the Obligations of Borrower hereunder, each Bank agrees to indemnify Administrative Agent and its officers, directors, shareholders, controlling Persons, employees, agents and servants, ratably in accordance with their Proportionate Shares for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may at any time be imposed on, incurred by or asserted against Administrative Agent or such Person in any way relating to or arising out of this Agreement or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or the enforcement of any of the terms hereof or thereof or of any such other documents (to the extent Borrower has not paid any such amounts pursuant to Section 5.24); provided, however, that no Bank shall be liable for any of the foregoing to the extent they arise from Administrative Agent's, or any such Person's gross negligence or willful misconduct. Administrative Agent or any such Person shall be fully justified in refusing to take or to continue to take any action hereunder or under any other Credit Document unless it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Without limitation of the foregoing, 64 each Bank agrees to reimburse Administrative Agent or any such Person promptly upon demand for its Proportionate Share of any out-of-pocket expenses (including counsel fees) incurred by Administrative Agent or any such Person in connection with the preparation, execution, administration or enforcement of, or legal advice in respect of rights or responsibilities under, the Operative Documents, to the extent that Administrative Agent or any such Person is not reimbursed for such expenses by Borrower. 9.6 SUCCESSOR AGENT. Administrative Agent may resign at any time by giving fifteen days' written notice thereof to the Secured Parties and Borrower, such resignation to become effective in the manner and at the time set forth below. Administrative Agent may be removed involuntarily at the request of Borrower or the Banks only for a material breach of its duties and obligations hereunder and under the other Credit Documents or for gross negligence or willful misconduct in connection with the performance of its duties hereunder or under the other Credit Documents and then only upon the affirmative vote of the Required Banks (excluding Administrative Agent from such vote and Administrative Agent's Proportionate Share (if any) of the Commitments from the amounts used to determine the portion of the Commitments necessary to constitute the required Proportionate Share of the remaining Banks). Upon any such resignation or removal of Administrative Agent, the Required Banks shall have the right, with the consent of Borrower (such consent not to be unreasonably withheld or delayed) to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Required Banks and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Banks' removal of the retiring Administrative Agent, the retiring Administrative Agent may, on behalf of the Secured Parties, with the consent of Borrower (such consent not to be unreasonably withheld or delayed), appoint a successor Administrative Agent hereunder, which shall be a Bank, if any Bank shall be willing to serve, and otherwise shall be a commercial bank having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Administrative Agent under the Operative Documents by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations as Administrative Agent only under the Credit Documents. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under the Operative Documents. 9.7 AUTHORIZATION. Each Secured Party hereby constitutes and appoints Administrative Agent, acting for and on behalf of itself and each of the Secured Parties and each successor or assign of Administrative Agent and the Secured Parties, the true and lawful attorney-in-fact of such Secured Party, with full power and authority in the place and stead of such Secured Party and in the name of such Secured Party, Administrative Agent or otherwise to (a) to execute, deliver and perform each of the Credit Documents to which Administrative Agent is or is intended to be a party, and each Bank agrees to be bound by all of the agreements of Administrative Agent contained in the Credit Documents, and (b) to release Liens on property that Borrower is permitted to sell or transfer pursuant to the terms of this Agreement or the other 65 Credit Documents and to enter into agreements supplemental hereto for the purpose of curing any formal defect, inconsistency, omission or ambiguity in this Agreement or any Credit Document to which it is a party. 9.8 OTHER ROLES. With respect to its Commitment, the Loans made by it and any Note issued to it, Administrative Agent in its individual capacity shall have the same rights and powers under the Operative Documents as any other Bank and may exercise the same as though it were not Administrative Agent. The term "Bank" or "Banks" shall, unless otherwise expressly indicated, include Administrative Agent in its individual capacity for so long as Administrative Agent has Loans or Commitments outstanding. Administrative Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with Borrower or any other Person, without any duty to account therefor to the Banks. For the avoidance of doubt Administrative Agent may act as Depositary Agent notwithstanding any potential or actual conflict of interest presented by the foregoing and Borrower. Each of the Banks hereby waives any claim against Administrative Agent and any of its Affiliates based upon any conflict of interest that such Person may have with regard to acting as an agent, arranger or issuing bank hereunder and acting in such other roles. 9.9 AMENDMENTS; WAIVERS. Subject to the provisions of this Section 9.9, unless otherwise specified in this Agreement or another Credit Document, the Required Banks (or Administrative Agent pursuant to Section 9.7, or otherwise with the consent in writing of the Majority Banks or Required Banks, as the case may be) and Borrower, Guarantors, Non-Guarantors or Sponsor may enter into agreements, waivers or supplements hereto for the purpose of adding, modifying or waiving any provisions to the Credit Documents or changing in any manner the rights of the Banks, Borrower, Guarantors, Non-Guarantors or Sponsor hereunder or thereunder or waiving any Potential Event of Default or Event of Default; provided, however, that no such supplemental agreement shall, without the consent of each Bank directly affected thereby: (a) modify, in any respect adverse to the Banks, Section 2.1.1(d), 2.5, 2.6, 2.7, 6.12 (with respect to the assignment of Borrower's or any Guarantors' rights under any of the Credit Documents), 9.13, 9.14 or 10.21 hereof, Section 3.1.2(b) of the Depositary Agreement or Article 2 of the Sponsor Guaranty; or (b) reduce the percentage specified in the definition of "Majority Banks" or "Required Banks"; or (c) amend this Section 9.9; or (d) release any Collateral (other than immaterial portions thereof) from the Lien of any of the Collateral Documents or allow release of any funds from any Account, in each case other than in accordance with Section 3.3 and any other applicable terms of the Credit Documents (provided, however, that with the consent of Administrative Agent, HFC may terminate or quitclaim any of the Non-Material Real Property Interests); or 66 (e) extend the Maturity Date or reduce the principal amount of any outstanding Loans or Notes or reduce the rate or change the time of payment of interest due on any Loan; or (f) reduce the amount or extend the payment date for any amount due under Article 2, whether principal, interest, fees or other amounts; or (g) reduce or change the time of payment of any fee due or payable hereunder; or (h) release any Loan Party from any of its material obligations under the Sponsor Guaranty or any Subsidiary Guaranty; or (i) increase the maximum duration of Interest Periods permitted hereunder; or (j) subordinate the Loans to any other Debt. No amendment, modification, termination or waiver of any provision of this Agreement affecting the rights or obligations of Administrative Agent or any Loan Party shall be effective without the written consent of Administrative Agent or such Loan Party, respectively. No amendment, modification, termination or waiver of any provision of any Note (other than by way of amending a document referred to therein) shall be effective without the written concurrence of the Bank which is the holder of such Note. NO CREDIT DOCUMENT TO WHICH BEAL BANK, S.S.B. IS A PARTY SHALL BE EFFECTIVE UNLESS TWO OFFICERS OF BEAL BANK, S.S.B. SHALL HAVE EXECUTED SUCH CREDIT DOCUMENT. 9.10 WITHHOLDING TAX. If the forms or other documentation required by Section 2.4.6 are not delivered to Administrative Agent, then Administrative Agent may withhold from any interest payment to any Bank not providing such forms or other documentation, an amount equivalent to the applicable withholding tax. 9.10.1 If the Internal Revenue Service or any authority of the United States or other jurisdiction asserts a claim that Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered, was not properly executed, or because such Bank failed to notify Administrative Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason), then such Bank shall indemnify Administrative Agent fully for all amounts paid, directly or indirectly, by Administrative Agent as tax or otherwise, including penalties and interest, together with all expenses incurred, including legal expenses, allocated staff costs, and any out of pocket expenses. Borrower shall not be responsible for any amounts paid or required to be paid by a Bank under this Section 9.10.1. 9.10.2 If any Bank sells, assigns, grants participation in, or otherwise transfers its rights under this Agreement, the purchaser, assignee, participant or transferee, as applicable, shall comply and be bound by the terms of Section 2.4.6 and this Section 9.10 as though it were such Bank. 67 9.11 GENERAL PROVISIONS AS TO PAYMENTS. Administrative Agent shall promptly distribute to each Bank, subject to the terms of any separate agreement between Administrative Agent and such Bank, its pro rata share of each payment of principal and interest payable to the Banks on the Loans and of fees hereunder received by Administrative Agent for the account of the Banks and of any other amounts owing under the Loans. The payments made for the account of each Bank shall be made, and distributed to it, for the account of (a) its domestic lending office in the case of payments of principal of, and interest on, its Base Rate Loans, (b) its domestic or foreign lending office, as each Bank may designate in writing to Administrative Agent, in the case of LIBOR Loans, and (c) its domestic lending office, or such other lending office as it may designate for the purpose from time to time, in the case of payments of fees and other amounts payable hereunder. Subject to the requirement of Section 2.8.2, Banks shall have the right to alter designated lending offices upon five Banking Days prior written notice to Administrative Agent and Borrower. Administrative Agent and each Bank acknowledge and agree that each payment made by or on behalf of any Loan Party to Administrative Agent under any Credit Document for the benefit of any Bank shall discharge the obligation of such Loan Party under such Credit Document to make such payment to Administrative Agent or such Bank irrespective of any designation made by such Bank, or any agreement or arrangement between Administrative Agent and such Bank, contemplated by this Section 9.11. 9.12 SUBSTITUTION OF BANK. Notwithstanding anything in any Credit Document to the contrary, should any Bank fail to make a Loan in violation of its obligations under this Agreement (a "Non-Advancing Bank"), Beal Bank, S.S.B. shall fund such Loan on the Closing Date and shall be deemed to have assumed each of the Non-Advancing Bank's obligations under this Agreement (including the obligation to make the Loan which the Non-Advancing Bank failed to make) and such Person automatically shall be substituted for the Non-Advancing Bank hereunder, and all interest and fees which would otherwise have been payable to the Non-Advancing Bank shall thereafter be payable to such Person. Nothing in (and no action taken pursuant to) this Section 9.12 shall relieve the Non-Advancing Bank from any liability it might have to Borrower or to the other Banks as a result of its failure to make any Loan. 9.13 PARTICIPATION. Nothing herein provided shall prevent any Bank from selling a participation in one or more of its Loans made hereunder; provided that (a) no such sale of a participation shall alter such Bank's or Borrower's obligations hereunder and (b) any agreement pursuant to which any Bank may grant a participation in its rights with respect to its Loans made hereunder shall provide that, with respect to such Loans, subject to the following proviso, such Bank shall retain the sole right and responsibility to exercise the rights of such Bank, including any rights it has to enforce the obligations of Borrower relating to such Loans, to approve any amendment, modification or waiver of any provision of this Agreement or any other Credit Document, and to take action to have the Obligations (or any portion thereof) declared due and payable pursuant to Article 7; provided, however, that such agreement may provide that the participant may exercise any rights that such Bank may have to approve or disapprove decreases in interest rates, lengthening of maturity of any Loans, extend the payment date for any principal or interest payments, release of any material portion of the Collateral (other than in accordance with the terms of the Credit Documents) or release any Loan Party (other than in accordance with the terms of the Credit Documents) from its obligations under the Sponsor Guaranty or any 68 Subsidiary Guaranty. Recipients of a participation in any Loans of any Bank shall have rights under this Agreement with respect to increased costs or reserve requirements under Section 2.4 or 2.6, if such recipient complies with the requirements of Section 2.4.6, to the same extent as if they were Banks (except that any such participant shall be entitled to claim any such amount only to the extent that the Bank from which such participant acquired its participation is entitled to, and such Bank makes such claim on its own behalf because it would have otherwise incurred the same costs). For the avoidance of doubt, Borrower shall not be responsible for increased costs arising out of any sale of a participation of any Loans or Notes. 9.14 TRANSFER OF COMMITMENT. Notwithstanding anything else herein to the contrary, any Bank, after receiving Administrative Agent's prior written consent (such consent not to be unreasonably withheld), may from time to time, without the consent of Borrower or any other Person, at its option, sell, assign, transfer, negotiate or otherwise dispose of a portion of one or more of its Loans made hereunder (including the Bank's interest in this Agreement and the other Credit Documents) to its Affiliate, any Bank or to one or more banks or other Persons that constitute a "Bank"; provided, however, that no Bank (including any assignee of any Bank) may assign any portion of its Loans in an amount less than $1,000,000 (unless such lesser amount constitutes the assigning Bank's entire share of the Loans); and provided, further, that at all times Beal Bank, S.S.B. and its Affiliates shall collectively hold no less than 51% of the aggregate amount of the Loans and the Commitments; and provided, further, that Borrower shall not be responsible for increased costs arising out of any assignment of any Loans or Notes. In the event of any such assignment, (a) the assigning Bank's Proportionate Share shall be reduced and its obligations hereunder released by the amount of the Proportionate Share assigned to the new Bank, (b) the parties to such assignment shall execute and deliver an appropriate agreement evidencing such sale, assignment, transfer or other disposition, in form and substance reasonably satisfactory to Administrative Agent and Borrower, (c) the parties to the sale, assignment, transfer or other disposition, excluding Borrower, shall collectively pay to Administrative Agent an administrative fee of $3,500, (d) at the assigning Bank's option, Borrower shall execute and deliver to such assigning Bank a new Note in the form attached hereto as Exhibit B-1, as requested, in a principal amount equal to such new Bank's Commitment, but only if it shall also be executing and exchanging with the assigning Bank a replacement note for any Note in an amount equal to the Commitment retained by the assigning Bank, if any; provided that Borrower shall have received for cancellation the existing Note held by such assigning Bank, and (v) Administrative Agent shall amend Exhibit H attached hereto to reflect the Proportionate Shares of the Banks following such assignment. Thereafter, such new Bank shall be deemed to be a Bank and shall have all of the rights and duties of a Bank (except as otherwise provided in this Article 9), in accordance with its Proportionate Share, under each of the Credit Documents. 9.15 LAWS. Notwithstanding the foregoing provisions of this Article 9, no sale, assignment, transfer, negotiation or other disposition of the interests of any Bank hereunder or under the other Credit Documents shall be allowed if it would require registration under the federal Securities Act of 1933, as then amended, any other federal securities laws or regulations or the securities laws or regulations of any applicable jurisdiction. Borrower shall, from time to time at the request and expense of Administrative Agent, execute and deliver to Administrative Agent, or to such party or parties as Administrative Agent may designate, any and all further 69 instruments as may in the opinion of Administrative Agent be reasonably necessary or advisable to give full force and effect to such sale, assignment, transfer, negotiation or disposition which would not require any such registration. 9.16 ASSIGNABILITY AS COLLATERAL. Notwithstanding any other provision contained in this Agreement or any other Credit Document to the contrary, any Bank may assign all or any portion of the Loans or Note held by it to the Federal Reserve Bank and the United States Treasury as collateral security; provided that any payment in respect of such assigned Loans or Note made by Borrower to or for the account of the assigning or pledging Bank in accordance with the terms of this Agreement shall satisfy Borrower's obligations hereunder in respect of such assigned Loans or Note to the extent of such payment. No such assignment shall release the assigning Bank from its obligations hereunder. ARTICLE 10 MISCELLANEOUS 10.1 ADDRESSES. Any communications between the parties hereto or notices provided herein to be given may be given to the following addresses: If to Administrative Agent: Beal Bank, S.S.B. 6000 Legacy Dr., 4E Plano, Texas 75024 Attn: William T. Saurenmann Tel: (469) 467-5510 Fax: (469) 241-9568 E-mail: bsaurenmann@bealbank.com with a copy to: CSG Investments, Inc. 6000 Legacy Dr., 4W Plano, Texas 75024 Attn: Steve Harvey Tel: (469) 467-5652 Fax: (469) 241-9567 E-mail: sharvey@csginvestments.com If to Borrower: OrCal Geothermal Inc. 980 Greg Street Sparks, NV 89431 Attn: President Tel: (775) 356-9029 Fax: (775) 356-9039 E-mail: dbronicki@ormat.com All notices or other communications required or permitted to be given hereunder shall be in writing and shall be considered as properly given (a) if delivered in person, (b) if sent 70by overnight delivery service (including Federal Express, UPS and other similar overnight delivery services), (c) if mailed by first class United States Mail, postage prepaid, registered or certified with return receipt requested, (d) if sent by facsimile or (e) if sent via other electronic means (including electronic mail). Notice so given shall be effective upon receipt by the addressee, except that communication or notice so transmitted by facsimile or other direct written electronic means shall be deemed to have been validly and effectively given on the day (if a Banking Day and, if not, on the next following Banking Day) on which it is transmitted if transmitted before 4:00 p.m., recipient's time, and if transmitted after that time, on the next following Banking Day; provided, however, that (i) if any notice is tendered to an addressee and the delivery thereof is refused by such addressee, such notice shall be effective upon such tender, and (ii) with respect to any notice given via facsimile or other electronic means, the sender of such message shall promptly provide the addressee with an original copy of such notice by any of the means specified in clause (a), (b) or (c) above. Any party shall have the right to change its address for notice hereunder to any other location within the continental United States by giving of 5 Banking Days' notice to the other parties in the manner set forth above. 10.2 ADDITIONAL SECURITY; RIGHT TO SET-OFF. Subject to Section 2.5.2, regardless of the adequacy of any other Collateral, any Secured Party with the prior written consent of Administrative Agent may execute or realize on its or Administrative Agent's security interest in any such deposits or other sums credited by or due from Banks to Borrower, and may apply any such deposits or other sums to or set them off against Borrower's obligations to Banks under any Notes and this Agreement at any time after the occurrence and during the continuance of any Event of Default. 10.3 DELAY AND WAIVER. No delay or omission to exercise any right, power or remedy accruing to the Secured Parties upon the occurrence of any Event of Default, Potential Event of Default, Material Adverse Effect or any breach or default of Borrower or any other Loan Party or unsatisfied condition precedent under this Agreement or any other Credit Document shall impair any such right, power or remedy of the Secured Parties, nor shall it be construed to be a waiver of any such breach or default or unsatisfied condition precedent, or an acquiescence therein, or of or in any similar breach or default or unsatisfied condition precedent thereafter occurring, nor shall any waiver of any single Event of Default, Potential Event of Default, Material Adverse Effect or other breach or default or unsatisfied condition precedent be deemed a waiver of any other Event of Default, Potential Event of Default, Material Adverse Effect or other breach or default or unsatisfied condition precedent theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of Administrative Agent or the Secured Parties of any Event of Default, Potential Event of Default, Material Adverse Effect or other breach or default or unsatisfied condition precedent under this Agreement or any other Credit Document, or any waiver on the part of Administrative Agent or the Secured Parties of any provision or condition of this Agreement or any other Credit Document, must be in writing and shall be effective only to the extent in such writing specifically set forth. All remedies, either under this Agreement or any other Credit Document or by law or otherwise afforded to Administrative Agent and the Secured Parties, shall be cumulative and not alternative. If any Event of Default has been waived by the Secured Parties in accordance with Section 9.9 and this Section 10.3, then after such waiver becomes effective 71 the applicable Event of Default shall for all purposes under the Credit Documents be deemed to be no longer continuing. 10.4 COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower will pay to Administrative Agent all of its reasonable costs and expenses in connection with the preparation, negotiation, closing and administering of this Agreement and the Credit Documents (including the Post-Closing Title Work), including the reasonable fees, expenses and disbursements of Jenkens & Gilchrist, a Professional Corporation, and Latham & Watkins LLP; provided, however, that Borrower shall not be required to pay the fees of the other Banks' attorneys; provided, further, that (a) except as set forth in Sections 5.21 and 7.1.17, no Loan Party shall be responsible for the payment of any fees and expenses related to the Independent Consultants and (b) Borrower shall not be responsible for the internal costs and internal expenses incurred in connection with the administering of any of the Credit Documents. Borrower will reimburse (i) Administrative Agent for all reasonable costs and expenses, including reasonable attorneys' fees (it being acknowledged and agreed that (A) Borrower shall only be responsible for the payment of one general counsel and one special counsel to Administrative Agent and (B) Borrower shall not be responsible for any attorneys' fees for any of the Banks, except as provided in the preceding clause (A)), expended or incurred by Administrative Agent and the Banks for their reasonable internal out-of-pocket expenses, in enforcing this Agreement or the other Credit Documents in connection with an Event of Default or Potential Event of Default, in actions for declaratory relief in any way related to this Agreement or in collecting any sum which becomes due on the Notes or under the Credit Documents and (ii) Administrative Agent and the Banks for their reasonable out-of-pocket expenses, including reasonable attorney fees (it being acknowledged and agreed that (A) Borrower shall only be responsible for the payment of one general counsel and one special counsel to Administrative Agent and (B) Borrower shall not be responsible for any attorneys' fees for any of the Banks, except as provided in the preceding clause (A)) and reasonable expert, consultant and advisor fees and expenses, in the case of a restructuring of the Loans or otherwise relating to the occurrence of any Potential Event of Default or Event of Default. Borrower shall not be responsible for any counsel fees of Administrative Agent or the Banks other than as set forth above, in Section 5.24 or as otherwise set forth in a separate agreement. 10.5 ENTIRE AGREEMENT. This Agreement and each of the Credit Documents integrate all the terms and conditions mentioned herein or incidental hereto and supersede all oral negotiations and prior writings in respect to the subject matter hereof. 10.6 GOVERNING LAW. THIS AGREEMENT AND ANY OTHER CREDIT DOCUMENT (UNLESS OTHERWISE EXPRESSLY PROVIDED FOR THEREIN), SHALL BE GOVERNED BY, AND CONSTRUED UNDER, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO CONFLICTS OF LAWS (OTHER THAN SECTION 5-1401 AND SECTION 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW). 10.7 SEVERABILITY. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 72 10.8 HEADINGS. Article, Section and Paragraph headings have been inserted in this Agreement as a matter of convenience for reference only and it is agreed that such headings are not a part of this Agreement and shall not be used in the interpretation of any provision of this Agreement. 10.9 ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and practices consistent with those applied in the preparation of the financial statements submitted by Borrower to Administrative Agent, and all financial data submitted pursuant to this Agreement shall be prepared in accordance with such principles and practices. 10.10 ADDITIONAL FINANCING. The parties hereto acknowledge that as of the Closing Date the Banks have made no agreement or commitment to provide any financing except as set forth herein. 10.11 NO PARTNERSHIP, ETC. The Banks and Borrower intend that the relationship between them shall be solely that of creditor and debtor. Nothing contained in this Agreement, the Notes or in any of the other Credit Documents shall be deemed or construed to create a partnership, tenancy-in-common, joint tenancy, joint venture or co-ownership by or between the Banks and Borrower or any other Person. None of Administrative Agent or the Banks shall be in any way responsible or liable for the debts, losses, obligations or duties of Borrower or any other Person with respect to the Projects or otherwise. All obligations to pay real property or other taxes, assessments, insurance premiums, and all other fees and charges arising from the ownership, operation or occupancy of the Projects (if any) and to perform all obligations and other agreements and contracts relating to the Projects shall be the sole responsibility of Borrower. 10.12 DEED OF TRUST/COLLATERAL DOCUMENTS. The Loans are secured in part by the Deeds of Trust encumbering certain properties in the State of California. Reference is hereby made to the Deeds of Trust and the other Collateral Documents for the provisions, among others, relating to the nature and extent of the security provided thereunder, the rights, duties and obligations of Borrower and the rights of Administrative Agent and the other Secured Parties with respect to such security. 10.13 LIMITATION ON LIABILITY. No claim shall be made by Borrower against Administrative Agent, the Banks or any of their respective Affiliates, directors, employees, attorneys or agents for any loss of profits, business or anticipated savings, special or punitive damages or any indirect or consequential loss whatsoever in respect of any breach or wrongful conduct (whether or not the claim therefor is based on contract, tort or duty imposed by law), in connection with, arising out of or in any way related to the transactions contemplated by this Agreement or the other Operative Documents or any act or omission or event occurring in connection therewith, and Borrower hereby waives, releases and agrees not to sue upon any such claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. 10.14 WAIVER OF JURY TRIAL. ADMINISTRATIVE AGENT, THE BANKS AND 73 BORROWER HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF ADMINISTRATIVE AGENT, THE BANKS OR BORROWER. THIS PROVISION IS A MATERIAL INDUCEMENT FOR BORROWER, ADMINISTRATIVE AGENT AND THE BANKS TO ENTER INTO THIS AGREEMENT. 10.15 CONSENT TO JURISDICTION. Administrative Agent, the Banks and Borrower agree that any legal action or proceeding by or against Borrower or with respect to or arising out of this Agreement, the Notes, or any other Credit Document may be brought in or removed to the courts of the State of New York, in and for the Borough of Manhattan, or of the United States of America for the Southern District of New York, as Administrative Agent may elect. By execution and delivery of this Agreement, the Banks, Administrative Agent and Borrower accept, for themselves and in respect of their property, generally and unconditionally, the jurisdiction of the aforesaid courts. Administrative Agent, the Banks and Borrower irrevocably consent to the service of process out of any of the aforementioned courts in any manner permitted by law. Administrative Agent, the Banks and Borrower further agree that the aforesaid courts of the State of New York and of the United States of America shall have exclusive jurisdiction with respect to any claim or counterclaim of Borrower based upon the assertion that the rate of interest charged by the Banks on or under this Agreement, the Loans or the other Credit Documents is usurious. Administrative Agent, the Banks and Borrower hereby waive any right to stay or dismiss any action or proceeding under or in connection with any or all of the Projects, this Agreement or any other Credit Document brought before the foregoing courts on the basis of forum non-conveniens. Nothing herein shall affect the right of Administrative Agent to bring legal action or proceedings in any other competent jurisdiction, including judicial or non-judicial foreclosure of the Deeds of Trust. 10.16 KNOWLEDGE AND ATTRIBUTION. References in this Agreement and the other Credit Documents to the "knowledge," "best knowledge" or facts and circumstances "known to" Borrower or any other Loan Party, and all like references, mean facts or circumstances of which a Responsible Officer of the applicable Loan Party has actual knowledge (after due inquiry). 10.17 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Borrower may not assign or otherwise transfer any of its rights under this Agreement except as provided in Section 6.13, and the Banks may not assign or otherwise transfer any of their rights under this Agreement except as provided in Article 9. 10.18 COUNTERPARTS. This Agreement and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed in one or more duplicate counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are 74 physically attached to the same document. 10.19 USURY. Nothing contained in this Agreement or the Notes shall be deemed to require the payment of interest or other charges by Borrower or any other Person in excess of the amount which the holders of the Notes may lawfully charge under applicable usury laws. In the event that the Banks shall collect moneys which are deemed to constitute interest which would increase the effective interest rate to a rate in excess of that permitted to be charged by applicable Legal Requirements, all such sums deemed to constitute interest in excess of the legal rate shall, upon such determination, at the option of the Banks, be returned to Borrower or credited against the principal balance then outstanding. 10.20 SURVIVAL. All representations, warranties, covenants and agreements made herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement and the other Credit Documents shall be considered to have been relied upon by the parties hereto and shall survive the execution and delivery of this Agreement, the other Credit Documents and the making of the Loans (it being acknowledged and agreed that, subject to the following sentence and except as expressly provided in any such Credit Document, all of the representations, warranties, covenants and agreements made in any Credit Document by any Loan Party shall terminate upon the payment in full in cash and the performance in full of the Obligations). Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Borrower set forth in Sections 2.1.1(d), 2.1.6, 2.3, 2.4.4, 2.6.3, 2.6.4, 2.7, 5.24, 9.8 and 10.4 and the agreements of the Banks set forth in Sections 9.1, 9.5 and 9.10.1 shall survive the payment and performance of the Loans and the other Obligations and the reimbursement of any amounts drawn hereunder, and the termination of this Agreement. 10.21 REFINANCING. Upon the written request of Administrative Agent at any time prior to December 31, 2004, the Banks shall have the right to convert (including by way of a refinancing) up to $100,000,000 of the Loans to senior secured notes issued by Borrower pursuant to Section 4(2) of the Securities Act of 1933. Borrower shall (and shall cause each other Loan Party (other than Ormat Technologies) to, as applicable) execute, acknowledge, and/or deliver all agreements, notices, statements, instruments and other documents (including a note purchase agreement, notes, an intercreditor agreement and amendments to any Credit Documents) necessary or advisable (as determined by Administrative Agent in its sole discretion) to effectuate such conversion and the issuance of such senior secured notes. Such note purchase agreement shall contain (a) identical terms and conditions set forth in Articles 2 and 4 through 10 of this Agreement, other than any changes necessarily resulting from such conversion, (b) customary representations and warranties by Borrower, as issuer of such senior secured notes, relating to securities law matters, (c) representations and warranties by Borrower of the type described in Sections 4.1, 4.3, 4.4 and 4.5, (d) customary representations and warranties by the purchasers of such senior secured notes, relating to securities law matters and (e) provisions otherwise conforming in substance to Model Form No. 2 of Note Purchase Agreement, including any changes to Articles 2, 9 and 10 of this Agreement necessarily resulting from such conversion. Without limiting the foregoing, Borrower shall (and shall cause each other Loan Party (other than Ormat Technologies) to, as applicable) (i) provide any information necessary or advisable in connection with the issuance of such senior secured notes, (ii) deliver, 75 to the satisfaction of Administrative Agent, each of the documents described in Sections 3.1.1, 3.1.2, 3.1.3, 3.1.4, 3.1.7 and 3.1.8 (including, if requested by S&P or Moody's, an opinion of counsel regarding non-consolidation of the Loan Parties) with respect to any Loan Party, (iii) take any other action reasonably requested by Administrative Agent in connection with such conversion, including any steps as may be necessary or advisable to render fully valid and enforceable under all applicable laws the rights of the initial purchasers and any other holders of such senior secured notes, and (iv) pay all reasonable fees and expenses (including reasonable attorneys' fees) of Administrative Agent and Beal Bank, S.S.B. incident to such conversion; provided that Borrower shall not be obligated to pay (A) any such attorneys' fees in excess of $25,000 or (B) any fees, expenses or other amounts charged by S&P or Moody's in connection with such conversion (whether on account of an initial rating or subsequent surveillance ratings). For the avoidance of doubt, the terms of such senior secured notes shall not provide for the payment of a "make-whole premium," as that term customarily is utilized in connection with Model Form No. 2 of Note Purchase Agreement, and shall not provide for interest rates (including default interest rates), interest periods, interest calculations, interest payment dates, principal amortization and repayment dates, optional and mandatory principal prepayment rights and obligations, or fees that deviate in any respect from such terms as set forth in this Agreement. In the event of any conversion pursuant to and in accordance with this Section 10.21, Borrower shall not be obligated to make any Make-Whole Premium or other prepayment premium that would otherwise be required under Section 2.1.6 of this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 76 IN WITNESS WHEREOF, the parties hereto, by their officers duly authorized, intending to be legally bound, have caused this Credit Agreement to be duly executed and delivered as of the day and year first above written. ORCAL GEOTHERMAL INC., a Delaware corporation By: /s/ Indecipherable ------------------------------------------- Name: Title: BEAL BANK, S.S.B., as Administrative Agent and a Bank By: /s/ Molly Curl ------------------------------------------- Name: Molly Curl Title: Sr. Vice President By: /s/ William T. Saurenmann ------------------------------------------- Name: William T. Saurenmann Title: Sr. Vice President 77 EXHIBIT A to Credit Agreement DEFINITIONS "Accounts" means the Revenue Account, the Distribution Suspense Account, the O&M Account, the Capital Expenditures Payment Account, the Funding Account, the Lease Suspense Account, the Debt Service Reserve Account, the Loss Proceeds Account and each cash collateral account referred to in the Credit Documents, including any sub-accounts within such accounts and excluding each of the Operating Accounts. "Acquisition" means the sale, conveyance, transfer and delivery of certain ownership interests in the Guarantors (other than OrHeber 1 and OrMammoth) and the Non-Guarantors (other than OrHeber2, OrHeber3 and ORNI) from the Sellers to Borrower, OrHeber 1, ORNI and OrMammoth, as applicable, pursuant to the Acquisition Agreement. "Acquisition Agreement" means the Ownership Interest Purchase Agreement, dated as of November 21, 2003, by and among Covanta, the Sellers, OrHeber 1, OrMammoth and Borrower (as assignee in interest to OrHeber 2 and OrHeber 3, as applicable, pursuant to that certain Assignment Agreement dated as of December 17, 2003 among OrHeber 1, OrHeber 2, OrHeber 3, OrMammoth and Borrower). "Additional Material Heber Real Property Interests" means, collectively, the real property interests created by or memorialized in the documents described under the heading "Additional Heber Material Real Property Interests" in section F of Exhibit G-6 to the Credit Agreement. "Additional Mammoth Leases" means the Federal Geothermal Resources Leases granted by the United States of America, as lessor, acting through the Bureau of Land Management, Serial Files CACA 14404, CACA 14405, CACA 14406 and CACA 14407. "Additional Project Documents" means any contracts or agreements related to the leasing, maintenance, repair, operation or use of the Projects entered into by any Project Company, or assigned to any Project Company, subsequent to the Closing Date; provided that all such contracts and agreements providing (a) for the payment by a Project Company of less than $500,000 per annum individually, or the provision to a Project Company of less than $500,000 per annum individually in value of goods or services, or (b) for a scheduled term of one year or less shall be deemed not to constitute an Additional Project Document. "Adjusted LIBO Rate" means the simple average of the rates appearing on the display referred to as the "LIBOR Page" on Reuters Monitor Money Rates Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London, England time, on the day which is two Banking Days prior to the first day of the applicable Interest Period, at the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then 1 the "Adjusted LIBO Rate" for such Interest Period shall be the average rate (rounded upwards, if necessary, to the next 1/16 of 1%) at which dollar deposits of $50,000,000 and for a maturity comparable to such Interest Period are offered by leading banks in immediately available funds in the London interbank eurocurrency market at approximately 11:00 a.m., London Time, on the day which is two Banking Days prior to the first day of the applicable Interest Period. "Administrative Agent" means Beal Bank, S.S.B., acting in its capacity as administrative agent for the Secured Parties under the Credit Documents. "Adverse PUHCA Event" means that Borrower or any of its "affiliates" (within the meaning of Section 2(a)(11)(B) of PUHCA) becomes an "electric utility company", "public utility company", "holding company" or a "subsidiary company" of a "holding company" within the meaning of PUHCA subject to, and not exempt from, regulation under PUHCA at a time at which applicable provisions of PUHCA, or any successor statute thereof, and the rules and regulations thereunder are in effect and such event or occurrence could reasonably be expected to have a Material Adverse Effect or a material and adverse effect on Administrative Agent or any of the Banks. "Affected Bank" has the meaning given in Section 2.9.1 of the Credit Agreement. "Affiliate" of a specified Person means any other Person that (a) directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the Person specified, or (b) only with respect to matters relating to PUHCA, owns or controls with the power to vote 10% or more of the equity interest in the Person specified or 10% or more of any class of voting securities of the Person specified. When used with respect to Borrower, "Affiliate" shall include Sponsor, the Guarantors, the Non-Guarantors, the Operators and any Affiliate thereof (other than Borrower). "Amor" means Amor 14 Corporation, a Delaware corporation. "Amortization Schedule" means the schedule for repayment of the principal of the Loans as set forth on Exhibit I to the Credit Agreement. "Applicable Post-Closing Period" means (a) with respect to the updated ALTA survey required to be provided for the SIGC Project pursuant to Section 5.20 of the Credit Agreement, the three-month period immediately following the Closing Date (provided, that if Borrower is diligently proceeding to provide such survey within such three-month period and is unable to do so, then Borrower shall have an additional 30 days to provide such survey), (b) with respect to the ALTA lender's title insurance policy (without a survey exception) required to be provided for the SIGC Project pursuant to Section 5.20 of the Credit Agreement, the four-month period immediately following the Closing Date, (c) with respect to the updated ALTA surveys required to be provided for the HGC Project and the HFC Project pursuant to Section 5.20 of the Credit Agreement, the six-month period immediately following the Closing Date (provided, that if Borrower is diligently proceeding to provide such survey within such six-month period and is unable to do so, then Borrower shall have an additional 30 days to provide such surveys), (d) with respect to the updated ALTA lender's title insurance policies (without a survey exception) required to be provided for the HGC Project and the HFC Project pursuant to Section 5.20 of the 2 Credit Agreement, the twelve-month period immediately following the Closing Date, and (e) with respect to the Mammoth Project, the nine-month period immediately following the Closing Date. "Average Debt Service Coverage Ratio" means, with respect to any period, the ratio of (a) Operating Cash Available for Debt Service during such period to (b) principal and interest on the Loans due during such period. "Bank" or "Banks" means Beal Bank, S.S.B. and any other similar financial institutions (including any insurance company or other financial institution (whether a corporation, partnership, trust or other entity) that is (a) engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of business, (b) reasonably experienced in finance transactions similar to the financing contemplated by the Credit Documents, and (c) capable of advancing Loans, and in each case having total assets in excess of $100,000,000 that are or become parties to the Credit Agreement and their successors and assigns, including each Bank. "Banking Day" means any day other than a Saturday, Sunday or other day on which banks are or Administrative Agent is authorized or required to be closed in the State of California, State of Nevada, State of New York or the State of Texas and, where such term is used in any respect relating to a LIBOR Loan, which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "Bankruptcy Court" means the United States Bankruptcy Court for the Southern District of New York with jurisdiction over the bankruptcy cases of each of the Reorganizing Debtors. "Bankruptcy Event" shall be deemed to occur, with respect to any Person, if that Person shall institute a voluntary case seeking liquidation or reorganization under the Bankruptcy Law, or shall consent to the institution of an involuntary case thereunder against it; or such Person shall file a petition or consent or otherwise institute any similar proceeding under any other applicable Federal or state law, or shall consent thereto; or such Person shall apply for, or consent or acquiesce to, the appointment of, a receiver, administrator, administrative receiver, liquidator, sequestrator, trustee or other officer with similar powers for itself or any substantial part of its assets; or such Person shall make a general assignment for the benefit of its creditors; or such Person shall admit in writing its inability to pay its debts generally as they become due; or if an involuntary case shall be commenced seeking liquidation or reorganization of such Person under the Bankruptcy Law or any similar proceedings shall be commenced against such Person under any other applicable Federal or state law and (a) the petition commencing the involuntary case is not timely controverted, (b) the petition commencing the involuntary case is not dismissed within 90 days of its filing, (c) an interim trustee is appointed to take possession of all or a portion of the property, and/or to operate all or any part of the business of such Person and such appointment is not vacated within 90 days, or (d) an order for relief shall have been issued or entered therein; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, administrator, administrative receiver, liquidator, sequestrator, trustee or other officer having similar powers, over such Person or all or a part of its property 3 shall have been entered; or any other similar relief shall be granted against such Person under any applicable Bankruptcy Law. "Bankruptcy Law" means Title 11, United States Code, and any other state or federal insolvency, reorganization, moratorium or similar law for the relief of debtors, or any successor statute. "Base Rate" means the greater of (a) the prime lending rate published from time to time in the eastern edition of the Wall Street Journal or (b) the Federal Funds Rate plus 0.50%. The Base Rate may not necessarily be the highest or lowest rate of interest charged by Administrative Agent to its commercial borrowers. "Base Rate Loans" means Loans bearing interest at rates determined by reference to the Base Rate. "Blended Debt Service Coverage Ratio" means the ratio of (a) with respect to each quarterly period preceding any applicable Principal Repayment Date, the sum of (i) Operating Cash Available for Debt Service during such period plus (ii) with respect to each quarterly period which is after the applicable Principal Repayment Date but prior to January 1, 2005, projected Operating Cash Available for Debt Service during such period (as set forth in the Projections) to (b) the sum of (i) with respect to each quarterly period preceding any applicable Principal Repayment Date, principal and interest on the Loans due during such period plus (ii) with respect to each quarterly period which is after the applicable Principal Repayment Date but prior to January 1, 2005, projected principal and interest on the Loans due during such period (as set forth in the Projections). "Borrower" means OrCal Geothermal Inc., a Delaware corporation. "Borrowing" means a borrowing by Borrower of any Loan. "Calculation Date" means the date corresponding to a Principal Repayment Date which is one Banking Day after the calculations, financial statements or other materials (if any) as may be reasonably requested by Administrative Agent to enable it to verify the relevant Average Debt Service Coverage Ratio have been delivered to, and the calculation of the Average Debt Service Coverage Ratio therein has been verified by, Administrative Agent. "Capital Adequacy Requirement" has the meaning given in Section 2.6.4 of the Credit Agreement. "Capital Expenditures Budget" has the meaning given in Section 5.11.2 of the Credit Agreement. "Capital Expenditures Payment Account" has the meaning given in Section 1.1 of the Depositary Agreement. "Change of Law" has the meaning given in Section 2.6.2 of the Credit Agreement. 4 "Close of Escrow" has the meaning given in Section 3.2 of the Credit Agreement. "Closing Date" has the meaning given in Section 3.1 of the Credit Agreement. "Code" means the Internal Revenue Code of 1986, as amended. "Collateral" has the meaning given in each of the Collateral Documents. "Collateral Documents" means each Deed of Trust, each Pledge Agreement, each Security Agreement, the Depositary Agreement, each Consent, and any fixture filings, financing statements, or other similar documents filed, recorded or delivered in connection with the foregoing. "Commitment Letter" means that certain Commitment Letter, dated as of November 14, 2003 (as amended on November 20, 2003), by and among Beal Bank, S.S.B., Sponsor and Borrower. "Commitments" means, with respect to each Bank, such Bank's Senior Loan Commitment, and with respect to all Banks, the Total Senior Loan Commitment. "Confirmation of Interest Period Selection" has the meaning given in Section 2.1.2(c)(ii) of the Credit Agreement. "Confirmation Order" means that certain Findings of Fact, Conclusions of Law and Order under 11 U.S.C. Section 1129 and Rule 3020 of the Federal Rules of Bankruptcy Procedure (I) Confirming the Heber Debtors' Third Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code and (II) Approving the Sale of Certain Interests to the Successful Bidder, dated November 21, 2003, entered by the United States Bankruptcy Court, Southern District of New York. "Connection Agreements" means the SIGC Connection Agreement and the HGC Connection Agreement. "Consents" means the consents specified on Exhibit E-2 to the Credit Agreement and any other third party consents to the assignments contemplated by the Credit Documents. "Constellation Entities" means CD Mammoth Lakes I, Inc. and CD Mammoth Lakes II, Inc., or any successors or assigns of such parties (other than any Loan Party or Affiliate thereof) in their capacity as, collectively, the direct holders of 50% of the ownership interests of Mammoth Lakes. "Covanta" means Covanta Energy Corporation, a Delaware corporation. "Credit Agreement" means the Credit Agreement, dated as of December 18, 2003, by and among Borrower, Administrative Agent, and the Banks. "Credit Documents" means the Credit Agreement, the Notes, the Collateral Documents, the DSR Letter of Credit (if any), the Escrow Agreement, the Fee Letter, the 5 Subordination Agreements, the Sponsor Guaranty, the Subsidiary Guaranties, the Ormat Industries Letter and any other loan or security agreements or letter agreement or similar agreement, entered into by Administrative Agent, Depositary Agent or any Secured Party, on the one hand, and one or more Loan Parties, on the other hand, in connection with the transactions contemplated by the Credit Documents. "Debt" of any Person at any date means, without duplication, (a) all obligations (including contingent obligations) of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable and other accrued expenses arising in the ordinary course of business which in accordance with GAAP would be shown on the liability side of the balance sheet of such Person, (d) all obligations of such Person under leases which are or should be, in accordance with GAAP, recorded as capital leases in respect of which such Person is liable, (e) all deferred obligations of such Person to reimburse any bank or other Person in respect of amounts paid or advanced under a letter of credit or other instrument, (f) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, (g) all obligations under Interest Rate Agreements, and (h) all Debt of others guaranteed directly or indirectly by such Person or as to which such Person has an obligation substantially the economic equivalent of a guarantee. "Debt Service Reserve Account" has the meaning given in Section 1.1 of the Depositary Agreement. "Deeds of Trust" means the following documents, each substantially in the form of Exhibit D-l to the Credit Agreement: (a) the Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated as of the Closing Date, between HGC and Chicago Title Insurance Company, as trustee, for the benefit of Administrative Agent, (b) the Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated as of the Closing Date, between HFC and Chicago Title Insurance Company, as trustee, for the benefit of Administrative Agent, and (c) each Deed of Trust entered into after the Closing Date pursuant to Section 5.17 or 5.18 of the Credit Agreement. "Default Rate" has the meaning given in Section 2.4.3 of the Credit Agreement. "Depositary Agent" means Hudson United Bank, not in its individual capacity but solely as depositary agent, bank and securities intermediary under the Depositary Agreement. "Depositary Agreement" means the Depositary Agreement, dated as of the Closing Date, among Borrower, each Guarantor, Administrative Agent and Depositary Agent. "Distribution Suspense Account" has the meaning given in Section 1.1 of the Depositary Agreement. "Dollars" and "$" means United States dollars or such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts in the United States of America. 6 "DSR Letter of Credit" has the meaning given in Section 1.1. of the Depositary Agreement. "DSR Minimum Balance" means, for any quarterly period, an amount equal to all principal and interest in respect of the Loans due or to become due within such period. "Edison" means Southern California Edison Company, a California corporation. "Eminent Domain Proceeds" has the meaning given in Section 3.7.1 of the Depositary Agreement. "Energy I" means Covanta SIGC Energy, Inc., a Delaware corporation. "Energy II" means Covanta SIGC Energy II, Inc., a California corporation. "Environmental Claim" means any and all judicial proceedings or administrative enforcement proceedings claiming or seeking to impose or recover liabilities, losses, administrative, regulatory or judicial actions, suits, demands, decrees, claims, Liens, judgments, warning notices, notices of noncompliance or violation, investigations, proceedings, removal or remedial actions or orders, or damages (foreseeable and unforeseeable, including consequential and punitive damages), penalties, fees, out-of-pocket costs, expenses, disbursements or attorneys' or consultants' fees, relating in any way to (a) a violation or alleged violation of any Hazardous Substance Law or Permit issued under any Hazardous Substance Law or (b) a Release or threatened Release of Hazardous Substances. "Environmental Reports" means, collectively, (a) the Phase I Environmental Site Assessment Update, Mammoth-Pacific, L.P., Properties (MPI, MPII and PLESI), Mono County, California, prepared by Environmental Management Associates, Inc. and dated November 2003, and (b) the Phase I Environmental Site Assessment Update, Heber Geothermal Plant/SIGC Geothermal Plant and Associated Geothermal Properties, Imperial County, California, prepared by Environmental Management Associates, Inc. and dated November 2003. "Equity Funds" means any cash capital contribution provided or required to be provided by Sponsor to Borrower. "Equity Selling Debtors" means Covanta Heber Field Energy, Inc., Heber Field Energy II, Inc., ERC Energy, Inc., ERC Energy II, Inc., Heber Loan Partners, and Covanta Energy Americas, Inc. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means any trade or business (whether or not incorporated) that is treated as a single employer together with Borrower, any Guarantor or Non-Guarantor under Section 52 or 414 of the Code or Title IV of ERISA. "ERISA Plan" means any employee benefit plan (including any Multiemployer Plan) under Section 3(3) of ERISA (a) maintained by Borrower, any Guarantor or Non- 7 Guarantor or any ERISA Affiliate, or to which any of them contributes or is obligated to contribute, or has contributed or been obligated to contribute, or has any liability, and (b) covered by Title IV of ERISA or to which Section 302 of ERISA, Section 412 of the Code or Subtitle J of the Code applies. "Escrow Agreement" has the meaning given in Section 3.1.24 of the Credit Agreement. "Event of Default" has the meaning given in Section 7.1 of the Credit Agreement. "Event of Eminent Domain" means any compulsory transfer or taking by condemnation, eminent domain or exercise of a similar power, or transfer under threat of such compulsory transfer or taking, of any part of the Collateral, by any agency, department, authority, commission, board, instrumentality or political subdivision of the State of California, the United States or another Governmental Instrumentality having jurisdiction. "Federal Funds Rate" means, for any day, the weighted average of the per annum rates on overnight Federal funds transactions with member banks of the Federal Reserve System arranged by Federal funds brokers as published by the Federal Reserve Bank of New York for such day (or, if such rate is not so published for any day, the average rate charged by Administrative Agent on such day on such transactions as determined by Administrative Agent). "Federal Reserve Board" means the Board of Governors of the Federal Reserve System. "Fee Letter" means that certain letter agreement regarding fees, dated as of November 14, 2003 (as amended on November 20, 2003), by and among Beal Bank, S.S.B., Sponsor and Borrower. "FERC" means the Federal Energy Regulatory Commission and its successors. "FPA" means the Federal Power Act, excluding Sections 1-18, 21-30, 202(c), 210-214, 305(c) and any necessary enforcement provision of Part III of the Act with regard to the foregoing sections. "Funding Account" has the meaning given in Section 1.1 of the Depositary Agreement. "Funds Flow Memorandum" has the meaning given in Section 1.1 of the Depositary Agreement. "GAAP" means generally accepted accounting principles in the United States of America. "GE Buyout Conditions" means (a) OrHeber 1 shall have acquired the SIGC Project from Owner Participant pursuant to the terms of the Purchase Agreement, dated as of November 14, 2003, by and between OrHeber 1 (as assignee of Ormat Technologies) and Owner Participant (without giving effect to any amendments or waivers thereto which have not been 8 approved in writing by Administrative Agent), (b) each of the actions (including all actions relating to the creation of a valid and perfected Lien in favor of Administrative Agent on the assets so acquired by OrHeber 1) described in Sections 5.17(i)-(iv) of the Credit Agreement shall have been completed to Administrative Agent's satisfaction (other than the actions described in Section 5.17(iv)(E) of the Credit Agreement relating to surveys which shall be completed during the Applicable Post-Closing Period), (c) the delivery by Standard & Poor's Corporate Value Consulting of an appraisal report, in form and substance reasonably satisfactory to Administrative Agent, which concludes that, after giving effect to the satisfaction of the GE Buyout Conditions and the related Mammoth Collateral Release, the aggregate fair market value of the SIGC Project, HFC Project and HGC Project is equal to or greater than $206,000,000, and (d) the delivery by Borrower to Administrative Agent of a certificate, in form and substance reasonably satisfactory to Administrative Agent, certifying that (i) no Potential Event of Default relating to the SIGC Project exists, (ii) no Event of Default exists and (iii) each of the GE Buyout Conditions have been satisfied. "GE Lease" means the Lease Agreement dated September 1, 1993 between SIGC and Owner Trustee, and all related sale lease-back credit documents entered into in connection therewith. "GECC" means General Electric Capital Corporation, a New York corporation. "GECC Liens" means the Liens of GECC under the GE Lease. "GeothermEx Report" means the report of GeothermEx, Inc. dated November 2003 and titled "An Assessment of Resources Supply for Power Projects at Mammoth and Heber Geothermal Fields, California". "Governing Documents" means, with respect to any Person, the certificate or articles of incorporation, bylaws, partnership agreement, operating agreement or other organizational or governing documents of such Person. "Governmental Instrumentality" means any national, state or local government, any political subdivision thereof or any other governmental, quasi-governmental, judicial, public or statutory instrumentality, authority, body, agency, bureau or entity, (including any zoning authority, FERC, the Securities Exchange Commission, the Comptroller of the Currency or the Federal Reserve Board, any central bank or any comparable authority) or any arbitrator with authority to bind a party at law. "Governmental Rule" means any law, rule, regulation, ordinance, order, code interpretation, treaty, judgment, decree, directive, guidelines, policy or similar form of decision of any Governmental Instrumentality. "Guarantors" means HFC, HGC, OrHeber 1 and OrMammoth; provided that (a) as of and after any Mammoth Ownership Event, the term "Guarantors" shall include Mammoth Lakes and (b) as of and after any Lease Buyout, the term "Guarantors" shall include SIGC, ORNI, OrHeber 2 and OrHeber 3. 9 "Hazardous Substances" means (statutory acronyms and abbreviations having the meaning given them in the definition of "Hazardous Substances Laws") substances defined as "hazardous substances," "pollutants" or "contaminants" in Section 101 of the CERCLA; those substances defined as "hazardous waste," "hazardous materials" or "regulated substances" by the RCRA; those substances designated as a "hazardous substance" pursuant to Section 311 of the CWA; those substances defined as "hazardous materials" in Section 103 of the HMTA; those substances regulated as a hazardous chemical substance or mixture or as an imminently hazardous chemical substance or mixture pursuant to Section 6 or 7 of the TSCA; those substances defined as "contaminants" by Section 1401 of the SDWA, if present in excess of permissible levels; those substances regulated by the Oil Pollution Act; those substances defined as a pesticide pursuant to Section 2(u) of the FIFRA; those substances defined as a source, special nuclear or by-product material by Section 11 of the AEA; those substances defined as "residual radioactive material" by Section 101 of the UMTRCA; those substances defined as "toxic materials" or "harmful physical agents" pursuant to Section 6 of the OSHA); those substances defined as hazardous wastes in 40 C.F.R. Part 261.3; those substances defined as hazardous waste constituents in 40 C.F.R. Part 260.10, specifically including Appendix VII and VIII of Subpart D of 40 C.F.R. Part 261; those substances designated as hazardous substances in 40 C.F.R. Parts 116.4 and 302.4; those substances defined as hazardous substances or hazardous materials in 49 C.F.R. Part 171.8; those substances regulated as hazardous materials, hazardous substances, or toxic substances in 40 C.F.R. Part 1910; those substances regulated as hazardous materials, hazardous substances, or toxic substances in any other Hazardous Substances Laws; and those substances regulated as hazardous materials, hazardous substances, or toxic substances in the regulations adopted and publications promulgated pursuant to said laws, whether or not such regulations or publications are specifically referenced herein. "Hazardous Substances Law" means any of: (i) the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601 et seq.) ("CERCLA"); (ii) the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et seq.) ("Clean Water Act" or "CWA"): (iii) the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.) ("RCRA"); (iv) the Atomic Energy Act of 1954 (42 U.S.C. Section 2011 et seq.) ("AEA"); (v) the Clean Air Act (42 U.S.C. Section 7401 et seq.) ("CAA"); (vi) the Emergency Planning and Community Right to Know Act (42 U.S.C. Section 11001 et seq.) ("EPCRA"); (vii) the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. Section 136 et seq.) ("FIFRA"); (viii) the Oil Pollution Act of 1990 (P.L. 101-380, 104 Stat. 486); 10 (ix) the Safe Drinking Water Act (42 U.S.C. Section 300f et seq.) ("SDWA"); (x) the Surface Mining Control and Reclamation Act of 1974 (30 U.S.C. Section 1201 et seq.) ("SMCRA"); (xi) the Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.) ("TSCA"); (xii) the Hazardous Materials Transportation Act (49 U.S.C. Section 1801 et seq.) ("HMTA"); (xiii) the Uranium Mill Tailings Radiation Control Act of 1978 (42 U.S.C. Section 7901 et seq.) ("UMTRCA"); (xiv) the Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.) ("OSHA"); (xv) the California Hazardous Waste Control Act, Cal. Health & Safety Code Section 25100, et seq.; (xvi) the California Hazardous Substance Act, Cal. Health & Safety Code Section 25100, et seq.; (xvii) the Porter-Cologne Water Quality Control Act, Cal. Water Code Section 13000, et seq.; (xviii) California Public Resources Code Section 25500, et seq. (to the extent relating to environmental review of power generating facilities and sites); (xix) California Health & Safety Code Section 39000, et seq. (relating to air pollution control of stationary sources); (xx) California Fish & Game Code Section 1600, et seq. (relating to protection of stream beds); (xxi) California Endangered Species Act (Cal. Fish & Game Code Section 2050, et seq.); (xxii) California Health & Safety Code Section 25280, et seq. (relating to underground storage tanks); (xxiii) California Health & Safety Code Section 25500, et seq. (relating to hazardous materials response plans and inventory and Risk Management Plans); (xxiv) California Integrated Waste Management Act of 1989 (Cal. Public Resources Code Section 40000, et seq.); (xxv) California Environmental Quality Act (Cal. Public Resources Code Section 21000, et seq.); 11 (xxvi) California Safe Drinking Water Act (Cal. Health & Safety Code Section 116270, et seq.); (xxvii) Surface Mining and Reclamation Act of 1975 (Cal. Public Resources Code Section 2710, et seq.); (xxviii) IID Governmental Rules; and (xxix) all other Federal, state and local Governmental Rules relating to the protection of human health or the environment or which otherwise govern Hazardous Substances, and the regulations adopted and publications promulgated pursuant to all such foregoing laws. "Heber O&M Agreement" means the Operation and Maintenance Agreement, dated as of the Closing Date, by and between OrHeber 1, HGC, HFC and Heber Operator. "Heber Operator" means Sponsor. "HFC" means Heber Field Company, a California general partnership. "HFC Project" means the geothermal fluid facility located in Heber, California and owned by HFC. "HGC" means Heber Geothermal Company, a California general partnership. "HGC Connection Agreement" means the Plant Connection Agreement dated July 31, 1985 between IID and HGC. "HGC Geothermal Sales Agreement" means the Geothermal Sales Agreement dated December 18, 1991 between U.S. Trust Company and HGC, as amended by the First Amendment to Geothermal Sales Agreement dated January 12, 1993 between U.S. Trust Company and HGC and the Second Amendment to Geothermal Sales Agreement dated September 4, 1996 between U.S. Trust Company and HGC, and as assigned by U.S. Trust Company to HGC pursuant to the HFC Purchase and Sale Agreement dated as of December 17, 1999 between HGC and GECC. "HGC Interconnection Agreement" means the Interconnection Agreement dated August 12, 1985 between Edison and HGC. "HGC Power Purchase Agreement" means the Power Purchase and Sales Agreement dated as of August 26, 1983 between Chevron U.S.A. Inc. and Edison, as assigned by Chevron U.S.A. Inc. to HGC by the Assignment and Assumption Agreement dated August 26, 1983, and as amended by the Amendment No. 1 to the Power Purchase and Sales Agreement dated December 11, 1984 between HGC and Edison, the Settlement Agreement and Amendment No. 2 to the Power Purchase Contract dated August 7, 1995 between HGC and Edison, the Agreement Addressing Renewable Energy Pricing and Payment Issues dated June 19, 2001 between HGC and Edison, and the Amendment No. 1 to Agreement Addressing Renewable Energy Pricing and Payment Issues dated November 30, 2001 between HGC and Edison. 12 "HGC Project" means the 52 MW geothermal electric power project located in Heber, California and owned by HGC. "HGC Water Supply Agreement" means the Water Supply Agreement, dated August 16, 1994, between IID and HGC. "IID" means Imperial Irrigation District, a California irrigation district. "Independent Consultants" means, collectively, the Insurance Consultant, Independent Engineer, GeothermEx, Inc., Pace Global Energy Services, LLC, Environmental Management Associates and Standard & Poor's Corporate Value Consulting. "Independent Engineer" means Stone & Webster Management Consultants, Inc. or, at any time after the Closing Date, such other independent engineer or engineering firm as may be appointed by Administrative Agent. "Independent Engineer's Report" means the report of the Independent Engineer dated November 13, 2003 and titled "Independent Technical Evaluation of Covanta Geothermal Assets". "Initial Capital Expenditures Budget" means the capital expenditures plan and budget, detailed by quarter, of anticipated capital expenditures (including reasonable allowance for contingencies) applicable to the relevant Project for the 2004 and 2005 calendar years, attached as Exhibit G-l to the Credit Agreement. "Initial Operating Budget" means the operating plan and budget, detailed by month, of anticipated Project Revenues, such budget to include scheduled debt service, proposed dividend distributions, proposed Major Maintenance, proposed reserves and all anticipated O&M Costs (including reasonable allowance for contingencies) applicable to the relevant Project for the 2004 calendar year, attached as Exhibit G-2 to the Credit Agreement. "Insurance Consultant" means Marsh USA, Inc. "Insurance Proceeds" has the meaning given in Section 3.7.1 of the Depositary Agreement. "Insured Heber Real Property Interests" means, collectively, the real property interests created by or memorialized in the documents described under the headings (a) "Insured Geothermal Leases" in section A of Exhibit G-6 to the Credit Agreement, (b) "Insured Surface Leases" in section B of Exhibit G-6 to the Credit Agreement, (c) "Insured Easements" in section C of Exhibit G-6 to the Credit Agreement, (d) "Insured Heber Fee Title Interests" in section D of Exhibit G-6 to the Credit Agreement and (e) "Insured SIGC Interests" in section E of Exhibit G-6 to the Credit Agreement. "Insured Real Property Interests" means, collectively, (i) the Insured Heber Real Property Interests, (ii) the Mammoth G-l and G-2 Geothermal Lease and (iii) the Mammoth G-3 Geothermal Lease. 13 "Interconnection Agreements" means the HGC Interconnection Agreement, the Mammoth G-2 Interconnection Agreement and the Mammoth G-3 Interconnection Agreement. "Interest Period" means, with respect to any LIBOR Loan, the twelve-month period which commences on the first day of such Loan, or the effective date of any conversion (as the case may be) and ends on the last day of such twelve-month period; provided that no single day shall be deemed to be a part of two Interest Periods. "Interest Rate" means the Base Rate or the Adjusted LIBO Rate, as the case may be. "Interest Rate Agreements" means one or more interest rate swap agreements, caps, collars, or other master interest rate hedging mechanisms. "Lease Buyout" has the meaning given in Section 5.17 of the Credit Agreement. "Lease Financing" means the provision of senior secured credit facilities for the purpose of financing the Lease Buyout. "Lease Solution" has the meaning given in Section 5.17 of the Credit Agreement. "Lease Suspense Account" has the meaning given in Section 1.1 of the Depositary Agreement. "Legal Requirements" means, as to any Person, any requirement under a Permit and any Governmental Rule, in each case applicable to or binding upon such Person or any of its properties or to which such Person or any of its property is subject. "Lending Office" means, with respect to any Bank, the office designated in writing as such to Administrative Agent and Borrower from time to time. "LIBOR Loan" has the meaning given in Section 2.1.1(b)(i) of the Credit Agreement. "Lien" means, with respect to any property or asset, any mortgage, deed of trust, lien, pledge, charge, security interest, or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected or effective under applicable law, as well as the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Liquidation Costs" has the meaning given in Section 2.7 of the Credit Agreement. "Loan Party" means Ormat Technologies, Sponsor, Borrower, each Guarantor, each Non-Guarantor and any Affiliate of Sponsor (other than Ormat Industries) which may become a party to any Credit Document. "Loans" has the meaning given in Section 2.1.1(a) of the Credit Agreement. 14 "Loss Proceeds" has the meaning given in Section 3.7.1(b) of the Depositary Agreement. "Loss Proceeds Account" has the meaning given in Section 1.1 of the Depositary Agreement. "Major Casualty Event" has the meaning given in Section 3.7.2(b) of the Depositary Agreement. "Major Condemnation Casualty Event" has the meaning given in Section 3.7.2(b) of the Depositary Agreement. "Major Insurance Casualty Event" has the meaning given in Section 3.7.2(b) of the Depositary Agreement. "Major Maintenance" means labor, materials and other direct expenses for any overhaul of, or major maintenance procedure for, any of the Projects which requires significant disassembly or shutdown of such Project or any material portion thereof, (a) in accordance with Prudent Utility Practices, (b) pursuant to manufacturers' recommendations or (c) pursuant to any applicable Legal Requirement. "Major Project Documents" means the Power Purchase Agreements, the O&M Agreements, the Water Supply Agreements, the SIGC Transmission Service Agreement, the Connection Agreements, the Interconnection Agreements, the HGC Geothermal Sales Agreement, the SIGC Participation Agreement, the SIGC Escrow Agreement, the GE Lease, the SIGC Sublease, the Material Real Property Documents, the Acquisition Agreement, and, unless otherwise agreed by Administrative Agent prior to its execution and delivery, each Additional Project Document. "Major Project Participants" means, without duplication, the Project Companies, the Operators, Edison, Covanta, IID, GECC (until the Lease Buyout), Owner Trustee (until the Lease Buyout), Owner Participant (until the Lease Buyout), First Trust of New York (until the Lease Buyout), and any counterparty to any Additional Project Document which is a Major Project Document. "Majority Banks" means, at any time, Banks having Proportionate Shares which in the aggregate exceed 51%. "Make-Whole Premium" has the meaning given in Section 2.1.6(b)(ii) of the Credit Agreement. "Mammoth Collateral Release" shall have the meaning given in Section 3.3.1 of the Credit Agreement. "Mammoth G-l and G-2 Geothermal Lease" means the Lease dated August 31, 1983 between Magma Power Company, as successor in interest to Magma Energy, Inc., and Holt Geothermal Company, as assigned by Holt Geothermal Company to Mammoth-Pacific on August 31, 1983, and as amended by the First Amendment to Geothermal Lease dated April 30, 15 1987, as further amended by the Second Amendment to Geothermal Lease dated January 1, 1990 and as further amended by the Third Amendment to Geothermal Lease dated April 12, 1991. "Mammoth G-l Power Purchase Agreement" means the Amended and Restated Power Purchase and Sales Agreement Between Mammoth-Pacific and Southern California Edison Company dated as of December 2, 1986 between Mammoth-Pacific and Edison, as amended by the Amendment No. 1 to the Amended and Restated Power Purchase and Sales Agreement Between Mammoth Pacific and Southern California Edison Company dated May 18, 1990 between Mammoth Pacific and Edison, and as assigned by Mammoth Pacific to Mammoth Lakes, and as further amended by the Agreement Addressing Renewable Energy Pricing and Payment Issues dated June 19, 2001 between Mammoth Lakes and Edison and the Amendment No. 1 to Agreement Addressing Renewable Energy Pricing and Payment Issues dated November 30, 2001 between Mammoth Lakes and Edison, and the clarification letters by Edison re: contract terms dated November 27, 2001 and November 29, 2001. "Mammoth G-2 Interconnection Agreement" means the Interconnection Facilities Agreement ("Agreement") Seller Owned and Operated Facility dated October 27, 1989 between Mammoth Pacific and Edison, attached as Appendix A to the Mammoth G-2 Power Purchase Agreement, as assigned by Mammoth Pacific to Mammoth Lakes. "Mammoth G-2 Power Purchase Agreement" means the Power Purchase Contract Between Southern California Edison Company and Mammoth Pacific (Casa Diablo Geothermal II) dated as of April 15, 1985 between Mammoth Pacific and Edison, as amended by the Amendment No. 1 to the Power Purchase Contract Between Southern California Edison Company and Mammoth Pacific (Mammoth Pacific II Project) dated October 27, 1989 between Mammoth Pacific and Edison and the Amendment No. 2 to the Power Purchase Contract Between Southern California Edison Company and Mammoth Pacific dated December 20, 1989 between Mammoth Pacific and Edison, and as assigned by Mammoth Pacific to Mammoth Lakes, and as further amended by the Agreement Addressing Renewable Energy Pricing and Payment Issues dated June 19, 2001 between Mammoth Lakes and Edison, the Amendment No. 1 to Agreement Addressing Renewable Energy Pricing and Payment Issues, dated November 30, 2001 between Mammoth Lakes and Edison, and the clarification letters by Edison re: contract terms, dated November 27, 2001 and November 29, 2001. "Mammoth G-3 Geothermal Lease" means, collectively, the Federal Geothermal Resources Leases granted by the United States of America, as lessor acting through the Bureau of Land Management, Serial Files CACA 14408 and CACA 11667. "Mammoth G-3 Interconnection Agreement" means the Interconnection Facilities Agreement ("Agreement") Seller Owned and Operated Facility, dated October 27, 1989, between Edison and Pacific Lighting Energy Systems, attached as Appendix A to the Mammoth G-3 Power Purchase Agreement, as assigned by Pacific Lighting Energy Systems to Mammoth Lakes. "Mammoth G-3 Power Purchase Agreement" means the Power Purchase Contract Between Southern California Edison Company and Santa Fe Geothermal, Inc. (Casa Diablo) 16 dated as of April 16, 1985 between Edison and Santa Fe Geothermal, Inc., as assigned by Santa Fe Geothermal, Inc. to Pacific Lighting Energy Systems, and as amended by the Amendment No. 1 to Power Purchase Contract Between Southern California Edison Company and Pacific Lighting Energy Systems (PLES I Project) dated October 27, 1989 between Edison and Pacific Lighting Energy Systems and the Amendment No. 2 Power Purchase Contract Between Southern California Edison Company and Pacific Lighting Energy Systems dated December 20, 1989 between Edison and Pacific Lighting Energy Systems, as further assigned by Pacific Lighting Energy Systems to Mammoth Lakes, and as further amended by the Agreement Addressing Renewable Energy Pricing and Payment Issues dated June 19, 2001 between Mammoth Lakes and Edison, the Amendment No. 1 to Agreement Addressing Renewable Energy Pricing and Payment Issues dated November 30, 2001 between Mammoth Lakes and Edison, and the clarification letters by Edison re: contract terms, dated November 27, 2001 and November 29, 2001. "Mammoth G-3 Site License" means that certain License for Electric Power Plant Site Utilizing Geothermal Resources, Serial No. CACA 021918, dated July 26, 1989, granted by the United States of America, as licensor acting through the Department of the Interior Bureau of Land Management, and held by Mammoth Lakes. "Mammoth Lakes" means Mammoth-Pacific, L.P., a California limited partnership. "Mammoth O&M Agreement" means the Plant Operating Services Agreement dated as of January 1, 1995 between Mammoth Lakes and Pacific Power Plant Operations, as assigned by Pacific Power Plant Operations to Covanta Pacific Power Plant Operations, Inc. and as further assigned by Covanta Pacific Power Plant Operations, Inc. to Mammoth Operator. "Mammoth Operator" means Sponsor. "Mammoth Ownership Event" means an acquisition by OrMammoth of direct ownership interests of Mammoth Lakes such that OrMammoth owns 100% of the direct ownership interests of Mammoth Lakes. "Mammoth Prepayment Conditions" means (a) the delivery by Borrower to Administrative Agent of a notice that it intends to effectuate the Mammoth Collateral Release through the satisfaction of the Mammoth Prepayment Conditions, (b) the delivery by Borrower of such notice at least three Banking Days prior to the proposed Mammoth Collateral Release (and, in any event, on or before February 15, 2004), (c) the deposit by Borrower into the Funding Account of $28,900,000 (which amount represents the amount of the Loans attributable to OrMammoth, the Mammoth Project and the related Collateral), (d) the payment by Borrower to Administrative Agent, on behalf of Banks, of a non-refundable release fee $1,445,000, and (e) the delivery by Borrower to Administrative Agent of a certificate, in form and substance reasonably satisfactory to Administrative Agent, certifying that (i) no Event of Default exists, (ii) since the Closing Date, no Material Adverse Effect has occurred and is continuing, (iii) the Collateral proposed to be released pursuant to the Mammoth Collateral Release will be used to secure the payment of Ormat Technologies', Ormat Nevada's or Ormat Funding Corp.'s (as the 17 case may be) obligations under its capital markets financing, and (iv) each of the Mammoth Prepayment Conditions have been satisfied. "Mammoth Project" means the 40 MW geothermal electric power project (comprised of three geothermal plants) located near Mammoth Lakes, California and owned by Mammoth Lakes. "Mandatory Prepayment" has the meaning given in Section 2.1.6(c) of the Credit Agreement. "Material Adverse Effect" means (a) any event or occurrence of whatever nature which could reasonably be expected to materially and adversely affect Borrower's, any of the Project Companies' or any of the Major Project Participants' ability to perform its obligations under a Project Document, where such inability could reasonably be expected to have a material and adverse affect on the leasing, operation or ownership of any of the Projects, (b) any event or occurrence of whatever nature which could reasonably be expected to materially and adversely affect any Loan Party's ability to perform its obligations under the Credit Documents, and (c) any event or occurrence of whatever nature which could reasonably be expected to materially and adversely affect the validity or priority of the Secured Parties' security interests in the Collateral (viewed on a collective basis for each Project). "Material Heber Real Property Interests" means, collectively, the Insured Heber Real Property Interests and the Additional Material Heber Real Property Interests. "Material Real Property Documents" means, collectively, the documents that create or memorialize the Material Real Property Interests. "Material Real Property Interests" means, collectively, the Insured Real Property Interests, the Additional Material Heber Real Property Interests and the Mammoth G-3 Site License. "Maturity" or "maturity" means, with respect to any Loan, Borrowing, interest, fee or other amount payable by Borrower under the Credit Agreement or the other Credit Documents, the date such Loan, Borrowing, interest, fee or other amount becomes due, whether upon the stated maturity or due date, upon acceleration or otherwise. "Maturity Date" means December 18, 2019. "Minimum Notice Period" means (a) at least three Banking Days before the date of any Borrowing (except for the initial Borrowing, which shall be at least one Banking Day before the date of such initial Borrowing), continuation or conversion of a Type of Loan resulting in whole or in part in one or more LIBOR Loans, and (b) at least one Banking Day before any Borrowing or conversion of a Type of Loan resulting in whole or in part in one or more Base Rate Loans. "Monthly Date" means, for any month, the last Banking Day of such month. "Moody's" means Moody's Investors Service, Inc. 18 "Mortgaged Property" means, with respect to each Deed of Trust, the "Mortgaged Property" referred to in the granting clause of such Deed of Trust. "Multiemployer Plan" means any "Multiemployer Plan" (as such term is defined in Section 3(37) or 4001(a)(3) of ERISA). "Net Worth Covenant" means the covenant set forth in Section 4.7 of the Sponsor Guaranty. "Non-Advancing Bank" has the meaning given in Section 9.12 of the Credit Agreement. "Non-Guarantors" means Mammoth Lakes, ORNI, OrHeber 2, OrHeber 3 and SIGC; provided that (a) as of and after any Mammoth Ownership Event, the term "Non-Guarantors" shall not include Mammoth Lakes and (b) as of and after any Lease Buyout, the term "Non-Guarantors" shall not include SIGC, ORNI, OrHeber 2 and OrHeber 3. "Non-Major Casualty Event" has the meaning given in Section 3.7.2(a) of the Depositary Agreement. "Non-Major Condemnation Casualty Event" has the meaning given in Section 3.7.2(a) of the Depositary Agreement. "Non-Major Insurance Casualty Event" has the meaning given in Section 3.7.2(a) of the Depositary Agreement. "Non-Material Real Property Interests" means, collectively, any real property interests held by a Project Company that are not a Material Real Property Interest. "Nonrecourse Persons" has the meaning given in Article 8 of the Credit Agreement. "Note" has the meaning given in Section 2.1.3 of the Credit Agreement. "Notice of Borrowing" has the meaning given in Section 2.1.1(b) of the Credit Agreement. "Notice of Conversion of Loan Type" has the meaning given in Section 2.1.5 of the Credit Agreement. "O&M Account" has the meaning given in Section 1.1 of the Depositary Agreement. "O&M Agreements" means the Heber O&M Agreement and the Mammoth O&M Agreement. "O&M Costs" for any period, cash amounts incurred and paid by any of the Project Companies for the operation and maintenance of any of the Projects or any portion 19 thereof, including (a) premiums for insurance policies, (b) costs of obtaining any other materials, supplies, utilities or services for any of the Projects, (c) costs of obtaining, maintaining, renewing and amending Permits, (d) franchise, licensing, property, real estate, sales and excise taxes, (e) general and administrative expenses, (f) employee salaries, wages and other employment-related costs, (g) costs required to be paid by any of the Project Companies under any Project Document or Credit Document (other than scheduled debt service), (h) legal and other transaction costs and all other fees payable to any of the Secured Parties (other than amounts constituting scheduled debt service), (i) expenditures made in connection with Major Maintenance, and (j) all other fees and expenses necessary for the continued operation and maintenance of any of the Projects and the conduct of the business of any of the Projects, but exclusive in all cases of non-cash charges, including depreciation or obsolescence charges or reserves therefor, amortization of intangibles or other bookkeeping entries of a similar nature, and also exclusive of all interest charges and charges for the payment or amortization of principal of Debt of any of the Loan Parties. O&M Costs shall not include (i) capital expenditures (other than capital expenditures made in connection with Major Maintenance), (ii) payments for restoration or repair of any of the Projects from the Loss Proceeds Account or (iii) any of the investments described in Section 6.6(b) of the Credit Agreement. "Obligations" means and includes, with respect to any Loan Party, all loans, advances, debts, liabilities, and obligations, howsoever arising, owed by such Person to Administrative Agent, Depositary Agent or the Banks of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to the terms of the Credit Agreement or any of the other Credit Documents, including all interest, reasonable fees, reasonable charges, reasonable expenses, reasonable attorneys' fees and consultant fees chargeable to such Person and payable by such Person hereunder or thereunder. "Operating Account" has the meaning given in Section 6.14 of the Credit Agreement. "Operating Budget" has the meaning given in Section 5.11.1 of the Credit Agreement. "Operating Cash Available for Debt Service" means, for any period, Project Revenues during such period minus O&M Costs during such period. "Operative Documents" means, collectively, the Credit Documents and the Project Documents. "Operators" means SIGC Operator, Heber Operator and Mammoth Operator. "OrHeber 1" means OrHeber 1 Inc., a Delaware corporation and a wholly-owned direct Subsidiary of Borrower. "OrHeber 2" means OrHeber 2 Inc., a Delaware corporation and a wholly-owned direct Subsidiary of Borrower. 20 "OrHeber 3" means OrHeber 3 Inc., a Delaware corporation and a wholly-owned direct Subsidiary of Borrower. "OrMammoth" means OrMammoth Inc., a Delaware corporation and a wholly-owned direct Subsidiary of Borrower. "Ormat Industries" means Ormat Industries Ltd., a company registered under the laws of Israel and the sole shareholder of Ormat Technologies. "Ormat Industries Letter" means the letter from Ormat Industries to Administrative Agent, pursuant to which Ormat Industries shall (a) acknowledge the transactions contemplated by the Ormat Technologies Subordination Agreement and the Net Worth Covenant contained in the Sponsor Guaranty, (b) acknowledge that the Banks are relying on the Ormat Technologies Subordination Agreement and the Sponsor Guaranty (including the Net Worth Covenant) and (c) agree not to take any action which could reasonably be expected to result in the violation of the Ormat Technologies Subordination Agreement or the Net Worth Covenant. "Ormat Nevada Subordination Agreement" means the Subordination Agreement, dated as of the Closing Date, among Sponsor, Borrower and Administrative Agent, pursuant to which Sponsor shall subordinate its right to receive payments under any Subordinated Loans. "Ormat Technologies" means Ormat Technologies, Inc., a Delaware corporation, the sole shareholder of Sponsor. "Ormat Technologies Subordination Agreement" means the Subordination Agreement, dated as of the Closing Date, among Sponsor, Ormat Technologies and Administrative Agent, pursuant to which Ormat Technologies shall subordinate its right to receive payments under the intercompany loans it has and will make to Sponsor to the extent necessary for Sponsor to satisfy the Net Worth Covenant. "ORNI" means ORNI 10 LLC, a Delaware limited liability company. "Other Taxes" has the meaning given in Section 2.4.4(a) of the Credit Agreement. "Outstanding Non-Royalty Claimant" has the meaning given in Section 4.20 of the Credit Agreement. "Owner Participant" means Aircraft Services Corporation, a Nevada corporation. "Owner Trustee" means U.S. Trust Company of California, N.A. "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. "Permit" means any action, approval, consent, waiver, exemption, variance, franchise, order, permit, authorization, right or license of or from a Governmental Instrumentality; provided, however, that the Mammoth G-3 Geothermal Lease, the Mammoth G-3 Site License, the Additional Mammoth Leases and any other lease or right-of-way issued by 21 the Bureau of Land Management shall not be considered to be "Permits" and shall be governed by the provisions of the Credit Documents that deal with real property interests. "Permitted Debt" means (a) Debt incurred under the Credit Documents, (b) Debt associated with the GE Lease, (c) the Subordinated Loans, (d) trade or other similar Debt incurred in the ordinary course of business (but not for borrowed money), either not more than 90 days past due or being contested in good faith, (e) Debt pursuant to the terms of a Project Document (but not for borrowed money), either not more than 90 days past due or being contested in good faith, (f) contingent liabilities, to the extent otherwise constituting Debt, including those relating to (i) the acquisition of goods, supplies or merchandise in the normal course of business or normal trade credit, (ii) the endorsement of negotiable instruments received in the normal course of its business, and (iii) contingent liabilities incurred with respect to any Operative Document or any Permit related to a Project, (g) obligations in respect of surety bonds or similar instruments in an aggregate amount not exceeding $1,500,000 at any one time outstanding and (h) Debt in respect of a DSR Letter of Credit that is subordinated to the Obligations pursuant to the subordination terms set forth in Exhibit D-4 to the Credit Agreement. "Permitted Investments" means (a) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having a maturity not exceeding one year from the date of issuance, (b) time deposits and certificates of deposit of any Bank or any domestic or foreign commercial bank whose outstanding long-term debt is rated at least A-l or the equivalent thereof by S&P or at least P-l or the equivalent thereof by Moody's having capital and surplus in excess of $500,000,000 and, in each case, having a maturity not exceeding 90 days from the date of acquisition, (c) commercial paper issued by any domestic corporation rated at least A-l or the equivalent thereof by S&P or at least P-l or the equivalent thereof by Moody's and, in each case, having a maturity not exceeding 90 days from the date of acquisition, (d) fully secured repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (a) above entered into with any Bank or bank meeting the qualifications established in clause (b) above, (e) high-grade corporate bonds rated at least AA or the equivalent thereof by S&P or at least Aa2 or the equivalent thereof by Moody's and, in each case, having a maturity not exceeding 90 days from the date of acquisition, and (f) money market mutual funds whose investment criteria are substantially similar to items (a) through (e) of this definition. "Permitted Liens" means (a) the Liens, rights and interests of Administrative Agent and any other Secured Party as provided in the Credit Documents; (b) Liens for any tax, assessment or other governmental charge, either secured by a bond or other security reasonably acceptable to Administrative Agent or not yet due or being contested in good faith and by appropriate proceedings, so long as (i) such proceedings shall not involve any substantial danger of the sale, forfeiture or loss of any Project, any Site or any easements, as the case may be, title thereto or any interest therein and shall not interfere in any material respect with the use or disposition of any Project, any Site or any easements, (ii) a bond or other security reasonably acceptable to Administrative Agent has been posted or provided in such manner and amount as to reasonably assure Administrative Agent that any taxes, assessments or other charges determined to be due will be promptly paid in full when such contest is determined, or 22 (iii) adequate cash reserves have been provided therefor; (c) materialmen's, mechanics', workers', repairmen's, employees' or other like Liens, arising in the ordinary course of business or in connection with the improvement of any Project after the Closing Date (or the mechanics' liens referred to in item No. 7 to Schedule 4.10 of the Acquisition Agreement), either for amounts not yet due or for amounts being contested in good faith and by appropriate proceedings, so long as (i) such proceedings shall not involve any substantial danger of the sale, forfeiture or loss of any Project, any Site or any easements, as the case may be, title thereto or any interest therein and shall not interfere in any material respect with the use or disposition of any Project, any Site or any easements, (ii) a bond or other security reasonably acceptable to Administrative Agent has been posted or provided in such manner and amount as to assure Administrative Agent that any amounts determined to be due will be promptly paid in full when such contest is determined, or (iii) adequate cash reserves have been provided therefor; (d) Liens arising out of judgments or awards so long as an appeal or proceeding for review is being prosecuted in good faith and for the payment of which adequate reserves, bonds or other security reasonably acceptable to Administrative Agent have been provided or are fully covered by insurance (subject to a customary deductible); (e) Title Exceptions; (f) Liens, deposits or pledges in connection with workers' compensation, unemployment insurance, or other forms of governmental insurance or benefits, or to secure statutory obligations or performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases, or for purposes of like general nature in the ordinary course of its business, not to exceed $1,000,000 in the aggregate at any time, and with any such Lien to be released as promptly as practicable; (g) other Liens incident to the ordinary course of business that are not incurred in connection with the obtaining of any loan, advance or credit and that do not in the aggregate materially impair the use of the property or assets of the applicable Loan Party (other than Ormat Technologies) or the value of such property or assets for the purposes of such business; (h) involuntary Liens (including a Lien of an attachment, judgment or execution) securing a charge or obligation, on any of Borrower's property, either real or personal, whether now or hereafter owned in the aggregate sum of less than $500,000; (i) until the Lease Buyout, the GECC Liens; and (j) any Liens and encumbrances (except those that could reasonably be expected to have a Material Adverse Effect) against any of the lands that are the subject of the Uninsured Real Property Interests. "Permitted Reorganization" means any transfer, assignment, merger, consolidation or other similar transaction pursuant to which one or more of ORNI, OrHeber 2 and OrHeber 3 cease to be a holding company formed for the primary purpose of owning equity interests in or more of the Project Companies or another Loan Party. Any such reorganization shall be permitted only if: (a) after giving effect to such reorganization, Administrative Agent, for the benefit of the Secured Parties, shall have a first-priority perfected Lien on the ownership interests of the remaining Guarantors and Non-Guarantors (other than (i) until a Mammoth Ownership Event, Mammoth Lakes and (ii) until the Lease Buyout, ORNI, OrHeber 2, OrHeber 3 and SIGC); (b) the applicable security agreements and pledge agreements shall have been amended in a manner satisfactory to Administrative Agent to preserve, protect and maintain the benefits of the Secured Parties' Liens on the Collateral; (c) each of Sponsor and the Guarantors shall have reaffirmed their respective obligations under the Sponsor Guaranty or the applicable Subsidiary Guaranty, as the case may be; (d) the applicable reorganization documents (including any amendments to any Loan Party's Governing Documents) shall be satisfactory to Administrative Agent; (e) Administrative Agent shall have received, and be satisfied with, each 23 of the documents described in Sections 3.1.1, 3.1.3 and 3.1.4 and the first sentence of Section 3.1.5 of the Credit Agreement; (f) Administrative Agent shall have received opinions of counsel to the Loan Parties involved with such reorganization, which opinions shall be satisfactory to Administrative Agent and shall cover or confirm, with respect to such reorganization, (i) the due incorporation of each such Loan Party, (ii) the due authorization and enforceability of each Major Project Document and Credit Document to which any such Loan Party is a party as of the date of such reorganization, (iii) regulatory matters (including preservation of QF status), (iv) the validity, perfection and priority of the Liens under the Collateral Documents, (v) Investment Company Act of 1940 matters, (vi) no violations of 1aw and no conflicts with certain agreements, court orders and Governing Documents, and (vii) receipt of all necessary consents and governmental approvals; (g) no Potential Event of Default or Event of Default shall have occurred and be continuing or would occur after giving effect to such reorganization; (h) with respect to SIGC, ORNI, OrHeber 2 and OrHeber 3, no such reorganization shall be permitted until the Lease Buyout occurs; and (i) the applicable surviving Loan Parties shall have made representations and warranties with respect to each of the matters described in Sections 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.9, 4.15, 4.16, 4.24 and 4.30 of the Credit Agreement. "Permitted Sponsor Sale" means any transfer, sale or other similar disposition pursuant to which Sponsor disposes up to 49% of its economic (but not voting) interests in Borrower to any Person. Any such disposition shall only be permitted if: (a) such Person shall not have control over the management or affairs of Borrower; (b) such Person shall be a corporation, limited liability company or limited liability partnership formed in the United States; (c) Sponsor shall have reaffirmed its obligations under the Sponsor Guaranty; (d) after giving effect to such disposition, Administrative Agent, for the benefit of the Secured Parties, shall have a first-priority perfected Lien on all of the ownership interests of Borrower; (e) Administrative Agent shall have received opinions of counsel to Sponsor and such Person, which opinions shall be satisfactory to Administrative Agent and shall cover or confirm, with respect to such disposition, (i) the due incorporation of Sponsor and such Person, (ii) the due authorization and enforceability of each Major Project Document and Credit Document to which any Sponsor or such Person is a party as of the date of such disposition, (iii) regulatory matters (including preservation of QF status), (iv) the validity, perfection and priority of the Liens under the applicable pledge agreement, (v) Investment Company Act of 1940 matters, (vi) no violations of law and no conflicts with certain agreements, court orders and Governing Documents, and (vii) receipt of all necessary consents and governmental approvals; (f) Administrative Agent shall have received from Sponsor and such Person, and be satisfied with, each of the documents described in described in Sections 3.1.1, 3.1.3 and 3.1.4 (with respect to such Person only) and the first sentence of Section 3.1.5 of the Credit Agreement; and (g) no Potential Event of Default or Event of Default shall have occurred and be continuing or would occur after giving effect to such reorganization. "Person" means any natural person, corporation, partnership, limited liability company, firm, association, Governmental Instrumentality or any other entity whether acting in an individual, fiduciary or other capacity. "Pledge Agreements" means the following agreements, each in substantially the form of Exhibit D-3 to the Credit Agreement: (a) the Pledge and Security Agreement, dated as of the Closing Date, among Sponsor, Borrower and Administrative Agent, (b) the Pledge and Security Agreement, dated as of the Closing Date, among Borrower, OrHeber 1 and Administrative Agent, (c) the Pledge and Security Agreement, dated as of the Closing Date, 24 among Borrower, OrMammoth and Administrative Agent, (d) the Pledge and Security Agreement, dated as of the Closing Date, among Borrower, OrHeber 1, HFC, HGC and Administrative Agent, (e) the Pledge and Security Agreement, dated as of the Closing Date, among OrHeber 1, ORNI and Administrative Agent and (f) each Pledge Agreement entered into after the Closing Date pursuant to Section 5.17 or 5.18 of the Credit Agreement. "Post-Closing Title Work" has the meaning given in Section 5.20 of the Credit Agreement. "Potential Event of Default" means the occurrence of any of the events specified in Section 7.1 of the Credit Agreement, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Power Purchase Agreements" means the HGC Power Purchase Agreement, the Mammoth G-l Power Purchase Agreement, the Mammoth G-2 Power Purchase Agreement, the Mammoth G-3 Power Purchase Agreement and the SIGC Power Purchase Agreement and any additional power purchase agreements entered into between Edison and any of the Project Companies. "Principal Repayment Dates" means (a) each March 31, June 30, September 30 and December 31, commencing on June 30, 2004 and (b) the Maturity Date. "Project Companies" means HFC, HGC, Mammoth Lakes and SIGC. "Project Documents" means, without duplication, the Major Project Documents and any other agreement or document relating to the development, construction or operation of a Project to which any Project Company is a party. "Project Document Modification" has the meaning given in Section 6.12.1 of the Credit Agreement. "Project Revenues" means all income and cash receipts of Borrower, any of the Guarantors and any of the Non-Guarantors derived from the ownership, leasing or operation of any of the Projects, including payments received by any of the Project Companies under the Power Purchase Agreements, proceeds of any delay in start up or business interruption or liability insurance (to the extent such liability insurance proceeds represent reimbursement of third party claims previously paid by a Loan Party), income derived from the sale or use of electric capacity or energy transmitted or distributed or ancillary services produced by any of the Projects, income derived from the sale of "green credits" or "green-tags", income derived from the production of renewable energy from any Governmental Instrumentality (including, without limitation, the California Energy Commission), income derived from the monetization of any credits earned in connection with the production of renewable energy, investment income on amounts in the Accounts (solely to the extent deposited in the applicable Account), and any working capital acquired by Borrower, any of the Guarantors or any of the Non-Guarantors under the Acquisition Agreement in excess of the amount of any Sponsor Support Payments made by Sponsor to Borrower pursuant to Section 2.2(b) of the Sponsor Guaranty, but excluding (a) proceeds of casualty insurance, (b) the proceeds of any condemnation awards relating to the Project and (c) proceeds from the Collateral Documents. With respect to Mammoth Lakes and, 25 until the termination of the GE Lease, OrHeber 2, OrHeber 3, ORNI and SIGC, Project Revenues shall only include income, cash receipts and proceeds which Mammoth Lakes, OrHeber 2, OrHeber 3, ORNI or SIGC, as the case may be, are entitled to (and actually receive) under Mammoth Lakes' Governing Documents or under the GE Lease, respectively. "Projections" means a projection of operating results for the Projects over a period commencing on the Closing Date and ending on December 31, 2023, which projection is attached as Exhibit G-3 to the Credit Agreement. "Projects" means the HFC Project, the HGC Project, the Mammoth Project and the SIGC Project. "Proportionate Share" means, with respect to each Bank at any time, a percentage equal to (a) with respect to any determination made prior to the making of any Loans hereunder, the percentage interest of such Bank in the Total Senior Loan Commitment, and (b) with respect to any determination made after the making of any Loans hereunder, the percentage interest of such Bank in the outstanding Loans. "Prudent Utility Practices" means those practices, methods, equipment, specifications and standards of safety and performance, as the same may change from time to time, as are commonly used by geothermal electric power projects in the State of California of a type and size similar to the Project as good, safe and prudent engineering practices in connection with the operation, maintenance, repair and use of electrical and other equipment, facilities and improvements of such power projects, that, in the exercise of reasonable judgment, based on the facts known at the time, would have been expected to accomplish the desired result in a manner consistent with the interest of safety, performance, dependability, efficiency and economy. "Prudent Utility Practices" does not necessarily mean one particular practice, method, equipment specification or standard in all cases, but is instead intended to encompass a broad range of acceptable practices, methods, equipment specifications and standards. "PUHCA" means the Public Utility Holding Company Act of 1935, as amended. "PURPA" means the Public Utility Regulatory Policies Act of 1978, as amended. "QF" means a "qualifying facility" as defined under the FPA, as amended by PURPA and Subpart B of Part 292 of the FERC's regulations. "Real Property Standard" means, when applied to any real property-related provision of the Credit Agreement, the fact that (a) the particular matter could not reasonably be expected to have a Material Adverse Effect (as determined by Administrative Agent) and (b) such matter can reasonably be expected to be satisfactorily cured or remedied by the performance of the Post-Closing Title Work (as determined by Administrative Agent). "Register" has the meaning given in Section 2.1.7 of the Credit Agreement. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System (or any successor). 26 "Regulatory Change" means any change after the Closing Date in Legal Requirements, or the adoption or making after such date of any interpretations, directives or requests of or under any Legal Requirements (whether or not having the force of law) by any Governmental Instrumentality charged with the interpretation or administration thereof. "Release" means disposing, discharging, injecting, spilling, leaking, leaching, dumping, pumping, pouring, emitting, escaping, emptying, seeping, placing or the like, into or upon any land or water or air, or otherwise entering into the environment. "Release Date" has the meaning given in Section 3.3.2 of the Credit Agreement. "Release Notice" has the meaning given in Section 3.3.2 of the Credit Agreement. "Reorganizing Debtors" means each of the Guarantors (other than OrHeber 1, ORNI and OrMammoth) and Non-Guarantors (other than Mammoth Lakes, OrHeber 2 and OrHeber 3). "Replacement Bank" has the meaning given in Section 2.9.1 of the Credit Agreement. "Replacement Obligor" means (a) with respect to any Person party to a Major Project Document in effect on the Closing Date, any Person satisfactory to Administrative Agent acting at the direction of the Majority Banks, or (b) with respect to any Person party to an Additional Project Document, any Person satisfactory to Administrative Agent and having credit, or acceptable credit support, equal to or greater than that of the replaced Person (or otherwise acceptable to Administrative Agent) on the date that the applicable Additional Project Document was entered into who, pursuant to any definitive agreement, definitive guarantee or definitive backup arrangement, in each case reasonably satisfactory to Administrative Agent, assumes the obligation of providing the services and products on terms and conditions no less favorable to Borrower than those which such Person is obligated to provide pursuant to the applicable Additional Project Document. "Reportable Event" means any of the events set forth in Section 4043(b) or (c) of ERISA for which notice to the PBGC has not been waived and, in the case of any event subject to Section 4043(b) of ERISA, for purposes of Section 5.4.17, the event shall be deemed to have occurred on the date by which notice of such event is required to be provided to the PBGC with respect thereto. "Request for Notice" means a request for notice or similar document recorded pursuant to Section 2924B of the California Civil Code. "Required Banks" means, at any time, Banks having Proportionate Shares which in the aggregate equal or exceed 66.67%. "Reserve Requirement" means, for LIBOR Loans, the maximum rate (expressed as a percentage) at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during the Interest Period therefor under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding $1,000,000,000 27 against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks by reason of any Regulatory Change against (a) any category of liabilities which includes deposits by reference to which the Adjusted LIBO Rate or LIBOR Loans is to be determined, (b) any category of liabilities or extensions of credit or other assets which include LIBOR Loans or (c) any category of liabilities or extensions of credit which are considered irrevocable commitments to lend. "Responsible Officer" means, as to any Person, its president, chief executive officer, any vice president, treasurer, chief financial officer, secretary or assistant secretary or any natural Person who is a managing general partner or manager or managing member of a limited liability company (or any of the preceding with regard to any such managing general partner, manager or managing member). "Restricted Payments Conditions" has the meaning given in Section 6.19 of the Credit Agreement. "Revenue Account" has the meaning given in Section 1.1 of the Depositary Agreement. "S&P" means Standard & Poor's Corporation and its successors and assigns. "Secured Parties" means Administrative Agent, each Bank and each of their respective successors, permitted transferees and permitted assigns; provided, that (a) no Affiliate of Sponsor and (b) no counterparty to an Interest Rate Agreement entered into by Borrower, any Guarantor or any Non-Guarantor shall be a "Secured Party" hereunder or under any other Credit Document. Nothing in this definition shall limit any Loan Party's subrogation rights provided for in the Credit Documents. "Security Agreements" means the following agreements, each in substantially the form of Exhibit D-2 to the Credit Agreement: (a) the Security Agreement, dated as of the Closing Date, between Administrative Agent and Borrower, (b) the Security Agreement, dated as of the Closing Date, between Administrative Agent and HFC, (c) the Security Agreement, dated as of the Closing Date, between Administrative Agent and HGC, (d) the Security Agreement, dated as of the Closing Date, between Administrative Agent and OrMammoth, (e) the Security Agreement, dated as of the Closing Date, between Administrative Agent and OrHeber 1, and (f) each Security Agreement entered into after the Closing Date pursuant to Section 5.17 or 5.18 of the Credit Agreement. "Seller Plan of Reorganization" means that certain Heber Debtors' Third Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code, dated November 21, 2003, proposed and filed by Amor, Energy I, Energy II, HFC, HGC and SIGC as debtors and debtors in possession under chapter 11 of the Bankruptcy Law and as confirmed by the Confirmation Order. "Sellers" means Covanta Heber Field Energy, Inc., Heber Field Energy II, Inc., ERC Energy, Inc., ERC Energy II, Inc., Heber Loan Partners, Covanta Power Pacific, Inc., 28 Covanta Energy Americas, Inc., Pacific Geothermal Company, Mammoth Geothermal Company, Amor, Energy I and Energy II. "Senior Loan Commitment" means, at any time with respect to each Bank, such Bank's Proportionate Share of the Total Senior Loan Commitment at such time. "SIGC" means Second Imperial Geothermal Company, L.P., a California limited partnership. "SIGC Connection Agreement" means the Plant Connection Agreement dated October 27, 1992 between IID and SIGC. "SIGC Escrow Agreement" means the First Amended and Restated Escrow Agreement dated as of September 1, 1993 among SIGC, Owner Trustee, Owner Participant, GECC and Morgan Guaranty Trust Company of New York, as amended by the letter agreements dated as of September 8, 1997 and December 20, 2000 among SIGC, GECC, Owner Participant, Owner Trustee and First Trust of New York, as successor in interest to Morgan Guaranty Trust Company of New York. "SIGC O&M Agreement" means the Operation and Maintenance Agreement dated as of November 24, 2002 between SIGC and Ogden SIGC Geothermal Operations, Inc., as assigned by Ogden SIGC Geothermal Operations, Inc. to Covanta SIGC Geothermal Operations, Inc., and as further assigned by Covanta SIGC Geothermal Operations, Inc. to SIGC Operator. "SIGC Operator" means ORNI 8 LLC. "SIGC Participation Agreement" means the Participation Agreement dated as of November 24, 1992 among SIGC, Amor, Energy I and Energy II as successors to Second Imperial Continental, Inc., Ogden SIGC Geothermal Operations, Inc., Owner Trustee, Owner Participant, and GECC, as amended by the Amendment No. 1 dated as of September 1, 1993 among SIGC, Amor, Energy I and Energy II as successors to Second Imperial Continental, Inc., Ogden SIGC Geothermal Operations, Inc., Owner Trustee, Owner Participant, and GECC. "SIGC Power Purchase Agreement" means the Power Purchase Contract dated as of April 16, 1985 between SIGC and Edison, as amended by the Amendment No. 1 to the Power Purchase Contract dated October 23, 1987 between SIGC and Edison, the Amendment No. 2 to the Power Purchase Contract dated July 27, 1990 between SIGC and Edison, the Amendment No. 3 to the Power Purchase Contract dated November 24, 1992 between SIGC and Edison, the Agreement Addressing Renewable Energy Pricing and Payment Issues dated June 19, 2001 between SIGC and Edison, the Amendment No. 1 to Agreement Addressing Renewable Energy Pricing and Payment Issues dated November 30, 2001 between SIGC and Edison, and the clarification letter by Edison re: Contract Terms dated November 13, 1992. "SIGC Project" means the 48 MW geothermal electric power project located in Heber, California and leased by SIGC pursuant to the GE Lease. "SIGC Sublease" means the Sublease and Geothermal Fluid Agreement dated November 17, 1992 between SIGC, HFC and Owner Trustee, as amended by Amendment No. 1 29 dated December 20, 2000, Amendment No. 2 dated February 11, 2002 and Amendment No. 3 dated August 31, 1993. "SIGC Transmission Service Agreement" means the IID-SIGC Transmission Service Agreement for Alternative Resources dated October 27, 1992 between IDD and SIGC. "SIGC Water Supply Agreement" means the Water Supply Agreement dated October 27, 1992 between IID and SIGC. "Site" means, with respect to a Project, all real property interests (viewed collectively) necessary to operate such Project in accordance with the terms of the applicable Power Purchase Agreements and the Projections, including the Material Real Property Interests. "Solvent" means, with respect to any Loan Party on a particular date, that on such date: (a) such Loan Party will be able to pay its debts as they mature in the ordinary course; (b) such Loan Party will have capital sufficient to carry on its business and all businesses in which it presently intends to engage; (c) such Loan Party will have assets which, at fair valuation and at present fair salable value on a going concern basis, are greater than the amount of its liabilities, whether direct or contingent, matured or unmatured; and (d) such Loan Party is not engaged in a business or transaction, and is not about to engage in a business or transaction, for which such Loan Party's property would constitute an unreasonably small capital; provided, however, that in determining whether any Loan Party is Solvent, such determination shall be made assuming that the Obligations are joint and several Obligations of all the Loan Parties other than Sponsor and Ormat Technologies, and that each of the Loan Parties (other than Ormat Technologies), to the extent that each such Loan Party has the financial resources to do so, will contribute to the maximum extent permitted under the applicable Credit Documents, such Loan Party's portion of the Obligations. "Sponsor" means Ormat Nevada Inc., a Delaware corporation, the sole shareholder of Borrower and a wholly-owned direct Subsidiary of Ormat Technologies. "Sponsor Guaranty" means that certain Sponsor Guaranty, dated as of the Closing Date, by and among Sponsor, Borrower and Administrative Agent. "Subordinated Loans" means the Debt of Borrower to Sponsor, which Debt shall (a) be subordinated to the Obligations pursuant to the terms of the Ormat Nevada Subordination Agreement, (b) accrue at an interest rate equal to the higher of (i) 5.00% per annum and (ii) the applicable federal rate (within the meaning of Section 1274(d) of the Code), (c) be due and payable (inclusive of principal and interest thereon) not earlier than the date that is 12 months after the Maturity Date, and (d) documented pursuant to the Credit Facility Due 31 December 2020, dated as of the Closing Date, between Sponsor and Borrower. "Subordination Agreements" means the Ormat Technologies Subordination Agreement and the Ormat Nevada Subordination Agreement. "Subsidiary" means, as to any Person, a corporation, partnership, limited liability company or other entity of which such Person: (a) owns 10% or more of the shares of stock or other ownership interests having ordinary voting power (other than stock or such other 30 ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership, limited liability company or other entity and/or (b) controls the management, directly or indirectly through one or more intermediaries. "Subsidiary Guaranties" means the following agreements, each substantially in the form of Exhibit D-5 to the Credit Agreement: (a) the Subsidiary Guaranty, dated as of the Closing Date, between Administrative Agent and HFC, (b) the Subsidiary Guaranty, dated as of the Closing Date, between Administrative Agent and HGC, (c) the Subsidiary Guaranty, dated as of the Closing Date, between Administrative Agent and OrMammoth, (d) the Subsidiary Guaranty, dated as of the Closing Date, between Administrative Agent and OrHeber 1, and (e) each Subsidiary Guaranty entered into after the Closing Date pursuant to Section 5.17 or 5.18 of the Credit Agreement. "Taxes" has the meaning, with respect to the Loans, given in Section 2.4.4(a) of the Credit Agreement. "Title Exceptions" means (a) the exceptions to title set forth in the title policies, proformas and commitments referred to in Section 7.9 of the Acquisition Agreement and (b) any other exceptions to title approved by the Banks pursuant to Section 3.2.12(b) of the Credit Agreement. "Title Insurer" means Chicago Title Insurance Company or any other title company that may from time to time be reasonably satisfactory to Administrative Agent. "Total Senior Loan Commitment" has the meaning given in Section 2.2 of the Credit Agreement. "Type" means the type of Loan, whether a Base Rate Loan or LIBOR Loan. "UCC" means the Uniform Commercial Code as the same may, from time to time, be in effect in the State of New York; provided, however, in the event that, by reason of mandatory provisions of law, any or all of the perfection or priority of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions of the Credit Agreement and of the other Credit Documents relating to such perfection or priority and for purposes of definitions related to such provisions. "Uninsured Heber Real Property Interests" means (a) those certain real property interests that (i) are described in the exhibits to the Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated as of the Closing Date, between HFC and Chicago Title Insurance Company, as trustee, for the benefit of Administrative Agent and (ii) are not Insured Heber Real Property Interests and (b) any other real property interests (other than the Insured Heber Real Property Interests) that may be held by HFC, HGC or SIGC and that are found to exist pursuant to the Post-Closing Title Work or otherwise. 31 "Uninsured Real Property Interests" means, collectively, the Additional Mammoth Leases, the Mammoth G-3 Site License and the Uninsured Heber Real Property Interests. "Unsatisfied Condition" means a condition in a Permit that has not been satisfied and that either (a) must be satisfied before such Permit can become effective, (b) must be satisfied as of the date on which a representation is made or a condition precedent must be satisfied under the Credit Agreement, or (c) must be satisfied as of a future date but with respect to which facts or circumstances exist which, to Borrower's, any Guarantor's or any Non-Guarantor's knowledge, could reasonably be expected to result in a failure to satisfy such Permit condition. "Waterfall Level" has the meaning given in Section 1.1 of the Depositary Agreement. "Water Supply Agreements" means the SIGC Water Supply Agreement and the HGC Water Supply Agreement. 32 RULES OF INTERPRETATION 1. The singular includes the plural and the plural includes the singular. 2. "or" is not exclusive, unless the context otherwise indicates. 3. A reference to a Governmental Rule includes any amendment or modification to such Governmental Rule, and all regulations, rulings and other Governmental Rules promulgated under such Governmental Rule. 4. A reference to a Person includes its permitted successors, permitted replacements and permitted assigns. 5. Except as otherwise defined, accounting terms have the meanings assigned to them by GAAP, as consistently applied by the accounting entity to which they refer. 6. The words "include", "includes" and "including" are not limiting. 7. A reference in a document to an Article, Section, Exhibit, Schedule, Annex or Appendix is to the Article, Section, Exhibit, Schedule, Annex or Appendix of such document unless otherwise indicated. Exhibits, Schedules, Annexes or Appendices to any document shall be deemed incorporated by reference in such document. In the event of any conflict between the provisions of the Credit Agreement (exclusive of the Exhibits, Schedules, Annexes and Appendices thereto) and any Exhibit, Schedule, Annex or Appendix thereto, the provisions of the Credit Agreement shall control. 8. References to any document, instrument or agreement (a) shall include all exhibits, schedules and other attachments thereto, (b) shall include all documents, instruments or agreements issued or executed in replacement thereof, and (c) shall mean such document, instrument or agreement, or replacement or predecessor thereto, as amended, amended and restated, modified and supplemented from time to time and in effect at any given time. 9. The words "hereof, "herein" and "hereunder" and words of similar import when used in any document shall refer to such document as a whole and not to any particular provision of such document. 10. References to "days" shall mean calendar days, unless the term "Banking Days" shall be used. References to a time of day shall mean such time in Dallas, Texas, unless otherwise specified. 11. If, at any time after the Closing Date, Moody's or S&P shall change its respective system of classifications, then any Moody's or S&P "rating" referred to herein shall be considered to be at or above a specified level if it is at or above the new rating which most closely corresponds to the specified level under the old rating system. 12. The Credit Documents are the result of negotiations between, and have been reviewed by Borrower, each Affiliate of Borrower party thereto, Administrative Agent, each Bank and their respective counsel. Accordingly, the Credit Documents shall be deemed to 33 be the product of all parties thereto, and no ambiguity shall be construed in favor of or against Borrower, any Affiliate of Borrower party thereto, Administrative Agent or any Bank solely as a result of any such party having drafted or proposed the ambiguous provision. 34 Note No. [ ] [ ], [ ] ---- --------- --- For value received, the undersigned ORCAL GEOTHERMAL INC., a corporation organized and existing under the laws of the State of Delaware ("Borrower"), unconditionally promises to pay to [INSERT NAME OF APPLICABLE BANK] ("Bank"), at the office of Beal Bank, S.S.B., located at 6000 Legacy Drive, Plano, Texas 75024 or such other office as shall be directed in writing by Beal Bank, S.S.B. to Borrower, in lawful money of the United States of America and in immediately available funds, the principal amount of [INSERT APPLICABLE BANK'S COMMITMENT / LOAN AMOUNT] DOLLARS ($[______]), or if less, the aggregate unpaid and outstanding principal amount of Loans advanced by Bank to Borrower pursuant to that certain Credit Agreement, dated as of December ___, 2003 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Borrower, the financial institutions from time to time parties thereto (collectively, the "Banks"), and each of the agents listed on the signature pages thereto, and all other amounts owed by Borrower to Bank hereunder. This is one of the Notes referred to in the Credit Agreement and is entitled to the benefits thereof and is subject to all terms, provisions and conditions thereof. Capitalized terms used and not defined herein shall have the meanings set forth in the Credit Agreement. This Note is made in connection with and is secured by, among other instruments, the provisions of the Collateral Documents. Reference is hereby made to the Credit Agreement and the Collateral Documents for the provisions, among others, with respect to the custody and application of the Collateral, the nature and extent of the security provided thereunder, the rights, duties and obligations of Borrower and the rights of the holder of this Note. The principal amount hereof is payable in accordance with the Credit Agreement, and Borrower has the right to prepay such principal amount solely in accordance with the Credit Agreement. Borrower further agrees to pay, in lawful money of the United States of America and in immediately available funds, interest from the date hereof on the unpaid and outstanding principal amount hereof until such unpaid and outstanding principal amount shall become due and payable (whether at stated maturity, by acceleration or otherwise) at the rates of interest and at the times set forth in the Credit Agreement, and Borrower agrees to pay all other fees, prepayment premiums and costs owed to Bank under the Credit Agreement at the times specified in, and otherwise in accordance with, the Credit Agreement. If any payment on this Note becomes due and payable on a date which is not a Banking Day, such payment shall be made on the preceding or next succeeding Banking Day, in either case in accordance with the terms of the Credit Agreement.EXHIBIT B-1 to Credit Agreement FORM OF NOTE $[ ] New York, New York ------------- All Loans made by Bank pursuant to the Credit Agreement and the other Credit Documents, and all payments and prepayments made on account of the principal balance hereof, may be recorded by Bank on the grid attached hereto, provided that failure to make such a notation shall not affect or diminish Borrower's obligation to repay all amounts due on this Note, as and when due. Upon the occurrence and during the continuation of any one or more Events of Default, all amounts then remaining unpaid on this Note may become or be declared to be immediately due and payable as provided in the Credit Agreement and the other Credit Documents. Borrower hereby expressly waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or notices or demands of any kind (other than such of the foregoing as are expressly required by the terms of the Credit Documents and applicable Legal Requirements). Recourse under this Note shall be limited as provided in Article 8 of the Credit Agreement. Borrower agrees to pay costs and expenses of Bank, including reasonable attorneys' fees, incurred in connection with the enforcement of this Note, at the times specified in, and otherwise in accordance with, the Credit Agreement. [SIGNATURE PAGE FOLLOWS] 2 THIS NOTE HAS BEEN EXECUTED AND DELIVERED IN AND SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO CONFLICTS OF LAWS (OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW). IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed as of the date first written above. ORCAL GEOTHERMAL INC., a Delaware corporation By: ------------------------------------ Name: Title: -------------------------------------------------------------------- PREPAYMENT OR DATE AMOUNT OF ADVANCE REPAYMENT OUTSTANDING BALANCE -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- E-mail: sharvey@csginvestments.com Re: OrCal Geothermal Inc. - Notice of Borrowing Ladies and Gentlemen: This Notice of Borrowing is delivered to you pursuant to Section 2.1.1 (b) of the Credit Agreement, dated as of December____, 2003 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among OrCal Geothermal Inc., a corporation organized under the laws of the State of Delaware ("Borrower"), the financial institutions from time to time parties thereto (collectively, the "Banks"), and each of the agents listed on the signature pages thereto. Unless otherwise defined herein, capitalized terms used herein have the meanings provided in the Credit Agreement. Borrower hereby gives you notice in accordance with Section 2.1.1(b) of the Credit Agreement that Borrower requests the Banks to advance to Borrower certain Loans as described below (the "Proposed Borrowing"): 1. The requested date of the Proposed Borrowing is _____________, _____, which is a Banking Day.EXHIBIT C-l to Credit Agreement FORM OF NOTICE OF BORROWING Date: , ---------- ---- Beal Bank, S.S.B. as Administrative Agent 6000 Legacy Dr., 4E Plano, Texas 75024 Attn: William T. Saurenmann Telephone No.: (469) 467-5510 Telecopy No.: (469) 241-9568 cc: CSG Investments, Inc. 6000 Legacy Dr., 4W Plano, Texas 75024 Attn: Steve Harvey Telephone No.: (469) 467-5652 Telecopy No.: (469) 241-9567 2. The Proposed Borrowing shall consist of an aggregate principal amount of Loans equal to $_____________.(1) 3. The Proposed Borrowing shall consist of [BASE RATE LOANS] [LIBOR LOANS WITH AN INITIAL INTEREST PERIOD OF 12 MONTHS]. [SIGNATURE PAGE FOLLOWS] ---------- (1) Such amount not to exceed $154,500,000. 2 IN WITNESS WHEREOF, Borrower has caused this Notice of Borrowing to be duly executed and delivered by an authorized officer of Borrower as of the date first above written. ORCAL GEOTHERMAL INC., a Delaware corporation By: ------------------------------------ Name: Title: S-1 EXHIBIT C-2 to Credit Agreement FORM OF CONFIRMATION OF INTEREST PERIOD SELECTION Date: __________ ___, ___ Beal Bank, S.S.B. as Administrative Agent 6000 Legacy Dr., 4E Plano, Texas 75024 Attn: William T. Saurenmann Telephone No.: (469) 467-5510 Telecopy No.: (469) 241-9568 cc: CSG Investments, Inc. 6000 Legacy Dr., 4W Plano, Texas 75024 Attn: Steve Harvey Telephone No.: (469) 467-5652 Telecopy No.: (469) 241-9567 E-mail: sharvey@csginvestments.com Re: OrCal Geothermal Inc. - Confirmation of Interest Period Selection Ladies and Gentlemen: This Confirmation of Interest Period Selection is delivered to you pursuant to Section 2.1.2(c)(ii) of the Credit Agreement, dated as of December ___, 2003 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among OrCal Geothermal Inc., a corporation organized under the laws of the State of Delaware ("Borrower"), the financial institutions from time to time parties thereto (collectively, the "Banks"), and each of the agents listed on the signature pages thereto. Unless otherwise defined herein, capitalized terms used herein have the meanings provided in the Credit Agreement. This Confirmation of Interest Period Selection confirms our telephonic notice of even date herewith relating to $______________ of LIBOR Loans initially funded on ________________ ____, ____, with a current Interest Period ending on_________________ __, _____. This Confirmation of Interest Period Selection constitutes a confirmation that effective __________ __, ____ (which date is the last day of the applicable Interest Period), the requested Interest Period for $___________ of such LIBOR Loans shall be 12 months. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, Borrower has caused this Confirmation of Interest Period Selection to be duly executed and delivered by an authorized officer of Borrower as of the date first above written. ORCAL GEOTHERMAL INC. a Delaware corporation By: ------------------------------------ Name: Title: S-1 EXHIBIT C-3 to Credit Agreement FORM OF NOTICE OF CONVERSION OF LOAN TYPE Date: ------ ----, ---- Beal Bank, S.S.B. as Administrative Agent 6000 Legacy Dr., 4E Plano, Texas 75024 Attn: William T. Saurenmann Telephone No.: (469) 467-5510 Telecopy No.: (469) 241-9568 cc: CSG Investments, Inc. 6000 Legacy Dr., 4W Plano, Texas 75024 Attn: Steve Harvey Telephone No.: (469) 467-5652 Telecopy No.: (469) 241-9567 E-mail: sharvey@csginvestments.com Re: OrCal Geothermal Inc. - Notice of Conversion of Loan Type Ladies and Gentlemen: This Notice of Conversion of Loan Type is delivered to you pursuant to Section 2.1.5 of the Credit Agreement, dated as of December ____, 2003 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among OrCal Geothermal Inc., a corporation organized under the laws of the State of Delaware ("Borrower"), the financial institutions from time to time parties thereto (collectively, the "Banks"), and each of the agents listed on the signature pages thereto. Unless otherwise defined herein, capitalized terms used herein have the meanings provided in the Credit Agreement. Borrower hereby requests in accordance with Section 2.1.5 of the Credit Agreement that certain Loans be converted from one Type of Loan to another Type of Loan, as more particularly described below (the "Proposed Loan Conversion"): (a) Borrower hereby requests that the Loans be converted from [BASE RATE LOANS] [LIBOR LOANS] to [BASE RATE LOANS] [LIBOR LOANS]. (b) [IF SUCH LOANS ARE TO BE CONVERTED FROM BASE RATE LOANS INTO LIBOR LOANS, THEN INSERT THE FOLLOWING; BORROWER HEREBY REQUESTS THAT SUCH BASE RATE 1 LOANS BE CONVERTED TO LIBOR LOANS WITH AN INITIAL INTEREST PERIOD OF 12 MONTHS.] (c) The proposed date of the Proposed Loan Conversion is ____________ ____, _______ (which date is a Banking Day [IF CONVERTING FROM LIBOR LOANS INTO BASE RATE LOANS, THEN INSERT THE FOLLOWING: AND THE FIRST DAY AFTER THE LAST DAY OF THE THEN-CURRENT INTEREST PERIOD WITH RESPECT TO THE LIBOR LOANS TO BE CONVERTED]). Borrower hereby certifies to Administrative Agent and the Banks that [NO][AN] Event of Default has occurred and is continuing under the Credit Agreement. [SIGNATURE PAGE FOLLOWS] 2 IN WITNESS WHEREOF, Borrower has caused this Notice of Conversion of Loan Type to be duly executed and delivered by an authorized officer of Borrower as of the date first above written. ORCAL GEOTHERMAL INC., a Delaware corporation By: ------------------------------------ Name: Title: S-l [Notice of Conversion of Loan Type] EXHIBIT C-4 to Credit Agreement ESCROW AGREEMENT Escrow No.: Escrow Officer: Nicki Carr Date: December 18, 2003 TO: CHICAGO TITLE COMPANY Re: OrCal Geothermal Inc. - Escrow Instructions This Escrow Agreement, dated as of the date first above written (this "Escrow Agreement"), by and among Ormat Nevada Inc., a Delaware corporation ("Sponsor"), OrCal Geothermal Inc., a Delaware corporation ("Borrower"), Beal Bank, S.S.B. ("Administrative Agent") and Chicago Title Company ("Escrow Agent" or "you"), is being entered into in connection with the closing of the loan (the "Loan") to Borrower in the principal amount of $154,500,000.00, pursuant to the terms of that certain Credit Agreement, dated as of the date first above written (the "Credit Agreement"), among Borrower, Administrative Agent and the other financial institutions from time to time party thereto. Borrower and Sponsor hereby acknowledge that (1) they have delivered or caused to be delivered to you in escrow each of the documents and instruments set forth on Schedule 1 hereto (such documents collectively referred to as the "Deliverables") and (2) each of the conditions set forth in Section 3.2 of the Credit Agreement to which the Deliverables relate has been satisfied or waived in accordance with the terms of the Credit Agreement. Copies (or, to the extent provided under the Credit Agreement, original executed copies) of the Deliverables are hereby delivered to you for handling solely in accordance with the instructions herein contained. If Administrative Agent and Borrower at any time jointly determine that the closing of the Loan will not occur and jointly inform you in writing of such determination, you are to return the Deliverables in accordance with further instructions which you will receive jointly from Borrower and Administrative Agent. Acceptance by you of the Deliverables and the duties set forth in this Escrow Agreement shall constitute a contractual obligation on the part of Escrow Agent with each of the other parties hereto to satisfy the terms and conditions hereof. You are authorized to handle the Deliverables in the manner described below when and only when you have received an Escrow Closing Letter (the "Escrow Closing Letter"), in substantially the form set forth on Attachment A hereto, executed by each of Borrower, Sponsor and Administrative Agent, (i) providing notice to you that (A) the purchase price to be paid pursuant to the Acquisition Agreement (as defined in the Credit Agreement) shall have been paid to the applicable parties and (B) the other fees and expenses to be paid in connection with the Credit Agreement shall have been paid in accordance with the terms of the Funds Flow Memorandum (as defined in the Credit Agreement) and (ii) instructing you to release the Deliverables from escrow. Upon receipt of the Escrow Closing Letter, you are authorized and instructed to deliver to Administrative Agent copies (or, as applicable, original executed copies) of the Deliverables. Any escrow charges payable to Escrow Agent with respect to this Escrow Agreement shall be paid by Borrower. This Escrow Agreement is in addition to, and shall have no effect on, any agreements you may have in connection with the Credit Agreement or the Acquisition Agreement in your capacity as title company or title insurer. The parties to this Escrow Agreement hereby acknowledge and agree that nothing provided herein shall limit the obligation of the Borrower and Sponsor or any of their affiliates under the Credit Documents (as defined in the Credit Agreement) with respect to their obligations to take all actions necessary or desirable to perfect liens in the collateral as described in such Credit Documents. This Escrow Agreement shall be governed by and construed in accordance with the laws of the State of New York. To the fullest extent permitted by applicable law, you hereby irrevocably submit to the non-exclusive jurisdiction of any New York State court or federal court sitting in the Borough of Manhattan in respect of any suit, action or proceeding arising out of or relating to the provisions of this Escrow Agreement and irrevocably agree that all claims in respect of any such suit, action or proceeding may be heard and determined in any such court. The parties hereto hereby waive, to the fullest extent permitted by applicable law, any objection that they may now or hereafter have to the laying of venue of any such suit, action or proceeding brought in any such court, and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. The parties hereto hereby waive, to the fullest extent permitted by applicable law, any right to trial by jury with respect to any action or proceeding arising out of or relating to this Escrow Agreement. Kindly acknowledge receipt and acceptance by Chicago Title Company of these instructions and the documents and instruments enclosed herein by executing a copy of this Escrow Agreement and delivering it to the attention of Jeffrey Greenberg of Latham & Watkins LLP, as counsel to Administrative Agent, with a copy to Noam Ayali of Chadbourne & Parke LLP, as counsel to Sponsor and Borrower, at Chadbourne & Parke's New York offices. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 2 IN WITNESS WHEREOF, the parties hereto, by their officers duly authorized, intending to be legally bound, have caused this Escrow Agreement to be duly executed and delivered as of the day and year first above written. ORMAT NEVADA INC., a Delaware corporation By: ------------------------------------ Name: Title: ORCAL GEOTHERMAL INC., a Delaware corporation By: ------------------------------------ Name: Title: BEAL BANK, S.S.B., as Administrative Agent and a Bank By: ------------------------------------ Name: Molly Curl Title: Sr. Vice President By: ------------------------------------ Name: William T. Saurenmann Title: Sr. Vice President Chicago Title Company, as Escrow Agent, hereby acknowledges, accepts and agrees to abide by the foregoing instructions. CHICAGO TITLE COMPANY By: ---------------------------------- Name: Title: S-l SCHEDULE 1 to Escrow Agreement SCHEDULE 1 Documents Delivered(1) 1. Secretary's certificate from HGC attaching a partnership agreement, an incumbency certificate and resolutions 2. Secretary's certificate from HFC attaching a partnership agreement, an incumbency certificate and resolutions 3. Secretary's certificate from a general partner of Mammoth Lakes attaching a certificate of partnership and partnership agreement 4. Secretary's certificate from the general partners of SIGC attaching a certificate of partnership and partnership agreement 5. Pledge and Security Agreement, dated as of the Closing Date, among Borrower, OrHeber 1, HFC, HGC and Administrative Agent 6. Security Agreement, dated as of the Closing Date, between Administrative Agent and HFC 7. Security Agreement, dated as of the Closing Date, between Administrative Agent and HGC 8. Subsidiary Guaranty, dated as of the Closing Date, between Administrative Agent and HFC 9. Subsidiary Guaranty, dated as of the Closing Date, between Administrative Agent and HGC 10. Joinder Agreement, dated as of the Closing Date, executed between Administrative Agent and HGC 11. Joinder Agreement, dated as of the Closing Date, executed between Administrative Agent and HFC 12. Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated as of the Closing Date, between HGC and Chicago Title Insurance Company, as trustee 13. Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated as of the Closing Date, between HFC and Chicago Title Insurance Company, as trustee ---------- (1) Capitalized terms in this Schedule 1 shall have the meanings given in the Credit Agreement. 1 [SCHEDULE I TO ESCROW AGREEMENT] SCHEDULE 1 to Escrow Agreement 14. Consent and Agreement, dated as of the Closing Date, among HFC, HGC, OrHeber 1, Sponsor and Administrative Agent 15. Consent and Agreement, dated as of the Closing Date, among OrMammoth, Sponsor and Administrative Agent 16. UCC-1 financing statement naming OrHeber 1 as debtor and Administrative Agent as the secured party, against the Pledged Equity Interests of OrHeber 1 in each of HGC and HFC 17. UCC-1 financing statement naming Borrower as debtor and Administrative Agent as the secured party, against the Pledged Equity Interests of Borrower in each of HGC and HFC 18. UCC-1 financing statement naming HGC as debtor and Administrative Agent as the secured party (for each of California and Nevada) 19. UCC-1 financing statement naming HFC as debtor and Administrative Agent as the secured party (for each of California and Nevada) 20. UCC-1 fixture filings related to each Deed of Trust, naming each of HGC and HFC as debtor and Administrative Agent as the secured party 21. Certified list and copy of each Major Project Document 22. Closing certificates dated the Closing Date from each of HFC, HGC, OrHeber 1 and OrMammoth 23. Legal opinion from Chadbourne & Parke LLP, as finance counsel to certain Loan Parties 24. Legal opinion of David E. Chanover Esq., as real estate counsel to HFC and HGC 25. Legal opinion of Perkins Coie, as California counsel to certain Loan Parties 26. Legal opinion of Morris, Nichols, Arsht & Tunnel, as Delaware counsel to certain Loan Parties 27. Lender's ALTA extended coverage policy of title insurance, together with such endorsements thereto as are reasonably required by the Banks (which shall include, but not be limited to, a tie-in endorsement for all such policies), or the commitment of Title Insurer to issue such a policy, dated as of the Closing Date, in the amount of $125,000,000, issued by Title Insurer in form and substance substantially similar to the owner's ALTA policy of title insurance provided to Borrower under the Acquisition Agreement, with respect to each of HGC and HFC, as more particularly described in Section 3.2.12 of the Credit Agreement 28. Requests for Notice 2 [SCHEDULE I TO ESCROW AGREEMENT] SCHEDULE 1 to Escrow Agreement 29. Letter from CT Corporation System evidencing acceptance of acting as agent for service of process in the State of New York for each of HGC and HFC, in respect of each Credit Document to which each is a party 30. All of the other deliverables set forth on the "closing table" in the New York offices of Chadbourne & Parke LLP which have not been delivered pursuant to Section 3.1 of the Credit Agreement. 3 [SCHEDULE 1 TO ESCROW AGREEMENT] ATTACHMENT A to Escrow Agreement ESCROW CLOSING LETTER Escrow No.: Escrow Officer: Nicki Carr Date: December 18, 2003 TO: CHICAGO TITLE COMPANY Re: OrCal Geothermal Inc. - Escrow Instructions This Escrow Closing Letter, dated as of the date first above written (this "Escrow Closing Letter") is being sent to you in connection with (i) that certain Escrow Agreement, dated as of December 18, 2003 (the "Escrow Agreement") by and among Ormat Nevada Inc., a Delaware corporation ("Sponsor"). OrCal Geothermal Inc., a Delaware corporation ("Borrower"), Beal Bank, S.S.B. ("Administrative Agent") and Chicago Title Company ("Escrow Agent" or "you"); and (ii) that certain Credit Agreement, dated as of December 18, 2003 (the "Credit Agreement"), among Borrower, Administrative Agent and the other financial institutions from time to time party thereto. The signatories to this Escrow Closing Letter hereby provide notice to you that (a) the purchase price to be paid pursuant to the Acquisition Agreement (as defined in the Credit Agreement) has been paid to the applicable parties and (b) the other fees and expenses to be paid in connection with the Loans have been paid in accordance with the terms of the Funds Flow Memorandum (as defined in the Credit Agreement). In the case of each of the preceding clauses (a) and (b), the signatories to this Escrow Closing Letter acknowledge and agree that such funds have been wired to the applicable parties as evidenced by either (i) federal reference numbers with respect to the wire to each applicable party or (ii) written confirmation of receipt from each such party (including Covanta Energy Corporation). Accordingly, the signatories to this Escrow Closing Letter hereby instruct you to release the Deliverables from escrow under the Escrow Agreement and terminate such escrow. The parties to this Escrow Closing Letter hereby acknowledge and agree that nothing provided herein shall limit the obligation of the Borrower and Sponsor or any of their affiliates under the Credit Documents (as defined in the Credit Agreement) with respect to their obligations to take all actions necessary or desirable to perfect liens in the collateral as described in such Credit Documents. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] A-l [EXHIBIT A TO ESCROW AGREEMENT] IN WITNESS WHEREOF, the parties hereto, by their officers duly authorized, intending to be legally bound, have caused this Escrow Closing Letter to be duly executed and delivered as of the day and year first above written. ORMAT NEVADA INC., a Delaware corporation By: ------------------------------- Name: Title: ORCAL GEOTHERMAL INC., a Delaware corporation By: ------------------------------- Name: Title: BEAL BANK, S.S.B., as Administrative Agent and a Bank By: ------------------------------- Name: Molly Curl Title: Sr. Vice President By: ------------------------------- Name: William T. Saurenmann Title: Sr. Vice President Chicago Title Company, as Escrow Agent, hereby acknowledges, accepts and agrees to abide by the foregoing instructions. CHICAGO TITLE COMPANY By: ------------------------------------ Name: Title: A-2 [EXHIBIT A TO ESCROW AGREEMENT] Exhibit D-1 to Credit Agreement RECORDING REQUESTED BY AND WHEN RECORDED, RETURN TO: Ann H. Miller Latham & Watkins LLP 650 Town Center Drive, Suite 2000 Costa Mesa, California 92626 -------------------------------------------------------------------------------- FORM OF DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING DATED AS OF , 20 --------------------- --- BY --------------------------, AS TRUSTOR TO CHICAGO TITLE COMPANY, AS TRUSTEE FOR THE BENEFIT OF BEAL BANK,S.S.B., AS BENEFICIARY -------------------------------------------------------------------------------- ATTENTION: OFFICE OF THE COUNTY RECORDER OR REGISTRAR OF DEEDS -- THIS INSTRUMENT COVERS GOODS THAT ARE OR ARE TO BECOME FIXTURES ON THE REAL PROPERTY DESCRIBED HEREIN AND THIS INSTRUMENT IS TO BE FILED OF RECORD IN THE RECORDS WHERE MORTGAGES OR DEEDS OF TRUST ON REAL ESTATE ARE RECORDED. IN ADDITION, THIS INSTRUMENT SHOULD BE APPROPRIATELY INDEXED, NOT ONLY AS A DEED OF TRUST, BUT ALSO AS A FINANCING STATEMENT COVERING GOODS THAT ARE TO BECOME FIXTURES ON THE REAL PROPERTY DESCRIBED HEREIN. THE NAME AND THE MAILING ADDRESS OF THE BENEFICIARY (SECURED PARTY) AND TRUSTOR (DEBTOR) ARE SET FORTH IN THE FIRST PARAGRAPH BELOW. TABLE OF CONTENTS Page ---- ARTICLE 1. DEFINITIONS.........................................................4 1.1 Defined Terms........................................................4 1.2 Accounting Terms.....................................................5 1.3 The Rules of Interpretation..........................................5 ARTICLE 2. GENERAL COVENANTS AND PROVISIONS....................................5 2.1 Trustor Performance of Credit Documents..............................5 2.2 General Representations, Covenants and Warranties....................5 2.3 Insurance; Application of Insurance Proceeds; Application of Eminent Domain Proceeds...........................................6 2.4 Assignment of Rents..................................................6 2.5 [Rejection of Surface and Geothermal Leases by Lessor................7 2.6 Indemnification......................................................7 2.7 Beneficiary Assumes No Secured Obligations...........................7 2.8 Further Assurances...................................................8 2.9 Acts of Trustor......................................................8 2.10 After-Acquired Property..............................................8 2.11 Mortgaged Property...................................................9 2.12 Power of Attorney...................................................12 2.13 Covenant to Pay.....................................................12 2.14 Security Agreement..................................................12 ARTICLE 3. REMEDIES...........................................................13 3.1 Acceleration of Maturity............................................13 3.2 Due-On Clause.......................................................13 3.3 Protective Advances.................................................14 3.4 Institution of Equity Proceedings...................................14 3.5 Beneficiary's Power of Enforcement..................................14 3.6 Beneficiary's Right to Enter and Take Possession, Operate and Apply Income.....................................................15 3.7 Separate Sales......................................................16 3.8 Waiver of Appraisement, Moratorium, Valuation, Stay, Extension and Redemption Laws..............................................16 3.9 Receiver............................................................17 3.10 Suits to Protect the Mortgaged Property.............................17 3.11 Proofs of Claim.....................................................17 3.12 Trustor to Pay Amounts Secured Hereby on Any Default in Payment; Application of Monies by Beneficiary.............................18 3.13 Delay or Omission; No Waiver........................................18 3.14 No Waiver of One Default to Affect Another..........................18 3.15 Discontinuance of Proceedings; Position of Parties Restored.........19 i 3.16 Remedies Cumulative.................................................19 3.17 Interest After Event of Default.....................................19 3.18 Foreclosure; Expenses of Litigation.................................19 3.19 Deficiency Judgments................................................20 3.20 WAIVER OF JURY TRIAL................................................20 3.21 Exculpation of Beneficiary..........................................20 ARTICLE 4. RIGHTS AND RESPONSIBILITIES OF TRUSTEE; OTHER PROVISIONS RELATING TO TRUSTEE..............................21 4.1 Exercise of Remedies by Trustee.....................................21 4.2 Rights and Privileges of Trustee....................................21 4.3 Resignation or Replacement of Trustee...............................21 4.4 Authority of Beneficiary............................................22 4.5 Effect of Appointment of Successor Trustee..........................22 4.6 Confirmation of Transfer and Succession.............................22 4.7 Exculpation.........................................................22 4.8 Endorsement and Execution of Documents..............................23 4.9 Multiple Trustees...................................................23 4.10 No Required Action..................................................23 4.11 Terms of Trustee's Acceptance.......................................23 ARTICLE 5. GENERAL............................................................23 5.1 Discharge...........................................................23 5.2 No Waiver...........................................................24 5.3 Extension, Rearrangement or Renewal of Secured Obligations..........24 5.4 Forcible Detainer...................................................24 5.5 Waiver of Stay or Extension.........................................24 5.6 Notices.............................................................25 5.7 Severability........................................................25 5.8 Application of Payments.............................................25 5.9 Governing Law.......................................................25 5.10 Entire Agreement....................................................25 5.11 Amendments..........................................................26 5.12 Successors and Assigns..............................................26 5.13 Renewal, Etc........................................................26 5.14 Liability...........................................................26 5.15 Severability........................................................26 5.16 Waiver..............................................................26 5.17 Additional Waivers..................................................27 5.18 Release of Collateral...............................................27 5.19 Credit Agreement Controls...........................................28 5.20 Time of the Essence.................................................28 5.21 Counterpart Execution...............................................28 ii Exhibit D-1 to Credit Agreement DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING THIS DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING, dated as of ______________, 20__ (this "Deed of Trust") is executed by _____________________________________ ("Trustor"), whose address is _____________________________, to CHICAGO TITLE COMPANY, as trustee ("Trustee"), whose address is 388 Market Street, Suite 1300, San Francisco, California 94111, Attn: Rod Pasion, for the benefit of BEAL BANK, S.S.B., in its capacity as administrative agent and bank (together with its successors and assigns, "Beneficiary"), whose address is 6000 Legacy Drive, Plano, Texas 75024, Attn: William T. Saurenmann. Recitals A. OrCal Geothermal, Inc., a Delaware corporation ("Borrower"), Beneficiary and Banks (as defined in the Credit Agreement) have entered into that certain Credit Agreement dated of December 18, 2003 (the "Credit Agreement"), pursuant to which Banks have agreed to provide certain financing to Borrower, subject to the terms and conditions set forth therein. B. This Deed of Trust is given pursuant to the Credit Agreement, and payment, fulfillment, and performance by Borrower of its obligations thereunder and under the other Credit Documents are secured hereby, and each and every term and provision of the Credit Agreement and the Note, including the rights, remedies, obligations, covenants, conditions, agreements, indemnities, representations and warranties of the parties therein, are hereby incorporated by reference herein as though set forth in full and shall be considered a part of this Deed of Trust. Agreement NOW, THEREFORE, to secure the prompt and complete payment and performance when due, by acceleration or otherwise, of all Obligations of the Loan Parties (including Trustor) to Beneficiary and the other Secured Parties pursuant to the Credit Documents (collectively, the "Secured Obligations"), Trustor, intending to be legally bound, does hereby grant, bargain, sell, convey, warrant, assign, transfer, mortgage, pledge, set over and confirm unto Trustee in trust for Beneficiary as set forth in this Deed of Trust, with power of sale and right of entry and possession, for the benefit of Beneficiary and the other Secured Parties, all of Trustor's estate, right, title, interest, property, claim and demand, now or hereafter arising, in and to the following property and rights (collectively, the "Mortgaged Property"): (a) [For fee interests: all of that real property located in the County of Imperial, State of California, described on Exhibit A[-1] hereto (collectively, the "Site")] [For leasehold interests: Trustor's interest under each of the Leases listed on Exhibit A[-2] hereto (collectively, as modified, supplemented or amended from time to time, the "Surface and Geothermal Leases") and the leasehold estate created thereby in and to the lands and premises more particularly described therein (collectively, the "Site")]; (b) any and all easements, leases, licenses, option rights, rights-of-way and other rights used in connection with the Site or as a means of access thereto [(including all rights of Trustor to exercise any election or option, to make any determination or to give any notice, consent, waiver or approval, or to take any other action under the Surface and Geothermal Leases)], all easements for ingress and egress and easements for water, transmission lines, telephone lines, natural gas and sewage pipelines, and all other such rights running in favor of Trustor, or appurtenant to the Site [or arising under the Surface and Geothermal Leases], and any and all sidewalks, alleys, strips and gores of land adjacent thereto or used in connection therewith, together with all and singular the tenements, hereditaments and appurtenances thereto, and with any land lying within the right-of-way of any streets, open or proposed, adjoining the same (including the easements, leases, licenses and other instruments described in Exhibit B hereto) (collectively, the "Easements"; and the Site and the Easements collectively referred to herein as the "Real Property"); (c) all buildings, structures, fixtures and other improvements now or hereafter erected on the Real Property, including the Project (collectively, the "Improvements"); (d) all machinery, apparatus, equipment, fittings, fixtures, boilers, turbines and other articles of personal property, including all goods and all goods which become fixtures, now owned or hereafter acquired by Trustor and now or hereafter located on, attached to or used in the operation of or in connection with the Real Property or the Improvements, and all replacements thereof, additions thereto and substitutions therefor, to the fullest extent permitted by applicable law (all of the foregoing being hereinafter collectively called the "Equipment"); (e) all inventory, raw materials, work in process and other materials used or consumed in the construction, operation or maintenance of, or now or hereafter located on or used in connection with, the Real Property, the Improvements or the Equipment, (including fuel and fuel deposits, now or hereafter located on the Real Property or elsewhere or otherwise owned by Trustor) (the above items, together with the Equipment, being hereinafter collectively called the "Tangible Collateral"); (f) all rights, powers, privileges and other benefits of Trustor (to the extent assignable) now or hereafter obtained by Trustor [under the Surface and Geothermal Leases or] from any Governmental Instrumentality, including Permits issued in the name of Trustor and governmental actions relating to (i) the ownership, operation, management and use of the Real Property, Improvements, Equipment or Tangible Collateral, (ii) the development and financing of the Project, the Improvements and the Equipment, and (iii) any improvements, modifications or additions thereto; (g) [any right of Trustor to elect to terminate the Surface and Geothermal Leases or remain in possession of the Real Property pursuant to 11 U.S.C. section 365(h) or any similar provision of applicable law and any possessory rights of Trustor in the Real Property pursuant to 11 U.S.C. section 365(h) or any other similar provision of applicable law;] 2 (h) all the lands and interests in lands, tenements and hereditaments hereafter acquired by Trustor in connection with or appurtenant to the Real Property or any other property or rights subject to the lien hereof, including all interests of Trustor, whether as lessor or lessee, in any leases of land hereafter made and all rights of Trustor thereunder; (i) any and all other property in any way associated or used in connection with or appurtenant to the Real Property, Improvements, Equipment or Tangible Collateral that may from time to time, by delivery or by writing of any kind, be subjected to the lien hereof by Trustor or by anyone on its behalf or with its consent, or which may come into the possession or be subject to the control of Trustee or Beneficiary pursuant to this Deed of Trust, being hereby assigned to Beneficiary and subjected or added to the lien or estate created by this Deed of Trust forthwith upon the acquisition thereof by Trustor, as fully as if such property were now owned by Trustor and were specifically described in this Deed of Trust and subjected to the lien and security interest hereof; and each of Trustee and Beneficiary is hereby authorized to receive any and all such property as and for additional security hereunder; (j) any and all contract rights, general intangibles, chattel paper, instruments, notes, letters of credit, insurance policies, insurance and condemnation awards and proceeds (including title insurance proceeds), warranties, trademarks, trade names, improvement plans and specifications (in each case whether existing now or in the future), relating to or otherwise arising in connection with the Mortgaged Property; and (k) all the remainder or remainders, reversion or reversions, rents, revenues, issues, profits, royalties, income and other benefits derived from any of the foregoing, all of which are hereby assigned to Beneficiary, who is hereby authorized to collect and receive the same, to give proper receipts and acquittances therefor and to apply the same in accordance with the provisions of this Deed of Trust. TO HAVE AND TO HOLD the said Mortgaged Property, whether now owned or held or hereafter acquired, unto Beneficiary, its successors and assigns, pursuant to the provisions of this Deed of Trust. IT IS HEREBY COVENANTED, DECLARED AND AGREED that the lien, security interest or estate created by this Deed of Trust to secure the payment of the Secured Obligations, both present and future, shall be first, prior and superior to any Lien, security interest, reservation of title or other interest heretofore, contemporaneously or subsequently suffered or granted by Trustor, its legal representatives, successors or assigns, except only those, if any, expressly hereinafter referred to and that the Mortgaged Property is to be held, dealt with and disposed of by Beneficiary, upon and subject to the terms, covenants, conditions, uses and agreements set forth in this Deed of Trust. If, notwithstanding any provisions in this Deed of Trust to the contrary, enforcement of the liability of Trustor hereunder for the full amount of the Secured Obligations would be an unlawful or voidable transfer under any applicable fraudulent conveyance or fraudulent transfer law or any comparable law, then the liability of Trustor hereunder shall be reduced to the highest amount for which such liability may then be enforced without giving rise to an unlawful or voidable transfer under any such law. 3 PROVIDED ALWAYS, that upon payment in full of the Secured Obligations in accordance with the terms and provisions hereof and of the other Credit Documents and the observance and performance by Trustor of its covenants and agreements set forth herein and therein, then this Deed of Trust and the estate hereby and therein granted shall cease and be void and shall be reconveyed as provided herein below. ARTICLE 1. DEFINITIONS 1.1 Defined Terms. Capitalized terms used in this Deed of Trust and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement. Any term defined by reference to an agreement, instrument or other document shall have the meaning so assigned to it whether or not such document is in effect. In addition, for purposes of this Deed of Trust, the following definitions shall apply: "Credit Agreement" has the meaning ascribed to it in the Recitals. "Counterparty" has the meaning ascribed to it in Section 5.17 below. "Easements" has the meaning ascribed to it in the Granting Clauses. "Equipment" has the meaning ascribed to it in the Granting Clauses. "Improvements" has the meaning ascribed to it in the Granting Clauses. "Leases" has the meaning ascribed to it in Section 2.4 below. "Mortgaged Property" has the meaning ascribed to it in the Granting Clauses. "Proceeds" has the meaning assigned to it under the UCC (as defined in Section 2.14.1 below) and, in any event, shall include, (i) any and all proceeds of any insurance (including, property casualty and title insurance), indemnity, warranty or guaranty payable from time to time with respect to any of the Mortgaged Property; (ii) any and all proceeds in the form of accounts (as such term is defined in the UCC), security deposits, tax escrows (if any), down payments (to the extent the same may be pledged under applicable law), collections, contract rights, documents, instruments, letters of credit, chattel paper, liens and security instruments, guaranties or general intangibles relating in whole or in part to the Mortgaged Property and all rights and remedies of whatever kind or nature Trustor may hold or acquire for the purpose of securing or enforcing any obligation due Trustor thereunder. "Project" means [For HGC: an approximately 52 MW geothermal electric power project located in Heber, California and owned by Trustor] [For HFC: a geothermal fluid facility located in Heber, California and owned by Trustor] [For SIGC: an approximately 48 MW geothermal electric power project located in Heber, California and owned by Trustor] [For Mammoth Lakes: an approximately 40 MW geothermal electric power project (comprised of three geothermal plants) located near Mammoth Lakes, California and owned by Trustor]. "Real Property" has the meaning ascribed to it in the Granting Clauses. 4 "Rents" has the meaning ascribed to it in Section 2.4 below. "Secured Obligations" has the meaning ascribed to it in the Granting Clauses. "Site" has the meaning ascribed to it in the Granting Clauses. ["Surface and Geothermal Leases" has the meaning ascribed to it in the Granting Clauses.] "Tangible Collateral" has the meaning ascribed to it in the Granting Clauses. "UCC Collateral" has the meaning given ascribed in Section 2.14.1 below. 1.2 Accounting Terms. As used herein and in any certificate or other document made or delivered pursuant hereto, accounting terms not defined herein shall have the respective meanings given to them under GAAP. 1.3 The Rules of Interpretation. The rules of interpretation as set forth in the Credit Agreement shall govern the terms, conditions and provisions hereof. In the event of any conflict between those set forth in this Deed of Trust and the Credit Agreement, the latter shall be deemed controlling and shall preempt the former. ARTICLE 2. GENERAL COVENANTS AND PROVISIONS 2.1 Trustor Performance of Credit Documents. Trustor shall perform, observe and comply with each and every provision hereof, and with each and every provision contained in the Credit Documents, and shall promptly pay to Beneficiary, when payment shall become due under the Credit Agreement, the principal with interest thereon and all other sums required to be paid by Trustor under this Deed of Trust and the other Credit Documents at the time and in the manner provided in the Credit Documents. If enforcement of the liability of Trustor under this Deed of Trust for the full amount of the Secured Obligations would be an unlawful or voidable transfer under any fraudulent conveyance or fraudulent transfer law or any comparable law, then the liability of Trustor hereunder shall be reduced to the highest amount for which such liability may then be enforced without giving rise to an unlawful or voidable transfer under any such law. 2.2 General Representations, Covenants and Warranties. Trustor represents, covenants and warrants that as of the date hereof: (a) Trustor has good, marketable, valid and legal (i) [fee simple title to the Site and the Improvements] [leasehold interest in the Site and Improvements] and (ii) interest in the rights granted pursuant to the Easements, in each case free and clear of all Liens except for the Title Exceptions or Permitted Liens (as applicable under Section 4.15 under the Credit Agreement); (b) good, marketable, valid and legal title to all other Mortgaged Property, free and clear of all Liens other than Permitted Liens; (c) Trustor has the full power and authority to encumber the Mortgaged Property in the manner set forth herein; (d) the Title Exceptions relating to the Mortgaged Property do not, in the aggregate, materially and adversely affect the value, operations or use of the Project; and (e) the Mortgaged Property includes all of Trustor's material real property interests (including fee, leasehold and easement interests). 5 2.3 Insurance; Application of Insurance Proceeds; Application of Eminent Domain Proceeds. 2.3.1 Trustor shall at its sole expense obtain for, deliver to, assign and maintain for the benefit of Beneficiary, during the term of this Deed of Trust, insurance policies insuring the Mortgaged Property (to the extent insurable) and liability insurance policies, all in accordance with the requirements of Section 5.14 of the Credit Agreement. Trustor shall pay promptly when due any premiums on such insurance policies and on any renewals thereof. In the event of the foreclosure of this Deed of Trust or any other transfer of the Mortgaged Property in extinguishment of the indebtedness and other sums secured hereby, all right, title and interest of Trustor in and to all casualty insurance policies, and renewals thereof then in force, shall pass to the purchaser or grantee in connection therewith. 2.3.2 All Insurance Proceeds and Eminent Domain Proceeds shall be paid or shall be applied in accordance with the provisions of the Credit Documents. 2.4 Assignment of Rents. Trustor unconditionally and absolutely assigns to Beneficiary all of Trustor's right, title and interest in and to: all leases, subleases, occupancy agreements, licenses, rental contracts and other similar agreements now or hereafter existing relating to the use or occupancy of the Mortgaged Property, together with all guarantees, modifications, extensions and renewals thereof (the "Leases"); and all rents, issues, profits, income and proceeds due or to become due from tenants of the Mortgaged Property, including rentals and all other payments of any kind under any leases now existing or hereafter entered into, together with all deposits (including security deposits) of tenants thereunder ("Rents"). This is an absolute assignment to Beneficiary and not an assignment as security for the performance of the obligations under the Credit Documents, or any other indebtedness. Subject to the provisions herein below, Beneficiary shall have the right, power and authority to: notify any person that the Leases have been assigned to Beneficiary and that all Rents and other obligations are to be paid directly to Beneficiary, whether or not Beneficiary has commenced or completed foreclosure or taken possession of the Mortgaged Property; settle compromise, release, extend the time of payment of, and make allowances, adjustments and discounts of any Rents or other obligations under the Leases; enforce payment of Rents and other rights under the Leases, prosecute any action or proceeding, and defend against any claim with respect to Rents and Leases; enter upon, take possession of and operate the Mortgaged Property; lease all or any part of the Mortgaged Property; perform any and all obligations of Trustor under the Leases and exercise any and all rights of Trustor therein contained to the full extent of Trustor's rights and obligations thereunder, with or without the bringing of any action or the appointment of a receiver; or while any Event of Default exists, exercise any or all remedies provided in Article 3 hereof, including the right to have a receiver appointed and any other rights and remedies under California Civil Code Section 2938; provided, however, that this assignment shall not impose upon Beneficiary any duty to produce Rents, nor shall it cause Beneficiary to be (i) a "mortgagee in possession" for any purpose; (ii) responsible for performing any obligations of the lessor, licensor or other counterparty under any Lease; or (iii) be responsible for waste committed by lessees or any other parties, for any dangerous or defective condition in the Mortgaged Property, or for any negligence in the management, upkeep, repair or control of the Mortgaged Property. At Beneficiary's request, Trustor shall deliver a copy of this Deed of Trust to each tenant under a Lease. Trustor irrevocably directs any tenant, without any requirement for notice to or consent by Trustor, to comply with all demands of Beneficiary under this Section 2.4 and to turn over to 6 Beneficiary on demand all Rents which it owes under a Lease. Beneficiary shall have the right, but not the obligation, to use and apply all Rents received hereunder in such order and such manner as Beneficiary may determine in accordance with the Credit Agreement. Notwithstanding that this is an absolute assignment of the Rents and Leases and not merely the collateral assignment of, or the grant of a lien or security interest in the Rents and Leases, Beneficiary grants to Trustor a revocable license to collect and receive the Rents and to retain, use and enjoy such Rents. Such license may be revoked by Beneficiary only upon the occurrence of any Event of Default, in which case Trustor shall immediately, without any further act or request on part of Beneficiary, turn over to Beneficiary all Rents which it receives. Trustor shall apply any Rents which it receives to the payment due under the Secured Obligations, taxes, assessments, water charges, sewer rents and other governmental charges levied, assessed or imposed against the Mortgaged Property, insurance premiums, and other obligations of lessor under the Leases before using such proceeds for any other purpose. 2.5 [Rejection of Surface and Geothermal Leases by Lessor. If the lessor under a Surface and Geothermal Lease rejects or disaffirms such Surface and Geothermal Lease or purports or seeks to disaffirm the Surface and Geothermal Lease pursuant to any Bankruptcy Law, then: 2.5.1 To the extent permitted by law or Governmental Rule, Trustor shall remain in possession of the Real Property demised under such Surface and Geothermal Lease and shall perform all acts reasonably necessary for Trustor to remain in such possession for the unexpired term of such Surface and Geothermal Lease (including all renewals), whether the then existing terms and provisions of such Surface and Geothermal Lease require such acts or otherwise; and 2.5.2 All the terms and provisions of this Deed of Trust and the lien created by this Deed of Trust shall remain in full force and effect and shall extend automatically to all of Trustor's rights and remedies arising at any time under, or pursuant to, Section 365(h) of the Bankruptcy Law, including all of Trustor's rights to remain in possession of the Real Property.] 2.6 Indemnification. Trustor hereby indemnifies Beneficiary against, and holds harmless Beneficiary from, all losses, damages, liabilities, claims, causes of action, judgments, court costs, attorneys' fees and other legal expenses, costs of inspection and other expenses that either may suffer or incur: (i) by reason of this Deed of Trust; (ii) by reason of the execution of this trust or in performance of any act required or permitted hereunder or by a Governmental Rule, including the disclosure or non-disclosure of any facts relating to the Mortgaged Property, or any part thereof, incidental to a judicial or non-judicial sale; or (iii) as a result of any failure of Trustor to perform its obligations. The above obligation of Trustor to indemnify and hold harmless Beneficiary shall survive the release and cancellation of the Secured Obligations and the release and reconveyance or partial release and reconveyance of this Deed of Trust. 2.7 Beneficiary Assumes No Secured Obligations. It is expressly agreed that, anything herein contained to the contrary notwithstanding, except as may otherwise be provided in the Credit Documents, Trustor shall remain obligated under all agreements which are included in the definition of "Mortgaged Property" and shall perform all of its obligations thereunder in accordance with the provisions thereof, and neither Beneficiary nor any of the Banks shall have any obligation or liability with respect to such obligations of Trustor, nor shall Beneficiary or any of the Banks be 7 required or obligated in any manner to perform or fulfill any obligations or duties of Trustor under such agreements, or to make any payment or to make any inquiry as to the nature or sufficiency of any payment received by it, or to present or file any claim or take any action to collect or enforce the payment of any amounts which have been assigned to Beneficiary hereunder or to which Beneficiary or the Banks may be entitled at any time or times. 2.8 Further Assurances. Trustor shall, from time to time, at its expense, promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or that Trustee or Beneficiary may reasonably request, in order to perfect, continue and protect the lien and security interest granted or purported to be granted hereby and to enable Beneficiary to obtain the full benefits of the lien and security interest granted or intended to be granted hereby. Trustor shall keep the Mortgaged Property free and clear of all Liens, other than Permitted Liens. Without limiting the generality of the foregoing, Trustor shall execute and record or file this Deed of Trust and each amendment hereto, and such financing or continuation statements, or amendments thereto, and such other instruments, endorsements or notices, as may be necessary, or as Beneficiary or Trustee may reasonably request, in order to perfect and preserve the lien and security interest granted or purported to be granted hereby. Trustor hereby authorizes Beneficiary to file one or more financing statements or continuation statements, and amendments thereto, relative to all or any part of the Mortgaged Property necessary to preserve or protect the lien and security interest granted hereby without the signature of Trustor where permitted by law. 2.9 Acts of Trustor. Except as provided in or permitted by the Credit Documents, Trustor hereby represents and warrants that it has not mortgaged, hypothecated, assigned or pledged and hereby covenants that it will not mortgage, hypothecate, assign or pledge, so long as this Deed of Trust shall remain in effect, any of its right, title or interest in and to the Mortgaged Property or any part thereof, to anyone other than Beneficiary. 2.10 After-Acquired Property. Any and all of the Mortgaged Property which is hereafter acquired shall immediately, without any further conveyance, assignment or act on the part of Trustor or Beneficiary, become and be subject to the lien and security interest of this Deed of Trust as fully and completely as though specifically described herein, but nothing contained in this Section 2.10 shall be deemed to modify or change the obligations of Trustor under Section 2.8 hereof. If and whenever from time to time Trustor shall hereafter acquire any real property or interest therein which constitutes or is intended to constitute part of the Mortgaged Property hereunder, Trustor shall promptly give notice thereof to Beneficiary and Trustor shall forthwith execute, acknowledge and deliver to Beneficiary a supplement to this Deed of Trust in form and substance reasonably satisfactory to Beneficiary subjecting the property so acquired to the lien of this Deed of Trust. At the same time, if Beneficiary so requests, Trustor shall deliver to Beneficiary either (i) an endorsement to the lender's policy of title insurance issued to Beneficiary insuring the lien of this Deed of Trust, or (ii) a new lender's title policy (which shall include tie in coverage relating to the lender's policy described in (i), above), in each case which shall insure to Beneficiary in form and substance reasonably satisfactory to Beneficiary that the lien of this Deed of Trust as insured under such title insurance policy or policies encumbers such later acquired property and that Trustor's title to such property meets all of the applicable requirements of the Credit Documents with respect to title to Trustor's real property interests. 8 2.11 Mortgaged Property. 2.11.1 [Trustor shall pay or cause to be paid all rent and other charges required under the Surface and Geothermal Leases as and when the same are due and shall promptly and faithfully perform or cause to be performed all other material terms, obligations, covenants, conditions, agreements, indemnities and liabilities of Trustor under the Surface and Geothermal Leases.] Trustor shall observe all applicable covenants, easements and other restrictions of record with respect to the Site, the Easements or to any other part of the Mortgaged Property, in all material respects. 2.11.2 [Trustor shall maintain in full force and effect, perform its obligations under, preserve, protect and defend the material rights of Trustor under and take all reasonable action necessary to prevent termination (except by expiration in accordance with its terms) of each and every Surface and Geothermal Lease, including prosecution of suits to enforce any material rights of Trustor thereunder and enforcement of any material claims with respect thereto. Trustor does hereby authorize and irrevocably appoint and constitute Beneficiary as its true and lawful attorney-in-fact, which appointment is coupled with an interest, in its name, place and stead, to take any and all actions deemed necessary or desirable by Beneficiary to perform and comply with all the obligations of Trustor under the Surface and Geothermal Leases, and to do and take upon the occurrence and during continuation of an Event of Default, but without any obligation so to do or take, any action which Beneficiary deems reasonably necessary to prevent or cure any default by Trustor under the Surface and Geothermal Leases, to enter into and upon the Real Property and Improvements or any part thereof as provided in the Credit Documents in order to prevent or cure any default of Trustor pursuant thereto, to the end that the rights of Trustor in and to the leasehold estates created by the Surface and Geothermal Leases shall be kept free from default.] 2.11.3 [Trustor shall not surrender its leasehold estates and interests under the Surface and Geothermal Leases or modify, change, supplement, alter or amend the Surface and Geothermal Leases or affirmatively waive any provisions thereof, either orally or in writing, except as permitted in the Credit Documents, and any attempt on the part of Trustor to do any of the foregoing without the written consent of Beneficiary shall be null and void.] 2.11.4 If any action or proceeding shall be instituted to evict Trustor or to recover possession of the Mortgaged Property or any part thereof or interest therein from Trustor or any action or proceeding otherwise affecting the Mortgaged Property or this Deed of Trust shall be instituted, then Trustor shall, immediately after receipt, deliver to Beneficiary a true and complete copy of each petition, summons, complaint, notice of motion, order to show cause and all other pleadings and papers, however designated, served in any such action or proceeding. 2.11.5 [Trustor covenants and agrees that the fee title to the Real Property and Improvements and the leasehold estates created under the Surface and Geothermal Leases shall not merge but shall always remain separate and distinct, notwithstanding the union of said estates either in Trustor or a third party by purchase or otherwise and, in case Trustor acquires the fee title or any other estate, title or interest in and to the Real Property and Improvements, the lien of this Deed of Trust shall, without further conveyance, simultaneously with such acquisition, be 9 spread to cover and attach to such acquired estate and as so spread and attached shall be prior to the lien of any mortgage placed on the acquired estate after the date of this Deed of Trust.] 2.11.6 [No release or forbearance of any of Trustor's obligations under the Surface and Geothermal Leases by the lessor thereunder, shall release Trustor from any of its obligations under this Deed of Trust.] 2.11.7 [Trustor shall, within ten (10) days after written demand from Beneficiary, deliver to Beneficiary proof of payment of all items that are required to be paid by Trustor under the Surface and Geothermal Leases, including rent, taxes, operating expenses and other charges.] 2.11.8 The lien of this Deed of Trust shall attach to all of Trustor's rights and remedies at any time arising under or pursuant to section 365(h) of the Bankruptcy Law, including all of Trustor's rights to remain in possession of the Mortgaged Property. [Trustor shall not elect to treat any of the Surface and Geothermal Leases as terminated under section 365(h)(l) of the Bankruptcy Law, and any such election shall be void.] 2.11.8.1 [If pursuant to section 365(h) of the Bankruptcy Law, Trustor shall seek to offset against the rent reserved in any of the Surface and Geothermal Leases the amount of any damages caused by the nonperformance by the lessor or any other party of any of their respective obligations thereunder after the rejection by the lessor or such other party of such Surface and Geothermal Lease under the Bankruptcy Law, then Trustor shall, prior to effecting such offset, notify Beneficiary of its intent to do so, setting forth the amount proposed to be so offset and the basis therefor. Beneficiary shall have the right to object to all or any part of such offset that, in the reasonable judgment of Beneficiary, would constitute a breach of such Surface and Geothermal Lease, and in the event of such objection, Trustor shall not effect any offset of the amounts found objectionable by Beneficiary. Neither Beneficiary's failure to object as aforesaid nor any objection relating to such offset shall constitute an approval of any such offset by Beneficiary.] 2.11.8.2 [If any action, proceeding, motion or notice shall be commenced or filed in respect of the lessor under any of the Surface and Geothermal Leases or any other party or in respect of such Surface and Geothermal Leases in connection with any case under the Bankruptcy Law, then Beneficiary shall have the option to intervene in any such litigation with counsel of Beneficiary's choice. Beneficiary may proceed in its own name in connection with any such litigation, and Trustor agrees to execute any and all powers, authorizations, consents or other documents required by Beneficiary in connection therewith.] 2.11.8.3 Trustor shall, after obtaining knowledge thereof, promptly notify Beneficiary of any filing by or against the lessor or other party with an interest in the Mortgaged Property of a petition under the Bankruptcy Law. Trustor shall promptly deliver to Beneficiary, following receipt, copies of any and all notices, summonses, pleadings, applications and other documents received by Trustor in connection with any such petition and any proceedings relating thereto. 2.11.8.4 [If there shall be filed by or against Trustor a petition under the Bankruptcy Law, and Trustor, as lessee under the Surface and Geothermal Leases, shall 10 determine to reject any of the Surface and Geothermal Leases pursuant to section 365(a) of the Bankruptcy Law, then Trustor shall give Beneficiary a notice of the date on which Trustor shall apply to the bankruptcy court for authority to reject such Surface and Geothermal Lease (such notice to be no later than twenty (20) days prior to such date). Beneficiary shall have the right, but not the obligation, to serve upon Trustor at any time prior to the date on which Trustor shall so apply to the bankruptcy court a notice stating that Beneficiary demands that Trustor assume and assign such Surface and Geothermal Lease to Beneficiary pursuant to section 365 of the Bankruptcy Law. If Beneficiary shall serve upon Trustor the notice described in the preceding sentence, to the extent permitted by law or Governmental Rule Trustor shall not seek to reject such Surface and Geothermal Lease and shall comply with the demand provided for in the preceding sentence. In addition, effective upon the entry of an order for relief with respect to Trustor under the Bankruptcy Law, Trustor hereby assigns and transfers to Beneficiary a non-exclusive right to apply to the bankruptcy court under section 365(d)(4) of the Bankruptcy Law for an order extending the period during which such Surface and Geothermal Lease may be rejected or assumed; and shall (a) promptly notify Beneficiary of any default by Trustor in the performance or observance of any of the terms, covenants or conditions on the part of Trustor to be performed or observed under such Surface and Geothermal Lease and of the giving of any written notice by the lessor thereunder to Trustor of any such default, and (b) promptly cause a copy of each written notice given to Trustor by the lessor under such Surface and Geothermal Lease to be delivered to Beneficiary. Beneficiary may rely on any notice received by it from any such lessor of any default by Trustor under such Surface and Geothermal Lease and may take such action as may be permitted by law or Governmental Rule to cure such default even though the existence of such default or the nature thereof shall be questioned or denied by Trustor or by any Person on its behalf.] 2.11.9 Trustor shall cause the Mortgaged Property to be maintained in accordance with Prudent Utility Practices and will not commit or suffer to be committed any waste of the Mortgaged Property. Except in accordance with the Credit Documents, the Real Property shall not be removed, demolished or materially altered (except for normal replacement of the Equipment), without the consent of Beneficiary. Trustor will not, without obtaining the prior consent of Beneficiary, initiate, join in or consent to any private restrictive covenant, zoning ordinance, or other public or private restrictions, limiting or affecting the uses which may be made of the Mortgaged Property or any part thereof. 2.11.10 No part of the Mortgaged Property shall in any manner be further encumbered (other than with Permitted Liens), sold, transferred, assigned or conveyed, or permitted to be further encumbered, sold, transferred, assigned or conveyed, except in accordance with the terms of the Credit Agreement, without the prior consent of Beneficiary, which consent in any and all circumstances may be withheld in the sole and absolute discretion of Beneficiary. The provisions of the foregoing sentence of this paragraph shall apply to each and every such further encumbrance, sale, transfer, assignment or conveyance, regardless of whether or not Beneficiary has consented to, or waived by its action or inaction its rights hereunder with respect to, any such previous further encumbrance, sale, transfer, assignment or conveyance, and, irrespective of whether such further encumbrance, sale, transfer, assignment or conveyance is voluntary, by reason of operation of law or is otherwise made. 11 2.12 Power of Attorney. Trustor does hereby irrevocably constitute and appoint Beneficiary, its true and lawful attorney (which appointment is coupled with an interest), with full power of substitution, for Trustor and in the name, place and stead of Trustor or in Beneficiary's own name, for so long as any of the Secured Obligations are outstanding, to ask, demand, collect, receive, receipt for and sue for any and all rents, income and other sums which are assigned hereunder with full power to endorse the name of Trustor on all instruments given in payment or in part payment thereof, to settle, adjust or compromise any claims thereunder as fully as Trustor itself could do and in its discretion file any claim or take any action or proceeding, either in its own name or in the name of Trustor or otherwise, which Beneficiary may deem necessary or appropriate to protect and preserve the right, title and interest of Beneficiary in and to such rents, income and other sums and the security intended to be afforded hereby; provided that Beneficiary shall not exercise such rights unless an Event of Default has occurred and is continuing. 2.13 Covenant to Pay. If an Event of Default has occurred and is continuing and such Event of Default could reasonably be expected to materially and adversely affect Beneficiary's interest hereunder in the Mortgaged Property or result in personal injury, then Beneficiary, among its other rights and remedies, shall have the right, but not the obligation, to pay, observe or perform the same, in whole or in part, and with such modifications as Beneficiary reasonably shall deem advisable. To the extent provided in the Credit Documents, all sums, including reasonable attorneys' fees, so expended or incurred by Beneficiary by reason of the default of Trustor, or by reason of the bankruptcy or insolvency of Trustor, as well as, without limitation, sums expended or incurred to sustain the lien or estate of this Deed of Trust or its priority, or to protect or enforce any rights of Beneficiary hereunder, or to recover any of the Secured Obligations, or to complete construction of the Project for which the Credit Documents are intended as financing, or for repairs, maintenance, alterations, replacements or improvements thereto or for the protection thereof, or for real estate taxes or other governmental assessments or charges against any part of the Mortgaged Property, or premiums for insurance of the Mortgaged Property, shall be entitled to the benefit of the lien on the Mortgaged Property as of the date of the recording of this Deed of Trust, shall be deemed to be added to and be part of the Secured Obligations secured hereby, and shall be repaid by Trustor as provided in the Credit Documents. 2.14 Security Agreement. 2.14.1 This Deed of Trust shall also be a security agreement between Trustor and Beneficiary covering the Mortgaged Property constituting personal property or fixtures (hereinafter collectively called "UCC Collateral") governed by the California Uniform Commercial Code ("UCC") as the same may be more specifically set forth in any financing statement delivered in connection with this Deed of Trust, and as further security for the payment and performance of the Secured Obligations, Trustor hereby grants to Beneficiary a security interest in such portion of the Mortgaged Property to the full extent that the Mortgaged Property may be subject to the UCC. In addition to Beneficiary's other rights hereunder, Beneficiary shall have all rights of a secured party under the UCC. Trustor shall execute and deliver to Beneficiary all financing statements and such further assurances that may be reasonably required by Beneficiary to establish, create, perfect (to the extent the same can be achieved by the filing of a financing statement) and maintain the validity and priority of Beneficiary's security interests, and Trustor shall bear all reasonable costs thereof, including all UCC searches. Except as otherwise provided in the Credit Documents, if Beneficiary should dispose of any of the 12 Mortgaged Property comprising the UCC Collateral pursuant to the UCC, ten (10) days' prior written notice by Beneficiary to Trustor shall be deemed to be reasonable notice; provided, however, Beneficiary may dispose of such property in accordance with the foreclosure procedures of this Deed of Trust in lieu of proceeding under the UCC. Beneficiary may from time to time execute and deliver at Trustor's expense, all continuation statements, termination statements, amendments, partial releases, or other instruments relating to all financing statements by and between Trustor and Beneficiary. Except as otherwise provided in the Credit Documents, if an Event of Default shall occur and is continuing, (a) Beneficiary, in addition to any other rights and remedies which it may have, may exercise immediately and without demand to the extent permitted by law, any and all rights and remedies granted to a secured party under the UCC including the right to take possession of the UCC Collateral or any part thereof, and to take such other measures as Beneficiary may deem necessary for the care, protection and preservation of such collateral and (b) upon request or demand of Beneficiary, Trustor shall at its expense, assemble the UCC Collateral and make it available to Beneficiary at a convenient place acceptable to Beneficiary. Trustor shall pay to Beneficiary on demand, any and all expenses, including reasonable attorneys' fees and disbursements incurred or paid by Beneficiary in protecting the interest in the UCC Collateral and in enforcing the rights hereunder with respect to such UCC Collateral. 2.14.2 Trustor and the Beneficiary agree, to the extent permitted by law, that: (i) this Deed of Trust upon recording or registration in the real estate records of the proper office shall constitute a financing statement filed as a "fixture filing" within the meaning of Sections 9334 and 9502 of the UCC; (ii) all or a part of the Mortgaged Property are or are to become fixtures; and (iii) the addresses of Trustor and Beneficiary are as set forth in the preamble of this Deed of Trust. ARTICLE 3. REMEDIES 3.1 Acceleration of Maturity. If an Event of Default occurs and is continuing, Beneficiary may, at the election of the Majority Banks (except that such acceleration shall be automatic if the Event of Default is occuring under Section 7.1.2 of the Credit Agreement), declare the Secured Obligations to be due and payable immediately, and upon such declaration such principal and interest and other sums shall immediately become due and payable without demand, presentment, notice or other requirements of any kind (all of which Trustor waives). 3.2 Due-On Clause. If (a) the Mortgaged Property is assigned in violation of Section 6.3 of the Credit Agreement, or (b) there is a change of control in violation of Section 7.1.11 of the Credit Agreement, then Beneficiary may, at the election of the Majority Banks, declare the Secured Obligations to be due and payable immediately, and upon such declaration such principal and interest and other sums shall immediately become due and payable without demand, presentment, notice or other requirements of any kind (all of which Trustor waives). Beneficiary's consent to any assignment or change of control shall not be deemed to be a waiver of Beneficiary's right to require its consent to any future assignment or change of control in accordance with the terms of the Credit Agreement. 13 3.3 Protective Advances. If an Event of Default shall have occurred and is continuing, then without thereby limiting Beneficiary's other rights or remedies, waiving or releasing any of Trustor's obligations, or imposing any obligation on Beneficiary, Beneficiary may, at the election of the Majority Banks, either advance any amount owing or perform any or all actions that Beneficiary considers necessary or appropriate to cure such default. No sums advanced or performance rendered by Beneficiary shall cure, or be deemed a waiver of any Event of Default. 3.4 Institution of Equity Proceedings. If an Event of Default occurs and is continuing, Beneficiary may, at the election of the Majority Banks, institute an action, suit or proceeding in equity for specific performance of this Deed of Trust, the Credit Agreement or any other Credit Document, all of which shall be specifically enforceable by injunction or other equitable remedy. 3.5 Beneficiary's Power of Enforcement. 3.5.1 If an Event of Default occurs and is continuing, Beneficiary, at the election of the Majority Banks, shall be entitled to prepare and record on its own behalf, or to deliver to Trustee for recording, if appropriate, written declaration of default and demand for sale and written notice of breach and election to sell (or other statutory notice) to cause the Mortgaged Property to be sold to satisfy the obligations hereof, and in the case of delivery to Trustee, Trustee shall cause said notice to be filed for record. 3.5.2 After the lapse of such time as may then be required by law following the recordation of said notice of breach and election to sell, and notice of sale having been given as then required by law, Trustee without demand on Trustor, may sell the Mortgaged Property or any portion thereof at the time and place fixed by it in said notice, either as a whole or in separate parcels, and in such order as it may determine, at public auction to the highest bidder, of cash in lawful money of the United States payable at the time of sale. Trustee may, for any cause it deems expedient, postpone the sale of all or any portion of said property until it shall be completed and, in every case, notice of postponement shall be given by public announcement thereof at the time and place last appointed for the sale and from time to time thereafter Trustee may postpone such sale by public announcement at the time fixed by the preceding postponement; provided that Trustee shall give Trustor notice of such postponement to the extent required by law. Trustee shall execute and deliver to the purchaser its deed, bill of sale, or other instrument conveying said property so sold, but without any covenant or warranty, express or implied. The recitals in such instrument of conveyance of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Beneficiary, may bid at the sale. 3.5.3 If any Event of Default occurs and is continuing, Beneficiary may, at the election of the Majority Banks, to the extent permitted by law, either with or without entry or taking possession of the Mortgaged Property, and without regard to whether or not the indebtedness and other sums secured hereby shall be due and without prejudice to the right of Beneficiary thereafter to bring an action or proceeding to foreclose or any other action for any other Event of Default existing at the time such earlier action was commenced, proceed by any appropriate action or proceeding: (1) to enforce payment of the Secured Obligations, to the extent permitted by law, or the performance of any term hereof or any other right; (2) to foreclose this Deed of Trust in any manner provided by law for the foreclosure of mortgages or 14 deeds of trust on real property and to sell, as an entirety or in separate lots or parcels, the Mortgaged Property or any portion thereof pursuant to the laws of the State of California or under the judgment or decree of a court or courts of competent jurisdiction, and Beneficiary shall be entitled to recover in any such proceeding all costs and expenses incident thereto, including reasonable attorneys' fees in such amount as shall be awarded by the court; (3) to exercise any or all of the rights and remedies available to it under the Credit Documents; and (4) to pursue any other remedy available to it. Beneficiary shall take action either by such proceedings or by the exercise of its powers with respect to entry or taking possession, or both, as Beneficiary may determine. 3.5.4 The remedies described in this Section 3.5 may be exercised with respect to all or any portion of the UCC Collateral, either simultaneously with the sale of any real property encumbered hereby or independent thereof. Beneficiary shall at any time be permitted to proceed with respect to all or any portion of the UCC Collateral in any manner permitted by the UCC. Trustor agrees that Beneficiary's inclusion of all or any portion of the UCC Collateral in a sale or other remedy exercised with respect to the real property encumbered hereby, as permitted by the UCC, is a commercially reasonable disposition of such property. 3.5.5 Where the Mortgaged Property consists of real property and personal property, any reinstatement of the Secured Obligations, following the occurrence of an Event of Default and an election by the Beneficiary, at the direction of the Required Banks, to accelerate the maturity of the Secured Obligations, which is made by Trustor or any other person or entity permitted to exercise the right of reinstatement under Section 2924c of the California Civil Code or any successor statute, shall, in accordance with the terms of UCC Section 9604, not prohibit the Beneficiary from conducting a sale or other disposition of any personal property or from otherwise proceeding against or continuing to proceed against any personal property in any manner permitted by the UCC; nor shall any such reinstatement invalidate, rescind or otherwise affect any sale, disposition or other proceeding held, conducted or instituted with respect to any personal property prior to such reinstatement. Any sums paid to Beneficiary, in effecting any reinstatement pursuant to Section 2924c of the California Civil Code shall be applied to the Secured Obligations and to Beneficiary's and Trustee's reasonable costs and expenses in the manner required by Section 2924c. 3.6 Beneficiary's Right to Enter and Take Possession, Operate and Apply Income. 3.6.1 If an Event of Default occurs and is continuing, Trustor, upon demand of Beneficiary, at the election of the Majority Banks, shall forthwith surrender to Beneficiary the actual possession and, if and to the extent permitted by law, Beneficiary itself, or by such officers or agents as it may appoint, may enter and take possession of all of the Mortgaged Property, including the Tangible Collateral, without liability for trespass, damages or otherwise, and may exclude Trustor and its agents and employees wholly therefrom and may have joint access with Trustor to the books, papers and accounts of Trustor. 3.6.2 If an Event of Default has occurred and is continuing and Trustor shall for any reason fail to surrender or deliver the Mortgaged Property or any part thereof after Beneficiary's demand, Beneficiary may obtain a judgment or decree conferring on Beneficiary or Trustee the right to immediate possession or requiring Trustor to deliver immediate possession 15 of all or part of such property to Beneficiary or Trustee and Trustor hereby specifically consents to the entry of such judgment or decree. Trustor shall pay to Beneficiary or Trustee, upon demand, all costs and expenses of obtaining such judgment or decree and reasonable compensation to Beneficiary or Trustee, their attorneys and agents, and all such costs, expenses and compensation shall, until paid, be secured by the lien of this Deed of Trust. 3.6.3 Upon every such entering upon or taking of possession, Beneficiary or Trustee may hold, store, use, operate, manage and control the Mortgaged Property and conduct the business thereof, and, from time to time in its sole and absolute discretion and without being under any duty to so act: 3.6.3.1 make all necessary and proper maintenance, repairs, renewals and replacements thereto and thereon, and all necessary additions, betterments and improvements thereto and thereon and purchase or otherwise acquire fixtures, personalty and other property in connection therewith; 3.6.3.2 insure or keep the Mortgaged Property insured; 3.6.3.3 manage and operate the Mortgaged Property and exercise all the rights and powers of Trustor in their name or otherwise with respect to the same; 3.6.3.4 enter into agreements with others to exercise the powers herein granted Beneficiary or Trustee, all as Beneficiary or Trustee from time to time may determine; and shall apply the monies so received by Beneficiary or Trustee in such priority as provided by the Credit Documents to (i) the payment of interest and principal due and payable to the Beneficiary, (ii) the deposits for taxes and assessments and insurance premiums due, (iii) the cost of insurance, taxes, assessments and other proper charges upon the Mortgaged Property or any part thereof, (iv) the compensation, expenses and disbursements of the agents, attorneys and other representatives of Beneficiary or Trustee as allowed under this Deed of Trust, and (v) any other charges or costs required to be paid by Trustor under the terms of the Credit Documents; or 3.6.3.5 rent or sublet the Mortgaged Property or any portion thereof for any purpose permitted by this Deed of Trust. Beneficiary or Trustee shall surrender possession of the Mortgaged Property to Trustor (x) as may be required by law or court order, or (y) when all amounts under any of the terms of the Credit Documents, including this Deed of Trust, shall have been paid current and all Events of Default have been cured or waived. The same right of taking possession, however, shall exist if any subsequent Event of Default shall occur and be continuing. 3.7 Separate Sales. To the extent permitted by law or Governmental Rule, the Mortgaged Property may be sold in one or more parcels and in such manner and order as Trustee, in his sole discretion, may elect, it being expressly understood and agreed that the right of sale arising out of any Event of Default shall not be exhausted by any one or more sales. 3.8 Waiver of Appraisement, Moratorium, Valuation, Stay, Extension and Redemption Laws. Trustor agrees to the full extent permitted by law that if an Event of Default occurs and is continuing, neither Trustor nor anyone claiming through or under it shall or will set 16 up, claim or seek to take advantage of any appraisement, moratorium, valuation, stay, extension or redemption laws now or hereafter in force, in order to prevent or hinder the enforcement or foreclosure of this Deed of Trust or the absolute sale of the Mortgaged Property or any portion thereof or the final and absolute putting into possession thereof, immediately after such sale, of the purchasers thereof, and Trustor for itself and all who may at any time claim through or under it, hereby waives, to the full extent that it may lawfully so do, the benefit of all such laws, and any and all right to have the assets comprising the Mortgaged Property marshalled upon any foreclosure of the lien hereof and agrees that Trustee or any court having jurisdiction to foreclose such lien may sell the Mortgaged Property in part or as an entirety. 3.9 Receiver. If an Event of Default occurs and is continuing, Beneficiary, to the extent permitted by law, and without regard to the value, adequacy or occupancy of the security for the indebtedness and other sums secured hereby, shall be entitled as a matter of right if it so elects to the appointment of a receiver to enter upon and take possession of the Mortgaged Property and to collect all earnings, revenues and receipts and apply the same as the court may direct, and such receiver may be appointed by any court of competent jurisdiction upon application by Beneficiary. To the extent permitted by law or Governmental Rule, Beneficiary may have a receiver appointed without notice to Trustor or any third party, and Beneficiary may waive any requirement that the receiver post a bond. To the extent permitted by law or Governmental Rule, Beneficiary shall have the power to designate and select the Person who shall serve as the receiver and to negotiate all terms and conditions under which such receiver shall serve. To the extent permitted by law or Governmental Rule, any receiver appointed on Beneficiary's behalf may be an Affiliate of Beneficiary. The reasonable expenses, including receiver's fees, reasonable attorneys' fees, costs and agents' compensation, incurred pursuant to the powers herein contained shall be secured by this Deed of Trust. The right to enter and take possession of and to manage and operate the Mortgaged Property and to collect all earnings, revenues and receipts, whether by a receiver or otherwise, shall be cumulative to any other right or remedy available to Beneficiary under this Deed of Trust, the other Credit Documents or otherwise available to Beneficiary and may be exercised concurrently therewith or independently thereof, but such rights shall be exercised in a manner which is otherwise in accordance with and consistent with the Credit Documents. Beneficiary shall be liable to account only for such earnings, revenues and receipts (including security deposits) actually received by Beneficiary, whether received pursuant to this section or any other provision hereof. Notwithstanding the appointment of any receiver or other custodian, Beneficiary shall be entitled as pledgee to the possession and control of any cash, deposits, or instruments at the time held by, or payable or deliverable under the terms of this Deed of Trust to, Beneficiary. 3.10 Suits to Protect the Mortgaged Property. Beneficiary shall have the power and authority to institute and maintain any suits and proceedings as Beneficiary, in its sole and absolute discretion, may deem advisable (a) to prevent any impairment of the Mortgaged Property by any acts which may be unlawful or in violation of this Deed of Trust, (b) to preserve or protect its interest in the Mortgaged Property, or (c) to restrain the enforcement of or compliance with any legislation or other Legal Requirement that may be unconstitutional or otherwise invalid, if the enforcement of or compliance with such enactment, rule or order might impair the security hereunder or be prejudicial to Beneficiary's interest. 3.11 Proofs of Claim. In the case of any receivership, insolvency, Bankruptcy Event, reorganization, arrangement, adjustment, composition or other judicial proceedings affecting 17 Trustor, any Affiliate or any guarantor, co-maker or endorser of any of Trustor's obligations, its creditors or its property, Beneficiary, to the extent permitted by law, shall be entitled to file such proofs of claim or other documents as it may deem be necessary or advisable in order to have its claims allowed in such proceedings for the entire amount due and payable by Trustor under the Credit Documents, at the date of the institution of such proceedings, and for any additional amounts which may become due and payable by Trustor after such date. 3.12 Trustor to Pay Amounts Secured Hereby on Any Default in Payment; Application of Monies by Beneficiary. 3.12.1 In case of a foreclosure sale of all or any part of the Mortgaged Property and of the application of the proceeds of sale to the payment of the sums secured hereby, to the extent permitted by law, Beneficiary shall be entitled to enforce payment from Trustor of any additional amounts then remaining due and unpaid and to recover judgment against Trustor for any portion thereof remaining unpaid, with interest at the interest rate on the Notes. The sale of a part of the Subject Property shall not exhaust the power of sale, but sales may be made from time to time until the Secured Obligations are paid and performed in full. 3.12.2 Trustor hereby agrees to the extent permitted by law, that no recovery of any such judgment by Beneficiary or other action by Beneficiary and no attachment or levy of any execution upon any of the Mortgaged Property or any other property shall in any way affect the Lien and security interest of this Deed of Trust upon the Mortgaged Property or any part thereof or any Lien, rights, powers or remedies of Beneficiary hereunder, but such Lien, rights, powers and remedies shall continue unimpaired as before. 3.12.3 The provisions of this Section 3.12 shall not be deemed to limit or otherwise modify the provisions of any guaranty of the Secured Obligations. 3.13 Delay or Omission; No Waiver. No delay or omission of Beneficiary or the Banks to exercise any right, power or remedy upon any Event of Default shall exhaust or impair any such right, power or remedy or shall be construed to waive any such Event of Default or to constitute acquiescence therein. Every right, power and remedy given to Beneficiary whether contained herein or in the other Credit Documents or otherwise available to Beneficiary may be exercised from time to time and as often as may be deemed expedient by Beneficiary. 3.14 No Waiver of One Default to Affect Another. No waiver of any Event of Default hereunder shall extend to or affect any subsequent or any other Event of Default then existing, or impair any rights, powers or remedies consequent thereon. If Beneficiary (a) grants forbearance or an extension of time for the payment of any sums secured hereby; (b) takes other or additional security for the payment thereof; (c) waives or does not exercise any right granted in this Deed of Trust or any other Credit Document; (d) releases any part of the Mortgaged Property from the lien or security interest of this Deed of Trust or any other instrument securing the Secured Obligations; (e) consents to the filing of any map, plat or replat of the Real Property or any part thereof; (f) consents to the granting of any easement on the Real Property; or (g) makes or consents to any agreement changing the terms of this Deed of Trust or any other Credit Document subordinating the lien or any charge hereof, no such act or omission shall release, discharge, modify, change or affect the liability under this Deed of Trust or any other Credit Document or otherwise of Trustor, or any 18 subsequent purchaser of the Mortgaged Property or any part thereof or any maker, co-signer, surety or guarantor with respect to any other matters not addressed by such act or omission. No such act or omission shall preclude Beneficiary from exercising any right, power or privilege herein granted or intended to be granted in case of any Event of Default then existing or of any subsequent Event of Default, nor, except as otherwise expressly provided in an instrument or instruments executed by Beneficiary, shall the lien or security interest of this Deed of Trust be altered thereby, except to the extent expressly provided in such acts or omissions. In the event of the sale or transfer by operation of law or otherwise of all or any part of the Mortgaged Property, Beneficiary, without notice to any person, firm or corporation, is hereby authorized and empowered to deal with any such vendee or transferee with reference to the Mortgaged Property or the indebtedness secured hereby, or with reference to any of the terms or conditions hereof, as fully and to the same extent as it might deal with the original parties hereto and without in any way releasing or discharging any of the liabilities or undertakings hereunder, or waiving its right to declare such sale or transfer an Event of Default as provided herein. Notwithstanding anything to the contrary contained in this Deed of Trust or any other Credit Document, (i) in the case of any non-monetary Event of Default, Beneficiary may continue to accept payments due hereunder without thereby waiving the existence of such or any other Event of Default and (ii) in the case of any monetary Event of Default, Beneficiary may accept partial payments of any sums due hereunder without thereby waiving the existence of such Event of Default if the partial payment is not sufficient to completely cure such Event of Default. 3.15 Discontinuance of Proceedings; Position of Parties Restored. If Beneficiary shall have proceeded to enforce any right or remedy under this Deed of Trust by foreclosure, entry of judgment or otherwise and such proceedings shall have been discontinued or abandoned for any reason, or such proceedings shall have resulted in a final determination adverse to Beneficiary, then and in every such case Trustor and Beneficiary shall be restored to their former positions and rights hereunder, and all rights, powers and remedies of Beneficiary shall continue as if no such proceedings had occurred or had been taken. 3.16 Remedies Cumulative. Subject to the provisions of Section 5.14 hereof, no right, power or remedy, including remedies with respect to any security for the Secured Obligations, conferred upon or reserved to Beneficiary by this Deed of Trust or any other Credit Document is exclusive of any other right, power or remedy, but each and every such right, power and remedy shall be cumulative and concurrent and shall be in addition to any other right, power and remedy given hereunder or under any other Credit Document, now or hereafter existing at law, in equity or by statute, and Beneficiary shall be entitled to resort to such rights, powers, remedies or security as Beneficiary shall in its sole and absolute discretion deem advisable. 3.17 Interest After Event of Default. If an Event of Default shall have occurred and is continuing, all sums outstanding and unpaid under the Credit Documents, including this Deed of Trust, shall, at Beneficiary's option, bear interest at the interest rate on the Note until such Event of Default has been cured. Trustor's obligation to pay such interest shall be secured by this Deed of Trust. 3.18 Foreclosure; Expenses of Litigation. If Trustee forecloses, reasonable attorneys' fees for services in the supervision of said foreclosure proceeding shall be allowed to the Trustee and Beneficiary as part of the foreclosure costs. In the event of foreclosure of the lien hereof, there shall be allowed and included as additional indebtedness all reasonable expenditures and expenses 19 which may be paid or incurred by or on behalf of Beneficiary for attorneys' fees, appraisers' fees, outlays for documentary and expert evidence, stenographers' charges, publication costs, and costs (which may be estimated as to items to be expended after foreclosure sale or entry of the decree) of procuring all such abstracts of title, title searches and examinations, title insurance policies and guarantees, and similar data and assurances with respect to title as Beneficiary may deem reasonably necessary either to prosecute such suit or to evidence to a bidder at any sale which may be had pursuant to such decree the true condition of the title to or the value of the Mortgaged Property or any portion thereof. All expenditures and expenses of the nature in this section mentioned, and such expenses and fees as may be incurred in the protection of the Mortgaged Property and the maintenance of the lien and security interest of this Deed of Trust, including the reasonable fees of any attorney employed by Beneficiary in any litigation or proceeding affecting this Deed of Trust or any other Credit Document, the Mortgaged Property or any portion thereof, including civil, probate, appellate and bankruptcy proceedings, or in preparation for the commencement or defense of any proceeding or threatened suit or proceeding, shall be immediately due and payable by Trustor, with interest thereon at the interest rate on the Note, and shall be secured by this Deed of Trust. Trustee waives its right to any statutory fee in connection with any judicial or nonjudicial foreclosure of the lien hereof and agrees to accept a reasonable fee for such services. 3.19 Deficiency Judgments. Subject to Article 8 of the Credit Agreement, if after foreclosure of this Deed of Trust or Trustee's sale hereunder, there shall remain any deficiency with respect to any amounts payable under the Credit Documents, including hereunder, or any amounts secured hereby, and Beneficiary shall institute any proceedings to recover such deficiency or deficiencies, all such amounts shall continue to bear interest at the interest rate on the Notes. Subject to Article 8 of the Credit Agreement, Trustor waives any defense to Beneficiary's recovery against Trustor of any deficiency after any foreclosure sale of the Mortgaged Property. Subject to Article 8 of the Credit Agreement, to the extent permitted by law, Trustor expressly waives any defense or benefits that may be derived from any statute granting Trustor any defense to any such recovery by Beneficiary. Subject to Article 8 of the Credit Agreement, in addition, Beneficiary and Trustee shall be entitled to recovery of all of their reasonable costs and expenditures (including any court imposed costs) in connection with such proceedings, including their reasonable attorneys' fees, appraisal fees and the other costs, fees and expenditures referred to in Section 3.18 above. This provision shall survive any foreclosure or sale of the Mortgaged Property, any portion thereof or the extinguishment of the lien hereof. 3.20 WAIVER OF JURY TRIAL. BENEFICIARY AND TRUSTOR EACH WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS DEED OF TRUST, THE CREDIT AGREEMENT OR ANY OTHER CREDIT DOCUMENT. ANY SUCH DISPUTES SHALL BE RESOLVED IN A BENCH TRIAL WITHOUT A JURY. 3.21 Exculpation of Beneficiary. The acceptance by Beneficiary of the assignment contained herein with all of the rights, powers, privileges and authority created hereby shall not, prior to entry upon and taking possession of the Mortgaged Property by Beneficiary, be deemed or construed to make Beneficiary a "mortgagee in possession"; nor thereafter or at any time or in any 20 event obligate Beneficiary to appear in or defend any action or proceeding relating to the Mortgaged Property, nor shall Beneficiary, prior to such entry and taking, be liable in any way for any injury or damage to person or property sustained by any Person in or about the Mortgaged Property. ARTICLE 4. RIGHTS AND RESPONSIBILITIES OF TRUSTEE; OTHER PROVISIONS RELATING TO TRUSTEE Notwithstanding anything to the contrary in this Deed of Trust, Trustor and Beneficiary agree as follows: 4.1 Exercise of Remedies by Trustee. To the extent that this Deed of Trust and applicable law authorizes or empowers Beneficiary to exercise any remedies set forth in Article 3 hereof or otherwise, or perform any acts in connection therewith, Trustee (but not to the exclusion of Beneficiary unless so required under the law of the State of California) shall have the power to exercise any or all such remedies, and to perform any acts provided for in this Deed of Trust in connection therewith, all for the benefit of Beneficiary and on Beneficiary's behalf in accordance with applicable law of the State of California. In connection therewith, Trustee: (a) shall not exercise, or waive the exercise of, any Beneficiary's remedies (other than any rights of Trustee to any indemnity or reimbursement), except at Beneficiary's request, and (b) shall exercise, or waive the exercise of, any or all of Beneficiary's remedies at Beneficiary's request, and in accordance with Beneficiary's directions as to the manner of such exercise or waiver. Trustee may, however, decline to follow Beneficiary's request or direction if Trustee shall be advised by counsel that the action or proceeding, or manner thereof, so directed may not lawfully be taken or waived. 4.2 Rights and Privileges of Trustee. To the extent that this Deed of Trust requires Trustor to indemnify Beneficiary or reimburse Beneficiary for any expenditures Beneficiary may incur, Trustee shall be entitled to the same indemnity and the same rights to reimbursement of expenses as Beneficiary, subject to such limitations and conditions as would apply in the case of Beneficiary. To the extent that this Deed of Trust negates or limits Beneficiary's liability as to any matter, Trustee shall be entitled to the same negation or limitation of liability. To the extent that Trustor, pursuant to this Deed of Trust, appoints Beneficiary as Trustor's attorney in fact for any purpose, Beneficiary or (when so instructed by Beneficiary) Trustee shall be entitled to act on Trustor's behalf without joinder or confirmation by the other. 4.3 Resignation or Replacement of Trustee. Trustee may resign by an instrument in writing addressed to Beneficiary, and Trustee may be removed at any time with or without cause (i.e., in Beneficiary's sole and absolute discretion) by an instrument in writing executed by Beneficiary. In case of the death, resignation, removal or disqualification of Trustee or if for any reason Beneficiary shall deem it desirable to appoint a substitute, successor or replacement Trustee to act instead of Trustee originally named (or in place of any substitute, successor or replacement Trustee), then Beneficiary shall have the right and is hereby authorized and empowered to appoint a successor, substitute or replacement Trustee, and, if preferred, several substitute trustees in succession, without any formality other than appointment and designation in writing executed by Beneficiary, which instrument shall be recorded if required by the law of the State of California. The law of the State of California shall govern the qualifications of any Trustee. The authority conferred upon Trustee by this Deed of Trust shall automatically extend to any and all other 21 successor, substitute and replacement Trustee(s) successively until the Secured Obligations have been paid in full or the Mortgaged Property has been sold hereunder or released in accordance with the provisions of the Credit Documents. Beneficiary's written appointment and designation of any Trustee shall be full evidence of Beneficiary's right and authority to make the same and of all facts therein recited. No confirmation, authorization, approval or other action by Trustor shall be required in connection with any resignation or other replacement of Trustee. 4.4 Authority of Beneficiary. If Beneficiary is a banking corporation, state banking corporation or a national banking association and the instrument of appointment of any successor or replacement Trustee is executed on Beneficiary's behalf by an officer of such corporation, state banking corporation or national banking association, then such appointment may be executed by any authorized officer or agent of Beneficiary and such appointment shall be conclusively presumed to be executed with authority and shall be valid and sufficient without proof of any action by the board of directors or any superior officer of Beneficiary. 4.5 Effect of Appointment of Successor Trustee. Upon the appointment and designation of any successor, substitute or replacement Trustee, Trustee's entire estate and title in the Mortgaged Property shall vest in the designated successor, substitute or replacement Trustee. Such successor, substitute or replacement Trustee shall thereupon succeed to and shall hold, possess and execute all the rights, powers, privileges, immunities and duties herein conferred upon Trustee. All references herein to Trustee shall be deemed to refer to Trustee (including any successor or substitute appointed and designated as herein provided) from time to time acting hereunder. 4.6 Confirmation of Transfer and Succession. Any new Trustee appointed pursuant to any of the provisions hereof shall, without any further act, deed or conveyance, become vested with all the estates, properties, rights, powers and trusts of his predecessor in the rights hereunder with like effect as if originally named as Trustee herein; but nevertheless, upon the written request of Beneficiary or of any successor, substitute or replacement Trustee, any former Trustee ceasing to act shall execute and deliver an instrument transferring to such successor, substitute or replacement Trustee all of the right, title, estate and interest in the Mortgaged Property of Trustee so ceasing to act, together with all the rights, powers, privileges, immunities and duties herein conferred upon Trustee, and shall duly assign, transfer and deliver all properties and monies held by said Trustee hereunder to said successor, substitute or replacement Trustee. 4.7 Exculpation. Trustee shall not be liable for any error of judgment or act done by Trustee in good faith, or otherwise be responsible or accountable under any circumstances whatsoever, except for Trustee's gross negligence, willful misconduct or knowing violation of law. Trustee shall not be personally liable in case of entry by it, or anyone entering by virtue of the powers herein granted it, upon the Mortgaged Property for debts contracted or liability or damages incurred in the management or operation of the Mortgaged Property. Trustee shall have the right to rely on any instrument, document or signature authorizing or supporting any action taken or proposed to be taken by it hereunder, believed by it in good faith to be genuine. All monies received by Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated in any manner from any other monies (except to the extent required by law). Trustee shall be under no liability for interest on any monies received by it hereunder. 22 4.8 Endorsement and Execution of Documents. Upon Beneficiary's written request, Trustee shall, without liability or notice to Trustor, execute, consent to, or join in any instrument or agreement in connection with or necessary to effectuate the purposes of the Credit Documents. Trustor hereby irrevocably designates Trustee as its attorney in fact to execute, acknowledge and deliver, on Trustor's behalf and in Trustor's name, all instruments or agreements necessary to implement any provision(s) of this Deed of Trust or to further perfect the lien created by this Deed of Trust on the Mortgaged Property. This power of attorney shall be deemed to be coupled with an interest and shall survive any disability of Trustor. 4.9 Multiple Trustees. If Beneficiary appoints multiple trustees, then any Trustee, individually, may exercise all powers granted to Trustee under this instrument, without the need for action by any other Trustee(s). 4.10 No Required Action. Trustee shall not be required to take any action under this Deed of Trust or to institute, appear in or defend any action, suit or other proceeding in connection therewith where in its opinion such action will be likely to involve it in expense or liability, unless requested so to do by a written instrument signed by Beneficiary and, if Trustee so requests, unless Trustee is tendered security and indemnity satisfactory to it against any and all costs, expense and liabilities arising therefrom. Trustee shall not be responsible for the execution, acknowledgment or validity of the Credit Documents, or for the proper authorization thereof, or for the sufficiency of the lien and security interest purported to be created hereby, and makes no representation in respect thereof or in respect of the rights, remedies and recourses of Beneficiary. 4.11 Terms of Trustee's Acceptance. Trustee accepts the trust created by this Deed of Trust upon the following terms and conditions: (a) Trustee may exercise any of its powers through appointment of attorney(s) in fact or agents. (b) Trustee shall be under no obligation to take any action upon any Event of Default unless furnished security or indemnity, in form satisfactory to Trustee, against costs, expenses, and liabilities that Trustee may incur. (c) Trustor shall reimburse Trustee, as part of the Secured Obligations secured hereunder, for all reasonable disbursements and expenses (including reasonable legal fees and expenses) incurred by reason of or arising from an Event of Default and as provided for in this Deed of Trust, including any of the foregoing incurred in Trustee's administering and executing the trust created by this Deed of Trust and performing Trustee's duties and exercising Trustee's powers under this Deed of Trust. ARTICLE 5. GENERAL 5.1 Discharge. When all of the Secured Obligations shall have been indefeasibly paid in full in cash, then this Deed of Trust and the lien and security interest created hereby shall be of no further force and effect, Trustor shall be released from the covenants, agreements and obligations of Trustor contained in this Deed of Trust and a11 right, title and interest in and to the Mortgaged Property shall revert to Trustor. Beneficiary and Trustee, at the request and the expense of Trustor, 23 shall promptly execute a deed of reconveyance and such other documents as may be reasonably requested by Trustor to evidence the discharge and satisfaction of this Deed of Trust and the release of Trustor from its obligations hereunder. 5.2 No Waiver. The exercise of the privileges granted in this Deed of Trust or in any other agreement to perform Trustor's obligations under the agreements which constitute the Mortgaged Property shall in no event be considered or constitute a waiver of any right which Beneficiary may have at any time, after an Event of Default shall have occurred and be continuing, to declare the Secured Obligations to be immediately due and payable. No delay or omission to exercise any right, remedy or power accruing upon any default shall impair any such right, remedy or power or shall be construed to be a waiver of any such default or acquiescence therein; and every such right, remedy and power may be exercised from time to time and as often as may be deemed expedient. 5.3 Extension, Rearrangement or Renewal of Secured Obligations. It is expressly agreed that any of the Secured Obligations at any time secured hereby may be from time to time extended for any period, or with the consent of Trustor rearranged or renewed, and that any part of the security herein described, or any other security for the Secured Obligations, may be waived or released, without altering, varying or diminishing the force, effect or lien or security interest of this Deed of Trust; and the lien and security interest granted by this Deed of Trust shall continue as a prior lien and security interest on all of the Mortgaged Property not expressly so released, until the Secured Obligations are fully paid and this Deed of Trust is terminated in accordance with the provisions hereof; and no other security now existing or hereafter taken to secure the payment of the Secured Obligations or any part thereof or the performance of any obligation or liability of Trustor whatever shall in any manner impair or affect the security given by this Deed of Trust; and all security for the payment of the Secured Obligations or any part thereof and the performance of any obligation or liability shall be taken, considered and held as cumulative. 5.4 Forcible Detainer. Trustor agrees for itself and all Persons claiming by, through or under it, that subsequent to foreclosure hereunder in accordance with this Deed of Trust and applicable law if Trustor shall hold possession of the Mortgaged Property or any part thereof, Trustor or the Persons so holding possession shall be guilty of trespass; and any such Person (including Trustor) failing or refusing to surrender possession upon demand shall be guilty of forcible detainer and shall be liable to Beneficiary or any purchaser in foreclosure, as applicable, for reasonable rental on said premises, and shall be subject to eviction and removal in accordance with law. 5.5 Waiver of Stay or Extension. To the extent permitted to be waived by law, Trustor shall not at any time insist upon or plead or in any manner whatever claim the benefit or advantage of any stay, extension or moratorium law now or at any time hereafter in force in any locality where the Mortgaged Property or any part thereof may or shall be situated, nor shall Trustor claim any benefit or advantage from any law now or hereafter in force providing for the valuation or appraisement of the Mortgaged Property or any part thereof prior to any sale thereof to be made pursuant to any provision of this Deed of Trust or to a decree of any court of competent jurisdiction, nor after any such sale shall Trustor claim or exercise any right conferred by any law now or at any time hereafter in force to redeem the Mortgaged Property so sold or any part thereof; and Trustor hereby expressly waives all benefit or advantage of any such law or laws and the appraisement of 24 the Mortgaged Property or any part thereof, and covenants that Trustor shall not hinder or delay the execution of any power herein granted and delegated to Beneficiary but that Trustor shall permit the execution of every such power as though no such law had been made. 5.6 Notices. Except where certified or registered mail notice is required by applicable law, any notice to Trustor or Beneficiary required or permitted hereunder shall be deemed to be given when given in the manner prescribed in Section 10.1 of the Credit Agreement. All notices to Trustee required or permitted hereunder shall be deemed given when given in the manner prescribed in Section 10.1 of the Credit Agreement to the following address: Chicago Title Company 388 Market Street, Suite 1300 San Francisco, California 94111 Attn: Rod Pasion Facsimile No.: (415) 781-4185 5.7 Severability. A11 rights, powers and remedies provided herein may be exercised only to the extent that the exercise thereof does not violate any applicable law, and are intended to be limited to the extent necessary so that they will not render this Deed of Trust invalid, unenforceable or not entitled to be recorded, registered or filed under any applicable law. In the event any term or provision contained in this Deed of Trust is in conflict, or may hereafter be held to be in conflict, with the laws of the State of California or of the United States of America, this Deed of Trust shall be affected only as to such particular term or provision, and shall in all other respects remain in full force and effect. 5.8 Application of Payments. In the event that any part of the Secured Obligations cannot lawfully be secured hereby, or in the event that the lien and security interest hereof cannot be lawfully enforced to pay any part of the Secured Obligations, or in the event that the lien or security interest created by this Deed of Trust shall be invalid or unenforceable as to any part of the Secured Obligations, then all payments on the Secured Obligations shall be deemed to have been first applied to the complete payment and liquidation of that part of the Secured Obligations which is not secured by this Deed of Trust and the unsecured portion of the Secured Obligations shall be completely paid and liquidated prior to the payment and liquidation of the remaining secured portion of the Secured Obligations. 5.9 Governing Law. THIS DEED OF TRUST IS GOVERNED BY AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. 5.10 Entire Agreement. THIS WRITTEN AGREEMENT, THE CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. 25 ---------------------------- ---------------------------- TRUSTOR BENEFICIARY 5.11 Amendments. This Deed of Trust may be amended, supplemented or otherwise modified only by an instrument in writing signed by Trustor and Beneficiary. 5.12 Successors and Assigns. All terms of this Deed of Trust shall run with the land and bind each of Trustor and Beneficiary and their respective successors and assigns, and all Persons claiming under or through Trustor or Beneficiary, as the case may be, or any such successor or assign, and shall inure to the benefit of Beneficiary and Trustor, and their respective successors and assigns. 5.13 Renewal, Etc. Beneficiary may at any time and from time to time renew or extend this Deed of Trust, or alter or modify the same in any way, or waive any of the terms, covenants or conditions hereof in whole or in part and may release any portion of the Mortgaged Property or any other security, and grant such extensions and indulgences in relation to the Secured Obligations as Beneficiary may determine, without the consent of any junior lienor or encumbrancer and without any obligation to give notice of any kind thereto and without in any manner affecting the priority of the lien and security interest hereof on any part of the Mortgaged Property; provided that nothing in this Section 5.13 shall grant Beneficiary the right to alter or modify the Deed of Trust without the consent of the Trustor unless otherwise specifically permitted in this Deed of Trust. 5.14 Liability. Notwithstanding any provision in this Deed of Trust to the contrary, recourse against the Trustor and its Affiliates, stockholders, officers, members, directors and employees under this Deed of Trust shall be limited to the extent provided in Article 8 of the Credit Agreement. 5.15 Severability. The Credit Documents are intended to be performed in accordance with, and only to the extent permitted by, all applicable Governmental Rules and Legal Requirements. If any provision of any of the Credit Documents or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, neither the remainder of the instrument in which such provision is contained, nor the application of such provision to other persons or circumstances, nor the other instruments referred to hereinabove, shall be affected thereby, but rather shall be enforceable to the greatest extent permitted by law. 5.16 Waiver. To the extent permitted by law, Trustor waives and releases any rights or defenses which Trustor might otherwise have (i) under California Code of Civil Procedure Sections 726, 725a, 580a, 580b, 580c and 580d and California Civil Code Section 2889, which statutes might otherwise limit or condition Beneficiary's exercise of certain of Beneficiary's rights and remedies in connection with the enforcement of obligations secured by a lien on real property or (ii) under any laws now existing or hereafter enacted providing for any appraisal before sale of a portion of the Mortgaged Property and (iii) to all rights of redemption, valuation, appraisal, stay of execution, notice of election to mature or to declare due the Secured Obligations and marshalling in the event 26AS OF THE DATE HEREOF, THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. of the foreclosure of the liens created under this Deed of Trust or the exercise of the power of sale granted hereunder. To the extent, if any, which such laws may be applicable and to the extent permitted by law, Trustor waives and releases any right or defense which Trustor might otherwise have under such provisions and under any other law of any applicable jurisdiction which might limit or restrict the effectiveness or scope of any of Trustor's waivers or releases hereunder. 5.17 Additional Waivers. To the extent that Trustor is considered the guarantor of any obligations of any party under the Credit Documents (other than Trustor) or its successors and assigns (the "Counterparty"), then Trustor, to the extent permitted under applicable law, hereby waives the following: (a) any and all benefits, rights and defenses it may have to subrogation, reimbursement, indemnification, and contribution and any other rights and defenses that are or may become available to Trustor by reason of California Civil Code Sections 2787 to 2855, inclusive; (b) any and all benefits, rights and defenses it may have because the Counterparty's debt may be secured by real property. This means, among other things: (i) Beneficiary may collect from Trustor without first foreclosing on any real or personal property collateral pledged by the Counterparty, (ii) if Beneficiary forecloses on any real property collateral pledged by the Counterparty, then (A) the amount of the debt may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, and (B) Beneficiary may collect from Trustor even if Beneficiary, by foreclosing on the real property collateral, has destroyed any right Trustor may have to collect from the Counterparty. This is an unconditional and irrevocable waiver of any rights and defenses Trustor may have because the Counterparty's debt is secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure; and (c) any and all benefits, rights and defenses it may have arising out of an election of remedies by Beneficiary, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed Trustor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the California Code of Civil Procedure or otherwise. 5.18 Release of Collateral. 5.18.1 Notwithstanding any provision herein to the contrary, the Mortgaged Property or any part thereof shall be released from the security interest created by this Deed of Trust at any time or from time to time upon the request of each of Beneficiary and Trustor; provided that the requirements of the Credit Documents have been satisfied. Upon satisfaction of such requirements, a Responsible Officer of Beneficiary shall instruct the Trustee to promptly execute, deliver and acknowledge any necessary or proper instruments of termination, satisfaction or release to evidence the release of any Mortgaged Property permitted to be released pursuant to this Deed of Trust. 27 5.18.2 Beneficiary may instruct the Trustee to release Mortgaged Property from the security interest created hereunder upon the sale or disposition of such Mortgaged Property pursuant to Beneficiary's powers, rights and duties with respect to remedies provided herein. 5.19 Credit Agreement Controls. In the event of any conflict between any terms and provisions set forth in this Deed of Trust and those set forth in the Credit Agreement, the terms and provisions of the Credit Agreement shall supersede and control the terms and provisions of this Deed of Trust. 5.20 Time of the Essence. Trustor acknowledges that time is of the essence in performing all of Trustor's obligations set forth herein. 5.21 Counterpart Execution. This Deed of Trust may be executed by the parties hereto in any number of counterparts (and be each of the parties hereof on separate counterparts), each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 28 IN WITNESS WHEREOF, Trustor has caused this Deed of Trust to be duly executed and delivered as of the day and year first above written. [Signature Block for Applicable Trustor] 29 Exhibit D-1 to Credit Agreement STATE OF CALIFORNIA ) ) ss COUNTY OF _________ ) On _________________, before me, ______________________, Notary Public, personally appeared _______________________________ and _______________, [_] personally known to me OR [_] proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacities, and that by their signatures on the instrument the persons, or the entity upon behalf of which the persons acted, executed the instrument. WITNESS my hand and official seal. ------------------------- Signature of Notary Exhibit D-1 to Credit Agreement EXHIBIT A DESCRIPTION OF SITE Exhibit D-l to Credit Agreement EXHIBIT B DESCRIPTION OF EASEMENTS EXHIBIT D-2 to Credit Agreement ================================================================================ FORM OF SECURITY AGREEMENT between [INSERT NAME OF ORMAT ENTITY], a ----------------------- (Grantor) and BEAL BANK, S.S.B. (Administrative Agent) DATED AS OF -----------, --- ================================================================================ TABLE OF CONTENTS PAGE ---- ARTICLE I. DEFINITIONS........................................................2 1.1 Defined Terms.......................................................2 1.2 Credit Agreement and UCC Definitions................................3 1.3 Rules of Interpretation.............................................3 ARTICLE II. PLEDGE AND GRANT OF SECURITY INTEREST.............................3 2.1 Granting Clause.....................................................3 2.2 Delivery of and Performance under Assigned Agreements...............5 2.3 Continuing Liability under Assigned Agreements and Permits..........6 2.4 Defaults under Assigned Agreements..................................6 2.5 Destruction of Collateral...........................................6 ARTICLE III. OBLIGATIONS SECURED..............................................6 ARTICLE IV. EVENTS OF DEFAULT; REPRESENTATIONS AND WARRANTIES.................7 ARTICLE V. REMEDIES UPON AN EVENT OF DEFAULT..................................9 5.1 Remedies Upon Event of Default......................................9 5.2 Minimum Notice Period..............................................11 5.3 Sale of Collateral.................................................11 5.4 Sales of Private Securities........................................12 5.5 Registration of Securities.........................................12 5.6 Actions Taken by Administrative Agent..............................13 5.7 Private Sales......................................................13 5.8 Waiver of Rights and Remedies Under Applicable Legal Requirements....................................................13 5.9 Compliance With Limitations and Restrictions.......................13 5.10 No Impairment of Remedies..........................................14 ARTICLE VI. MISCELLANEOUS....................................................14 6.1 Remedies Cumulative; Delay Not Waiver..............................14 6.2 Attorney-In-Fact...................................................14 6.3 Perfection; Further Assurances; Certain Waivers....................15 i 6.4 Continuing Assignment and Security Interest; Transfer of Notes........ 16 6.5 Termination of Security Interest...................................... 16 6.6 Limitation on Duty of Administrative Agent with Respect to the Collateral......................................................... 17 6.7 Liability............................................................. 17 6.8 Amendments; Waivers; Consents......................................... 17 6.9 Notices............................................................... 17 6.10 Reinstatement......................................................... 17 6.11 Application of Proceeds............................................... 17 6.12 Administrative Agent May Perform...................................... 18 6.13 Expenses; Interest.................................................... 18 6.14 Severability.......................................................... 18 6.15 Survival of Provisions................................................ 18 6.16 Successions or Assignments............................................ 18 6.17 Headings Descriptive.................................................. 18 6.18 Entire Agreement...................................................... 19 6.19 Time.................................................................. 19 6.20 Counterparts.......................................................... 19 6.21 Governing Law......................................................... 19 6.22 WAIVER OF JURY TRIAL.................................................. 19 6.23 Submission to Jurisdiction............................................ 19 6.24 Third Party Rights.................................................... 20 ii SECURITY AGREEMENT THIS SECURITY AGREEMENT, dated as of [________] [___], [_____] (as amended, amended and restated, supplemented or otherwise modified from time to time, this "Agreement"), is entered into by and between [INSERT NAME OF ORMAT ENTITY], A. [____________________] [ORGANIZED] [FORMED] and existing under the laws of the State of [______________] ("Grantor"), and BEAL BANK, S.S.B., in its capacity as administrative agent (together with its successors, designees and assigns in such capacity, "Administrative Agent") for the Secured Parties. RECITALS A. [ORCAL GEOTHERMAL INC., A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE ("BORROWER")] [GRANTOR] directly or indirectly [INTENDS TO ACQUIRE] [HAS ACQUIRED] (the "Acquisition") certain Persons which directly or indirectly own, lease, use and operate certain geothermal power plants and geothermal fluid facilities located in the State of California, known as the Heber Project, the Mammoth Lakes Project and the SIGC Project (the "Projects"). B. In order to partially finance the Acquisition, [BORROWER] [GRANTOR] has entered into that certain Credit Agreement, dated as of December 18, 2003 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among [BORROWER] [GRANTOR], the financial institutions from time to time parties thereto (collectively, "Lenders"), and each of the agents listed on the signature pages thereto, pursuant to which, among other things, Lenders have [MADE] [EXTENDED COMMITMENTS TO MAKE] loans to, and for the benefit of, [BORROWER] [GRANTOR]. [C.] [GRANTOR IS A WHOLLY-OWNED [DIRECT] [INDIRECT] SUBSIDIARY OF BORROWER, AND GRANTOR [HAS AND] WILL RECEIVE SUBSTANTIAL BENEFITS FROM THE MAKING OF SUCH LOANS TO BORROWER. GRANTOR HAS GUARANTEED THE OBLIGATIONS OF BORROWER UNDER THE CREDIT AGREEMENT PURSUANT TO THAT CERTAIN SUBSIDIARY GUARANTY, DATED AS OF THE DATE HEREOF (AS AMENDED, AMENDED AND RESTATED, SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO TIME, THE "SUBSIDIARY GUARANTY"), AND THE LIENS CREATED HEREBY SECURE, AMONG OTHER THINGS, GRANTOR'S OBLIGATIONS THEREUNDER.] [C.] [D.] [IT IS A CONDITION PRECEDENT TO THE EFFECTIVENESS OF THE CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS, AND THE MAKING OF THE ADVANCES OF CREDIT CONTEMPLATED THEREBY, THAT GRANTOR SHALL HAVE EXECUTED THIS AGREEMENT.] [IT IS A REQUIREMENT UNDER THE CREDIT AGREEMENT THAT GRANTOR EXECUTE AND DELIVER THIS AGREEMENT.] AGREEMENT NOW, THEREFORE, in consideration of the promises contained herein, and to induce Lenders to enter into the Credit Agreement and to make the loans contemplated thereby, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Grantor hereby agrees with Administrative Agent, for the benefit of the Secured Parties, as follows: ARTICLE I. DEFINITIONS 1.1 Defined Terms. The following terms (whether or not underscored) when used in this Agreement, including its preamble and recitals, shall have the following meanings: "Acquisition" has the meaning given in the recitals to this Agreement. "Administrative Agent" has the meaning given in the preamble to this Agreement. "Assigned Agreement" and "Assigned Agreements" have the meaning given in Section 2.1(a). ["BORROWER" HAS THE MEANING GIVEN IN THE RECITALS TO THIS AGREEMENT.] "Collateral" has the meaning given in Section 2.1. "Credit Agreement" has the meaning given in the recitals to this Agreement. "Grantor" has the meaning given in the preamble to this Agreement. "Lenders" has the meaning given in the recitals to this Agreement. "Obligations" means and includes all loans, advances, debts, liabilities, and obligations, howsoever arising, owed by [BORROWER,] Grantor or any Affiliate thereof to Administrative Agent or any Lender of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to the terms of the Credit Agreement or any of the other Credit Documents [(INCLUDING THE SUBSIDIARY GUARANTY)], including all interest, reasonable fees, reasonable charges, reasonable expenses, reasonable attorneys' fees and consultant fees chargeable to [BORROWER,] Grantor or any Affiliate thereof and payable by [BORROWER,] Grantor or any Affiliate thereof hereunder or thereunder. "Projects" has the meaning given in the recitals to this Agreement. "Securities Laws" has the meaning given in Section 5.4. ["SUBSIDIARY GUARANTY" HAS THE MEANING GIVEN IN THE RECITALS TO THIS AGREEMENT.] "UCC" means the Uniform Commercial Code as the same may, from time to time, be in effect in the State of New York; provided, however, in the event that, by reason of mandatory provisions of law, any or all of the perfection or priority of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than 2 the State of New York the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or priority and for purposes of definitions related to such provisions. 1.2 Credit Agreement and UCC Definitions. Unless otherwise defined herein or unless the context otherwise requires, terms used in this Agreement, including its preamble and recitals, have the meanings provided in Exhibit A to the Credit Agreement or, if not defined therein, the UCC. 1.3 Rules of Interpretation. Unless otherwise provided herein, the rules of interpretation set forth in Exhibit A to the Credit Agreement shall apply to this Agreement, including its preamble and recitals. ARTICLE II. PLEDGE AND GRANT OF SECURITY INTEREST 2.1 Granting Clause. To secure the timely payment in full in cash and performance in full of the Obligations, Grantor does hereby collaterally assign, grant and pledge to, and subject to a continuing security interest in favor of, Administrative Agent, for the benefit of Administrative Agent and each other Secured Party, all the estate, right, title and interest of Grantor in, to and under all assets of Grantor, whether now owned or hereafter existing or acquired, including all the estate, right, title and interest of Grantor in, to and under the following (collectively, the "Collateral"): (a) all contracts, agreements and documents (individually, an "Assigned Agreement" and collectively, the "Assigned Agreements"), including the following contracts, agreements and documents, as amended, amended and restated, supplemented or otherwise modified from time to time, and all of Grantor's rights thereunder: (i) the Project Documents listed on Exhibit A hereto; (ii) all other Project Documents not listed on Exhibit A hereto to which the Grantor is a party; (iii) all other agreements, including vendor warranties and guaranties, running to Grantor or assigned to Grantor, relating to the leasing, use, maintenance, improvement, operation or acquisition of a Project or any part thereof, or transport of material, equipment and other parts of a Project or any part thereof; (iv) any lease or sublease agreements or easement agreements relating to a Project or any part thereof or any ancillary facilities, to which Grantor may be or become a party; and (v) each Additional Project Document to which Grantor is or may become a party, and any other agreements to which Grantor may be or become a party relating to the leasing, use, maintenance, improvement or operation of a Project or any part thereof. 3 (b) to the extent permitted by Legal Requirements and the terms of Grantor's Permits, all of Grantor's Permits; (c) the insurance policies maintained by Grantor, including any such policies insuring against loss of revenues by reason of interruption of the operation of a Project and all proceeds and other amounts payable to Grantor thereunder, and all eminent domain proceeds; (d) all rents, profits, income, royalties and revenues derived in any other manner by Grantor as a result of its leasing or ownership of a Project or any part thereof and the use or operation of a Project or any part thereof, including all Project Revenues; (e) all other personal property and fixtures, wherever located and whenever acquired, whether or not of a type which may be subject to a security interest under the UCC, including all machinery, tools, engines, appliances, mechanical and electrical systems, geothermal fluid facilities, wells, elevators, lighting, alarm systems, fire control systems, furnishings, furniture, service equipment, motor vehicles, building or maintenance equipment, building or maintenance materials, supplies, goods and property covered by any warehouse receipts or bills of lading or other such documents, spare parts, maps, plans, specifications, architectural, engineering, construction or shop drawings, manuals or similar documents, copyrights, patents, trademarks, trade names and other intellectual property of any kind, and any replacements, renewals or substitutions for any of the foregoing or additional tangible or intangible personal property hereafter acquired by Grantor; (f) all goods (including inventory, equipment and any accessions thereto), money, instruments (including promissory notes), securities and all other investment property, security entitlements, financial assets, accounts (including health-care-insurance receivables), contract rights, documents, deposit accounts, chattel paper (whether tangible or electronic), letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims and supporting obligations; (g) all general intangibles, including, to the extent assignable, all construction, service, engineering, consulting, architectural and other similar contracts concerning the design, construction, operation, occupancy, maintenance and/or use of a Project, all architectural drawings, plans, specifications, soil tests, appraisals, route surveys, engineering reports and similar materials relating to all or any portion of a Project and all payment and performance bonds or warranties or guarantees relating to a Project, all rights under and in patents, patent licenses, rights in intellectual property, trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, trade secrets, service marks, logos, other source and business identifiers, trademark registrations and applications for registration used exclusively at or relating exclusively to any part of Grantor's business, all renewals, extensions and continuations-in-part of the items referred to above, any written agreements granting to Grantor any right to use any trademark or trademark registration at or in connection with Grantor's business, and the right of Grantor to sue for past, present and future infringements of the foregoing, and the right in the name and on behalf of Grantor to appear in and defend any action or proceeding brought with respect to any part of Grantor's real or 4 personal property and to commence any action or proceeding to protect the interest of Grantor in such Collateral; (h) all books, records, writings, design documents, computer programs, printouts and other computer materials and records, data bases, software, information and other property relating to, used or useful in connection with, Grantor's business; (i) all Accounts, including any sub-accounts within such Accounts; and (j) the proceeds of all of the foregoing collateral, whether cash or non-cash, including (i) all rights of Grantor to receive moneys due and to become due under or pursuant to the Collateral, (ii) all rights of Grantor to receive return of any premiums for or proceeds of any insurance, indemnity, warranty or guaranty with respect to the Collateral or to receive condemnation proceeds, (iii) all claims of Grantor for damages arising out of or for breach of or default under the Assigned Agreements or any other Collateral, (iv) all rights of Grantor to terminate, amend, supplement, modify or waive performance under the Assigned Agreements, to perform thereunder and to compel performance and otherwise exercise all remedies thereunder, (v) all rights of Grantor under each such contract or agreement to make determinations, to exercise any election (including the election of remedies) or option or to give or receive any notice, consent, waiver, or approval, together with full power and authority with respect to any contract or agreement to demand, receive, enforce, collect or provide receipt for any of the foregoing rights or any property the subject of any of the contracts or agreements, to enforce or execute any checks, or other instruments or orders, to file any claims and to take any action which may be necessary or advisable in connection with any of the foregoing, (vi) all rights of Grantor to payment for goods or other property sold or leased or services performed by Grantor, (vii) to the extent not included in the foregoing, all proceeds receivable or received when any and all of the foregoing Collateral is sold, collected, exchanged or otherwise disposed of, whether voluntarily or involuntarily, and (viii) any and all additions and accessions to the Collateral, and all proceeds thereof, including proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims, including all awards, all insurance proceeds, including any unearned premiums or refunds of premiums on any insurance policies covering all or any part of the Collateral and the right to receive and apply the proceeds of any insurance, or of any judgments or settlements made in lieu thereof for damage to or diminution of the Collateral; provided, however, that "Collateral" shall not include (A) any distributions or dividends to [INSERT NAME OF GRANTOR'S OWNER(S)] expressly permitted pursuant to the terms of the Credit Agreement or any other Credit Document or (B) any property which has been sold or disposed of in accordance with Section 6.3 of the Credit Agreement. 2.2 Delivery of and Performance under Assigned Agreements. In order to effectuate the foregoing, Grantor has heretofore delivered or concurrently with the delivery hereof is delivering to Administrative Agent, a copy of each of the Assigned Agreements listed on Exhibit A hereto and a copy of each of its material Permits in effect as of the date hereof. Grantor shall likewise deliver to Administrative Agent an executed counterpart of each Additional Project Document and any amendments and supplements to the foregoing, as they are entered into by Grantor promptly upon the execution thereof. Unless an Event of Default has occurred and is 5 continuing, Grantor may exercise all rights, interests and benefits under the Assigned Agreements in any manner consistent with the terms of the Credit Documents. 2.3 Continuing Liability under Assigned Agreements and Permits. Notwithstanding anything to the contrary under any of the Credit Documents and except as permitted under the Credit Documents, Grantor shall remain liable under each of the Assigned Agreements and its Permits, to perform all of the obligations undertaken by it thereunder, all in accordance with and pursuant to the terms and provisions thereof, and Administrative Agent shall have no obligation or liability under any of such Assigned Agreements or Permits by reason of or arising out of this Agreement or any other document related thereto (except as expressly provided for in any applicable Consent), nor shall Administrative Agent be required or obligated in any manner to perform or fulfill any obligations of Grantor thereunder or to make any payment, or to make any inquiry as to the nature or sufficiency of any payment received by it, or present or file any claim, or take any action to collect or enforce the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 2.4 Defaults under Assigned Agreements. If any default by Grantor under any of the Assigned Agreements shall occur and be continuing, Administrative Agent may, at its option (but shall not be obligated to), remedy any such default by giving written notice of such intent to Grantor and to the parties to each Assigned Agreement in default. Any curing by Administrative Agent of Grantor's default under any of the Assigned Agreements shall not be construed as an assumption by Administrative Agent or any other Secured Party of any obligations, covenants or agreements of Grantor under such Assigned Agreements, and Administrative Agent shall not incur any liability to Grantor or any other Person as a result of any actions undertaken by Administrative Agent in curing or attempting to cure any such default. This Agreement shall not be deemed to release or to affect in any way the obligations of Grantor under the Assigned Agreements. 2.5 Destruction of Collateral. No injury to, or loss or destruction of, the Collateral or any part thereof shall relieve Grantor of any of its obligations hereunder or any of the Obligations under the Credit Agreement or any other Credit Document. ARTICLE III. OBLIGATIONS SECURED Without limiting the generality of the foregoing, this Agreement and all of the Collateral secure the payment and performance when due of all Obligations. If, notwithstanding the representation and warranty set forth in Section 4(b)(ix)-(x) or anything to the contrary herein, enforcement of the liability of Grantor under this Agreement for the full amount of the Obligations would be an unlawful or voidable transfer under any applicable fraudulent conveyance or fraudulent transfer law or any comparable law, then the liability of Grantor hereunder shall be reduced to the highest amount for which such liability may then be enforced without giving rise to an unlawful or voidable transfer under any such law. 6 ARTICLE IV. EVENTS OF DEFAULT; REPRESENTATIONS AND WARRANTIES (a) The occurrence of an Event of Default under, and as defined in, the Credit Agreement, whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body, shall constitute an Event of Default hereunder. Any such Event of Default shall be considered cured or waived for the purposes of this Agreement when it has been cured or waived in accordance with the Credit Agreement. (b) Grantor represents and warrants to and in favor of Administrative Agent and the other Secured Parties, as of the [DATE HEREOF] [CLOSING DATE], as follows: (i) Grantor is [ORGANIZED] [FORMED] and validly existing under the laws of the State of [__________] and is qualified to do business in such jurisdiction and in each other jurisdiction in which the conduct of its business requires such qualification. (ii) Grantor has the full power and authority to conduct its business as contemplated by this Agreement and each other Operative Documents. This Agreement and the other Operative Documents to which Grantor is a party have been duly authorized, executed and delivered by Grantor. (iii) The execution, delivery and performance by Grantor of this Agreement and each other Operative Document to which it is a party and the consummation of the transactions contemplated hereby (including the granting of security interests hereunder) or under any other Operative Document to which it is a party do not and will not (A) violate any provision of (I) any Legal Requirement applicable to Grantor, (II) the Governing Documents of Grantor, or (III) any order, judgment or decree of any court or agency or Governmental Instrumentality binding on Grantor, (B) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of Grantor, (C) result in or require the creation or imposition of any Lien upon any of the properties or assets of Grantor (other than any Liens created hereby or under any of the other Credit Documents in favor of Administrative Agent on behalf of the Secured Parties), or (D) require any approval of any Person, except for such approvals or consents which will be obtained on or before the [CLOSING DATE] [DATE HEREOF] and disclosed in writing to the Administrative Agent. (iv) Grantor has not executed and is not aware of any effective financing statement, security agreement or other instrument similar in effect covering all or any part of the Collateral on file in any recording office, except such as may have been filed pursuant to this Agreement and the other Credit Documents or permitted pursuant hereto or thereto. (v) This Agreement and each other Operative Document to which Grantor is a party constitutes a legal, valid and binding obligation of Grantor enforceable against Grantor in accordance with its terms, except to the extent that enforceability may 7 be limited by applicable bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors' rights or by the effect of general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (vi) Grantor is in compliance with all Legal Requirements, except noncompliance which could not reasonably be expected to have a Material Adverse Effect. (vii) Grantor is not an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. No provision of the FPA or PUHCA as to securities, rates or financial or organizational matters precludes Grantor from entering into and performing its obligations hereunder. (viii) The name of Grantor is "[________________]," as indicated in the public records of the State of [_____________________]. Grantor's federal employee identification number is [_____________________] and Grantor's [____________________] organizational number is [___________________]. (ix) After giving effect to the transactions contemplated by this Agreement and the contingent obligations evidenced hereby (but excluding the effect of the provisions of Article III which limit the Obligations to an amount that would not render Grantor's indebtedness, liabilities or obligations under this Agreement subject to avoidance), Grantor is Solvent. (x) Grantor is not executing this Agreement with any intention to hinder, delay or defraud any present or future creditor or creditors of Grantor. (xi) The security interest granted to Administrative Agent (for the benefit of the Secured Parties) pursuant to this Agreement in the Collateral constitutes a valid lien, subject, with respect to any proceeds, to the limitations set forth in Section 9-315 of the UCC. The security interest granted to Administrative Agent (for the benefit of the Secured Parties) pursuant to this Agreement in the Collateral will be perfected (A) with respect to any property that can solely be perfected by filing, to the extent Article 9 of the UCC applies thereto, upon the filing of financing statements in the filing offices identified on Exhibit D-6 to the Credit Agreement and (B) with respect to any property that can be perfected by possession, upon Administrative Agent receiving possession thereof, and in each case such security interest will be, as to Collateral perfected under the UCC, superior and prior to the rights of all third Persons now existing or hereafter arising whether by way of mortgage, Lien, security interests, encumbrance, assignment or otherwise, except (I) with respect to the Collateral described in clause (A) of this Section 4(b)(xi), the Permitted Liens described in clauses (a) and (e) of the definition of "Permitted Liens" and, to the extent required by Governmental Rule, those matters described in clauses (b), (c) and (g) of the definition of "Permitted Liens" and (II) with respect to the Collateral described in clause (B) of this Section 4(b)(xi), the Permitted Liens described in clause (a) of the definition of "Permitted Liens" and, to the 8 extent required by Governmental Rule, those matters described in clause (b) of the definition of "Permitted Liens". Except to the extent possession of portions of such Collateral is required for perfection, all such action as is necessary has been taken to establish and perfect Administrative Agent's rights in and to such Collateral to the extent Administrative Agent's security interest can be perfected by filing, including any recording, filing, registration, giving of notice or other similar action. Subject to the requirements contained in the UCC with respect to the filing of continuation statements, as of [THE CLOSING DATE][THE DATE HEREOF], no filing, recordation, re-filing or re-recording other than [THOSE LISTED ON EXHIBIT D-6 TO THE CREDIT AGREEMENT][INSERT REQUIRED FILINGS] is necessary to perfect and maintain the perfection of the interest, title or Liens of this Agreement, and on [THE CLOSING DATE][THE DATE HEREOF] all such filings or recordings will have been made to the extent Administrative Agent's security interest can be perfected by filing. Grantor has properly delivered or caused to be delivered to Administrative Agent all such Collateral that requires perfection of the Lien and security interest described above by possession. ARTICLE V. REMEDIES UPON AN EVENT OF DEFAULT 5.1 Remedies Upon Event of Default. Upon the occurrence and during the continuation of an Event of Default, Administrative Agent shall have the right, but not the obligation, to do any of the following: (a) declare [(INCLUDING BY CALLING UPON THE SUBSIDIARY GUARANTY)] any amounts payable by Grantor under any of the Credit Documents to be due and payable immediately, and thereupon the same shall become immediately due and payable without presentment, demand, notice of dishonor, protest or further notice of any kind, all of which are expressly waived by Grantor, anything contained herein to the contrary notwithstanding (provided that, if such Event of Default occurs under Section __________ of the Credit Agreement with respect to [BORROWER] [GRANTOR], all such amounts shall become automatically due and payable); (b) proceed to protect and enforce the rights vested in it by this Agreement and under the UCC; (c) cause all revenues hereby pledged as security and all other moneys and other property pledged hereunder to be paid and/or delivered directly to it, and demand, sue for, collect and receive any such moneys and property; (d) cause any action at law or suit in equity or other proceeding to be instituted and prosecuted to collect or enforce any of the Obligations, or rights hereunder or included in the Collateral, or for specific enforcement of any covenant or agreement contained herein or in any of the Assigned Agreements, or in aid of the exercise of any power herein or therein granted, or for any foreclosure hereunder and sale under a judgment or decree in any judicial proceeding, or to enforce any other legal or equitable right vested in it by this Agreement or by law; 9 (e) foreclose or enforce any other agreement or other instrument by or under or pursuant to which the Obligations are issued or secured; (f) incur expenses, including reasonable attorneys' fees, reasonable consultants' fees, and other reasonable costs appropriate to the exercise of any right or power under this Agreement; (g) perform any obligation of Grantor hereunder or under any other Credit Document or Assigned Agreement, submit renewal notices or exercise any purchase options under leases, and make payments, purchase, contest or compromise any encumbrance, charge, or lien, and pay taxes and expenses and insure, process and preserve the Collateral without, however, any obligation to do so; (h) take possession of the Collateral and of any and all books of account and records of Grantor relating to any of the Collateral and render it usable and repair and renovate the same without, however, any obligation to do so, and enter upon, or authorize its designated agent to enter upon, any location where the same may be located for that purpose (including the right of Administrative Agent to exclude Grantor and all Persons claiming access through Grantor from any access to the Collateral or to any part thereof) and Administrative Agent and its representatives are hereby granted an irrevocable license to enter upon such premises for such purpose, control, manage, operate, rent and lease the Collateral, either separately or in conjunction with a Project, collect all rents and income from the Collateral and apply the same to reimburse the Secured Parties for any reasonable cost or expenses incurred hereunder or under any of the Credit Documents and to the payment or performance of Grantor's obligations hereunder or under any of the Credit Documents, and apply the balance to the Obligations as provided for in the Credit Agreement and any remaining excess balance to whomsoever is legally entitled thereto; (i) make any reasonable compromise or settlement deemed desirable with respect to any of the Collateral and may extend the time of payment, arrange for payment installments, or otherwise modify the terms of, any Collateral; (j) secure the appointment of a receiver of the Collateral or any part thereof, whether incidental to a proposed sale of the Collateral or otherwise, and all disbursements made by such receiver and the expenses of such receivership shall be added to and be made a part of the Obligations, and, whether or not said principal sum, including such disbursements and expenses, exceeds the indebtedness originally intended to be secured hereby, the entire amount of said sum, including such disbursements and expenses, shall be secured by this Agreement and shall be due and payable upon demand therefor and thereafter shall bear interest at the Default Rate or the maximum rate permitted by applicable Legal Requirements, whichever is less; (k) enter into any extension, reorganization, deposit, merger, consolidation or other agreement pertaining to, or deposit, surrender, accept, hold or apply other property in exchange for, the Collateral or any part thereof; 10 (l) transfer the Collateral or any part thereof to the name of Administrative Agent or to the name of Administrative Agent's nominee; (m) take possession of and endorse in the name of Grantor or in the name of Administrative Agent, for the account of Grantor, any bills of exchange, checks, drafts, money orders, notes or any other chattel paper, documents or instruments constituting all or any part of the Collateral or received as interest, rent or other payment on or on account of the Collateral or any part thereof or on account of its sale or lease; (n) appoint another (who may be an employee, officer or other representative of Administrative Agent) to do any of the foregoing, or take any other action permitted hereunder, on behalf of Administrative Agent; (o) execute (in the name, place and stead of Grantor) endorsements, assignments and other instruments of conveyance or transfer with respect to all or any of the Collateral; (p) take any other action which Administrative Agent deems necessary or desirable to protect or realize upon its security interest in the Collateral or any part thereof; (q) require Grantor to assemble the Collateral or any part thereof and to make the same (to the extent the same is reasonably moveable) available to Administrative Agent at a place to be designated by Administrative Agent which is reasonably convenient to Grantor and Administrative Agent; (r) make formal application for the transfer of all of Grantor's Permits to Administrative Agent or to any assignee of Administrative Agent or to any purchaser of any of the Collateral to the extent the same are assignable in accordance with their terms and applicable Legal Requirements; and/or (s) exercise any other or additional rights or remedies granted to Administrative Agent under any other provision of this Agreement or any related agreement, or exercisable by a secured party under the UCC or under any other applicable Legal Requirement. 5.2 Minimum Notice Period. If, pursuant to applicable Legal Requirements, prior notice of any action described in Section 5.1 is required to be given to Grantor, Grantor hereby acknowledges that the minimum time required by such applicable Legal Requirements, or, if no minimum time is specified, fifteen (15) Banking Days, shall be deemed a reasonable notice period. 5.3 Sale of Collateral. In addition to exercising the foregoing rights, Administrative Agent may, to the extent permitted by applicable Legal Requirements, arrange for and conduct the sale of the Collateral at a public or private Sale (as Administrative Agent may elect) which sale may be conducted by an employee or representative of Administrative Agent, and any such sale shall be considered or deemed to be a sale made in a commercially reasonable manner. Administrative Agent agrees to provide at least fifteen (15) Banking Days' prior written notice to Grantor specifying the time and place of any public sale or the time after which any private sale is to be made and Grantor agrees that such fifteen (15) Banking Days' notice shall constitute 11 reasonable notification (unless a longer notice period shall be required by applicable Legal Requirements). Administrative Agent may release, temporarily or otherwise, to Grantor any item of Collateral of which Administrative Agent has taken possession pursuant to any right granted to Administrative Agent by this Agreement without waiving any rights granted to Administrative Agent under this Agreement, the Credit Agreement, the other Credit Documents or any other agreement related hereto or thereto. Grantor, in dealing with or disposing of the Collateral or any part thereof, hereby waives all rights, legal and equitable, it may now or hereafter have to require marshaling of assets or to require, upon foreclosure, sales of assets in a particular order. Each successor of Grantor under the Credit Documents agrees that it shall be bound by the above waiver, to the same extent as if such holder gave the waiver itself. Grantor also hereby waives, to the full extent it may lawfully do so, the benefit of all laws providing for rights of appraisal, valuation, stay, extension or redemption after foreclosure now or hereafter in force. If Administrative Agent sells any of the Collateral upon credit, Grantor will be credited only with payments actually made by the purchaser and received by Administrative Agent. In the event the purchaser fails to pay for the Collateral, Administrative Agent may resell the Collateral and Grantor shall be credited with the proceeds of the sale. In the event Administrative Agent shall bid at any foreclosure or trustee's sale or at any private sale permitted by Legal Requirements or this Agreement or any other Credit Document, Administrative Agent may bid all or less than the amount of the Obligations. 5.4 Sales of Private Securities. Grantor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws (collectively, the "Securities Laws"), Administrative Agent may be compelled, with respect to any sale of all or any part of the Collateral constituting "securities", however defined in the Securities Laws, to limit purchasers to those who will agree, among other things, to acquire such Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Grantor acknowledges that any such private sales may be at prices and on terms less favorable to Administrative Agent and the other Secured Parties than those obtainable through a public sale without such restrictions, and, notwithstanding such circumstances, Administrative Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit the issuer thereof to register it for public sale. 5.5 Registration of Securities. If Administrative Agent with the prior written consent of the other Secured Parties shall decide to exercise its right to sell any or all of the Collateral, and if, in the opinion of counsel for Administrative Agent, it is necessary to have such Collateral, or that portion thereof to be sold, registered under the provisions of any Securities Laws, Grantor shall execute and deliver, all at Grantor's expense, all such instruments and documents which, in the opinion of Administrative Agent, are necessary to register or qualify such Collateral, or that portion thereof to be sold, under the provisions of the Securities Laws and shall use best efforts to cause any registration statement relating thereto to become effective and to remain effective for a period of not less than six months from the date of the first public offering of such Collateral, or that portion thereof to be sold, and to make all amendments thereto and/or to any related prospectus or similar document which, are necessary, all in conformity with the Securities Laws applicable thereto. Without limiting the generality of the foregoing, Grantor agrees to comply with the applicable provisions of the securities or "Blue Sky" laws of any jurisdiction(s) which Administrative Agent shall reasonably designate and to make available to 12 its security holders, as soon as practicable, an earnings statement which will satisfy the provisions of Section 1l(a) of the Securities Act of 1933. 5.6 Actions Taken by Administrative Agent. Any action or proceeding to enforce this Agreement or any Assigned Agreement may be taken by Administrative Agent either in Grantor's name or in Administrative Agent's name, as Administrative Agent may deem necessary. 5.7 Private Sales. Administrative Agent shall incur no liability as a result of the sale of the Collateral, or any part thereof, at any private sale pursuant to Article V conducted in a commercially reasonable manner and in accordance with the requirements of applicable Legal Requirements. Grantor hereby waives any claims against Administrative Agent and the other Secured Parties arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Obligations, even if Administrative Agent accepts the first offer received and does not offer the Collateral to more than one offeree, provided that such private sale is conducted in a commercially reasonable manner and in accordance with applicable Legal Requirements. 5.8 Waiver of Rights and Remedies Under Applicable Legal Requirements. To the extent permitted under applicable Legal Requirements, Grantor hereby waives all rights and remedies of a debtor or grantor under the UCC or other applicable Legal Requirements, and all formalities prescribed by law relative to the sale or disposition of the Collateral (other than notice of sale and any other rights, remedies and formalities that are expressly contemplated by this Agreement) during the continuation of an Event of Default and all other rights and remedies of Grantor with respect thereto. To the extent that any such rights, remedies or formalities are not waivable under the UCC or other applicable Legal Requirements, Administrative Agent agrees to comply and observe such formalities and requirements in accordance with the UCC and applicable Legal Requirements. In exercising its right to take possession of the Collateral upon the occurrence and during the continuation of an Event of Default hereunder, Administrative Agent, personally or by its agents or attorneys, and subject to the rights of any tenant under any lease or sublease of the Collateral, to the fullest extent permitted by Legal Requirements, may enter upon any land owned or leased by Grantor without being guilty of trespass or any wrongdoing, and without liability to Grantor for damages thereby occasioned. 5.9 Compliance With Limitations and Restrictions. Grantor hereby agrees that in respect of any sale of any of the Collateral pursuant to the terms hereof, Administrative Agent is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel is necessary in order to avoid any violation of applicable Legal Requirements, or in order to obtain any required approval of the sale or of the purchaser by any Governmental Authority or official, and Grantor further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall Administrative Agent be liable or accountable to Grantor for any discount allowed by reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. 13 5.10 No Impairment of Remedies. If, in the exercise of any of its rights and remedies hereunder, Administrative Agent shall forfeit any of its rights or remedies, including any right to enter a deficiency judgment against Grantor or any other Person, whether because of any applicable Legal Requirements pertaining to "election of remedies" or otherwise, Grantor hereby consents to such action by Administrative Agent and, to the extent permitted by applicable Legal Requirements, waives any claim based upon such action, even if such action by Administrative Agent shall result in a full or partial loss of any rights of subrogation, indemnification or reimbursement which Grantor might otherwise have had but for such action by Administrative Agent or the terms herein. Any election of remedies which results in the denial or impairment of the right of Administrative Agent to seek a deficiency judgment against any of the parties to any of the Credit Documents shall not, to the extent permitted by applicable Legal Requirements, impair Grantor's obligation hereunder. ARTICLE VI. MISCELLANEOUS 6.1 Remedies Cumulative; Delay Not Waiver. 6.1.1 Remedies Cumulative. No right, power or remedy herein conferred upon or reserved to Administrative Agent hereunder is intended to be exclusive of any other right, power or remedy, and every such right, power and remedy shall, to the extent permitted by applicable Legal Requirements, be cumulative and in addition to every other right, power and remedy given hereunder or under any other Credit Document now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Resort to any or all security now or hereafter held by Administrative Agent or any other Secured Party, may be taken concurrently or successively and in one or several consolidated or independent judicial actions or lawfully taken nonjudicial proceedings, or both. 6.1.2 Delay Not Waiver; Separate Causes of Action. No delay or omission to exercise any right, power or remedy accruing to Administrative Agent upon the occurrence of any Event of Default shall impair any such right, power or remedy of Administrative Agent, nor shall it be construed to be a waiver of any such Event of Default, or an acquiescence therein, or of or in any other breach or default thereafter occurring, nor shall any waiver of any other breach or default under this Agreement or any other Credit Document be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of Administrative Agent of any breach or default under this Agreement, or any waiver on the part of the Secured Parties or Administrative Agent of any provision or condition of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. Each and every default by Grantor in payment hereunder shall give rise to a separate cause of action hereunder, and separate suits may be brought hereunder as each cause of action arises. 6.2 Attorney-In-Fact. Grantor hereby constitutes and appoints Administrative Agent, acting for and on behalf of itself and the other Secured Parties and each successor or permitted assign of Administrative Agent and the other Secured Parties, the true and lawful attorney-in-fact of Grantor, with full power and authority in the place and stead of Grantor and in the name of 14 Grantor, Administrative Agent or otherwise to enforce all rights, interests and remedies of Grantor with respect to the Collateral or enforce all rights, interests and remedies of Administrative Agent under this Agreement (including the rights set forth in Section 5.1); provided, however, that Administrative Agent shall not exercise any of the aforementioned rights unless an Event of Default has occurred and is continuing and has not been waived or cured in accordance with the Credit Documents. This power of attorney is a power coupled with an interest and shall be irrevocable; provided further, however, that nothing in this Agreement shall prevent Grantor from, prior to the exercise by Administrative Agent of any of the aforementioned rights, undertaking Grantor's operations in the ordinary course of business in accordance with the Collateral and the Credit Documents. 6.3 Perfection: Further Assurances: Certain Waivers. 6.3.1 Perfection. Grantor agrees that from time to time, at the expense of Grantor, Grantor shall promptly execute and deliver all further instruments and documents, and take all further action, that may be reasonably necessary, or that Administrative Agent may reasonably request, in order to perfect, to ensure the continued perfection of, and to protect the assignment and security interest granted or intended to be granted hereby or to enable Administrative Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Grantor shall: (a) if any Collateral shall be evidenced by a promissory note or other instrument, deliver and pledge to Administrative Agent such note or instrument duly endorsed (without recourse) and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Administrative Agent; and (b) authorize, execute and file such financing statements or continuation statements, or amendments thereto, and such other instruments, endorsements or notices, as may be reasonably necessary or desirable, or as Administrative Agent may reasonably request or as required by applicable Legal Requirements, in order to perfect and preserve the assignments and security interests granted or purported to be granted hereby. If Grantor shall at any time acquire a commercial tort claim, as defined in the UCC, with a fair market value in excess of $50,000 Grantor shall promptly notify Administrative Agent in a writing signed by Grantor of the brief details thereof and grant to Administrative Agent in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Administrative Agent. 6.3.2 Filing of Financing and Continuation Statements. Grantor hereby authorizes the filing of any financial statements or continuation statements, and amendments to financing statements, or any similar document in any jurisdictions and with any filing offices as Administrative Agent may determine, in its sole discretion, are necessary or advisable to perfect the security interest granted to Administrative Agent, for the benefit of the Secured Parties, herein. Such financing statements may describe the Collateral in the same manner as described herein or may contain an indication or description of the Collateral that describes such property in any other manner as Administrative Agent may determine, in its sole discretion, is necessary, advisable or prudent to ensure the perfection of the security interest in the Collateral granted to Administrative Agent herein, including describing such property as "all assets" or "all personal property", whether now owned or hereafter acquired. 15 6.3.3 Information Concerning Collateral. Grantor shall promptly upon request, and at the expense of Grantor, provide to Administrative Agent all information and evidence it may reasonably request concerning the Collateral to enable Administrative Agent to enforce the provisions of this Agreement. 6.3.4 Waiver. Grantor hereby waives, to the maximum extent permitted by applicable Legal Requirements, (a) all rights under any law limiting remedies, including recovery of a deficiency, under an obligation secured by a mortgage or deed of trust on real property if the real property is sold under a power of sale contained in such mortgage or deed of trust; (b) all rights under any law to require Administrative Agent to pursue any Person other than Grantor, any security which Administrative Agent may hold, or any other remedy before proceeding against Grantor; (c) all rights of reimbursement or subrogation and all rights to participate in any security held by Administrative Agent until the Obligations have been paid and the covenants of the Credit Documents have been performed in full; (d) all rights to require Administrative Agent to give any notices of any kind, including without limitation notices of nonpayment, nonperformance, protest, dishonor, default, delinquency or acceleration, or to make any presentments, demands or protests, except as set forth herein or as expressly provided in the Credit Agreement or other Credit Documents; (e) all rights to assert the bankruptcy or insolvency of Grantor as a defense hereunder or as the basis for rescission hereof; (f) subject to Section 6.6, all rights under any law purporting to reduce Grantor's obligations hereunder if the Obligations are reduced (other than as a result of payment of such Obligations); (g) all defenses based on the disability or lack of authority of Grantor or any Person, the repudiation of the Credit Documents by Grantor or any Person, the failure by Administrative Agent or the Secured Parties to enforce any claim against Grantor, or the unenforceability in whole or in part of any Credit Documents; and (h) all suretyship and guarantor's defenses generally. 6.4 Continuing Assignment and Security Interest; Transfer of Notes. This Agreement shall create a continuing pledge and assignment of and security interest in the Collateral and shall (a) remain in full force and effect until the payment in full in cash and performance in full of the Obligations (other than the Obligations that are intended to survive the termination of the Credit Documents); (b) be binding upon Grantor and its successors and assigns; and (c) inure, together with the rights and remedies of Administrative Agent, to the benefit of Administrative Agent and its successors and permitted assigns for the benefit of the Secured Parties. Without limiting the generality of the foregoing clause (c), any of the Secured Parties may assign or otherwise transfer the Notes or other evidence of indebtedness held by them to any other Person to the extent permitted by and in accordance with the Credit Agreement, and such other Person shall thereupon become vested with all or an appropriate part of the benefits in respect thereof granted to the Secured Parties herein or otherwise. The release of the security interest in any or all of the Collateral, the taking or acceptance of additional security, or the resort by Administrative Agent to any security it may have in any order it may deem appropriate, shall not affect the liability of any Person on the indebtedness secured hereby, except for release of Collateral upon the payment in full in cash and performance in full of the Obligations. 6.5 Termination of Security Interest. Upon the payment in full in cash and performance in full of all Obligations (other than the Obligations that are intended to survive the termination of the Credit Documents), this Agreement and the security interest and all other rights granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon 16 any such termination, Administrative Agent shall, at Grantor's expense and upon its written direction, execute and, subject to Section 6.10, deliver to Grantor such documents (including UCC-3 termination statements) as Grantor shall reasonably request to evidence such termination, to release all security interest on the Collateral and to return such Collateral to Grantor. 6.6 Limitation on Duty of Administrative Agent with Respect to the Collateral. The powers conferred on Administrative Agent hereunder are solely to protect its interest and the interests of the Secured Parties in the Collateral and shall not impose any duty on it to exercise any such powers. Except for (a) the safe custody of any Collateral in its possession, (b) the accounting for monies actually received by it hereunder and (c) any duty expressly imposed on Administrative Agent by applicable Legal Requirements with respect to any Collateral that has not been waived by Grantor hereunder, Administrative Agent shall have no duty with respect to any Collateral and no implied duties or obligations shall be read into this Agreement against Administrative Agent. Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment that is substantially equivalent to that which Administrative Agent accords its own property, it being expressly agreed, to the maximum extent permitted by applicable Legal Requirements, that Administrative Agent shall have no responsibility for (i) taking any necessary steps to preserve rights against any parties with respect to any Collateral or (ii) taking any action to protect against any diminution in value of the Collateral, but, in each case, Administrative Agent may do so and all expenses reasonably incurred in connection therewith shall be part of the Obligations. 6.7 Liability. Recourse against Grantor, any of its Affiliates and other Nonrecourse Persons under this Agreement shall be limited to the extent provided in Article 8 of the Credit Agreement. 6.8 Amendments; Waivers; Consents. This Agreement may not be amended, modified or supplemented, except in a writing signed by each of the parties hereto and otherwise in accordance with the provisions of Section 9.9 of the Credit Agreement. 6.9 Notices. All notices required or permitted under the terms and provisions hereof shall be in writing, and any such notice shall be effective if given in accordance with the provisions of Section 10.1 of the Credit Agreement. Notices to Grantor or Administrative Agent may be given at the addresses set forth in the [CREDIT AGREEMENT] [GUARANTY]. 6.10 Reinstatement. This Agreement and the obligations of Grantor hereunder shall automatically be reinstated if and to the extent that for any reason any payment made pursuant to this Agreement is rescinded or must otherwise be restored or returned, whether as a result of any proceedings in bankruptcy or reorganization or otherwise with respect to Grantor or any other Person or as a result of any settlement or compromise with any Person (including Grantor) in respect of such payment, and Grantor shall pay Administrative Agent on demand all of its reasonable costs and expenses (including reasonable fees of counsel) incurred by Administrative Agent in connection with such rescission or restoration. 6.11 Application of Proceeds. Upon the occurrence and during the continuation of an Event of Default, the proceeds of any sale of, or other realization upon, all or any part of the 17 Collateral shall be applied in accordance with Section 2.4.5 of the Credit Agreement. Grantor and its Affiliates which are parties to the Credit Documents shall remain liable for any deficiency in accordance with the respective Credit Documents to which each is a party. 6.12 Administrative Agent May Perform. Upon the occurrence and during the continuance of an Event of Default, if Grantor fails to perform any agreement contained herein, Administrative Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Administrative Agent incurred in connection therewith shall be part of the Obligations. 6.13 Expenses; Interest. 6.13.1 Expenses. Grantor agrees to pay on demand to Administrative Agent all costs and expenses incurred by Administrative Agent (including the reasonable fees and disbursements of counsel) incident to its enforcement, exercise, protection or preservation of any of its rights, remedies or claims (or the rights or claims of any other Secured Party) under this Agreement. 6.13.2 Interest. Any amount required to be paid by Grantor pursuant to the terms hereof that is not paid when due shall bear interest at the Default Rate or the maximum rate permitted by law, whichever is less, from the date due until paid in full in cash. 6.14 Severability. The provisions of this Agreement are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. 6.15 Survival of Provisions. All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement and the Credit Documents and the making of the Loans and extensions of credit under the Credit Agreement. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Grantor set forth herein shall terminate at the same time as the security interest and other rights granted hereunder shall terminate pursuant to Section 6.5. 6.16 Successions or Assignments. 6.16.1 Successors. This Agreement shall inure to the benefit of the successors or permitted assigns of the Secured Parties under the Credit Agreement who shall have, to the extent of their interest, the rights of the Secured Parties hereunder. 6.16.2 Assignment. This Agreement is binding upon Grantor and its successors and assigns. Grantor is not entitled to assign its obligations hereunder to any other Person without the written consent of Administrative Agent, and any purported assignment in violation of this provision shall be void. 6.17 Headings Descriptive. Article and Section headings have been inserted in this Agreement as a matter of convenience for reference only and it is agreed that such article and 18 section headings are not a part of this Agreement and shall not be used in the interpretation of any provision of this Agreement. 6.18 Entire Agreement. This Agreement, together with the other Credit Documents, is intended by the parties as a final expression of their agreement and is intended as a complete and exclusive statement of the terms and conditions thereof. 6.19 Time. Time is of the essence of this Agreement. 6.20 Counterparts. This Agreement and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. NO CREDIT DOCUMENT TO WHICH BEAL BANK, S.S.B. IS A PARTY SHALL BE EFFECTIVE UNLESS TWO OFFICERS OF BEAL BANK, S.S.B. SHALL HAVE EXECUTED SUCH CREDIT DOCUMENT. 6.21 Governing Law. This Agreement, including all matters of construction, validity, performance and the creation, validity, enforcement or priority of the lien of, and security interests created by, this Agreement in or upon the Collateral shall be governed by the laws of the State of New York, without reference to conflicts of law (other than Section 5-1401 and Section 5-1402 of the New York General Obligations Law), except as required by mandatory provisions of law and except to the extent that the validity or perfection of the lien and security interest hereunder, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of New York. 6.22 WAIVER OF JURY TRIAL. GRANTOR AND ADMINISTRATIVE AGENT HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, OR ANY COURSE OR CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF ADMINISTRATIVE AGENT OR GRANTOR. THIS PROVISION IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO THIS AGREEMENT. 6.23 Submission to Jurisdiction. Administrative Agent and Grantor agree that any legal action or proceeding by or against Grantor or with respect to or arising out of this Agreement may be brought in or removed to the courts of the State of New York, in and for the Borough of Manhattan, or of the United States, of America for the Southern District of New York, as Administrative Agent may elect. By execution and delivery of this Agreement, Administrative Agent and Grantor accept, for themselves and in respect of their property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts. Administrative Agent and Grantor irrevocably consent to the service of process out of any of the aforementioned courts in any manner permitted by law. Administrative Agent and Grantor 19 hereby waive any right to stay or dismiss any action or proceeding under or in connection with this Agreement brought before the foregoing courts on the basis of forum non-conveniens. Nothing herein shall affect the right of Administrative Agent to bring legal action or proceedings in any other competent jurisdiction. 6.24 Third Party Rights. Nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon, or give to any Person, other than Grantor, Administrative Agent and the other Secured Parties, any security, rights, remedies or claims, legal or equitable, under or by reason hereof, or any covenant or condition hereof; and this Agreement and the covenants and agreements herein contained are and shall be held to be for the sole and exclusive benefit of Grantor, Administrative Agent and the other Secured Parties. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 20 IN WITNESS WHEREOF, the parties hereto, by their officers duly authorized, intending to legally bound, have caused this Security Agreement to be duly executed as of the date first above written. [INSERT NAME OF GRANTOR], a , ----------------------- as Grantor By: ------------------------------------ Name: Title: BEAL BANK, S.S.B., as Administrative Agent By: ------------------------------------ Name: Title: By: ------------------------------------ Name: Title: S-1 [ 's Security Agreement] ----------- EXHIBIT A Assigned Agreements [ORMAT TO PROVIDE.] A-1 EXHIBIT D-3 to Credit Agreement ================================================================================ FORM OF PLEDGE AND SECURITY AGREEMENT among [INSERT NAME OF PLEDGOR], a --------------------------------- (Pledgor) and [INSERT NAME OF ISSUER OF PLEDGED EQUITY INTERESTS], a --------------------------------------- (Company) and BEAL BANK, S.S.B. (Administrative Agent) DATED AS OF , -------------- ----- ================================================================================TABLE OF CONTENTS PAGE ---- ARTICLE I. DEFINITIONS........................................................2 1.1 Defined Terms.........................................................2 1.2 Credit Agreement and UCC Definitions..................................3 1.3 Rules of Interpretation...............................................3 ARTICLE II. PLEDGE AND GRANT OF SECURITY INTEREST.............................3 2.1 Granting Clause.......................................................3 2.2 Delivery of Certificates..............................................4 2.3 Retention of Certain Rights...........................................4 ARTICLE III. OBLIGATIONS SECURED..............................................4 ARTICLE IV. EVENTS OF DEFAULT.................................................5 ARTICLE V. REPRESENTATIONS AND WARRANTIES.....................................5 5.1 Organization..........................................................5 5.2 Power and Authorization; Enforceable Obligations......................5 5.3 No Legal Bar..........................................................5 5.4 Beneficial Ownership; Pledged Equity Interests........................6 5.5 No Prior Assignment...................................................6 5.6 No Other Financing Documents..........................................6 5.7 Compliance with Law...................................................6 5.8 Investment Company Act; Federal Energy Laws...........................6 5.9 Name; Organizational Number...........................................6 5.10 Company Information...................................................6 5.11 Capital Adequacy; Etc.................................................7 5.12 Perfection of Security Interest.......................................7 ARTICLE VI. COVENANTS OF PLEDGOR..............................................7 6.1 Defense of Collateral.................................................8 6.2 Limitation of Liens...................................................8 6.3 No Other Filings .....................................................8 6.4 No Sale of Collateral.................................................8 6.5 Filing of Bankruptcy Proceedings......................................8 6.6 Distributions ........................................................8 6.7 Maintenance of Records................................................8 6.8 Name; Jurisdiction of Organization....................................8 6.9 Certificated Securities...............................................9 6.10 Amendments to Organizational Documents................................9 ARTICLE VII. REMEDIES UPON EVENT OF DEFAULT...................................9 7.1 Remedies Upon an Event of Default.....................................9 7.2 Minimum Notice Period................................................10 7.3 Right to Cure........................................................10 7.4 Expenses; Interest...................................................10 7.5 Sale of Collateral...................................................10 7.6 Compliance With Limitations and Restrictions.........................11 7.7 Registration of Securities...........................................11 i TABLE OF CONTENTS PAGE ---- 7.8 No Impairment of Remedies...........................................12 ARTICLE VIII. MISCELLANEOUS..................................................12 8.1 Remedies Cumulative; Delay Not Waiver................................12 8.2 Company's Consent and Covenant.......................................15 8.3 Attorney-in-Fact.....................................................15 8.4 Perfection; Further Assurances.......................................15 8.5 Payment of Taxes.....................................................16 8.6 Place of Business; Location of Records...............................16 8.7 Continuing Assignment and Security Interest; Transfer of Notes..........................................................16 8.8 Termination of Security Interest.....................................16 8.9 Security Interest Absolute...........................................17 8.10 Limitation on Duty of Administrative Agent with Respect to the Collateral.........................................17 8.11 Liability............................................................18 8.12 Amendments; Waivers; Consents........................................18 8.13 Notices..............................................................18 8.14 Delivery of Collateral; Proxy........................................19 8.15 Governing Law........................................................20 8.16 Reinstatement........................................................20 8.17 Severability.........................................................20 8.18 Survival of Provisions...............................................20 8.19 Headings Descriptive.................................................20 8.20 Entire Agreement.....................................................20 8.21 Time.................................................................21 8.22 Counterparts.........................................................21 8.23 Limitation of Liability..............................................21 8.24 Submission to Jurisdiction...........................................21 8.25 WAIVER OF JURY TRIAL.................................................21 8.26 Knowledge and Attribution............................................22 8.27 Rights of Administrative Agent.......................................22 8.28 Consent and Acknowledgement..........................................22 8.29 Third Party Beneficiaries............................................22 8.30 Waiver of Transfer Restrictions......................................22 EXHIBITS AND SCHEDULE Exhibit A - Irrevocable Proxy Exhibit B - Transfer Document Schedule I - Description of Pledged Equity Interests ii PLEDGE AND SECURITY AGREEMENT This PLEDGE AND SECURITY AGREEMENT, dated as of [_______] [___], [_____] (as amended, amended and restated, supplemented or otherwise modified from time to time, this "Agreement") is entered into by and among [INSERT NAME OF PLEDGOR], a ________________ [ORGANIZED][FORMED] and existing under the laws of the State of _______________ ("Pledgor"), [INSERT NAME OF ISSUER OF PLEDGED EQUITY INTERESTS], a _________________ [ORGANIZED][FORMED] and existing under the laws of the State of _________________ ("Company"), and BEAL BANK, S.S.B., in its capacity as administrative agent (together with its successors, designees and assigns in such capacity, "Administrative Agent") for the Secured Parties. RECITALS A. [PLEDGOR] [COMPANY] [ORCAL GEOTHERMAL INC., A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE ("BORROWER")] directly or indirectly [INTENDS TO ACQUIRE] [HAS ACQUIRED] (the "Acquisition") certain Persons who directly or indirectly own, lease, operate and use certain geothermal power plants and geothermal fluid facilities located in the State of California, known as the Heber Project, the Mammoth Lakes Project and the SIGC Project (the "Projects"). B. In order to partially finance the Acquisition, [BORROWER] [PLEDGOR] [COMPANY] has entered into that certain Credit Agreement, dated as of December 18, 2003 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among [BORROWER] [PLEDGOR] [COMPANY], the financial institutions from time to time parties thereto (collectively, "Lenders"), and the agents listed on the signature pages thereto, pursuant to which, among other things, Lenders have [MADE][EXTENDED COMMITMENTS TO MAKE] loans to, and for the benefit of, [BORROWER] [PLEDGOR] [COMPANY]. C. As of the Closing Date, Pledgor is a [PARTNER] [MEMBER] [SHAREHOLDER] and owns ____% of the [PARTNERSHIP] [MEMBERSHIP] [OWNERSHIP] interests of Company. [D.] [PLEDGOR IS A WHOLLY-OWNED [DIRECT] [INDIRECT] SUBSIDIARY OF BORROWER, AND PLEDGOR [HAS AND] WILL RECEIVE SUBSTANTIAL BENEFITS FROM THE MAKING OF SUCH LOANS TO BORROWER. PLEDGOR HAS GUARANTEED THE OBLIGATIONS OF BORROWER UNDER THE CREDIT AGREEMENT PURSUANT TO THAT CERTAIN SUBSIDIARY GUARANTY, DATED AS OF THE DATE HEREOF (AS AMENDED, AMENDED AND RESTATED, SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO TIME, THE "SUBSIDIARY GUARANTY"), AND THE LIENS CREATED HEREBY SECURE, AMONG OTHER THINGS, PLEDGOR'S OBLIGATIONS THEREUNDER.] [D.] [E.] [IT IS A CONDITION PRECEDENT TO THE EFFECTIVENESS OF THE CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS, AND THE MAKING OF THE ADVANCES OF CREDIT CONTEMPLATED THEREBY, THAT PLEDGOR SHALL HAVE EXECUTED THIS AGREEMENT.] [IT IS A REQUIREMENT UNDER THE CREDIT AGREEMENT THAT PLEDGOR EXECUTE AND DELIVER THIS AGREEMENT.] AGREEMENT NOW, THEREFORE, in consideration of the promises contained herein, and to induce Lenders to enter into the Credit Agreement and to make the advances of credit to [COMPANY] [BORROWER] contemplated thereby, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Company and Pledgor hereby agree with Administrative Agent, for the benefit of the Secured Parties, as follows: ARTICLE I. DEFINITIONS 1.1 Defined Terms. The following terms (whether or not underscored) when used in this Agreement, including its preamble and recitals, shall have the following meanings: "Acquisition" has the meaning given in the recitals to this Agreement. "Administrative Agent" has the meaning given in the preamble to this Agreement. "Collateral" has the meaning given in Section 2.1. "Company" has the meaning given in the preamble to this Agreement. "Credit Agreement" has the meaning given in the recitals to this Agreement. "Governing Agreement" has the meaning given in Section 8.30. "Lenders" has the meaning given in the recitals to this Agreement. "Obligations" means and includes all loans, advances, debts, liabilities, and obligations, howsoever arising, owed by [BORROWER,] Company, Pledgor or any Affiliate thereof to Administrative Agent or any Lender of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to the terms of the Credit Agreement or any of the other Credit Documents [(INCLUDING THE SUBSIDIARY GUARANTY)], including all interest, reasonable fees, reasonable charges, reasonable expenses, reasonable attorneys' fees and consultant fees chargeable to [BORROWER,] Company, Pledgor or any Affiliate thereof and payable by [BORROWER,] Company, Pledgor or any Affiliate thereof hereunder or thereunder. "Pledged Equity Interests" has the meaning given in Section 2.1. "Pledgor" has the meaning given in the preamble to this Agreement. "Projects" has the meaning given in the recitals to this Agreement. "Securities Laws" has the meaning given in Section 7.7. ["SUBSIDIARY GUARANTY" HAS THE MEANING GIVEN IN THE RECITALS TO THIS AGREEMENT.] 2 "UCC" means the Uniform Commercial Code as the same may, from time to time, be in effect in the State of New York; provided, however, that in the event that, by reason of mandatory provisions of law, any or all of the perfection or priority of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or priority and for purposes of definitions related to such provisions. 1.2 Credit Agreement and UCC Definitions. Unless otherwise defined herein or unless the context otherwise requires, terms used in this Agreement, including its preamble and recitals, have the meanings provided in Exhibit A to the Credit Agreement or, if not defined therein, the UCC. 1.3 Rules of Interpretation. Unless otherwise provided herein, the rules of interpretation set forth in Exhibit A to the Credit Agreement shall apply to this Agreement, including its preamble and recitals. ARTICLE II. PLEDGE AND GRANT OF SECURITY INTEREST 2.1 Granting Clause. To secure the timely payment in full in cash and performance in full of the Obligations, Pledgor hereby collaterally assigns, grants and pledges to Administrative Agent, for the benefit of Administrative Agent and the other Secured Parties, a continuing security interest in all the estate, right, title and interest of Pledgor, now owned or hereafter existing or acquired, in, to and under any and all of the following (the "Collateral"): Any and all of Pledgor's right(s), title(s) and interest(s), whether now owned or hereafter existing or acquired, in Company, and all of the [PARTNERSHIP INTERESTS] [MEMBERSHIP INTERESTS] [SHARES] of Company related thereto (the "Pledged Equity Interests"), including the [PARTNERSHIP INTERESTS] [MEMBERSHIP INTERESTS] [SHARES] described on Schedule I hereto and Pledgor's share of: (a) all rights to receive income, gain, profit, dividends and other distributions allocated or distributed to Pledgor in respect of or in exchange for all or any portion of the Pledged Equity Interests; (b) all of Pledgor's capital or ownership interest, including capital accounts, in Company; (c) all of Pledgor's voting rights in or rights to control or direct the affairs of Company; (d) all of Pledgor's rights, title and interest, as a [MEMBER] [PARTNER] [SHAREHOLDER] of Company, in, to or under any and all of Company's assets or properties derived from the Pledged Equity Interests; 3 (e) all other rights, title and interest in or to Company derived from the Pledged Equity Interests; (f) all indebtedness or other obligations of Company owed to Pledgor; (g) all claims of Pledgor for damages arising out of, or for any breach or default relating to, the Collateral; (h) all rights of Pledgor to terminate, amend, supplement, modify, or cancel, the Governing Documents of Company, to take all actions thereunder and to compel performance and otherwise exercise all remedies thereunder; (i) all securities, notes, certificates and other instruments representing or evidencing any of the foregoing rights and interests or the ownership thereof and any interest of Pledgor reflected in the books of any financial intermediary pertaining to such rights and interests and all non-cash dividends, cash, options, warrants, stock splits, reclassifications, rights, instruments or other investment property and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such rights and interests; and (j) all proceeds of the foregoing Collateral, whether cash or non-cash; provided, however, that "Collateral" shall not include (i) any cash or other property distributed to Pledgor following a distribution made pursuant to Waterfall Level 8 or Section 3.6.2(b) of the Depositary Agreement or (ii) any other distribution or dividend to Pledgor expressly permitted pursuant to the terms of the Credit Agreement or any other Credit Document. 2.2 Delivery of Certificates. All certificates, notes and other instruments representing or evidencing any Collateral (including the certificates described on Schedule I hereto) shall be delivered to and held by or on behalf of, and, in the case of notes, endorsed to the order of, Administrative Agent, or its designee pursuant hereto, in the manner set forth in Section 8.14. 2.3 Retention of Certain Rights. So long as Administrative Agent has not exercised remedies with respect to the Collateral under this Agreement or any other Credit Document upon the occurrence and during the continuation of an Event of Default, Pledgor reserves the right to exercise all voting and other rights, title and interest with respect to the Collateral (except as limited by the Credit Documents) and to receive all income, gains, profits, dividends and other distributions from the Collateral whether non-cash dividends, cash, options, warrants, stock splits, reclassifications, rights, instruments or other investment property or other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such rights and interests (except as limited by the Credit Documents); provided that no vote shall be cast, right exercised or other action taken which could reasonably be expected to result in a Material Adverse Effect. ARTICLE III. OBLIGATIONS SECURED Without limiting the generality of the foregoing, this Agreement and all of the Collateral secure the payment and performance when due of all Obligations. If, notwithstanding the 4 representation and warranty set forth in Section 5.11 or anything to the contrary herein, enforcement of the liability of Pledgor under this Agreement for the full amount of the Obligations would be an unlawful or voidable transfer under any applicable fraudulent conveyance or fraudulent transfer law or any comparable law, then the liability of Pledgor hereunder shall be reduced to the highest amount for which such liability may then be enforced without giving rise to an unlawful or voidable transfer under any such law. ARTICLE IV. EVENTS OF DEFAULT The occurrence of an Event of Default under, and as defined in, the Credit Agreement, whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body, shall constitute an Event of Default hereunder. Any such Event of Default shall be considered cured or waived for the purposes of this Agreement when it has been cured or waived in accordance with the Credit Agreement. ARTICLE V. REPRESENTATIONS AND WARRANTIES Pledgor represents and warrants to and in favor of Administrative Agent and the other Secured Parties, as of the [DATE HEREOF] [CLOSING DATE], as follows: 5.1 Organization. Pledgor is [organized] [formed] and validly existing under the laws of the State of [___________] and is qualified to do business in such jurisdiction and in each other jurisdiction in which the conduct of its business requires such qualification. 5.2 Power and Authorization; Enforceable Obligations. Pledgor has the full power and authority to conduct its business as contemplated by this Agreement and each other Operative Documents. This Agreement and the other Operative Documents to which Pledgor is a party have been duly authorized, executed and delivered by Pledgor. This Agreement and each other Operative Document to which Pledgor is a party constitutes a legal, valid and binding obligation of Pledgor enforceable against Pledgor in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors' rights or by the effect of general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 5.3 No Legal Bar. The execution, delivery and performance by Pledgor of this Agreement and each other Operative Document to which it is a party and the consummation of the transactions contemplated hereby (including the granting of security interests hereunder) or under any other Operative Document to which it is a party do not or will not violate any applicable Legal Requirement or any material contractual obligation of Pledgor and do not or will not result in, or require, the creation or imposition of any Lien (other than the Liens created hereby) on any of the properties or revenues of Pledgor pursuant to any applicable Legal Requirement or any such contractual obligation. 5 5.4 Beneficial Ownership; Pledged Equity Interests. Pledgor is the lawful and beneficial owner of and has full right, title and interest in, to and under rights and interests comprising the Collateral, subject to no Liens (other than the Liens created hereby). The Pledged Equity Interests (a) have been duly authorized and validly issued, (b) are fully paid and non-assessable and (c) constitute [________%] of the outstanding [MEMBERSHIP INTERESTS] [PARTNERSHIP INTERESTS] [SHARES] of Company. 5.5 No Prior Assignment. Pledgor has not previously assigned any of its rights in, to or under all or any portion of the Collateral, except as specifically permitted by the Credit Agreement or the other Credit Documents. 5.6 No Other Financing Documents. Pledgor has not executed and is not aware of any effective financing statement, security agreement or other instrument similar in effect covering all or any part of the Collateral on file in any recording office, except such as may have been filed pursuant to this Agreement and the other Credit Documents. 5.7 Compliance with Law. Pledgor is not (a) in violation of any applicable Legal Requirements in any material respect or (b) subject to or in default in any material respect with respect to any final judgments, writs, injunctions, decrees, rules or regulations of any court or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. 5.8 Investment Company Act; Federal Energy Laws. Pledgor is not an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. No provision of the FPA or PUHCA as to securities, rates or financial or organizational matters precludes Pledgor from entering into and performing its obligations hereunder. 5.9 Name; Organizational Number. The name of Pledgor is "[_________________________]," as indicated in the public records of the State of [___________________]. Pledgor's federal employee identification number is [___________________] and Pledgor's [___________________] organizational number is [_____________________]. 5.10 Company Information. Pledgor has established adequate means of obtaining financial and other information pertaining to the businesses, operations and condition (financial or otherwise) of [BORROWER,] [COMPANY], each Guarantor and Non-Guarantor and their respective properties (including the Projects) on a continuing basis, and Pledgor now is and hereafter will be completely familiar with the businesses, operations and condition (financial or otherwise) of [BORROWER,] [COMPANY], each Guarantor and Non-Guarantor and their respective properties (including the Projects). Pledgor hereby agrees that none of the Secured Parties shall have any duty to advise Pledgor of information known to any such Secured Party regarding such condition or any such circumstances or of any changes or potential changes affecting the Collateral. In the event any Secured Party, in its respective discretion, undertakes at any time or from time to time to provide any such information to Pledgor, neither such Secured Party nor any other Secured Party shall be under any obligation (a) to undertake any investigation not a part of its regular business routine, or reasonable commercial lending practices or (b) to make any other or future disclosure of such information to Pledgor. 6 5.11 Capital Adequacy; Etc. (a) After giving effect to the transactions contemplated by this Agreement and the contingent obligations evidenced hereby (but excluding the effect of the provisions of Article III which limit the Obligations to an amount that would not render Pledgor's indebtedness, liabilities or obligations under this Agreement subject to avoidance), Pledgor is Solvent. (b) Pledgor is not executing this Agreement with any intention to hinder, delay or defraud any present or future creditor or creditors of Pledgor. 5.12 Perfection of Security Interest. The security interest granted to Administrative Agent (for the benefit of the Secured Parties) pursuant to this Agreement in the Collateral constitutes a valid lien, subject, with respect to any proceeds, to the limitations set forth in Section 9-315 of the UCC. The security interest granted to Administrative Agent (for the benefit of the Secured Parties) pursuant to this Agreement in the Collateral will be perfected (a) with respect to any property that can solely be perfected by filing, to the extent Article 9 of the UCC applies thereto, upon the filing of financing statements in the filing offices identified on Exhibit D-6 to the Credit Agreement and (b) with respect to any property that can be perfected by possession, upon Administrative Agent receiving possession thereof, and in each case such security interest will be, as to Collateral perfected under the UCC, superior and prior to the rights of all third Persons now existing or hereafter arising whether by way of mortgage, Lien, security interests, encumbrance, assignment or otherwise, except (I) with respect to the Collateral described in clause (a) of this Section 5.12, the Permitted Liens described in clauses (a) and (e) of the definition of "Permitted Liens" and, to the extent required by Governmental Rule, those matters described in clauses (b), (c) and (g) of the definition of "Permitted Liens" and (II) with respect to the Collateral described in clause (b) of this Section 5.12, the Permitted Liens described in clause (a) of the definition of "Permitted Liens" and, to the extent required by Governmental Rule, those matters described in clause (b) of the definition of "Permitted Liens". Except to the extent possession of portions of such Collateral is required for perfection, all such action as is necessary has been taken to establish and perfect Administrative Agent's rights in and to such Collateral to the extent Administrative Agent's security interest can be perfected by filing, including any recording, filing, registration, giving of notice or other similar action. Subject to the requirements contained in the UCC with respect to the filing of continuation statements, as of [THE CLOSING DATE] [THE DATE HEREOF], no filing, recordation, re-filing or re-recording other than [THOSE LISTED ON EXHIBIT D-6 TO THE CREDIT AGREEMENT] [INSERT REQUIRED FILINGS] is necessary to perfect and maintain the perfection of the interest, title or Liens of this Agreement, and on [THE CLOSING DATE] [THE DATE HEREOF] all such filings or recordings will have been made to the extent Administrative Agent's security interest can be perfected by filing. Pledgor has properly delivered or caused to be delivered to Administrative Agent all such Collateral that requires perfection of the Lien and security interest described above by possession. ARTICLE VI. COVENANTS OF PLEDGOR Pledgor covenants to and in favor of Administrative Agent and the other Secured Parties as follows: 7 6.1 Defense of Collateral. Pledgor shall, until the indefeasible payment in full in cash of all Obligations, defend its title to the Collateral and the interest of Administrative Agent (for the benefit of itself and the other Secured Parties) in the Collateral pledged hereunder against the claims and demands of all other Persons. 6.2 Limitation of Liens. Pledgor shall not directly or indirectly create, incur, assume or suffer to exist any Liens on or with respect to all or any part of the Collateral (other than Permitted Liens). Pledgor shall at its own cost and expense promptly take such action as may be necessary to discharge any such Liens. 6.3 No Other Filings. Pledgor shall not file or authorize or permit to be filed in any jurisdiction any financing statements under the UCC or any like statement relating to the Collateral in which Administrative Agent (for the benefit of itself and the other Secured Parties) is not named as the sole secured party. 6.4 No Sale of Collateral. Except as expressly permitted by this Agreement or the other Credit Documents, Pledgor shall not cause, suffer or permit the sale, assignment, conveyance, pledge or other transfer of all or any portion of Pledgor's ownership interest in Company or any other portion of the Collateral. 6.5 Filing of Bankruptcy Proceedings. To the extent it may do so under applicable Legal Requirements, Pledgor, for itself, its successors and assigns, shall not cast any vote as an owner in Company (a) in favor of the commencement of a voluntary case or other proceeding seeking liquidation, reorganization, rehabilitation or other relief with respect to Company or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect in any jurisdiction or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of the owners of Company or any substantial part of Company's property, (b) to authorize Company to consent to any such aforesaid relief or to the appointment of or taking possession by any such aforesaid official in an involuntary case or other proceeding commenced against Company or (c) to authorize Company to make a general assignment for the benefit of creditors. 6.6 Distributions. If Pledgor in its capacity as an owner of Company receives any income, dividend or other distribution of money or property of any kind from Company (other than as expressly permitted by the Credit Documents), Pledgor shall hold such income or distribution as trustee for and shall promptly deliver the same to Administrative Agent. 6.7 Maintenance of Records. Pledgor shall, at all times, keep accurate and complete records of the Collateral. Pledgor shall permit representatives of Administrative Agent, upon reasonable prior notice, at any time during normal business hours of Pledgor to inspect and make abstracts from Pledgor's books and records pertaining to the Collateral. Upon the occurrence and during the continuation of any Event of Default, at Administrative Agent's request, Pledgor shall promptly deliver copies of any and all such records to Administrative Agent. 6.8 Name; Jurisdiction of Organization. Pledgor shall not change its name, its jurisdiction of organization, the location of its principal place of business or its organization identification number without notice to Administrative Agent at least 30 days prior to such 8 change. In the event of such change, Pledgor shall (at its expense) execute and deliver such instruments and documents as may be required by Administrative Agent or applicable Legal Requirements to maintain a prior perfected security interest in the Collateral. 6.9 Certificated Securities. Pledgor shall cause its equity interests to be evidenced by and remain "certificated securities" as defined in Article 8 of the UCC. 6.10 Amendments to Organizational Documents. Except as expressly permitted by this Agreement or the other Credit Documents, Pledgor shall not terminate, amend, supplement or otherwise modify, or cancel, the Governing Documents of Company. ARTICLE VII. REMEDIES UPON EVENT OF DEFAULT 7.1 Remedies Upon an Event of Default. Upon the occurrence and during the continuation of an Event of Default, Administrative Agent shall have the right, at its election, but not the obligation, to do any of the following: (a) vote or exercise any and all of Pledgor's rights or powers incident to its ownership of the Pledged Equity Interests, including any rights or powers to manage or control Company; (b) demand, sue for, collect or receive any money or property at any time payable to or receivable by Pledgor on account of or in exchange for all or any part of the Collateral; (c) cause any action at law or suit in equity or other proceeding to be instituted and prosecuted to collect or enforce any obligation or right hereunder or included in the Collateral, including specific enforcement of any covenant or agreement contained herein, or to foreclose or enforce the security interest in all or any part of the Collateral granted herein, or to enforce any other legal or equitable right vested in it by this Agreement or by applicable Legal Requirements; (d) amend, terminate, supplement or modify Company's Governing Documents; (e) incur expenses, including reasonable attorneys' fees, reasonable consultants' fees, and other costs appropriate to the exercise of any right or power under this Agreement; (f) perform any obligation of Pledgor hereunder; (g) secure the appointment of a receiver of the Collateral or any part thereof, whether incidental to a proposed sale of the Collateral or otherwise, and all disbursements made by such receiver and the expenses of such receivership shall be added to and be made a part of the Obligations, and, whether or not said principal sum, including such disbursements and expenses, exceeds the indebtedness originally intended to be secured hereby, the entire amount of said sum, including such disbursements and expenses, shall be secured by this Agreement and 9 shall be due and payable upon demand therefor and thereafter shall bear interest at the Default Rate or the maximum rate permitted by applicable Legal Requirements, whichever is less; (h) exercise any other or additional rights or remedies granted to Administrative Agent under any other provision of this Agreement or any other Credit Document, or exercisable by a secured party under the UCC or under any other applicable Legal Requirement; (i) take any other action which Administrative Agent deems necessary or desirable to protect or realize upon its security interest in the Collateral or any part thereof; and/or (j) appoint another Person (who may be an employee, officer or other representative of Administrative Agent) to do any of the foregoing, or take any other action permitted hereunder, on behalf of Administrative Agent. 7.2 Minimum Notice Period. If, pursuant to applicable Legal Requirements, prior notice of any action described in Section 7.1 is required to be given to Pledgor or Company, Pledgor and Company hereby acknowledge and agree that the minimum time required by such applicable Legal Requirements, or if no minimum is specified, fifteen (15) Banking Days, shall be deemed a reasonable notice period. 7.3 Right to Cure. In addition to the foregoing remedies, Administrative Agent may, but shall not be obligated to, cure any Event of Default and incur reasonable fees, costs and expenses in doing so, in which event Pledgor and Company shall reimburse Administrative Agent for all such fees, costs and expenses as provided for in Section 7.4 below. 7.4 Expenses; Interest. (a) Each of Pledgor and Company jointly and severally agrees to pay on demand to Administrative Agent all costs and expenses incurred by Administrative Agent (including the reasonable fees and disbursements of counsel) in connection with exercising any actions taken under Section 7.1 or the enforcement, exercise, protection or preservation of any of its rights, remedies or claims (or the rights or claims of any other Secured Party) under this Agreement. (b) Any amount required to be paid by Pledgor or Company pursuant to the terms hereof that is not paid when due shall bear interest at the Default Rate or the maximum rate permitted by law, whichever is less, from the date due until paid in full in cash. 7.5 Sale of Collateral. In addition to exercising the foregoing rights, Administrative Agent may, to the extent permitted by applicable Legal Requirements, arrange for and conduct a sale of the Collateral at a public or private sale (as Administrative Agent may elect) which sale may be conducted by an employee or representative of Administrative Agent, and any such sale shall be considered or deemed to be a sale made in a commercially reasonable manner. Administrative Agent agrees to provide at least fifteen (15) Banking Days' prior written notice to Pledgor specifying the time and place of any public sale or the time after which any private sale is to be made and Pledgor agrees that such fifteen (15) Banking Days' notice shall constitute 10 reasonable notification (unless a longer notice period shall be required by applicable Legal Requirements). Administrative Agent may release, temporarily or otherwise, to Pledgor any item of Collateral of which Administrative Agent has taken possession pursuant to any right granted to Administrative Agent by this Agreement without waiving any rights granted to Administrative Agent under this Agreement, the Credit Agreement or the other Credit Documents. Pledgor, in dealing with or disposing of the Collateral or any part thereof, hereby waives all rights, legal and equitable, it may now or hereafter have to require marshaling of assets or to require, upon foreclosure, sales of assets in a particular order. Pledgor also waives its right to challenge the reasonableness of any disclaimer of warranties, title and the like made by Administrative Agent in connection with a sale of the Collateral. Each successor of Pledgor under the Credit Documents agrees that it shall be bound by the above waiver, to the same extent as if such holder gave the waiver itself. Pledgor also hereby waives, to the full extent it may lawfully do so, the benefit of all laws providing for rights of appraisal, valuation, stay or extension or of redemption after foreclosure now or hereafter in force. If Administrative Agent sells any of the Collateral upon credit, Pledgor will be credited only with payments actually made by the purchaser and received by Administrative Agent. In the event the purchaser fails to pay for the Collateral, Administrative Agent may resell the Collateral and Pledgor shall be credited with the proceeds of the sale. In the event Administrative Agent shall bid at any foreclosure or trustee's sale or at any private sale permitted by Legal Requirements or this Agreement or any other Credit Document, Administrative Agent may bid all or less than the amount of the Obligations. 7.6 Compliance With Limitations and Restrictions. Pledgor hereby agrees that in respect of any sale of any of the Collateral pursuant to the terms hereof, Administrative Agent is hereby authorized to comply with any limitation or restriction in connection with such sale as Administrative Agent may be advised by counsel is necessary in order to avoid any violation of applicable Legal Requirements, or in order to obtain any required approval of the sale or of the purchaser by any Governmental Authority or official, and Pledgor further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall Administrative Agent be liable or accountable to Pledgor for any discount allowed by reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. 7.7 Registration of Securities. If Administrative Agent shall decide to exercise its right to sell any or all of the Collateral, and if, in the opinion of counsel to Administrative Agent, it is necessary to have such Collateral, or that portion thereof to be sold, registered under the provisions of the Securities Act of 1933, as amended, or otherwise registered or qualified under any federal or state securities laws or regulations (collectively, the "Securities Laws"), Pledgor and Company will execute and deliver, all at Pledgor's and Company's expense, all such instruments and documents which, in the opinion of Administrative Agent, are necessary to register or qualify such Collateral, or that portion thereof to be sold, under the provisions of the Securities Laws. Pledgor and Company will execute and will use best efforts to cause any registration statement relating thereto to become effective and to remain effective for a period of not less than six months from the date of the first public offering of such Collateral, or that portion thereof to be sold, and to make all amendments thereto and/or to any related prospectus or similar document which, in the reasonable opinion of Administrative Agent, are necessary, all in conformity with the Securities Laws applicable thereto. Without limiting the generality of the 11 foregoing, Pledgor and Company agree to comply with the applicable provisions of the securities or "Blue Sky" laws of any jurisdiction(s) which Administrative Agent shall reasonably designate and to make available to its security holders, as soon as practicable, an earnings statement which will satisfy the provisions of Section 11(a) of the Securities Act of 1933. 7.8 No Impairment of Remedies. If, in the exercise of any of its rights and remedies under this Agreement, Administrative Agent shall forfeit any of its rights or remedies, including any right to enter a deficiency judgment against Pledgor or any other Person, whether because of any applicable Legal Requirements pertaining to "election of remedies" or otherwise, Pledgor hereby consents to such action by Administrative Agent and, to the extent permitted by applicable Legal Requirements, waives any claim based upon such action, even if such action by Administrative Agent shall result in a full or partial loss of any rights of subrogation, indemnification or reimbursement which Pledgor might otherwise have had but for such action by Administrative Agent or the terms herein. Any election of remedies which results in the denial or impairment of the right of Administrative Agent to seek a deficiency judgment against any of the parties to any of the Credit Documents shall not, to the extent permitted by applicable Legal Requirements, impair Pledgor's obligation hereunder. ARTICLE VIII. MISCELLANEOUS 8.1 Remedies Cumulative; Delay Not Waiver. 8.1.1 Remedies Cumulative. No right, power or remedy herein conferred upon or reserved to Administrative Agent is intended to be exclusive of any other right, power or remedy, and every such right, power and remedy shall, to the extent permitted by applicable Legal Requirements, be cumulative and in addition to every other right, power and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Resort to any or all security now or hereafter held by Administrative Agent may be taken concurrently or successively and in one or several consolidated or independent judicial actions or lawfully taken non-judicial proceedings, or both. 8.1.2 No Waiver; Separate Causes of Action. No delay or omission to exercise any right, power or remedy accruing to Administrative Agent upon the occurrence and during the continuance of any Event of Default as aforesaid shall impair any such right, power or remedy of Administrative Agent, nor shall it be construed to be a waiver of any such Event of Default or of any similar breach or default thereafter occurring or an acquiescence therein, nor shall any waiver of any other breach or default under this Agreement or any other Credit Document be deemed a waiver of any other breach or default theretofore or thereafter occurring. Each and every default by Pledgor in payment hereunder shall give rise to a separate cause of action hereunder, and separate suits may be brought hereunder as each cause of action arises and every power and remedy given by this Agreement may be exercised from time to time, and as often as shall be deemed expedient, by Administrative Agent. 12 8.1.3 Application of Proceeds. Upon the occurrence and during the continuation of an Event of Default, the proceeds of any sale of or other realization upon, all or any part of the Collateral shall be applied in accordance with Section 2.4.5 of the Credit Agreement. Pledgor and its Affiliates which are party to any Credit Documents shall remain liable for any deficiency in accordance with the respective Credit Documents to which each is a party. 8.1.4 Certain Waivers. Pledgor hereby waives and relinquishes, to the maximum extent permitted by applicable Legal Requirements, all rights and remedies accorded to pledgors, sureties or guarantors and agrees not to assert or take advantage of any such rights or remedies, including: (a) any law limiting remedies, including recovery of a deficiency, under an obligation secured by a mortgage or deed of trust on real property if the real property is sold under a power of sale contained in the mortgage or deed of trust, and all defenses based on any loss whether as a result of any such sale or otherwise; (b) any right to require Administrative Agent or the other Secured Parties to proceed against Company or any other Person or to proceed against or exhaust any security held by Administrative Agent or the other Secured Parties at any time or to pursue any other remedy in Administrative Agent's or any other Secured Party's power before proceeding against Pledgor; (c) any defense that may arise by reason of the incapacity, lack of power or authority, death, dissolution, merger, termination or disability of Pledgor, Company or any other Person or the failure of Administrative Agent or any other Secured Party to file or enforce a claim against the estate (in administration, bankruptcy or any other proceeding) of Pledgor, Company or any other Person; (d) any right to enforce any remedy that Administrative Agent or the other Secured Parties may have against Company or any other Person and any right to participate in any security held by Administrative Agent until the Obligations have been paid and the covenants of the Credit Documents have been performed in full; (e) any right to require Administrative Agent to give any notices of any kind, including, without limitation, notices of nonpayment, nonperformance, protest, dishonor, default, delinquency or acceleration, or to make any presentments, demands or protests, except as set forth herein or expressly provided in the Credit Agreement or any of the Credit Documents; (f) any right to assert the bankruptcy or insolvency of Company or any other Person as a defense hereunder or as the basis for rescission hereof and any defense arising because of Administrative Agent's or any other Secured Party's election, in any proceeding instituted under the Federal Bankruptcy Code, of the application of Section 1111(b)(2) of the Federal Bankruptcy Code; (g) subject to Section 8.9, any right under any law purporting to reduce Pledgor's obligations hereunder if the Obligations are reduced other than as a result of payment of such Obligations; (h) any defense based on the repudiation of the Credit Documents by Company or any other Person, the failure by Administrative Agent or the Secured Parties to enforce any claim against Pledgor, Company or any other Person or the unenforceability in whole or in part of any Credit Documents; (i) all suretyship and guarantor's defenses generally; (j) any right to insist upon, plead or in any manner whatever claim or take the benefit or advantage of, any appraisal, valuation, stay, extension, marshaling of assets, redemption or similar law, or exemption, whether now or at any time hereafter in force, which may delay, prevent or otherwise affect the performance by Pledgor of its obligations under, or the enforcement by Administrative Agent of, this Agreement; (k) any requirement on the part of Administrative Agent or the holder of any Notes to mitigate the damages resulting from any default; (l) any defense based upon an election of remedies by Administrative Agent or the other Secured Parties, including an election to proceed by non-judicial rather than judicial foreclosure, which destroys or otherwise impairs the 13 subrogation rights of Pledgor, the right of Pledgor to proceed against Company or another Person for reimbursement, or both; (m) any defense based on any offset against any amounts which may be owed by any Person to Pledgor for any reason whatsoever; (n) any defense based on any act, failure to act, delay or omission whatsoever on the part of Company or any of its Affiliates or the failure by Company or any of its Affiliates to do any act or thing or to observe or perform any covenant, condition or agreement to be observed or performed by it under the Credit Documents, (o) any defense, setoff or counterclaim which may at any time be available to or asserted by Company or any of its Affiliates against Administrative Agent, the other Secured Parties or any other Person under the Credit Documents; (p) any duty on the part of Administrative Agent or any other Secured Party to disclose to Pledgor any facts Administrative Agent or any other Secured Party may now or hereafter know about Company or any of its Affiliates, regardless of whether Administrative Agent or any other Secured Party has reason to believe that any such facts materially increase the risk beyond that which Pledgor intends to assume, or have reason to believe that such facts are unknown to Pledgor, or have a reasonable opportunity to communicate such facts to Pledgor; (q) any defense based on any change in the time, manner or place of any payment under, or in any other term of, the Credit Documents or any other amendment, renewal, extension, acceleration, compromise or waiver of or any consent or departure from the terms of the Credit Documents; and (r) any defense based upon any borrowing or grant of a security interest under Section 364 of the Federal Bankruptcy Code. 8.1.5 Foreclosure Waiver. To the extent permitted by Legal Requirements, Pledgor waives the posting of any bond otherwise required of Administrative Agent in connection with any judicial process or proceeding to obtain possession of, replevy, attach, or levy upon the Collateral, to enforce any judgment or other security for the Obligations, to enforce any judgment or other court order entered in favor of Administrative Agent, or to enforce by specific performance, temporary restraining order, preliminary or permanent injunction, this Agreement or any other agreement or document between Pledgor, Administrative Agent and the other Secured Parties. Pledgor further agrees that upon the occurrence and during the continuation of an Event of Default, Administrative Agent may elect to non-judicially or judicially foreclose against any real or personal property security it holds for the Obligations or any part thereof, or to exercise any other remedy against Company or any other Person, any security or any guarantor, even if the effect of that action is to deprive Pledgor of the right to collect reimbursement from Company or any other Person for any sums paid by Pledgor to Administrative Agent or any Lender. 8.1.6 Waiver of Rights of Subrogation. Until the indefeasible payment in full in cash of the Obligations, (a) Pledgor shall not exercise any right of subrogation and shall not enforce any remedy which the Secured Parties now have or may hereafter have against Company, and waives the benefit of, and all rights to participate in, any security now or hereafter held by Administrative Agent or any other Secured Party from Company and (b) Pledgor agrees not to exercise any claim, right or remedy which Pledgor may now have or hereafter acquire against Company that arises hereunder and/or from the performance by Pledgor hereunder, including any claim, remedy or right of subrogation, reimbursement, exoneration, contribution, indemnification, or participation in any claim, right or remedy of the Secured Parties against Company, or any security which the Secured Parties now have or hereafter acquire, whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise. Any amount paid to Pledgor on account of any such subrogation rights prior to the 14 indefeasible payment in full in cash of the Obligation shall be held in trust for the benefit of Administrative Agent and shall immediately thereafter be paid to Administrative Agent, for the benefit of the Secured Parties. 8.2 Company's Consent and Covenant. Company hereby consents to the assignment of and grant of a security interest in the Collateral to Administrative Agent (for the benefit of the Secured Parties) and to the exercise by Administrative Agent of all rights and powers assigned or delegated to Administrative Agent by Pledgor hereunder, including the rights upon and during an Event of Default to exercise Pledgor's voting rights and other rights to manage or control Company, all in accordance with the Credit Documents. 8.3 Attorney-in-Fact. Pledgor hereby constitutes and appoints Administrative Agent, acting for and on behalf of itself and the other Secured Parties and each successor or permitted assign of Administrative Agent and the other Secured Parties, the true and lawful attorney-in-fact of Pledgor, with full power and authority in the place and stead of Pledgor and in the name of Pledgor, Administrative Agent or otherwise to enforce all rights, interests and remedies of Pledgor with respect to the Collateral or enforce all rights, interests and remedies of Administrative Agent under this Agreement (including the rights set forth in Section 7.1); provided, however, that Administrative Agent shall not exercise any of the aforementioned rights unless an Event of Default has occurred and is continuing and has not been waived or cured in accordance with the Credit Documents. This power of attorney is a power coupled with an interest and shall be irrevocable; provided, however, that nothing in this Agreement shall prevent Pledgor from, prior to the exercise by Administrative Agent of any of the aforementioned rights, undertaking Pledgor's operations in the ordinary course of business in accordance with the Collateral and the Credit Documents. 8.4 Perfection; Further Assurances. 8.4.1 Perfection. Pledgor agrees that from time to time, at the expense of Company and Pledgor, Pledgor shall promptly execute and deliver all further instruments and documents, and take all further action, that may be reasonably necessary, or that Administrative Agent may reasonably request, in order to perfect, to ensure the continued perfection of, and to protect the assignment and security interest granted or intended to be granted hereby or to enable Administrative Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Pledgor shall (a) deliver the Collateral or any part thereof to Administrative Agent, as Administrative Agent may request, accompanied by such duly executed instruments of transfer or assignment as Administrative Agent may request, and (b) authorize, execute and file such financing or continuation statements, or amendments thereto, and such other instruments, endorsements or notices, as may be reasonably necessary or desirable or as Administrative Agent may reasonably request, in order to perfect and preserve the assignments and security interests granted or purported to be granted hereby. 8.4.2 Filing of Financing and Continuation Statements. Pledgor hereby authorizes the filing of any financing statements or continuation statements, and amendments to financing statements, or any similar document in any jurisdictions and with any filing offices as Administrative Agent may determine, in its sole discretion, are necessary or advisable to perfect 15 the security interest granted to Administrative Agent, for the benefit of the Secured Parties, herein. Such financing statements may describe the Collateral in the same manner as described herein or may contain an indication or description of the Collateral that describes such property in any other manner as Administrative Agent may determine, in its sole discretion, is necessary, advisable or prudent to ensure the perfection of the security interest in the Collateral granted to Administrative Agent herein. 8.4.3 Information Concerning Collateral. Pledgor shall, promptly upon request, provide to Administrative Agent all information and evidence it may reasonably request concerning the Collateral to enable Administrative Agent to enforce the provisions of this Agreement. 8.5 Payment of Taxes. Pledgor shall pay or cause to be paid, before any fine, penalty, interest or cost attaches thereto, all taxes, assessments and other governmental or non-governmental charges or levies (other than those taxes, assessments or charges that it is contesting in good faith and by appropriate proceedings, and in respect of which it has established adequate reserves for such taxes) now or hereafter assessed or levied against the Collateral pledged by it hereunder and shall retain copies of, and, upon request, permit Administrative Agent or any Lender to examine receipts showing payment of any of the foregoing. 8.6 Place of Business; Location of Records. Unless Administrative Agent is otherwise notified under Section 6, the chief executive office of Pledgor is, and all records of Pledgor concerning the Collateral are and will be, located at the address set forth in Section 8.13. 8.7 Continuing Assignment and Security Interest; Transfer of Notes. This Agreement shall create a continuing pledge and assignment of and security interest in the Collateral and shall (a) remain in full force and effect until the indefeasible payment in full in cash and performance in full of the Obligations (other than the Obligations that are intended to survive the termination of the Credit Agreement) and as otherwise provided in Section 8.16; (b) be binding upon Company, Pledgor, and their respective successors and assigns; and (c) inure, together with the rights and remedies of Administrative Agent, to the benefit of Administrative Agent, the Secured Parties and their respective successors and permitted assigns. Without limiting the generality of the foregoing clause (c), Administrative Agent or any of the Secured Parties may assign or otherwise transfer the Notes or other evidence of indebtedness held by them to any other Person to the extent permitted by and in accordance with Article 9 of the Credit Agreement, and such other Person shall thereupon become vested with all or an appropriate part of the benefits in respect thereof granted to the Secured Parties herein or otherwise. The release of the security interest in any of the Collateral, the taking or acceptance of additional security, or the resort by Administrative Agent to any security it may have in any order it may deem appropriate, shall not affect the liability of any Person on the indebtedness secured hereby. 8.8 Termination of Security Interest. Upon the payment in full in cash and performance in full of all Obligations (other than the obligations that are intended to survive the termination of the Credit Documents), this Agreement and the security interest and all other rights granted hereby shall terminate and all rights to the Collateral shall revert to Pledgor. Upon any such termination, Administrative Agent will return all certificates previously delivered to 16 Administrative Agent representing the Pledged Equity Interests and, at Pledgor's expense and upon its written direction, execute and, subject to Section 8.16, deliver to Pledgor such documents (including UCC-3 termination statements) as Company or Pledgor shall reasonably request to evidence such termination, to release all security interest on the Collateral and to return such Collateral to Pledgor. If this Agreement shall be terminated or revoked by operation of law, Pledgor shall indemnify and save Administrative Agent and the other Secured Parties harmless from any loss which may be suffered or incurred by Administrative Agent and the other Secured Parties in acting hereunder prior to the receipt by Administrative Agent, its successors, transferees, or assigns of notice of such termination or revocation. 8.9 Security Interest Absolute. All rights of Administrative Agent and the other Secured Parties and the security interest hereunder, and all obligations of Pledgor hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of the Credit Agreement, any other Credit Document or any other agreement or instrument relating thereto; (b) the exercise by any Secured Party of any remedy, power or privilege contained in any Credit Document or available at law, equity or otherwise; (c) the failure of any Secured Party (i) to assert any claim or demand or to enforce any right or remedy against Company, any Affiliate of Company or any other Person under the provisions of the Credit Agreement, any Note, any other Credit Document or otherwise or (ii) to exercise any right or remedy against any other guarantor of, or collateral securing, any of the Obligations; (d) any change in the time, manner or place of payment of, or in any other term of the Obligations (including any increase in the amount thereof), or any other amendment or waiver of or any consent to any departure from the Credit Agreement or any other Credit Document; (e) any action by Administrative Agent to take and hold security or collateral for the payment of the Obligations, or sell, exchange, release, dispose of, or otherwise deal with, any property pledged, mortgaged or conveyed, or in which Administrative Agent has been granted a Lien, to secure any indebtedness to Administrative Agent of Pledgor, Company, any of its Affiliates or any other Person party to a Credit Document; (f) any reduction, limitation, impairment or termination of any of the Obligations for any reason other than the written agreement of the Secured Parties to terminate the Obligations in full, but including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to, and Pledgor hereby waives any right to or claim of, any defense or setoff, counterclaim, recoupment, or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Obligation of Company, any Affiliate of Company or otherwise; (g) any amendment to, rescission, waiver, or other modification of, or any consent to departure from, any of the terms of the Credit Agreement, any Note, or any other Credit Document; (h) any exchange, surrender, release or non-perfection of any Collateral, or any release, amendment or waiver or addition of or consent to departure from any other security interest held by any Secured Party; (i) the application by Administrative Agent of any sums by whomever paid or however realized to any amounts owing by Pledgor, Company or any other Loan Party to Administrative Agent in such manner as Administrative Agent shall determine in its discretion; (j) any bankruptcy or insolvency of Company, Pledgor or any other Person; or (k) any other circumstance which might otherwise constitute a defense available to, or a discharge of, Pledgor or any third party pledgor (other than the defense of payment). 8.10 Limitation on Duty of Administrative Agent with Respect to the Collateral. The powers conferred on Administrative Agent hereunder are solely to protect its interest and the 17 interests of the other Secured Parties in the Collateral and shall not impose any duty on Administrative Agent or any of its designated agents to exercise any such powers. Except for (a) the safe custody of any Collateral in its possession, (b) the accounting for monies actually received by it hereunder and (c) any duty expressly imposed on Administrative Agent by applicable Legal Requirements with respect to any Collateral that has not been waived hereunder, Administrative Agent shall have no duty with respect to any Collateral and no implied duties or obligations shall be read into this Agreement against Administrative Agent. Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment that is substantially equivalent to that which Administrative Agent accords its own property, it being expressly agreed, to the maximum extent permitted by applicable Legal Requirements, that Administrative Agent shall have no responsibility for (i) taking any necessary steps to preserve rights against any parties with respect to any Collateral, or (ii) taking any action to protect against any diminution in value of the Collateral, but, in each case, Administrative Agent may do so and all expenses reasonably incurred in connection therewith shall be part of the Obligations. 8.11 Liability. Recourse against Company, Pledgor, their respective Affiliates and the other Nonrecourse Persons under this Agreement shall be limited to the extent provided in Article 8 of the Credit Agreement. 8.12 Amendments; Waivers; Consents. This Agreement may not be amended, amended and restated, supplemented or otherwise modified, except in a writing signed by each of the parties hereto and otherwise in accordance with the provisions of Section 9.9 of the Credit Agreement. 8.13 Notices. Any communications between the parties hereto or notices provided herein to be given may be given to the following addresses: If to Administrative Agent: Beal Bank, S.S.B. 6000 Legacy Dr., 4E Plano, Texas 75024 Attn: William T. Saurenmann Telephone No.: (469) 467-5510 Telecopy No.: (469) 241-9568 E-mail: bsaurenmann@bealbank.com with a copy to: CSG Investments, Inc. 6000 Legacy Dr., 4W Plano, Texas 75024 Attn: Steve Harvey Tel: (469) 467-5652 Fax: (469) 241-9567E-mail: sharvey@csginvestments.com 18 Telephone No.: (775) 356-9029 Telecopy No.: (775) 356-9039 E-mail: dbronicki@ormat.com All notices or other communications required or permitted to be given hereunder shall be in writing and shall be considered as properly given (a) if delivered in person, (b) if sent by overnight delivery service (including Federal Express, UPS and other similar overnight delivery services), (c) if mailed by first class United States Mail, postage prepaid, registered or certified with return receipt requested, (d) if sent by facsimile or (e) if sent via other electronic means (including electronic mail). Notice so given shall be effective upon receipt by the addressee, except that communication or notice so transmitted by facsimile or other direct written electronic means shall be deemed to have been validly and effectively given on the day (if a Banking Day and, if not, on the next following Banking Day) on which it is transmitted if transmitted before 4:00 p.m., recipient's time, and if transmitted after that time, on the next following Banking Day; provided, however, that (i) if any notice is tendered to an addressee and the delivery thereof is refused by such addressee, such notice shall be effective upon such tender, and (ii) with respect to any notice given via facsimile or other electronic means, the sender of such message shall promptly provide the addressee with an original copy of such notice by any of the means specified in clause (a), (b) or (c) above. Any party shall have the right to change its address for notice hereunder to any other location within the continental United States by giving of 5 Banking Days' notice to the other parties in the manner set forth above. 8.14 Delivery of Collateral; Proxy. All certificates or instruments representing or evidencing the Collateral shall be delivered to and held by or on behalf of Administrative Agent pursuant hereto. All such certificates or instruments shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance acceptable to Administrative Agent. Administrative Agent shall have the right, at any time in its discretion and without prior notice to Pledgor, following the occurrence and during the continuation of an Event of Default, to transfer to or to register in the name of Administrative Agent or any of its nominees any or all of the Collateral and to exchange certificates or instruments representing or evidencing Collateral for certificates or instruments of smaller or larger denominations; provided, however, that once such Event of Default has been cured or waived, Administrative Agent will promptly transfer to or register in the name or cause 19If to Company: [INSERT NAME OF COMPANY] 980 Greg Street Sparks, NV 89431 Attn: President Telephone No.: (775) 356-9029 Telecopy No.: (775) 356-9039 E-mail: dbronicki@ormat.com If to Pledgor: [INSERT NAME OF PLEDGOR] 980 Greg Street Sparks, NV 89431 Attn: President its nominees to transfer to or register in the name of Pledgor all such Collateral. In furtherance of the foregoing, Pledgor shall further execute and deliver to Administrative Agent a proxy in the form attached hereto as Exhibit A and, if any ownership interest shall be evidenced by certificates or documents, an irrevocable power in the form of Exhibit B with respect to the ownership interests of Company owned by Pledgor. 8.15 Governing Law. This Agreement, including all matters of construction, validity, performance and the creation, validity, enforcement or priority of the lien of, and security interests created by, this Agreement in or upon the Collateral, shall be governed by the laws of the State of New York, without reference to conflicts of law (other than Section 5-1401 and Section 5-1402 of the New York General Obligations Law), except as required by mandatory provisions of law and except to the extent that the validity or perfection or priority of the lien and security interest hereunder, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of New York. 8.16 Reinstatement. This Agreement shall continue to be effective or be automatically reinstated, as the case may be, if at any time any payment pursuant to this Agreement is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, reorganization, liquidation of Pledgor, Company or any other Person party to a Credit Document or upon the dissolution of, or appointment of any intervenor or conservator of, or trustee or similar official for, Pledgor, Company or any other Person party to a Credit Document or any substantial part of Pledgor's, any Company's or any other such Person's assets, or otherwise, all as though such payments had not been made, and Company shall pay Administrative Agent on demand all reasonable costs and expenses (including reasonable fees of counsel) incurred by Administrative Agent in connection with such rescission or restoration. 8.17 Severability. The provisions of this Agreement are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. 8.18 Survival of Provisions. All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement and the other Credit Documents and the making of the Loans and extensions of credit thereunder. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Pledgor set forth herein shall terminate at the same time as the security interest and other rights granted hereunder shall terminate pursuant to Section 8.8. 8.19 Headings Descriptive. The headings in this Agreement are for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 8.20 Entire Agreement. This Agreement, together with each other Credit Document, is intended by the parties as a final expression of their agreement and is intended as a complete and exclusive statement of the terms and conditions thereof. 20 8.21 Time. Time is of the essence of this Agreement. 8.22 Counterparts. This Agreement and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute one and the same agreement. Signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. NO CREDIT DOCUMENT TO WHICH BEAL BANK, S.S.B. IS A PARTY SHALL BE EFFECTIVE UNLESS TWO OFFICERS OF BEAL BANK, S.S.B. SHALL HAVE EXECUTED SUCH CREDIT DOCUMENT. 8.23 Limitation of Liability. No claim shall be made by Pledgor or Company against Administrative Agent or the Secured Parties or any of their Affiliates, directors, employees, attorneys or agents for any loss of profits, business or anticipated savings, special or punitive damages or any indirect or consequential loss whatsoever in respect of any breach or wrongful conduct (whether or not the claim therefor is based on contract, tort or duty imposed by law), in connection with, arising out of or in any way related to the transactions contemplated by this Agreement or the other Credit Documents or any act or omission or event occurring in connection therewith; and Pledgor and Company hereby waive, release and agree not to sue upon any such claim for any such damages, whether or not accrued and whether or not known or suspected to exist in their favor. 8.24 Submission to Jurisdiction. Administrative Agent, Company and Pledgor agree that any legal action or proceeding by or against Pledgor or Company or with respect to or arising out of this Agreement or any other Credit Document may be brought in or removed to the courts of the State of New York, in and for the Borough of Manhattan, or of the United States of America for the Southern District of New York, as Administrative Agent may elect. By execution and delivery of this Agreement, Administrative Agent, Company and Pledgor accept, for themselves and in respect of their property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts. Administrative Agent, Company and Pledgor irrevocably consent to the service of process out of any of the aforementioned courts in any manner permitted by law. Administrative Agent, Company and Pledgor hereby waive any right to stay or dismiss any action or proceeding under or in connection with this Agreement brought before the foregoing courts on the basis of forum non-conveniens. Nothing herein shall affect the right of Administrative Agent to bring legal action or proceedings in any other competent jurisdiction. 8.25 WAIVER OF JURY TRIAL. PLEDGOR, COMPANY AND ADMINISTRATIVE AGENT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND THE RELATIONSHIP AMONG PLEDGOR, COMPANY AND ADMINISTRATIVE AGENT THAT IS BEING ESTABLISHED. PLEDGOR, COMPANY AND ADMINISTRATIVE AGENT ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT, AND THAT EACH WILL CONTINUE 21 TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. PLEDGOR, COMPANY AND ADMINISTRATIVE AGENT FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 8.26 Knowledge and Attribution. Reference in this Agreement to the "knowledge," "best knowledge" or facts and circumstances "known to" Pledgor, and all like references, means facts or circumstances of which a Responsible Officer of Pledgor has actual knowledge (after due inquiry). 8.27 Rights of Administrative Agent. Administrative Agent shall be entitled to the rights, protections, immunities and indemnities set forth in the Credit Agreement as if specifically set forth herein. 8.28 Consent and Acknowledgement. Pledgor hereby acknowledges receiving copies of the Credit Agreement, the Depository Agreement and the other Credit Documents and consents to the terms and provisions of each. 8.29 Third Party Beneficiaries. Nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon, or give to any Person, other than Pledgor, Company, Administrative Agent and the other Secured Parties, any security, rights, remedies or claims, legal or equitable, under or by reason hereof, or any covenant or condition hereof; and this Agreement and the covenants and agreements herein contained are and shall be held to be for the sole and exclusive benefit of Pledgor, Company, Administrative Agent and the other Secured Parties. 8.30 Waiver of Transfer Restrictions. Notwithstanding anything to the contrary contained in that certain [INSERT DESCRIPTION OF GOVERNING DOCUMENT] (the "Governing Agreement"), Pledgor hereby waives any requirement contained in the Governing Agreement that it consent to a transfer of a [MEMBERSHIP INTEREST] [PARTNERSHIP INTEREST] [SHARE] in Company in connection with a foreclosure on such [MEMBERSHIP INTEREST] [PARTNERSHIP INTEREST] [SHARE] under the Credit Documents. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 22 IN WITNESS WHEREOF, the parties hereto, by their officers duly authorized, intending to be legally bound, have caused this Pledge and Security Agreement to be duly executed and delivered as of the date first above written. [INSERT NAME OF PLEDGOR], a , ------------------------------------- as Pledgor By: ------------------------------------ Name: ------------------------------ Title: ----------------------------- [INSERT NAME OF COMPANY], a , ------------------------------------- as Company By: ------------------------------------ Name: ------------------------------ Title: ----------------------------- BEAL BANK, S.S.B., as Administrative Agent By: ------------------------------------ Name: ------------------------------ Title: ----------------------------- By: ------------------------------------ Name: ------------------------------ Title: ----------------------------- S-1 [_________'s Pledge Agreement]EXHIBIT A IRREVOCABLE PROXY The undersigned hereby appoints Beal Bank, S.S.B., not in its individual capacity but solely as "Administrative Agent" under the Credit Agreement (the "Administrative Agent"), as Proxy with full power of substitution, and hereby authorizes Administrative Agent to represent and vote all of the [MEMBERSHIP INTERESTS] [PARTNERSHIP INTERESTS] [SHARES] OF [INSERT NAME OF COMPANY), a [______________], owned by the undersigned on the date of exercise hereof during the continuance of an Event of Default under, and as defined in, the Pledge and Security Agreement, dated as of December ____, 2003, among [INSERT NAME OF PLEDGOR], [INSERT NAME OF COMPANY] and Administrative Agent at any meeting or at any other time chosen by Administrative Agent in its sole discretion. Date: [INSERT NAME OF PLEDGOR] -------------------- By: ------------------------------------ Name: ------------------------------ Title:----------------------------- A-1 --------------------EXHIBIT B TRANSFER DOCUMENT FOR VALUE RECEIVED, [INSERT NAME OF PLEDG0R] hereby sells, assigns and transfers unto ______________________ all of its ownership interests in [INSERT NAME OF COMPANY], a [__________________] standing in its name on the books of [INSERT NAME OF COMPANY], a [__________________], represented by the following certificate(s): ________________, and irrevocably appoints ____________________ as attorney to transfer the ownership interests with full power of substitution in the premises. Date: [INSERT NAME OF PLEDGOR] ------------------- By: -------------------------- Name: -------------------- Title: In the presence of: ------------------------- B-1 [SHARES] of [INSERT NAME OF COMPANY] -------------------------------------------------------------------------------- I-1SCHEDULE I DESCRIPTION OF PLEDGED EQUITY INTERESTS -------------------------------------------------------------------------------- CERTIFICATE NO. DESCRIPTION: -------------------------------------------------------------------------------- [__________] [_______%] of the [PARTNERSHIP INTERESTS] [EQUITY INTERESTS] Exhibit D-4 to the Credit Agreement SUBORDINATION TERMS 1. General: Payment of the Subordinated Costs of OrCal Geothermal Inc., a corporation organized and existing under the laws of the State of Delaware ("Borrower") to the issuer of the DSR Letter of Credit (the "Junior Claimant") shall be junior, subordinate and subject in right of payment in accordance with the terms hereof to the prior payment in full in cash of all of the Senior Claims. The Junior Claimant agrees that it will not ask, demand, sue for, take or receive from Borrower or any of its subsidiaries by set-off or in any other manner, or (subject to the last sentence of this paragraph) retain payment (in whole or in part) of, any of the Subordinated Costs or any security therefor. Borrower agrees that (subject to the last sentence of this paragraph) it will not make, nor permit to be made, any payment of any kind on account of, or provide any additional security or guarantee for, the Subordinated Costs (whether on behalf of Borrower or otherwise). Junior Claimant directs Borrower to make, and Borrower agrees to make, the payment of the Senior Claims in full in cash prior to the payment of the Subordinated Costs. Notwithstanding the foregoing, Borrower may pay to Junior Claimant Subordinated Costs due to Junior Claimant with funds available for distribution by Borrower pursuant to Waterfall Level 8 or Section 3.6.2(b) of the Depositary Agreement, in each case in accordance with the Depositary Agreement. 2. Definitions: The following terms have the following meanings: "Credit Agreement" means that certain Credit Agreement, dated as of December 18, 2003 (as amended, amended and restated, supplemented or otherwise modified from time to time), among Borrower, the financial institutions from time to time parties thereto (collectively, the "Banks"), and Beal Bank, S.S.B., as administrative agent (in such capacity, "Administrative Agent"). "Obligations" means and includes all loans, advances, debts, liabilities, and obligations, howsoever arising, owed by Borrower or any Affiliate thereof to Administrative Agent or any Bank of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to the terms of the Credit Agreement or any of the other documents entered into in connection therewith, including all interest, reasonable fees, reasonable charges, reasonable expenses, reasonable attorneys' fees and consultant fees chargeable to Borrower or any Affiliate thereof and payable by Borrower or any Affiliate thereof hereunder or thereunder. "Proceeding" means any (a) insolvency, bankruptcy, receivership, liquidation, reorganization, readjustment, composition or other similar proceeding relating to Borrower or any subsidiary thereof or its property, (b) proceeding for any liquidation, dissolution or other winding-up of Borrower or any subsidiary thereof, voluntary or involuntary, whether or not involving insolvency or bankruptcy proceedings, (c) general assignment for the benefit of creditors of Borrower or any subsidiary thereof, or (d) other marshaling of the assets of 1 Borrower or any subsidiary thereof. "Senior Claimants" means the Banks and Administrative Agent. "Senior Claims" means (a) the principal of, and premium, if any, and interest on the Loans under the Credit Agreement (including any interest accruing thereon at the legal rate after the commencement of any Proceeding and any additional interest that would have accrued thereon but for the commencement of such Proceeding); and (b) all other Obligations owing to any Senior Claimant. "Subordinated Costs" means and includes all reimbursement obligations, loans, advances, debts, liabilities, and obligations, howsoever arising, owed by Borrower to Junior Claimant of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to the terms of the DSR Letter of Credit and related agreements, including all interest, fees, charges, expenses, attorneys' fees and consultant fees chargeable to Borrower and payable by Borrower thereunder. "Subordination Period" means the period of time commencing on December 18, 2003 and ending on the date on which all Senior Claims shall have been indefeasibly paid in full in cash. 3. Payment Upon Dissolution, Etc.: In the event of (a) any insolvency or bankruptcy case or proceeding in connection therewith, relative to Borrower or to its creditors as such, or to its assets, (b) any liquidation, dissolution or other winding up of Borrower, whether partial or complete and whether voluntary or involuntary and whether or not involving insolvency or bankruptcy or (c) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of Borrower, then (without limiting any of the subordination provisions set forth herein) the Senior Claimants shall be entitled to receive payment in full in cash of all amounts due or to become due on or in respect of all Senior Claims before the Junior Claimant shall be entitled to receive any payment on account of the Subordinated Costs. 4. Payments in Error: Should any payment on account of, or any collateral for any part of, the Subordinated Costs be received by Junior Claimant in violation of the terms hereof, such payment or collateral shall be delivered by Junior Claimant forthwith to Administrative Agent, on behalf of the Senior Claimants, for deposit into the Revenue Account referred to in the Credit Agreement, in the case of any such payment, or to secure the Senior Claims, in the case of any such collateral, in each case in the form received. Administrative Agent shall be irrevocably authorized to supply any required endorsement or assignment which may have been omitted. Until so delivered, any such payment or collateral shall be held by Junior Claimant in trust for the Senior Claimants and shall not be commingled with other funds or property of Junior Claimant. 5. Proceeding Against Borrower; No Collateral; No Action: During the Subordination Period, but subject to paragraph 6, Junior Claimant shall not commence or voluntarily permit Borrower or any of its subsidiaries to commence or, unless the holders of the Senior Claims 2 shall also join therein, join with any other creditor or creditors of Borrower or any of its subsidiaries in commencing any Proceeding against Borrower or any of its subsidiaries. At any general meeting of creditors of Borrower or any of its subsidiaries during the Subordination Period, or in the event of any Proceeding during the Subordination Period, Administrative Agent, on behalf of the Senior Claimants, shall be irrevocably authorized at any such meeting or in any such Proceeding: (a) to enforce claims comprising the Subordinated Costs in the name of Junior Claimant, by proof of debt, proof of claim, suit or otherwise; (b) to collect any assets of Borrower or any of its subsidiaries distributed, dividend or applied by way of dividend or payment as a result of a Proceeding, or securities issued, on account of the Subordinated Costs as a result thereof and apply the same, or the proceeds of any realization upon the same that the Senior Claimants in their discretion elect to effect, to the payment of Senior Claims until all Senior Claims shall have been paid in full (the Senior Claimants hereby agreeing to render any surplus to Junior Claimant (in satisfaction of the Subordinated Costs) or as a court of competent jurisdiction may direct); and (c) other than voting claims comprising or arising out of the Subordinated Costs in any Proceeding (including the right to vote to accept or reject any plan of partial or complete liquidation or reorganization), to take generally any action in connection with any such meeting or Proceeding which Junior Claimant might otherwise have the right to take in respect of the Subordinated Costs and claims relating thereto. 6. Authorizations to Senior Claimants: After the commencement of any Proceeding referred to above, Junior Claimant shall be entitled inquire of Administrative Agent in writing whether Administrative Agent, on behalf of Senior Claimants, intends to exercise the foregoing rights with respect to the Subordinated Costs. Should Administrative Agent fail, within a reasonable time after receipt of such inquiry (but in any event no earlier than 15 business days following any such inquiry), either to file a proof of claim with respect to the Subordinated Costs and to furnish a copy thereof to Junior Claimant, or to inform Junior Claimant in writing that the Senior Claimants intend to exercise their rights to assert the Subordinated Costs in the manner hereinabove provided, Junior Claimant shall be entitled, but shall not be required to, proceed to file a proof of claim with respect to the Subordinated Costs and take such further steps with respect thereto, not inconsistent with the terms hereof, as Junior Claimant shall reasonably deem proper. 7. Notice: Any communications between the parties shall utilize the following addresses: 3 Fax: (775)356-9039 E-mail: dbronicki@ormat.com All notices or other communications required or permitted to be given under the relevant agreement shall be in writing and shall be considered as properly given (a) if delivered in person, (b) if sent by overnight delivery service (including Federal Express, UPS and other similar overnight delivery services), (c) if mailed by first class United States Mail, postage prepaid, registered or certified with return receipt requested, (d) if sent by facsimile or (e) if sent via other electronic means (including electronic mail). Notice so given shall be effective upon receipt by the addressee, except that communication or notice so transmitted by facsimile or other direct written electronic means shall be deemed to have been validly and effectively given on the day (if a business day and, if not, on the next following business day) on which it is transmitted if transmitted before 4:00 p.m., recipient's time, and if transmitted after that time, on the next following business day; provided, however, that (i) if any notice is tendered to an addressee and the delivery thereof is refused by such addressee, such notice shall be effective upon such tender, and (ii) with respect to any notice given via facsimile or other electronic means, the sender of such message shall promptly provide the addressee with an original copy of such notice by any of the means specified in clause (a), (b) or (c) above. Any party shall have the right to change its address for notice hereunder to any other location within the continental United States by giving of 5 business days' notice to the other parties in the manner set forth above 4If to Administrative Agent Beal Bank, S.S.B. or Senior Claimants: 6000 Legacy Dr., 4E Plano, Texas 75024 Attn: William T. Saurenmann Tel: (469) 467-5510 Fax: (469) 241-9568 E-mail: bsaurenmann@bealbank.com with a copy to: CSG Investments, Inc. 6000 Legacy Dr., 4W Plano, Texas 75024 Attn: Steve Harvey Tel: (469) 467-5652 Fax: (469) 241-9567 E-mail: sharvey@csginvestments.com If to Borrower: OrCal Geothermal Inc. 980 Greg Street Sparks, Nevada 89431-6039 Attn: President Tel: (775) 356-9029 8. No Waiver; Modification to Senior Debt: Administrative Agent and the Senior Claimants shall be authorized to demand specific performance of the terms hereof, whether or not Borrower shall have complied with the provisions hereof applicable to it, at any time when Junior Claimant shall have failed to comply with any provision hereof applicable to it. Junior Claimant shall irrevocably waive any defense based on the adequacy of a remedy at law which might be asserted as a bar to the remedy of specific performance hereof in any action brought therefor by the Senior Claimants. Junior Claimant shall further waive presentment, notice and protest in connection with all negotiable instruments evidencing Senior Claims or Subordinated Costs to which Junior Claimant may be a party, notice of the acceptance thereof by the Senior Claimants, notice of any loan made, extension granted or other action taken in reliance hereon, and all demands and notices of every kind in connection herewith, Senior Claims or time of payment of Senior Claims or Subordinated Costs (other than notices expressly required hereby). Junior Claimant shall assent to any renewal, extension or postponement of the time of payment of Senior Claims or any other indulgence with respect thereto, to any increase in the amount of Senior Claims, to any substitution, exchange or release of collateral therefor and to the addition or release of any person primarily or secondarily liable thereon and assents to the provisions of any instrument, security or other writing evidencing Senior Claims. 9. Subrogation: Subject to and from and after the expiration of the Subordination Period, Junior Claimant shall be subrogated to the rights of the Senior Claimants to receive payments or distributions of cash, property or securities of Borrower applicable to the Senior Claims until all amounts owing on the Subordinated Costs shall be paid in full, it being understood that the provisions hereof are intended solely for the purpose of defining the relative rights of Junior Claimant and the Senior Claimants; provided that such rights of subrogation shall be nonexclusive, and shall be shared with any other subordinated creditor of Borrower which has entered into an agreement with the Administrative Agent providing similar rights of subrogation. 10. Benefit of Subordination Provisions: Nothing contained in these subordination provisions is intended to or shall impair, as between Borrower, its creditors other than the Senior Claimants and Junior Claimant, the obligation of Borrower, which is absolute and unconditional, to pay to Junior Claimant the principal of and the premium, if any, and the interest on the Subordinated Costs as and when the same shall become due and payable in accordance with, and subject to, the terms hereof and the DSR Letter of Credit, or to affect the relative rights of Junior Claimant and creditors of Borrower other than the Senior Claimants. 11. Further Assurances: Borrower and Junior Claimant shall execute and deliver to the Senior Claimants such further instruments and shall take such further action as the Senior Claimants may at any time or times reasonably request in order to carry out the provisions and intent hereof. To this end, Junior Claimant (a) shall irrevocably authorize and empower (without imposing any obligation on) the Senior Claimants and any agent thereof to demand, sue for, collect and receive all payments and distributions on or in respect of its Subordinated Costs which are required to be paid or delivered to the Senior Claimants, as provided herein, and to 5 file and prove all claims therefor and take all such other action, in the name of Junior Claimant or otherwise, as the Senior Claimants reasonably may determine to be necessary or appropriate for the enforcement of these subordination provisions, all in such manner as the Senior Claimants or Administrative Agent reasonably shall instruct, (b) in connection with any Proceeding, shall irrevocably authorize and empower (without imposing any obligation on) the Senior Claimants and Administrative Agent to vote the Subordinated Costs in such manner as the Senior Claimants or Administrative Agent shall instruct and (c) shall agree to execute and deliver to the Senior Claimants or Administrative Agent all such further instruments confirming the above authorization, and all such powers of attorney, proofs of claim, assignments of claim and other instruments, and to take all such other action, as reasonably may be requested by Senior Claimants in order to enable the Senior Claimants to enforce all claims upon or in respect of the Subordinated Costs in accordance herewith. 12. Amendment: These subordination provisions shall not be amended, modified or supplemented, except in a writing signed by each of the parties. 13. Beneficiaries: Nothing in these subordination provisions, expressed or implied, shall give or be construed to give to any Person other than the parties hereto and the Senior Claimants, any legal or equitable right, remedy or claim hereunder, or under any covenants and provisions hereof, each such covenant and provision being for the sole benefit of the parties hereto and the Senior Claimants. The rights granted to the Senior Claimants in these subordination provisions are solely for their protection and nothing contained in these subordination provisions shall impose on the Senior Claimants any duties with respect to any property of Borrower, any of its subsidiaries or Junior Claimant received hereunder. Except as expressly required by applicable law, the Senior Claimants shall have no duty to preserve rights against prior parties in any property of any kind received hereunder. 14. Documentation: Junior Claimant and Borrower shall agree to become bound by these subordination provisions pursuant to an agreement which is reasonably satisfactory to Administrative Agent. 15. Bankruptcy: These subordination provisions shall remain in full force and effect as between Junior Claimant and Senior Claimant notwithstanding the occurrence of any Proceeding affecting Borrower or any of its subsidiaries. 16. Representations and Warranties: Junior Claimant, shall represent and warrant to and in favor of Administrative Agent and the Banks, as of the date of the incurrence of the Subordinated Costs, that these subordination provisions constitute its legal, valid and binding obligation enforceable against it in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors' rights or by the effect of general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 6 EXHIBIT D-5 to Credit Agreement ================================================================================ FORM OF SUBSIDIARY GUARANTY by [INSERT NAME OF GUARANTOR], a[__________________] (Guarantor) in favor of BEAL BANK, S.S.B. (Administrative Agent) DATED AS OF________ _______, _____ ================================================================================ TABLE OF CONTENTS PAGE ---- ARTICLE I. DEFINITIONS.........................................................2 1.1 Defined Terms.........................................................2 1.2 General Definitions...................................................2 1.3 Rules of Interpretation...............................................2 ARTICLE II. GUARANTY...........................................................3 2.1 Guaranty..............................................................3 2.2 Obligations Absolute and Unconditional................................3 ARTICLE III. REPRESENTATIONS AND WARRANTIES; EVENTS OF DEFAULT.................5 3.1 Guarantor Representations and Warranties..............................5 3.2 Events of Default.....................................................6 ARTICLE IV. COVENANTS..........................................................7 4.1 Maintenance of Corporate Existence....................................7 4.2 Compliance with Laws..................................................7 4.3 Further Assurances....................................................7 4.4 Security Documents....................................................7 4.5 Credit Agreement......................................................7 ARTICLE V. SUBORDINATION; SUBROGRATION; ETC....................................7 5.1 Taxes ................................................................7 5.2 Subordination.........................................................8 5.3 Waiver................................................................8 5.4 Subrogation..........................................................10 5.5 Bankruptcy...........................................................10 5.6 Reinstatement........................................................11 ARTICLE VI. MISCELLANEOUS.....................................................12 6.1 Obligations Secured..................................................12 6.2 Successions or Assignments...........................................12 6.3 Other Waivers........................................................12 6.4 Headings.............................................................12 6.5 Remedies Cumulative..................................................13 6.6 Severability.........................................................13 6.7 Amendments...........................................................13 i 6.8 Jurisdiction.........................................................13 6.9 Governing Law........................................................13 6.10 Integration of Terms.................................................13 6.11 Notices..............................................................14 6.12 Interest; Collection Expenses; Set-Off...............................15 6.13 Counterparts.........................................................15 6.14 Limitations on Liability.............................................15 6.15 Time.................................................................15 6.16 Termination..........................................................16 6.17 Credit Documents.....................................................16 ii This SUBSIDIARY GUARANTY, dated as of _____________, ______(as amended, amended and restated, supplemented or otherwise modified from time to time, this "Guaranty"), is entered into by [INSERT NAME OF GUARANTOR], a [______________] [ORGANIZED] [FORMED] and existing under the laws of the State of [___________] ("Guarantor") in favor of BEAL BANK, S.S.B., in its capacity as administrative agent (in such capacity, "Administrative Agent") for each of the Secured Parties. RECITALS A. OrCal Geothermal Inc., a corporation organized and existing under the laws of the State of Delaware ("Borrower"), directly or indirectly, [INTENDS TO ACQUIRE] [HAS ACQUIRED] (the "Acquisition") ownership interests in certain Persons which directly or indirectly lease, own, operate and use certain geothermal power plants and geothermal fluid facilities located in the State of California, known as the Heber Project, the Mammoth Lakes Project and the SIGC Project (the "Projects"). B. In order to partially finance the Acquisition, Borrower has entered into that certain Credit Agreement, dated as of December 18, 2003 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Borrower, the financial institutions from time to time parties thereto (collectively, the "Banks"), and each of the agents listed on the signature pages thereto, pursuant to which, among other things, the Banks have [MADE] [EXTENDED COMMITMENTS TO MAKE] loans to, and for the benefit of, Borrower. C. Guarantor is a wholly-owned [DIRECT] [INDIRECT] subsidiary of Borrower, and Guarantor [HAS AND] will receive substantial economic benefits from the making of such loans to Borrower. D. Guarantor has agreed to, among other things, guarantee payment in full in cash and performance in full of the Obligations. E. [IT IS A CONDITION PRECEDENT TO THE EFFECTIVENESS OF THE CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS, AND THE MAKING OF THE ADVANCES OF CREDIT CONTEMPLATED THEREBY, THAT GUARANTOR SHALL HAVE EXECUTED THIS GUARANTY.] [IT IS A REQUIREMENT UNDER THE CREDIT AGREEMENT THAT GUARANTOR EXECUTE AND DELIVER THIS GUARANTY.] AGREEMENT NOW, THEREFORE, in consideration of the promises contained herein, and to induce the Banks to enter into the Credit Agreement and to make the loans to Borrower contemplated thereby, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Guarantor hereby agrees with Administrative Agent (for the benefit of the Secured Parties) as follows: ARTICLE I. DEFINITIONS 1.1 Defined Terms. The following terms (whether or not underscored) when used in this Guaranty, including its preamble and recitals, shall have the following meanings: "Acquisition" has the meaning given in the recitals to this Guaranty. "Administrative Agent" has the meaning given in the preamble to this Guaranty. "Banks" has the meaning given in the recitals to this Guaranty. "Borrower" has the meaning given in the recitals to this Guaranty. "Credit Agreement" has the meaning given in the recitals to this Guaranty. "Guaranteed Obligations" has the meaning given in Section 2.1(a). "Guarantor" has the meaning given in the preamble to this Guaranty. "Guaranty" has the meaning given in the preamble to this Guaranty. "Obligations" means and includes all loans, advances, debts, liabilities, and obligations, howsoever arising, owed by Borrower, Guarantor or any Affiliate thereof to Administrative Agent or any Lender of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to the terms of the Credit Agreement or any of the other Credit Documents (including this Guaranty), including all interest, reasonable fees, reasonable charges, reasonable expenses, reasonable attorneys' fees and consultant fees chargeable to Borrower, Guarantor or any Affiliate thereof and payable by Borrower, Guarantor or any Affiliate thereof hereunder or thereunder "Project Participants" means Sponsor, each Guarantor and each Non-Guarantor. "Projects" has the meaning given in the recitals to this Guaranty. 1.2 General Definitions. Unless otherwise defined herein or unless the context otherwise requires, capitalized terms used in this Guaranty, including its preamble and recitals, have the meanings provided in Exhibit A to the Credit Agreement. 1.3 Rules of Interpretation. Unless otherwise provided herein, the rules of interpretation set forth in Exhibit A to the Credit Agreement shall apply to this Guaranty, including its preamble and recitals. 2 ARTICLE II. GUARANTY 2.1 Guaranty. (a) Guarantor, as primary obligor and not merely as surety, hereby unconditionally and irrevocably guarantees to Administrative Agent (for the benefit of the Secured Parties) the prompt payment in full in cash and the prompt performance in full of the Obligations (collectively, the "Guaranteed Obligations"). (b) Guarantor agrees that if for any reason Borrower or any Project Participant shall fail to pay or perform, as the case may be, when due any of the Guaranteed Obligations, Guarantor shall promptly pay or perform, as the case may be, the same forthwith on the date such payment or performance of such Guaranteed Obligation is due or required, without regard to any exercise or non-exercise by Guarantor, Borrower, any Affiliate of Borrower, Administrative Agent or any other Secured Party of any right, remedy, power or privilege under or in respect of the Credit Agreement or the other Credit Documents, and that in the case of any extension of time of the payment, performance or renewal of any of the Guaranteed Obligations, the same will be promptly paid or performed, as the case may be, in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. (c) Without limiting the foregoing, Guarantor acknowledges and agrees that, upon the occurrence and during the continuance of an Event of Default as set forth in Section 3.2, at the election of the Majority Banks, all of the Guaranteed Obligations shall immediately become due and payable. 2.2 Obligations Absolute and Unconditional. (a) The obligations of Guarantor hereunder are primary obligations of Guarantor and are an absolute, unconditional, continuing and irrevocable guaranty of payment and performance of the Guaranteed Obligations and the other obligations of Guarantor hereunder and not of collectibility, and are in no way conditioned on or contingent upon any attempt to enforce in whole or in part Borrower's, any Project Participant's or any of Borrower's Affiliates' liabilities and obligations to the Secured Parties. Each failure by Guarantor to pay or perform, as the case may be, a Guaranteed Obligation or any other obligation hereunder shall give rise to a separate cause of action hereunder, and separate suits may be brought hereunder as each cause of action arises. (b) The Secured Parties may, at any time and from time to time (whether or not after revocation or termination of this Guaranty) without the consent of or notice to Guarantor, except such notice as may be required by the Credit Documents or applicable law which cannot be waived, without incurring responsibility to Guarantor, without impairing or releasing the obligations of Guarantor hereunder, upon or without any terms or conditions and in whole or in part: (i) change the manner, place and terms of payment or performance of, or renew or alter, any Guaranteed Obligation or any obligations and liabilities 3 (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, or in any manner modify, amend or supplement the terms of the Credit Documents or any documents, instruments or agreements executed in connection therewith, in each case with the consent of Borrower, the Project Participants and Guarantor (in each case, as and to the extent required by the applicable Credit Document), and the agreements and guarantees herein made shall apply to the Guaranteed Obligations or such other obligations as changed, extended, renewed, modified, amended, supplemented or altered in any manner; (ii) exercise or refrain from exercising any rights against Borrower, any Project Participant, or others (including Guarantor) or otherwise act or refrain from acting; (iii) add or release any other guarantor from its obligations without affecting or impairing the obligations of Guarantor hereunder; (iv) settle or compromise any Guaranteed Obligations or any obligations and liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment or performance of all or any part thereof to the payment or performance of any obligations and liabilities which may be due to the Secured Parties or others; (v) sell, exchange, release, surrender, realize upon or otherwise deal with in any manner or in any order any property by whomsoever pledged or mortgaged to secure or securing the Guaranteed Obligations or any liabilities or obligations (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof and/or any offset thereagainst; (vi) apply any sums by whomsoever paid or howsoever realized to any obligations and liabilities of Borrower or any Project Participant to the Secured Parties under the Credit Documents in the manner provided therein regardless of what obligations and liabilities remain unpaid, except that sums paid by Guarantor hereunder shall be deemed to have been paid in respect of the applicable obligation of Guarantor hereunder; (vii) consent to or waive any breach of, or any act, omission or default under, the Credit Documents or otherwise amend, modify or supplement (with the consent of Guarantor, Borrower and the Project Participants, as and to the extent required by the Credit Documents) the Credit Documents or any of such other instruments or agreements; and/or (viii) act or fail to act in any manner referred to in this Guaranty which may deprive Guarantor of its right to subrogation against Borrower or any Project Participant to recover full indemnity for any payments or performances made pursuant to this Guaranty or of its right of contribution against any other party. (c) No invalidity, irregularity or unenforceability of the Guaranteed Obligations or invalidity, irregularity, unenforceability or non-perfection of any collateral 4 (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, or in any manner modify, amend or supplement the terms of the Credit Documents or any documents, instruments or agreements executed in connection therewith, in each case with the consent of Borrower, the Project Participants and Guarantor (in each case, as and to the extent required by the applicable Credit Document), and the agreements and guarantees herein made shall apply to the Guaranteed Obligations or such other obligations as changed, extended, renewed, modified, amended, supplemented or altered in any manner; (ii) exercise or refrain from exercising any rights against Borrower, any Project Participant, or others (including Guarantor) or otherwise act or refrain from acting; (iii) add or release any other guarantor from its obligations without affecting or impairing the obligations of Guarantor hereunder; (iv) settle or compromise any Guaranteed Obligations or any obligations and liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment or performance of all or any part thereof to the payment or performance of any obligations and liabilities which may be due to the Secured Parties or others; (v) sell, exchange, release, surrender, realize upon or otherwise deal with in any manner or in any order any property by whomsoever pledged or mortgaged to secure or securing the Guaranteed Obligations or any liabilities or obligations (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof and/or any offset thereagainst; (vi) apply any sums by whomsoever paid or howsoever realized to any obligations and liabilities of Borrower or any Project Participant to the Secured Parties under the Credit Documents in the manner provided therein regardless of what obligations and liabilities remain unpaid, except that sums paid by Guarantor hereunder shall be deemed to have been paid in respect of the applicable obligation of Guarantor hereunder; (vii) consent to or waive any breach of, or any act, omission or default under, the Credit Documents or otherwise amend, modify or supplement (with the consent of Guarantor, Borrower and the Project Participants, as and to the extent required by the Credit Documents) the Credit Documents or any of such other instruments or agreements; and/or (viii) act or fail to act in any manner referred to in this Guaranty which may deprive Guarantor of its right to subrogation against Borrower or any Project Participant to recover full indemnity for any payments or performances made pursuant to this Guaranty or of its right of contribution against any other party. (c) No invalidity, irregularity or unenforceability of the Guaranteed Obligations or invalidity, irregularity, unenforceability or non-perfection of any collateral 4 therefor, shall affect, impair or be a defense to this Guaranty, which is a primary obligation of Guarantor. (d) This is a continuing Guaranty and all obligations to which it applies or may apply under the terms hereof shall be conclusively presumed to have been created in reliance hereon. In the event that, notwithstanding the provisions of Section 2.3(a) above, this Guaranty shall be deemed revocable in accordance with applicable law, then any such revocation shall become effective only upon receipt by Administrative Agent of written notice of revocation signed by Guarantor. To the extent permitted by applicable law, no revocation or termination hereof shall affect, in any manner, rights arising under this Guaranty with respect to Guaranteed Obligations arising prior to receipt by Administrative Agent of written notice of such revocation or termination. Any such revocation or termination shall be deemed to be an Event of Default. ARTICLE III. REPRESENTATIONS AND WARRANTIES; EVENTS OF DEFAULT 3.1 Guarantor Representations and Warranties. Guarantor represents and warrants to and in favor of Administrative Agent and the other Secured Parties, as of the [CLOSING DATE] [DATE HEREOF], that: 3.1.1 Existence. Guarantor is [ORGANIZED] [FORMED] and validly existing under the laws of the jurisdiction of its [INCORPORATION] [FORMATION] and is qualified to do business in such jurisdiction and in each other jurisdiction in which the conduct of their business requires such qualification. 3.1.2 Power and Authorization. Guarantor has full power and authority to conduct its business as contemplated by the Operative Documents. The Credit Documents and the Project Documents to which Guarantor is a party have been duly authorized, executed and delivered by Guarantor. 3.1.3 No Conflict. The execution, delivery and performance by Guarantor of the Credit Documents and Major Project Documents to which it is a party and the consummation of the transactions contemplated by the Credit Documents and the Major Project Documents do not and will not (a) violate any provision of (i) any Legal Requirement applicable to Guarantor, (ii) the Governing Documents of Guarantor or (iii) any order, judgment or decree of any court or agency or Governmental Instrumentality binding on Guarantor, (b) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of Guarantor, (c) result in or require the creation or imposition of any Lien upon any of the properties or assets of Guarantor (other than any Liens created under any of the Credit Documents in favor of Administrative Agent on behalf of the Secured Parties), or (d) require any approval of any Person, except for such approvals or consents which will be obtained on or before the [CLOSING DATE] [DATE HEREOF] and disclosed in writing to the Administrative Agent. 3.1.4 Enforceable Obligations. Each Credit Document and Major Project Document to which Guarantor is a party constitutes a legal, valid and binding obligation of such party, as the case may be, enforceable in accordance with its terms, except to the extent 5 that enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors' rights or by the effect of general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3.1.5 Compliance with Law. Guarantor (a) is not in violation of any applicable Legal Requirements in any material respect and (b) is not subject to or in default in any material respect with respect to any final judgments, writs, injunctions, decrees, rules or regulations of any court or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. 3.1.6 Adequate Financial Means. (a) After giving effect to the transactions contemplated by this Guaranty and the contingent obligations evidenced hereby (but excluding the effect of the provisions of Section 6.1 which limit the Guaranteed Obligations to an amount that would not render Guarantor's indebtedness, liabilities or obligations under this Guaranty subject to avoidance), Guarantor is Solvent. (b) Guarantor is not executing this Guaranty with any intention to hinder, delay or defraud any present or future creditor or creditors of Guarantor. 3.1.7 Capital Structure. [INSERT REPRESENTATION OUTLINING OWNERSHIP OF GUARANTOR AND ITS SUBSIDIARIES.] 3.1.8 Collateral. [INSERT REPRESENTATION REGARDING LIENS AND COLLATERAL OF GUARANTOR AND ITS SUBSIDIARIES. TO BE MODIFIED DEPENDING ON APPLICABLE COLLATERAL.] 3.1.9 Credit Agreement. The representations and warranties of Borrower contained in Article 4 of the Credit Agreement (insofar as such representations and warranties apply to Guarantor or the [__________] Project) are true and correct. 3.2 Events of Default. The occurrence of an Event of Default under, and as defined in, the Credit Agreement, whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body, shall constitute an Event of Default hereunder. Any such Event of Default shall be considered cured or waived for the purposes of this Guaranty when it has been cured or waived in accordance with the Credit Agreement. 6 ARTICLE IV. COVENANTS Guarantor hereby covenants and agrees for the benefit of Borrower, the Project Participants, Administrative Agent and the other Secured Parties, until this Guaranty is terminated pursuant to Section 6.15, as follows: 4.1 Maintenance of Corporate Existence. Guarantor shall maintain and preserve its existence and all material rights, privileges and franchises necessary in the normal conduct of its business. 4.2 Compliance with Laws. Guarantor shall promptly comply, or cause compliance, in all material respects with all Legal Requirements (including Legal Requirements and applicable Permits relating to pollution control, environmental protection, equal employment opportunity or employee benefit plans, ERISA Plans and employee safety, with respect to Guarantor or the [_________] Project), and make such alterations to such Project as may be required for such compliance. 4.3 Further Assurances. Guarantor shall promptly provide Administrative Agent with such information and other documents related to this Guaranty and the Guaranteed Obligations that Administrative Agent may reasonably request. 4.4 Security Documents. Concurrent with the execution of this Guaranty, Guarantor shall [ENTER INTO A DEED OF TRUST IN THE FORM OF EXHIBIT D-1 TO THE CREDIT AGREEMENT,] enter into a Security Agreement in the form of Exhibit D-2 to the Credit Agreement, enter into a Pledge Agreement in the form of Exhibit D-3 to the Credit Agreement, enter into a joinder agreement pursuant to the Depositary Agreement, and take all other actions which the Administrative Agent may reasonably request in order to create a first priority, perfected Lien on all assets, properties and ownership interests of Guarantor (subject to Permitted Liens). 4.5 Credit Agreement. Guarantor shall comply with the covenants set forth in Articles 5 and 6 of the Credit Agreement (insofar as such covenants apply to Guarantor or the [_________] Project). Guarantor acknowledges that failure to comply with such any such covenants could result in the occurrence of an Event of Default. ARTICLE V. SUBORDINATION; SUBROGRATION; ETC. 5.1 Taxes. Except as otherwise required by applicable Legal Requirements, each payment required to be made by Guarantor hereunder shall be made in immediately available funds without deduction or withholding for or on account of Taxes or Other Taxes. If such deduction or withholding is so required, Guarantor shall, upon notice thereof from Administrative Agent, (a) pay the amount required to be deducted or withheld to the appropriate authorities before penalties attach thereto or interest accrues thereon, (b) on or before the 60th day after payment of such amount, forward to Administrative Agent an official receipt evidencing such payment (or a certified copy thereof), and (c) in the case of any such deduction or withholding, forthwith pay to Administrative Agent (for the benefit of the Secured Parties) 7 such additional amount as may be necessary to ensure that the net amount actually received by Administrative Agent (for the benefit of the Secured Parties) is free and clear of such Taxes or Other Taxes, as the case may be, including any Taxes or Other Taxes on such additional amount, is equal to the amount that the Administrative Agent (for the benefit of the Secured Parties) would have received had there been no such deduction or withholding. 5.2 Subordination. Except as otherwise specifically provided in this Guaranty, all existing and future indebtedness of, or other obligations owed by, Borrower or any of its subsidiaries to Guarantor is hereby subordinated to all Guaranteed Obligations. Without the prior written consent of Administrative Agent, such subordinated indebtedness (including interest thereon) shall not be paid or withdrawn in whole or in part, nor shall Guarantor accept any payment of or on account of any such indebtedness while this Guaranty is in effect. Any payment by Borrower or any subsidiary thereof in violation of this Guaranty shall be received by Guarantor in trust for Administrative Agent and the Secured Parties, and Guarantor shall cause the same to be paid to Administrative Agent for the benefit of the Secured Parties immediately upon demand by Administrative Agent on account of the Guaranteed Obligations. Guarantor shall not assign all or any portion of such indebtedness while the Guaranty remains in effect except upon prior written notice to Administrative Agent and pursuant to an agreement by which the assignee of any such indebtedness agrees that the assignment is made subject to the terms of this Guaranty, and that any attempted assignment of such indebtedness in violation of the provisions hereof shall be void. Nothing in this Section 5.2 shall apply to any repayment of existing or future indebtedness or obligation, distribution, withdrawal of capital or any other payment of any kind or nature whether in cash, in kind, or otherwise, that is permitted to be made to Guarantor or any of its Affiliates pursuant to and in accordance with the Credit Documents. 5.3 Waiver. Guarantor hereby unconditionally and irrevocably waives and relinquishes, to the maximum extent permitted by applicable Legal Requirements, all rights and remedies accorded to sureties or guarantors and agrees not to assert or take advantage of any such rights or remedies, including: (a) any right to require Administrative Agent or the other Secured Parties to proceed against Borrower, any Project Participant or any other Person or to proceed against or exhaust any security held by Administrative Agent or any other Secured Party at any time or to pursue any other remedy in Administrative Agent's or any other Secured Party's power before proceeding against Guarantor; (b) any defense that may arise by reason of the incapacity, lack of power or authority, death, dissolution, merger, termination or disability of Guarantor, Borrower, any Project Participant or any other Person or the failure of Administrative Agent or any other Secured Party to file or enforce a claim against the estate (in administration, bankruptcy or any other proceeding) of Guarantor, Borrower, any Project Participant or any other Person; (c) promptness, diligence, demand, presentment, protest and notice of any kind, including notice of the existence, creation or incurring of any new or additional indebtedness or obligation or of any action or non-action on the part of Borrower, any Project Participant, Administrative Agent, the other Secured Parties, any endorser or creditor of the 8 foregoing or on the part of any other Person under this or any other instrument in connection with any obligation or evidence of indebtedness held by Administrative Agent or the other Secured Parties as collateral or in connection with any Guaranteed Obligation; (d) any defense based upon an election of remedies by Administrative Agent or the other Secured Parties, including an election to proceed by non-judicial rather than judicial foreclosure, which destroys or otherwise impairs the subrogation rights of Guarantor, the right of Guarantor to proceed against Borrower, any Project Participant or another Person for reimbursement, or both; (e) any defense based on any offset against any amounts which may be owed by any Person to Guarantor for any reason whatsoever; (f) any defense based on any act, failure to act, delay or omission whatsoever on the part of Borrower, any Project Participant or any of Borrower's Affiliates or the failure by Borrower, any Project Participant or any of Borrower's Affiliates to do any act or thing or to observe or perform any covenant, condition or agreement to be observed or performed by it under the Credit Agreement or any other Operative Document; (g) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (h) any defense setoff or counterclaim which may at any time be available to or asserted by Borrower, any Project Participant or any of Borrower's Affiliates thereof against Administrative Agent, the other Secured Parties or any other Person under the Credit Agreement or any other Operative Document; (i) any duty on the part of Administrative Agent or any other Secured Party to disclose to Guarantor any facts any Secured Party may now or hereafter know about Borrower, any Project Participant or the Projects, regardless of whether Administrative Agent or any other Secured Party has reason to believe that any such facts materially increase the risk beyond that which Guarantor intends to assume, or have reason to believe that such facts are unknown to Guarantor, or have a reasonable opportunity to communicate such facts to Guarantor, since Guarantor acknowledges that Guarantor is fully responsible for being and keeping informed of the financial condition of Borrower and of all circumstances bearing on the risk of non-payment or non-performance of any Guaranteed Obligation; (j) any defense based on any change in the time, manner or place of any payment or performance under, or in any other term of, the Credit Agreement or any other Operative Document, or any other amendment, renewal, extension, acceleration, compromise or waiver of or any consent or departure from the terms of the Credit Agreement or any other Operative Document; (k) any right to assert the bankruptcy or insolvency of Borrower, any Project Participant or any other Person as a defense hereunder or as the basis for rescission hereof and any defense arising because of Administrative Agent's or any other Secured Party's 9 election, in any proceeding instituted under the Federal Bankruptcy Code, of the application of Section 1111(b)(2) of the Federal Bankruptcy Code; (l) any defense based upon any borrowing or grant of a security interest under Section 364 of the Federal Bankruptcy Code; and (m) any other circumstance (including any statute of limitations), any act or omission by Borrower, any Project Participant, or any existence of or reliance on any representation by Administrative Agent, Borrower, any Project Participant or any Secured Party that might otherwise constitute a defense available to, or discharge of, any guarantor or surety (other than, subject to Section 5.6, defense of payment or performance of the applicable Guaranteed Obligations). 5.4 Subrogation. Until this Guaranty is terminated in accordance with Section 6.15 below, (a) none of Guarantor, Borrower, and any Project Participant (or any Person on their respective behalf) shall exercise any right of subrogation or enforce any remedy which it now may have or may hereafter have against any Person in respect of the Guaranteed Obligations, and will not claim the benefit of any rights to, or seek to participate in, any security now or hereafter held by Guarantor, Borrower, any Project Participant or any other Person from any Person in respect of the Guaranteed Obligations, and (b) none of Guarantor, Borrower, and any Project Participant (or any Person on their respective behalf) shall enforce any claim, right or remedy which Guarantor may now have or may hereafter acquire against any Person that arises hereunder, from the existence or enforcement of this Guaranty or from the performance by Guarantor hereunder (including any claim, remedy or right of subrogation, reimbursement, exoneration, contribution, indemnification, or participation in any claim, right or remedy of Guarantor, Borrower, any Project Participant or any other Person against any Person, or any security which Guarantor, Borrower, any Project Participant or any other Person now may have or may hereafter acquire), whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise. 5.5 Bankruptcy. (a) The obligations of Guarantor under this Guaranty shall not be altered, limited or affected by any proceeding, voluntary or involuntary, involving the bankruptcy, reorganization, insolvency, receivership, liquidation or arrangement of Borrower, any Project Participant or any Affiliate thereof, or by any defense which Borrower, any Project Participant or any Affiliate thereof may have by reason of any order, decree or decision of any court or administrative body resulting from any such proceeding. (b) Guarantor shall file, in any bankruptcy or other proceeding in which the filing of claims is required or permitted by law, all claims which Guarantor may have against Borrower or any Project Participant relating to any indebtedness of Borrower or any Project Participant to Guarantor, and hereby assigns to Administrative Agent (on behalf of the Secured Parties) all rights of Guarantor thereunder. If Guarantor does not file any such claim, Administrative Agent, as attorney-in-fact for Guarantor, is hereby authorized to do so in the name of Guarantor or, in Administrative Agent's discretion, to assign the claim to a nominee and to cause proofs of claim to be filed in the name of Administrative Agent's nominee. The 10 foregoing power of attorney is coupled with an interest and cannot be revoked. Administrative Agent or its nominee shall have the sole right to accept or reject any plan proposed in any such proceeding and to take any other action which a party filing a claim is entitled to take. In all such cases, whether in administration, bankruptcy or otherwise, the person authorized to pay such a claim shall pay the same to Administrative Agent to the extent of any Guaranteed Obligations which then remain unpaid or unperformed, and, to the full extent necessary for that purpose, Guarantor hereby assigns to Administrative Agent all of Guarantor's rights to all such payments or distributions to which Guarantor would otherwise be entitled; provided, however, that Guarantor's obligations hereunder shall not be satisfied except to the extent that Administrative Agent receives cash by reason of any such payment or distribution. If Administrative Agent receives anything hereunder other than cash, the same shall be held as collateral for amounts due under this Guaranty. (c) Guarantor hereby irrevocably waives, to the extent it may do so under applicable Legal Requirements, any protection to which it may be entitled under Sections 365(c)(l), 365(c)(2) and 365(e)(2) of the Bankruptcy Law or equivalent provisions of the laws or regulations of any other jurisdiction with respect to any proceedings, or any successor provision of law of similar import, in the event of any Bankruptcy Event with respect to Borrower or any Project Participant. Specifically, in the event that the trustee (or similar official) in a Bankruptcy Event with respect to Borrower or any Project Participant or the debtor-in-possession takes any action (including the institution of any action, suit or other proceeding for the purpose of enforcing the rights of Borrower, or any Project Participant under this Guaranty or any other Credit Document), Guarantor shall not assert any defense, claim or counterclaim denying liability hereunder on the basis that this Guaranty or any other Credit Document is an executory contract or a "financial accommodation" that cannot be assumed, assigned or enforced or on any other theory directly or indirectly based on Section 365(c)(l), 365(c)(2) or 365(e)(2) of the Bankruptcy Law, or equivalent provisions of the law or regulations of any other jurisdiction with respect to any proceedings or any successor provision of law of similar import. If a Bankruptcy Event with respect to Borrower or any Project Participant shall occur, Guarantor agrees, after the occurrence of such Bankruptcy Event, to reconfirm in writing, to the extent permitted by applicable Legal Requirements, its pre-petition waiver of any protection to which it may be entitled under Sections 365(c)(l), 365(c)(2) and 365(e)(2) of the Bankruptcy Law or equivalent provisions of the laws or regulations of any other jurisdiction with respect to proceedings and, to give effect to such waiver, Guarantor consents to the assumption and enforcement of each provision of this Guaranty and any other Credit Document by the debtor-in-possession or Borrower's or any Project Participant's trustee in bankruptcy, as the case may be. 5.6 Reinstatement. This Guaranty and the obligations of Guarantor hereunder shall continue to be effective or be automatically reinstated, as the case may be, if and to the extent that for any reason any payment by or on behalf of Guarantor in respect of the Guaranteed Obligations is rescinded or otherwise restored to Guarantor or Borrower, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, all as if such payment had not been made, and Guarantor agrees that it will indemnify Administrative Agent, the Secured Parties and their respective successors and assigns, on demand for all reasonable costs and expenses (including reasonable fees of counsel) incurred by Administrative Agent, the Secured Parties and their respective successors and assigns in connection with any such rescission or restoration. 11 ARTICLE VI. MISCELLANEOUS 6.1 Obligations Secured. Without limiting the generality of the foregoing, this Guaranty and all of the Collateral secure the payment and performance when due of all Guaranteed Obligations. If, notwithstanding the representation and warranty set forth in Section 3.1.5 or anything to the contrary herein, enforcement of the liability of Guarantor under this Guaranty for the full amount of the Guaranteed Obligations would be an unlawful or voidable transfer under any applicable fraudulent conveyance or fraudulent transfer law or any comparable law, then the liability of Guarantor hereunder shall be reduced to the highest amount for which such liability may then be enforced without giving rise to an unlawful or voidable transfer under any such law. 6.2 Successions or Assignments. (a) This Guaranty shall inure to the benefit of the successors or permitted assigns of the Secured Parties under the Credit Agreement who shall have, to the extent of their interest, the rights of the Secured Parties hereunder. (b) This Guaranty is binding upon Guarantor and its successors and permitted assigns. Guarantor may not assign any of its obligations hereunder without the prior written consent of the Banks (and any purported assignment in violation of this Section shall be void). 6.3 Other Waivers. (a) No delay or omission on the part of Administrative Agent or the Secured Parties in exercising any of their rights (including those hereunder) and no partial or single exercise thereof and no action or non-action by Administrative Agent or the other Secured Parties, with or without notice to Guarantor, Borrower, any Project Participant or any other Person, shall constitute a waiver of any rights or shall affect or impair this Guaranty. (b) ADMINISTRATIVE AGENT AND GUARANTOR HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH, THIS GUARANTY OR ANY OTHER CREDIT DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE SECURED PARTIES, ADMINISTRATIVE AGENT OR GUARANTOR. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE SECURED PARTIES AND ADMINISTRATIVE AGENT TO ACCEPT THIS GUARANTY, ENTER INTO THE CREDIT AGREEMENT AND MAKE LOANS THEREUNDER. 6.4 Headings. The headings in this Guaranty are for convenience of reference only and shall not constitute a part of this Guaranty for any other purpose or be given any substantive effect. 12 6.5 Remedies Cumulative. Each and every right and remedy of Administrative Agent or the other Secured Parties hereunder shall be cumulative and shall be in addition to any other right or remedy given hereunder or under any other Credit Document, or now or hereafter existing at law or in equity. 6.6 Severability. Any provision of this Guaranty that may be determined by competent authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 6.7 Amendments. This Guaranty may be amended, waived or otherwise modified only with the written consent of the parties hereto and otherwise in accordance with Section 9.9 of the Credit Agreement. 6.8 Jurisdiction. Administrative Agent and Guarantor agree that any legal action or proceeding by or against Guarantor or with respect to or arising out of this Guaranty or any other Credit Document may be brought in or removed to the courts of the State of New York, in and for the Borough of Manhattan, or of the United States of America for the Southern District of New York, as Administrative Agent may elect. By execution and delivery of this Guaranty, Administrative Agent and Guarantor accept, for themselves and in respect of their property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts. Administrative Agent and Guarantor irrevocably consent to the service of process out of any of the aforementioned courts in any manner permitted by law. Any such process or summons in connection with any such action or proceeding may also be served by mailing a copy thereof by certified or registered mail, or any substantially similar form of mail, addressed to Guarantor as provided for notices hereunder. Guarantor agrees that service of process upon CT Corporation System and written notice of such service given to Guarantor shall be deemed in every respect effective service of process upon Guarantor in any such suit, action or proceeding in any such court. Administrative Agent and Guarantor hereby waive any right to stay or dismiss any action or proceeding under or in connection with any or all of the Projects, this Guaranty or any other Credit Document brought before the foregoing courts on the basis of forum non-conveniens. Nothing herein shall affect the right of Administrative Agent to bring legal action or proceedings in any other competent jurisdiction. Administrative Agent and Guarantor further agree that the aforesaid courts of the State of New York and of the United States of America shall have exclusive jurisdiction with respect to any claim or counterclaim of Guarantor based upon the assertion that the rate of interest charged by the Secured Parties on or under this Guaranty and/or the other Credit Documents is usurious. 6.9 Governing Law. This Guaranty and the rights and obligations of Administrative Agent and Guarantor shall be governed by, and construed in accordance with, the law of the State of New York without reference to principles of conflicts of law (other than Section 5-1401 and Section 5-1402 of the New York General Obligations Law). 6.10 Integration of Terms. This Guaranty, together with the other Credit Documents, is intended by the parties as a final expression of their agreement and is intended as a complete and exclusive statement of the terms and conditions thereof. 13 6.11 Notices. Any communications between the parties hereto or notices provided herein to be given may be given to the following addresses: If to Administrative Agent: Beal Bank, S.S.B. 6000 Legacy Dr., 4E Plano, Texas 75024 Attn: William T. Saurenmann Telephone No.: (469) 467-5510 Telecopy No.: (469) 241-9568 E-mail: bsaurenmann@bealbank.com with a copy to: CSG Investments, Inc. 6000 Legacy Dr., 4W Plano, Texas 75024 Attn: Steve Harvey Telephone No.: (469) 467-5652 Telecopy No.: (469) 241-9567 E-mail: sharvey@csginvestments.com If to Guarantor: [INSERT NAME OF GUARANTOR] c/o OrCal Geothermal Inc. 980 Greg Street Sparks, Nevada 89431-6039 Attn: President Tel: (775)356-9029 Fax: (775)356-9039 E-mail: dbronicki@ormat.com All notices or other communications required or permitted to be given hereunder shall be in writing and shall be considered as properly given (a) if delivered in person, (b) if sent by overnight delivery service (including Federal Express, UPS and other similar overnight delivery services), (c) if mailed by first class United States Mail, postage prepaid, registered or certified with return receipt requested, (d) if sent by facsimile or (e) if sent via other electronic means (including electronic mail). Notice so given shall be effective upon receipt by the addressee, except that communication or notice so transmitted by facsimile or other direct written electronic means shall be deemed to have been validly and effectively given on the day (if a Banking Day and, if not, on the next following Banking Day) on which it is transmitted if transmitted before 4:00 p.m., recipient's time, and if transmitted after that time, on the next following Banking Day; provided, however, that (i) if any notice is tendered to an addressee and the delivery thereof is refused by such addressee, such notice shall be effective upon such tender, and (ii) with respect to any notice given via facsimile or other electronic means, the sender of such message shall promptly provide the addressee with an original copy of such notice by any of the means specified in clauses (a), (b) or (c) above. Any party shall have the right to change its address for notice hereunder to any other location within the continental United States by giving of five Banking Days' notice to the other parties in the manner set forth above. 146.12 Interest; Collection Expenses; Set-Off. (a) Without regard to any limitation set forth in this Guaranty, any amount required to be paid by Guarantor pursuant to the terms hereof that is not paid when due shall bear interest at the Default Rate or the maximum rate permitted by law, whichever is less, from the date due until paid in full in cash. (b) Without regard to any limitation set forth in this Guaranty, if Administrative Agent is required to pursue any remedy against Guarantor hereunder, Guarantor shall pay to Administrative Agent upon demand therefore, all reasonable attorneys' fees and all other costs and expenses incurred by Administrative Agent in enforcing this Guaranty (and such fees, costs and expenses shall be deemed to be part of the Guaranteed Obligations). (c) In addition to any rights now or hereafter granted under applicable Legal Requirements or otherwise, and not by way of limitation of any such rights, upon the failure of Guarantor to make any payment as required hereunder, Administrative Agent is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to Guarantor or to any other Person, any such notice being hereby expressly waived, to set-off and to appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by Administrative Agent or any Bank (including by branches and agencies of Administrative Agent and each Bank wherever located) to or for the credit or the account of Guarantor, against and on account of the obligations of Guarantor under this Guaranty, irrespective of whether or not Administrative Agent shall have made any demand hereunder. 6.13 Counterparts. This Guaranty and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute one and the same agreement. Signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. NO CREDIT DOCUMENT TO WHICH BEAL BANK, S.S.B. IS A PARTY SHALL BE EFFECTIVE UNLESS TWO OFFICERS OF BEAL BANK, S.S.B. SHALL HAVE EXECUTED SUCH CREDIT DOCUMENT. 6.14 Limitations on Liability. No claim shall be made by Guarantor against Administrative Agent or the Secured Parties or any of their Affiliates, directors, employees, attorneys or agents for any loss of profits, business or anticipated savings, special or punitive damages or any indirect or consequential loss whatsoever in respect of any breach or wrongful conduct (whether or not the claim therefor is based on contract, tort or duty imposed by law), in connection with, arising out of or in any way related to the transactions contemplated by this Guaranty or the other Credit Documents or any act or omission or event occurring in connection therewith; and Guarantor hereby waives, releases and agrees not to sue upon any such claim for any such damages, whether or not accrued and whether or not known or suspected to exist in their favor. 6.15 Time. Time is of the essence of this Guaranty. 15 6.16 Termination. Subject to Section 5.6, this Guaranty and all of the obligations of Guarantor hereunder shall terminate upon the payment in full in cash and performance in full of all Guaranteed Obligations in accordance with the Credit Documents (other than the Guaranteed Obligations that are intended to survive the termination of the Credit Documents). Unless earlier terminated pursuant to the foregoing sentence, this Guaranty shall survive any foreclosure proceedings instituted, commenced or completed against Borrower or any of its subsidiaries. 6.17 Credit Documents. Guarantor acknowledges that it has been provided with a copy of the Credit Agreement, the Depositary Agreement and the other Credit Documents and has read and is familiar with the provisions of the Credit Agreement, the Depositary Agreement and the other Credit Documents. Guarantor hereby consents to the terms set forth in the Credit Agreement, the Depositary Agreement and the other Credit Documents. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 16 IN WITNESS WHEREOF, the parties hereto, by their authorized representatives duly authorized, intending to be legally bound, have caused this Subsidiary Guaranty to be duly executed and delivered as of the date first above written. [INSERT NAME OF GUARANTOR], a[___________________], as Guarantor By: ------------------------------------ Name: Title: BEAL BANK, S.S.B., as Administrative Agent By: ------------------------------------ Name: Title: By: ------------------------------------ Name: Title: S-1 [_________'s Subsidiary Guaranty] OrHeber 1, HGC, HFC and Administrative Agent dated as of theEXHIBIT D-6 to Credit Agreement SCHEDULE OF SECURITY FILINGS -------------------------------------------------------------------------------- DEBTOR COLLATERAL DOCUMENT FILING OFFICE -------------------------------------------------------------------------------- Sponsor Pledge Agreement among Borrower, Delaware Secretary of State Sponsor and Administrative Agent dated as of the Closing Date -------------------------------------------------------------------------------- Borrower Security Agreement between Borrower Delaware Secretary of State and Administrative Agent dated as of the Closing Date -------------------------------------------------------------------------------- Borrower Pledge Agreement among Borrower, Delaware Secretary of State OrHeber 1 and Administrative Agent dated as of the Closing Date -------------------------------------------------------------------------------- Borrower Pledge Agreement among Borrower, Delaware Secretary of State OrMammoth and Administrative Agent dated as of the Closing Date -------------------------------------------------------------------------------- Borrower Pledge Agreement among Borrower, Delaware Secretary of State OrHeber 1, HGC, HFC and Administrative Agent dated as of the Closing Date -------------------------------------------------------------------------------- OrHeber 1 Security Agreement between OrHeber 1 Delaware Secretary of State and Administrative Agent dated as of the Closing Date -------------------------------------------------------------------------------- OrHeber 1 Pledge Agreement among Borrower, Delaware Secretary of State Closing Date -------------------------------------------------------------------------------- Insurance Company, as Trustee, for the benefit of Administrative Agent, dated as of the Closing Date-------------------------------------------------------------------------------- DEBTOR COLLATERAL DOCUMENT FILING OFFICE -------------------------------------------------------------------------------- OrHeber 1 Pledge Agreement among OrHeber 1, Delaware Secretary of State ORNI and Administrative Agent -------------------------------------------------------------------------------- OrMammoth Security Agreement between OrMammoth Delaware Secretary of State and Administrative Agent dated as of the Closing Date -------------------------------------------------------------------------------- HFC Security Agreement between HFC and Nevada Secretary of State Administrative Agent dated as of the Closing Date -------------------------------------------------------------------------------- HFC Security Agreement between HFC and California Secretary of State Administrative Agent dated as of the Closing Date -------------------------------------------------------------------------------- HGC Security Agreement between HGC and Nevada Secretary of State Administrative Agent dated as of the Closing Date -------------------------------------------------------------------------------- HGC Security Agreement between HGC and California Secretary of State Administrative Agent dated as of the Closing Date -------------------------------------------------------------------------------- HFC Deed of Trust, Assignment of Rents, County Recorder of Imperial Security Agreement and Fixture County, California Filings by HFC to Chicago Title -------------------------------------------------------------------------------- 2 Insurance Company, as Trustee, for the benefit of Administrative Agent, dated as of the Closing Date -------------------------------------------------------------------------------- 3-------------------------------------------------------------------------------- DEBTOR COLLATERAL DOCUMENT FILING OFFICE -------------------------------------------------------------------------------- HGC Deed of Trust, Assignment of Rents, County Recorder of Imperial Security Agreement and Fixture County, California Filings by HGC to Chicago Title EXHIBIT E-l to Credit Agreement ================================================================================ FORM OF CONSENT AND AGREEMENT among [INSERT NAME OF CONTRACTING PARTY], a[_____________________] (Contracting Party) and [INSERT NAME OF PROJECT OWNER], a[_______________________] (Project Owner) and BEAL BANK, S.S.B. (Administrative Agent) DATED AS OF ______________ , _____ ================================================================================ This CONSENT AND AGREEMENT, dated as of [_______________] [__], [____] (this "Consent"), is entered into by and among [INSERT NAME OF CONTRACTING PARTY], a [_______________] [ORGANIZED] [FORMED] and existing under the laws of the State of [_______________] (together with its permitted successors and assigns, "Contracting Party"), BEAL BANK, S.S.B., in its capacity as Administrative Agent for the Secured Parties referred to below (together with its successors, designees and assigns in such capacity, "Administrative Agent"), and [INSERT NAME OF PROJECT OWNER], a [_______________] [ORGANIZED] [FORMED] and existing under the laws of the State of California (together with its permitted successors and assigns, "Project Owner"). RECITALS A. OrCal Geothermal Inc., a corporation organized and existing under the laws of the State of Delaware and a direct or indirect parent of Project Owner ("Borrower") directly or indirectly has acquired (the "Acquisition") certain Persons (including Project Owner) which directly or indirectly own, lease, use and operate certain geothermal power plants and geothermal fluid facilities located in the State of California, including the [INSERT NAME OF RELEVANT PROJECT] (the "Project"). B. In order to partially finance the Acquisition, Borrower has entered into that certain Credit Agreement, dated as of December 18, 2003 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Borrower, the financial institutions from time to time parties thereto (collectively, the "Lenders"), and each of the agents listed on the signature pages thereto, pursuant to which, among other things, the Lenders have made loans to, and for the benefit of, Borrower. Borrower is a direct or indirect parent of Project Owner, and Project Owner will receive substantial benefits from the making of these loans to Borrower. C. Contracting Party and Project Owner have entered into that certain [INSERT DESCRIPTION OF RELEVANT PROJECT DOCUMENT(S)], dated as of [_______________] [__], [_____] (as amended, amended and restated, supplemented or otherwise modified from time to time in accordance with the terms thereof and hereof, the "Assigned Agreement[S]"). D. Pursuant to a guaranty agreement executed by Project Owner and Administrative Agent (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Guaranty Agreement"), Project Owner has guaranteed all of Borrower's obligations to the Lenders. E. Pursuant to a security agreement executed by Project Owner and Administrative Agent (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Security Agreement"), Project Owner has agreed, among other things, to assign, as collateral security for its obligations under the Guaranty Agreement and related documents (collectively, the "Credit Documents"), all of its right, title and interest in, to and under the Assigned Agreement to Administrative Agent for the benefit of itself, the Lenders and each other entity or person provided collateral security under the Credit Documents (the "Secured Parties"). F. It is a requirement under the Credit Agreement that Contracting Party and Project Owner execute and deliver this Consent. AGREEMENT NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound, the parties hereto hereby agree, notwithstanding anything in the Assigned Agreement to the contrary, as follows: 1. Assignment and Agreement. 1.1 Consent to Assignment. Contracting Party (a) is hereby notified that the Lenders have made the extensions of credit contemplated by the Credit Agreement, (b) consents to the collateral assignment under the Security Agreement of all of Project Owner's right, title and interest in, to and under the Assigned Agreement, including, without limitation, all of Project Owner's rights to receive payment and all payments due and to become due to Project Owner under or with respect to the Assigned Agreement (collectively, the "Assigned Interests") and (c) acknowledges the right of Administrative Agent, in the exercise of Administrative Agent's rights and remedies pursuant [AND SUBJECT(1)] to the Security Agreement, upon written notice to Contracting Party, to make all demands, give all notices, take all actions and exercise all rights of Project Owner under the Assigned Agreement. 1.2 Subsequent Owner. (a) Contracting Party agrees that, if Administrative Agent notifies Contracting Party in writing that, pursuant to and in accordance with the Security Agreement, it has assigned, foreclosed or sold the Assigned Interest, then (i) Administrative Agent or its successor, assignee and/or designee, or any purchaser of the Assigned Interests (a "Subsequent Owner") shall be substituted for Project Owner under the Assigned Agreement and (ii) Contracting Party shall (A) recognize Administrative Agent or the Subsequent Owner, as the case may be, as its counterparty under the Assigned Agreement and (B) continue to perform its obligations under the Assigned Agreement in favor of Administrative Agent or the Subsequent Owner, as the case may be; provided that Administrative Agent or such Subsequent Owner, as the case may be, has assumed in writing all of Project Owner's rights and obligations (including, without limitation, the obligation to cure any then existing payment and performance defaults, but excluding any obligation to cure any then existing performance defaults which by their nature are incapable of being cured) under the Assigned Agreement. (b) [INSERT THE FOLLOWING ONLY IF WARRANTIES ARE PROVIDED BY CONTRACTING PARTY UNDER THE RELEVANT ASSIGNED AGREEMENT: Without limiting anything herein, the warranties provided by Contracting Party under the Assigned Agreement shall continue in full force and effect (until the expiration of the applicable warranty periods set forth in the ---------- (1) Bracketed language to be included only in the Consents related to Project Documents to which an Affiliate of Project Company is a Contracting Party. 2 Assigned Agreement) in the event that Administrative Agent or a Subsequent Owner succeeds to Project Owner's right, title and interest in the Assigned Agreement.] 1.3 Right to Cure. If Project Owner defaults in the performance of any of its obligations under the Assigned Agreement, or upon the occurrence or non-occurrence of any event or condition under the Assigned Agreement which would immediately or with the passage of any applicable grace period or the giving of notice, or both, enable Contracting Party to terminate or suspend its performance under the Assigned Agreement (each hereinafter a "default"). Contracting Party shall not terminate or suspend its performance under the Assigned Agreement until it first gives written notice of such default to Administrative Agent and affords Administrative Agent a period of at least 30 days (or if such default is a nonmonetary default, such longer period (not to exceed 90 days) as may be required so long as Administrative Agent has commenced and is diligently pursuing appropriate action to cure such default within such longer period) from receipt of such notice to cure such default; provided, however, that (a) if possession of the Project is necessary to cure such nonmonetary default and Administrative Agent has commenced foreclosure proceedings, Administrative Agent shall be allowed a reasonable time to complete such proceedings within such longer period, and (b) if Administrative Agent is prohibited from curing any such nonmonetary default by any process, stay or injunction issued by any governmental authority or pursuant to any bankruptcy or insolvency proceeding or other similar proceeding involving Project Owner, then the time periods specified herein for curing a nonmonetary default shall be extended for the period of such prohibition. In the event the Administrative Agent does not cure any such default within such applicable extended cure period, Contracting Party shall continue to have all rights and remedies afforded to it under the Assigned Agreement. 1.4 No Amendments. (a) Contracting Party agrees that it shall not, without the prior written consent of Administrative Agent, enter into any novation, material amendment or other material modification of the Assigned Agreement. (b) Contracting Party agrees that it shall not, without the prior written consent of Administrative Agent, (i) sell, assign or otherwise transfer any of its rights under the Assigned Agreement (other than (A) its right to receive payments under the Assigned Agreement and (B) its right to subcontract under the Assigned Agreement), (ii) terminate, cancel or suspend its performance under the Assigned Agreement (unless it has given Administrative Agent any notice and opportunity to cure that are required by Section 1.3 hereof), (iii) consent to any assignment or other transfer by Project Owner of its rights under the Assigned Agreement or (iv) consent to any voluntary termination, cancellation or suspension of performance by Project Owner under the Assigned Agreement. 1.5 Replacement Agreements. In the event the Assigned Agreement is rejected or terminated as a result of any bankruptcy, insolvency, reorganization or similar proceeding affecting Project Owner, Contracting Party shall, at the option of Administrative Agent exercised within 45 days after such rejection or termination, enter into a new agreement with Administrative Agent having identical terms, conditions, agreements, provisions and limitations as the Assigned Agreement (subject to any conforming changes necessitated by the 3 substitution of parties and other changes as the parties may mutually agree), provided that (a) the term under such new agreement shall be no longer than the remaining balance of the term specified in the Assigned Agreement, and (b) upon execution of such new agreement, Administrative Agent cures any outstanding payment and performance defaults under the Assigned Agreement, excluding any performance defaults which by their nature are incapable of being cured. 1.6 Limitations on Liability. Contracting Party acknowledges and agrees that Administrative Agent shall not have any liability or obligation under the Assigned Agreement as a result of this Consent, the Security Agreement or otherwise, nor shall Administrative Agent be obligated or required to (a) perform any of Project Owner's obligations under the Assigned Agreement, except during any period in which Administrative Agent has assumed Project Owner's rights and obligations under the Assigned Agreement pursuant to Section 1.2[(A)] above, or (b) take any action to collect or enforce any claim for payment assigned under the Security Agreement. If Administrative Agent has assumed Project Owner's rights and obligations under the Assigned Agreement pursuant to Section 1.2[(A)] above or has entered into a new agreement pursuant to Section 1.5 above, Administrative Agent's liability to Contracting Party under the Assigned Agreement or such new agreement, and the sole recourse of Contracting Party in seeking enforcement of the obligations under such agreements, shall be limited to the interest of Administrative Agent in the Project. 1.7 Delivery of Notices. Contracting Party shall deliver to Administrative Agent, concurrently with the delivery thereof to Project Owner, a copy of each notice, request or demand given by Contracting Party to Project Owner pursuant to the Assigned Agreement relating to (a) a default by Project Owner under the Assigned Agreement and (b) any matter that would require the consent of Administrative Agent pursuant to Section 1.4 of this Consent. Failure of Contracting Party to provide a copy of any such notice, request or demand or any other notice specified in Section 1.3 hereof to Administration Agent shall not constitute a breach of this Consent and Administrative Agent agrees that Contracting Party shall have no liability to Administrative Agent for such failure; provided, however, that no cancellation, suspension or termination of the Assigned Agreement by Contracting Party, or any other actions taken by Contracting Party under the Assigned Agreement, shall be binding upon Administrative Agent or Project Owner without such notice, request or demand (as applicable), if applicable under Section 1.3, the opportunity to cure during the applicable extended cure period specified in Section 1.3 and, if applicable under Section 1.4, consent of Administrative Agent. 1.8 Transfer. In the event Administrative Agent or its designee is substituted for Project Owner under the Assigned Agreement pursuant to Section 1.2 or a new agreement entered into pursuant to Section 1.5, then, subsequent to such substitution, Administrative Agent shall have the right to assign all of its interest in the Assigned Agreement or such new agreement to any entity; provided that such assignee assumes in writing the obligations of Administrative Agent under the Assigned Agreement or such new agreement. Upon such assignment, Administrative Agent shall be released from any further liability under the Assigned Agreement or such new agreement. 4 2. Payments under the Assigned Agreement. 2.1 Payments. Contracting Party shall pay all amounts (if any) payable by it under the Assigned Agreement in the manner and as and when required by the Assigned Agreement directly into the account specified on Exhibit A hereto, or to such other person, entity or account as shall be specified from time to time by Administrative Agent to Contracting Party in writing. Notwithstanding the foregoing, if any entity or person has become a Subsequent Owner pursuant to the terms hereof, then Contracting Party shall pay all such amounts directly to such Subsequent Owner or an account designated by Subsequent Owner. Contracting Party, Project Owner and Administrative Agent each acknowledge and agree that each payment made by Contracting Party in accordance with this Section 2.1 shall, to the extent of the amount paid, constitute payment of the relevant amount owing by Contracting Party to Project Owner under the Assigned Agreement and that such payment shall discharge the obligation of Contracting Party under the Assigned Agreement to make such payment to Project Owner. 2.2 No Offset, Etc. All payments required to be made by Contracting Party under the Assigned Agreement shall be made without any offset, recoupment, abatement, withholding, reduction or defense whatsoever, other than those allowed by the terms of the Assigned Agreement. 3. Representations and Warranties of Contracting Party. Contracting Party hereby represents and warrants, in favor of Administrative Agent and the Lenders, as of the date hereof, that: (a) Contracting Party (i) is a [________________] duly [FORMED] [ORGANIZED] and validly existing under the laws of the State of [_________________], (ii) is duly qualified, authorized to do business and in good standing in the State of California, and (iii) has all requisite power and authority to enter into and to perform its obligations hereunder and under the Assigned Agreement, and to carry out the terms hereof and thereof and the transactions contemplated hereby and thereby; (b) the execution, delivery and performance by Contracting Party of this Consent and the Assigned Agreement have been duly authorized by all necessary corporate or other action on the part of Contracting Party and do not require any approvals, filings with, or consents of any entity or person which have not previously been obtained or made; (c) each of this Consent and the Assigned Agreement is in full force and effect, has been duly executed and delivered on behalf of Contracting Party by the appropriate officers of Contracting Party, and constitutes the legal, valid and binding obligation of Contracting Party, enforceable against Contracting Party in accordance with its terms, except as the enforceability thereof may be limited by (i) bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and (ii) general equitable principles (whether considered in a proceeding in equity or at law); (d) there is no litigation, action, suit, proceeding or investigation pending or (to the best of Contracting Party's knowledge) threatened against Contracting Party before or by any court, administrative agency, arbitrator or governmental authority, body or agency which, if 5 adversely determined, individually or in the aggregate, could have a material adverse effect on the performance by Contracting Party of its obligations hereunder or under the Assigned Agreement; (e) the execution, delivery and performance by Contracting Party of this Consent and the Assigned Agreement, and the consummation of the transactions contemplated hereby and thereby, do or will not result in any violation of, breach of or default under any term of its formation or governance documents, or of any contract or agreement to which it is a party or by which it or its property is bound, or of any license, permit, franchise, judgment, injunction, order, law, rule or regulation applicable to it, other than any such violation, breach or default which could not reasonably be expected to have a material adverse effect on Contracting Party's ability to perform its obligations under the Assigned Agreement or this Consent; (f) neither Contracting Party nor, to the best of Contracting Party's knowledge, any other party to the Assigned Agreement, is in default of any of its obligations thereunder; (g) to the best of Contracting Party's knowledge, (i) no event of force majeure exists under, and as defined in, the Assigned Agreement and (ii) no event or condition exists which would either immediately or with the passage of any applicable grace period or giving of notice, or both, enable either Contracting Party or Project Owner to terminate or suspend its obligations under the Assigned Agreement; and (h) the Assigned Agreement and this Consent are the only agreements between Project Owner and Contracting Party with respect to the Project, and all of the conditions precedent to effectiveness under the Assigned Agreement have been satisfied or waived. Each of the representations and warranties set forth in this Section 3 shall survive the execution and delivery of this Consent and the Assigned Agreement and the consummation of the transactions contemplated hereby and thereby. 4. Additional Provisions. [INSERT SPECIFIC PROVISIONS AS MAY BE RELEVANT TO THE ASSIGNED AGREEMENT. SUCH PROVISIONS, IF ANY, TO BE IDENTIFIED AFTER DUE DILIGENCE AND REVIEW OF THE ASSIGNED AGREEMENT. WITH RESPECT TO AFFILIATE CONTRACTS, SUCH PROVISIONS TO INCLUDE RIGHT OF ADMINISTRATIVE AGENT TO TERMINATE THE ASSIGNED AGREEMENT UPON 30 DAYS NOTICE IN THE EVENT OF A STOCK OR ASSET FORECLOSURE.] 5. Miscellaneous. 5.1 Addresses. Any communications between the parties hereto or notices provided herein to be given may be given to the following addresses: 6 Fax: (469) 241-9567 E-mail: sharvey@csginvestments.com All notices or other communications required or permitted to be given hereunder shall be in writing and shall be considered as properly given (a) if delivered in person, (b) if sent by overnight delivery service (including Federal Express, UPS and other similar overnight delivery services), (c) if mailed by first class United States Mail, postage prepaid, registered or certified with return receipt requested, (d) if sent by facsimile or (e) if sent via other electronic means (including electronic mail). Notice so given shall be effective upon receipt by the addressee, except that communication or notice so transmitted by facsimile or other direct written electronic means shall be deemed to have been validly and effectively given on the day (if a Banking Day and, if not, on the next following Banking Day) on which it is transmitted if transmitted before 4:00 p.m., recipient's time, and if transmitted after that time, on the next following Banking Day; provided, however, that (i) if any notice is tendered to an addressee and the delivery thereof is refused by such addressee, such notice shall be effective upon such tender, and (ii) with respect to any notice given via facsimile or other electronic means, the sender of such message shall promptly provide the addressee with an original copy of such notice by any of the means 7If to Project Owner: [INSERT NAME OF PROJECT OWNER] 980 Greg Street Sparks, NV 89431 Attn: President Tel: (775) 356-9029 Fax: (775) 356-9039 E-mail: ---------------------- If to Contracting Party: [INSERT NAME OF CONTRACTING PARTY] ----------------------------- ----------------------------- Attn: --------------------------- Tel: ---------------------------- Fax: ---------------------------- E-mail: ------------------------- If to Administrative Agent: Beal Bank, S.S.B. 6000 Legacy Dr., 4E Plano, Texas 75024 Attn: William T. Saurenmann Tel: (469) 467-5510 Fax: (469) 241-9568 E-mail: ----------------------- with a copy to: CSG Investments, Inc. 6000 Legacy Dr., 4W Plano, Texas 75024 Attn: Steve Harvey Tel: (469) 467-5652 specified in clause (a), (b) or (c) above. Any party shall have the right to change its address for notice hereunder to any other location within the continental United States by giving of 5 Banking Days' notice to the other parties in the manner set forth above. 5.2 Governing Law; Submission to Jurisdiction. (a) THIS CONSENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH, AND BE GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW EXCEPT SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW). (b) Any legal action or proceeding with respect to this Consent and any action for enforcement of any judgment in respect thereof may be brought in the courts of the Borough of Manhattan or of the United States of America for the Southern District of New York, and, by execution and delivery of this Consent, Contracting Party hereby accepts for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts and appellate courts from any appeal thereof. Contracting Party irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to Contracting Party at its notice address provided pursuant to Section 5.1 hereof. Contracting Party hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Consent brought in the courts referred to above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. Nothing herein shall affect the right of Administrative Agent to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against Contracting Party in any other jurisdiction. 5.3 Counterparts. This Consent may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. 5.4 Headings Descriptive. The headings of the several sections and subsections of this Consent are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Consent. 5.5 Severability. In case any provision in or obligation under this Consent shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 5.6 Amendment, Waiver. Neither this Consent nor any of the terms hereof may be terminated, amended, supplemented, waived or modified except by an instrument in writing signed by Contracting Party, Project Owner and Administrative Agent. 8 5.7 Successors and Assigns. This Consent shall bind and benefit Contracting Party, Administrative Agent, and their respective successors and permitted assigns. 5.8 Third Party Beneficiaries. Contracting Party and Administrative Agent hereby acknowledge and agree that the Secured Parties are intended third-party beneficiaries of this Consent. 5.9 WAIVER OF TRIAL BY JURY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, CONTRACTING PARTY, PROJECT OWNER AND ADMINISTRATIVE AGENT HEREBY IRREVOCABLY WAIVE ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS CONSENT OR ANY MATTER ARISING HEREUNDER. 5.10 Entire Agreement. This Consent and any agreement, document or instrument attached hereto or referred to herein integrate all the terms and conditions mentioned herein or incidental hereto and supersede all oral negotiations and prior writings between the parties hereto in respect of the subject matter hereof. In the event of any conflict between the terms, conditions and provisions of this Consent and any such agreement, document or instrument (including, without limitation, the Assigned Agreement), the terms, conditions and provisions of this Consent shall prevail. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 9 IN WITNESS WHEREOF, the parties hereto, by their officers duly authorized, intending to be legally bound, have caused this Consent and Agreement to be duly executed and delivered as of the date first above written. [INSERT NAME OF PROJECT OWNER], a[____________________], as Project Owner By: ------------------------------- Name: Title: [INSERT NAME OF CONTRACTING PARTY], a[____________________], as Contracting Party By: ------------------------------- Name: Title: Accepted and Agreed to: BEAL BANK, S.S.B., as Administrative Agent By: ------------------------------- Name: Title: By: ------------------------------- Name: Title: S-1 [[INSERT NAME OF CONTRACTING PARTY] Consent] For the account of # ---------------------------- -------------- Revenue Account, Account No. ------------------------ Administrative Agent shall be permitted to modify the account information setExhibit A to Consent and Agreement Payment Instructions All amounts owed to Project Owner shall be paid to the following account: ----------------------- ABA # Account --------------- forth above upon five (5) days' prior written notice to Contracting Party and Project Owner. A-1 Service Agreement, SIGC Connection Agreement --------------------------------------------------------------------------------EXHIBIT E-2 to Credit Agreement SCHEDULE OF POST-CLOSING CONSENTS -------------------------------------------------------------------------------- MAJOR PROJECT PARTICIPANT MAJOR PROJECT DOCUMENTS -------------------------------------------------------------------------------- Edison HGC Power Purchase Agreement, HGC Interconnection Agreement -------------------------------------------------------------------------------- Edison Mammoth G-1 Power Purchase Agreement -------------------------------------------------------------------------------- Edison Mammoth G-2 Power Purchase Agreement, Mammoth G-2 Interconnection Agreement -------------------------------------------------------------------------------- Edison Mammoth G-3 Power Purchase Agreement, Mammoth G-3 Interconnection Agreement -------------------------------------------------------------------------------- Edison SIGC Power Purchase Agreement -------------------------------------------------------------------------------- IID HGC Water Supply Agreement, HGC Connection Agreement -------------------------------------------------------------------------------- IID SIGC Water Supply Agreement, SIGC Transmission Exhibit F-l to Credit Agreement ORCAL GEOTHERMAL INC. Beal Bank, S.S.B., as Administrative Agent 6000 Legacy Dr. Plano, Texas 75024 BORROWER'S CLOSING CERTIFICATE The undersigned, Connie Stechman, does hereby certify that she is the Assistant Secretary of OrCal Geothermal Inc. a Delaware corporation, (the "Borrower"), and, as such, she does hereby further certify on behalf of the Borrower to the Administrative Agent and the Banks that, as of the Closing Date: 1. All conditions precedent to the occurrence of the Closing Date have been satisfied [OR WAIVED]. 2. All conditions (other than the payment of the purchase price) to the consummation of the Acquisition in accordance with the terms and provisions of the Acquisition Agreement have been satisfied without waiver or amendment, except [INSERT ANY WAIVERS OR AMENDMENTS AGREED TO BY BANKS]. 3. Borrower has complied with all of the terms and provisions of, and representations and warranties contained in, the Commitment Letter. 4. Immediately prior to and after the Closing Date and the consummation of the Acquisition, Borrower, OrHeber 1 and OrMammoth is and will be Solvent. 5. The Projections, the Initial Operating Budget and the Initial Capital Expenditures Budget were prepared in good faith based on reasonable assumptions. I am delivering this Borrower's Closing Certificate pursuant to Section 3.1.7 of the Credit Agreement. The certifications made in this Borrower's Closing Certificate are solely for the benefit of the Administrative Agent and the Banks. I have made the certifications contained herein in my capacity as a Responsible Officer of the Borrower. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Credit Agreement, dated as of December 18, 2003 (the "Credit Agreement"), by and among OrCal Geothermal Inc., a corporation organized under the laws of the State of Delaware, the financial institutions from time to time parties thereto (collectively, the "Banks"), and each of the agents listed on the signature pages thereto. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the undersigned has executed this Borrower's Closing Certificate on behalf of the Borrower as of this ______ day of December, 2003. OrCal Geothermal Inc. By: ------------------------------------ Name: Title: