As filed with the Securities and Exchange Commission on October 22, 2004
Registration No. 333-117527
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT
NO.
2
TO
FORM
S-1
REGISTRATION STATEMENT
UNDER
THE
SECURITIES ACT OF
1933
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ORMAT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or Other Jurisdiction of Incorporation of Organization) |
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4911
(Primary Standard Industrial Classification Code Number) |
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88-0326081
(I.R.S. Employer Identification Number) |
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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)
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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)
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Copies to:
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Philip
L. Colbran, Esq.
J. Allen Miller, Esq. Chadbourne & Parke LLP 30 Rockefeller Plaza New York, New York 10112 (212) 408-5100 |
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Noam Ayali, Esq.
Chadbourne & Parke LLP 1200 New Hampshire Avenue, N.W. Washington, District of Columbia 20036 (202) 974-5600 |
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Joshua G. Kiernan,
Esq.
Arthur A. Scavone, Esq. White & Case LLP 1155 Avenue of the Americas New York, New York 10036 (212) 819-8200 |
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Approximate
date of commencement of proposed sale to the public:
As soon as
practicable after this registration statement becomes
effective.
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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.
CALCULATION OF REGISTRATION FEE
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Title
of each class of
securities to be registered |
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Proposed
maximum aggregate
Offering price(1)(2) |
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Amount
of
Registration fee |
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Common Stock, par value $0.001 per share (and associated preferred share purchase right)(3) |
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$ | 115,000,000 |
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$ | 14,571 | (4) | |||
Total |
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$ | 115,000,000 |
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$ | 14,571 | ||||
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(1) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act. |
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(2) | Includes shares which the underwriters have the option to purchase to cover over-allotments, if any. |
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(3) | The rights will initially trade together with the common stock. The value attributable to the rights, if any, is reflected in the market price of the common stock. |
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(4) | The registrant previously paid a fee of $14,751 in connection with the initial filing of the registration statement. |
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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.
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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 October 22, 2004
PROSPECTUS
6,250,000 Shares
Ormat Technologies, Inc.
Common Stock
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We are offering 6,250,000 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 $15 and $17 per share.
Investing in our common stock involves risks. See "Risk Factors" beginning on page 10.
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Per Share |
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Total | |||||||
Public offering price |
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$ |
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Underwriting discount |
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$ |
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Proceeds to Ormat Technologies, Inc. (before expenses). |
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$ |
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We have granted the underwriters a 30-day option to purchase up to 937,500 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.
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L EHMAN B ROTHERS
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D EUTSCHE B ANK S ECURITIES |
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RBC C APITAL M ARKETS |
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W ELLS F ARGO S ECURITIES |
, 2004
TABLE OF CONTENTS
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Page | |||||
Prospectus Summary |
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1 | ||||
Risk Factors |
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10 | ||||
Special Note Regarding Forward-Looking Statements |
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Use of Proceeds |
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Dividend Policy |
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Capitalization |
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Dilution |
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Selected Consolidated Financial and Other Data |
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Unaudited Pro Forma Condensed Combined Financial Data |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Business |
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Management |
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98 | ||||
Certain Relationships and Related Transactions |
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Description of Certain Material Agreements |
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Principal Stockholders |
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127 | ||||
Description of Capital Stock |
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Shares Eligible for Future Sale |
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United States Federal Income Tax Consequences to Non-U.S. Holders |
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Underwriting |
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Validity of Common Stock |
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143 | ||||
Expert |
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Where You Can Find More Information |
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Index To Financial Statements |
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F-1 | ||||
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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.
Ormat Technologies, Inc.
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 power units for geothermal and recovered energy-based electricity generation and other power generating equipment and provide services relating to the engineering, procurement, construction, operation and maintenance of geothermal and recovered energy power plants. As we manufacture and design the equipment used in our power plants, we are able to operate and maintain our projects efficiently and to respond to operational issues in a timely and cost-efficient manner.
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, 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. These characteristics 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.
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.
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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 164 megawatts (MW) between December 31, 2002 and June 30, 2004, of which 152 MW was attributable to our acquisition of geothermal power plants from third parties and 12 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 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 79.2% 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 20.8% 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 $33.9 million, respectively. Pro forma revenues from the sale of electricity constituted approximately 79.6% of our total pro forma revenues in 2003. 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.
All of the revenues that we derive from the sale of electricity are from fully-contracted payments under long-term power purchase agreements, providing generally predictable cash flows. 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 and are only marginally weather dependent. 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 305 MW as of June 30, 2004. We currently expect to continue growing our power generation business through:
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• | the development and construction of new geothermal and recovered energy-based power plants; |
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• | the expansion and enhancement of our existing projects; and |
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• | 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
2
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, we expect would add approximately 35 MW in generating capacity to the current Olkaria III project. We are also in the early development stage of 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 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 believe 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.
3
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 approximately 79.6% 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.
5
The Offering
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Issuer |
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Ormat Technologies, Inc. |
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Common stock offered by Ormat Technologies, Inc. |
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6,250,000 shares |
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Underwriters' option to purchase additional shares |
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937,500 shares |
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Common stock outstanding after giving effect to this offering |
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30,624,996 shares |
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Use of proceeds |
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We estimate that the net proceeds we will receive from this offering will be approximately $89.9 million, or approximately $103.8 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 all of the net proceeds from this offering 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 investment-grade instruments and bank deposits. See "Use of Proceeds." |
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Proposed New York Stock Exchange symbol |
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ORA |
Except as otherwise indicated, all common stock information in this prospectus is based on the number of shares of common stock outstanding on October 15, 2004 after giving effect to the 1 for 1.325444 reverse stock split effected on October 21, 2004 in connection with this offering and:
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• | assumes an initial public offering price of $16 per share, the mid-point of the range on the cover of the prospectus; |
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• | excludes 230,000 shares of common stock issuable upon the exercise of stock options that will be outstanding as of the effective date of the registration statement at a weighted average exercise price of $16 per share; |
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• | excludes 1,020,000 shares of common stock reserved for future issuance under our 2004 Incentive Compensation Plan; and |
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• | excludes the 937,500 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. |
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Dividend Policy |
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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 10.
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.
Information in Prospectus
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.
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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 consolidated financial statements included elsewhere in this prospectus. In the opinion of our management, our unaudited historical 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 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 $154.5 million in connection with the acquisition of the Heber 1 and Heber 2 projects and our 50% ownership interest in the Mammoth projects.
The information set forth below should be read in conjunction with "Unaudited Pro Forma Condensed Financial Data", "Selected Historical Financial Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the financial statements relating to the Heber 1, Heber 2, Mammoth and Puna projects included elsewhere in this prospectus.
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Summary Historical and Unaudited Pro Forma Condensed Consolidated Financial Data
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Year Ended December 31, |
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Six
Months
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Pro Forma |
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2001 |
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2002 |
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2003 |
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2003 |
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2003 |
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2004 |
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(in
thousands,
except per share data) |
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(unaudited) |
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(inthousands,
exceptpersharedata) (unaudited) |
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Statement of Operations Data: |
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Revenues: |
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Electricity Segment |
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$ | 33,956 |
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$ | 65,491 |
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$ | 77,752 |
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$ | 162,620 |
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$ | 35,651 |
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$ | 70,215 |
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Products Segment |
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13,959 |
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20,138 |
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41,688 |
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41,688 |
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16,022 |
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29,491 |
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47,915 |
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85,629 |
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119,440 |
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204,308 |
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51,673 |
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99,706 |
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Cost of Revenues: |
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Electricity Segment |
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12,536 |
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33,482 |
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46,726 |
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98,901 |
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22,165 |
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40,612 |
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Products Segment |
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17,454 |
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17,293 |
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29,494 |
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29,494 |
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10,306 |
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23,122 |
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29,990 |
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50,775 |
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76,220 |
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128,395 |
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32,471 |
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63,734 |
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Gross margin |
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17,925 |
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34,854 |
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43,220 |
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75,913 |
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19,202 |
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35,972 |
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Operating income |
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4,217 |
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20,227 |
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25,490 |
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56,549 |
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11,612 |
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25,605 |
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Interest expense |
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(4,333 | ) |
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(6,179 | ) |
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(8,120 | ) |
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(40,363 | ) |
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(3,835 | ) |
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(19,475 | ) |
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|||||||||||
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 |
|
$ | (0.27 | ) |
|
$ | (0.04) |
|
$ | 0.66 |
|
$ | 1.44 |
|
$ | 0.24 |
|
$ | 0.27 |
|
||||||||||
Income
(loss) from
continuing operations |
|
$ | (0.07 | ) |
|
$ | 0.37 |
|
$ | 0.66 |
|
$ | 1.44 |
|
$ | 0.25 |
|
$ | 0.27 |
|
||||||||||
Loss from discontinued operations |
|
(0.20 | ) |
|
(0.41 | ) |
|
— |
|
— |
|
— |
|
— |
|
|||||||||||||||
Net income (loss) |
|
(0.27 | ) |
|
(0.04 | ) |
|
0.66 |
|
1.44 |
|
0.24 |
|
0.27 |
|
|||||||||||||||
Weighted average number of shares outstanding |
|
23,214,281 |
|
23,214,281 |
|
23,214,281 |
|
23,214,281 |
|
23,214,281 |
|
23,227,036 |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
||||||||
|
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 | ||||||||||||
|
9
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:
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• | regular and unexpected maintenance and replacement expenditures; |
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• | shutdowns due to the breakdown or failure of our equipment or the equipment of the transmission serving utility; |
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• | labor disputes; |
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• | the presence of hazardous materials on our project sites; and |
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• | 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
10
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:
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• | unanticipated cost increases; |
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• | shortages and inconsistent qualities of equipment, material and labor; |
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• | work stoppages; |
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• | inability to obtain permits and other regulatory matters; |
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• | failure by key contractors and vendors to timely and properly perform; |
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• | adverse environmental and geological conditions (including inclement weather conditions); and |
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• | 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
11
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 $42.0 million for the six-month period ended June 30, 2004, which represented 42.1% of our total revenues for such six-month period. Our pro forma revenues from the sale of electricity by our foreign projects constituted approximately 20.8% 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:
|
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• | changes in government policies or personnel; |
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• | changes in general economic conditions; |
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• | restrictions on currency transfer or convertibility; |
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• | changes in labor relations; |
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• | political instability and civil unrest; |
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• | changes in the local electricity market; |
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• | breach or repudiation of important contractual undertakings by governmental entities; and |
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• | 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
12
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 $22.4 million as of June 30, 2004.
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.
13
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. These three power purchase agreements are expected to phase-in and commence generating revenues starting in 2006. When all three are generating revenues, measured against our revenues from the sale of electricity for the period ending June 30, 2004 and assuming no other changes in our revenues, the revenues from such agreements would have constituted, collectively, less than 8% of our total revenues from the sale of electricity. 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
14
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 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.
15
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 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.
16
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 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
17
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.
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:
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• | failure of the acquired companies to achieve the results we expect; |
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• | inability to retain key personnel of the acquired companies; |
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• | risks associated with unanticipated events or liabilities; and |
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• | 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
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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. 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
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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.
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, Yoram Bronicki 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 and have entered into employment agreements with Lucien Bronicki, Yehudit Bronicki, Hezy Ram and Yoram Bronicki, 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.
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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 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 (or a default under such debt documents arises as a result of a cross-default to the debt documents of some of our other projects) 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.
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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 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
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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 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
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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.
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, 79.6% of our common stock will be held by Ormat Industries, Ltd. (77.2% 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.
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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; |
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• | variance in our financial performance from the expectations of market analysts; |
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• | conditions and trends in the end markets we serve and changes in the estimation of the size and growth rate of these markets; |
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• | announcements of significant contracts by us or our competitors; |
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• | changes in our pricing policies or the pricing policies of our competitors; |
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• | loss of one or more of our significant customers; |
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• | legislation; |
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• | changes in market valuation or earnings of our competitors; |
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• | the trading volume of our common stock; and |
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• | 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 30,624,996 shares of common stock outstanding. The 6,250,000 shares sold in this offering (or 7,187,500 shares if the underwriters' over-allotment option is exercised
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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 common stock in this offering will contribute 78.8% of the total amount invested to fund our company, but will own only 20.4% 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:
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• | significant considerations and risks discussed in this prospectus; |
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• | operating risks, including equipment failures and the amounts and timing of revenues and expenses; |
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• | geothermal resource risk (such as the heat content of the reservoir, useful life and geological formation); |
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• | environmental constraints on operations and environmental liabilities arising out of past or present operations; |
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• | project delays or cancellations; |
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• | financial market conditions and the results of financing efforts; |
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• | political, legal, regulatory, governmental, administrative and economic conditions and developments in the United States and other countries in which we operate; |
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• | the enforceability of the long-term power purchase agreements for our projects; |
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• | contract counterparty risk; |
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• | weather and other natural phenomena; |
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• | 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; |
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• | current and future litigation; |
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• | our ability to successfully identify, integrate and complete acquisitions; |
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• | competition from other similar geothermal energy projects, including any such new geothermal energy projects developed in the future, and from alternative electricity producing technologies; |
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• | the effect of and changes in economic conditions in the areas in which we operate; |
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• | market or business conditions and fluctuations in demand for energy or capacity in the markets in which we operate; and |
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• | 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. |
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USE OF PROCEEDS
We estimate that the net proceeds we will receive from this offering will be approximately $89.9 million, or approximately $103.8 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 all of the net proceeds from this offering 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 investment-grade instruments or bank deposits.
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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. In accordance with this policy, conditional upon, and effective as of, the effectiveness of the registration statement of which this prospectus forms a part, we will pay an interim dividend for 2004 of $2.5 million to our parent company, Ormat Industries.
29
CAPITALIZATION
The following table summarizes our capitalization as of June 30, 2004 on:
|
|
• | a historical basis; and |
|
|
• | pro forma to give effect to an interim dividend for 2004 of $2.5 million to our parent company pursuant to our dividend policy that is conditional upon, and effective as of the effectiveness of this registration statement, 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 |
|
Pro
Forma
As Adjusted |
|||||||
|
(unaudited) | |||||||||
|
(in thousands) | |||||||||
Cash and cash equivalents |
|
$ | 21,170 |
|
$ | 108,542 | ||||
Debt: |
|
|
||||||||
Parent company loans |
|
193,852 |
|
193,852 | ||||||
Long-term debt |
|
442,300 |
|
442,300 | ||||||
Total debt |
|
636,152 |
|
636,152 | ||||||
Shareholders' equity: |
|
|||||||||
Common stock, $0.001 par value; 200,000,000 shares authorized and 24,374,996 shares issued and outstanding, historical; 200,000,000 shares authorized and 30,624,996 shares issued and outstanding, pro forma as adjusted |
|
24 |
|
30 | ||||||
Additional paid-in capital |
|
27,001 |
|
116,867 | ||||||
Divisional deficit |
|
(10,293 | ) |
|
(10,293 | ) | ||||
Unearned stock-based compensation |
|
(51 | ) |
|
(51 | ) | ||||
Retained Earnings |
|
46,551 |
|
44,051 | ||||||
Total shareholders' equity |
|
63,232 |
|
150,604 | ||||||
Total capitalization |
|
$ | 699,384 |
|
$ | 787,484 | ||||
|
The discussion and tables above exclude (i) 230,000 shares of our common stock issuable upon the exercise of stock options that will be outstanding as of the effective date of the registration statement, and (ii) 1,020,000 shares of our common stock reserved for future issuance under our 2004 Incentive Compensation Plan. See "Management—Stock Option Plan."
30
DILUTION
At June 30, 2004, the net tangible book value of our common stock was approximately $13.5 million, or approximately $0.56 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 $16.00 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 $103.8 million, or approximately $3.38 per share of our common stock. This represents an immediate increase in net tangible book value of $2.82 per share, and an immediate dilution in net tangible book value of $12.62 per share to new stockholders. The following table illustrates this per share dilution to new stockholders:
|
|
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share |
|
|
$ | 16.00 | ||||||
Net tangible book value per share before the offering |
|
$ | 0.56 |
|
||||||
Net increase in tangible book value per share attributable to new stockholders |
|
2.82 |
|
|||||||
Net tangible book value per share after the offering |
|
|
3.38 | |||||||
Dilution in net tangible book value per share to new stockholders |
|
|
$ | 12.62 | ||||||
|
The table below summarizes, as of June 30, 2004, 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 |
|
||||||||||||||
|
(dollars in thousands, except per share data) | |||||||||||||||||||||
Our existing stockholders |
|
24,374,996 |
|
79.6 | % |
|
$ | 26,862 |
|
21.2 | % |
|
$ | 1.10 | ||||||||
New stockholders in this offering |
|
6,250,000 |
|
20.4 | % |
|
100,000 |
|
78.8 | % |
|
16.00 | ||||||||||
Total |
|
30,624,996 |
|
100.0 | % |
|
$ | 126,862 |
|
100.0 | % |
|
||||||||||
|
The discussion and tables above exclude (i) 230,000 shares of our common stock issuable upon the exercise of stock options that will be outstanding as of the effective date of the registration statement, and (ii) 1,020,000 shares of our common stock reserved for future issuance under our 2004 Incentive Compensation Plan. See "Management—Stock Option Plan."
31
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 | |||||||||||||||||
|
(unaudited) |
|
(in thousands, except per share data) |
|
(unaudited) | |||||||||||||||||||||||||
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 |
|
22,165 |
|
29,440 | ||||||||||||||||
Lease |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
11,172 | ||||||||||||||||
Total Electricity Segment |
|
6,847 |
|
8,556 |
|
12,536 |
|
33,482 |
|
46,726 |
|
22,165 |
|
40,612 | ||||||||||||||||
Products Segment |
|
40,644 |
|
22,709 |
|
17,454 |
|
17,293 |
|
29,494 |
|
10,306 |
|
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 | ) |
|
— |
|
— |
|
— | |||||||||||||||
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Six Months Ended June 30, | |||||||||||||||||||||||||||
|
1999 |
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2003 |
|
2004 | |||||||||||||||||
|
(unaudited) |
|
(in thousands, except per share data) |
|
(unaudited) | |||||||||||||||||||||||||
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 |
|
$ | 0.36 |
|
$ | 0.41 |
|
$ | (0.07 | ) |
|
$ | 0.37 |
|
$ | 0.67 |
|
$ | 0.25 |
|
$ | 0.27 | ||||||||
Loss from discontinued operations |
|
(0.14 | ) |
|
(0.13 | ) |
|
(0.20 | ) |
|
(0.41 | ) |
|
— |
|
— |
|
— | ||||||||||||
Cumulative effect of change in accounting principle |
|
— |
|
— |
|
— |
|
— |
|
(0.01 | ) |
|
(0.01 | ) |
|
— | ||||||||||||||
Net income (loss) |
|
$ | 0.22 |
|
$ | 0.28 |
|
$ | (0.27 | ) |
|
$ | (0.04 | ) |
|
$ | 0.66 |
|
$ | 0.24 |
|
$ | 0.27 | |||||||
Weighted average number of shares outstanding |
|
23,214,281 |
|
23,214,281 |
|
23,214,281 |
|
23,214,281 |
|
23,214,281 |
|
23,214,281 |
|
23,227,036 | ||||||||||||||||
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.
33
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
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.
34
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 |
|
$ | 0.27 |
|
|
|
$ | 0.20 | ||||||||||
Shares used in computing pro forma net income per share — basic and diluted |
|
23,227,036 |
|
|
|
23,227,036 | ||||||||||||
|
35
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 |
|
$ | 0.67 |
|
|
|
|
$ | 1.44 | |||||||||||||
Shares used in computing pro forma income per share — basic and diluted |
|
23,214,281 |
|
|
|
|
23,214,281 | |||||||||||||||
|
36
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.
37
(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 | ||||
|
38
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 services relating to the engineering, procurement, construction, operation and maintenance of geothermal and recovered energy power plants, 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 services relating to the engineering, procurement, construction, operation and maintenance of geothermal and recovered energy power plants. 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 164 MW between December 31, 2002 and June 30, 2004, of which 152 MW was attributable to our acquisition of geothermal power plants from third parties and 12 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 and operate or control and operate geothermal projects in Guatemala, Kenya, Nicaragua and the Philippines. In 2003, pro forma revenues from the sale of electricity by our
39
power plants were $162.6 million. Our net ownership in our generating capacity has increased from 94 MW, as of December 31, 2001, to 305 MW, as of June 30, 2004. Such revenues do not include any 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 $20.3 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.
40
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 33.3% and 9.2% of our pro forma revenues, respectively, and 52.3% and 4.2% of our pro forma 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 |
41
|
|
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
42
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:
|
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|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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
43
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 salaries, 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, sales commissions to sales representatives 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.
44
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 |
45
|
|
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 |
46
|
|
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. |
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• | 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
47
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.
48
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.
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|
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Year ended December 31, |
|
Six
Months ended
June 30, |
|||||||||||||||||||
|
2001 |
|
2002 |
|
2003 |
|
2003 |
|
2004 | |||||||||||||
|
|
(in thousands) |
|
|
(inthousands)
(unaudited) |
|||||||||||||||||
Statements of Operations Data: |
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|
|||||||||||||||||
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 |
|
62.2 |
|
57.8 | ||||||||||||
Products Segment |
|
125.0 |
|
85.9 |
|
70.7 |
|
64.3 |
|
78.4 | ||||||||||||
|
62.6 |
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59.3 |
|
63.8 |
|
62.8 |
|
63.9 | |||||||||||||
Gross margin: |
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|
|
|
|
|||||||||||||||||
Electricity Segment |
|
63.1 |
|
48.9 |
|
39.9 |
|
37.8 |
|
42.2 | ||||||||||||
Products Segment |
|
(25.0 | ) |
|
14.1 |
|
29.3 |
|
35.7 |
|
21.6 | |||||||||||
|
37.4 |
|
40.7 |
|
36.2 |
|
37.2 |
|
36.1 | |||||||||||||
Operating expenses: |
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|
|
|
|
|||||||||||||||||
Research and development |
|
3.6 |
|
1.8 |
|
1.2 |
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1.7 |
|
1.2 | ||||||||||||
Selling and marketing |
|
13.6 |
|
7.1 |
|
5.9 |
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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): |
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|
|
|
|
|||||||||||||||||
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 |
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18.1 |
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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 |
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0.4 |
|
0.5 |
|
0.4 |
|
2.5 | ||||||||||||
Income (loss) from continuing operations |
|
(3.6 | ) |
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9.9 |
|
13.1 |
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11.3 |
|
6.3 | |||||||||||
Discontinued operations: |
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|||||||||||||||||
Loss from operations of discontinued activities in Kazakhstan |
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(9.8 | ) |
|
(3.6 | ) |
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— |
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— |
|
— | ||||||||||
Loss of sale of Kazakhstan operations |
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— |
|
(7.5 | ) |
|
— |
|
— |
|
— | |||||||||||
Income (loss) before cumulative effect of change in accounting principle |
|
(13.4 | ) |
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(1.2 | ) |
|
13.1 |
|
11.3 |
|
6.3 | ||||||||||
Cumulative effect of change in accounting principle net of tax benefit |
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— |
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— |
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(0.2 | ) |
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(0.4 | ) |
|
— | ||||||||||
Net income (loss) |
|
(13.4 | ) |
|
(1.2 | ) |
|
12.9 |
|
10.9 |
|
6.3 | ||||||||||
|
49
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 a 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
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|
|
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 $22.2 million for the six months ended June 30, 2003, which represented a 82.9% 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
50
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 (62.2%) 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 $10.3 million for the six months ended June 30, 2003, which represented a 124.3% increase in cost of revenues related to such segment. Such $12.8 million increase in cost of revenues was attributable to an increase in revenues recognized during the relevant period in 2004 as a result of an increase in the volume of sales, 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 64.3%. 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
51
$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
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|
|
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 |
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$ | 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%
52
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.
53
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.
54
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
|
|
|
|
|
|
|
|
|
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|
|
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.
55
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.
56
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
57
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.
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Three Months ended | |||||||||||||||||||||||||
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March
31,
2003 |
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June 30,
2003 |
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Sept. 30,
2003 |
|
Dec. 31,
2003 |
|
March 31,
2004 |
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June
30,
2004 |
|||||||||||||||
|
(unaudited)
(inthousands,exceptsharedata) |
|||||||||||||||||||||||||
Revenues: |
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|
|
|
|
|
||||||||||||||||||||
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: |
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|
|
|
|
|
||||||||||||||||||||
Electricity Segment |
|
10,148 |
|
12,017 |
|
10,837 |
|
13,724 |
|
19,390 |
|
21,222 | ||||||||||||||
Products Segment |
|
6,317 |
|
3,989 |
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8,973 |
|
10,215 |
|
11,328 |
|
11,794 | ||||||||||||||
|
16,465 |
|
16,006 |
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19,810 |
|
23,939 |
|
30,718 |
|
33,016 | |||||||||||||||
Gross margin |
|
8,951 |
|
10,251 |
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12,591 |
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11,427 |
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16,887 |
|
19,085 | ||||||||||||||
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|
|||||||||||||||||||||
Operating expenses: |
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|
|
|
|
|
||||||||||||||||||||
Research and development |
|
439 |
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432 |
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325 |
|
195 |
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302 |
|
900 | ||||||||||||||
Selling and marketing |
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1,367 |
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1,299 |
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2,342 |
|
2,079 |
|
1,854 |
|
2,092 | ||||||||||||||
General and administrative |
|
2,057 |
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1,996 |
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1,632 |
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3,567 |
|
2,332 |
|
2,887 | ||||||||||||||
Operating income |
|
5,088 |
|
6,524 |
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8,292 |
|
5,586 |
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12,399 |
|
13,206 | ||||||||||||||
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|
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|
|||||||||||||||||||||
Other income (expense): |
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|
|
|
|
|
||||||||||||||||||||
Interest income |
|
109 |
|
190 |
|
217 |
|
91 |
|
244 |
|
187 | ||||||||||||||
Interest expense |
|
(1,720 | ) |
|
(2,115 | ) |
|
(2,277 | ) |
|
(2,008 | ) |
|
(8,523 | ) |
|
(10,952 | ) | ||||||||
Foreign currency translation and transaction loss |
|
(114 | ) |
|
(37 | ) |
|
(66 | ) |
|
(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 |
|
4,707 |
|
6,214 |
|
3,708 |
|
3,775 |
|
2,534 | ||||||||||||||
Income tax provision |
|
(1,397 | ) |
|
(776 | ) |
|
(2,134 | ) |
|
1,801 |
|
(1,479 | ) |
|
(478 | ) | |||||||||
Minority interest in earnings of subsidiaries |
|
(201 | ) |
|
(198 | ) |
|
(161 | ) |
|
41 |
|
(108 | ) |
|
— | ||||||||||
Equity in income of investees |
|
89 |
|
99 |
|
106 |
|
265 |
|
549 |
|
1,486 | ||||||||||||||
Income before cumulative effect of change in accounting principle |
|
1,987 |
|
3,832 |
|
4,025 |
|
5,815 |
|
2,737 |
|
3,542 | ||||||||||||||
Cumulative effect of change in accounting principle (net of tax benefit of $124,740) |
|
(205 | ) |
|
— |
|
— |
|
— |
|
— |
|
— | |||||||||||||
Net income |
|
$ | 1,782 |
|
$ | 3,832 |
|
$ | 4,025 |
|
$ | 5,815 |
|
$ | 2,737 |
|
$ | 3.542 | ||||||||
Net income per share—basic and diluted |
|
$ | 0.08 |
|
$ | 0.17 |
|
$ | 0.17 |
|
$ | 0.25 |
|
$ | 0.12 |
|
$ | 0.15 | ||||||||
Weighted average number of shares |
|
23,214,281 |
|
23,214,281 |
|
23,214,281 |
|
23,214,281 |
|
23,214,281 |
|
23,239,791 | ||||||||||||||
|
58
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.
For a discussion regarding our parent company loans, see "Certain Relationships and Related Transactions." 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,
59
(2) guaranteeing the liabilities of any third party without obtaining the prior written approval of the 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 currently intend to refinance the acquisition cost of the Puna project by the end of the year. In connection with such potential refinancing, we are currently in discussions with an international financial institution regarding the refinancing of the acquisition cost of the Puna project, which will involve our relevant project subsidiary's entering into a leveraged lease financing transaction. However, we have not ruled out alternative options such as the issuance by Ormat Funding of an additional tranche of its senior secured notes or the incurrence by our relevant project subsidiary of project finance debt or other form of third party financing. In anticipation of such financing, we have entered into a rate lock agreement with Lehman Brothers Special Financing, Inc., an affiliate of one of the underwriters of this offering, to provide interest rate protection for such financing. Such forward rate agreement and its implications are further described under "—Exposure to Market Risks" below.
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.
In accordance with our dividend policy, conditional upon, and effective as of, the effectiveness of the registration statement of which this prospectus forms a part, we will pay an interim dividend for 2004 of $2.5 million to our parent company, Ormat Industries.
We estimate that the net proceeds we will receive from this offering will be approximately $89.9 million, or approximately $103.8 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 all of the net proceeds of this offering 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 investment-grade instruments and bank deposits. 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
60
offering, will be sufficient to address our liquidity and other investment requirements for the next 24 months, however, we are not dependent on the proceeds of this offering to fund our continuing operations. In the long term, if we undertake additional acquisition or significant expansion, or incur other unexpected capital needs, we expect to have access to public capital markets not available to us before the offering.
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 million, $16.9 million and $6.9 million, 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 $11.6 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.
61
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 |
|
|
• | 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 $72.4 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 $11.6 million, as compared with $11.0 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 $72.4 million, as compared with $54.9 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.
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
62
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 an estimated 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 an estimated 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 enhancement program is currently planned and is intended to increase the output of the project by an estimated 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.
Ormesa Project Enhancement . In connection with the Ormesa project, we plan to drill one additional well, add a further OEC unit and replace existing units in order to increase the output of the project by an estimated 10 MW. A preliminary budget is under preparation and we expect that any related capital expenditures will be funded by us from internally generated cash.
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.
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 13 MW.
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 $40.0 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. Our exposure to such market risk is currently not significant, principally because our long-term power
63
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 costs. 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. As of June 30, 2004, 42.9% of our consolidated long-term debt (excluding amounts owed to our parent) was in the form of fixed rate securities and therefore not subject to interest rate fluctuation risk. However, as of such date, 57.1% of our debt was in the form of a floating rate exposing 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, $395.7 million of our debt, including $143.2 million 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" above for further discussion of our debt instruments.
In anticipation of our plans to refinance the acquisition cost of our Puna project, on October 12, 2004, we entered into a rate lock agreement with Lehman Brothers Special Financing, Inc., an affiliate of one of the underwriters of this offering, at a locked-in treasury rate of 4.2075%, with a notional amount of $62.5 million, and terminating on December 31, 2004 (referred to as the determination date). The rate lock is based on a 10-year treasury security (referred to as the base treasury rate) that matures in August 2004. Pursuant to such agreement, if the base treasury rate, on the determination date is greater than 4.2075%, our counterparty will be required to pay us a floating amount; however, if the base treasury rate is less than 4.2075%, we will be required to pay to our counterparty the floating amount. If the base treasury rate equals 4.2075% on the determination date, no payment will be required to be made by either party. Based on treasury rates and the yield curve on October 16, 2004, each 1 basis point difference between the locked-in rate and the base treasury rate equalled approximately $50,000.
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
64
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 intend to invest all of the net proceeds we derive from this offering, pending the use of such proceeds as described in "Use of Proceeds," 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 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):
65
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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
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 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 $11.8 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.
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,
66
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% 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.
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.
67
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 164 MW between December 31, 2002 and June 30, 2004, of which 152 MW was attributable to our acquisition of geothermal power plants from third parties and 12 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.
68
The table below summarizes key information relating to our projects that are currently in operation, under construction and/or subject to enhancement.
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Project |
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Location |
|
Ownership |
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Commercial
Operation Date |
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Generating
Capacity in MW (1) |
|
Power Purchaser |
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Contract
Expiration |
||||||||||||||
Projects in Operation |
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|
|
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||||||||||||||||||||
Domestic |
|
|
|
|
|
|
||||||||||||||||||||
Ormesa |
|
East Mesa, California |
|
100 | % |
|
1986/1987 |
|
48 |
|
Southern California Edison Company |
|
2016/2017 | |||||||||||||
Heber 1 |
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Heber, California |
|
100 | % |
|
1985 |
|
38 |
|
Southern California Edison Company |
|
2015 | |||||||||||||
Heber 2 |
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Heber, California |
|
100 | % |
|
1993 |
|
36 |
|
Southern California Edison Company |
|
2023 | |||||||||||||
Steamboat (2) |
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Steamboat, Nevada |
|
100 | % |
|
1986/1988/1992 |
|
34 |
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Sierra Pacific Power Company |
|
2006/2018/2022 | |||||||||||||
Mammoth (3) |
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Mammoth Lakes, California |
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50 | % |
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1984/1990 |
|
25 |
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Southern California Edison Company |
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2014/2020 | |||||||||||||
Puna |
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Puna, Hawaii |
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100 | % |
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1993 |
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25 |
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Hawaii Electric Light Company |
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2027 | |||||||||||||
Brady |
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Churchill County, Nevada |
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100 | % |
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1985/1992 |
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20 |
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Sierra Pacific Power Company |
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2022 | |||||||||||||
Steamboat Hills |
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Steamboat Hills, Nevada |
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100 | % |
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1988 |
|
6 |
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Sierra Pacific Power Company |
|
2018 | |||||||||||||
Total Domestic Projects in Operation : |
|
|
|
|
232 |
|
|
|||||||||||||||||||
Foreign |
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|
|
|
|
|
||||||||||||||||||||
Leyte (3) |
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Philippines |
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80 | % |
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1997 |
|
49 |
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PNOC - Energy Development Corporation |
|
2007 | |||||||||||||
Momotombo (3) |
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Nicaragua |
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100 | % |
|
mid 1980's |
|
28 |
|
DISNORTE/DISSUR |
|
2014 | |||||||||||||
Zunil (3) |
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Guatemala |
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21 | % |
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1999 |
|
24 |
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Instituto Nacional de Electrification |
|
2019 | |||||||||||||
Olkaria III |
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Kenya |
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100 | % |
|
2000 |
|
13 |
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Kenya Power & Lighting Co. Ltd. |
|
2020 (4) | |||||||||||||
Total Foreign Projects in Operation : |
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|
|
|
114 |
|
|
|||||||||||||||||||
Total Projects in Operation : |
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|
|
|
346 |
|
|
|||||||||||||||||||
Projects under Construction |
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|
|
|
|
|
||||||||||||||||||||
Desert Peak 2 |
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Churchill County, Nevada |
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100 | % |
|
2006 (5) |
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15 |
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Nevada Power Company |
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n/a (7) | |||||||||||||
Galena |
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Steamboat Hills, Nevada |
|
100 | % |
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2005 (5) |
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13 | (6) |
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Sierra Pacific Power Company |
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n/a (7) | ||||||||||||
Amatitlan |
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Guatemala |
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100 | % |
|
2006 (5) |
|
20 |
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Instituto Nacional de Electrification |
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n/a (8) | |||||||||||||
Total
Projects under
Construction : |
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|
|
|
48 |
|
|
|||||||||||||||||||
|
69
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project |
|
Location |
|
Ownership |
|
Commercial
Operation Date |
|
Generating
Capacity in MW (1) |
|
Power Purchaser |
|
Contract
Expiration |
||||||||||||||
Projects under Enhancement |
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|
|
|
|
|
||||||||||||||||||||
Heber 1 and 2 Enhancement (9) |
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Heber, California |
|
100 | % |
|
|
18 | (11) |
|
|
|||||||||||||||
Puna Enhancement (10) |
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Puna, Hawaii |
|
100 | % |
|
|
9 | (12) |
|
|
|||||||||||||||
Steamboat Hills Enhancement (10) |
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Steamboat Hills, Nevada |
|
100 | % |
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|
7 |
|
|
||||||||||||||||
Mammoth Enhancement (10) |
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Mammoth Lakes, California |
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50 | % |
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|
4 |
|
|
||||||||||||||||
Ormesa Enhancement (10) |
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East Mesa, California |
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100 | % |
|
|
10 | (13) |
|
||||||||||||||||
Total Projects under Enhancement : |
|
|
|
|
48 |
|
|
|||||||||||||||||||
Total Projects under Construction or Enhancement : |
|
|
|
|
96 |
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
(1) | References to generating capacity 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 operational data for the previous 12 months. |
|
|
(2) | 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 we expect would add approximately 35 MW of generating capacity to this project. |
|
|
(5) | Projected. |
|
|
(6) | Incremental megawatts 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 the implementation of these proposed enhancements. |
|
|
(10) | These enhancements are in their early engineering stage. |
|
|
(11) | We expect that 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) | We expect that 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. |
|
|
(13) | We expect that the enhancement will result in an additional 10 MW that, subject to negotiation of offtake arrangements, will be sold to a different power purchaser. |
70
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 305 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 76 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, we expect 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 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 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.
71
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 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
72
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 "—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 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
73
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.
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
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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 laws.
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 for a wide range of prices during the past year, but because the markets for these RECs still remain limited, the prices have been volatile, and vary greatly from state to state. On October 14, 2004, we entered into agreements with Sierra Pacific Power Company, a utility company in the state of Nevada, to sell RECs resulting from electricity we generate for station use at our Desert Peak, Brady, Steamboat Hills and Steamboat 2/3 projects. The price for such RECs under such agreements is $0.005 per kWh, subject to a reduction to $0.0045 per kWh if we generate less than 80% or more than 120% of a baseline amount.
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
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* | The Energy Information Administration is a governmental agency under the U.S. Department of Energy. |
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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.
Under the American Jobs Creation Act of 2004 that was passed by Congress on October 11, 2004, and which the President is expected to sign shortly, geothermal power companies would be allowed to claim a "production tax credit" of 1.8 cents per kWh on electricity produced from geothermal resources. According to such bill, credits could be claimed on such electricity sold during the first five years after a project achieves commercial operation. Only projects put into service during the period after the bill is signed into law and through December 31, 2005 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.
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 Utilities Service) have approved recovered energy-based power generation units as renewable energy resources, which qualifies recovered energy-based power generators (whether in those two states or elsewhere in the United States) for federally funded, low interest loans. 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 Europe and other markets worldwide. In North America alone, we estimate the potential total market for recovered energy-based generation to be approximately 1,000 MW.
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Competitive Strengths
Competitive Assets. Our assets are competitive for the following reasons:
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• | 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. |
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• | 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. |
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• | 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. 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:
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• | 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; |
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• | 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; |
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• | Acquisition of New Assets — acquiring from third parties additional geothermal and other renewable assets that meet our investment criteria; |
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• | 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; |
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• | 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 |
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• | 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 currently operate and maintain approximately 346 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 Material Agreements" section.
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Domestic Projects
Our projects in operation in the United States have a generating capacity of approximately 232 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 34 MW; the OG II plant has a generating capacity of 14 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 36 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 6 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 25 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.
In July, 2004, a transformer for one of the plants at the Leyte project ceased operating for a period of three months. In addition, in August 2004, one of the generators at the Leyte project also ceased operations. We have replaced the transformer and have sent the generator for repair, which has not yet been completed. As a result of these events, for the nine-month period ended September 30, 2004, we experienced a $1.2 million reduction in revenues compared to our expected revenues for that period. We expect that our commercial and business interruption insurance policies will, subject to deductibles and applicable waiting periods, cover the costs associated with such replacement and repair as well as cover the reduction in revenues we experienced as a result of the reduced electricity generation.
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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.
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 we expect, 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 28 MW in the United States by the end of 2006 and approximately 20 additional MW in Guatemala by June 2006.
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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 plant which we expect will have a generating capacity of 20 MW, 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 up to an aggregate of 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, Ormesa and Puna projects, which we believe could increase the generating capacity of each of these facilities by 4 MW, 7 MW, 10 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
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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 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)
One of our project subsidiaries has a concession over the geothermal field relating to the San Vicente project and the Chanameca project in El Salvador. However, we are currently discussing the sale of this concession with a potential buyer.
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
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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.
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.
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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 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.
In connection with the sale of our power units for geothermal power plants, power units for recovered energy-based power generation and remote power units and other generators, we, from time to time, enter into sales agreements for the marketing and sale of such products pursuant to which we are obligated to pay commissions to such representatives upon the sale of our products in the relevant territory covered by such agreements by such representatives or, in some cases, by other representatives in such territory.
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
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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.
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.
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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.
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 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.
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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.
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.
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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. 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. As part of such discussions, we received a letter from the plaintiffs in which they assert that, in addition to the amounts they claim are owed to them, they are also entitled to a reasonable net operating royalty from our Galena project. We believe such assertion is without merit and believe that any outcome of such litigation or settlement discussions will not have a material impact on our results of operations. We estimate that the aggregate amount of all claims subject to such litigation will not exceed $1 million.
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
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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 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
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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 (SEC) of its financing transactions.
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
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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 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
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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.
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
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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.
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 "—Our Projects" above.
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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:
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Name |
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Age |
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Position | ||||||
Lucien Bronicki |
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70 |
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Chairman
of the Board of Directors;
Chief Technology Officer(3) |
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Yehudit "Dita" Bronicki |
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62 |
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Chief Executive Officer; President; Director(2) | ||||||
Yoram Bronicki |
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37 |
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Chief Operating Officer—North America; Director Nominee†(1) | ||||||
Lisa Kidron |
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40 |
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Chief Financial Officer, Ormat Systems * | ||||||
Nadav Amir |
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54 |
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Executive Vice President—Engineering, Ormat Systems * | ||||||
Hezy Ram |
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54 |
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Executive Vice President—Business Development, Ormat Nevada ** | ||||||
Joseph Shiloah |
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58 |
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Executive Vice President—Marketing and Sales, Ormat Systems * | ||||||
Zvi Reiss |
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53 |
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Executive Vice President—Project Management, Ormat Systems * | ||||||
Aaron Choresh |
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58 |
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Vice President—Operations and Product Support, Ormat Systems * | ||||||
Zvi Krieger |
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49 |
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Vice President—Geothermal Engineering, Ormat Systems * | ||||||
Etty Rosner |
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49 |
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Vice President—Contract Administrator; Corporate Secretary * | ||||||
Connie Stechman |
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48 |
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Vice President—Controller; Director†† | ||||||
Independent Director Nominees: |
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Dan Falk |
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59 |
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Independent Director Nominee†(3) | ||||||
Edward R. Muller |
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52 |
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Independent Director Nominee†(1) | ||||||
Jacob J. Worenklein |
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56 |
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Independent Director Nominee†(2) | ||||||
Significant Employees: |
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Shimon Hatzir |
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43 |
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Vice President—Electrical and Conceptual Engineering, Ormat Systems * | ||||||
Ran Raviv |
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36 |
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Vice President—Business Development, Ormat Nevada ** | ||||||
Daniel Schochet |
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73 |
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Vice President, Market Development** | ||||||
Ohad Zimron |
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49 |
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Vice President—Product Engineering, Ormat Systems * | ||||||
Uzi Albert |
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52 |
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Manager—Logistics and Production, Ormat Systems * | ||||||
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* | Performs the functions described in the table, but is employed by Ormat Systems. |
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** | Performs the functions described in the table, but is employed by Ormat Nevada. |
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† | This nominee will be appointed prior to the completion of this offering. |
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†† | Ms. Stechman will be stepping down from the board, effective upon the effective date of the registration statement. |
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(1) | Denotes Class I Director |
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(2) | Denotes Class II Director. |
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(3) | Denotes Class III Director. |
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
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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 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 and our President, positions she has held since our inception in 1994, and was our Secretary from 1994 through October 2004. 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 this 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
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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 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 will be a member of our board of directors until the effective date of the registration statement and is 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.
Dan Falk . Dan 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
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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 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 this 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 this 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 the Americas, 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.
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. 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
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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 approximately 35.15%, as of June 30, 2004, of the outstanding ordinary shares of Ormat Industries.
Board Composition
Our board of directors is currently composed of three members. Effective upon the effective date of the registration statement of which this prospectus forms a part, the number of directors on our board of directors will be increased to a total of six members, including three independent directors, Dani Falk, Edward Muller and Jacob Worenklein. Also, on the effective date, our board of directors will be classified into three classes of directors serving staggered, three-year terms as indicated:
Class I Directors (term expiring
upon the annual
shareholders
meeting in
2005)
Yoram Bronicki
Edward
R. Muller
Class II
Directors (term expiring
upon the
annual
shareholders meeting
in 2006)
Yehudit Bronicki
Jacob J.
Worenklein
Class III Directors (term expiring
upon the
annual
shareholders meeting
in 2007)
Lucien Bronicki
Dan
Falk
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 Dan Falk, Jacob Worenklein and Edward Muller to the audit committee, and to appoint Dan Falk as the chair of the audit committee. Dan 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 Dan 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, Dan 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.
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 each of 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 $7,500. The non-employee directors shall also receive options to purchase 7,500 shares of our common stock at the public offering price, and 5,000 shares of our common stock at the market price on the relevant grant date on an annual basis from the second year of service.
We intend to promptly reimburse all directors for reasonable expenses incurred to attend meetings of our board of directors or committees.
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Executive Compensation
The following table sets forth all compensation received during the year ended December 31, 2003, 2002 and 2001 by our named executive officers. The compensation described in this table does not include medical, group life insurance, or other benefits which are available generally to all of our salaried employees.
Summary Compensation Table
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Name and Principal Position(s) |
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Year |
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Salary ($) (1) |
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Bonus ($) (2) |
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Other
Annual
Compensation ($) |
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Securities
Underlying Options (#) (3) |
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All Other
Compensation ($) (4) |
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Yehudit Bronicki |
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2003 |
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45,518 |
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— |
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— |
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— |
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Chief Executive Officer |
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2002 |
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— |
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— |
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— |
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— |
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— | ||||||||||||||
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2001 |
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— |
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— |
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— |
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— |
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— | |||||||||||||||
Nadav Amir |
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2003 |
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— |
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— |
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— |
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— |
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— | ||||||||||||||
Executive Vice President |
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2002 |
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— |
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— |
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— |
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— |
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— | ||||||||||||||
—Engineering |
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2001 |
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— |
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— |
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— |
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— |
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— | ||||||||||||||
Hezy Ram |
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2003 |
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— |
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— |
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— |
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— |
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— | ||||||||||||||
Executive Vice President |
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2002 |
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— |
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— |
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— |
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— |
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—Business Development |
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2001 |
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— |
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— |
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— |
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Zvi Reiss |
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2003 |
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— |
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— |
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— |
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— |
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Executive Vice President |
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2002 |
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— |
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— |
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— |
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— |
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— | ||||||||||||||
—Project Management |
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2001 |
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— |
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— |
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— |
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— |
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Aaron Choresh |
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2003 |
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— |
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— |
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— |
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— |
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Vice President |
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2002 |
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— |
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—Operations and Product Support |
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2001 |
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(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. |
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(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. |
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(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 33,000 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. |
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(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. |
Stock Option Plan
Our board of directors adopted the Ormat Technologies, Inc. 2004 Incentive Compensation Plan (which we refer to as the plan) in October 2004, which plan was subsequently adopted by our stockholders. The plan provides for the grant of the following types of awards (each an award): incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as
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amended (which we refer to as the Code), non-qualified stock options, restricted stock, stock appreciation rights, stock units, performance awards, phantom stock, incentive bonuses and other possible related dividend equivalents to our employees, directors and independent contractors (whom we refer to as the eligible individuals). Incentive stock options may be granted to our employees only. A total of 1,250,000 shares of our common stock were reserved for issuance pursuant to the plan, all of which could be issued as options or as other forms of awards. We intend to grant options to purchase up to 200,000 shares of our common stock to our employees and options to purchase up to 30,000 shares of our common stock to our non-employee directors prior to the effective date of the registration statement. If there is a merger, consolidation, stock or other non-cash dividend, extraordinary cash dividend, split-up, spin-off, combination or exchange of shares, reorganization or recapitalization or change in capitalization, or any other similar corporate event, the administrator may make certain adjustments in the aggregate number and kind of shares of common stock subject to the plan and dividend equivalents.
If any shares of common stock that have been made subject to an award cease to be subject to the award, such shares of common stock will again be available for an award and will not be considered as having been previously made subject to an award. Any shares of common stock delivered upon exercise of an option in payment of all or part of the option, or delivered or withheld in satisfaction of withholding taxes with respect to an award, will be additional shares of common stock available for an award under the plan. After an award of phantom stock has been paid out, the shares of common stock underlying the award will again be available for an award and will not be considered as having been previously made subject to an award. Certain awards may also be payable in cash.
Administration of the Plan . Our board of directors, or the compensation committee appointed by our board, will administer the plan. Awards intended to qualify as "performance based compensation" within the meaning of Section 162(m) of the Code to any of the Company's five most highly compensated executives will be granted by a grant committee, a sub-committee of the compensation committee that will consist of two or more "outside directors" within the meaning of Section 162(m) of the Code. The administrator has the power to determine the terms of the awards, including the exercise price, the number of shares subject to each award, the exercisability of the awards and the form of consideration payable upon exercise. Under the plan, the administrator may delegate to our Chief Executive Officer, or his or her delegate, the right to designate other eligible individuals (other than our Chief Executive Officer or his or her delegate) to receive awards and to determine the amount of any awards granted to such eligible individuals and the terms of such awards, except that performance awards to any of the Company's five most highly compensated officers will only be granted by the grant committee, in accordance with the requirements of Section 162(m) of the Code.
Options . A stock option is the right to purchase shares of our common stock at a fixed exercise price for a fixed period of time. The administrator will determine the exercise price of options granted under our plan, which will be at least equal to the fair market value of our common stock on the date of grant. The aggregate fair market value, determined as of the date the option is granted, of the shares of our common stock for which any employee may be granted incentive stock options which are exercisable for the first time in any calendar year may not exceed $100,000. Stock options generally may not be exercised after ten years from the date of the grant thereof. At the relevant time of exercise, the option price must be paid in full in cash or if permitted in the award agreement in shares of our common stock with a fair market value on the date of exercise equal to the option price or in a combination of cash and shares of common stock whose fair market value on the date of exercise thereof together with such cash will equal the option price. After termination of any of our employees, directors or independent contractors, unless the administrator determines otherwise, an unvested option typically will be subject to forfeiture, and a vested option will be exercisable for the period of time stated in the option agreement. If termination is due to death or retirement, the option generally will remain exercisable for one year following such termination. In all other cases, the option generally will remain exercisable for three months. However, an option may never be exercised later than the expiration of its term.
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Stock Appreciation Rights . A stock appreciation right is the right to receive the appreciation in the fair market value of our common stock between the exercise date and the date of grant, for that number of shares of our common stock with respect to which the stock appreciation right is exercised. A stock appreciation right may be granted in conjunction with an option or alone. We may pay the appreciation in either cash, in shares of our common stock with equivalent value, or in some combination, as determined by the administrator. The administrator determines the exercise price of stock appreciation rights, the vesting schedule and other terms and conditions of stock appreciation rights; however, stock appreciation rights expire under the same rules that apply to stock options.
Restricted Stock . Restricted stock awards are awards of shares of our common stock that vest in accordance with terms and conditions established by the administrator. The administrator may impose whatever conditions to vesting it determines to be appropriate. The administrator will determine the number of shares of restricted stock granted to any employee. Unless the administrator determines otherwise, shares that do not vest typically will be subject to forfeiture to the extent the vesting schedule and/or specified performance or other criteria have not be satisfied, or upon the termination of employee, director or independent contractor for any reason including death or retirement.
Stock Units . Stock units are rights to receive shares of our common stock at a future date. The administrator determines the terms and conditions of stock units.
Phantom Stock . Phantom stock are rights to receive an amount of cash equal to the fair market value of a share of our common stock at a specified date. The administrator determines the terms and conditions of phantom stock.
Incentive Bonuses . Incentive bonuses are rights to receive cash or shares of our common stock. The administrator determines the terms and conditions of such incentive bonuses. The Board has determined that up to 20% of the annual profits available for distribution by the Company may, at any time from time to time, be distributed to the employees of the Company by way of cash incentive bonuses to employees, pursuant and subject to the provisions of the 2004 Plan and at the discretion of the board. In determining whether there are annual profits available for distribution as cash incentive bonuses, our board of directors will take into account our business plan and current and expected obligations, and no such distribution will be made that in the judgment of our board of directors would prevent the Company from meeting such business plan or obligations.
Any such distribution will only be made when, as and if approved by our board of directors out of funds legally available therefor. The actual amount and timing of any such distribution 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 such distribution, the board 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.
Performance Awards . Performance awards are awards of options, stock appreciation rights, restricted stock, stock units, phantom stock, and incentive bonus awards that will result in a payment to a key employee only if performance goals established by the administrator are achieved, or if the awards otherwise vest. The administrator or its delegates or the grant committee will establish performance goals in its discretion, which, depending on the extent to which they are met, will determine the number and/or the value of performance units and performance shares to be paid out to key employees. The performance goals may be based upon the achievement of company-wide, divisional or individual goals (including continued service), applicable securities laws or other basis determined by the administrator. Under the plan, no person will receive, in any one fiscal year, grants of performance awards for more than 400,000 shares of our common stock for performance awards of options, stock appreciation rights, restricted stock, stock units and phantom stock. The maximum dollar amount of any performance award of incentive bonuses that may be paid to any key employee in any fiscal year may not exceed $10 million. Performance goals or awards to any of the Company's five most highly compensated executives will only be set or granted by the grant committee.
Dividend Equivalents . Any award (other than options, stock appreciation rights and bonuses) under the plan may, in the discretion of the administrator, earn dividend equivalents.
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Transferability of Awards . Unless the administrator determines otherwise, no award or portion of an award will be transferable other than by will or by the laws of descent and distribution, except that an option and tandem stock appreciation right may be transferred pursuant to a domestic relations order or by gift to a family member of the holder to the extent permitted in the applicable award. A tandem stock appreciation right may never be transferred except to the transferee of the related option. Only the participant may exercise an award during his or her lifetime.
Amendment and Termination of the Plan . The plan will automatically terminate in 2014, unless we terminate it earlier. In addition, our board of directors has the authority to amend, suspend or terminate our plan, provided that such amendment does not adversely affect any award previously granted under our plan, unless the board of directors determines that an amendment is desired or appropriate to comply with the requirements of Section 885 of the American Jobs Creation Act of 2004 (which we refer to as the AJCA).
New Legislation . Congress has recently passed the AJCA and the President is expected to sign the legislation shortly. The legislation affects the timing for recognition of income attributable to certain types of non-qualified deferred compensation. Our board of directors intends to amend the plan, to the extent such amendment is desirable or appropriate, to comply with the requirements of Section 885 of the AJCA.
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 an additional successive four-year term, unless terminated earlier 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 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, 2007. Mr. Ram's employment agreement provides for an annual base salary of $175,000.
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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 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 four years and eleven 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 twelve-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, subject to certain allocation procedures set forth in the registration rights agreement. 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 an additional successive four-year term, unless terminated earlier 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 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 Chief Executive Officer. For a description of the employment agreement of Yehudit Bronicki, see "Management—Employment Agreements."
We have also entered into an executive employment 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.
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 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 has 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.
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 April 1996, Ormat-Leyte Co. Ltd. is required to deliver the electricity generated at the Leyte Project
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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.
Leases
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).
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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 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 October 15, 2004, and as adjusted to reflect the sale of common stock being offered in this offering, for:
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• | each person, or group of affiliated persons, known to us to own beneficially 5% or more of our outstanding common stock; |
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• | each of our directors; |
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• | each of our named executive officers; and |
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• | all of our directors and executive officers as a group. |
Percentage ownership before the offering is based on 24,374,996 shares of common stock outstanding as of October 15, 2004, subject to the assumptions set forth below. Percentage ownership after the offering is based on 30,624,996 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 October 21, 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.
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Shares
of Ormat Technologies
Common Stock Beneficially Owned |
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Shares of Ormat Industries
Common Stock Beneficially Owned |
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Maximum
Number of Shares being Sold in the Over- Allotment Option, if Any |
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Shares Beneficially
Owned After the Offering if the Underwriters' Over- Allotment Option is Exercised in Full |
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Percent
in this Offering |
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Name of Beneficial Owner |
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Number of
Shares |
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Before
Offering |
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After
Offering |
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Number |
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Percent |
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Number
of Shares |
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Percentage
Ownership |
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Principal Stockholder: |
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Ormat Industries Ltd. † |
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24,374,996 (1) |
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100 | % |
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79.6 | % |
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— |
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— |
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— |
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24,374,996 |
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77.2% | ||||||||||||||||
Directors and Executive Officers: |
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Yehudit Bronicki † |
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— |
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— |
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— |
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32,269,130 | (2) |
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34.91 | % |
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— |
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— |
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— | ||||||||||||||||
Lucien Bronicki † |
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— |
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— |
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— |
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32,269,130 | (2) |
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34.91 | % |
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Yoram Bronicki † |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— | ||||||||||||||||||
Nadav Amir† |
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— |
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— |
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— |
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33,000 | (3) |
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* |
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— |
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— |
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— | |||||||||||||||||
Hezy Ram†† |
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— |
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— |
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— |
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24,750 | (4) |
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* |
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— |
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— |
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— | |||||||||||||||||
Aaron Choresh† |
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— |
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— |
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— |
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20,625 | (5) |
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* |
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— |
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— |
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— | |||||||||||||||||
Zvi Reiss† |
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— |
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— |
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— |
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28,875 | (6) |
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* |
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— |
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— |
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— | |||||||||||||||||
All executive officers and directors as a group (eleven (11) persons) |
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— |
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— |
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— |
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38,906,811 |
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35.11 | % |
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— |
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— |
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— | |||||||||||||||||
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† | c/o Ormat Industries Ltd., Industrial Area, P.O. Box 68 Yavneh 81100, Israel |
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† | c/o Ormat Technologies, Inc., 980 Greg Street, Sparks, NV 89431 |
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* | Represents beneficial ownership of less than 1% of the outstanding shares of common stock. |
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(1) | The board of directors of Ormat Industries has voting power and investment power over our shares. The board of Ormat Industries includes Lucien Bronicki, Dita Bronicki and Yoram Bronicki, who collectively with their family as of October 15, 2004 beneficially owned approximately 34.91% of the ordinary shares of Ormat Industries through their holdings in Bronicki 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. |
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(3) | Represents currently exercisable options granted to Mr.Amir to purchase 33,000 ordinary shares of Ormat Industries; this excludes options to purchase 66,000 ordinary shares of Ormat Industries which are not exercisable within 60 days of June 30, 2004. |
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(4) | Represents currently exercisable options granted to Mr. Ram to purchase 24,750 ordinary shares of Ormat Industries; this excludes options to purchase 66,000 ordinary shares of Ormat Industries which are not exercisable within 60 days of June 30, 2004. |
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(5) | Represents currently exercisable options granted to Mr. Choresh to purchase 20,625 ordinary shares of Ormat Industries; this excludes options to purchase 41,875 ordinary shares of Ormat Industries which are not exercisable within 60 days of June 30, 2004. |
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(6) | Represents currently exercisable options granted to Mr. Reiss to purchase 28,875 ordinary shares of Ormat Industries; this excludes options to purchase 61,875 ordinary shares of Ormat Industries which are not exercisable within 60 days of June 30, 2004. |
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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, 24,374,996 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 Participating Preferred Stock for issuance in connection with the exercise of our preferred share purchase rights pursuant to our rights plan. 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:
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• | any breach of his or her duty of loyalty to us or our stockholders; |
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• | acts or omissions not in good faith which involve intentional misconduct or a knowing violation of law; |
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• | the payment of dividends or the redemption or purchase of stock in violation of Delaware law; or |
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• | 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, Amended and Restated By-laws, Rights Plan 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. Our directors are divided into three classes, each class consisting 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. To amend or repeal the provisions providing for our classified board of directors in our amended and restated certificate of incorporation and by-laws, the affirmative vote of the holders of at least 75% of the then outstanding shares of capital stock entitled to vote is required.
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
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business permitted to be conducted at any special meeting of stockholders is limited to the business 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
Pursuant to our rights agreement with American Stock Transfer & Trust Company, as rights agent, each holder of our common stock has the right (which we refer to, collectively, as the rights) to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock for each share of common stock owned by each such holder for $ , subject to adjustment. Our rights initially trade with, and are inseparable from, our common stock. Our rights are evidenced only by certificates that represent shares of our common stock. New rights will accompany any new shares of common stock we issue after the date this offering is completed until the date on which the rights are distributed as described below. The rights will generally become exercisable ten days following a public announcement that a person or group of affiliated or associated persons (which we refer to as an acquiring person) has acquired beneficial ownership of 15% or more of the voting power of all of our outstanding capital stock or ten business days, or such later date as may be determined by our board of directors prior to such time as any person or group becomes an acquiring person, following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the voting power of all of our outstanding capital stock. In the event that, at any time after a person has become an acquiring person, we are acquired in a merger or other business combination transaction or 50% or more of our consolidated assets or earning power is sold, proper provision will be made so that each holder of rights will thereafter have the right to receive, upon the exercise thereof, at the then current exercise price of the rights, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the rights. In the event that any person becomes an acquiring person, proper provision shall be made so that each holder of rights, other than the rights beneficially owned by the acquiring person, which will thereafter be void, will have the right to receive upon exercise, instead of shares of Series A Junior Participating Preferred Stock, that number of shares of common stock having a market value of two times the exercise price of the rights. The rights have the right to vote once exercised, expire in 2014 and may be redeemed by us, at the discretion of our board of directors, in whole, but not in part, at a price of $.001 per right at any time prior to the acquisition by a person or group of affiliated or associated persons of beneficial ownership of 15% or more of the voting power of all of our outstanding capital stock, unless extended.
We cannot redeem shares of Series A Junior Participating Preferred Stock purchasable upon the exercise of the rights. Each share of Series A Junior Participating Preferred Stock will be entitled to a minimum preferential quarterly dividend payment of $1 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per share of common stock whenever such dividend is declared. In the event of liquidation, the holders of Series A Junior Participating Preferred Stock will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment of 100 times the payment made per share of common stock. Each share of Series A Junior Participating Preferred Stock will have 100 votes, voting together with the holders of the common stock. In the event of any merger, consolidation or other transaction in which shares of
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common stock are exchanged, each share of Series A Junior Participating Preferred Stock will be entitled to receive 100 times the amount received per share of common stock.
Our board of directors may adjust the purchase price of Series A Junior Participating Preferred Stock, the number of shares of Series A Junior Participating Preferred Stock issuable, and the number of our outstanding rights to prevent dilution that may occur from a stock dividend, a stock split or a reclassification of our Series A Junior Participating Preferred Stock. No adjustments to the purchase price of our Series A Junior Participating Preferred Stock of less than 1% will be made.
The purpose of the rights plan is to encourage potential acquirors to negotiate with our board of directors prior to attempting a takeover and to give the board leverage in negotiating on behalf of the stockholders the terms of any proposed takeover. The rights are intended to have anti-takeover effects. If the rights become exercisable, the rights will cause substantial dilution to a person or group that attempts to acquire or merge with us in most circumstances. Accordingly, the existence of the rights plan may deter a potential acquiror from making a takeover proposal or tender offer for an outstanding common stock. The rights should not interfere with any merger or other business combination approved by our board of directors as we may redeem the rights as described below and since a transaction approved by our board of directors would not cause the rights to become exercisable.
The terms of our rights agreement may be amended by our board of directors without the consent of the holders of our rights. After a person or group becomes an acquiring person, our board of directors may not amend the agreement in a way that adversely affects holders of our rights.
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 have applied to list our common stock on the New York Stock Exchange under the symbol "ORA".
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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 30,624,996 outstanding shares of common stock based upon our shares outstanding as of October 15, 2004.
Of these shares, the 6,250,000 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 24,374,996 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, all of these remaining shares of common stock are held by our parent company, which is subject to a lock-up agreement for a period of 180 days after the date of this prospectus under which it has agreed not to sell or otherwise dispose of its shares of common stock.
The representative, in its sole discretion, may release the shares subject to the lock-up agreement 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 agreement, 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 agreement prior to the expiration of the lock-up period.
As of the date of this prospectus, none of the remaining shares may be eligible for sale in the public market. Beginning 180 days after the date of this prospectus, all of these remaining shares will be eligible for sale in the public market, 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:
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• | 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or |
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• | 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 30,624,996 shares of common stock outstanding, immediately after this offering, there will be outstanding options to purchase 230,000 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:
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• | financial institutions or insurance companies; |
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• | real estate investment trusts, regulated investment companies or grantor trusts; |
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• | dealers or traders in securities or currencies; |
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• | tax-exempt entities; |
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• | persons that received our stock as compensation for the performance of services; |
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• | 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; |
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• | persons that have a "functional currency" other than the U.S. dollar; or |
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• | 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:
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• | a citizen or resident of the United States; |
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• | 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; |
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• | an estate the income of which is subject to United States federal income taxation regardless of its source; or |
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• | 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
137
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.
138
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 |
|
6,250,000 | ||||
|
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 937,500 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 $3,128,500. 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
139
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, 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. |
Distribution Standards
In connection with the listing of our common stock on the New York Stock Exchange, the underwriters will undertake to sell our common stock in a manner such that we satisfy the following New York Stock Exchange standards prior to trading: (1) maintain at least 2,000 U.S. stockholders of 100 shares or more; (2) maintain at least 1,100,000 publicly held shares outstanding in the United States; and (3) maintain aggregate market value of publicly held shares of at least $60 million in the United States.
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
140
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.
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
141
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 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
and Note 21 as to which
the
date is October
21,
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; 23,214,281, 23,214,281 and 24,374,996 shares issued and outstanding |
|
23 |
|
23 |
|
24 | ||||||||
Additional paid-in capital |
|
6,988 |
|
7,002 |
|
27,001 | ||||||||
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 |
|
22,165 |
|
29,440 | ||||||||||||
Lease |
|
— |
|
— |
|
— |
|
— |
|
11,172 | ||||||||||||
Total electricity |
|
12,536 |
|
33,482 |
|
46,726 |
|
22,165 |
|
40,612 | ||||||||||||
Products |
|
17,454 |
|
17,293 |
|
29,494 |
|
10,306 |
|
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 |
|
$ | (0.07 | ) |
|
$ | 0.37 |
|
$ | 0.67 |
|
$ | 0.25 |
|
$ | 0.27 | ||||||
Loss from discontinued operations |
|
(0.20 | ) |
|
(0.41 | ) |
|
— |
|
— |
|
— | ||||||||||
Cumulative effect of change in accounting principle |
|
— |
|
— |
|
(0.01 | ) |
|
(0.01 | ) |
|
— | ||||||||||
Net income (loss) |
|
$ | (0.27 | ) |
|
$ | (0.04 | ) |
|
$ | 0.66 |
|
$ | 0.24 |
|
$ | 0.27 | |||||
Weighted average number of shares outstanding |
|
23,214,281 |
|
23,214,281 |
|
23,214,281 |
|
23,214,281 |
|
23,227,036 | ||||||||||||
|
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 |
|
23,214 |
|
$ | 23 |
|
$ | 6,839 |
|
$ | 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 |
|
23,214 |
|
23 |
|
6,839 |
|
(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 |
|
23,214 |
|
23 |
|
6,988 |
|
(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 |
|
23,214 |
|
23 |
|
7,002 |
|
(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) |
|
1,161 |
|
1 |
|
19,999 |
|
— |
|
— |
|
— |
|
— |
|
20,000 | ||||||||||||||||||
Distribution to Parent (unaudited) |
|
— |
|
— |
|
— |
|
(57 | ) |
|
— |
|
— |
|
— |
|
(57 | ) | ||||||||||||||||
Net income (unaudited) |
|
— |
|
— |
|
— |
|
1,027 |
|
— |
|
5,252 |
|
— |
|
6,279 | ||||||||||||||||||
Balance, June 30, 2004 (Unaudited) |
|
24,375 |
|
$ | 24 |
|
$ | 27,001 |
|
$ | (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 754 shares of $1.00 par value common stock to 155,892,833 authorized shares, comprising of 150,892,833 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 151 shares of $1.00 par value common stock were divided and converted (stock split) to 23,214,281 shares of $0.001 par value common stock.
Further, on June 29, 2004, $20,000 outstanding pursuant to the note payable to Parent was converted to 1,160,714 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.
As further discussed in Note 21, on October 21, 2004, the board of directors approved a 1-for-1.325444 reverse stock split of the Company's common stock.
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.
The accompanying financials statements for all periods presented include the historical financial information of the Company prior to the acquisition of the power generation business, combined with the historical financial information of the acquired power generation business which was carved out of the Parent for all years presented. The difference between the assets and liabilities of the power generation business consists of accumulated retained earnings (deficit) as well as amounts due to/from Parent resulting from cash transfers. Such amounts have been aggregated and presented in the accompanying statement of stockholder's equity as "divisional deficit" because it is not possible to distinguish the beginning balance as the records were not available to accurately break out the two components. On July 1, 2004, the effective date of the transaction, the divisional deficit will be reclassified to additional paid-in capital. Retained earnings in the accompanying statement of stockholder's equity for all periods presented represents the retained earnings of the Company prior to the acquition 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.
F-10
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
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 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
F-11
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
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 | ||||
|
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
F-12
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
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.
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
F-13
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
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 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
F-14
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
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.
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:
F-15
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
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|
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 | % | ||||||
|
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:
|
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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 |
|
$ | (0.27 | ) |
|
$ | (0.04 | ) |
|
$ | 0.66 |
|
$ | 0.24 |
|
$ | 0.27 |
|
||||||||
Pro forma |
|
$ | (0.27 | ) |
|
$ | (0.05 | ) |
|
$ | 0.66 |
|
$ | 0.24 |
|
$ | 0.27 |
|
||||||||
|
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
F-16
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
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 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 | |||
|
F-17
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
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:
|
|
|
|
|
|
|
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.
F-18
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
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):
|
|
|
|
|
|
|
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:
F-19
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
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 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 |
|
$ | 0.46 |
|
$ | 1.74 | ||||
|
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):
F-20
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 | |||||
|
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.
F-21
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
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 | |||||
|
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.
F-22
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
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.
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):
F-23
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
|
|
|
|
|
|
|
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 | ||||
|
|
|
|
|
|
|
|
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.
F-24
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
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 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
F-25
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
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. 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 $0.04, $0.09, $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 |
|
519,173 |
|
23,965 |
|
543,138 | ||||||||
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 |
|
26,475 |
|
275,463 | ||||||||
|
|
|
||||||||||||
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 |
|
27,510 |
|
778,183 | ||||||||
|
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 1,160,714 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 four of its senior executive officers, the terms of which expire at various times through June 2008. Such agreements provide for monthly or annual 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 $2.0 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).
Interest Rate Lock Agreement
In anticipation of the Company's plans to refinance the cost of the Puna project, on October 12, 2004, the Company entered into a treasury rate lock agreement ("Rate Lock Agreement") with a financial institution, at a locked-in treasury rate of 4.2075%, with a notional amount of $62.5 million, and terminating on December 31, 2004 (the "Determination Date"). The rate lock is based on a 10-year treasury security that matures in August 2014. Pursuant to the Rate Lock Agreement, if the base treasury rate on the Determination Date is greater than 4.2075%, the counterparty will be required to pay the Company a floating amount; however, if the base treasury rate is less than 4.2075%, the Company will be required to pay to the counterparty the floating amount. If the base treasury rate equals 4.2075% on the Determination Date, no payment will be required to be made by either party. Based on treasury rates and the yield curve on October 16, 2004, each 1 basis point difference between the locked-in rate and the base treasury rate equalled approximately $50,000.
Cash Dividend
On October 21, 2004, the Company's board of directors declared and authorized the payment of a cash dividend in the aggregate amount of $2.5 million, conditional upon and effective as of the effective date the Company's initial public offering.
2004 Incentive Compensation Plan
On October 21, 2004, the Company's board of directors adopted the 2004 Incentive Compensation Plan ("2004 Incentive Plan"), which provides for the grant of the following types of awards: incentive stock options, non-qualified stock options, restricted stock, stock appreciation rights, stock units, performance awards, phantom stock, incentive bonuses and other possible related dividend
F-48
Ormat
Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements
(dollars in thousands, except per share
amounts)
equivalents to employees of the Company, directors and independent contractors. Under the 2004 Incentive Plan, a total of 1,250,000 shares of the Company's common stock have been reserved for issuance, all of which could be issued as options or as other forms of awards. The Company has not granted any options under the 2004 Incentive Plan; however, the Company intends to grant options to purchase up to 200,000 shares of common stock to employees and options to purchase up to 30,000 shares of common stock to non-employee directors prior to the effective date of the Company's initial public offering. The exercise price of the options will be the price of the shares of the common stock offered in the initial public offering. Such options will expire ten years from the date of grant, with vesting at 25%, 25% and 50%, in year two, three, and four, respectively, after the date of grant.
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.
21. Stock Split
On October 21, 2004. the board of directors approved a 1-for-1.325444 reverse stock split of the Company's 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 reverse stock split for all periods presented. The par value of the common stock remained at $0.001 per share. Additionally, the Company amended and restated its certificate of incorporation, pursuant to which the authorized capital stock of the Company was increased from 150,892.833 shares of $0.001 common stock immediately following the split to 200,000,000 authorized shares of $0.001 par value common stock.
F-49
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-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, 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-51
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-52
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-53
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-54
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-55
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-56
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-57
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-58
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-59
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-60
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-61
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-62
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-63
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-64
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-65
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-66
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-67
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-68
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-69
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.:
|
|
• | 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-70
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-71
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-72
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-73
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 Ormat Technologies, Inc. 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-74
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-75
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-76
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-77
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-78
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-79
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-80
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-81
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-82
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-83
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-84
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-85
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-86
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:
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December 31, |
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September 30, | |||||||
|
2002 |
|
2003 | |||||||
Plant and related equipment |
|
$ | 152,196,497 |
|
$ | 152,181,247 | ||||
Transportation equipment |
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181,442 |
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181,442 | ||||||
Furniture and fixtures |
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117,665 |
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120,667 | ||||||
Asset retirement cost |
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— |
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1,097,000 | ||||||
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152,495,604 |
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153,580,356 | |||||||
Less accumulated depreciation |
|
(59,296,969 | ) |
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(63,435,625 | ) | ||||
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$ | 93,198,635 |
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$ | 90,144,731 | |||||
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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-87
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:
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Change |
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Balance at |
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Resulting from |
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Balance at | |||||||||
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December 31, |
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Application of |
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January 1, | |||||||||
|
2002 |
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SFAS No. 143 |
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2003 | |||||||||
Property, plant and equipment |
|
$ | 152,495,604 |
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$ | 1,097,000 |
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$ | 153,592,604 | |||||
Accumulated depreciation |
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(59,296,969 | ) |
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(439,000 | ) |
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(59,735,969 | ) | |||||
Net property, plant and equipment |
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$ | 93,198,635 |
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$ | 658,000 |
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$ | 93,856,635 | |||||
Non-current asset retirement obligation |
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$ | — |
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$ | 2,765,000 |
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$ | 2,765,000 | |||||
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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:
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Year Ended |
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Nine Months Ended |
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December 31, |
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September 30, |
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2002 |
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2003 |
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||||||||||
Balance at beginning of period |
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$ | 2,565,000 |
|
$ | 2,765,000 |
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|||||||
Accretion expense |
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200,000 |
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165,664 |
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Balance at end of period |
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$ | 2,765,000 |
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$ | 2,930,664 |
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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-88
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 $709,200 as of December 31, 2002 and September 30, 2003, respectively, for advances received. Such amounts are to be repaid monthly, subject to available operating cash flow, over a 20-year period beginning January 1, 1996.
7. Subsequent Events
On December 18, 2003, the partnership interests owned by MGC and PGC were sold to an unrelated entity.
F-89
6,250,000 Shares
Common Stock
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PROSPECTUS
2004
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L
EHMAN
B
ROTHERS
Sole
Book
-
Running
Manager
D
EUTSCHE
B
ANK
S
ECURITIES
Joint
Lead
Manager
RBC C APITAL M ARKETS
W ELLS F ARGO S ECURITIES
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses, other than the underwriting discounts and commissions, payable by us in connection with the sale and distribution of the securities being registered. All amounts shown are estimates, except the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. filing fee and the New York Stock Exchange application fee.
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SEC registration fee |
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$ | 14,571 | |||
NASD filing fee |
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$ | 12,000 | |||
New York Stock Exchange application fee |
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$ | 200,000 | |||
Accounting fees and expenses |
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$ | 1,200,000 | |||
Legal fees and expenses |
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$ | 750,000 | |||
Printing and engraving expenses |
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$ | 550,000 | |||
Transfer agent fees and expenses |
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$ | 14,900 | |||
Blue sky fees and expenses |
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$ | 3,000 | |||
Miscellaneous fees and expenses |
|
$ | 384,029 | |||
Total |
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$ | 3,128,500 | |||
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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 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.
II-1
Item 15. Recent Sales of Unregistered Securities
On June 30, we issued 1,160,714 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
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Exhibit No. |
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Document | ||||
1.1 |
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Form of Underwriting Agreement* | ||||
3.1 |
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Second Amended and Restated Certificate of Incorporation | ||||
3.2 |
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Second Amended and Restated By-laws | ||||
4.1 |
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Form of Common Share Stock Certificate* | ||||
4.2 |
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Form of Preferred Share Stock Certificate* | ||||
4.3 |
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Form of Rights Agreement by and between Ormat Technologies, Inc. and American Stock Transfer & Trust Company | ||||
5.1 |
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Opinion of Chadbourne & Parke LLP, related to the shares of common stock being sold in the initial public offering | ||||
8.1 |
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Opinion of Chadbourne & Parke LLP, related to tax matters | ||||
10.1 |
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Financing Agreements | ||||
10.1.1 |
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Foreign Currency Loan Agreement, dated June 1, 2004, between Ormat Technologies, Inc. and United Mizrahi Bank LTD.* | ||||
10.1.2 |
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Amended and Restated Bridge Loan Agreement, dated October 2, 2003, by and between Ormat Nevada, Inc. and Bank Leumi USA* | ||||
10.1.3 |
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Credit Facility Agreement, dated September 5, 2000, between Ormat Momotombo Power Company and Bank Hapoalim B.M.* | ||||
10.1.4 |
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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 |
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Credit Agreement, dated May 13, 1996, between Ormat-Leyte and Export-Import Bank of the United States* | ||||
10.1.7 |
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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* | ||||
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II-2
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Exhibit No. |
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Document | ||||
10.1.9 |
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Loan Agreement, dated October 1, 2003, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | ||||
10.1.10 |
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Amendment No. 1 to Loan Agreement, dated September 20, 2004, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | ||||
10.1.11 |
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Capital Note, dated December 22, 2003, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | ||||
10.1.12 |
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Amendment to Capital Note, dated September 20, 2004, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | ||||
10.1.13 |
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Guarantee Fee Agreement, dated January 1, 1999, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | ||||
10.1.14 |
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Reimbursement Agreement, dated July 15, 2004, by and between Ormat Technologies, Inc. and Ormat Industries Ltd.* | ||||
10.1.15 |
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Services Agreement, dated July 15, 2004, by and between Ormat Industries Ltd. and Ormat Systems Ltd.* | ||||
10.1.16 |
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Letter of Credit and Loan Agreement, dated June 30, 2004, by and between Ormat Nevada, Inc., and Hudson United Bank | ||||
10.1.17 |
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First Amendment to Letter of Credit and Loan Agreement, dated June 30, 2004, by and between Ormat Nevada, Inc., and Hudson United Bank | ||||
10.1.18 |
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Subordination Agreement, dated June 30, 2004, by and between Ormat Technologies, Inc. and Hudson United Bank | ||||
10.2 |
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Purchase Agreements | ||||
10.2.1 |
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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 |
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Purchase Agreement, dated July 15, 2004, by and between Ormat Industries Ltd. and Ormat Systems Ltd.* | ||||
10.3 |
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Power Purchase Agreements | ||||
10.3.1 |
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Power Purchase Contract, dated July 18, 1984, between Southern California Edison Company and Republic Geothermal, Inc.* | ||||
10.3.2 |
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Amendment No. 1, to the Power Purchase Contract, dated December 23, 1988, between Southern California Edison Company and Ormesa Geothermal* | ||||
10.3.3 |
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Power Purchase Contract, dated June 13, 1984, between Southern California Edison Company and Ormat Systems, Inc.* | ||||
10.3.4 |
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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 |
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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 |
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Settlement Agreement and Amendment No. 2, to Power Purchase Contract, dated August 7, 1995, between HGC and Southern California Edison Company* | ||||
10.3.7 |
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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* | ||||
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II-3
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Exhibit No. |
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Document | ||||
10.3.9 |
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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 |
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Amended and Restated Power Purchase and Sales Agreement, dated December 2, 1986, between Mammoth Pacific and Southern California Edison Company* | ||||
10.3.12 |
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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 |
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Power Purchase Contract, dated April 15, 1985, between Mammoth Pacific and Southern California Edison Company* | ||||
10.3.14 |
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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 |
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Power Purchase Contract, dated April 16, 1985, between Southern California Edison Company and Santa Fe Geothermal, Inc.* | ||||
10.3.17 |
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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 |
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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 |
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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 |
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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* | ||||
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II-4
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Exhibit No. |
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Document | ||||
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 |
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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* | ||||
|
II-5
|
|
|
|
|
|
|
Exhibit No. |
|
Document | ||||
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 † * | ||||
|
II-6
|
|
|
|
|
|
|
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 † * | ||||
|
II-7
|
|
|
|
|
|
|
Exhibit No. |
|
Document | ||||
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.* | ||||
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 |
|
Form of Registration Rights Agreement by and between Ormat Technologies, Inc. and Ormat Industries Ltd. | ||||
10.6.1 |
|
Ormat Technologies, Inc. 2004 Incentive Compensation Plan | ||||
10.6.2 |
|
Form of Incentive Stock Option Agreement | ||||
10.6.3 |
|
Form of Nonqualified Stock Option Agreement | ||||
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* | ||||
10.10.1 |
|
Form of Executive Employment Agreement of Hezy Ram | ||||
10.10.2 |
|
Amendment No. 1 to Form of Executive Employment Agreement of Hezy Ram | ||||
10.11 |
|
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 Dan Falk* | ||||
23.4 |
|
Consent of Edward R. Muller* | ||||
23.5 |
|
Consent of Jacob J. Worenklein* | ||||
23.6 |
|
Consent of Yoram Bronicki | ||||
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* | ||||
|
|
|
|
|
|
|
|
*Previously filed. |
|
|
† | 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. |
II-8
|
|
‡ | 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. |
|
|
(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. 2 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 October 22, 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. 2 to the registration statement (No. 333-117527) has been signed by the following persons in the capacities on October 22, 2004
|
|
|
Signature | Title | |
|
||
* | Chairman of the Board and Director | |
|
||
Lucien Bronicki | ||
|
||
/s/ Yehudit Bronicki |
Director,
Chief Executive
Officer and
President (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 |
|
Second Amended and Restated Certificate of Incorporation | ||||
3.2 |
|
Second Amended and Restated By-laws | ||||
4.1 |
|
Form of Common Share Stock Certificate* | ||||
4.2 |
|
Form of Preferred Share Stock Certificate* | ||||
4.3 |
|
Form of Rights Agreement by and between Ormat Technologies, Inc. and American Stock Transfer & Trust Company | ||||
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.* | ||||
10.1.16 |
|
Letter of Credit and Loan Agreement, dated June 30, 2004, by and between Ormat Nevada, Inc., and Hudson United Bank | ||||
|
|
|
|
|
|
|
|
Exhibit No. |
|
Document | ||||
10.1.17 |
|
First Amendment to Letter of Credit and Loan Agreement, dated June 30, 2004, by and between Ormat Nevada, Inc., and Hudson United Bank | ||||
10.1.18 |
|
Subordination Agreement, dated June 30, 2004, by and between Ormat Technologies, Inc. and Hudson United Bank | ||||
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* | ||||
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* | ||||
|
|
|
|
|
|
|
|
Exhibit No. |
|
Document | ||||
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* | ||||
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.* | ||||
|
|
|
|
|
|
|
|
Exhibit No. |
|
Document | ||||
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* | ||||
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 |
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Leases | ||||
10.4.1 |
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Ormesa BLM Geothermal Resources Lease CA 966 ‡ * | ||||
10.4.2 |
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Ormesa BLM License for Electric Power Plant Site CA 24678 ‡‡ * | ||||
10.4.3 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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Lease Agreement, dated February 17, 1977, by and between Joseph L. Holtz, as Lessor, and Chevron U.S.A. Inc., as Lessee* | ||||
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Exhibit No. |
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Document | ||||
10.4.10 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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Lease Agreement, dated April 7, 1972, by and between Nowlin Partnership, as Lessor, and Standard Oil Company of California, as Lessee* | ||||
10.4.18 |
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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 |
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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 |
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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 |
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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 |
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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 |
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Geothermal Lease Agreement, dated February 15, 1977, by and between Walter J. Holtz, as Lessor, and Magma Energy Inc., as Lessee † * | ||||
10.4.24 |
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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 |
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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 |
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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 † * | ||||
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Exhibit No. |
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Document | ||||
10.4.28 |
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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 |
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Geothermal Resources Sublease, dated May 31, 1991, by and between Fleetwood Corporation, as Lessor, and Far West Capital, Inc., as Lessee † * | ||||
10.4.30 |
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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 |
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Engineering, Procurement and Construction Contract, dated August 23, 2002, by and between Tuaropaki Power Company Limited and Ormat Pacific Inc.* | ||||
10.5.2 |
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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 |
|
Form of Registration Rights Agreement by and between Ormat Technologies, Inc. and Ormat Industries Ltd. | ||||
10.6.1 |
|
Ormat Technologies, Inc. 2004 Incentive Compensation Plan | ||||
10.6.2 |
|
Form of Incentive Stock Option Agreement | ||||
10.6.3 |
|
Form of Nonqualified Stock Option Agreement | ||||
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* | ||||
10.10.1 |
|
Form of Executive Employment Agreement of Hezy Ram | ||||
10.10.2 |
|
Amendment No. 1 to Form of Executive Employment Agreement of Hezy Ram | ||||
10.11 |
|
Form of Indemnification Agreement | ||||
21.1 |
|
Subsidiaries of the registrant | ||||
23.1 |
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Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm | ||||
23.2 |
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Consent of Chadbourne & Parke LLP (contained in Exhibit 5.1) | ||||
23.3 |
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Consent of Dan Falk* | ||||
23.4 |
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Consent of Edward R. Muller* | ||||
23.5 |
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Consent of Jacob J. Worenklein* | ||||
23.6 |
|
Consent of Yoram Bronicki | ||||
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* | ||||
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* | Previously filed. |
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† | 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. |
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|
‡ | 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. |
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|
‡‡ | 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. |
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|
‡‡‡ | 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 3.1 SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ORMAT TECHNOLOGIES, INC. -------------------------------------------------------------------------------- Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware -------------------------------------------------------------------------------- Ormat Technologies, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify as follows: FIRST: The name of the Corporation is Ormat Technologies, Inc. SECOND: The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on September 15, 1994. THIRD: The First Amended and Restated Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on June 30, 2004. FOURTH: The First Amended and Restated Certificate of Incorporation of the Corporation is hereby amended in its entirety and restated and integrated into a single instrument to read in full as set forth in the Second Amended and Restated Certificate of Incorporation of the Corporation attached hereto as Exhibit A and made a part hereof. FIFTH: The Amended and Restated Certificate of Incorporation of the Corporation was proposed by the Board of Directors of the Corporation and was duly adopted in accordance with Section 228 of the General Corporation Law of the State of Delaware by the sole shareholder of the Corporation in the manner prescribed by Section 242 of the General Corporation Law of the State of Delaware. SIXTH: The Amended and Restated Certificate of Incorporation of the Corporation was duly adopted in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by its officer thereunto duly authorized this 21st day of October, 2004. ORMAT TECHNOLOGIES, INC. By:/s/ Yehudit Bronicki ------------------------------------ Name: Yehudit Bronicki Title: President 2 EXHIBIT A SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ORMAT TECHNOLOGIES, INC. FIRST: The name of the Corporation is Ormat Technologies, Inc. SECOND: The Corporation's registered office in the State of Delaware is located at 3500 South Dupont Highway, in the City of Dover, County of Kent. The name and address of its registered agent is HIQ Corporate Services, Inc., 3500 South Dupont Highway, Dover, Delaware 19901. THIRD: The nature of the business, or objects or purposes to be transacted, promoted or carried on, are: To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of all classes of stock which the Corporation shall have the authority to issue is Two Hundred Five Million (205,000,000), of which (i) Two Hundred Million (200,000,000) shares of par value of $.001 each are to be of a class designated Common Stock (the "Common Stock") and (ii) Five Million (5,000,000) shares of par value of $.001 are to be of a class designated Preferred Stock (the "Preferred Stock"). Simultaneously with the effective date of the filing of this Second Amended and Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), (i) each share of common stock, par value $.001 per share, of the Corporation issued and outstanding or authorized and unissued immediately prior to the effective date of the filing of the Certificate of Incorporation (the "Old Common Stock") shall automatically be reclassified and continued (the "Reverse Stock Split"), without any action on the part of the holder thereof, as one over one point three two five four four four (1/1.325444) of one share of Common Stock, equivalent to zero point seven five four four six four one six (0.75446416) share of Common Stock; (ii) the remaining par value of Forty Nine Thousand One Hundred and Seven and 17/100 Dollars ($49,107.17) shall be and hereby is classified as excess capital; (iii) each certificate outstanding and previously representing shares of Old Common Stock shall, until surrendered and exchanged, be deemed, for all corporate purposes, to constitute and represent the number of whole shares of Common Stock of the Corporation into which the outstanding shares of Old Common Stock previously represented by such certificate were converted by virtue of the Reverse Stock Split. Effective immediately upon the consummation of the Reverse Stock Split, the authorized number of shares of Common Stock is increased, from One Hundred Fifty Million Eight Hundred Ninety Two Thousand Eight Hundred and Twenty Eight (150,892,828) shares to Two Hundred Million (200,000,000) shares. In this Article Fourth, any reference to a section or paragraph, without further attribution, within a provision relating to a particular class of stock is intended to refer solely to the specified section or paragraph of the provisions relating to the same class of stock. COMMON STOCK The Common Stock shall have the following voting powers, designations, preferences and relative, participating, optional and other special rights, and qualifications, limitations or restrictions thereof: 1. Dividends. Whenever the full dividends upon any outstanding Preferred Stock for all past dividend periods shall have been paid and the full dividends thereon for the then current respective dividend periods shall have been paid, or declared and a sum sufficient for the respective payments thereof set apart, the holders of shares of the Common Stock shall be entitled to receive such dividends and distributions in equal amounts per share, payable in cash or otherwise, as may be declared thereon by the Board of Directors from time to time out of assets or funds of the Corporation legally available therefor. 2. Rights on Liquidation. In the event of any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, after the payment or setting apart for payment to the holders of any outstanding Preferred Stock of the full preferential amounts to which such holders are entitled as herein provided or referred to, all of the remaining assets of the Corporation shall belong to and be distributable in equal amounts per share to the holders of the Common Stock. For purposes of this paragraph 2, a consolidation or merger of the Corporation with any other corporation, or the sale, transfer or lease of all or substantially all its assets shall not constitute or be deemed a liquidation, dissolution or winding-up of the Corporation. 3. Voting. Except as otherwise provided by the laws of the State of Delaware or by this Article Fourth, each share of Common Stock shall entitle the holder thereof to one vote. 2 PREFERRED STOCK The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to provide for the issuance of shares of Preferred Stock in series and, by filing a certificate pursuant to the applicable law of the State of Delaware (hereinafter referred to as a "Preferred Stock Designation"), to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (a) the designation of the series, which may be by distinguishing number, letter or title; (b) the number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the Preferred Stock Designation) increase or decrease (but not below the number of shares thereof then outstanding); (c) whether dividends, if any, shall be cumulative or noncumulative and the dividend rate of the series; (d) the dates at which dividends, if any, shall be payable; (e) the redemption rights and price or prices, if any, for shares of the series; (f) the terms and amount of any sinking fund provided for the purchase or redemption of shares of the series; (g) the amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation; (h) whether the shares of the series shall be convertible into shares of any other class or series, or any other security, of the Corporation or any other corporation, and, if so, the specification of such other class or series or such other security, the conversion price or prices or rate or rates, any adjustments thereof, the date or dates as of which such shares shall be convertible and all other terms and conditions upon which such conversion may be made; 3 (i) restrictions on the issuance of shares of the same series or of any other class or series; and (j) the voting rights, if any, of the holders of shares of the series. Except as may be provided in this Certificate of Incorporation or in a Preferred Stock Designation, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, and holders of Preferred Stock shall not be entitled to receive notice of any meeting of stockholders at which they are not entitled to vote. Notwithstanding the foregoing, the holders of Preferred Stock that shall have the right to vote for the election of directors as provided herein, in any other Preferred Stock Designation, or by law shall vote together with the holders of shares of Common Stock and any other capital stock of the Corporation entitled to vote generally, as a single class, on all matters relating to the election of directors. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the outstanding Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to any Preferred Stock Designation. The Corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law. SERIES A JUNIOR PARTICIPATING PREFERRED STOCK 1. Designation and Amount. A series of Preferred Stock of par value $.001 per share is hereby created and shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be Five Hundred Thousand (500,000). Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. 4 2. Dividends and Distributions. 2.1. Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock and of any other junior stock of the Corporation, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the second Monday of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 2.2. The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph 2.1 immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. 2.3. Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next 5 preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: 3.1. Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 3.2. Except as otherwise provided herein, in any other Preferred Stock Designation creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. 6 3.3. Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 4. Certain Restrictions. 4.1. Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in paragraph 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (a) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (b) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (c) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (d) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. 7 4.2. The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under subparagraph (c) of paragraph 4.1, purchase or otherwise acquire such shares at such time and in such manner. 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein or in any other Preferred Stock Designation creating a series of Preferred Stock or any similar stock or as otherwise required by law. 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (i) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (ii) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (i) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or 8 any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. 9. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock. 10. Amendment. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of the outstanding shares of Series A Preferred Stock, voting together as a single class. FIFTH: The Corporation is to have perpetual existence. SIXTH: The private property of the stockholders of the Corporation shall not be subject to the payment of corporate debts to any extent whatever. SEVENTH: Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the number of directors of the Corporation shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the whole Board. A director need not be a stockholder. The election of directors of the Corporation need not be by ballot unless the By-Laws so require. 9 The directors, including those who may be elected by the holders of any series of Preferred Stock or any other series or class of stock as provided herein or in any Preferred Stock Designation shall be divided into three classes, as nearly equal in number as possible. One class of directors shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 2005, another class shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 2006, and another class shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 2007. Members of each class shall hold office until their successors are duly elected and qualified. At each annual meeting of the stockholders of the Corporation, commencing with the 2005 annual meeting, the successors of the class of directors whose term expires at that meeting shall be elected by a plurality vote of all votes cast for the election of directors at such meeting to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock, as provided herein or in any Preferred Stock Designation, to elect additional directors under specific circumstances, any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 66 2/3% of the voting power of the then outstanding capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Subject to the rights of the holders of any series of Preferred Stock, and unless the Board of Directors otherwise determines, newly created directorships resulting from any increase in the authorized number of directors or any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then serving on the Board, though less than a quorum. and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the whole Board of Directors shall shorten the term of any incumbent director. No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. No repeal or modification of this paragraph, directly or by adoption of an inconsistent provision of this Certificate of 10 Incorporation, by the stockholders of the Corporation shall be effective with respect to any cause of action, suit, claim or other matter that, but for this paragraph, would accrue or arise prior to such repeal or modification. EIGHTH: Unless otherwise determined by the Board of Directors, no holder of stock of the Corporation shall, as such holder, have any right to purchase or subscribe for any stock of any class which the Corporation may issue or sell, whether or not exchangeable for any stock of the Corporation of any class or classes and whether out of unissued shares authorized by the Certificate of Incorporation of the Corporation as originally filed or by any amendment thereof or out of shares of stock of the Corporation acquired by it after the issue thereof. NINTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the General Corporation Law of the State of Delaware or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the General Corporation Law of the State of Delaware order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. TENTH: 1. Amendment of Certificate of Incorporation. From time to time any of the provisions of the Certificate of Incorporation may be amended, altered or repealed, and other provisions authorized by the statutes of the State of Delaware at the time in force may be added or inserted in the manner at the time prescribed by said statutes, and all rights at any time conferred upon the stockholders of the Corporation by its Certificate of Incorporation are granted, subject to this reservation. Notwithstanding the foregoing and any other provision herein (and notwithstanding the fact that a lesser percentage or separate class vote may be specified herein, in the By-Laws of the Corporation or by 11 law), the affirmative vote of the holders of at least 75% of the voting power of the then outstanding shares of capital stock of the corporation entitled to vote generally, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, the second paragraph of Article Seventh hereof. 2. By-Laws. The Board of Directors is expressly authorized to make, alter, amend and repeal the By-Laws of the Corporation, in any manner not inconsistent with the laws of the State of Delaware or of the Certificate of Incorporation of the Corporation, subject to the power of the holders of the then outstanding shares of capital stock of the Corporation entitled to vote generally to alter or repeal the By-Laws made by the Board of Directors. ELEVENTH: 1. Written Consent in Lieu of Meeting. Any action which could be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall (a) be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and (b) be delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the records of proceedings of meetings of stockholders. 2. Special Meeting of Stockholders. A special meeting of the stockholders for any purpose or purposes, unless otherwise provided by law, may be called by the Chairman of the Board, the President, the Board or the holders of not less than a majority of all the outstanding shares of the corporation entitled to vote at the meeting may call special meetings of the stockholders for any purpose or, at any time that Ormat Industries Ltd. or any OIL Transferee owns at least 20% of the then outstanding shares of Common Stock, by Ormat Industries Ltd. or any OIL Transferee. For purposes of this Section 2 of Article Eleventh, "OIL Transferee" shall mean a transferee of Ormat Industries Ltd. or any other OIL Transferee that receives at least 20% of the then outstanding shares of Common Stock that pursuant to an instrument of transfer or related agreement has been granted rights under this Section 2 of Article Eleventh by Ormat Industries Ltd. or any OIL Transferee. 12
EXHIBIT 3.2 SECOND AMENDED AND RESTATED BY-LAWS OF ORMAT TECHNOLOGIES, INC. Adopted on October 21, 2004 Amendments are listed on p. i ORMAT TECHNOLOGIES, INC. AMENDMENTS DATE OF SECTION EFFECT OF AMENDMENT AMENDMENT ---------- --------------------------------------------------------- ----------- i CONTENTS SECTION 1. OFFICES.................................................................1 SECTION 2. STOCKHOLDERS............................................................1 2.1 Annual Meeting..........................................................1 2.2 Special Meetings........................................................1 2.3 Place of Meeting........................................................2 2.4 Notice of Meeting.......................................................2 2.5 Waiver of Notice........................................................2 2.5.1 Waiver in Writing..............................................2 2.5.2 Waiver by Attendance...........................................3 2.6 Fixing of Record Date for Determining Stockholders......................3 2.6.1 Meetings.......................................................3 2.6.2 Consent to Corporate Action Without a Meeting..................3 2.6.3 Dividends, Distributions and Other Rights......................4 2.7 Voting List.............................................................4 2.8 Quorum..................................................................4 2.9 Manner of Acting........................................................5 2.10 Proxies.................................................................5 2.10.1 Appointment....................................................5 2.10.2 Delivery to Corporation; Duration..............................6 2.11 Voting of Shares........................................................6 2.12 Voting for Directors....................................................6 2.13 Action by Stockholders Without a Meeting................................6 2.14 Organization............................................................7 2.15 Notice of Stockholder Business and Nominations..........................7 2.15.1 Annual Meetings of Stockholders................................7 2.15.2 Special Meetings of Stockholders...............................8 2.15.3 General........................................................9 2.16 Business and Order of Business.........................................10 SECTION 3. BOARD OF DIRECTORS.....................................................10 3.1 General Powers.........................................................10 3.2 Number and Tenure......................................................10 3.3 Annual and Regular Meetings............................................11 3.4 Special Meetings.......................................................11 3.5 Meetings by Telephone..................................................11 3.6 Notice of Special Meetings.............................................11 3.6.1 Personal Delivery.............................................11 3.6.2 Delivery by Mail..............................................12 3.6.3 Delivery by Private Carrier...................................12 3.6.4 Facsimile Notice..............................................12 ii iii3.6.5 Delivery by Telegraph.........................................12 3.6.6 Oral Notice...................................................12 3.7 Waiver of Notice.......................................................12 3.7.1 In Writing....................................................12 3.7.2 By Attendance.................................................13 3.8 Quorum.................................................................13 3.9 Manner of Acting.......................................................13 3.10 Presumption of Assent..................................................13 3.11 Action by Board or Committees Without a Meeting........................13 3.12 Resignation............................................................14 3.13 Removal................................................................14 3.14 Vacancies..............................................................14 3.15 Committees.............................................................14 3.15.1 Creation and Authority of Committees..........................14 3.15.2 Minutes of Meetings...........................................15 3.15.3 Quorum and Manner of Acting...................................15 3.15.4 Resignation...................................................15 3.15.5 Removal.......................................................16 3.16 Compensation...........................................................16 SECTION 4. OFFICERS...............................................................16 4.1 Number.................................................................16 4.2 Election and Term of Office............................................16 4.3 Resignation............................................................16 4.4 Removal................................................................17 4.5 Vacancies..............................................................17 4.6 Chairman of the Board..................................................17 4.7 President..............................................................17 4.8 Vice President.........................................................17 4.9 Secretary..............................................................18 4.10 Treasurer..............................................................18 4.11 Salaries...............................................................18 SECTION 5. CONTRACTS, BUSINESS, LOANS, CHECKS AND DEPOSITS........................19 5.1 Contracts..............................................................19 5.2 Business...............................................................19 5.3 Loans to the Corporation...............................................19 5.4 Checks, Drafts, Etc....................................................19 5.5 Deposits...............................................................19 SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER.............................20 6.1 Issuance of Shares.....................................................20 6.2 Certificates for Shares................................................20 6.3 Stock Records..........................................................20 6.4 Restriction on Transfer................................................20 6.5 Transfer of Shares.....................................................21 6.6 Lost or Destroyed Certificates.........................................21 SECTION 7. BOOKS AND RECORDS......................................................21 SECTION 8. ACCOUNTING YEAR........................................................22 SECTION 9. SEAL...................................................................22 SECTION 10. INDEMNIFICATION........................................................22 10.1 Right to Indemnification...............................................22 10.2 Right of Indemnitee to Bring Suit......................................23 10.3 Nonexclusivity of Rights...............................................23 10.4 Insurance, Contracts and Funding.......................................24 10.5 Indemnification of Employees and Agents of the Corporation.............24 10.6 Persons Serving Other Entities.........................................24 SECTION 11. AMENDMENTS OR REPEAL...................................................24 ivSECOND AMENDED AND RESTATED BY-LAWS OF ORMAT TECHNOLOGIES, INC. SECTION 1. OFFICES The principal office of the corporation shall be located at its principal place of business or such other place as the Board of Directors (the "Board") may designate. The corporation may have such other offices, either within or without the State of Delaware, as the Board may designate or as the business of the corporation may require from time to time. SECTION 2. STOCKHOLDERS 2.1 ANNUAL MEETING The annual meeting of the stockholders shall be scheduled upon the preparation of the financial statements of the prior fiscal year at the principal office of the corporation or such other place designated by the Board for the purpose of electing Directors and transacting such other business as may properly come before the meeting. If the day fixed for the annual meeting is a legal holiday at the place of the meeting, the meeting shall be held on the next succeeding business day. If the annual meeting is not held on the date designated therefor, the Board shall cause the meeting to be held as soon thereafter as may be convenient. 2.2 SPECIAL MEETINGS A special meeting of the stockholders for any purpose or purposes, unless otherwise provided by law, may be called by the Chairman of the Board, the President, the Board or the holders of not less than a majority of all the outstanding shares of the corporation entitled to vote at the meeting may call special meetings of the stockholders for any purpose or, at any time that Ormat Industries Ltd. or any OIL Transferee owns at least 20% of the then outstanding shares of Common Stock, by Ormat Industries Ltd. or any OIL Transferee. For purposes of this subsection 2.2 hereof, "OIL Transferee" shall mean a transferee of Ormat Industries Ltd. or any other OIL Transferee that receives at least 20% of the then outstanding shares of Common Stock that pursuant to an instrument of transfer or related agreement has been granted rights under subsection 2.2 hereof by Ormat Industries Ltd. or any OIL Transferee. 1 2.3 PLACE OF MEETING All meetings shall be held at the principal office of the corporation or at such other place within or without the State of Delaware designated by the Board, by any persons entitled to call a meeting hereunder or in a waiver of notice signed by all of the stockholders entitled to notice of the meeting. 2.4 NOTICE OF MEETING The Chairman of the Board, the President, the Secretary, the Board, or stockholders calling an annual or special meeting of stockholders as provided for herein, shall cause to be delivered to each stockholder entitled to notice of or to vote at the meeting either personally or by mail, not less than ten nor more than sixty days before the meeting, written notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. At any time, upon written request of the holders of not less than the number of outstanding shares of the corporation specified in subsection 2.2 hereof and entitled to vote at the meeting, it shall be the duty of the Secretary to give notice of a special meeting of stockholders to be held on such date and at such place and hour as the Secretary may fix, not less than ten nor more than sixty days after receipt of said request, and if the Secretary shall neglect or refuse to issue such notice, the person making the request may do so and may fix the date for such meeting. If such notice is mailed, it shall be deemed delivered when deposited in the official government mail properly addressed to the stockholder at such stockholder's address as it appears on the stock transfer books of the corporation with postage prepaid. If the notice is telegraphed, it shall be deemed delivered when the content of the telegram is delivered to the telegraph company. Notice given in any other manner shall be deemed delivered when dispatched to the stockholder's address, telephone number or other number appearing on the stock transfer records of the corporation. 2.5 WAIVER OF NOTICE 2.5.1 WAIVER IN WRITING Whenever any notice is required to be given to any stockholder under the provisions of these By-laws, the Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") or the General Corporation Law of the State of Delaware, as now or hereafter amended (the "DGCL"), a waiver thereof in writing, signed by the 2 person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. 2.5.2 WAIVER BY ATTENDANCE The attendance of a stockholder at a meeting shall constitute a waiver of notice of such meeting, except when a stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. 2.6 FIXING OF RECORD DATE FOR DETERMINING STOCKHOLDERS 2.6.1 MEETINGS For the purpose of determining stockholders entitled to notice of and to vote at any meeting of stockholders or any adjournment thereof, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date shall not be more than sixty (or the maximum number permitted by applicable law) nor less than ten days before the date of such meeting. If no record date is fixed by the Board, the record date for determining stockholders entitled to notice of and to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of and to vote at the meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. 2.6.2 CONSENT TO CORPORATE ACTION WITHOUT A MEETING For the purpose of determining stockholders entitled to consent to corporate action in writing without a meeting, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which date shall not be more than ten (or the maximum number permitted by applicable law) days after the date upon which the resolution fixing the record date is adopted by the Board. If no record date has been fixed by the Board, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board is required by Chapter 1 of the DGCL, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by 3 certified or registered mail, return receipt requested. If no record date has been fixed by the Board and prior action by the Board is required by Chapter 1 of the DGCL, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board adopts the resolution taking such prior action. 2.6.3 DIVIDENDS, DISTRIBUTIONS AND OTHER RIGHTS For the purpose of determining stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (or the maximum number permitted by applicable law) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. 2.7 VOTING LIST At least ten days before each meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting, or any adjournment thereof, shall be made, arranged in alphabetical order, with the address of and number of shares held by each stockholder. This list shall be open to examination by any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. This list shall also be produced and kept at such meeting for inspection by any stockholder who is present. 2.8 QUORUM A majority of the outstanding shares of the corporation entitled to vote, present in person or represented by proxy at the meeting, shall constitute a quorum at a meeting of the stockholders; provided, that where a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy at the meeting, shall constitute a quorum entitled to take action with respect to that vote on that matter. If less than a majority of the outstanding shares entitled to vote are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. If a quorum is present or represented at a reconvened meeting following such an adjournment, any business may be transacted that might have been transacted at the meeting as originally called. The 4 stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. 2.9 MANNER OF ACTING In all matters other than the election of Directors, if a quorum is present, the affirmative vote of the majority of the outstanding shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, unless the vote of a greater number is required by these By-laws, the Certificate of Incorporation or the DGCL. Where a separate vote by a class or classes is required, if a quorum of such class or classes is present, the affirmative vote of the majority of outstanding shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class or classes. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of Directors. 2.10 PROXIES 2.10.1 APPOINTMENT Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy. Such authorization may be accomplished by (a) the stockholder or such stockholder's authorized officer, director, employee or agent executing a writing or causing his or her signature to be affixed to such writing by any reasonable means, including facsimile signature or (b) by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission to the intended holder of the proxy or to a proxy solicitation firm, proxy support service or similar agent duly authorized by the intended proxy holder to receive such transmission; provided, that any such telegram, cablegram or other electronic transmission must either set forth or be accompanied by information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission by which a stockholder has authorized another person to act as proxy for such stockholder may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used; provided, that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. 5 2.10.2 DELIVERY TO CORPORATION; DURATION A proxy shall be filed with the Secretary before or at the time of the meeting or the delivery to the corporation of the consent to corporate action in writing. A proxy shall become invalid three years after the date of its execution unless otherwise provided in the proxy. A proxy with respect to a specified meeting shall entitle the holder thereof to vote at any reconvened meeting following adjournment of such meeting but shall not be valid after the final adjournment thereof. 2.11 VOTING OF SHARES Each outstanding share entitled to vote with respect to the subject matter of an issue submitted to a meeting of stockholders shall be entitled to one vote upon each such issue. 2.12 VOTING FOR DIRECTORS Each stockholder entitled to vote at an election of Directors may vote, in person or by proxy, the number of shares owned by such stockholder for as many persons as there are Directors to be elected and for whose election such stockholder has a right to vote. 2.13 ACTION BY STOCKHOLDERS WITHOUT A MEETING Any action which could be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall (a) be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and (b) be delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the records of proceedings of meetings of stockholders. Delivery made to the corporation's registered office shall be by hand or by certified mail or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless written consents signed by all stockholders entitled to vote with respect to the subject matter thereof are delivered to the corporation, in the manner required by this Section, within sixty (or the maximum number permitted by applicable law) days of the earliest dated consent delivered to the corporation in the manner required by this Section. The validity of any consent executed by a proxy for a stockholder pursuant to a telegram, cablegram or other means of electronic transmission transmitted to such proxy holder by 6 or upon the authorization of the stockholder shall be determined by or at the direction of the Secretary. A written record of the information upon which the person making such determination relied shall be made and kept in the records of the proceedings of the stockholders. Any such consent shall be inserted in the minute book as if it were the minutes of a meeting of the stockholders. 2.14 ORGANIZATION At every meeting of the stockholders the Chairman of the Board, or in the absence of the Chairman of the Board, the Chief Executive Officer, or in the absence of the Chief Executive Officer, a director or an officer of the corporation designated by the Board, shall act as Chairman of the meeting. The Secretary, or, in the Secretary's absence, an Assistant Secretary, shall act as Secretary at all meetings of the stockholders. In the absence from any such meeting of the Secretary and the Assistant Secretaries, the Chairman may appoint any person to act as Secretary of the meeting. 2.15 NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS 2.15.1 ANNUAL MEETINGS OF STOCKHOLDERS Nominations of persons for election to the Board of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the corporation's notice of meeting, (b) by or at the direction of the Board or (c) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice provided for in this Section, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section. For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of the prior paragraph hereof, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the case of the annual meeting to be held in 2005 or in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the corporation. 7 In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (1) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (2) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (3) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner and (ii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner. Notwithstanding anything in the second sentence of the prior paragraph hereof to the contrary, in the event that the number of directors to be elected to the Board of the corporation is increased and there is no public announcement by the corporation naming all of the nominees for director or specifying the size of the increased Board at least 100 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the corporation. Notwithstanding the foregoing, at any time Ormat Industries Ltd. or any OIL Transferee owns a majority of the then outstanding Common Stock, notice by Ormat Industries Ltd. or any OIL Transferee shall be timely and complete if delivered in writing or orally at least five days prior to the date the corporation mails its proxy statement in connection with such meeting of stockholders. 2.15.2 SPECIAL MEETINGS OF STOCKHOLDERS Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the corporation's notice of meeting. Nominations of persons for election to the Board may be made at a special meeting of stockholders at which directors are to be elected pursuant to the corporation's notice of meeting (a) by or at the direction of the Board or (b) provided that the Board has determined that directors shall be elected at such meeting, by any stockholder of the 8 corporation who is a stockholder of record at the time of giving of notice provided for in this Section, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section. In the event the corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board, any stockholder who shall be entitled to vote at the meeting may nominate a person or persons (as the case may be), for election to such position(s) as specified in the corporation's notice of meeting, if the stockholder's notice required by subsection 2.15.2 hereof shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. 2.15.3 GENERAL Only such persons who are nominated in accordance with the procedures set forth in this Section shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section. Any person nominated for election as director by the Board or any committee designated by the Board shall, upon the request of the Board or such committee, furnish to the Secretary of the corporation all such information pertaining to such person that is required to be set forth in a stockholder's notice of nomination. Except as otherwise provided by law, the Certificate of Incorporation or these By-laws, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section and, if any proposed nomination or business is not in compliance with this Section, to declare that such defective proposal or nomination shall be disregarded. For purposes of this Section, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. Notwithstanding the foregoing provisions of this Section, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section. Nothing in 9 this Section shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. 2.16 BUSINESS AND ORDER OF BUSINESS At each meeting of the stockholders such business may be transacted as may properly be brought before such meeting, except as otherwise provided by law or in these By-laws. The order of business at all meetings of the stockholders shall be as determined by the Chairman of the meeting, unless otherwise determined by a majority in interest of the stockholders present in person or by proxy at such meeting and entitled to vote thereat. SECTION 3. BOARD OF DIRECTORS 3.1 GENERAL POWERS The business and affairs of the corporation shall be managed by the Board. 3.2 NUMBER AND TENURE The Board shall be composed of not less than five nor more than fifteen Directors, the specific number to be set by resolution of the Board. The number of Directors may be changed from time to time by amendment to these By-laws, but no decrease in the number of Directors shall have the effect of shortening the term of any incumbent Director. Directors need not be stockholders of the corporation or residents of the State of Delaware. The Directors, including those who may be elected by the holders of any series of Preferred Stock or any other series or class of stock as provided in the Certificate of Incorporation or in any Preferred Stock Designation (as defined in the Certificate of Incorporation) shall be divided into three classes, as nearly equal in number as possible. One class of Directors shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 2005, another class shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 2006, and another class shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 2007. Unless a Director dies, resigns, or is removed, members of each class shall hold office until their successors are duly elected and qualified. At each annual meeting of the stockholders of the Corporation, commencing with the 2005 annual meeting, the successors of the class of Directors whose term expires at that meeting shall be elected by a plurality vote of all votes cast for the election of Directors at such meeting 10 to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. 3.3 ANNUAL AND REGULAR MEETINGS An annual Board meeting shall be held without notice immediately after and at the same place as the annual meeting of stockholders. By resolution, the Board or any committee designated by the Board may specify the time and place either within or without the State of Delaware for holding regular meetings thereof without other notice than such resolution. 3.4 SPECIAL MEETINGS Special meetings of the Board or any committee appointed by the Board may be called by or at the request of the Chairman of the Board, the President, the Secretary or, in the case of special Board meetings, any one Director and, in the case of any special meeting of any committee appointed by the Board, by the Chairman thereof. The person or persons authorized to call special meetings may fix any place either within or without the State of Delaware as the place for holding any special meeting called by them. 3.5 MEETINGS BY TELEPHONE Members of the Board or any committee designated by the Board may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation by such means shall constitute presence in person at a meeting. 3.6 NOTICE OF SPECIAL MEETINGS Notice of a special Board or committee meeting stating the place, day and hour of the meeting shall be given to a Director in writing or orally by telephone or in person. Neither the business to be transacted at, nor the purpose of, any special meeting need be specified in the notice of such meeting. 3.6.1 PERSONAL DELIVERY If notice is given by personal delivery, the notice shall be effective if delivered to a Director at least two days before the meeting. 11 3.6.2 DELIVERY BY MAIL If notice is delivered by mail, the notice shall be deemed effective if deposited in the official government mail properly addressed to a Director at his or her address shown on the records of the corporation with postage prepaid at least five days before the meeting. 3.6.3 DELIVERY BY PRIVATE CARRIER If notice is given by private carrier, the notice shall be deemed effective when dispatched to a Director at his or her address shown on the records of the corporation at least three days before the meeting. 3.6.4 FACSIMILE NOTICE If notice is delivered by wire or wireless equipment which transmits a facsimile of the notice, the notice shall be deemed effective when dispatched at least two days before the meeting to a Director at his or her telephone number or other number appearing on the records of the corporation. 3.6.5 DELIVERY BY TELEGRAPH If notice is delivered by telegraph, the notice shall be deemed effective if the content thereof is delivered to the telegraph company at least two days before the meeting for delivery to a Director at his or her address shown on the records of the corporation. 3.6.6 ORAL NOTICE If notice is delivered orally, by telephone or in person, the notice shall be deemed effective if personally given to the Director at least two days before the meeting. 3.7 WAIVER OF NOTICE 3.7.1 IN WRITING Whenever any notice is required to be given to any Director under the provisions of these By-laws, the Certificate of Incorporation or the DGCL, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board or any committee appointed by the Board need be specified in the waiver of notice of such meeting. 12 3.7.2 BY ATTENDANCE The attendance of a Director at a Board or committee meeting shall constitute a waiver of notice of such meeting, except when a Director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. 3.8 QUORUM A majority of the total number of Directors fixed by or in the manner provided in these By-laws or, if vacancies exist on the Board, a majority of the total number of Directors then serving on the Board (such number may be not less than one-third of the total number of Directors fixed by or in the manner provided in these By-laws) shall constitute a quorum for the transaction of business at any Board meeting. If less than a majority are present at a meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. 3.9 MANNER OF ACTING The act of the majority of the Directors present at a Board or committee meeting at which there is a quorum shall be the act of the Board or committee, unless the vote of a greater number is required by these By-laws, the Certificate of Incorporation or the DGCL. 3.10 PRESUMPTION OF ASSENT A Director of the corporation present at a Board or committee meeting at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his or her dissent is entered in the minutes of the meeting, or unless such Director files a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof, or forwards such dissent by registered mail to the Secretary of the corporation immediately after the adjournment of the meeting. A Director who voted in favor of such action may not dissent. 3.11 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING Any action which could be taken at a meeting of the Board or of any committee appointed by the Board may be taken without a meeting if a written consent setting forth the action so taken is signed by each of the Directors or by each committee member. Any such written consent shall be inserted in the minute book as if it were the minutes of a Board or a committee meeting. 13 3.12 RESIGNATION Any Director may resign at any time by delivering written notice to the Chairman of the Board, the President, the Secretary or the Board, or to the registered office of the corporation. Any such resignation shall take effect at the time specified therein, or if the time is not specified, upon delivery thereof and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 3.13 REMOVAL At a meeting of stockholders called expressly for that purpose, one or more members of the Board (including the entire Board) may be removed, with or without cause, by a vote of the holders of a majority of the shares then entitled to vote on the election of Directors. If the Certificate of Incorporation provides for cumulative voting in the election of Directors, then if less than the entire Board is to be removed, no Director may be removed without cause if the votes cast against his or her removal would be sufficient to elect such Director if then cumulatively voted at an election of the entire Board. 3.14 VACANCIES Any vacancy occurring on the Board may be filled by the affirmative vote of a majority of the remaining Directors though less than a quorum of the Board. A Director elected to fill a vacancy shall be elected for the unexpired term of his or her predecessor in office. Any directorship to be filled by reason of an increase in the number of Directors may be filled by the Board. 3.15 COMMITTEES 3.15.1 CREATION AND AUTHORITY OF COMMITTEES The Board may, by resolution passed by a majority of the number of Directors fixed by or in the manner provided in these By-laws, appoint standing or temporary committees, each committee to consist of one or more Directors of the corporation. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board establishing such 14 committee or as otherwise provided in these By-laws, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which require it; but no such committee shall have the power or authority in reference to (a) amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board as provided in Section 151(a) of the DGCL, fix the designations, preferences or rights of such shares to the extent permitted under Section 141 of the DGCL), (b) adopting an agreement of merger or consolidation under Section 251 or 252 of the DGCL, (c) recommending to the stockholders the sale, lease or exchange or other disposition of all or substantially all of the property and assets of the corporation, (d) recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (e) amending these By-laws; and, unless expressly provided by resolution of the Board, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the DGCL. 3.15.2 MINUTES OF MEETINGS All committees so appointed shall keep regular minutes of their meetings and shall cause them to be recorded in books kept for that purpose. 3.15.3 QUORUM AND MANNER OF ACTING A majority of the number of Directors composing any committee of the Board, as established and fixed by resolution of the Board, shall constitute a quorum for the transaction of business at any meeting of such committee but, if less than a majority are present at a meeting, a majority of such Directors present may adjourn the meeting from time to time without further notice. The act of a majority of the members of a committee present at a meeting at which a quorum is present shall be the act of such committee. 3.15.4 RESIGNATION Any member of any committee may resign at any time by delivering written notice thereof to the Chairman of the Board, the President, the Secretary, the Board or the Chairman of such committee. Any such resignation shall take effect at the time specified therein, or if the time is not specified, upon delivery thereof and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 15 3.15.5 REMOVAL The Board may remove from office any member of any committee elected or appointed by it, but only by the affirmative vote of not less than a majority of the number of Directors fixed by or in the manner provided in these By-laws. 3.16 COMPENSATION By Board resolution, Directors and committee members may be paid their expenses, if any, of attendance at each Board or committee meeting, or a fixed sum for attendance at each Board or committee meeting, or a stated salary as Director or a committee member, or a combination of the foregoing. No such payment shall preclude any Director or committee member from serving the corporation in any other capacity and receiving compensation therefor. SECTION 4. OFFICERS 4.1 NUMBER The officers of the corporation shall be a President, a Secretary and a Treasurer, each of whom shall be elected by the Board. One or more Vice Presidents and such other officers and assistant officers, including a Chairman of the Board, may be elected or appointed by the Board, such officers and assistant officers to hold office for such period, have such authority and perform such duties as are provided in these By-laws or as may be provided by resolution of the Board. Any officer may be assigned by the Board any additional title that the Board deems appropriate. The Board may delegate to any officer or agent the power to appoint any such subordinate officers or agents and to prescribe their respective terms of office, authority and duties. Any two or more offices may be held by the same person. 4.2 ELECTION AND TERM OF OFFICE The officers of the corporation shall be elected annually by the Board at the Board meeting held after the annual meeting of the stockholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as a Board meeting conveniently may be held. Unless an officer dies, resigns or is removed from office, he or she shall hold office until the next annual meeting of the Board or until his or her successor is elected. 4.3 RESIGNATION Any officer may resign at any time by delivering written notice to the Chairman of the Board, the President, a Vice President, the Secretary or the Board. Any 16 such resignation shall take effect at the time specified therein, or if the time is not specified, upon delivery thereof and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 4.4 REMOVAL Any officer or agent elected or appointed by the Board may be removed by the Board whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. 4.5 VACANCIES A vacancy in any office because of death, resignation, removal, disqualification, creation of a new office or any other cause may be filled by the Board for the unexpired portion of the term, or for a new term established by the Board. 4.6 CHAIRMAN OF THE BOARD If elected, the Chairman of the Board shall perform such duties as shall be assigned to him or her by the Board from time to time and shall preside over meetings of the Board and stockholders unless another officer is appointed or designated by the Board as Chairman of such meeting. 4.7 PRESIDENT The President shall be the chief executive officer of the corporation unless some other officer is so designated by the Board, shall preside over meetings of the Board and stockholders in the absence of a Chairman of the Board and, subject to the Board's control, shall supervise and control all of the assets, business and affairs of the corporation. The President may sign certificates for shares of the corporation, deeds, mortgages, bonds, contracts or other instruments, except when the signing and execution thereof have been expressly delegated by the Board or by these By-laws to some other officer or agent of the corporation or are required by law to be otherwise signed or executed by some other officer or in some other manner. In general, the President shall perform all duties incident to the office of President and such other duties as are prescribed by the Board from time to time. 4.8 VICE PRESIDENT In the event of the death of the President or his or her inability to act, the Vice President (or if there is more than one Vice President, the Vice President who was designated by the Board as the successor to the President, or if no Vice President is so 17 designated, the Vice President first elected to such office) shall perform the duties of the President, except as may be limited by resolution of the Board, with all the powers of and subject to all the restrictions upon the President. Any Vice President may sign with the Secretary or any Assistant Secretary certificates for shares of the corporation. Vice Presidents shall have, to the extent authorized by the President or the Board, the same powers as the President to sign deeds, mortgages, bonds, contracts or other instruments. Vice Presidents shall perform such other duties as from time to time may be assigned to them by the President or by the Board. 4.9 SECRETARY The Secretary shall be responsible for preparation of minutes of meetings of the Board and stockholders, maintenance of the corporation's records and stock registers, and authentication of the corporation's records and shall in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him or her by the President or by the Board. In the absence of the Secretary, an Assistant Secretary may perform the duties of the Secretary. 4.10 TREASURER If required by the Board, the Treasurer shall give a bond for the faithful discharge of his or her duties in such amount and with such surety or sureties as the Board shall determine. The Treasurer shall have charge and custody of and be responsible for all funds and securities of the corporation; receive and give receipts for moneys due and payable to the corporation from any source whatsoever, and deposit all such moneys in the name of the corporation in banks, trust companies or other depositories selected in accordance with the provisions of these By-laws; sign certificates for shares of the corporation; and in general perform all of the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him or her by the President or by the Board. In the absence of the Treasurer, an Assistant Treasurer may perform the duties of the Treasurer. 4.11 SALARIES The salaries of the officers shall be fixed from time to time by the Board or by any person or persons to whom the Board has delegated such authority. No officer shall be prevented from receiving such salary by reason of the fact that he or she is also a Director of the corporation. 18 SECTION 5. CONTRACTS, BUSINESS, LOANS, CHECKS AND DEPOSITS 5.1 CONTRACTS The Board may authorize any officer or officers, or agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation. Such authority may be general or confined to specific instances. 5.2 BUSINESS The corporation shall not sell, transfer or terminate its business relating to the manufacturing and sale of energy-related equipment and services acquired from Ormat Industries Ltd. (the "OSL Business") nor transfer out of the State of Israel any of the operations, plant or personnel related to the OSL Business which are located or conducted in the State of Israel, other than temporary assignments of personnel in the ordinary course of business, without the affirmative vote of the holders of at least 75% of the voting power of the then outstanding shares of capital stock of the corporation entitled to vote generally, voting together as a single class. 5.3 LOANS TO THE CORPORATION No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board. Such authority may be general or confined to specific instances. 5.4 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, or agent or agents, of the corporation and in such manner as is from time to time determined by resolution of the Board. 5.5 DEPOSITS All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the Board may select. 19 SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER 6.1 ISSUANCE OF SHARES No shares of the corporation shall be issued unless authorized by the Board, which authorization shall include the maximum number of shares to be issued and the consideration to be received for each share. 6.2 CERTIFICATES FOR SHARES Certificates representing shares of the corporation shall be signed by the Chairman of the Board or a Vice Chairman of the Board, if any, or the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, any of whose signatures may be a facsimile. The Board may in its discretion appoint responsible banks or trust companies from time to time to act as transfer agents and registrars of the stock of the corporation; and, when such appointments shall have been made, no stock certificate shall be valid until countersigned by one of such transfer agents and registered by one of such registrars. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person was such officer, transfer agent or registrar at the date of issue. All certificates shall include on their face written notice of any restrictions which may be imposed on the transferability of such shares and shall be consecutively numbered or otherwise identified. 6.3 STOCK RECORDS The stock transfer books shall be kept at the registered office or principal place of business of the corporation or at the office of the corporation's transfer agent or registrar. The name and address of each person to whom certificates for shares are issued, together with the class and number of shares represented by each such certificate and the date of issue thereof, shall be entered on the stock transfer books of the corporation. The person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. 6.4 RESTRICTION ON TRANSFER Except to the extent that the corporation has obtained an opinion of counsel acceptable to the corporation that transfer restrictions are not required under applicable securities laws, or has otherwise satisfied itself that such transfer restrictions are not required, all certificates representing shares of the corporation shall bear a legend on the 20 face of the certificate, or on the reverse of the certificate if a reference to the legend is contained on the face, which reads substantially as follows: "The securities evidenced by this certificate have not been registered under the Securities Act of 1933 or any applicable state law, and no interest therein may be sold, distributed, assigned, offered, pledged or otherwise transferred unless (a) there is an effective registration statement under such Act and applicable state securities laws covering any such transaction involving said securities or (b) this corporation receives an opinion of legal counsel for the holder of these securities (concurred in by legal counsel for this corporation) stating that such transaction is exempt from registration or this corporation otherwise satisfies itself that such transaction is exempt from registration. Neither the offering of the securities nor any offering materials have been reviewed by any administrator under the Securities Act of 1933 or any applicable state law." 6.5 TRANSFER OF SHARES The transfer of shares of the corporation shall be made only on the stock transfer books of the corporation pursuant to authorization or document of transfer made by the holder of record thereof or by his or her legal representative, who shall furnish proper evidence of authority to transfer, or by his or her attorney-in-fact authorized by power of attorney duly executed and filed with the Secretary of the corporation. All certificates surrendered to the corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificates for a like number of shares shall have been surrendered and cancelled. 6.6 LOST OR DESTROYED CERTIFICATES In the case of a lost, destroyed or mutilated certificate, a new certificate may be issued therefor upon such terms and indemnity to the corporation as the Board may prescribe. SECTION 7. BOOKS AND RECORDS The corporation shall keep correct and complete books and records of account, stock transfer books, minutes of the proceedings of its stockholders and Board and such other records as may be necessary or advisable. 21 SECTION 8. ACCOUNTING YEAR The accounting year of the corporation shall be the calendar year; provided that if a different accounting year is at any time selected for purposes of federal income taxes, the accounting year shall be the year so selected. SECTION 9. SEAL The seal of the corporation, if any, shall consist of the name of the corporation, the state of its incorporation and the year of its incorporation. SECTION 10. INDEMNIFICATION 10.1 RIGHT TO INDEMNIFICATION Each person who was or is made a party or is threatened to be made a party to or is otherwise involved (including, without limitation, as a witness) in any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a Director, officer or employee or agent of the corporation or that, being or having been such a Director, officer, employee or agent of the corporation, he or she is or was serving at the request of the corporation as a Director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as such a Director, officer, employee or agent or in any other capacity while serving as such a Director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the full extent permitted by the DGCL, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than permitted prior thereto), or by other applicable law as then in effect, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) actually and reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators; provided, however, that except as provided in subsection 10.2 hereof with respect to proceedings seeking to enforce rights to indemnification, the corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized or ratified by the Board. The right to indemnification conferred in subsection 10.1 hereof shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in 22 advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that if the DGCL requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a Director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this subsection 10.1 or otherwise. 10.2 RIGHT OF INDEMNITEE TO BRING SUIT If a claim under subsection 10.1 hereof is not paid in full by the corporation within sixty days after a written claim has been received by the corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. The indemnitee shall be presumed to be entitled to indemnification under this Section upon submission of a written claim (and, in an action brought to enforce a claim for an advancement of expenses, where the required undertaking, if any is required, has been tendered to the corporation), and thereafter the corporation shall have the burden of proof to overcome the presumption that the indemnitee is not so entitled. Neither the failure of the corporation (including its Board, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances nor an actual determination by the corporation (including its Board, independent legal counsel or its stockholders) that the indemnitee is not entitled to indemnification shall be a defense to the suit or create a presumption that the indemnitee is not so entitled. 10.3 NONEXCLUSIVITY OF RIGHTS The rights to indemnification and to the advancement of expenses conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, agreement, vote of stockholders or disinterested Directors, provisions of the Certificate of Incorporation or By-laws of the corporation or of Ormat Industries Ltd., or of any of the affiliates or subsidiaries of this corporation or otherwise. Notwithstanding any amendment to or repeal of this Section, any indemnitee shall be entitled to indemnification in accordance with the provisions hereof with respect to any acts or omissions of such indemnitee occurring prior to such amendment or repeal. 23 10.4 INSURANCE, CONTRACTS AND FUNDING The corporation may maintain insurance, at its expense, to protect itself and any Director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL. The corporation, without further stockholder approval, may enter into contracts with any Director, officer, employee or agent in furtherance of the provisions of this Section and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Section. 10.5 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION The corporation may, by action of the Board, grant rights to indemnification and advancement of expenses to employees or agents or groups of employees or agents of the corporation with the same scope and effect as the provisions of this Section with respect to the indemnification and advancement of expenses of Directors and officers of the corporation; provided, however, that an undertaking shall be made by an employee or agent only if required by the Board. 10.6 PERSONS SERVING OTHER ENTITIES Any person who is or was a Director, officer or employee of the corporation who is or was serving (a) as a Director or officer of another corporation of which a majority of the shares entitled to vote in the election of its Directors is held by the corporation or (b) in an executive or management capacity in a partnership, joint venture, trust or other enterprise of which the corporation or a wholly owned subsidiary of the corporation is a general partner or has a majority ownership shall be deemed to be so serving at the request of the corporation and entitled to indemnification and advancement of expenses under subsection 10.1 hereof. SECTION 11. AMENDMENTS OR REPEAL These By-laws may be amended or repealed and new By-laws may be adopted by the Board. The stockholders may also amend and repeal these By-laws or adopt new By-laws. All By-laws made by the Board may be amended or repealed by the stockholders. Notwithstanding the foregoing and any other provisions of these By-laws or the Certificate of Incorporation of the corporation (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law, these By-laws or the Certificate of Incorporation of the corporation), the affirmative vote of the holders of at 24 least 75% of the voting power of the then outstanding shares of capital stock of the corporation entitled to vote generally, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, Section 3.2 and Section 5.2 hereof. Notwithstanding any amendment to Section 10 hereof or repeal of these By-laws, or of any amendment or repeal of any of the procedures that may be established by the Board pursuant to Section 10 hereof, any indemnitee shall be entitled to indemnification in accordance with the provisions hereof and thereof with respect to any acts or omissions of such indemnitee occurring prior to such amendment or repeal. The foregoing By-laws were adopted by the Board of Directors on October 21, 2004. /s/ Yehudit Bronicki ------------------------------ Yehudit Bronicki President 25
Exhibit 4.3 -------------------------------------------------------------------------------- ORMAT TECHNOLOGIES, INC. and AMERICAN STOCK TRANSFER & TRUST COMPANY, AS RIGHTS AGENT RIGHTS AGREEMENT Dated as of [ ], 2004 -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ---- Section 1. Certain Definitions..............................................................................2 Section 2. Appointment of Rights Agent......................................................................8 Section 3. Issue of Right Certificates......................................................................8 Section 4. Form of Right Certificates......................................................................13 Section 5. Countersignature and Registration...............................................................13 Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates...............................................................14 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights...................................16 Section 8. Cancellation and Destruction of Right Certificates..............................................18 Section 9. Availability of Preferred Shares................................................................19 Section 10. Preferred Shares Record Date....................................................................20 Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights..............................20 Section 12. Certificate of Adjusted Purchase Price or Number of Shares......................................35 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power............................35 Section 14. Fractional Rights and Fractional Shares.........................................................37 Section 15. Rights of Action................................................................................40 Section 16. Agreement of Right Holders......................................................................40 Section 17. Right Holder Not Deemed a Stockholder...........................................................41 Section 18. Concerning the Rights Agent.....................................................................42 Section 19. Merger or Consolidation or Change of Name of Rights Agent.......................................43 Section 20. Duties of Rights Agent..........................................................................44 Section 21. Change of Rights Agent..........................................................................48 Section 22. Issuance of New Right Certificates..............................................................50 Section 23. Redemption......................................................................................52 Section 24. Exchange........................................................................................53 Section 25. Notice of Certain Events........................................................................56 Section 26. Notices.........................................................................................57 Section 27. Supplements and Amendments......................................................................58 Section 28. Successors......................................................................................60 Section 29. Benefits of this Agreement......................................................................60 Section 30. Severability....................................................................................60 Section 31. Governing Law...................................................................................60 Section 32. Counterparts....................................................................................60 Section 33. Descriptive Headings............................................................................61 Exhibit A - Form of Right Certificate ii RIGHTS AGREEMENT Agreement, dated as of [ ], 2004, between Ormat Technologies, Inc., a Delaware corporation (the "Corporation"), and, a American Stock Transfer & Trust Company, a New York banking corporation, as Rights Agent (the "Rights Agent"). The Board of Directors of the Corporation has authorized and declared a dividend of one preferred share purchase right (a "Right") for each share of Common Stock (as hereinafter defined) of the Corporation outstanding as of the effective date of this Agreement (the "Record Date"), each Right representing the right to purchase one one-hundredth of a Preferred Share (as hereinafter defined), upon the terms and subject to the conditions herein set forth, and has further authorized and directed the issuance of one Right with respect to each Common Share of the Corporation that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date (as such terms are hereinafter defined); provided, however, that Rights may be issued with respect to shares of Common Stock of the Corporation that shall become outstanding after the Distribution Date and prior to the earlier of the Redemption Date and the Final Expiration Date in accordance with the provisions of Section 22 hereof. Accordingly, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. Certain Definitions. For purposes of this Agreement, the following terms have the meanings indicated: (a) "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which on or after the Record Date, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the Common Stock then outstanding, but shall not include the Corporation, any Subsidiary (as such term is hereinafter defined) of the Corporation, any employee benefit plan of the Corporation, Ormat Industries, or any Subsidiary of the Corporation, or any entity holding Common Stock for or pursuant to the terms of any such plan. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of shares of Common Stock by the Corporation, which, by reducing the number of shares of Common Stock outstanding, increases the proportionate number of the shares of Common Stock beneficially owned by such Person to 15% or more of the Common Stock then outstanding; provided, however, that if a Person shall become the Beneficial Owner of 15% or more of the Common Stock then outstanding by reason of share purchases by the Corporation and shall, after such share purchases by the Corporation, become the Beneficial Owner of any additional shares of Common Stock (other than an acquisition that does not directly or indirectly increase the proportionate share of the Common Stock then outstanding beneficially owned by 2 such Person), then such Person shall be deemed to be an "Acquiring Person". Notwithstanding the foregoing, if the Board of Directors of the Corporation determines in good faith that a Person who would otherwise be an "Acquiring Person", as defined pursuant to the foregoing provisions of this paragraph (a), has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of shares of Common Stock so that such Person would no longer be an "Acquiring Person", as defined pursuant to the foregoing provisions of this paragraph (a), then such Person shall not be deemed to be an "Acquiring Person" for any purposes of this Agreement. Notwithstanding the foregoing provisions of this paragraph (a), Ormat Industries shall not be deemed to be an Acquiring Person as a result of its ownership of capital stock of the Corporation. (b) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date of this Agreement. (c) A Person shall be deemed the "Beneficial Owner" of and shall be deemed to have "Beneficial Ownership" of and to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly; 3 (ii) which such Person or any of such Person's Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or 4 (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section l(c)(ii)(B)) or disposing of any securities of the Corporation. Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase "then outstanding", when used with reference to a Person's Beneficial Ownership of securities of the Corporation, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder. (d) "Business Day" shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. (e) "close of business" on any given date shall mean 5:00 P.M., New York City time, on such date; provided, however, that if such date is not a Business Day it shall mean 5:00 P.M., New York City time, on the next succeeding Business Day. 5 (f) "Common Shares" when used with reference to any Person other than the Corporation shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. (g) "Common Stock" shall mean the Common Stock, par value $.001 per share, of the Corporation. (h) "current per share market price" shall have the meaning set forth in Section 11(d)(i) hereof. (i) "Designated Office" shall have the meaning set forth in Section 5 hereof. (j) "Distribution Date" shall have the meaning set forth in Section 3(a) hereof. (k) "equivalent preferred shares" shall have the meaning set forth in Section 11(b) hereof. (l) "Exchange Ratio" shall have the meaning set forth in Section 24(a) hereof. (m) "Final Expiration Date" shall have the meaning set forth in Section 7(b) hereof. (n) "Nasdaq" shall have the meaning set forth in Section 11(d)(i) hereof. 6 (o) "Ormat Industries" shall mean Ormat Industries Ltd., an Israeli corporation and corporate parent of the Corporation. (p) "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. (q) "Preferred Shares" shall mean shares of Series A Junior Participating Preferred Stock, par value $.001 per share, of the Corporation having the rights and preferences set forth in the Restated Certificate of Incorporation of the Corporation. (r) "Purchase Price" shall have the meaning set forth in Section 7(a) hereof. (s) "Record Date" shall have the meaning set forth in the second paragraph of the Preamble hereof. (t) "Redemption Date" shall have the meaning set forth in Section 7(b) hereof. (u) "Redemption Price" shall have the meaning set forth in Section 23(a) hereof. (v) "Right" shall have the meaning set forth in the second paragraph of the Preamble hereof. (w) "Right Certificate" shall have the meaning set forth in Section 3(a) hereof. (x) "Security" shall have the meaning set forth in Section 11(d)(i) hereof. 7 (y) "Shares Acquisition Date" shall mean the first date of public announcement by the Corporation or an Acquiring Person that an Acquiring Person has become such. (z) "Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person. (aa) "Trading Day" shall have the meaning set forth in Section 11(d)(i) hereof. Section 2. Appointment of Rights Agent. The Corporation hereby appoints the Rights Agent to act as agent for the Corporation in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Corporation may from time to time appoint such co-Rights Agents as it may deem necessary or desirable. The Rights Agent shall have no duty to supervise, and in no event shall be liable, for the acts or omissions of any co-Rights Agent. Section 3. Issue of Right Certificates. (a) Until the earlier of (i) the tenth day after the Shares Acquisition Date or (ii) the tenth Business Day (or such later date as may be determined by action of the Board of Directors of the Corporation prior to such time as any Person becomes an Acquiring Person) after the date of the commencement by any Person (other than the Corporation, any Subsidiary of the Corporation, any employee benefit plan of the Corporation or of any Subsidiary of the Corporation or any entity holding shares of Common Stock for or pursuant to the terms of any such plan) of, or of 8 the first public announcement of the intention of any Person (other than the Corporation, any Subsidiary of the Corporation, any employee benefit plan of the Corporation or of any Subsidiary of the Corporation or any entity holding Common Shares for or pursuant to the terms of any such plan) to commence, a tender or exchange offer the consummation of which would result in any Person becoming an Acquiring Person, the earlier of such dates being herein referred to as the "Distribution Date"), (x) the Rights will be attached to (subject to the provisions of Section 3(b) hereof) the shares of Common Stock (whether in book-entry, uncertificated or certificated form) issued and outstanding and the Rights will be owned by the registered holders of the shares of Common Stock and will not be evidenced by separate Right Certificates, and (y) any transfer of shares of Common Stock (or any interest therein, including the creation of a security interest) will also effect a transfer of the associated Rights (or the equivalent interest therein) and neither the Rights nor any interest therein may be transferred otherwise than by transfer of the associated shares of Common Stock (or the equivalent interest therein). As soon as practicable after the Distribution Date, the Corporation will prepare and execute, the Rights Agent will countersign, and the Corporation will send or cause to be sent (and the Rights Agent will, if requested and provided with a list of the relevant holders of Common Stock by the Corporation, send) by first-class, insured, postage-prepaid mail, to each record holder of shares of Common Stock as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Corporation, a Right Certificate, in substantially the form of Exhibit A hereto (a 9 "Right Certificate"), evidencing one Right for each share of Common Stock so held, subject, in the case of shares of Common Stock held in uncertificated form on the Distribution Date, to the rights provided by law to a registered pledgee whose security interest has been duly registered with the Corporation. As of the Distribution Date, the Rights will be evidenced solely by such Right Certificates. (b) Until the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date, certificates for shares of Common Stock shall have impressed on, printed on, written on or otherwise affixed to them substantially the following legend: This certificate also evidences and entitles the holder hereof to certain Rights as set forth (and as defined) in a Rights Agreement between Ormat Technologies, Inc. and American Stock Transfer & Trust Company, as Rights Agent, dated as of [ ], 2004, as it may be amended from time to time (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Ormat Technologies, Inc. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Ormat Technologies, Inc. will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. Under certain circumstances, as set forth in the Rights Agreement, Rights beneficially owned by any Person (as defined in the Rights Agreement) who becomes an Acquiring Person (as defined in the Rights Agreement) may become void. With respect to such certificates containing the foregoing legend, until the Distribution Date, the Rights associated with the shares of Common Stock represented by such certificates shall be evidenced by such certificates alone, and the surrender for transfer of 10 any such certificate shall also constitute the transfer of the Rights associated with the shares of Common Stock represented thereby. (c) Until the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date, confirmations and account statements sent to holders of shares of Common Stock in book-entry form and initial transaction statements relating to the registration, pledge or release from pledge of shares of Common Stock in uncertificated form shall have impressed on, printed on, written on or otherwise affixed to them substantially the following legend: The shares of Common Stock, par value $.001 per share, of Ormat Technologies, Inc. to which this statement relates also evidence and entitle the holder thereof to certain Rights as set forth (and as defined) in a Rights Agreement between Ormat Technologies, Inc. and American Stock Transfer & Trust Company, as Rights Agent, dated as of [ ], 2004 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Ormat Technologies, Inc. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by the shares to which this statement relates. Ormat Technologies, Inc. will mail to the holder of the shares to which this statement relates and any registered pledgee of uncertificated shares a copy of the Rights Agreement without charge after receipt of a written request therefor. Under certain circumstances, as set forth in the Rights Agreement, Rights beneficially owned by any Person (as defined in the Rights Agreement) who becomes an Acquiring Person (as defined in the Rights Agreement) may become void. With respect to shares of Common Stock in book-entry form for which there has been sent a confirmation or account statement and shares of Common Stock in uncertificated form for which there has been sent an initial transaction statement containing the foregoing legend, until the earliest of the Distribution Date, the Redemption Date or the 11 Final Expiration Date, the Rights associated with such Common Shares shall be evidenced by such Common Shares alone, and the registration of transfer or pledge, or the release from pledge, of any such Common Shares shall also constitute the registration of transfer or pledge, or the release from pledge, as the case may be, of the Rights associated with such Common Shares. (d) In the event that the Corporation purchases or acquires any shares of Common Stock after the Record Date but prior to the Distribution Date, any Rights associated with such Common Shares shall be deemed canceled and retired so that the Corporation shall not be entitled to exercise any Rights associated with the shares of Common Stock which are no longer outstanding. 12 Section 4. Form of Right Certificates. Subject to the provisions of Section 22 hereof, the Right Certificates (and the forms of election to purchase Preferred Shares and of assignment to be printed on the reverse thereof) shall be substantially the same as Exhibit A hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Corporation may deem appropriate and which do not affect the rights, duties or responsibilities of the Rights Agent, and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed or the National Association of Securities Dealers, Inc., or to conform to usage. Section 5. Countersignature and Registration. The Right Certificates shall be executed on behalf of the Corporation by the Chairman of the Board or a Vice Chairman of the Board, if any, or the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, shall have affixed thereto the Corporation's seal or a facsimile thereof, and shall be attested by the Secretary or an Assistant Secretary of the Corporation, either manually or by facsimile signature. The Right Certificates shall be countersigned by the Rights Agent, either manually or by facsimile signature, and shall not be valid for any purpose unless countersigned. In case any officer of the Corporation who shall have signed any of the Right Certificates shall cease to be such officer of the Corporation before countersignature by the Rights Agent 13 and issuance and delivery by the Corporation, such Right Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Corporation with the same force and effect as though the person who signed such Right Certificates had not ceased to be such officer of the Corporation; and any Right Certificate may be signed on behalf of the Corporation by any person who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Corporation to sign such Right Certificate, although at the date of the execution of this Agreement any such person was not such an officer. Following the Distribution Date and receipt by the Rights Agent of a list of the relevant holders of Common Stock as of the Distribution Date provided by the Corporation, the Rights Agent will keep or cause to be kept, at an office designated by the Rights Agent for such purpose (the "Designated Office"), books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates, the number of Rights evidenced on its face by each of the Right Certificates and the date of each of the Right Certificates. Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject to the provisions of Section 14 hereof, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the earlier of the Redemption Date or the Final Expiration Date, any Right Certificate or Right Certificates (other than Right 14 Certificates representing Rights that have become void pursuant to Section 11(a)(ii) hereof or that have been exchanged pursuant to Section 24 hereof) may be transferred, split up, combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder of the Rights evidenced thereby to purchase a like number of one one-hundredths of a Preferred Share as the Right Certificate or Right Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate or Right Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Right Certificate or Right Certificates to be transferred, split up, combined or exchanged at the Designated Office of the Rights Agent. Thereupon the Rights Agent shall countersign and deliver to the Person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Corporation may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates. The Rights Agent is not responsible or obligated to inquire as to whether the Corporation required that any such taxes or charges be paid or whether the payment of any such taxes or charges has been made. Upon receipt by the Corporation and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of loss, theft or destruction, of indemnity or security satisfactory to them, and, at the Corporation's request, reimbursement to the Corporation and the 15 Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate if mutilated, the Corporation will make and deliver a new Right Certificate of like tenor to the Rights Agent for delivery to the registered holder in lieu of the Right Certificate so lost, stolen, destroyed or mutilated. Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. (a) Each Right (other than Rights that have become void pursuant to Section 11(a)(ii) hereof or that have been exchanged pursuant to Section 24 hereof) shall initially entitle the registered holder thereof to purchase one one-hundredth of a Preferred Share, subject to adjustment from time to time as provided in Section 11 or 13 hereof. The purchase price (the "Purchase Price") for each one one-hundredth of a Preferred Share purchasable pursuant to the exercise of a Right shall be $[___], and shall be subject to adjustment from time to time as provided in Section 11 or 13 hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below. (b) The registered holder of any Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Distribution Date upon surrender of the Right Certificate evidencing such Rights, with the form of election to purchase on the reverse side thereof duly and properly executed, to the Rights Agent at the Designated Office of the Rights Agent, together with payment of the Purchase Price for each one one-hundredth of a Preferred Share as to which the Rights are exercised, at or prior to the earliest of (i) the close of business on the tenth anniversary of the Record Date (the "Final 16 Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date"), or (iii) the time at which such Rights are exchanged as provided in Section 24 hereof. (c) Upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase duly executed and properly completed, accompanied by payment of the Purchase Price for the shares to be purchased and an amount equal to any applicable tax or charge required to be paid by the holder of the Rights evidenced by such Right Certificate in accordance with Section 9 hereof by certified check, cashier's check or money order payable to the order of the Corporation, the Rights Agent shall thereupon promptly (i) (A) requisition from any transfer agent of the Preferred Shares certificates for the number of Preferred Shares to be purchased and the Corporation hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B) requisition from the depositary agent depositary receipts representing such number of one one-hundredths of a Preferred Share as are to be purchased (in which case certificates for the Preferred Shares represented by such receipts shall be deposited by the transfer agent for the Preferred Shares with the depositary agent) and the Corporation hereby directs the depositary agent to comply with such request, (ii) when appropriate, requisition from the Corporation the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts, cause the 17 same to be delivered to or upon the order of the registered holder of the Rights evidenced by such Right Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt, deliver such cash to or upon the order of the registered holder of the Rights evidenced by such Right Certificate. (d) In case the registered holder of the Rights evidenced by any Right Certificate shall exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Rights or to his duly authorized assigns, subject to the provisions of Section 6 and Section 14 hereof. Section 8. Cancellation and Destruction of Right Certificates. All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the or Corporation to any of its agents, be delivered to the Rights Agent for cancellation or in canceled form, or, if surrendered to the Rights Agent, shall be canceled by it, and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Right Certificate purchased or acquired by the Corporation otherwise than upon the exercise thereof. The Rights Agent shall deliver all canceled Right Certificates to the Corporation, or shall, at the written request of the Corporation, 18 destroy such canceled Right Certificates, and in such case shall deliver a certificate of destruction thereof to the Corporation. Section 9. Availability of Preferred Shares. The Corporation covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued Preferred Shares or any Preferred Shares held in its treasury, the number of Preferred Shares that will be sufficient to permit the exercise in full of all outstanding Rights in accordance with Section 7 hereof. The Corporation covenants and agrees that it will take all such action as may be necessary to ensure that all Preferred Shares delivered upon exercise of Rights shall, at the time of delivery of the certificates for such Preferred Shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable shares. The Corporation further covenants and agrees that it will pay when due and payable any and all taxes and charges which may be payable in respect of the issuance or delivery of the Rights or the Right Certificates or of any Preferred Shares upon the exercise of Rights. The Corporation shall not, however, be required to pay any such tax or charge which may be payable in respect of any transfer or delivery of Rights or Right Certificates to a person other than, or the issuance or delivery of certificates or depositary receipts for the Preferred Shares in a name other than that of, the registered holder of the Rights evidenced by Right Certificates surrendered for exercise or to issue or to deliver any certificates or depositary receipts for Preferred Shares upon the exercise of any Rights until any such tax and charge shall have been paid (any such tax and charge 19 being payable by the holder of such Rights at the time of surrender of the related Right Certificates) or until it has been established to the Corporation's reasonable satisfaction that no such tax or charge is due. Section 10. Preferred Shares Record Date. Each Person in whose name any Preferred Shares are issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of such Preferred Shares on, and the date of issuance of such Preferred Shares and the date of any certificate for such Preferred Shares shall be, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable taxes or charges pursuant to Section 9) was made; provided, however, that if the date of such surrender and payment is a date upon which the Preferred Shares transfer books of the Corporation are closed, such Person shall be deemed to have become the record holder of such shares on, and the date of issuance of such Preferred Shares and the date of any such certificate shall be, the next succeeding Business Day on which the Preferred Shares transfer books of the Corporation are open. Prior to the exercise of any Rights, the holder thereof shall not be entitled to any rights of a holder of Preferred Shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Corporation, except as provided herein. Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights. The Purchase Price, the number of Preferred Shares covered by each Right 20 and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a) (i) In the event the Corporation shall at any time after the Record Date (A) declare a dividend on the Preferred Shares payable in Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the outstanding Preferred Shares into a smaller number of Preferred Shares or (D) issue any shares of its capital stock in a reclassification of the Preferred Shares (including any such reclassification in connection with a consolidation or merger in which the Corporation is the continuing or surviving corporation), except as otherwise provided in this Section 11(a), the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Shares transfer books of the Corporation were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate 21 par value of the shares of capital stock of the Corporation issuable upon exercise of one Right. (ii) (A) Subject to clause (B) of this subparagraph (ii) and Section 24 of this Agreement, in the event any Person becomes an Acquiring Person, each registered holder of a Right shall thereafter have a right to receive, upon exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of such number of Preferred Shares for which a Right is then exercisable, such number of shares of Common Stock as shall equal the result obtained by (x) multiplying the then current Purchase Price by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable and dividing that product by (y) 50% of the then current per share market price of the shares of Common Stock (determined pursuant to Section 11(d) hereof) on the date of the occurrence of such event. In the event that any Person shall become an Acquiring Person and the Rights shall then be outstanding, the Corporation shall not take any action which would eliminate or diminish the benefits intended to be afforded by the Rights. (B) From and after the occurrence of the event described in clause (A) of this subsection (ii), any Rights that are or were acquired or 22 beneficially owned by any Acquiring Person (or any Associate or Affiliate of such Acquiring Person) shall be void and any holder of such Rights shall thereafter have no right to exercise such Rights under any provision of this Agreement. No Right Certificate shall be issued pursuant to Section 3 hereof that evidences Rights beneficially owned by an Acquiring Person (or any Associate or Affiliate of such Acquiring Person) whose Rights would be void pursuant to the preceding sentence and any Right Certificate evidencing Rights beneficially owned by any such Acquiring Person (or any Associate or Affiliate of such Acquiring Person) shall be void. No Right Certificate shall be issued at any time upon the transfer of any Rights to an Acquiring Person (or any Associate or Affiliate of such Acquiring Person) whose Rights would be void pursuant to the second preceding sentence or to any nominee of such Acquiring Person, Associate or Affiliate; and any Right Certificate delivered to the Rights Agent for transfer to an Acquiring Person (or any Associate or Affiliate of such Acquiring Person) whose Rights would be void pursuant to the second preceding sentence shall be canceled. (iii) In the event that there shall not be sufficient shares of Common Stock issued but not outstanding or authorized but unissued to permit the exercise in full of the Rights in accordance with the foregoing 23 subparagraph (ii), the Corporation shall take all such action as may be necessary to authorize additional shares of Common Stock for issuance upon exercise of the Rights. In the event the Corporation shall, after good faith effort, be unable to take all such action as may be necessary to authorize such additional shares of Common Stock, the Corporation shall substitute, for each share of Common Stock that would otherwise be issuable upon exercise of a Right, a number of Preferred Shares or fraction thereof such that the current per share market price of one Preferred Share multiplied by such number or fraction is equal to the current per share market price of one share of Common Stock as of the date of issuance of such Preferred Shares or fraction thereof. (b) In case the Corporation shall fix a record date for the issuance of rights, options or warrants to all holders of Preferred Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Preferred Shares (or shares having the same rights, privileges and preferences as the Preferred Shares ("equivalent preferred shares")) or securities convertible into Preferred Shares or equivalent preferred shares at a price per Preferred Share or equivalent preferred share (or having a conversion price per share, if a security convertible into Preferred Shares or equivalent preferred shares) less than the then current per share market price of the Preferred Shares on such record date, the Purchase Price to be in effect after such record date shall be 24 determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Preferred Shares outstanding on such record date plus the number of Preferred Shares which the aggregate offering price of the total number of Preferred Shares and/or equivalent preferred shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and the denominator of which shall be the number of Preferred Shares outstanding on such record date plus the number of additional Preferred Shares and/or equivalent preferred shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible); provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Corporation issuable upon exercise of one Right. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Corporation, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. Preferred Shares owned by or held for the account of the Corporation shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights, options or 25 warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Corporation shall fix a record date for the making of a distribution to all holders of the Preferred Shares (including any such distribution made in connection with a consolidation or merger in which the Corporation is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular quarterly cash dividend or a dividend payable in Preferred Shares) or subscription rights or warrants (excluding those referred to in Section 11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the then current per share market price of the Preferred Shares on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Corporation, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one Preferred Share and the denominator of which shall be such current per share market price of the Preferred Shares; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Corporation issuable upon exercise 26 of one Right. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (d) (i) For the purpose of any computation hereunder, the "current per share market price" of any security (a "Security" for the purpose of this Section 11(d)(i)) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to but not including such date; provided, however, that in the event that the current per share market price of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares, or (B) any subdivision, combination or reclassification of such Security and prior to the expiration of 30 Trading Days after but not including the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the current per share market price of the Security shall be appropriately adjusted to reflect the current market price per share equivalent of such Security; and provided, further, that in the event that the current per share market price of the shares of Common Stock is determined as of a date prior to the expiration of 30 Trading Days following the Record Date, the 27 current per share market price of the shares of Common Stock shall be deemed to be the average of the daily closing prices per share of Common Stock for the period of Trading Days commencing with the Record Date and ending immediately prior to such date. The closing price of a Security for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Security is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the Nasdaq Stock Market, Inc. National Market System ("Nasdaq") or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Corporation. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading is open for the 28 transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day. (ii) For the purpose of any computation hereunder, the "current per share market price" of the Preferred Shares shall be determined in accordance with the method set forth in Section 11(d)(i). If the Preferred Shares are not publicly traded, the "current per share market price" of the Preferred Shares shall be conclusively deemed to be the current per share market price of the shares of Common Stock as determined pursuant to Section 11(d)(i) (appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof), multiplied by one hundred. If neither the shares of Common Stock nor the Preferred Shares are publicly held or so listed or traded, "current per share market price" shall mean the fair value per share as determined in good faith by the Board of Directors of the Corporation, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. (e) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be 29 made to the nearest cent or to the nearest one one-millionth of a Preferred Share or one ten-thousandth of any other share or security as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which requires such adjustment or (ii) the date of the expiration of the right to exercise any Rights. (f) If as a result of an adjustment made pursuant to Section 11(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Corporation other than Preferred Shares, thereafter the number of such other shares so receivable upon exercise of any Right shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Shares contained in Section 11(a) through (c), inclusive, and the provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares shall apply on like terms to any such other shares. (g) All Rights originally issued by the Corporation subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one one-hundredths of a Preferred Share purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. 30 (h) Unless the Corporation shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one one-hundredths of a Preferred Share (calculated to the nearest one one-millionth of a Preferred Share) obtained by (i) multiplying (x) the number of one one-hundredths of a share covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Corporation may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of one one-hundredths of a Preferred Share purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of one one-hundredths of a Preferred Share for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately 31 after adjustment of the Purchase Price. The Corporation shall make a public announcement and give prompt notice to the Rights Agent of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least 10 days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Corporation shall, as promptly as practicable, cause to be distributed to registered holders of Rights on such record date Right Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Corporation, shall cause to be distributed to such registered holders in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Corporation, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein and shall be registered in the names of the registered holders of the Rights on the record date specified in the public announcement. 32 (j) Irrespective of any adjustment or change in the Purchase Price or the number of one one-hundredths of a Preferred Share issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price and the number of one one-hundredths of a Preferred Share which were expressed in the initial Right Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below one one-hundredth of the then par value, if any, of the Preferred Shares issuable upon exercise of the Rights, the Corporation shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable Preferred Shares at such adjusted Purchase Price. (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Corporation may elect to defer (and shall promptly notify the Rights Agent of any such elections) until the occurrence of such event the issuing to the registered holder of any Right exercised after such record date of the Preferred Shares and other capital stock or securities of the Corporation, if any, issuable upon such exercise over and above the Preferred Shares and other capital stock or securities of the Corporation, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Corporation shall deliver to such holder a due bill or other appropriate instrument 33 evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Corporation shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any consolidation or subdivision of the Preferred Shares, issuance wholly for cash of any Preferred Shares at less than the current market price, issuance wholly for cash of Preferred Shares or securities which by their terms are convertible into or exchangeable for Preferred Shares, dividends on Preferred Shares payable in Preferred Shares or issuance of rights, options or warrants referred to hereinabove in Section 11(b), hereafter made by the Corporation to holders of its Preferred Shares shall not be taxable to such stockholders. (n) In the event that at any time after the Record Date and prior to the Distribution Date, the Corporation shall (i) declare or pay any dividend on the Common Stock payable in shares of Common Stock or (ii) effect a subdivision, combination or consolidation of the Common Stock (by reclassification or otherwise than by payment of dividends in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in any such case (A) the number of one one-hundredths of a Preferred Share purchasable after such event upon proper exercise of each Right shall be determined by multiplying the 34 number of one one-hundredths of a Preferred Share so purchasable immediately prior to such event by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately before such event and the denominator of which is the number of shares of Common Stock outstanding immediately after such event, and (B) each share of Common Stock outstanding immediately after such event shall have issued with respect to it that number of Rights which each share of Common Stock outstanding immediately prior to such event had issued with respect to it. The adjustments provided for in this Section 11(n) shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected. 35 Section 12. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Section 11 or 13 hereof, the Corporation shall promptly (a) prepare a certificate setting forth such adjustment, and a brief statement of the facts and computations accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the Common Stock or the Preferred Shares a copy of such certificate and (c) mail a brief summary thereof to each registered holder of a Right in accordance with Section 25 hereof. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained and shall have no duty with respect to and shall not be deemed to have knowledge of any adjustment unless and until it shall have received such a certificate. Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. In the event, directly or indirectly, at any time after a Person has become an Acquiring Person, (a) the Corporation shall consolidate with, or merge with and into, any other Person, (b) any Person shall consolidate with the Corporation, or merge with and into the Corporation and the Corporation shall be the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the shares of Common Stock shall be changed into or exchanged for stock or other securities of any other Person (or the Corporation) or cash or any other property, or (c) the Corporation shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Corporation and its Subsidiaries (taken as a whole) 36 to any other Person other than the Corporation or one or more of its wholly-owned Subsidiaries, then, and in each such case, proper provision shall be made so that (i) each registered holder of a Right (except as otherwise provided herein) shall thereafter have the right to receive, upon the exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of Common Shares of such other Person (including the Corporation as successor thereto or as the surviving corporation) as shall equal the result obtained by (A) multiplying the then current Purchase Price by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable and dividing that product by (B) 50% of the then current per share market price of the Common Shares of such other Person (determined pursuant to Section 11(d) hereof) on the date of consummation of such consolidation, merger, sale or transfer; (ii) the issuer of such Common Shares shall thereafter be liable for, and shall assume, by virtue of such consolidation, merger, sale or transfer, all the obligations and duties of the Corporation pursuant to this Agreement; (iii) the term "Corporation" shall thereafter be deemed to refer to such issuer; and (iv) such issuer shall take such steps (including, but not limited to, the reservation of a sufficient number of its Common Shares in accordance with Section 9 hereof) in connection with such consummation as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to its Common Shares thereafter deliverable upon the exercise of the Rights. 37 The Corporation shall not consummate any such consolidation, merger, sale or transfer unless prior thereto the Corporation and such issuer shall have executed and delivered to the Rights Agent a supplemental agreement so providing. The Corporation shall not enter into any transaction of the kind referred to in this Section 13 if at the time of such transaction there are any rights, warrants, instruments or securities outstanding or any agreements or arrangements which, as a result of the consummation of such transaction, would eliminate or substantially diminish the benefits intended to be afforded by the Rights. The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. Section 14. Fractional Rights and Fractional Shares. (a) The Corporation shall not be required to issue fractions of Rights or to distribute Right Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Rights with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if 38 the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by Nasdaq or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Corporation. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Corporation shall be used. (b) The Corporation shall not be required to issue fractions of Preferred Shares (other than fractions which are integral multiples of one one-hundredth of a Preferred Share) upon exercise of the Rights or to distribute certificates which evidence fractional Preferred Shares (other than fractions which are integral multiples of one one-hundredth of a Preferred Share). Fractions of Preferred Shares in integral multiples of one one-hundredth of a Preferred Share may, at the election of the Corporation, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Corporation and a depositary selected by it; provided, that such agreement shall provide that the holders of such depositary 39 receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Shares represented by such depositary receipts. In lieu of fractional Preferred Shares that are not integral multiples of one one-hundredth of a Preferred Share, the Corporation shall pay to the registered holders of Rights at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Preferred Share. For the purposes of this Section 14(b), the current market value of a Preferred Share shall be the closing price of a Preferred Share (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of such exercise. (c) The holder of a Right by the acceptance of the Right expressly waives such holder's right to receive any fractional Rights or any fractional shares upon exercise of a Right (except as provided above). Section 15. Rights of Action. All rights of action in respect of this Agreement, excepting the rights of action expressly given to the Rights Agent under this Agreement, are vested in the respective registered holders of the Rights and any registered holder of any Right, without the consent of the Rights Agent or of the holder of any other Right, may, in such holder's own behalf and for such holder's own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Corporation to enforce, or otherwise act in respect of, such holder's right to exercise the Rights registered in such holder's name in the manner provided in the Right Certificates 40 and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of the obligations of any Person subject to, this Agreement. Section 16. Agreement of Right Holders. Every holder of a Right, by accepting the same, consents and agrees with the Corporation and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the shares of Common Stock; (b) after the Distribution Date, the Rights are transferable only on the registry books of the Rights Agent upon surrender of the Right Certificates evidencing such Rights at the Designated Office of the Rights Agent, duly endorsed or accompanied by a proper instrument of transfer; and (c) the Corporation and the Rights Agent shall deem and treat the Person in whose name the Right is registered as the absolute owner thereof (notwithstanding any notations of ownership or writing on the Right Certificates evidencing such Rights or any certificate for the associated Common Stock made by anyone other than the Corporation or the Rights Agent) for all purposes whatsoever, and neither the Corporation nor the Rights Agent shall be affected by any notice to the contrary, except as required by law. 41 Section 17. Right Holder Not Deemed a Stockholder. No holder, as such, of any Right shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Preferred Shares or any other securities of the Corporation which may at any time be issuable on the exercise of such Rights, nor shall anything contained herein or in any Right Certificate be construed to confer upon the holder of any Right, as such, any of the rights of a stockholder of the Corporation or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until such Right or Rights shall have been exercised in accordance with the provisions hereof. Section 18. Concerning the Rights Agent. The Corporation agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the execution, delivery, administration and amendment of this Agreement and the exercise and performance of its duties hereunder. The Corporation also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, damage, judgment, fine, penalty, claim, demand, settlement, cost or expense, incurred without gross negligence, bad faith or willful misconduct (as each is finally determined by a court of competent jurisdiction) on the part of the Rights Agent, for any action taken, suffered or omitted by the Rights Agent in 42 connection with the acceptance and administration of this Agreement, including, without limitation, the costs and expenses of defending against any claim of liability. Anything to the contrary notwithstanding, in no event shall the Rights Agent be liable for special, indirect, consequential or incidental loss or damage of any kind whatsoever (including, without limitation, lost profits), even if the Rights Agent has been advised of the likelihood of such loss or damage. The indemnity, exculpation and compensation provided for in this Agreement shall survive the termination of this Agreement, the termination and expiration of the Rights, and the resignation or removal of the Rights Agent. The Rights Agent shall be authorized to rely on, shall be protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its administration of this Agreement in reliance upon any Right Certificate or certificate for the Preferred Shares or Common Shares or for other securities of the Corporation, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, instruction, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons, or otherwise upon the opinion of counsel as set forth in Section 20 hereof. Section 19. Merger or Consolidation or Change of Name of Rights Agent. Any Person into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any Person resulting from any merger or 43 consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any Person succeeding to the stock transfer or corporate trust powers of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided, that such Person would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Right Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases the Rights evidenced by such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name; and in all such cases the Rights evidenced 44 by such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. Section 20. Duties of Rights Agent. The Rights Agent undertakes only the duties and obligations expressly imposed by this Agreement upon the following terms and conditions, by all of which the Corporation and the holders of Rights, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Corporation), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent, and the Rights Agent shall incur no liability for or in respect of any action taken, suffered or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Corporation prior to taking, suffering or omitting any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chief Executive Officer, any Vice President, the Treasurer or the Secretary of the Corporation and delivered to the Rights Agent; and such certificate shall be full authorization and protection to the Rights Agent, and the Rights Agent shall incur no liability for or in respect of 45 any action taken, suffered or omitted in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder to the Corporation and any other Person only for its own gross negligence, bad faith or willful misconduct (as each is finally determined by a court of competent jurisdiction). (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Right Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Corporation only. (e) The Rights Agent shall not have any liability nor be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible or liable for any breach by the Corporation of any covenant or condition contained in this Agreement or in any Right Certificate; nor shall it be responsible or liable for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that would require any such 46 change or adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after actual notice that such change or adjustment is required); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Preferred Shares to be issued pursuant to this Agreement or any Right Certificate or as to whether any Preferred Shares will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Corporation agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any one of the Chief Executive Officer, any Vice President, the Secretary or the Treasurer of the Corporation, and to apply to such officers for advice or instructions in connection with its duties, and such advice or instructions shall be full authorization and protection to the Rights Agent and the Rights Agent shall incur no liability for or in respect of any action taken, suffered or omitted by it in good faith in accordance with the advice or instructions of any such officer or for any delay in acting while waiting for those instructions. 47 (h) The Rights Agent and any stockholder, Affiliate, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Corporation or become pecuniarily interested in any transaction in which the Corporation may be interested, or contract with or lend money to the Corporation or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Corporation or for any other Person. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable, accountable or liable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Corporation or any other Person resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds in the performance of any of its duties hereunder or in the exercise of its rights if it reasonably believes in good faith that repayment of such funds as required by this Agreement is not reasonably assured to it. (k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, the certificate contained in the form of assignment or the form of election to purchase set forth on the reverse thereof, as the case 48 may be, has not been completed to certify the holder is not an Acquiring Person (or an Affiliate or Associate thereof), the Rights Agent shall not take any further action with respect to such requested exercise or transfer without first consulting with the Corporation. Section 21. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Corporation and to each transfer agent of the shares of Common Stock or the Preferred Shares by registered or certified mail, and to the registered holders of the Rights by first-class mail. The Corporation may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the shares of Common Stock or the Preferred Shares by registered or certified mail, and to the registered holders of the Rights by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Corporation shall appoint a successor to the Rights Agent. If the Corporation shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the registered holder of a Right (which holder shall, with such notice, submit such holder's Right Certificate, if any, or such holder's certificate, if any, for the associated shares of Common Stock for inspection by the Corporation), then the registered holder of any Right Certificate may apply to any court 49 of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Corporation or by such a court, shall be a Person, or an Affiliate of such a Person, organized and doing business under the laws of the United States or of the State of New York (or of any other state of the United States so long as such Person is authorized to do business as a banking institution in the State of New York), in good standing, having an office in the State of New York, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed. The predecessor Rights Agent shall deliver and transfer to the successor Rights Agent, or, if no successor Rights Agent is appointed within 30 days after the predecessor Rights Agent has given or received notice of resignation or removal to or from the Corporation, as the case may be, to the Corporation, any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose and thereafter the predecessor Rights Agent shall have no further duties or obligations as Rights Agent under this Agreement (it being understood that the foregoing is not intended to release the Rights Agent from any liability resulting from the Rights Agent's gross negligence, bad faith or willful misconduct (as each is finally determined by a court of competent 50 jurisdiction) while acting as Rights Agent hereunder). Not later than the effective date of any such appointment the Corporation shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the shares of Common Stock or the Preferred Shares, and mail a notice thereof in writing to the registered holders of the Rights. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. Issuance of New Right Certificates. Notwithstanding any of the provisions of this Agreement or of the Right Certificates to the contrary, the Corporation may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable upon exercise of a Right made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Common Stock following the Distribution Date and prior to the earlier of the Redemption Date and the Final Expiration Date, the Corporation (a) shall with respect to shares of Common Stock so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement in existence prior to the Distribution Date, or upon the exercise, conversion or exchange of securities, notes or debentures (pursuant to the terms thereof) issued by the Corporation and in existence prior to the Distribution Date, and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of 51 the Corporation, issue Right Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that (i) the Corporation shall not be obligated to issue any such Right Certificates if, and to the extent that, the Corporation shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Corporation or the Person to whom such Right Certificate would be issued or would create a significant risk of such options or employee plans or arrangements failing to qualify for otherwise available special tax treatment, and (ii) no such Right Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof. Section 23. Redemption. (a) The Board of Directors of the Corporation may, at its option, at any time prior to such time as any Person becomes an Acquiring Person, redeem all but not less than all the then outstanding Rights at a redemption price of $.001 per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"). The redemption of the Rights by the Board of Directors of the Corporation may be made effective at such time, on such basis and with such conditions as the Board of Directors of the Corporation in its sole discretion may establish. (b) Immediately upon the action of the Board of Directors of the Corporation ordering the redemption of the Rights pursuant to paragraph (a) of this Section 23, and without any further action and without any notice, the right to 52 exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. The Corporation shall promptly give public notice and notice to the Rights Agent of any such redemption; provided, however, that the failure to give, or any defect in, any such notice shall not affect the validity of such redemption. Within 10 days after such action of the Board of Directors of the Corporation ordering the redemption of the Rights, the Corporation shall mail a notice of redemption to all the registered holders of the then outstanding Rights at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the shares of Common Stock. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Corporation nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 24 hereof, and other than in connection with the purchase of shares of Common Stock prior to the Distribution Date. Section 24. Exchange. (a) The Board of Directors of the Corporation may, at its option, at any time after any Person becomes an Acquiring Person, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights 53 that have become void pursuant to the provisions of Section 11(a)(ii) hereof) for shares of Common Stock at an exchange ratio of one share of Common Stock per Right, appropriately adjusted pursuant to Section 11(i) to reflect any stock split, stock dividend or similar transaction occurring after the Record Date (such exchange ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors of the Corporation shall not be empowered to effect such exchange at any time after the Record Date if any Person (other than the Corporation, any Subsidiary of the Corporation, any employee benefit plan of Ormat Industries, the Corporation or any such Subsidiary, or any entity holding shares of Common Stock for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the shares of Common Stock then outstanding. (b) Immediately upon the action of the Board of Directors of the Corporation ordering the exchange of any Rights pursuant to paragraph (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of shares of Common Stock equal to the number of such Rights held by such holder multiplied by the Exchange Ratio. The Corporation shall 54 promptly give public notice and notice to the Rights Agent of any such exchange; provided, however, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Corporation shall promptly mail a notice of any such exchange to all of the registered holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the shares of Common Stock for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 11(a)(ii) hereof) held by each holder of Rights. (c) In the event that there shall not be sufficient shares of Common Stock issued but not outstanding or authorized but unissued to permit any exchange of Rights as contemplated in accordance with this Section 24, the Corporation shall take all such action as may be necessary to authorize additional shares of Common Stock for issuance upon exchange of the Rights. In the event the Corporation shall, after good faith effort, be unable to take all such action as may be necessary to authorize such additional shares of Common Stock, the Corporation shall substitute, for each share of Common Stock that would otherwise be issuable upon exchange of a Right, a number of Preferred Shares or fraction thereof such that the current per share market price of one Preferred Share multiplied by such number or fraction is equal to the current per share 55 market price of one share of Common Stock as of the date of issuance of such Preferred Shares or fraction thereof. (d) The Corporation shall not be required to issue fractions of shares of Common Stock or to distribute certificates which evidence fractional shares of Common Stock. In lieu of such fractional shares of Common Stock, the Corporation shall pay to the registered holders of the Rights with regard to which such fractional shares of Common Stock would otherwise be issuable an amount in cash equal to the same fraction of the current market value of a whole share of Common Stock. For the purposes of this paragraph (d), the current market value of a whole share of Common Stock shall be the closing price of a share of Common Stock (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of exchange pursuant to this Section 24. Section 25. Notice of Certain Events. (a) In case at any time after the Record Date the Corporation shall propose (i) to pay any dividend payable in stock of any class to the holders of its Preferred Shares or to make any other distribution to the holders of its Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares rights or warrants to subscribe for or to purchase any additional Preferred Shares or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of its Preferred Shares (other than a reclassification involving only the subdivision of outstanding Preferred Shares), (iv) to 56 effect any consolidation or merger into or with, or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of 50% or more of the assets or earning power of the Corporation and its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the liquidation, dissolution or winding up of the Corporation, or (vi) to declare or pay any dividend on the Common Shares payable in Common Shares or to effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares), then, in each such case, the Corporation shall give to each registered holder of a Right and the Rights Agent, in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, or distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the Common Shares and/or Preferred Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least 10 days prior to the record date for determining holders of the Preferred Shares for purposes of such action, and in the case of any such other action, at least 10 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Common Shares and/or Preferred Shares, whichever shall be the earlier. (b) In case the event set forth in Section 11(a)(ii) hereof shall occur, then the Corporation shall as soon as practicable thereafter give to each registered 57 holder of a Right and the Rights Agent, in accordance with Section 26 hereof, a notice of the occurrence of such event, which notice shall describe such event and the consequences of such event to holders of Rights under Section 11(a)(ii) hereof. Section 26. Notices. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Right to or on the Corporation shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Ormat Technologies, Inc. 980 Greg Street Sparks, Nevada 89431 Attention: Connie Stechman with a copy to: Ormat Technologies, Inc. c/o Ormat Industries Ltd. Industrial Area, P.O. Box 68 Yavneh 8100 Israel Attention: Corporate Secretary Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Corporation or by the holder of any Right to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Corporation) as follows: 58 American Stock Transfer & Trust Company 59 Maiden Lane New York, New York 10038 Attention: Corporate Trust Department Notices or demands authorized by this Agreement to be given or made by the Corporation or the Rights Agent to the holder of any Right shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Corporation or the registry books of the holders of the Rights maintained by the Rights Agent after the Distribution Date as herein provided. Any notice or demand given prior to the Distribution Date by the Corporation or the Rights Agent to the holders of the Rights shall also be given to any registered pledgee of any uncertificated Common Share by first-class mail, postage prepaid, addressed to such registered pledgee at the address of such registered pledgee as shown on the registry books of the Corporation. Section 27. Supplements and Amendments. The Corporation may from time to time supplement or amend this Agreement without the approval of any holders of Rights in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, or to make any other provisions with respect to the Rights or in regard to matters or questions arising hereunder which the Corporation may deem necessary or desirable, any such supplement or amendment to be evidenced by a writing signed by the Corporation and the Rights Agent; provided, however, that nothing herein shall obligate the Rights Agent 59 to execute such a supplement or amendment if such supplement or amendment changes or increases the rights, duties or obligations of the Rights Agent; and further provided that from and after such time as any Person becomes an Acquiring Person, this Agreement shall not be amended in any manner which would adversely affect the interests of the holders of Rights. Without limiting the foregoing, the Corporation may at any time prior to such time as any Person becomes an Acquiring Person amend this Agreement to lower the thresholds set forth in Sections 1(a) and 3(a) to not less than the greater of (i) the sum of .001% and the largest percentage of the outstanding shares of Common Stock then known by the Corporation to be beneficially owned by any Person (other than the Corporation, any Subsidiary of the Corporation, any employee benefit plan of Ormat Industries, the Corporation or any Subsidiary of the Corporation, or any entity holding shares of Common Stock for or pursuant to the terms of any such plan) and (ii) 10%. Upon the delivery of a certificate from an appropriate officer of the Corporation which states that the proposed supplement or amendment is in compliance with the terms of this Section 27, the Rights Agent shall execute such supplement or amendment. Section 28. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Corporation or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Corporation, the Rights Agent and the 60 registered holders of the Rights any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Corporation, the Rights Agent and the registered holders of the Rights. Section 30. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Section 31. Governing Law. This Agreement and each Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Section 32. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 33. Descriptive Headings. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 61 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. ORMAT TECHNOLOGIES, INC. By ------------------------------------- AMERICAN STOCK TRANSFER & TRUST COMPANY, as Rights Agent By ------------------------------------- 62 Exhibit A Form of Right Certificate Certificate No. R- _____ Rights NOT EXERCISABLE AFTER [ ], 2014 OR EARLIER IF REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.001 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. Right Certificate ORMAT TECHNOLOGIES, INC. This certifies that ________________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of [ ], 2004 (the "Rights Agreement"), between Ormat Technologies, Inc., a Delaware corporation (the "Corporation"), and American Stock Transfer & Trust Company, a New York banking corporation, as Rights Agent (the "Rights Agent"), to purchase from the Corporation at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M., New York City time, on [ ], 2014 at the Designated Office (as such term is defined in the Rights Agreement of the Rights Agent, or at the office of its successor as Rights Agent, one one-hundredth of a fully paid non-assessable share of Series A Junior Participating Preferred Stock, par value $.001 per share (the "Preferred Shares"), of the Corporation, at a purchase price of $[___] per one one-hundredth of a Preferred Share (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed. The number of Rights evidenced by this Right Certificate (and the number of one one-hundredths of a Preferred Share which may be purchased upon exercise thereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of __________, 2004, based on the Preferred Shares as constituted at such date. As provided in the Rights Agreement, the Purchase Price and the number of one one-hundredths of a Preferred Share which may be purchased upon the exercise of A-1 the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events. This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Corporation and the holders of the Rights. Copies of the Rights Agreement are on file at the principal executive offices of the Corporation and the above-mentioned offices of the Rights Agent. This Right Certificate, with or without other Right Certificates, upon surrender at the principal office of the Rights Agent, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of Preferred Shares as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If the Rights evidenced by this Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Right Certificate (i) may be redeemed by the Corporation at a redemption price of $.001 per Right or (ii) may be exchanged in whole or in part for Preferred Shares or the Corporation's Common Stock, par value $.001 per share. No fractional Preferred Shares will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one one-hundredth of a Preferred Share, which may, at the election of the Corporation, be evidenced by depositary receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of Rights evidenced by this Right Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Preferred Shares or of any other securities of the Corporation which may at any time be issuable on the exercise thereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder of any Rights evidenced hereby, as such, any of the rights of a stockholder of the Corporation or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive A-2 dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement. This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Corporation and its corporate seal. Dated as of ____________. ATTEST: ORMAT TECHNOLOGIES, INC. By: ------------------------------------ ----------------------------------- Countersigned: AMERICAN STOCK TRANSFER & TRUST CORPORATION, as Rights Agent By: --------------------------------- Authorized Signature A-3Form of Reverse Side of Right Certificate FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Rights evidenced by this Right Certificate.) FOR VALUE RECEIVED _______________________________ hereby sells, assigns and transfers unto ___________________ ________________________________________________________ (Please print name and address of transferee) ______________________ Rights evidenced by this Right Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint __________________ attorney, to transfer the said Rights on the books of the within-named Corporation, with full power of substitution. Dated: ------------------------- ------------------------------- Signature Signature Guaranteed: Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., a commercial bank or trust Corporation or other eligible institution, in each case, participating in a Medallion program approved by the Securities Transfer Association, Inc. -------------------------------------------------------------------------------- The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement). ------------------------------- Signature -------------------------------------------------------------------------------- A-4 Form of Reverse Side of Right Certificate -- continued FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise Rights evidenced by the Right Certificate.) To: Ormat Industries, Inc. The undersigned hereby irrevocably elects to exercise ___________________ Rights evidenced by this Right Certificate to purchase the Preferred Shares issuable upon the exercise of such Rights and requests that certificates for such Preferred Shares be issued in the name of: ------------------------------------------ Please insert social security or other identifying number ------------------------------------------ -------------------------------------------------------------------------------- (Please print name and address) -------------------------------------------------------------------------------- If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: ------------------------------------------ Please insert social security or other identifying number ------------------------------------------ -------------------------------------------------------------------------------- (Please print name and address) -------------------------------------------------------------------------------- Dated: ---------------------------- ------------------------------- Signature Signature Guaranteed: A-5 Form of Reverse Side of Right Certificate -- continued -------------------------------------------------------------------------------- Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., a commercial bank or trust Corporation or other eligible institution, in each case, participating in a Medallion program approved by the Securities Transfer Association, Inc. The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement). ------------------------------- Signature -------------------------------------------------------------------------------- NOTICE The signature in the Form of Assignment or Form of Election to Purchase, as the case may be, must conform to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. In the event the certification set forth above in the Form of Assignment or the Form of Election to Purchase, as the case may be, is not completed, the Corporation and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Right Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and such Assignment or Election to Purchase will not be honored. A-6
Exhibit 5.1 October 19, 2004 [Letterhead of Chadbourne & Parke LLP] Ormat Technologies, Inc. 980 Greg Street Sparks, Nevada 89431 Ladies and Gentlemen: In connection with the registration under the Securities Act of 1933 (the "Act") of up to 7,187,500 shares (the "Securities") of Common Stock, par value $0.001 per share, of Ormat Technologies, Inc., a Delaware corporation (the "Company"), and the stock purchase rights related to the shares (the "Rights") to be issued pursuant to the Rights Agreement (the "Rights Agreement"), to be entered into between the Company and American Stock Transfer & Trust Company, as Rights Agent (the "Rights Agent"), we, as your special counsel, have examined such corporate records, certificates and other documents, and such questions of law, as we have considered necessary or appropriate for the purposes of this opinion. Upon the basis of such examination, we advise you that, in our opinion: (1) When the registration statement relating to the Securities and the Rights (the "Registration Statement") has become effective under the Act, the terms of the sale of the Securities have been duly established in conformity with the Company's certificate of incorporation, and the Securities have been duly issued and sold as contemplated by the Registration Statement, the Securities will be validly issued, fully paid and nonassessable. 2 (2) Assuming (i) that the Board of Directors of the Company, after fully informing itself with respect to the Rights Agreement and the Rights and after giving due consideration to all relevant matters, determines that the execution and delivery of the Rights Agreement and the issuance of the Rights thereunder would be in the best interests of the Company and its stockholders, (ii) the due authorization, execution and delivery of the Rights Agreement by the Company and the Rights Agent in substantially the form included as Exhibit 4.3 to the Registration Statement, (iii) that the Rights Agreement has been duly authorized, executed and delivered by the Rights Agent, and (iv) that the Rights Agreement is a binding obligation of the Rights Agent, then when the Registration Statement has become effective under the Act and the Securities have been validly issued and sold as contemplated by the Registration Statement, the Rights attributable to the Securities will be validly issued. In connection with our opinion set forth in paragraph (2) above, we note that the question whether the Board of Directors of the Company might be required to redeem the Rights at some future time will depend upon the facts and circumstances existing at that time and, accordingly, is beyond the scope of such opinion. The foregoing opinion is limited to the Federal laws of the United States, the laws of the State of New York and the General Corporation Law of the State of Delaware, and we are expressing no opinion as to the effect of the laws of any other jurisdiction. 3 Also, we have relied as to certain factual matters on information obtained from public officials, officers of the Company and other sources believed by us to be responsible. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the heading "Validity of Common Stock" in the Prospectus. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act. Very truly yours, /s/ Chadbourne & Parke LLP
Exhibit 8.1 October 19, 2004 [Letterhead of Chadbourne & Parke LLP] OPINION LETTER Ormat Technologies, Inc. 980 Greg Street Sparks, Nevada 89431 Ladies and Gentlemen: We have acted as special United States tax counsel to Ormat Technologies, Inc., a Delaware corporation (the "Company"), in connection with the preparation of the registration statement on Form S-1 (the "Registration Statement") and the related prospectus (the "Prospectus") with respect to the initial public offering by the Company of its common stock (the "Shares"). The Company is filing the Registration Statement with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"). This opinion is furnished in connection with the Registration Statement. Unless otherwise indicated, each capitalized term used herein has the meaning ascribed to it in the Registration Statement and Prospectus. In that connection, we have reviewed the Registration Statement and the Prospectus and such other documents and corporate records as we have deemed necessary or appropriate in order to enable us to render the opinion below. We have relied upon statements and representations made by the Company, and the facts, representations, assumptions and other information stated in the Registration Statement and Prospectus, and such other documents as we have deemed appropriate, and we have assumed that such statements and representations are true without regard to any qualifications as to knowledge, belief, Ormat Technologies, Inc. -2- October 19, 2004 materiality or substantiality. Our opinion is conditioned upon, among other things, the initial and continuing truth, accuracy, validity and completeness of the items described above on which we are relying. Based upon and subject to the foregoing, although the information set forth under the heading "United States Federal Income Tax Consequences to Non-U.S. Holders" in the Prospectus does not purport to discuss all possible United States federal income tax consequences of an investment in the Shares, in our opinion, subject to the limitations and qualifications set forth in the Prospectus, and except for the specific discussion regarding the Company's belief that it will not be classified as a United States real property holding corporation as of the date of the offering and that it does not expect to become a United States real property holding corporation, the information set forth under the heading "United States Federal Income Tax Consequences to Non-U.S. Holders", to the extent such information constitutes matters of law or legal conclusions, is accurate in all material respects as of the date of the Prospectus. In rendering our opinion, we have considered the applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Department regulations promulgated thereunder, pertinent judicial authorities, interpretive rulings of the Internal Revenue Service and such other authorities as we have considered relevant. It should be noted that statutes, regulations, judicial decisions and administrative interpretations are subject to change at any time (possibly with retroactive effect). A change in the authorities or the accuracy or completeness of any of the facts, information, documents, corporate records, Ormat Technologies, Inc. -3- October 19, 2004 covenants, statements, rulings, representations or assumptions on which our opinion is based could affect our conclusions. This opinion is expressed as of the date hereof, and we are under no obligation to supplement or revise our opinion to reflect any changes (including changes that have retroactive effect) (i) in applicable law or (ii) in any fact, information, document, corporate record, covenant, statement, representation or assumption stated herein that becomes untrue or incorrect. Further, legal opinions are not binding upon the Internal Revenue Service and there can be no assurance that contrary positions may not be asserted by the Internal Revenue Service. Any variation or difference in any fact from those set forth or assumed either herein or in the Registration Statement or Prospectus may affect the conclusions stated herein. This letter is furnished to you for use in connection with the Registration Statement and is solely for your benefit and the benefit of your shareholders at the time of the initial public offering. It is not to be used, circulated, quoted, or otherwise referred to for any other purpose without our express written permission. This letter may not be relied upon or used by any entity or person other than you and your shareholders at the time of the initial public offering. Our opinion is not intended to be, nor should it be construed to be, specific tax advice to any shareholder of the Company. Accordingly, each such shareholder is urged to consult with his or her own tax advisor as to the specific tax consequences to him or her of an investment in the Shares. Very truly yours, /s/ Chadbourne & Parke LLP
Exhibit 10.1.16 ================================================================================ LETTER OF CREDIT AND LOAN AGREEMENT BETWEEN ORMAT NEVADA INC., AS BORROWER, AND HUDSON UNITED BANK, AS LENDER DATED AS OF JUNE 30, 2004 ================================================================================ TABLE OF CONTENTS SECTION 1.1 General Definitions.......................................................................1 SECTION 1.2 Accounting Terms and Determinations......................................................10 SECTION 1.3 Other Terms; Headings....................................................................10 ARTICLE II THE CREDIT FACILITIES.................................................................................10 SECTION 2.1 Letters of Credit and Loans..............................................................10 SECTION 2.2 Term.....................................................................................13 SECTION 2.3 Evidence of Debt; Account Statements.....................................................13 SECTION 2.4 Amortization of Loans; Post-Default Cash Collateralization of Letters of Credit..........13 SECTION 2.5 Maximum Amount of the Facility; Mandatory Prepayments; Optional Prepayments..............14 SECTION 2.6 Payment Procedures.......................................................................14 SECTION 2.7 Payments.................................................................................15 ARTICLE III INTEREST, FEES AND EXPENSES..........................................................................15 SECTION 3.1 Interest.................................................................................15 SECTION 3.2 Interest After Event of Default..........................................................16 SECTION 3.3 Commitment Fee...........................................................................16 SECTION 3.4 Unused Line Fee..........................................................................16 SECTION 3.5 Letter of Credit Fees....................................................................16 SECTION 3.6 Calculations.............................................................................16 SECTION 3.7 Indemnification in Certain Events........................................................17 ARTICLE IV CONDITIONS PRECEDENT..................................................................................17 SECTION 4.1 Conditions to Initial Letter of Credit...................................................17 SECTION 4.2 Conditions Precedent to Issuance of Each Letter of Credit................................19 SECTION 4.3 Determinations Under Section 4...........................................................19 ARTICLE V REPRESENTATIONS AND WARRANTIES.........................................................................20 SECTION 5.1 Representations and Warranties of the Borrower...........................................20 ARTICLE VI COVENANTS OF THE BORROWER.............................................................................25 SECTION 6.1 Affirmative Covenants....................................................................25 SECTION 6.2 Negative Covenants.......................................................................31 ARTICLE VII FINANCIAL COVENANTS..................................................................................33 SECTION 7.1 Tangible Net Worth.......................................................................33 SECTION 7.2 Leverage Ratio...........................................................................33 SECTION 7.3 Minimum Coverage Ratio...................................................................33 -i-AMENDED AND RESTATED AMENDED AND RESTATED -ii-ARTICLE VIII EVENTS OF DEFAULT...................................................................................33 SECTION 8.1 Events of Default........................................................................33 SECTION 8.2 Acceleration and Cash Collateralization..................................................35 ARTICLE IX GENERAL PROVISIONS....................................................................................36 SECTION 9.1 GOVERNING LAW............................................................................36 SECTION 9.2 SUBMISSION TO JURISDICTION...............................................................36 SECTION 9.3 SERVICE OF PROCESS.......................................................................36 SECTION 9.4 JURY TRIAL...............................................................................36 SECTION 9.5 LIMITATION OF LIABILITY..................................................................37 SECTION 9.6 Delays; Partial Exercise of Remedies.....................................................37 SECTION 9.7 Notices..................................................................................37 SECTION 9.8 Assignments and Participations...........................................................37 SECTION 9.9 Indemnification; Reimbursement of Expenses of Collection.................................37 SECTION 9.10 Right of Setoff..........................................................................38 SECTION 9.11 Amendments and Waivers...................................................................38 SECTION 9.12 Nonliability of Lender...................................................................39 SECTION 9.13 Counterparts; Telecopied Signatures......................................................39 SECTION 9.14 Severability.............................................................................39 SECTION 9.15 Maximum Rate.............................................................................39 SECTION 9.16 ENTIRE AGREEMENT; SUCCESSORS AND ASSIGNS.................................................40 SECTION 9.17 References to Ormat Technologies.........................................................40 SCHEDULES Schedule 5.1(e) Consents and Filings Schedule 5.1(f) Material Transactions Schedule 5.1(h) Joint Ventures or Partnerships Schedule 5.1(o) Taxes and Tax Returns Schedule 5.1(p) Judgments or Litigation Schedule 5.1(s) ERISA Schedule 5.1(x) Contracts, Orders, etc. Schedule 9.10 Excluded Accounts EXHIBITS Exhibit A Promissory Note Exhibit B Subordination Agreement Exhibit C Letter of Credit Request Exhibit D Opinion of Counsel Exhibit E Compliance Certificate THIS LETTER OF CREDIT AND LOAN AGREEMENT is entered into as of JUNE 30, 2004, between ORMAT NEVADA INC., a Delaware corporation having its chief executive office and principal place of business at 980 Greg Street, Sparks, Nevada 89431 (the "Borrower"), and HUDSON UNITED BANK, a bank organized under the laws of the State of New Jersey having an office at 87 Post Road East, Westport, Connecticut 06880 (the "Lender"). W I T N E S S E T H : WHEREAS, the Borrower has requested the Lender to provide a letter of credit and term loan facility upon the terms and subject to the conditions herein set forth; and WHEREAS, upon the terms and subject to the conditions set forth herein, the Lender is willing to issue, and to use its best efforts to cause to be issued by Fronting Banks, letters of credit for the account of the Borrower and wholly owned Subsidiaries of the Borrower and to make term loans to the Borrower to fund payment of the reimbursement obligations arising from such letters of credit that have not been paid by the Borrower; NOW, THEREFORE, in consideration of the mutual covenants and undertakings and the terms and conditions contained herein, the Borrower and the Lender hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 General Definitions. As used herein, the following terms shall have the meanings herein specified (to be equally applicable to both the singular and plural forms of the terms defined): "Adjusted Consolidated Cash Flow" means, for any Person, for any period, the sum of (i) Unrestricted Adjusted Consolidated Net Income of such Person and its consolidated Subsidiaries and Consolidated Persons with respect to such first Person for such period plus (ii) the aggregate amount of all non-cash charges deducted in arriving at such Unrestricted Adjusted Consolidated Net Income less (iii) principal payments made or required to be made on account of Indebtedness during such period. "Affiliate" means, as to any Person, any other Person who directly or indirectly controls, is under common control with, is controlled by or is a director or officer of such Person. As used in this definition, "control" (including its correlative meanings, "controlled by" and "under common control with") means possession, directly or indirectly, of the power to direct or cause the direction of management or policies (whether through ownership of voting securities or partnership or other ownership interests, by contract or otherwise). "Agreement" means this Letter of Credit and Loan Agreement, as amended, supplemented or otherwise modified from time to time. AMENDED AND RESTATED "Auditors" means PricewaterhouseCoopers LLP, another "Big Four" firm of independent public accountants, or another nationally-recognized firm of independent public accountants selected by the Borrower and satisfactory to the Lender in its reasonable discretion. "Availability Expiration Date" means the earlier of (i) the Initial Availability Expiration Date, as such date may be extended from time to time under Section 2.2, and (ii) the date of termination of the Lender's obligation to issue, or use its best efforts to cause to be issued, Letters of Credit or to make Loans "Base Rate" means as of any date the higher of (i) the prime, base or equivalent rate of interest announced from time to time by Citibank, N.A. or any successor thereto (which may not be the lowest rate of interest charged by such bank) and (ii) the published annualized rate for ninety-day dealer commercial paper that appears in the "Money Rates" Section of the Wall Street Journal (U.S. Edition). "Business Day" means any day other than a Saturday, a Sunday or a day on which commercial banks in New York, New York or Reno, Nevada are required or permitted by law to close. When used in connection with the LIBOR Rate or any Interest Period, a Business Day shall also exclude any day on which commercial banks are not open for dealings in Dollar deposits in the London interbank market. "Capital Expenditures" means expenditures (or commitments to make expenditures that are required to be recorded as capital expenditures in accordance with GAAP) for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, and shall include all such commitments and payments in respect of expenditures for any fixed assets or improvements, replacements, substitutions or additions of or to Facilities covered by Capitalized Lease Obligations, operating leases and leasehold improvements. "Capitalized Lease Obligations" means any rental obligation which, under GAAP, is or will be required to be capitalized on the books of the lessee, taken at the amount thereof accounted for as indebtedness (net of interest expense) in accordance with GAAP. "Change of Control" means one or more of the following events: (i) the shareholder of the Borrower shall approve any plan or proposal for the liquidation or dissolution of the Borrower; or (ii) the shareholder of the Borrower shall approve any plan or proposal for a merger or consolidation to which the Borrower is a party and as a result of which either (A) the Tangible Net Worth of the survivor or successor entity is less than that required under Section 7.1, or (B) the shareholder of the Borrower ceases to own a sufficient amount of the voting stock of the Borrower with rights to elect -2- AMENDED AND RESTATED a majority of the members of the Borrower's board of directors. "Closing Date" means the date of execution and delivery of this Agreement. "Code" has the meaning specified in Section 1.3. "Commitment" means the Lender's commitment to issue Letters of Credit, and to use its best efforts to cause Letters of Credit to be issued, reissued and renewed by Fronting Banks and to make Loans in an aggregate outstanding amount up to the Maximum Amount of the Facility, as such amount may be decreased from time to time in accordance with Section 2.1(g). "Confidential Information" means information that the Borrower or any of its Affiliates furnishes to the Lender that is designated by the Borrower or such Affiliate as being confidential, but does not include any such information that (i) is or becomes generally available to the public or (ii) is or becomes available to the Lender from a source other than the Borrower or such Affiliate which is not known at such time by the Lender to be subject to a confidentiality restriction until such time as it is known by the Lender to be subject to a confidentiality restriction. "Consolidated Person" means any Person that is required to be accounted for on the financial statements of another Person under FASB FIN 46, Consolidation of Variable Interest Entities. "Default" means any of the events specified in Section 8.1, whether or not any of the requirements for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Dollars" and the sign "$" mean freely transferable lawful currency of the United States. "Electric Utility" means a public utility, an electric utility or an electric utility holding company or a Subsidiary of any thereof or an Affiliate of an electric utility holding company, as those terms are used in PUHCA, PURPA, the rules or regulations implementing PUHCA or PURPA or under any other Requirement of Law. "Environmental Laws" means all federal, state and local statutes, laws (including, without limitation, common or case law), rulings, regulations or governmental, administrative or judicial policies, directives, orders or interpretations applicable to the business or property of the Borrower relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) including, without limitation, the Comprehensive Environmental Response Compensation and Liability Act, the Resource Conservation and Recovery Act and all other laws and regulations relating to emissions, discharges, releases or threatened releases of Hazardous Materials, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any Hazardous Materials. -3- AMENDED AND RESTATED "ERISA" means the Employee Retirement Income Security Act of 1974, 29 U.S.C. ss.ss. 1000 et seq., as amended, successor statutes and regulations or guidelines promulgated thereunder. "ERISA Affiliate" means any Person required to be aggregated with the Borrower under Section 414(b), (c), (m) or (o) of the Internal Revenue Code. "Event of Default" means the occurrence of any of the events specified in Section 8.1. "Facility" means a power plant, industrial power generation infrastructure asset, or other alternative energy plant and related facilities owned or leased by the Borrower or any of its Subsidiaries, in each case with related rights under power purchase contracts, sales and service agreements, leases, easements, permits and similar contractual rights. "Federal Reserve Board" has the meaning specified in Section 5.1(n). "FERC" means the Federal Energy Regulatory Commission and any Person succeeding to the functions thereof. "Financial Covenants" means those covenants set forth in Article VII. "Financial Statements" means the consolidated balance sheets and statements of cash flow, profits and losses and shareholders' equity of the Borrower and its Subsidiaries and Consolidated Persons for the period specified, prepared in accordance with GAAP and consistently with prior practices. "Foreign Plan" has the meaning specified in Section 6.1(k). "Fronting Bank" means HSBC Bank USA or a U.S. federal chartered bank with offices located in any of the twenty largest cities in the United States whose combined capital and surplus is at least $1,000,000,000 and whose long-term unsecured debt is rated A or better by Standard & Poor's Corporation and A3 or better by Moody's Investors Service, Inc. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board that are applicable to the circumstances as of the date of determination. "Governing Documents" means the certificate of incorporation and by-laws or other organizational or governing documents of the Borrower or Ormat Technologies. "Governmental Authority" means any nation or government, any state or other political subdivision thereof or any entity exercising executive, legislative, judicial, regulatory or administrative functions thereof or pertaining thereto. -4- AMENDED AND RESTATED "Hazardous Materials" means any and all pollutants and contaminants and any and all toxic, caustic, radioactive or hazardous materials, substances or wastes that are regulated under any Environmental Laws. "Indebtedness" means as of the date of determination thereof (without duplication), (i) all obligations of a Person for borrowed money of any kind or nature, including, without limitation, funded debt, and net amounts payable under currency and interest rate hedging or swap agreements or arrangements therefor, regardless of whether the same is evidenced by any note, debenture, bond or other instrument, (ii) all obligations of a Person to pay the deferred purchase price of property or services (other than current trade accounts payable under normal trade terms and which arise in the ordinary course of business and are not delinquent), (iii) the then outstanding amount of withdrawal or termination liability incurred under ERISA, (iv) all Indebtedness of others secured by a Lien on any asset of a Person whether or not the Indebtedness is assumed by such Person, (v) all Indebtedness of others to the extent guaranteed by a Person and (vi) all obligations of a Person in respect of letters of credit, bankers acceptances or similar instruments issued or accepted by banks or other financial institutions for the account of such Person. "Initial Availability Expiration Date" means June 30, 2007. "Insolvency Event" means, with respect to any Person, the occurrence of any of the following: (i) such Person shall be adjudicated insolvent or bankrupt, or shall generally fail to pay or admit in writing its inability to pay its debts as they become due, (ii) such Person shall seek dissolution or reorganization or the appointment of a receiver, trustee, custodian or liquidator for it or a substantial portion of its property, assets or business or to effect a plan or other arrangement with its creditors, (iii) such Person shall make a general assignment for the benefit of its creditors, or consent to or acquiesce in the appointment of a receiver, trustee, custodian or liquidator for a substantial portion of its property, assets or business, (iv) such Person shall file a voluntary petition under any bankruptcy, insolvency or similar law, (v) such Person shall take any corporate or similar act in furtherance of any of the foregoing or (vi) such Person, or a substantial portion of its property, assets or business shall become the subject of an involuntary proceeding or petition for (A) its dissolution or reorganization or (B) the appointment of a receiver, trustee, custodian or liquidator, and (I) such proceeding shall not be dismissed or stayed within sixty days or (II) such receiver, trustee, custodian or liquidator shall be appointed; provided, however, that the Lender shall have no obligation to make any Advance during the pendency of any sixty-day period described in clauses (A) and (B). "Interest Period" means the initial period commencing on the Closing Date and terminating on June 30, 2004, and each subsequent three-month period determined in accordance with Section 3.1(b); provided, however, that (i) an Interest Period may not end after the Maturity Date; and (ii) whenever the last day of an Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, except that, if such extension would cause the last day of such Interest Period to occur in the next following calendar month, then the last day of such Interest Period shall occur on the next preceding Business Day. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, any successor statute and any regulations or guidelines promulgated thereunder. -5- AMENDED AND RESTATED "Internal Revenue Service" or "IRS" means the United States Internal Revenue Service and any successor agency. "L/C Cash Collateral Account" means an interest-bearing cash collateral account established by the Borrower with the Lender in the name of the Borrower, but under the sole dominion and control of the Lender, subject to the terms of this Agreement. "Letter of Credit Request" has the meaning specified in Section 2.1(c). "Letters of Credit" means all letters of credit issued under Section 2.1(a) hereof for the account of the Borrower or, at the Borrower's request, for the account of any of the Borrower's wholly owned Subsidiaries. "Leverage Ratio" means at any time, the ratio of (i) all Indebtedness of the Borrower to (ii) the Tangible Net Worth of the Borrower. "Liabilities" of a Person as of the date of determination thereof means the liabilities of such Person on such date as determined in accordance with GAAP. Liabilities to Affiliates shall be treated as Liabilities except where eliminated by consolidation in financial statements prepared in accordance with GAAP or as otherwise provided herein. "LIBOR Rate" means, with respect to each Interest Period, the rate determined by the Lender to be (i) the per annum rate for deposits in Dollars for a period of one month that appears on the Dow Jones Market Service (formerly Telerate) Page 3750 Screen as of 11:00 a.m., London time, on the day that is two Business Days prior to the first day of an Interest Period (rounded upwards, if necessary, to the nearest 1/100th of 1%); or (ii) if such rate does not appear on the Dow Jones Market Service Page 3750 Screen, the reserve adjusted rate per annum equal to the one-month London Interbank Offered Rate that appears in the "Money Rates" section of The Wall Street Journal (U.S. Edition) on the first day of such Interest Period; or (iii) if such rate does not appear on the Dow Jones Market Service Page 3750 Screen and The Wall Street Journal (U.S. Edition) no longer publishes such one-month London Interbank Offered Rate, the per annum rate for deposits in U.S. Dollars for a period of one month that appears on the Reuters Screen ISDA Page as of 11:00 a.m., London time, on the day that is two Business Days prior to the first day of an Interest Rate Period (rounded upwards, if necessary, to the nearest 1/100th of 1%). As used under this definition, "Dow Jones Market Service Page 3750 Screen" means the display designated as "Page 3750" on the Dow Jones Market Service (or such other page as may replace Page 3750 on that service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British Bankers' Association Interest Settlement Rates for U.S. Dollar deposits). "Lien" means any lien, claim, charge, pledge, security interest, assignment, hypothecation, deed of trust, mortgage, lease, conditional sale, retention of title or other encumbrance or preferential arrangement having substantially the same economic effect as any of the foregoing, whether voluntary or imposed by law. "Loan" has the meaning specified in Section 2.1(d). -6- AMENDED AND RESTATED "Loan Documents" means this Agreement, the Note, the Subordination Agreement and all other documents and instruments delivered or to be delivered by the Borrower or any Affiliate under or in connection with this Agreement and designated therein as a "Loan Document," as each of the same may be amended, supplemented or otherwise modified from time to time. "Material Adverse Effect" means, with respect to any event, act, condition or occurrence of whatever nature before the Availability Expiration Date, whether singly or in conjunction with any one or more other events, acts, conditions or occurrences, whether or not related, (i) a material and adverse effect on the business, operations, results of operations, assets, liabilities or condition (financial or otherwise) of the Borrower individually, or the Borrower and its Subsidiaries in the aggregate and taken as a whole, which could reasonably be expected to render the Borrower unable to repay the outstanding Loans and to reimburse or, to the extent required by the terms of this Agreement, cash collateralize all the obligations of the Borrower with respect to the Letters of Credit. "Material Contract" means any long term power purchase agreement to which the Borrower or any of its Subsidiaries is a party in each case for which breach, nonperformance, cancellation or failure to renew could have a Material Adverse Effect. "Maximum Amount of the Facility" means Fifteen Million Dollars ($15,000,000) less the amount of any reduction of the Commitment under Section 2.1(g) less the amount of any Letter of Credit issued by a Fronting Bank that is not re-issued, extended or renewed upon its expiration following the Borrower's request for such re-issuance, extension or renewal (if the beneficiary of such Letter of Credit will not accept a Letter of Credit issued by the Lender). "Minimum Coverage Ratio" means, at any time, the ratio of (i) Adjusted Consolidated Cash Flow for any calendar quarter or calendar year, as applicable, to (ii) the aggregate amount of all principal and interest payable by the Borrower and its Subsidiaries on account of Indebtedness during such calendar quarter or calendar year. "Multiemployer Plan" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate has contributed within the past six years or with respect to which the Borrower or any ERISA Affiliate may incur any liability. "Note" means a promissory note of the Borrower payable to the order of the Lender, substantially in the form of Exhibit A hereto, as amended, supplemented or otherwise modified from time to time. "Obligations" means all loans, advances, debts, liabilities, obligations, covenants and duties owing by the Borrower to the Lender of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, which may arise under, out of, or in connection with this Agreement, the Note, the other Loan Documents, whether or not for the payment of money, whether arising by reason of an extension of credit, opening, guaranteeing or confirming of a letter of credit (including, but not limited to, the Letters of Credit), loan, guaranty, indemnification or in any other manner, whether direct or indirect (including, without limitation, those acquired by assignment, purchase, discount or otherwise), whether absolute or contingent, due or to become due, and however acquired. The term includes, without limitation, all interest (including interest accruing on or after an Insolvency Event, whether or not an allowed claim), -7- AMENDED AND RESTATED charges, expenses, commitment, facility, unused line, closing, letter of credit or other fees, reasonable attorneys' fees, and any other sum properly chargeable to the Borrower under this Agreement, the Note, or the other Loan Documents. "Ormat Funding" means Ormat Funding Corp., a Delaware corporation. "Ormat Technologies" means Ormat Technologies, Inc., a Delaware corporation. "PBGC" means the Pension Benefit Guaranty Corporation and any Person succeeding to the functions thereof. "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA (other than a Multiemployer Plan) which the Borrower or any ERISA Affiliate sponsors or maintains, or to which it makes, is making or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time within the immediately preceding five years. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, joint stock company, association, corporation, institution, entity, party or government (including, without limitation, any division, agency or department thereof) or any other legal entity, whether acting in an individual, fiduciary or other capacity, and, as applicable, the successors, heirs and assigns of each. "Plan" means any employee benefit plan, as defined in Section 3(3) of ERISA, maintained or contributed to by the Borrower or any ERISA Affiliate with respect to which any of them may incur liability. "Prohibited Transaction" has the meaning specified in Section 5.1(s)(v). "Property" means any real property owned, leased or controlled by the Borrower. "Pro Rata Share" means, on any date, a fraction (expressed as a percentage) (i) the numerator of which is the sum of the amount of all undrawn Letters of Credit and the outstanding amount of the Loans on such date and (ii) the denominator of which is the aggregate unsecured Indebtedness of the Borrower with respect to which the Borrower has any obligation to make payments of principal or interest or to create segregated cash reserves or deposit cash collateral, in each case during the twelve-month period following such date including, without limitation, the amount of all undrawn Letters of Credit and the outstanding amount of the Loans on such date. "PUHCA" means the Public Utility Holding Company Act of 1935, as amended, any successor statute and any regulations or guidelines promulgated thereunder. "PURPA" means the Public Utility Regulatory Policies Act of 1978, as amended, any successor statute and regulations or guidelines promulgated thereunder. "Reportable Event" means any of the events described in Section 4043 of ERISA and the regulations thereunder, other than a reportable event for which the thirty-day notice requirement to the PBGC has been waived. -8- AMENDED AND RESTATED "Requirement of Law" means (i) the Governing Documents, (ii) any law, treaty, rule or regulation or determination of an arbitrator, court or other Governmental Authority applicable to the Borrower or Ormat Technologies, or (iii) any franchise, license, lease, permit, certificate, authorization, qualification, easement, right of way, or other right or approval binding on the Borrower or any of its property. "Responsible Officer" means (i) the President, the Chief Executive Officer, the Chief Financial Officer or the Chief Operating Officer of the Borrower, (ii) either of Rany Raviv or Connie Stechman in his or her capacity as an Authorized Representative appointed by the Board of Directors of the Borrower or (iii) any other executive officer of the Borrower approved by the Lender from time to time. "Solvent" means, when used with respect to any Person, that as of the date as to which such Person's solvency is to be measured: (i) the fair saleable value of its assets is in excess of the total amount of its liabilities (including, without limitation, contingent liabilities as valued in accordance with applicable law) as they become absolute and matured; (ii) it has sufficient capital to conduct its business; and (iii) it is able to meet its debts as they mature. "Subordination Agreement" means the subordination agreement between Ormat Technologies and the Lender, substantially in the form of Exhibit B hereto, as amended, supplemented or otherwise modified from time to time. "Subsidiary" means, as to any Person, a corporation or other entity in which that Person directly or indirectly owns or controls the shares of stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or appoint other managers of such corporation or other entity and whose accounts are consolidated with the accounts of such Person in such Person's financial statements. "Tangible Net Worth" means, as at any date for the determination thereof, with respect to any Person, (i) total assets determined under GAAP less (ii) intangible assets including, without limitation, goodwill, patents, patent rights, trademarks, trade names, copyrights, design rights, franchises, bond discounts, underwriting expenses, treasury stock, organization expenses, and other similar items (other than the value of power purchase agreements, FERC licensing costs, geothermal leases and other agreements that contribute to the value of the Facilities), less (iii) total Liabilities determined under GAAP (other than liabilities that are subordinated to the Obligations under the Subordination Agreement). "Termination Event" means (i) a Reportable Event with respect to any Pension Plan or Multiemployer Plan, (ii) the withdrawal of the Borrower or any ERISA Affiliate from a Pension Plan during a plan year in which it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (iii) the providing of notice of intent to terminate a Pension Plan in a distress termination (as described in Section 4041(c) of ERISA), (iv) the institution by the PBGC of proceedings to terminate a Pension Plan or Multiemployer Plan, (v) any event or condition -9- AMENDED AND RESTATED (A) which is reasonably likely to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan, or (B) that is reasonably likely to result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, or (vi) the partial or complete withdrawal, within the meaning of Sections 4203 and 4205 of ERISA, of the Borrower or any ERISA Affiliate from a Multiemployer Plan. "Unrestricted Adjusted Consolidated Net Income" means, for any period, the aggregate net income (or loss) of any Person and its consolidated Subsidiaries and Consolidated Persons with respect to such first Person for such period determined in conformity with GAAP and that is not restricted for use by such Person under any Requirement of Law or contract or agreement. SECTION 1.2 Accounting Terms and Determinations. Unless otherwise defined or specified herein, all accounting terms used in this Agreement shall be construed in accordance with GAAP, applied on a basis consistent in all material respects with the Financial Statements delivered to the Lender on or before the Closing Date. All accounting determinations for purposes of determining compliance with Articles VI, VII and VIII shall be made in accordance with GAAP as in effect on the Closing Date and applied on a basis consistent in all material respects with the Financial Statements delivered to the Lender on or before the Closing Date. The Financial Statements required to be delivered hereunder from and after the Closing Date, and all financial records, shall be maintained in accordance with GAAP. If GAAP shall change from the basis used in preparing the Financial Statements delivered to the Lender on or before the Closing Date, the certificates required to be delivered pursuant to Section 6.1(i)(ii) demonstrating compliance with the covenants contained herein shall include calculations setting forth the adjustments necessary to demonstrate whether the Borrower is in compliance with the financial covenants based upon GAAP as in effect on the Closing Date. SECTION 1.3 Other Terms; Headings. Terms used herein that are defined in the Uniform Commercial Code, as in effect from time to time in the State of New York (the "Code") shall have the meanings given in the Code. Each of the words "hereof," "herein," and "hereunder" refer to this Agreement as a whole. An Event of Default shall "continue" or be "continuing" unless and until such Event of Default has been waived in accordance with Section 9.11 or cured. References to Articles, Sections, Annexes, Schedules and Exhibits are internal references to this Agreement, and to its attachments, unless otherwise specified. The headings and the Table of Contents are for convenience only and shall not affect the meaning or construction of any provision of this Agreement. ARTICLE II THE CREDIT FACILITIES SECTION 2.1 Letters of Credit and Loans. (a) Subject to the terms and conditions set forth in this Agreement, on and after the Closing Date until (but excluding) the Availability Expiration Date, the Lender, upon receipt of a Letter of Credit Request, shall issue, or if so requested by the Borrower from time to time, use its -10- AMENDED AND RESTATED best efforts to cause a Fronting Bank to issue, reissue or renew, Letters of Credit for the account of the Borrower or, at the Borrower's request, for the account of any wholly owned Subsidiary of the Borrower. Each Letter of Credit shall be requested in accordance with the Borrower's ordinary business requirements in the ownership, operation and development of Facilities to support the obligations of the Borrower or its wholly owned Subsidiaries under power purchase or other material project agreements or Ormat Funding's debt reserve requirements with respect to Ormat Funding's 8 1/4% Senior Secured Notes due 2020, each with a tenor and containing terms acceptable to the Borrower, the Lender and, if applicable, the Fronting Bank, and in a face amount of not less than $1,000,000. The Lender shall not be required to issue, or use its best efforts to cause the issuance of, any Letter of Credit if, after giving effect thereto, the maximum aggregate amount of (i) all Letters of Credit and Loans outstanding at such time would exceed the Maximum Amount of the Facility or (ii) the aggregate outstanding amount of Letters of Credit from Fronting Banks would exceed $6,000,000. Notwithstanding any provision of this Agreement or any other Loan Document, no Subsidiary of the Borrower shall be liable for any reimbursement obligation with respect to any Letter of Credit. (b) Unless otherwise previously agreed in writing by the Borrower and the Lender, the initial term of any Letter of Credit shall not exceed one calendar year from the date of issuance, subject to automatic renewal unless notice to the contrary is given by the Lender or the Fronting Bank, as the case may be, to the beneficiary of such Letter of Credit in writing at least thirty days before the then effective expiration date of such Letter of Credit or before the end of such longer period before the then effective expiration date as may be specified in such Letter of Credit. Each Letter of Credit shall state that, except as otherwise provided therein, such Letter of Credit is governed by the UCP 500 Uniform Customs and Practice for Documentary Credits. Each Letter of Credit issued, at the Borrower's request, for the account of a wholly owned Subsidiary of the Borrower shall be deemed issued for the account of the Borrower and the obligations arising in connection therewith shall be part of the Obligations. (c) Whenever the Borrower desires the issuance of a Letter of Credit, the Borrower shall deliver to the Lender a written notice no later than 2:00 P.M. New York City time at least five Business Days (or such shorter period as may be agreed to by the Lender) in advance of the proposed date of issuance of a letter of credit request in substantially the form attached as Exhibit C (a "Letter of Credit Request"). The transmittal by the Borrower of each Letter of Credit Request shall be deemed to be a representation and warranty by the Borrower that the Letter of Credit may be issued in accordance with and will not violate any of the requirements of this Section 2.1. Prior to the date of issuance of each Letter of Credit, the Borrower shall provide to the Lender a precise description of the documents and the text of any certificate to be presented by the beneficiary of such Letter of Credit which, if presented by such beneficiary on or prior to the expiration date of such Letter of Credit, would require the Lender (in its capacity as issuing bank) or the Fronting Bank, as the case may be, to make payment under such Letter of Credit. The Lender, in its reasonable judgment, may require changes in any such documents and certificates. A Letter of Credit Request may be given in writing or electronically with prompt written confirmation. Any electronic Letter of Credit Request shall be deemed to have been prepared by, or under the supervision of, a Responsible Officer. (d) If any request for drawing under any Letter of Credit is presented to the Lender or a Fronting Bank by the beneficiary thereof prior to the Availability Expiration Date, -11- AMENDED AND RESTATED (i) the Borrower shall be deemed to have requested a loan (a "Loan") on the date on which such drawing is honored in an amount equal to the amount of such drawing and (ii) without regard to the satisfaction of the applicable conditions specified in Section 5.2 and the other terms and conditions of borrowing hereunder, the Lender shall, on the date of such drawing, make a Loan in the amount of such drawing, the proceeds of which shall be applied directly by the Lender to repay the reimbursement obligation owed to the Lender or the Fronting Bank, as the case may be, for the amount of such drawing. Each Loan shall be payable in full, with all interest accrued thereon, on the earlier of (i) twelve months after the date on which such Loan was made under Section 2.1(d) and (ii) the Availability Expiration Date. (e) As between the Borrower, on the one hand, and the Lender (including in its capacity as an account party of a Fronting Bank), on the other hand, the Borrower assumes all risks of the acts and omissions of the Lender other than the Lender's gross negligence or willful misconduct or of the misuse of the Letters of Credit by the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, the Lender shall not be responsible (i) for the form, validity, sufficiency, accuracy, genuineness or legal effects of any document submitted by any party in connection with the application for and issuance of or any drawing honored under such Letters of Credit even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged, (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit, or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason, (iii) for failure of the beneficiary of any such Letter of Credit to comply fully with conditions required in order to draw upon such Letter of Credit, (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, telecopy or otherwise, (v) for errors in interpretation of technical terms, (vi) for any loss or delay in the transmission or otherwise of any document required to make a drawing under any such Letter of Credit, or of the proceeds thereof, (vii) for the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing honored under such Letter of Credit, (viii) any failure of the Lender to cause a Fronting Bank to re-issue, extend or renew a Letter of Credit despite the Lender's best efforts to cause the same and (ix) for any consequences arising from causes beyond the control of the Lender. None of the above shall affect, impair, or prevent the vesting of any of the Lender's rights or powers hereunder. Any action taken or omitted to be taken by the Lender under or in connection with any Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall not create any liability of the Lender to the Borrower. (f) The obligations of the Borrower to reimburse the Lender for drawings honored under the Letters of Credit shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances including, without limitation, the following circumstances: (i) any lack of validity or enforceability of this Agreement, any Letter of Credit or any other agreement or instrument relating thereto, (ii) the existence of any claim, setoff, defense or other right which the Borrower or any Affiliate of the Borrower may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for which any such beneficiary or transferee may be acting), the Lender or any other Person, whether in connection with this Agreement, the other Loan Documents, the transactions contemplated herein or therein or any unrelated transaction, (iii) any draft, demand, certificate or other documents presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect, (iv) the surrender or -12- AMENDED AND RESTATED impairment of any security for the performance or observance of any of the terms of any of the Loan Documents, (v) payment by the Lender or a Fronting Bank under any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit, (vi) failure of any drawing under a Letter of Credit or any non-application or misapplication by the beneficiary of the proceeds of any drawing, or (vii) the fact that a Default or Event of Default shall have occurred and be continuing. Any action taken or omitted to be taken by the Lender or a Fronting Bank in connection with any payment under a Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall not create any liability of the Lender or a Fronting Bank to the Borrower. (g) Upon not less than three Business Days' prior notice from the Borrower to the Lender, the Borrower may reduce the Commitment permanently, in whole or in part, provided that (i) any partial reduction shall be in an integral multiple of $1,000,000 and (ii) any such notice shall be irrevocable once given. SECTION 2.2 Term. The Commitment shall commence on the Closing Date and extend through the Initial Availability Expiration Date, unless sooner terminated by the terms hereof, provided that the Availability Expiration Date shall be extended for successive one-year periods beyond the then-effective expiration date unless the Borrower notifies the Lender, or the Lender notifies the Borrower, in writing at least one hundred twenty days and no more than one hundred fifty days prior to the then effective Availability Expiration Date that it does not wish to extend the Availability Expiration Date. SECTION 2.3 Evidence of Debt; Account Statements. The Lender shall maintain in its records one or more accounts evidencing the Obligations and the amount of the Loans made by the Lender and of principal and interest payable and paid to the Lender from time to time under this Agreement. In any legal action or proceeding in respect of this Agreement, the Lender's records shall be prima facie evidence of the existence and amounts of the Obligations, absent manifest error. The Lender shall provide the Borrower with statements of the accounts maintained by it hereunder promptly following the making of each Loan, the receipt of each payment to the Lender under this Agreement, any other adjustments made by the Lender to such accounts from time to time and any other information relating to such accounts as the Borrower may reasonably request from time to time. SECTION 2.4 Amortization of Loans; Post-Default Cash Collateralization of Letters of Credit. (a) The Borrower shall pay to the Lender in four consecutive quarterly installments, commencing on the last Business Day of the calendar quarter immediately following the making of each Loan under Section 2.1(d), and on the last Business Day of each of the three calendar quarters thereafter, the Pro Rata Share of the Adjusted Consolidated Cash Flow for such calendar quarter (not to exceed, so long as no Event of Default has occurred and is continuing, the outstanding balance of the Loans including accrued and unpaid interest and fees and expenses payable to the Lender at such time), which payments shall be applied to the principal outstanding amount of such Loan and any accrued and unpaid interest thereon, and, if an Event of Default has occurred and is continuing, the cash collateralization in full of the undrawn amount of all outstanding Letters of Credit; provided, however, that the amount of each Loan shall be repaid in -13- AMENDED AND RESTATED full, and all amounts of Adjusted Consolidated Cash Flow shall be available for such repayment, on the earlier of (i) twelve months after the date on which such Loan was made and (ii) the Availability Expiration Date. (b) All payments received by the Lender under subsection (a) hereof shall be applied first to any accrued and unpaid interest on the Loans and then to the outstanding principal amount of the Loans, provided that, if an Event of Default has occurred and is continuing, the Lender shall have the right to apply all payments and other amounts received by it on account of the Obligations to such of the Obligations and in such order as it shall elect in its sole discretion. SECTION 2.5 Maximum Amount of the Facility; Mandatory Prepayments; Optional Prepayments. (a) In no event shall (i) the sum of the aggregate outstanding principal balances of the Loans and the aggregate undrawn amount of all outstanding Letters of Credit exceed the Maximum Amount of the Facility or (ii) the amount of Letters of Credit issued by Fronting Banks exceed $6,000,000. (b) In addition to any prepayment required as a result of an Event of Default hereunder, the Borrower shall immediately upon discovery by or notice to the Borrower that the lending limit specified in Section 2.5(a) has been exceeded, prepay to the Lender an amount sufficient to reduce the outstanding balances to the applicable maximum allowed amount, or, in the case of Letters of Credit, to cash collateralize such excess amount, without the necessity of a demand by the Lender. (c) The Borrower shall have the right at any time to make prepayments of the Loans without premium or penalty, upon irrevocable notice given to the Lender prior to 4:00 P.M., New York City time, at least two Business Days prior to the date of such prepayment, specifying the date and amount thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein. Any prepayment of the Loans under this Section shall be applied as reasonably specified by the Borrower in such notice or, if an Event of Default has occurred and is continuing, as the Lender shall elect in its sole discretion. (d) The entire outstanding principal amount of the Loans, together with all accrued and unpaid interest thereon and fees related thereto, shall become due and payable on the Availability Expiration Date. SECTION 2.6 Payment Procedures. (a) The Borrower hereby authorizes the Lender to charge the Borrower with the amount of all interest, fees, reasonable expenses and other payments to be made hereunder and under the other Loan Documents by adding such amount to the Obligations. The Lender may, but shall not be obligated to, discharge the Borrower's payment obligations hereunder by so increasing the amount of the Obligations. (b) Whenever any payment or other transfer of funds to be made hereunder shall be stated to be due or made on a day that is not a Business Day, such payment or transfer may, except as provided in the proviso to the definition of "Interest Period," be made on the next -14- AMENDED AND RESTATED succeeding Business Day, and, if applicable, such extension of time shall be included in the computation of the amount of interest due hereunder. SECTION 2.7 Payments. The Borrower shall make each payment hereunder not later than 4:00 P.M. (New York time) on the day when due, in Dollars, to the Lender by wire transfer in immediately available funds to the Lender's office in Mahwah, New Jersey, Account No. 270600002201, ABA No. 021201503, Reference: Ormat, Attention: Rose Diaz. ARTICLE III INTEREST, FEES AND EXPENSES SECTION 3.1 Interest. (a) The Borrower shall pay to the Lender interest on the Loans at an interest rate per annum equal to the LIBOR Rate plus 4.00%, payable quarterly in arrears on the last Business Day of each calendar quarter and on the Availability Expiration Date. (b) The initial Interest Period for each Loan shall commence on the date such Loan is made under Section 2.1(d) and a new Interest Period shall automatically commence on the day following the last day of the initial Interest Period (and on the day following the last day of each subsequent Interest Period) and end in each case on the first day of the following month. (c) Anything in subsections (a) and (b) hereof to the contrary notwithstanding, (i) If the last day of an Interest Period is less than one month prior to the Maturity Date, the Loans will bear interest for the period from the last day of such Interest Period to the Maturity Date at a fluctuating rate per annum equal to the Base Rate plus 1.50%, each change in such fluctuating rate to take effect simultaneously with the corresponding change in the Base Rate. (ii) If, at least one Business Day before the last day of an Interest Period, the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other Governmental Authority asserts that it is unlawful, for the Lender or any of its Affiliates to perform its obligations hereunder to continue any Loan as a loan bearing interest with reference to the LIBOR Rate, the Lender shall promptly give written notice of such circumstance, and the Loans shall not thereafter bear interest with reference to the LIBOR Rate until such circumstances no longer exist, and the Loans shall thereafter during such period bear interest at a fluctuating rate per annum equal to the Base Rate plus 1.50%, each change in such fluctuating rate to take effect simultaneously with the corresponding change in the Base Rate. (iii) If, at least one Business Day before the last day of any Interest Period, the LIBOR Rate cannot be determined pursuant to any of clause (i), (ii) or (iii) of the definition of such term in Section 1.1 due to a disruption in the market over which -15- AMENDED AND RESTATED the Lender has no control, the Lender shall promptly give written notice of such circumstance, and the Loans shall not thereafter bear interest with reference to the LIBOR Rate until such circumstances no longer exist, and the Loans shall thereafter during such period bear interest at a fluctuating rate per annum equal to the Base Rate plus 1.50%, each change in such fluctuating rate to take effect simultaneously with the corresponding change in the Base Rate. (iv) All interest payable by reference to the Base Rate under this subsection (c) shall be payable quarterly, in arrears, on the first Business Day of each calendar quarter and on the Maturity Date. SECTION 3.2 Interest After Event of Default. Upon the occurrence and during the continuance of an Event of Default, interest on the Loans shall be payable on demand at a rate per annum equal to the rate in effect under Section 3.1 plus 2%. SECTION 3.3 Commitment Fee. The Borrower shall pay to the Lender on the Closing Date a non-refundable commitment fee in the amount of $300,000. SECTION 3.4 Unused Line Fee. The Borrower shall, for the period from the Closing Date through the Availability Expiration Date, pay in arrears to the Lender on the last Business Day of each calendar quarter, commencing June 2004 and on the Availability Expiration Date, in arrears, an unused line fee equal to .10% per annum of the difference between (a) the Maximum Amount of the Facility, and (b) the average daily outstanding amount of (i) the Loans and (ii) the aggregate undrawn amount of all outstanding Letters of Credit during such quarter or portion thereof. SECTION 3.5 Letter of Credit Fees. The Borrower shall pay to the Lender a non-refundable fee in the amount of 2.50% per annum (in the case of a Letter of Credit issued, re-issued, extended (whether by automatic extension or otherwise) or renewed by the Lender) and 2.75% per annum (in the case of a Letter of Credit issued, re-issued, extended (whether by automatic extension or otherwise) or renewed by a Fronting Bank) of (a) the weighted monthly average amount stated to be available for drawing under such Letter of Credit during the year following the issuance, re-issuance, extension or renewal thereof, which shall be payable at the time of issuance, re-issuance, extension or renewal of such Letter of Credit and (b) any increase in such weighted monthly average amount resulting from amounts actually drawn under such Letter of Credit, which shall be payable at the time of each such increase (such weighted monthly average amount, including any such increase, being referred to herein as the "LC Weighted Average"). The Borrower shall also pay or reimburse the Lender for all advising and confirming bank fees, not to exceed 0.25% per annum of the LC Weighted Average of the applicable Letter of Credit, actually charged by the confirming bank in connection with the issuance, re-issuance, extension or renewal of any Letter of Credit that has been issued by the Lender and confirmed by such confirming bank. SECTION 3.6 Calculations. All calculations of interest and fees hereunder shall be made by the Lender, on the basis of a year of 360 days for the actual number of days elapsed in the period for which such interest or fees are payable. Each determination by the Lender of an interest rate, fee or other payment hereunder shall be final, conclusive and binding for all purposes, absent manifest error. -16- AMENDED AND RESTATED SECTION 3.7 Indemnification in Certain Events. (a) If after the Closing Date, (i) any change in or in the interpretation of any law or regulation is introduced, including, without limitation, with respect to reserve requirements, applicable to the Lender or any other banking or financial institution from which the Lender borrows funds or obtains credit, (ii) the Lender complies with any future guideline or request from any central bank or other Governmental Authority or (iii) the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof has the effect described below, or the Lender complies with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, and in the case of any event set forth in this clause (iii), such adoption, change or compliance has the direct effect of reducing the rate of return on the Lender's capital as a consequence of its obligations hereunder to a level below that which the Lender would have achieved but for such adoption, change or compliance (taking into consideration the Lender's policies with respect to capital adequacy) by a material amount, and any of the foregoing events described in clauses (i), (ii) and (iii) increases the Lender's cost of funding or maintaining the Loans, or reduces the amount receivable in respect thereof by the Lender, then the Borrower shall, after written request by the Lender and receipt by the Borrower of a certificate from an officer of the Lender specifying the cause, amount and calculation of such increase or reduction, as applicable, pay to the Lender additional amounts sufficient to indemnify the Lender against such increase in cost or reduction in amount receivable. (b) The Borrower agrees to indemnify the Lender against any loss, cost or expense incurred by the Lender as a result of the making of a payment or prepayment on account of a Loan on a day which is not the last day of an Interest Period with respect thereto, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Lender to fund such Loan. ARTICLE IV CONDITIONS PRECEDENT SECTION 4.1 Conditions to Initial Letter of Credit. The obligation of the Lender to issue or to use its best efforts to cause a Fronting Bank to issue the initial Letter of Credit is subject to the satisfaction of the following conditions prior to or concurrent with the issuance of such initial Letter of Credit: (a) The Lender shall have received the following, each dated the date of the initial Letter of Credit or as of such earlier date acceptable to the Lender, in form and substance satisfactory to the Lender: (i) the Note, duly executed by the Borrower; (ii) the Subordination Agreement, duly executed by Ormat Technologies; -17- AMENDED AND RESTATED (iii) (A) the audited Financial Statements for the fiscal year ended December 31, 2003 certified by the Auditors and (B) a certificate executed by a Responsible Officer certifying that since December 31, 2003, except for the transactions specified in Schedule 5.1(f), no change, event, occurrence or development or event involving a prospective change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of the Borrower has occurred which has had or could reasonably be expected to have a Material Adverse Effect, and that all information provided by or on behalf of the Borrower to the Lender hereunder or in connection herewith is true and correct in all material respects; (iv) the opinion of counsel for the Borrower, substantially in the form of Exhibit D hereto, which the Borrower hereby requests its counsel to provide; (v) a copy of the Governing Documents of the Borrower and the resolutions of the board of directors of the Borrower authorizing the execution, delivery and performance of this Agreement, the other Loan Documents and the transactions contemplated hereby and thereby, attached to which is a certificate of the Secretary or an Assistant Secretary of the Borrower certifying (A) that such copies of the Governing Documents and resolutions are true, complete and accurate copies thereof, have not been amended or modified since the date of such certificate and are in full force and effect and (B) the incumbency, names and true signatures of the officers of the Borrower authorized to sign the Loan Documents to which it is or is to be a party; (vi) a copy of the Governing Documents of Ormat Technologies and the resolutions of the board of directors of the Ormat Technologies authorizing the execution, delivery and performance of the Subordination Agreement attached to which is a certificate of the Secretary or an Assistant Secretary of Ormat Technologies certifying (A) that such copies of the Governing Documents and resolutions are true, complete and accurate copies thereof, have not been amended or modified since the date of such certificate and are in full force and effect and (B) the incumbency, names and true signatures of the officers of Ormat Technologies authorized to sign the Subordination Agreement; (vii) a certified copy of the certificate of the Secretary of State of the State of Delaware, dated within fifteen days of the Closing Date, listing the certificate of incorporation of the Borrower and any amendment thereto on file in such official's office and certifying that any such amendments are the only amendments to such certificate of incorporation on file in that office; and (viii) a good standing certificate from the Secretary of State of each state in which the Borrower is incorporated or qualified as a foreign corporation, each dated within fifteen days of the Closing Date. (b) There shall be no pending or threatened litigation, proceeding, inquiry or other action seeking an injunction or other restraining order, damages or other relief with respect to -18- AMENDED AND RESTATED the transactions contemplated by this Agreement, the other Loan Documents, or the transactions contemplated hereby or thereby or the Borrower's business, prospects, operations, assets, liabilities or conditions (financial or otherwise), except where such litigation, proceeding, inquiry or other action could not reasonably be expected to have a Material Adverse Effect. (c) The Borrower shall have paid all accrued fees and reasonable expenses of the Lender in connection with the negotiation, preparation, execution and delivery of the Loan Documents (including the reasonable fees and expenses of counsel to the Lender) and all other fees required to be paid by the Borrower on or before the Closing Date under Article III. (d) No consent or authorization of, filing with or other act by or in respect of, any Governmental Authority or any other Person shall be required in connection with the execution, delivery, performance, validity or enforceability of this Agreement or the other Loan Documents or the consummation of the transactions contemplated hereby or thereby or the continuing operations of the Borrower or any of its Subsidiaries following the consummation of such transactions that have not been obtained. (e) The Borrower shall be in compliance in all material respects with all Requirements of Law and Material Contracts. (f) There shall exist no Default, and the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct immediately prior to, and after giving effect to, any Letter of Credit to be issued on the Closing Date. (g) The Financial Covenants shall have been satisfied for the year ended December 31, 2003 and the calendar quarter ended March 31, 2004. SECTION 4.2 Conditions Precedent to Issuance of Each Letter of Credit. The obligation of the Lender to issue and to use its best efforts to cause a Fronting Bank to issue any Letter of Credit, other than the initial Letter of Credit, is subject to the following conditions precedent: (a) all representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct on and as of the date of issuance of such Letter of Credit as if then made, other than representations and warranties that expressly relate solely to an earlier date, in which case they shall be true and correct as of such earlier date; (b) no Default shall have occurred and be continuing or would result from the issuance of such Letter of Credit; and (c) except for the transactions specified in Schedule 5.1(f), no Material Adverse Effect shall have occurred or shall be reasonably likely to occur after giving effect to the issuance of such Letter of Credit. SECTION 4.3 Determinations Under Section 4.1. For purposes of determining compliance with the conditions specified in Section 4.1, the Lender shall be deemed to have consented to, approved or accepted or to be satisfied with each document or other matter required thereunder to be consented to or approved by or to be acceptable or satisfactory to the Lender unless -19- AMENDED AND RESTATED the Borrower shall have received written notice from the Lender prior to the initial Loan or Letter of Credit specifying its objection thereto. ARTICLE V REPRESENTATIONS AND WARRANTIES SECTION 5.1 Representations and Warranties of the Borrower. The Borrower represents and warrants as follows: (a) Organization, Good Standing and Qualification. The Borrower (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, (ii) has the power and authority to own its properties and assets and to conduct the business in which it now is, or proposes to be, engaged and (iii) is duly qualified, authorized to do business and in good standing in each jurisdiction where it now is, or proposes to be, engaged in business. (b) Authority. The Borrower has the requisite corporate power and authority to execute, deliver and perform its obligations under each of the Loan Documents. All corporate action necessary for the execution, delivery and performance by the Borrower of the Loan Documents (including the consent of its shareholder where required) has been taken. (c) Enforceability. This Agreement is and, when executed and delivered, each other Loan Document to which the Borrower is a party will be, the legal, valid and binding obligation of the Borrower enforceable in accordance with its terms, except as enforceability may be limited by (i) bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) general principles of equity. (d) No Conflict. The execution, delivery and performance of each Loan Document by the Borrower do not and will not contravene (i) any of the Governing Documents of the Borrower, (ii) any Requirement of Law or (iii) any Material Contract, and will not result in the imposition of any Liens upon any of its properties. (e) Consents and Filings. No consent, authorization or approval of, or filing with or other act by, any Governmental Authority or other Person is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement or any other Loan Document or the consummation of the transactions contemplated hereby or thereby, except those that have been obtained or made and are specified in Schedule 5.1(e). (f) Financial Data. The Borrower has provided to the Lender complete and accurate copies of audited Financial Statements for the fiscal year ended December 31, 2003. Such statements have been prepared in accordance with GAAP consistently applied throughout the period involved and fairly present the results of operations and profits and losses of the Borrower for the period covered. Since December 31, 2003, except as specified in Schedule 5.1(f), (i) there has been no change, occurrence, development or event which has had or could reasonably be expected to have a material adverse effect on the business, operations, results of operations, assets, liabilities or condition (financial or otherwise) of the Borrower and (ii) none of the capital stock of the Borrower has been redeemed, retired, purchased or otherwise acquired for value by the Borrower. -20- AMENDED AND RESTATED (g) Accuracy and Completeness of Information. All data, reports and information heretofore or contemporaneously furnished by or on behalf of the Borrower in writing to the Lender for purposes of or in connection with this Agreement or any other Loan Document, or any transaction contemplated hereby or thereby, are true and accurate in all material respects on the date as of which such data, reports and information are dated or certified and not incomplete by omitting to state any material fact necessary to make such data, reports and information not misleading at such time. There are no facts now known to any executive officer of the Borrower which individually or in the aggregate could reasonably be expected to have a material adverse effect on the business, operations, results of operations, assets, liabilities or condition (financial or otherwise) of the Borrower and which have not been specified herein, in the Financial Statements, or in any certificate, opinion or other written statement made or furnished by the Borrower to the Lender. (h) No Joint Ventures or Partnerships. As of the Closing Date, the Borrower is not engaged in any joint venture or partnership with any other Person except as specified in Schedule 5.1(h). (i) Corporate and Trade Name. During the past five years, the Borrower has not been known by or used any corporate, trade or fictitious name other than Ormat Nevada, Inc. (j) No Actual or Pending Material Modification of Business. There exists no actual or, to the best of the Borrower's knowledge, threatened termination, cancellation, limitation, modification or change in or of the business relationship of the Borrower with any customer or group of customers whose purchases individually or in the aggregate could reasonably be expected to have a material adverse effect on the business, operations, results of operations, assets, liabilities or condition (financial or otherwise) of the Borrower. (k) No Broker's or Finder's Fees. No broker or finder brought about the obtaining, making or closing of the financial accommodations afforded hereunder or in connection herewith by the Lender. No broker's or finder's fees or commissions will be payable by the Borrower to any Person in connection with the transactions contemplated by this Agreement. (l) Investment Company. The Borrower is not an "investment company," or an "affiliated Person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. (m) Public Utility. (i) Neither the Borrower nor any of its Subsidiaries (by reason of any action or inaction or by reason of the ownership or operation by it or any Affiliate of any Facility or otherwise) is subject to any type of financial, organizational or rate regulation as an Electric Utility or to be regulated as a "public utility company" or a company which is a "holding company" of a "public utility company" subject to registration with the Securities and Exchange Commission or to regulation under PUHCA. (ii) Neither the Lender nor any of its Affiliates will, solely (i.e., without regard to any other activity or operation) by reason of this Agreement and the other -21- AMENDED AND RESTATED Loan Documents and the consummation of the transactions contemplated hereby and thereby, be or deemed to be, or be subject to regulation as, a "public utility company" or a company which is a "holding company" of a "public utility company" subject to registration with the Securities and Exchange Commission or to regulation under PUHCA or any other Requirement of Law regulating utilities or independent power producers. (iii) Each Facility owned by the Borrower or any of its Affiliates on the Closing Date is (A) a "qualifying facility" within the meaning of the PURPA regulations, eligible for the benefit of the exemptions provided by 18 C.P.R. ss. 292.601, (B) an "exempt wholesale generator" under the National Energy Policy Act of 1992 or (C) exempt from all regulation under PUHCA. (n) Margin Stock. The Borrower does not own any "margin stock" as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and the proceeds of Loans will be used only for the purposes contemplated hereunder. (o) Taxes and Tax Returns. (i) To the best of the Borrower's knowledge after due inquiry, the Borrower has properly completed and timely filed all income tax returns, if any, it is required to file up to and including for the year ended December 31, 2003. To the best of the Borrower's knowledge after due inquiry, the information filed is complete and accurate in all material respects. To the best of the Borrower's knowledge, after due inquiry, all deductions taken in such income tax returns are appropriate and in accordance with applicable laws and regulations. (ii) To the best of the Borrower's knowledge after due inquiry, except as specified in Schedule 5.1(o), all taxes, assessments, fees and other governmental charges for periods beginning prior to the date hereof have been timely paid (or, if not yet due, adequate reserves therefor have been established) and the Borrower has no liability for taxes in excess of the amounts so paid or reserves so established. (iii) To the best of the Borrower's knowledge after due inquiry, except as specified in Schedule 5.1(o), (A) no deficiencies for taxes have been claimed, proposed or assessed by any taxing or other Governmental Authority against the Borrower and no tax Liens have been filed and (B) there are no pending or threatened audits, investigations or claims for or relating to any liability of the Borrower for taxes and there are no matters under discussion with any Governmental Authority which could result in an additional liability of the Borrower for taxes beyond amounts reserved therefor in accordance with GAAP. Except as is required solely for the use by the Borrower of net operating loss carryforwards, no extension of a statute of limitations relating to taxes, assessments, fees or other governmental charges is in effect as of the Closing Date with respect to the Borrower. -22- AMENDED AND RESTATED (iv) As of the Closing Date, the Borrower is not a party to and has no obligations under any written tax sharing agreement or agreement regarding payments in lieu of taxes. (p) No Judgments or Litigation. Except as specified in Schedule 5.1(p), no judgments, orders, writs or decrees are outstanding against the Borrower or any of its Subsidiaries or otherwise involving any Facility, nor is there pending or, to the best of the Borrower's knowledge, threatened any litigation, contested claim, investigation, arbitration, or governmental proceeding by or against the Borrower or any of its Subsidiaries or otherwise involving any Facility that (i) individually or in the aggregate could reasonably be expected to have a material adverse effect on the business, operations, results of operations, assets, liabilities or condition (financial or otherwise) of the Borrower or (ii) purports to affect the legality, validity or enforceability of this Agreement, the Note or any other Loan Document or the consummation of the transactions contemplated hereby or thereby. (q) Title to Property. The Borrower has (i) good and marketable fee simple title to or valid leasehold interests in or other relevant rights in all of its real property and (ii) good and marketable title to all of its other property. (r) No Defaults. After giving effect to the closing of the transactions contemplated herein, neither the Borrower nor any of its Subsidiaries is in default under any term of any Material Contract or Requirement of Law, which default could reasonably be expected to have a material adverse effect on the business, operations, results of operations, assets, liabilities or condition (financial or otherwise) of the Borrower or otherwise cause an Event of Default to occur, nor has the Borrower or any of its Subsidiaries received notice of any such default. (s) ERISA. (i) Except as specified in Schedule 5.1(s), as of the Closing Date, the Borrower does not maintain or contribute to any Plan. (ii) The Borrower and, to the best of the Borrower's knowledge, each ERISA Affiliate have fulfilled all contribution obligations for each Plan (including obligations related to the minimum funding standards of ERISA and the Internal Revenue Code) as they have become due, and, to the best of the Borrower's knowledge, no application for a funding waiver or an extension of any amortization period pursuant to Sections 303 and 304 of ERISA or Section 412 of the Internal Revenue Code has been made with respect to any Plan. (iii) To the best of the Borrower's knowledge no Termination Event has occurred nor has any other event occurred that is likely to result in a Termination Event. Neither the Borrower or, to the best of the Borrower's knowledge, any ERISA Affiliate, nor any fiduciary of any Plan, is subject to any direct or indirect liability with respect to any Plan under any Requirement of Law or agreement which could reasonably be expected to have a Material Adverse Effect. (iv) Neither the Borrower nor, to the best of the Borrower's knowledge, any ERISA Affiliate is required to or reasonably expects to be required to provide -23- AMENDED AND RESTATED security to any Plan under Section 307 of ERISA or Section 401(a)(29) of the Internal Revenue Code. (v) The Borrower is in compliance in all respects with any applicable provisions of ERISA with respect to all Plans except where such noncompliance could not reasonably be expected to have a Material Adverse Effect. To the best of the Borrower's knowledge, there has been no prohibited transaction as defined in Section 406 of ERISA or Section 4975 of the Internal Revenue Code (a "Prohibited Transaction") with respect to any Plan or any Multiemployer Plan. The Borrower and, to the best of the Borrower's knowledge, each ERISA Affiliate have made when due any and all payments required to be made under any agreement relating to a Multiemployer Plan or any Requirement of Law pertaining thereto. With respect to each Plan and Multiemployer Plan, the Borrower and each ERISA Affiliate have not incurred any liability to the PBGC and have not had asserted against them any penalty for failure to fulfill the minimum funding requirements of ERISA. (vi) Each Plan which is intended to qualify under Section 401(a) of the Internal Revenue Code has received a favorable determination letter from the IRS and no event has occurred which would cause the loss of such qualification except where the loss of such qualification could not reasonably be expected to have a Material Adverse Effect. (vii) Neither the Borrower nor, to the best of the Borrower's knowledge, any ERISA Affiliate has instituted or intends to institute proceedings to terminate any Plan. (t) Labor Matters. There are no collective bargaining agreements to which the Borrower or any of its Subsidiaries is a party as of the Closing Date. There are no existing or threatened strikes, lockouts or other disputes relating to any collective bargaining or similar agreement to which the Borrower or any of its Subsidiaries is a party which, individually or in the aggregate, taken as a whole, could reasonably be expected to have a material adverse effect on the business, operations, results of operations, assets, liabilities or condition (financial or otherwise) of the Borrower. (u) Compliance with Environmental Laws. The Borrower (i) is not the subject of a judicial or administrative proceeding or investigation relating to the violation of any Environmental Law or asserting potential liability arising from the release or disposal by any Person of any Hazardous Materials, (ii) has not filed or received any notice under any Environmental Law concerning the treatment, storage, disposal, spill or release or threatened release of any Hazardous Materials at, on, beneath or adjacent to property owned or leased by it, or the release or threatened release at any other location of any Hazardous Material generated, used, stored, treated, transported or released by or on behalf of the Borrower and (iii) has no knowledge of any contingent liability of the Borrower for any release of any Hazardous Materials, in each case which proceedings, investigations notices and liabilities involve an amount in excess of $1,000,000 in the aggregate and could reasonably be expected to have a Material Adverse Effect. -24- AMENDED AND RESTATED (v) Licenses and Permits. The Borrower has obtained, and holds in full force and effect, all franchises, licenses, leases, permits, certificates, authorizations, qualifications, easements, rights of way and other rights and approvals, in each case which are material to and necessary for the operation of its business as now conducted and as proposed to be conducted. (w) Business and Properties. The business of the Borrower or any of its Subsidiaries is not presently affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, 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 on the business, operations, results of operations, assets, liabilities or condition (financial or otherwise) of the Borrower. (x) Contracts, Orders, etc. Set forth on Schedule 5.1(x) is a complete and accurate list of all indentures, loan or credit agreements, lease finance agreements, guarantees, mortgages, security agreements, bonds, notes and other similar agreements or instruments, and all orders, writs, judgments, awards, injunctions and decrees, which materially affect the Borrower's right to borrow money or to incur its obligations under this Agreement. ARTICLE VI COVENANTS OF THE BORROWER SECTION 6.1 Affirmative Covenants. Until the satisfaction of all Obligations in full, the termination of the Commitment and the expiration or, to the extent required under the terms of this Agreement, full cash collateralization of all Letters of Credit: (a) Corporate Existence. The Borrower shall (i) maintain its corporate existence, (ii) qualify to transact business as a foreign corporation where the nature or extent of its business or the ownership of its property requires it to be so qualified and (iii) maintain in full force and effect all licenses, bonds, franchises, leases, trademarks and qualifications to do business, and all patents, contracts and other rights and privileges necessary to the conduct of its businesses or the performance of its obligations under this Agreement and the other Loan Documents, except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. (b) Maintenance of Property. The Borrower shall keep all property useful, necessary and material to its business in good working order and condition (ordinary wear and tear excepted) as may be required or appropriate, except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. (c) Taxes and other Claims. The Borrower shall pay and discharge when due (i) all federal, state and local tax assessments and other governmental charges and levies imposed against the Borrower or any of its property; and (ii) all lawful claims that, if unpaid, might by law become a Lien upon its property; provided, however, that any such tax assessment, charge, levy or claim need not be paid if it is being contested, in good faith, by appropriate proceedings diligently conducted and if an adequate reserve or other appropriate provision shall have been made therefor as required in accordance with GAAP. -25- AMENDED AND RESTATED (d) Government Regulations. The Borrower shall comply with all applicable federal, state, local or foreign laws and regulations, including, without limitation, those relating to environmental matters, employee matters (including the collection, payment and deposit of employees' income, unemployment and social security taxes) and with respect to pension liabilities, except where the failure to comply would not have a Material Adverse Effect. (e) Insurance. The Borrower shall, or, at its option, shall cause one or more of its Subsidiaries to, maintain adequate insurance on all property and assets of the Borrower and the Facilities, including fire, theft, burglary, pilferage, casualty, general liability, worker's compensation, public liability, business interruption, third party property damage and replacement value insurance under such policies of insurance, with such insurance companies, in such amounts and covering such risks as are at all times reasonably satisfactory to the Lender. (f) Books and Records; Inspections. The Borrower shall (i) maintain adequate books and records (including, without limitation, computer printouts and programs) in accordance with GAAP and otherwise reflecting all financial transactions of the Borrower and (ii) provide the Lender and its agents access to the premises of the Borrower at any reasonable time and from time to time, during normal business hours and upon reasonable notice under the circumstances, and at any reasonable time on and after the occurrence of a Default. (g) Notification Requirements. The Borrower shall timely give to the Lender the following notices and other documents: (i) Notice of Defaults. Promptly, and in any event within five Business Days after becoming aware of the occurrence of a Default, a certificate of a Responsible Officer specifying the nature thereof and the Borrower's proposed response thereto, each in reasonable detail. (ii) Proceedings, Adverse Changes and other Events. Promptly, and in any event within ten Business Days after the Borrower becomes aware of any of the following, (A) notice of (I) any proceeding being instituted or threatened to be instituted by or against the Borrower in any federal, state, local or foreign court or before any commission or other regulatory body (federal, state, local or foreign) which has or could reasonably be expected to have a Material Adverse Effect, (II) any order, judgment or decree which has or could reasonably be expected to have a Material Adverse Effect being entered against the Borrower or any of its properties or assets or (III) any actual change, development or event including, without limitation, any investigation or proceeding before any Governmental Authority which has had or could reasonably be expected to have a Material Adverse Effect, and (B) a written statement describing such proceeding, order, judgment, decree, change, development or event and the action, if any, being taken with respect thereto by the Borrower. (iii) ERISA Notices. (A) Promptly, and in any event no later than ten Business Days after the occurrence of the later of a Termination Event or knowledge by the Borrower that a Termination Event has -26- AMENDED AND RESTATED occurred, a written statement of a Responsible Officer describing such Termination Event and any action that is being taken with respect thereto by the Borrower or any ERISA Affiliate, and any action taken or threatened by the Internal Revenue Service, the Department of Labor or the PBGC; (B) promptly, and in any event no later than ten Business Days after the later of the filing thereof with the Internal Revenue Service or knowledge by the Borrower of such filing of an ERISA Affiliate, a copy of each funding waiver request filed with respect to any Plan subject to the funding requirements of Section 412 of the Internal Revenue Code and all communications received by the Borrower or any ERISA Affiliate with respect to such request; (C) promptly, and in any event no later than ten Business Days after the later of receipt by the Borrower or knowledge by the Borrower of receipt by any ERISA Affiliate of the PBGC's intention to terminate a Pension Plan or to have a trustee appointed to administer a Pension Plan, a copy of each such notice; (D) promptly, and in any event no later than ten Business Days after the later of the occurrence thereof or knowledge by the Borrower of the occurrence, notice (including the nature of the event and, when known, any action taken or threatened by the Internal Revenue Service or the PBGC with respect thereto) of: (I) any Prohibited Transaction which could subject the Borrower or any ERISA Affiliate to a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Internal Revenue Code in connection with any Plan, or any trust created thereunder and which could reasonably be expected to have a Material Adverse Effect, (II) any cessation of operations (by the Borrower or any ERISA Affiliate) at a Facility in the circumstances described in Section 4062(e) of ERISA and which could reasonably be expected to have a Material Adverse Effect, (III) a failure by the Borrower or any ERISA Affiliate to make a payment to a Plan required to avoid imposition of a Lien under Section 302(f) of ERISA or -27- AMENDED AND RESTATED Section 412(n) of the Internal Revenue Code and which could reasonably be expected to have a Material Adverse Effect, (IV) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA or Section 401(a)(29) of the Internal Revenue Code and which could reasonably be expected to have a Material Adverse Effect, or (V) any change in the actuarial assumptions or funding methods used for any Plan, where the effect of such change is materially to increase or reduce the unfunded benefit liability or obligation to make periodic contributions and which could reasonably be expected to have a Material Adverse Effect; (E) promptly upon the request of the Lender, each annual report (IRS Form 5500 series) and all accompanying schedules, the most recent actuarial reports, the most recent financial information concerning the financial status of each Plan administered or maintained by the Borrower or any ERISA Affiliate, and schedules showing the amounts contributed to each such Plan by or on behalf of the Borrower or any ERISA Affiliate in which any of its personnel participate or from which such personnel may derive a benefit; (F) promptly upon the filing thereof or upon knowledge of such filing by the Borrower, copies of any Form 5310, or any successor or equivalent form to Form 5310, filed with the PBGC in connection with the termination of any Plan, and copies of any standard termination notice or distress termination notice filed with the PBGC in connection with the termination of any Pension Plan; (G) promptly, and in any event no later than ten Business Days after the later of receipt thereof by the Borrower or knowledge by the Borrower of receipt by any ERISA Affiliate, notice and demand for payment of withdrawal liability under Section 4201 of ERISA with respect to a Multiemployer Plan and which could reasonably be expected to have a Material Adverse Effect; (H) promptly, and in any event no later than ten Business Days after the later of receipt thereof by the Borrower or knowledge by the Borrower of receipt by any ERISA Affiliate, notice by the Department of Labor of any penalty, audit, investigation or -28- AMENDED AND RESTATED any purported violation of ERISA with respect to a Plan and which could reasonably be expected to have a Material Adverse Effect; (I) promptly, and in any event no later than ten Business Days after the later of receipt thereof by the Borrower or knowledge by the Borrower of receipt by any ERISA Affiliate, notice by the Internal Revenue Service or the Treasury Department of any income tax deficiency or delinquency, excise tax penalty, audit or investigation with respect to a Plan and which could reasonably be expected to have a Material Adverse Effect; and (J) promptly, and in any event no later than ten Business Days after the later of receipt thereof by the Borrower or knowledge by the Borrower of receipt by any ERISA Affiliate, notice of any administrative or judicial complaint, or the entry of a judgment, award or settlement agreement, in either case with respect to a Plan that could have a Material Adverse Effect. (iv) Material Contracts. Promptly, and in any event within ten Business Days after any Material Contract is terminated or amended other than amendments which are ministerial or non-substantive in nature. (v) Environmental Matters. Promptly, and in any event within ten Business Days after receipt by the Borrower thereof, copies of each (A) written notice that any violation of any Environmental Law may have been committed or is about to be committed by the Borrower, (B) written notice that any administrative or judicial complaint or order has been filed or is about to be filed against the Borrower alleging violations of any Environmental Law or requiring the Borrower to take any action in connection with the release of toxic or Hazardous Materials into the environment, or (C) written notice from a Governmental Authority or other Person alleging that the Borrower may be liable or responsible for costs associated with a response to or cleanup of a release of a Hazardous Material into the environment or any damages caused thereby, in each case which could reasonably be expected to have a Material Adverse Effect. (h) Casualty Loss. The Borrower shall (i) provide written notice to the Lender, within ten Business Days, of any damage to, the destruction of or any other loss to any material asset or material property owned or used by the Borrower or any condemnation, confiscation or other taking, in whole or in part, or any use that otherwise diminishes so as to render impracticable or unreasonable the use of such asset or property owned or used by the Borrower together with the amount of the damage, destruction, loss or diminution in value, in each case if the amount involved exceeds $5,000,000 (a "Casualty Loss") and (ii) diligently file and prosecute its claim or claims for any award or payment in connection with a Casualty Loss. (i) Financial Reporting. The Borrower shall deliver to the Lender the following: -29- AMENDED AND RESTATED (i) Annual Financial Statements. As soon as available, but not later than one hundred twenty days after the end of each fiscal year of the Borrower, beginning with the fiscal year ending December 31, 2004, (A) the Borrower's annual audited Financial Statements; (B) to the extent not included in the Financial Statements delivered pursuant to clause (A) above, a comparison in reasonable detail to the prior year's Financial Statements in form satisfactory to the Lender; and (C) the Auditors' unqualified opinion on the Borrower's annual audited Financial Statements for such fiscal year. (ii) Quarterly Financial Statements. As soon as available, but not later than sixty days after the end of the first three quarters of each fiscal year of the Borrower, commencing with the first fiscal quarter ending June 30, 2004, quarterly Financial Statements as at the end of such quarter, certified by a Responsible Officer, together with a compliance certificate signed by a Responsible Officer, substantially in the form of Exhibit E hereto, with an attached schedule of calculations demonstrating compliance with the Financial Covenants. (j) Punctual Payment. The Borrower shall timely pay the principal and interest and any other amount due under this Agreement and the other Loan Documents. (k) ERISA. The Borrower shall (i) maintain each Plan intended to qualify under Section 401(a) of the Internal Revenue Code so as to satisfy the qualification requirements thereof, except when the failure to so comply could not reasonably be expected to have a Material Adverse Effect; (ii) contribute, or require that contributions be made, in a timely manner (A) to each Plan in amounts sufficient (I) to satisfy the minimum funding requirements of Section 302 of ERISA or Section 412 of the Internal Revenue Code, if applicable, (II) to satisfy any other Requirements of Law and (III) to satisfy the terms and conditions of each such Plan, and (B) to each Foreign Plan in amounts sufficient to satisfy the minimum funding requirements of any applicable law or regulation, without any application for a waiver from any such funding requirements, in each case, except when the failure to so comply could not reasonably be expected to have a Material Adverse Effect; (iii) cause each Plan or Foreign Plan to comply in all material respects with applicable law (including, without limitation, all applicable statutes, orders, rules and regulations); and (iv) pay in a timely manner, in all material respects, all required premiums to the PBGC. As used in this Section, "Foreign Plan" means a plan that provides retirement or health benefits and that is maintained by, or otherwise contributed to, the Borrower for the benefit of employees outside the United States. (l) Environmental Matters. The Borrower shall conduct its business so as to comply in all respects with all applicable Environmental Laws in all jurisdictions in which it is doing business including, without limitation, compliance with the terms and conditions of all permits and governmental authorizations, except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. (m) Payment of Dividends and Distributions. Subject to applicable Requirements of Law and to contractual restrictions applicable to the Borrower or to Subsidiaries of the Borrower that are in effect from time to time, the Borrower shall cause each of its Subsidiaries (i) to declare and pay cash dividends, partnership, limited liability company or similar distributions, or similar -30- AMENDED AND RESTATED forms of payment made on account of equity interests, as the case may be, so as to maximize the amount of cash distributable to the Borrower from time to time. (n) Solvency. The Borrower shall remain Solvent at all times. (o) Further Assurances. The Borrower shall take all such further actions and execute all such further documents and instruments as the Lender may at any time determine in its reasonable discretion to be necessary to carry out and consummate the transactions contemplated by the Loan Documents. SECTION 6.2 Negative Covenants. Until the satisfaction of all Obligations in full, the termination of the Commitment and the expiration or, to the extent required under the terms of this Agreement, full cash collateralization of all Letters of Credit: (a) Consolidation and Merger. The Borrower will not wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or agree to do any of the foregoing at any future time, except a transaction of merger or consolidation if the Borrower shall be the continuing or surviving corporation and its Tangible Net Worth shall, immediately after giving effect to such merger or consolidation, not be reduced as a result thereof. (b) Corporate Changes, etc. Except to the extent otherwise expressly permitted under this Agreement, the Borrower will not amend, alter or modify its Governing Documents or its corporate or capital structure or status in a manner that could reasonably be expected to have a Material Adverse Effect. (c) Change of Business. The Borrower will not make any material change in the nature of its business as carried on at the date hereof or enter into any new type of business outside the energy industry. (d) Sales, etc. of Assets. The Borrower will not, directly or indirectly, sell, lease, transfer or otherwise dispose of all or substantially all its assets. (e) Fiscal Year. The Borrower will not change its fiscal year from a year ending on December 31. (f) Accounting Changes. The Borrower will not at any time make or permit any change in accounting policies or reporting practices, except as required or permitted by GAAP. (g) No Prohibited Transactions Under ERISA. The Borrower will not, directly or indirectly: (i) engage in any prohibited transaction which could reasonably be expected to result in a civil penalty or excise tax described in Section 406 of ERISA or 4975 of the Internal Revenue Code for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the Department of Labor and which could reasonably be expected to have a Material Adverse Effect; -31- AMENDED AND RESTATED (ii) permit to exist with respect to any Pension Plan any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the Internal Revenue Code), whether or not waived; (iii) terminate any Pension Plan where such event would result in any liability of the Borrower or any ERISA Affiliate under Title IV of ERISA; (iv) fail to make any required contribution or payment to any Multiemployer Plan if such failure could reasonably be expected to have a Material Adverse Effect; (v) fail to pay any required installment or any other payment required under Section 412 of the Internal Revenue Code on or before the due date for such installment or other payment if such failure could reasonably be expected to have a Material Adverse Effect; (vi) amend a Pension Plan resulting in an increase in current liability for the plan year such that the Borrower or any ERISA Affiliate is required to provide security to such Plan under Section 307 of ERISA or Section 401(a)(29) of the Internal Revenue Code if such amendment could reasonably be expected to have a Material Adverse Effect; or (vii) withdraw from any Multiemployer Plan where such withdrawal is reasonably likely to result in any liability of any such entity under Title IV of ERISA and which could reasonably be expected to have a Material Adverse Effect. (h) Payment of Subordinated Debt and Amendments of Material Contracts. The Borrower will not make any payment in violation of the Subordination Agreement. The Borrower will not, and will not permit any of its Subsidiaries to, amend, modify, cancel or terminate, or permit the amendment, modification, cancellation or termination of, any of the Material Contracts, except in the event that any such amendment, modification, cancellation or termination could not reasonably be expected to have a Material Adverse Effect. (i) Use of Proceeds. The Borrower will not use any portion of the proceeds of any Letter of Credit or any Loan in violation of Section 2.1 or for the purpose of purchasing or carrying any "margin stock" (as defined in Regulation U of the Federal Reserve Board) in any manner which violates the provisions of Regulation T, U or X of such Board or for any other purpose in violation of any applicable statute or regulation, or of the terms and conditions of this Agreement. (j) Limitation on Actions Affecting Public Utility Regulation. (i) The Borrower will not, and will not permit any of its Subsidiaries to, take or fail to take any action if, as a direct consequence thereof, the Borrower or any of its Subsidiaries would be, or be deemed to be, subject to any financial, organizational or rate regulation as an Electric Utility or to be regulated as a "public utility company" or a company which is a "holding company" or a "public utility -32- AMENDED AND RESTATED company" subject to registration with the Securities and Exchange Commission or to regulation under PUHCA. (ii) The Borrower will not, and will not permit any of its Subsidiaries to, take or fail to take any action if, as a sole result of such action or inaction, the Lender would be "a public utility company" or a company which is a "holding company" of a "public utility company" or otherwise be subject to registration with the Securities and Exchange Commission or to regulation under PUHCA or any other Requirement of Law regulating utilities or independent power producers, provided that it shall not be a violation of this Section if as a result of the exercise of its remedies hereunder or under applicable law the Lender obtains control of any Facility and thus becomes subject to regulation as the owner of a "qualifying facility" as defined under the PURPA regulations, or as an "exempt wholesale generator" as defined under the National Energy Policy Act of 1992. ARTICLE VII FINANCIAL COVENANTS Until the satisfaction of all Obligations in full, the termination of the Commitment and the expiration or, to the extent required under the terms of this Agreement, full cash collateralization of all Letters of Credit: SECTION 7.1 Tangible Net Worth. The Tangible Net Worth of the Borrower shall not be less than $85,000,000 at any time. SECTION 7.2 Leverage Ratio. The Leverage Ratio shall not be greater than 4.00 to 1.00 at any time. SECTION 7.3 Minimum Coverage Ratio. The Minimum Coverage Ratio shall not be less than 1.25 to 1.00 for any calendar quarter or any calendar year. ARTICLE VIII EVENTS OF DEFAULT SECTION 8.1 Events of Default. The occurrence of any of the following events shall constitute an "Event of Default": (a) the Borrower shall fail to pay any principal, interest, fees, reasonable expenses or other Obligations within thirty days of the date when due, except with respect to the last payments of principal, interest or fees due hereunder (including, without limitation, upon acceleration), which shall be payable on the date when due (or on the date of acceleration); or (b) the Borrower shall fail to perform or observe: (i) any term, condition, covenant or agreement contained in Section 6.1(f) or (j) or Section 6.2; -33- AMENDED AND RESTATED (ii) any covenant contained in Section 6.1(g) or Article VII more than ten days after the earlier of (A) the date on which any Responsible Officer of the Borrower knew or reasonably should have known of such failure in the ordinary course of his or her responsibilities and (B) the date on which the Lender notified the Borrower in writing of such failure; or (iii) any term, condition, covenant or agreement contained in this Agreement or any other Loan Document to which it is a party (except as provided in Section 8.1(a) or (b)(i) or (ii)) more than thirty days after the earlier of (A) the date on which any Responsible Officer of the Borrower knew or reasonably should have known of such failure in the ordinary course of his or her responsibilities and (B) the date on which the Lender notified the Borrower in writing of such failure; provided, however, that if such failure is susceptible of cure but cannot reasonably be expected to be cured within such thirty-day period, and provided further that the Borrower shall have commenced to cure such failure within such thirty-day period and thereafter diligently and expeditiously proceeds to cure the same, such thirty-day period shall be extended for one additional thirty-day period; or (c) the Borrower shall dissolve, wind up or otherwise cease to conduct its business except as permitted under Section 6.2(a); or (d) the Borrower shall become the subject of an Insolvency Event; or (e) the Borrower (i) shall fail to make any payment in respect of Indebtedness of the Borrower in an amount in excess of $5,000,000 when due (whether at scheduled maturity or by acceleration, demand or otherwise) or (ii) shall otherwise be in breach or default in any of its obligations under any agreement with respect to any such Indebtedness of the Borrower, if the effect of such breach or default is to cause such Indebtedness to become due or redeemed or permit, after giving effect to all applicable grace periods and cure rights, the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to declare such Indebtedness due or require such Indebtedness to be redeemed prior to its stated maturity; or (f) any representation or warranty made by the Borrower under or in connection with any Loan Document, Financial Statement or certificate delivered in connection therewith shall prove to have been incorrect in any material respect when made or deemed made; or (g) one or more federal tax liens for more than $1,000,000 shall be filed of record against the Borrower and shall not be stayed, bonded or discharged within thirty days; or (h) a Change of Control shall have occurred; or (i) one or more judgments or orders for the payment of money in excess of $2,500,000 in the aggregate (other than judgments and orders that are fully covered by insurance and with respect to which the insurance company has accepted liability) shall be rendered against the Borrower or any of its Subsidiaries and shall not be stayed, vacated, bonded or discharged within thirty days; or -34- AMENDED AND RESTATED (j) any covenant, agreement or obligation of the Borrower referred to in Section 8.1(a) or (b)(i) shall cease to be enforceable; or (k) the occurrence of any event that could reasonably be expected to have a Material Adverse Effect if such event continues to exist more than forty-five days after the date on which the Lender notified the Borrower in writing of such event; provided, however, that if such event is susceptible of reversal but cannot reasonably be expected to be reversed within such forty-five-day period, and provided further that the Borrower shall have commenced to reverse such event within such forty-five-day period and thereafter diligently and expeditiously proceeds to reverse such event, such forty-five-day period shall be extended for one additional forty-five-day period. SECTION 8.2 Acceleration and Cash Collateralization. Upon the occurrence and during the continuance of an Event of Default, the Lender may: (a) Acceleration. Declare all Obligations immediately due and payable by written notice to the Borrower (except with respect to any Event of Default specified in (i) Section 8.1(d), in which case the Obligations shall automatically become immediately due and payable, and (ii) Section 8.1(e)(ii), in which case the Lender may not, solely based on such Event of Default, declare the Obligations immediately due and payable if the holder or holders of the Indebtedness with respect to which there is a breach or default have not declared such Indebtedness due or required such Indebtedness to be redeemed) without presentment, demand, protest or any other action or obligation of the Lender except as stated in this subsection. (b) Termination of Commitment. Declare the Commitment immediately terminated (except with respect to any Event of Default specified in Section 8.1(d), in which case the Commitment shall automatically terminate) and, at all times thereafter, any Letter of Credit issued or caused to be issued by the Lender and any Loan made by the Lender pursuant to this Agreement shall be in the Lender's sole and absolute discretion. (c) Cash Collateralization. With respect to all Letters of Credit outstanding at the time of an Event of Default, require the Borrower to make deposits in the L/C Cash Collateral Account in accordance with Section 2.4(a) up to an amount equal to 105% of the aggregate then undrawn amount of the outstanding Letters of Credit. While the Event of Default continues, amounts held in the L/C Cash Collateral Account shall be under the sole dominion and control of the Lender and shall be applied by the Lender to the payment of drafts drawn under such Letters of Credit, and the balance, if any, in the L/C Cash Collateral Account, after all such Letters of Credit shall have expired or been fully drawn upon, shall be applied to repay the other Obligations. After all such Letters of Credit shall have expired or been fully drawn upon, all Obligations in respect of Letters of Credit shall have been satisfied and all other Obligations shall have been paid in full, the balance, if any, in the L/C Cash Collateral Account shall be returned to the Borrower. If the Event of Default is cured, waived or otherwise ceases, any amounts then on deposit in the L/C Cash Collateral Account shall be returned to the Borrower within ten Business Days. (d) Excess Cash Collateral. If at any time the balance in the L/C Cash Collateral Account exceeds 105% of the aggregate then undrawn amount of the outstanding Letters of Credit, then such excess amounts shall be returned to the Borrower within ten Business Days of the date on which such excess arose. -35- AMENDED AND RESTATED (e) Security Interest. The Lender shall have, and the Borrower hereby grants to the Lender, a security interest in the L/C Cash Collateral Account which security interest shall attach and become effective at the time the L/C Cash Collateral Account is established. ARTICLE IX GENERAL PROVISIONS SECTION 9.1 GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND ANY DISPUTE ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR OTHERWISE, SHALL BE GOVERNED BY THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW) AND DECISIONS OF THE STATE OF NEW YORK. SECTION 9.2 SUBMISSION TO JURISDICTION. ALL DISPUTES BETWEEN THE BORROWER AND THE LENDER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE AND FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK, AND THE COURTS TO WHICH AN APPEAL THEREFROM MAY BE TAKEN; PROVIDED, HOWEVER, THAT THE LENDER SHALL HAVE THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE BORROWER OR ITS PROPERTY IN ANY LOCATION REASONABLY SELECTED BY THE LENDER IN GOOD FAITH TO ENABLE THE LENDER TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE LENDER. THE BORROWER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH THE LENDER HAS COMMENCED A PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON FORUM NON CONVENIENS. SECTION 9.3 SERVICE OF PROCESS. THE BORROWER HEREBY IRREVOCABLY DESIGNATES CT CORPORATION, 111 EIGHTH AVENUE, NEW YORK, NEW YORK 10011, AS THE DESIGNEE AND AGENT OF THE BORROWER TO RECEIVE, FOR AND ON BEHALF OF THE BORROWER, SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT AT ITS ADDRESS WILL BE PROMPTLY FORWARDED BY MAIL TO THE BORROWER, BUT THE FAILURE OF THE BORROWER TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. SECTION 9.4 JURY TRIAL. THE BORROWER AND THE LENDER EACH HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO A -36- AMENDED AND RESTATED TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO (I) THIS AGREEMENT, (II) ANY OTHER LOAN DOCUMENT OR OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN THE BORROWER AND THE LENDER, OR (III) ANY CONDUCT, ACT OR OMISSION OF THE BORROWER, THE LENDER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR OTHER AFFILIATES, IN EACH CASE WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR OTHERWISE. SECTION 9.5 LIMITATION OF LIABILITY. THE BORROWER HEREBY WAIVES ALL FUTURE CLAIMS AGAINST THE LENDER FOR SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES UNLESS RESULTING FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE LENDER. SECTION 9.6 Delays; Partial Exercise of Remedies. No delay or omission of the Lender to exercise any right or remedy hereunder shall impair any such right or operate as a waiver thereof. No single or partial exercise by the Lender of any right or remedy shall preclude any other or further exercise thereof, or preclude any other right or remedy. SECTION 9.7 Notices. Except as otherwise provided herein, all notices and correspondence hereunder shall be in writing and sent by certified or registered mail, return receipt requested, by overnight delivery service, with all charges prepaid, or by telecopier followed by a hard copy sent by regular mail, if to the Lender, then to United Capital, c/o Hudson United Bank, 87 Post Road East, Westport, Connecticut 06880, Telecopy: (203) 328-9339, Attention: Mr. Jerome P. Peters, Jr., Senior Vice President, with a copy to Luskin, Stern & Eisler LLP, 330 Madison Avenue, New York, New York 10017, Telecopy: (212) 293-2705, Attention: Nathan M. Eisler, Esq., and if to the Borrower, then to Ormat Nevada Inc., 980 Greg Street, Sparks, Nevada 89431, Telecopy: (775) 356-9039, Attention: President, or, in each case, to such other address specified by either party in writing to the other party in the manner required under this Section. All such notices and correspondence shall be deemed given (i) if sent by certified or registered mail, three Business Days after being postmarked, (ii) if sent by overnight delivery service, when received at the above stated addresses or when delivery is refused and (iii) if sent by telecopier transmission, when such transmission is confirmed. SECTION 9.8 Assignments and Participations. (a) Borrower Assignment. The Borrower shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Lender. (b) Lender Assignment. The Lender, with the prior written consent of the Borrower which shall not be unreasonably withheld or delayed, may assign to one or more banks or other financial institutions all or a portion of its rights and obligations under this Agreement, the Note and the other Loan Documents. SECTION 9.9 Indemnification; Reimbursement of Expenses of Collection. (a) The Borrower hereby indemnifies and agrees to defend and hold harmless the Lender and its directors, officers, agents, employees and counsel (each, an "Indemnified Party") from and against any and all losses, claims, damages, liabilities, deficiencies, judgments or -37- AMENDED AND RESTATED expenses incurred by any of them (except to the extent that it is finally judicially determined to have resulted from their own gross negligence or willful misconduct) arising out of or by reason of (i) any litigations, investigations, claims or proceedings which arise out of or are in any way related to (A) this Agreement, any other Loan Document or the transactions contemplated hereby or thereby, (B) any actual or proposed use by the Borrower of the Letters of Credit or the proceeds of the Loans or (C) the Lender's entering into this Agreement, the other Loan Documents or any other agreement or document relating hereto, including, without limitation, amounts paid in settlement, court costs and the reasonable fees and disbursements of counsel incurred in connection with any such litigation, investigation, claim or proceeding or any advice rendered in connection with any of the foregoing and (ii) any remedial or other action taken by the Borrower or the Lender in connection with compliance by the Borrower, or any of its properties, with any federal, state or local Environmental Laws. In addition, the Borrower shall, upon demand, pay to the Lender all reasonable costs and expenses incurred by the Lender (including, without limitation, recording costs and the reasonable fees and disbursements of counsel and other professionals) in connection with the preparation, execution, delivery, administration, modification and amendment of the Loan Documents, and, upon the occurrence and during the continuance of an Event of Default, pay to the Lender all reasonable costs and expenses (including, without limitation, the reasonable fees and disbursements of counsel and other professionals) paid or incurred by the Lender in (A) enforcing or defending its rights under or in respect of this Agreement, the other Loan Documents or any other document or instrument now or hereafter executed and delivered in connection herewith, (B) collecting the Obligations, and (C) obtaining any legal, accounting or other advice reasonably required in connection with any of the foregoing. If and to the extent that the Obligations of the Borrower hereunder are unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of such Obligations which is permissible under applicable law. (b) The Borrower's obligations under this Section 9.9 shall survive any termination of this Agreement and the other Loan Documents and the payment in full of the Obligations, and are in addition to, and not in substitution of, any of its other obligations set forth in this Agreement. SECTION 9.10 Right of Setoff. In addition to and not in limitation of all rights of offset that the Lender or any of its Affiliates may have under applicable law, and whether or not the Lender has made any demand or the Obligations of the Borrower have matured, the Lender and its Affiliates shall have the right to appropriate and apply to the payment of the Obligations of the Borrower all (i) deposits of the Borrower or any of its Affiliates held by the Lender or any of its Affiliates other than deposits in any of the accounts specified in Schedule 9.10 or any successor or other special account held by the Lender or any of its Affiliates as a depository for funds on deposit to secure or support financings provided by other Persons to the Borrower or its Affiliates and (ii) other obligations then or thereafter owing by the Lender or any of its Affiliates to the Borrower or any of its Affiliates. SECTION 9.11 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document shall be effective unless in writing and signed by the party to be charged thereby. -38- AMENDED AND RESTATED SECTION 9.12 Nonliability of Lender. The relationship between the Borrower and the Lender shall be solely that of borrower and lender. The Lender shall not have any fiduciary responsibilities to the Borrower. The Lender undertakes no responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations. SECTION 9.13 Counterparts; Telecopied Signatures. This Agreement and any waiver or amendment hereto may be executed in counterparts and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but both of which shall together constitute one and the same instrument. This Agreement may be executed and delivered by telecopier or other facsimile transmission all with the same force and effect as if the same was a fully executed and delivered original counterpart. SECTION 9.14 Severability. In case any provision in or obligation under this Agreement, the Note or any other Loan Document 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. SECTION 9.15 Maximum Rate. Notwithstanding anything to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Borrower and the Lender hereby agree that all agreements among them under this Agreement and the other Loan Documents, whether now existing or hereafter arising and whether written or oral, are expressly limited so that in no contingency or event whatsoever shall the amount paid, or agreed to be paid, to the Lender for the use, forbearance, or detention of the money loaned to the Borrower and evidenced hereby or thereby or for the performance or payment of any covenant or obligation contained herein or therein, exceed the maximum non-usurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the Obligations, under the laws of the State of New York (or the law of any other jurisdiction whose laws may be mandatorily applicable notwithstanding other provisions of this Agreement and the other Loan Documents), or under applicable federal laws which may presently or hereafter be in effect and which allow a higher maximum non-usurious interest rate than under New York (or such other jurisdiction's) law, in any case after taking into account, to the extent permitted by applicable law, any and all relevant payments or charges under this Agreement and the other Loan Documents, and any available exemptions, exceptions and exclusions (the "Highest Lawful Rate"). If due to any circumstance whatsoever, fulfillment of any provisions of this Agreement or any of the other Loan Documents at the time performance of such provision shall be due shall exceed the Highest Lawful Rate, then, automatically, the obligation to be fulfilled shall be modified or reduced to the extent necessary to limit such interest to the Highest Lawful Rate, and if from any such circumstance the Lender should ever receive anything of value deemed interest by applicable law which would exceed the Highest Lawful Rate, such excessive interest shall be applied to the reduction of the principal amount then outstanding hereunder or on account of any other then outstanding Obligations and not to the payment of interest, or if such excessive interest exceeds the principal unpaid balance then outstanding hereunder and such other then outstanding Obligations, such excess shall be refunded to the Borrower. All sums paid or agreed to be paid to the Lender for the use, forbearance, or detention of the Obligations and other Indebtedness of the Borrower to the Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread -39- AMENDED AND RESTATED throughout the full term of such Indebtedness, until payment in full thereof, so that the actual rate of interest on account of all such Indebtedness does not exceed the Highest Lawful Rate throughout the entire term of such Indebtedness. The terms and provisions of this Section shall control every other provision of this Agreement and all agreements between the Borrower and the Lender. SECTION 9.16 ENTIRE AGREEMENT; SUCCESSORS AND ASSIGNS. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE AGREEMENT BETWEEN THE BORROWER AND THE LENDER IN RESPECT OF THE SUBJECT MATTER HEREOF, SUPERSEDE ANY PRIOR WRITTEN AND VERBAL AGREEMENTS BETWEEN THEM IN RESPECT OF THE SUBJECT MATTER HEREOF, AND SHALL BIND AND BENEFIT THE BORROWER AND THE LENDER AND THEIR RESPECTIVE SUCCESSORS AND PERMITTED ASSIGNS. SECTION 9.17 References to Ormat Technologies. No reference to Ormat Technologies in this Agreement or any of the other Loan Documents shall be deemed to create any liability of Ormat Technologies for the Obligations, provided that the Lender hereby reserves any claims it may have against Ormat Technologies for liability under laws relating to undercapitalization, fraud or any other acts that could result in liability of a shareholder for the obligations of its subsidiary. -40- AMENDED AND RESTATED IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their proper and duly authorized officers as of the date first set forth above. ORMAT NEVADA INC. By: /s/ Connie Stechman ---------------------------- Connie Stechman Authorized Representative HUDSON UNITED BANK By: /s/ Jerome Peters ---------------------------- Jerome P. Peters, Jr. Senior Vice President AMENDED AND RESTATED SCHEDULE 5.1(e) CONSENTS AND FILINGS None. AMENDED AND RESTATED SCHEDULE 5.1(f) MATERIAL TRANSACTIONS Each of the following has occurred since December 31, 2003: 1. The acquisition by ORNI 8 LLC, a subsidiary of the Borrower, of 100% of the interests in CE Puna Limited Partnership, a Maryland general partnership and Puna Geothermal Venture, a Hawaii general partnership, pursuant to the Purchase and Sale Agreement, dated as of April 22, 2004, by and among Constellation Power, Inc., a Maryland corporation, as seller, COSI Puna, Inc., a Maryland corporation, ORNI 8 LLC, a Delaware limited liability company, as purchaser, and Borrower, as purchaser's parent. 2. The acquisition by ORNI 11 LLC and ORNI 12 LLC, each a subsidiary of the Borrower, of 100% of the general and limited partnership interests of Yankee Caithness Joint Venture, L.P., a Delaware limited partnership, pursuant to the Purchase and Sale Agreement, dated as of May 20, 2004, by and among Nevada Power Holdings, LLC, a Delaware limited liability company, and Steamboat Finance Holdings, LLC, a Delaware limited liability company, as sellers, and ORNI 11 LLC, a Delaware limited liability company, and ORNI 12 LLC, a Delaware limited liability company, as purchasers. 3. The application of the Financial Accounting Standards Board's guidelines, FASB FIN 46, Consolidation of Variable Interest Entities, to the Borrower and the Borrower's Affiliates. AMENDED AND RESTATED SCHEDULE 5.1(h) JOINT VENTURES OR PARTNERSHIPS None. AMENDED AND RESTATED SCHEDULE 5.1(o) TAXES AND TAX RETURNS None. AMENDED AND RESTATED SCHEDULE 5.1(p) JUDGMENTS OR LITIGATION None. AMENDED AND RESTATED SCHEDULE 5.1(s) ERISA Ormat Nevada Inc., a Delaware corporation, maintains or contributes to the following plans: 1. Ormat 401(k) Plan 2. Short Term Disability Plan 3. Long Term Disability Plan 4. Group Term Life Insurance 5. Guardian Dental 6. VSP Vision Care Benefits 7. CBSA Group Medical Plan AMENDED AND RESTATED SCHEDULE 5.1(x) CONTRACTS, ORDERS, ETC. None. AMENDED AND RESTATED SCHEDULE 9.10 EXCLUDED ACCOUNTS -------------------------------------------------------------------------------- Name of Account Account Number -------------------------------------------------------------------------------- OrCal Geothermal Revenue Account 2897400361 -------------------------------------------------------------------------------- OrCal Geothermal O&M Account 2897400370 -------------------------------------------------------------------------------- OrCal Geothermal Debt Service Reserve Account 2897400389 -------------------------------------------------------------------------------- OrCal Geothermal Lease Suspense Account 2897400398 -------------------------------------------------------------------------------- OrCal Geothermal Capital Expenditures Payment Account 2897400405 -------------------------------------------------------------------------------- OrCal Geothermal Distribution Suspense Account 2897400414 -------------------------------------------------------------------------------- OrCal Geothermal Loss Proceeds Account 2897400423 -------------------------------------------------------------------------------- OrCal Geothermal Funding Account 2897400432 -------------------------------------------------------------------------------- Ormesa Revenue Account 2897400272 -------------------------------------------------------------------------------- Ormesa Debt Service Reserve Account 2897400281 -------------------------------------------------------------------------------- Ormesa Restoration Sub-Account 2897400316 -------------------------------------------------------------------------------- Ormesa Loss Proceeds Account 2897400307 -------------------------------------------------------------------------------- Ormesa O&M Account 2897400290 -------------------------------------------------------------------------------- AMENDED AND RESTATEDEXHIBIT A PROMISSORY NOTE New York, New York ---- --, ---- FOR VALUE RECEIVED, Ormat Nevada Inc., a Delaware corporation having its chief executive office and principal place of business at 980 Greg Street, Sparks, Nevada 89431 (the "Borrower"), hereby unconditionally promises to pay to the order of Hudson United Bank, a bank organized under the laws of the State of New Jersey (the "Lender"), at the Lender's office at 87 Post Road East, Westport, Connecticut 06880 or at such other location as the Lender may from time to time designate in writing, in lawful money of the United States of America and in immediately available funds, the principal amount of each Loan made by the Lender to the Borrower under Section 2.1(d) of the Credit Agreement (as defined below) in four consecutive quarterly installments, commencing on the last Business Day of the calendar quarter immediately following the making of such Loan in accordance with Section 2.4(a) of the Credit Agreement, provided that the amount of each Loan shall be repaid in full on the earlier of (i) twelve months after the date on which such Loan was made and (ii) the Availability Expiration Date. The Borrower further promises to pay interest in like money and funds to the Lender at the aforementioned address (or at such other location as the Lender may from time to time designate in writing) on the unpaid principal amount of each Loan from time to time outstanding from and including the date hereof until paid in full at the rates and on the dates determined in accordance with Sections 3.1 and 3.2 of the Credit Agreement. All capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Letter of Credit and Loan Agreement of even date herewith (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement") between the Borrower and the Lender. This Note is the Note referred to in the Credit Agreement and shall be entitled to the benefit of all terms and conditions of, and the security of all security interests, liens and rights granted under or in connection with, the Credit Agreement and the other Loan Documents, and is subject to optional and mandatory prepayment as provided in the Credit Agreement. Upon the occurrence of any one or more of the Events of Default specified in the Credit Agreement, all amounts then remaining unpaid on this Note may be declared to be or may automatically become immediately due and payable as provided in the Credit Agreement. The Borrower acknowledges that the holder of this Note may assign, transfer or sell all or a portion of its rights and interests in, to and under this Note to one or more Persons as provided in the Credit Agreement and that such Persons shall thereupon become vested with all of the rights and benefits of the Lender in respect hereof as to all or that portion of this Note which is so assigned, transferred or sold. In the event of any conflict between the terms hereof and the terms and provisions of the Credit Agreement, the terms and provisions of the Credit Agreement shall control. The Borrower waives presentment, demand for payment, protest and notice of dishonor of this Note and authorizes the holder hereof, without notice, to increase or decrease the rate of interest on any amount owing under this Note in accordance with the Credit Agreement. The Borrower shall make all payments hereunder without setoff, recoupment, deduction or counterclaim. No failure to exercise and no delay in exercising any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. This Note may not be changed or modified orally, but only by an agreement in writing, which is signed by the party or parties against whom enforcement of any waiver, change or modification is sought. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS NOTE AND ANY DISPUTE ARISING OUT OF OR IN CONNECTION WITH THIS NOTE, WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR OTHERWISE, SHALL BE GOVERNED BY THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW) AND DECISIONS OF THE STATE OF NEW YORK. EACH OF THE BORROWER AND, BY ITS ACCEPTANCE HEREOF, THE LENDER HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO THIS NOTE OR ANY CONDUCT, ACTS OR OMISSIONS OF THE BORROWER, THE LENDER OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR OTHER AFFILIATES, IN EACH CASE WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR OTHERWISE. ORMAT NEVADA INC. By: ---------------------------- Connie Stechman Authorized Representative 2 EXHIBIT B SUBORDINATION AGREEMENT SUBORDINATION AGREEMENT dated as of ____ __, ____ (this "Agreement") between Ormat Technologies, Inc., a Delaware corporation (together with its successors and assigns, the "Junior Lender"), and Hudson United Bank, a bank organized under the laws of the State of New Jersey (together with its successors and assigns, "Hudson United"). W I T N E S S E T H : WHEREAS, Ormat Nevada Inc., a Delaware corporation ("Ormat Nevada"), is a wholly owned Subsidiary of the Junior Lender and has intercompany indebtedness to the Junior Lender which is evidenced by the Credit Facility dated December 18, 2003 in an amount up to $80,000,000 (as amended, supplemented or otherwise modified from time to time, the "Junior Credit Facility") from Ormat Nevada in favor of the Junior Lender; and WHEREAS, it is a condition precedent to the effectiveness of the Letter of Credit and Loan Agreement of even date herewith (as amended, supplemented or otherwise modified from time to time, the "HUB Credit Agreement") between Ormat Nevada and Hudson United that the Junior Lender and Ormat Nevada shall have executed and delivered this Agreement subordinating the Junior Lender's rights with respect to the Junior Obligations (as defined below) to the rights of Hudson United with respect to the HUB Obligations (as defined below); NOW, THEREFORE, in consideration of the promises contained herein and to induce Hudson United to enter into the HUB Credit Agreement and to issue, or cause to be issued, letters of credit and to make term loans thereunder, the Junior Lender agrees as follows: SECTION 1. DEFINITIONS. (a) "Pro Rata Share", as used herein, means, at any time, a fraction (expressed as a percentage) (i) the numerator of which is the sum of the amount of all undrawn Letters of Credit and the outstanding amount of the Loans at such time and (ii) the denominator of which is the aggregate unsecured Indebtedness of the Borrower including, without limitation, the amount of all undrawn Letters of Credit and the outstanding amount of the Loans at such time. (b) All other capitalized terms not otherwise defined herein shall have the meanings set forth in the HUB Credit Agreement, and the rules of usage set forth therein shall apply hereto. SECTION 2. SUBORDINATION. (a) All Junior Obligations, and all rights and remedies of the Junior Lender with respect thereto, are and shall at all times continue to be subject, subordinate and junior in right of payment in the manner provided herein to the HUB Obligations including, without limitation, all interest on the HUB Obligations at the applicable rates stated in the HUB Credit Agreement from the date of the filing by or against Ormat Nevada of a petition under any bankruptcy, insolvency or similar law to the date of the indefeasible payment in full of the HUB Obligations, in each case whether or not such interest is an allowable claim under any such law or in any case or proceeding thereunder ("Postpetition Interest"). The term "Junior Obligations," as used in this Agreement, shall mean the Liabilities of Ormat Nevada to the Junior Lender under the Junior Credit Facility (including extensions, modifications, refinancings, renewals and refundings thereof). The term "HUB Obligations," as used in this Agreement, shall mean the principal amount of and premium, if any, and interest (including, without limitation, Postpetition Interest) on all Obligations of Ormat Nevada to Hudson United under the HUB Credit Agreement together with all fees, costs and expenses relating thereto, whether direct or contingent, now or hereafter existing, due or to become due to, or held or to be held by, Hudson United (including extensions, modifications, refinancings, renewals and refundings thereof). (b) The Junior Lender shall not receive or accept any payment on the Junior Obligations, whether as principal, premium, interest or otherwise (including by setoff or right of recoupment) if, and for so long as, a Default has occurred under the HUB Credit Agreement or a Default would occur under the HUB Credit Agreement as a result of any such payment, unless and until all the HUB Obligations including, without limitation, all Post-petition Interest have been paid in full in cash. (c) The Pro Rata Share of any amounts received by the Junior Lender as payment on the Junior Obligations in violation of this Agreement shall be held in trust for Hudson United and, as soon as possible, turned over to Hudson United and applied against the HUB Obligations until the Commitment has been terminated, the HUB Obligations have been paid in full in cash and all Letters of Credit have (at Ormat Nevada's option or if required by the HUB Credit Agreement) been fully cash collateralized or have terminated or expired. (d) The Junior Lender will not commence any action or proceeding against Ormat Nevada to recover all or any part of the Junior Obligations or join with any creditor, unless Hudson United shall also have joined, in bringing against Ormat Nevada any such proceeding including, without limitation, any proceeding under any bankruptcy, insolvency or similar law or any other proceeding the result of which could give rise to an Insolvency Event until the date on which the Commitment has been terminated, the HUB Obligations have been paid in full in cash and all Letters of Credit have (at Ormat Nevada's option or if required by the HUB Credit Agreement) been fully cash collateralized or have terminated or expired. (e) Upon the occurrence of any Insolvency Event of Ormat Nevada or in the event of a sale of all or substantially all of the assets or any other marshaling of the assets and liabilities, or any recapitalization, refinancing or reorganization of Ormat Nevada, the HUB Obligations shall first be paid in full in cash before the Junior Lender shall be entitled to receive any money, distributions or other assets in any such proceeding. In any such event, Hudson United may (without having any obligation to do so), and is hereby irrevocably authorized and granted an exclusive power (which power is coupled with an interest), but without imposing any obligation upon Hudson United, to demand, sue for, collect or receive the Pro Rata Share of every such payment or distribution of cash, property, stock or obligations, and to give acquittance therefor, to file claims and proofs of claim in any statutory or nonstatutory proceeding, to exercise the rights of the Junior Lender arising under or relating to the Junior -2- Credit Facility and to vote the claim under the Junior Credit Facility in its sole discretion in connection with any such event, including, without limitation, the right to participate in any composition of creditors and to vote at creditors' meetings for the election of trustees, acceptances of plans of reorganization and any other matter upon which the Junior Lender is entitled to vote, in each case to the extent of the Pro Rata Share of such claims and rights. In furtherance of the foregoing, at the request of Hudson United, the Junior Lender shall execute and deliver to Hudson United a power of attorney and such further powers and instruments as Hudson United may request to enable the Hudson United to enforce its rights under this subsection. (f) Hudson United may, at any time and from time to time, without the consent of or notice to the Junior Lender, without incurring responsibility or liability to the Junior Lender and without impairing or releasing any right or remedy of Hudson United hereunder: (i) With the written consent of Ormat Nevada, change the manner, place or terms of payment or change or extend the time of payment of, or renew, increase or alter the HUB Obligations, amend the HUB Credit Agreement or any other Loan Document in any manner or enter into or amend in any manner any other agreement relating to the HUB Obligations; (ii) Exchange, release, dispose of or otherwise deal with any cash collateral or other property by whomsoever at any time pledged to secure, or howsoever securing, the HUB Obligations, in each case in accordance with the terms of the HUB Credit Agreement or with the written consent of, or at the request of, Ormat Nevada; (iii) Release any Person liable in any manner for the payment or collection of any of the HUB Obligations; (iv) Exercise or refrain from exercising any rights against Ormat Nevada or any other Person; or (v) Apply any sums by whomsoever paid or however realized to the HUB Obligations. (g) The Junior Lender waives notice of acceptance of this Agreement. (h) The Junior Lender will cause the Credit Facility and any other instrument that evidences any Junior Obligations to bear upon its face a statement or legend to the effect that such instrument is subordinated to the HUB Obligations in the manner and to the extent set forth in this Agreement. The Junior Lender shall reflect on its financial statements that the Junior Obligations are so subordinated to the Senior Obligations. (i) Subject to the payment in full of the HUB Obligations in immediately available funds, the Junior Lender shall be subrogated to Hudson United's rights to receive payments or distributions in cash or property applicable to the HUB Obligations, and no payment or distribution made to Hudson United by virtue of this Agreement that otherwise would have been made to the Junior Lender shall be deemed to be a payment by Ormat Nevada -3- on account of the Junior Obligations, it being understood that the provisions of this Section 2 are intended solely for the purpose of defining the relative rights of the Junior Lender, on the one hand, and Hudson United, on the other hand. (j) The Junior Lender will not sell, assign, transfer or otherwise dispose of all or any part of the Junior Obligations to any Person without having first obtained such Person's agreement in writing to be bound as the Junior Lender's successor by the terms of this Agreement. Nothing contained in this Agreement is intended to or shall impair, as between Ormat Nevada, its creditors (other than Hudson United) and the Junior Lender, the obligation of Ormat Nevada, which is absolute and unconditional, to pay to the Junior Lender the principal of and the premium, if any, and the interest on the Junior Obligations as and when the same shall become due and payable in accordance with, and subject to, the terms of this Agreement and the Junior Credit Facility, or to affect the relative rights of the Junior Lender and the creditors of Ormat Nevada (other than Hudson United). Nothing contained in this Agreement is intended to subordinate or shall be construed as subordinating, to any obligation whatsoever, including the HUB Obligations, any payment or obligation now or hereafter due and payable from Ormat Nevada to the Junior Lender, other than the Junior Obligations. Hudson United hereby acknowledges that the rights of the Junior Lender under the Junior Credit Facility may be subordinated in the future to the rights of other creditors of Ormat Nevada. SECTION 3. TERMINATION. This Agreement shall terminate and cease to be of further effect upon the termination of the Commitment, the payment in full in cash of the HUB Obligations and the termination or expiration or (at Ormat Nevada's request or if required by the HUB Credit Agreement) cash collateralization in full of all Letters of Credit. SECTION 4. BENEFIT OF AGREEMENT. Nothing in this Agreement, expressed or implied, shall give or be construed to give to any Person including, without limitation, Ormat Nevada (but excluding Junior Lender and Hudson United) any legal or equitable right, remedy or claim under this Agreement, or under any covenant or provision herein contained, all such covenants and provisions being for the sole benefit of Hudson United or the Junior Lender, as applicable. SECTION 5. NOTICES. Except as otherwise provided herein, all notices and other communications hereunder shall be in writing and sent by certified or registered mail, return receipt requested, by overnight delivery service, with all charges prepaid, or by telecopier followed by a hard copy sent by regular mail, if to Hudson United, then to Hudson United Bank, 87 Post Road East, Westport, Connecticut 06880, Telecopy: (203) 328 9339, Attention: Mr. Jerome P. Peters, Jr., Senior Vice President, with a copy to Luskin, Stern & Eisler LLP, 330 Madison Avenue, New York, New York 10017, Telecopy: (212) 293 2705, Attention: Nathan M. Eisler, Esq., and if to the Junior Lender or Ormat Nevada, then to c/o Ormat Technologies, Inc., 980 Greg Street, Sparks, Nevada 89431, Telecopy: (775) 356-9039, Attention: President, -4- or, in each case, to such other address as a party may specify to the other parties in the manner required hereunder. All such notices and correspondence shall be deemed given (i) if sent by certified or registered mail, three Business Days after being postmarked, (ii) if sent by overnight delivery service, when received at the above stated addresses or when delivery is refused and (iii) if sent by telecopier transmission, when such transmission is confirmed. SECTION 6. AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of this Agreement, or consent to any departure by the Junior Lender or Ormat Nevada therefrom, shall in any event be effective unless the same shall be in writing and signed by the party to be charged thereby. SECTION 7. DELAYS; PARTIAL EXERCISE OF REMEDIES. No delay or omission of Hudson United to exercise any right or remedy hereunder shall impair any such right or operate as a waiver thereof. No single or partial exercise by Hudson United of any right or remedy shall preclude any other or further exercise thereof, or preclude any other right or remedy. SECTION 8. COUNTERPARTS; TELECOPIED SIGNATURES. This Agreement and any waiver or amendment hereto may be executed in counterparts and by the parties hereto in 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. This Agreement may be executed and delivered by telecopier or other facsimile transmission all with the same force and effect as if the same was a fully executed and delivered original manual counterpart. SECTION 9. SEVERABILITY. In case any provision in or obligation under this Agreement 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. SECTION 10. ENTIRE AGREEMENT; SUCCESSORS AND ASSIGNS; CONFLICT. This Agreement constitutes the entire agreement among the parties in respect of the subject matter hereof, supersedes any prior written and verbal agreements among them in respect of the subject matter hereof and shall bind and benefit the parties (including, without limitation, Hudson United) and their respective successors and permitted assigns. In the event of any express conflict between any term, covenant or condition of this Agreement and any term, covenant or condition of any of the HUB Credit Agreement or the Loan Documents or the Junior Credit Facility, the provisions of this Agreement shall control. SECTION 11. SPECIFIC PERFORMANCE. HUDSON UNITED IS HEREBY AUTHORIZED TO DEMAND SPECIFIC PERFORMANCE OF THIS AGREEMENT AT ANY TIME WHEN THE JUNIOR LENDER SHALL HAVE FAILED TO COMPLY WITH ANY OF THE PROVISIONS OF THIS AGREEMENT APPLICABLE TO IT. THE JUNIOR LENDER HEREBY IRREVOCABLY WAIVES ANY DEFENSE BASED ON THE ADEQUACY OF A REMEDY AT LAW THAT MIGHT BE ASSERTED AS A BAR TO SUCH REMEDY OF SPECIFIC PERFORMANCE. SECTION 12. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT AND ANY DISPUTE ARISING OUT OF -5- OR IN CONNECTION WITH THIS AGREEMENT, WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR OTHERWISE, SHALL BE GOVERNED BY THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW) AND DECISIONS OF THE STATE OF NEW YORK. SECTION 13. SUBMISSION TO JURISDICTION. ALL DISPUTES BETWEEN THE JUNIOR LENDER AND HUDSON UNITED ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE AND FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK, AND THE COURTS TO WHICH AN APPEAL THEREFROM MAY BE TAKEN; PROVIDED, HOWEVER, THAT HUDSON UNITED SHALL HAVE THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE JUNIOR LENDER IN ANY LOCATION REASONABLY SELECTED BY HUDSON UNITED IN GOOD FAITH TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF HUDSON UNITED. THE JUNIOR LENDER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH HUDSON UNITED HAS COMMENCED A PROCEEDING CONSISTENT WITH THIS SECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON FORUM NON CONVENIENS. SECTION 14. JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO (I) THIS AGREEMENT OR (II) ANY CONDUCT, ACTS OR OMISSIONS OF THE JUNIOR LENDER, ORMAT NEVADA, HUDSON UNITED OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR OTHER AFFILIATES, IN EACH CASE WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR OTHERWISE. -6- IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be executed by its proper and duly authorized officer as of the date first set forth above. ORMAT TECHNOLOGIES, INC. By: ------------------------------- Connie Stechman Authorized Representative HUDSON UNITED BANK By: ------------------------------- Jerome P. Peters, Jr. Senior Vice President -7- ACKNOWLEDGEMENT Ormat Nevada Inc. hereby acknowledges the provisions of the foregoing Subordination Agreement and agrees to abide by the terms thereof. ORMAT NEVADA INC. By: ------------------------------ Connie Stechman Authorized Representative EXHIBIT C [Form of Letter of Credit Request] ----------, ---- Hudson United Bank 87 Post Road East Westport, Connecticut 06880 Attention: Mr. Jerome P. Peters, Jr. Ladies and Gentlemen: The undersigned, Ormat Nevada Inc. (the "Borrower"), refers to the Letter of Credit and Loan Agreement dated as of June __, 2004 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"; capitalized terms used and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement) between the Borrower and Hudson United Bank (the "Lender"), and hereby irrevocably requests that the Lender [issue] [use its best efforts to cause a Fronting Bank to issue] a Letter of Credit for the account of [the Borrower] [_________, a wholly owned Subsidiary of the Borrower] (the "Proposed Issuance") containing the following terms: 1. Date of Issuance: -------------------------- 2. Face Amount: US$ --------------------------- 3. Expiration Date: --------------------------- 4. Beneficiary: [Name and Address] ------------------------------ ------------------------------ ------------------------------ ------------------------------ The undersigned hereby certifies that the following statements will be true and correct on the date of the Proposed Issuance: (A) the representations and warranties contained in the Credit Agreement and the other Loan Documents are true and correct on and as of the date of the Proposed Issuance as if then made, other than representations and warranties that expressly relate solely to an earlier date (in which case they were true and correct on and as of such earlier date); (B) no Default has occurred and is continuing or would result from such Proposed Issuance; (C) except for the transactions specified in Schedule 5.1(f) to the Credit Agreement, no Material Adverse Effect has occurred or is reasonably likely to occur after giving effect to the Proposed Issuance; and (D) the Proposed Issuance may be issued in accordance with and will not violate any of the requirements of Section 2.1 of the Credit Agreement). ORMAT NEVADA INC. By: ------------------------------------ Name: Title: 2 EXHIBIT D [Chadbourne & Parke LLP Letterhead] June __, 2004 Hudson United Bank 87 Post Road East Westport, Connecticut 06880 Ladies and Gentlemen: We have acted as special New York counsel to (a) Ormat Nevada Inc., a Delaware corporation (the "Borrower") in connection with the preparation, execution and delivery of the Letter of Credit and Loan Agreement of even date herewith (the "Credit Agreement") between the Borrower and Hudson United Bank (the "Lender") and (b) Ormat Technologies, Inc., a Delaware corporation ("Ormat Technologies") in connection with the preparation, execution and delivery of the Subordination Agreement of even date herewith (the "Subordination Agreement") between Ormat Technologies and the Lender. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. This opinion is delivered pursuant to Section 4.1(a)(iv) of the Credit Agreement. In connection with this opinion, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents, each of which is dated the date hereof unless otherwise noted: A. The Credit Agreement; B. The Note; C. The Subordination Agreement; D. Each of the agreements, instruments, and other documents listed on Schedule 1 hereto; E. The Certificate of Incorporation of each of the Borrower and Ormat Technologies (together, the "Corporations"), as amended, certified on June 23, 2004 by the Secretary of State of the State of Delaware, and the By-Laws of each of the Corporations, as amended, certified as in effect on the date hereof by the Secretaries of the Corporations, as applicable; and F. The long-form good standing certificate, dated as of June 18, 2004, from the Secretary of State of the State of Delaware for each of the Corporations. The documents referenced in paragraphs A through C above are hereinafter referred to as the "Loan Documents." The documents referenced in paragraphs A through F above are hereinafter referred to as the "Examined Documents." -2- We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, agreements, documents, and other instruments, and such certificates and comparable documents of public officials and of officers and representatives of the Corporations, as we have deemed necessary or appropriate as a basis for the opinions set forth below. In such examination, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us as certified, conformed, photostatic copies, or facsimiles. In rendering the opinions set forth below, we have relied, to the extent we deemed necessary or appropriate as a basis for such opinions, on certificates, orders, decrees, correspondence, and other documents from public officials as to the matters stated in such documents. As to questions of fact material to the opinions set forth below, we have relied, to the extent we deemed necessary or appropriate as a basis for such opinions, upon the representations and warranties of the Corporations contained in the Loan Documents and other certificates of their respective officers and other representatives, and of public officials. In such examination, we have assumed, without investigation, (a) the due execution and delivery pursuant to due authorization on behalf of each of the parties to each of the Loan Documents (other than the Corporations), (b) that each party to each Loan Document (other than the Corporations) is duly organized or formed, validly existing, and in good standing under the law of the jurisdiction of its organization or formation and has full power and authority to enter into and carry out its obligations under such Loan Document, and (c) that each Loan Document is valid and binding on, and enforceable against, each party thereto (other than the Corporations). Based on the foregoing, having regard for such legal considerations as we deem relevant, and subject to the qualifications and limitations contained herein, it is our opinion that: 1. Each of the Corporations is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. 2. Neither the execution and delivery of the Loan Documents, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof, (a) violates the General Corporation Law of the State of Delaware (the "DGCL") or those laws, rules, and regulations of the State of New York and the United States of America that, in our experience, are normally applicable to transactions of the type contemplated by the Loan Documents (collectively, "Applicable Laws"), (b) violates, results in the breach of, or constitutes a default under any Examined Document, or (c) results in the creation or imposition pursuant to the provisions of any Examined Document of any lien, charge, or encumbrance upon any of the property of any Corporation (except as specifically contemplated under the Loan Documents). Neither the issuance of the Letters of Credit nor the making of the Loans and the -3- application of the proceeds thereof as provided in the Credit Agreement will violate Regulations T, U or X of the Board of Governors of the Federal Reserve System. 3. No authorization, consent, waiver, approval, or other action or consideration by, and no notice to or filing with, any governmental or regulatory authority, body, or instrumentality under New York or federal laws or the DGCL, is required for the due execution and delivery by each Corporation of the Loan Documents to which it is a party or the performance by each Corporation of all of its obligations under the Loan Documents to which it is a party. 4. Each of the Loan Documents has been duly executed and delivered by the Borrower, and constitutes the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. The Subordination Agreement has been duly executed and delivered by Ormat Technologies, and constitutes the legal, valid and binding obligation of Ormat Technologies, enforceable against Ormat Technologies in accordance with its terms. 5. To the best of our knowledge, there is no pending or threatened litigation, contested claim, investigation, arbitration, or governmental proceeding by or against the Borrower or Ormat Technologies that (i) individually or in the aggregate could reasonably be expected to have a material adverse effect on the business, operations, results of operations, assets, liabilities or condition (financial or otherwise) of the Borrower or Ormat Technologies or (ii) purports to affect the legality, validity or enforceability of the Loan Documents. Our opinions contained in paragraph 4 above with respect to the enforceability of the Loan Documents are subject to the following qualifications: (a) the enforceability of the Loan Documents may be limited by the effect of bankruptcy, insolvency, reorganization, arrangement, moratorium, or other similar laws relating to or affecting the rights of creditors generally, including, without limitation, laws relating to fraudulent transfers or conveyances, preferences, and equitable subordination; (b) the enforceability of the Loan Documents may be limited by statutory requirements with respect to good faith, fair dealing, and commercial reasonableness, by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) and by the effect of judicial decisions that have held that certain provisions are unenforceable where their enforcement would violate the implied covenant of good faith and fair dealing, or would be commercially unreasonable, or where a default is not material; (c) certain remedial provisions of the Loan Documents are or may be unenforceable in whole or in part under the laws of the State of New York, but the inclusion of such provisions does not make the remedies afforded by the Loan -4- Documents inadequate for the practical realization of the rights and benefits purported to be provided thereby; (d) the availability of equitable remedies, including, without limitation, specific enforcement and injunctive relief, is subject to the discretion of the court before which any proceedings therefor may be brought; and (e) notwithstanding certain language of the Loan Documents, the Lender may be limited to recovering only reasonable compensation for funding losses, increased costs, or yield protection. In giving the opinions set forth in paragraph 4 above, we express no opinion as to: (a) the enforceability of any provisions contained in the Loan Documents that purport to establish (or may be construed to establish) evidentiary standards; (b) the enforceability of forum selection clauses in federal courts; (c) the legality, validity, binding effect, or enforceability of any provision of any of the Loan Documents insofar as they provide for the payment or reimbursement of costs and expenses or indemnification for claims, losses, or liabilities in excess of a reasonable amount determined by any court or other tribunal; (d) the enforceability under certain circumstances of provisions indemnifying a party against liability for its own wrongful or negligent acts; (e) the compliance or non-compliance, or the effect of non-compliance, with any financial tests, ratios, or covenants in the Loan Documents; (f) the effect of the compliance or noncompliance of the Lender with any state or federal laws or regulations (including, without limitation, any unpublished order, decree, or directive issued by any Governmental Authority) applicable to Lender because of its legal or regulatory status, the nature of its business, or its authority to conduct business in any jurisdiction; (g) the enforceability of provisions in the Loan Documents that may be rendered unenforceable or ineffective by operation of Sections 9-401 or 9-409 of the NY-UCC; (h) the enforceability of any provision that provides that the assertion or employment of any right or remedy shall not prevent the concurrent assertion or employment of any other right or remedy, or that each and every remedy shall be cumulative and in addition to every other remedy or that any delay or omission to -5- exercise any right or remedy shall not impair any other right or remedy or constitute a waiver thereof; (i) the enforceability of any provisions providing for indemnification or contribution to the extent such indemnification or contribution violates the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, or the securities laws of any state or is against public policy; (j) the creation, validity, perfection, the effect of perfection or nonperfection, or the priority of any lien or security interest; (k) the enforceability under certain circumstances of contractual provisions respecting various self-help or summary remedies without notice or opportunity for hearing or correction, especially if their operation would work a forfeiture or impose a penalty upon the burdened party; or (l) the enforceability of (i) restrictions upon non-written modifications and waivers, (ii) provisions authorizing or validating conclusive or discretionary determinations, (iii) grants of setoff rights, (iv) proxies, powers, and trusts, and (v) provisions for liquidated damages, default interest, late charges, monetary penalties, prepayment or make-whole premiums. Our opinion set forth in paragraph 4 regarding the enforceability of choice-of-law and forum selection provisions in the Loan Documents is rendered in reliance upon the Act of July 19, 1984, ch. 421, 1984 McKinney's Sess. Laws of N.Y. 1406 (codified at N.Y. Gen. Oblig. Law Sections 5.1401, 5.1402 (McKinney 1989) and N.Y. CPLR 327(b) (McKinney 1990)) and is subject to the qualifications that such enforceability may be limited by public policy considerations of any jurisdiction in which enforcement of such provisions, or of a judgment upon an agreement containing such provisions, is sought. Our opinions set forth in paragraphs 2 and 3 are based on our review of Applicable Laws (as defined in paragraph 2), without having made any investigation concerning any other laws, rules, or regulations. Our opinions do not address (a) ministerial or immaterial filings and registrations required to be made by the Corporations in the ordinary course of business with any Governmental Authority, (b) any approval of any federal, state, regional, county, municipal, or local governmental authority (other than the approvals required to be obtained by the Corporations for the execution, delivery, and performance of the Loan Documents), (c) any consents, approvals, notices, registrations, or governmental approvals by or in respect of any Governmental Authority in connection with the construction, use, ownership, or operation of the Facilities, or (d) any laws, rules, or regulations relating to antitrust, tax, health, safety, or the environment. Furthermore, with respect to our opinions contained in paragraphs 2 and 3, we give no opinion as to any violation by any Corporation of any federal, Delaware, or New York court order, writ, judgment, or decree. -6- When in this opinion we have used the phrase "to the best of our knowledge", "known to us" or similar phrases we have not made any independent investigation of the relevant facts for purposes of this opinion, but we have relied on the representations made in the Loan Documents and in certificates of public officials and of officers and other agents of the Corporations and the principal attorneys involved in the review of the Loan Documents are not aware of any facts inconsistent therewith. We do not express any opinion with respect to the law of any jurisdiction other than the federal law of the United States, the law of the State of New York, and, in the case of our opinions set forth in paragraphs 1, 2, and 3, the DGCL. Without limiting the generality of the foregoing, we express no opinion concerning the law of any other jurisdiction in which the Lender may be located or in which enforcement of the Loan Documents may be sought that limits the amount of interest that may be legally charged or collected. Furthermore, we express no opinion as to the effect of any change in law, circumstance, or the occurrence of any event, after the date hereof. This opinion is rendered to you solely in your capacity as the Lender and may not be relied upon by any other person, other than permitted assignees of the Lender pursuant to Section 9.8 of the Credit Agreement, or for any other purpose without our prior written consent. This opinion may be relied upon solely as of the date hereof, and we undertake no obligation to update or supplement this opinion after the date hereof. Very truly yours, SCHEDULE 1 ADDITIONAL EXAMINED DOCUMENTS ORMESA LLC 1. Credit Agreement, dated as of December 31, 2002, among Ormesa LLC, a Delaware limited liability company ("Ormesa"), each of the lenders that is a party thereto, United Capital, a division of Hudson United Bank, a New Jersey banking corporation ("United"), as Administrative Agent, and United, as Collateral Agent (the "Ormesa Credit Agreement"). Capitalized terms used in this Section of Schedule 1 and not otherwise defined herein shall have the meanings ascribed to such terms in Schedule I to the Ormesa Credit Agreement. 2. Initial Term Loan Note, dated December 31, 2002, by Ormesa in favor of United. 3. Borrower Security Agreement, dated as of December 31, 2002, between Ormesa and Collateral Agent. 4. Borrower Equity Interest Pledge, dated as of December 31, 2002, between Ormat Funding Corp. and Collateral Agent. 5. Depositary Agreement, dated as of December 31, 2002, among Ormesa, Administrative Agent, Collateral Agent, and Depositary Bank. 6. Consent to Assignment of Agreement, dated as of December 31, 2002, among the Borrower, Collateral Agent, and Ormesa. 7. Deed of Trust, dated as of December 31, 2002, by Ormesa in favor of the Collateral Agent. ORMAT NEVADA INC. 1. Amended and Restated Bridge Loan Agreement, dated as of October 2, 2003, between the Borrower and Bank Leumi USA ("Bank Leumi") (the "Bank Leumi Loan Agreement"). Capitalized terms used in this Section of Schedule 1 and not otherwise defined herein shall have the meanings ascribed to such terms in the Bank Leumi Loan Agreement. 2. Restated Promissory Note (GRID), dated October 2, 2003, by the Borrower in favor of Bank Leumi. ORCAL GEOTHERMAL INC. 1. Credit Agreement, dated as of December 18, 2003, among OrCal Geothermal Inc., a Delaware corporation ("OrCal"), each of the financial institutions that is a party thereto, and Beal Bank, S.S.B., as Administrative Agent (the "OrCal Credit Agreement"). Capitalized terms used in this Section of Schedule 1 and not otherwise defined herein shall have the meanings ascribed to such terms in Exhibit A to the OrCal Credit Agreement. 2. Note, dated December 18, 2003, by OrCal in favor of Beal Bank, S.S.B. 3. Depositary Agreement, dated as of December 18, 2003, among OrCal, each Guarantor, Administrative Agent, and Depositary Agent. 4. Joinder Agreement, dated as of December 18, 2003, among HGC, Depositary Agent, and Administrative Agent. 5. Joinder Agreement, dated as of December 18, 2003, among HFC, Depositary Agent, and Administrative Agent. 6. Security Agreement, dated as of December 18, 2003, between OrCal and Administrative Agent. 7. Pledge Agreement, dated as of December 18, 2003, among the Borrower, OrCal, and Administrative Agent. 8. Pledge Agreement, dated as of December 18, 2003, among OrCal, OrHeber 1, and Administrative Agent. 9. Pledge Agreement, dated as of December 18, 2003, among OrCal, OrHeber 1, HFC, HGC, and Administrative Agent. 10. Consent, dated as of December 18, 2003, among the Borrower, OrHeber 1, HGC, HFC, and Administrative Agent. 11. Subordination Agreement, dated as of December 18, 2003, among the Borrower, OrCal, and Administrative Agent. ORMAT FUNDING CORP. 1. Indenture, dated as of February 13, 2004, among Ormat Funding Corp., a Delaware corporation ("Ormat Funding"), Brady Power Partners, a Nevada general partnership ("Brady"), Steamboat Development Corp., a Utah Corporation ("Steamboat -2- Development"), Steamboat Geothermal LLC, a Delaware limited liability company ("Steamboat Geothermal"), OrMammoth Inc., a Delaware corporation ("OrMammoth"), ORNI 1 LLC, a Delaware limited liability company ("ORNI 1"), ORNI 2 LLC, a Delaware limited liability company ("ORNI 2"), ORNI 7 LLC, a Delaware limited liability company ("ORNI 7"), Ormesa LLC, a Delaware limited liability company ("Ormesa"), and Union Bank of California, N.A., as Trustee (the "Ormat Funding Indenture"). Capitalized terms used in this Section of Schedule 1 and not otherwise defined herein shall have the meanings ascribed to such terms in the Ormat Funding Indenture. 2. Registration Rights Agreement, dated as of February 13, 2004, among Ormat Funding and the Guarantors and the other parties named on the signature pages thereof. 3. Note Purchase Agreement, dated as of February 6, 2004, among Ormat Funding, the Guarantors, and the Initial Purchaser. 4. Global Note, dated February 13, 2004, by Ormat Funding in favor of Cede & Co. 5. Regulation S Temporary Global Note, dated February 13, 2004, by Ormat Funding in favor of Cede & Co. 6. Depositary Agreement, dated as of February 13, 2004, among Ormat Funding, Brady, Steamboat Geothermal, Steamboat Development, OrMammoth, ORNI 1, ORNI 2, ORNI 7, Collateral Agent, and Depositary. 7. Collateral Agency Agreement, dated as of February 13, 2004, among Ormat Funding, ORNI 1, ORNI 2, ORNI 7, Brady, Steamboat Development, Steamboat Geothermal, Collateral Agent, and Trustee. 8. Pledge and Security Agreement, dated as of February 13, 2004, between the Borrower and Collateral Agent. 9. Pledge and Security Agreement, dated as of February 13, 2004, between Ormat Funding and Collateral Agent. 10. Amended and Restated Credit Facility, dated as of December 1, 2003, between the Borrower and Ormat Funding, as amended by the First Amendment to Amended and Restated Credit Facility, dated as of February 5, 2004, between the Borrower and Ormat Funding. 11. Consent and Agreement, dated as of February 13, 2004, among the Borrower, Steamboat Development, Steamboat Geothermal, and Collateral Agent. 12. Consent and Agreement, dated as of February 13, 2004, among the Borrower, Brady, and Collateral Agent. -3- EXHIBIT E CERTIFICATE Reference is made to the Letter of Credit and Loan Agreement dated as of June __, 2004 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"; capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement) between Ormat Nevada Inc. (the "Borrower") and Hudson United Bank (the "Lender"). Pursuant to Section 6.1(i)(ii) of the Credit Agreement, the undersigned Responsible Officer of the Borrower hereby certifies to the Lender as follows: 1. Financial Statements. The Financial Statements attached hereto for the fiscal quarter ended ____________, ____ have been prepared in accordance with GAAP and present fairly in all material respects the financial condition and results of operations of the Borrower and its Subsidiaries and Consolidated Persons for the period specified (subject to normal year-end audit adjustments and the absence of footnotes). 2. Events of Default. As of the date of this Certificate, no Default or Event of Default has occurred and is continuing [except (describe any Default or Event of Default and the action which the Borrower proposes to take with respect thereto)]. 3. Section 7.1. The Tangible Net Worth of the Borrower as of ________, ____, calculated in accordance with the Credit Agreement (which calculation is attached), was $_________. 4. Section 7.2. The Leverage Ratio as of __________, ____, calculated in accordance with the Credit Agreement (which calculation is attached), was ____ to 1.00. 5. Section 7.3. The Minimum Coverage Ratio for the calendar quarter or year _________, ____, through _________, ____, calculated in accordance with the Credit Agreement (which calculation is attached), was ____________ . ----------------------------------- Name: Dated: __________, ____ SCHEDULE 1 [Calculations]
Exhibit 10.1.17 FIRST AMENDMENT TO LETTER OF CREDIT AND LOAN AGREEMENT FIRST AMENDMENT dated as of June 30, 2004 (this "Amendment") between Ormat Nevada Inc., a Delaware corporation (the "Borrower"), and Hudson United Bank, a bank organized under the laws of the State of New Jersey (the "Lender"), to the Letter of Credit and Loan Agreement dated as of June 30, 2004 (the "Credit Agreement") between the Borrower and the Lender. Unless otherwise indicated, all capitalized terms used herein without definition shall have the meanings given to such terms in the Credit Agreement. W I T N E S S E T H: WHEREAS, the Borrower and the Lender are parties to the Credit Agreement; and WHEREAS, the Borrower and the Lender have agreed to amend the Credit Agreement to change the definition of Adjusted Consolidated Cash Flow. NOW, THEREFORE, in consideration of the mutual promises contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. AMENDMENT TO CREDIT AGREEMENT. Effective as of the date hereof, the definition of Adjusted Consolidated Cash Flow in Section 1.1 of the Credit Agreement is hereby amended by (a) deleting the word "less" in clause (ii) thereof and substituting the word "plus" in lieu thereof and (b) deleting the word "principal" in clause (iii) thereof and substituting the word "interest" in lieu thereof. SECTION 2. GENERAL PROVISIONS. (a) Except as expressly amended hereby, the Credit Agreement and the other Loan Documents are ratified and confirmed in all respects and shall remain in full force and effect in accordance with their respective terms. (b) All references to the Credit Agreement shall mean the Credit Agreement as amended hereby and as hereafter modified, amended, restated or supplemented from time to time. (c) This Amendment may be executed by the parties hereto individually or in combination, in one or more counterparts, each of which shall be an original and both of which shall constitute one and the same agreement. This Amendment may be executed and delivered by telecopier with the same force and effect as if it were an originally executed and delivered manual counterpart. (d) THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW). (e) This Amendment shall constitute a Loan Document. -2- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their proper and duly authorized officers as of the date first set forth above. HUDSON UNITED BANK By: /s/ Jerome Peters ------------------------------------- Jerome P. Peters, Jr. Senior Vice President ORMAT NEVADA INC. By: /s/ Connie Stechman ------------------------------------- Connie Stechman Authorized Representative -3-
Exhibit 10.1.18 SUBORDINATION AGREEMENT SUBORDINATION AGREEMENT dated as of June 30, 2004 (this "Agreement") between Ormat Technologies, Inc., a Delaware corporation (together with its successors and assigns, the "Junior Lender"), and Hudson United Bank, a bank organized under the laws of the State of New Jersey (together with its successors and assigns, "Hudson United"). W I T N E S S E T H : WHEREAS, Ormat Nevada Inc., a Delaware corporation ("Ormat Nevada"), is a wholly owned Subsidiary of the Junior Lender; WHEREAS, Ormat Nevada is a party to the Letter of Credit and Loan Agreement of even date herewith (as amended, supplemented or otherwise modified from time to time, the "HUB Credit Agreement") with Hudson United; WHEREAS, Ormat Nevada has intercompany indebtedness to the Junior Lender which is evidenced by the Credit Facility dated December 18, 2003 in an amount up to $80,000,000, and Ormat Nevada has proposed to incur additional intercompany indebtedness to the Junior Lender which is evidenced by the Credit Facility of even date herewith in an amount up to $78,000,000 (as amended, supplemented or otherwise modified from time to time, the "Second Junior Credit Facility") from Ormat Nevada in favor of the Junior Lender; and WHEREAS, the Junior Lender and Ormat Nevada have agreed to execute and deliver this Agreement subordinating the Junior Lender's rights with respect to the Junior Obligations (as defined below) to the rights of Hudson United with respect to the HUB Obligations (as defined below); NOW, THEREFORE, in consideration of the promises contained herein, the Junior Lender agrees as follows: SECTION 1. DEFINITIONS. All capitalized terms not otherwise defined herein shall have the meanings set forth in the HUB Credit Agreement, and the rules of usage set forth therein shall apply hereto. SECTION 2. SUBORDINATION. (a) All Junior Obligations, and all rights and remedies of the Junior Lender with respect thereto, are and shall at all times continue to be subject, subordinate and junior in right of payment in the manner provided herein to the HUB Obligations including, without limitation, all interest on the HUB Obligations at the applicable rates stated in the HUB Credit Agreement from the date of the filing by or against Ormat Nevada of a petition under any bankruptcy, insolvency or similar law to the date of the indefeasible payment in full of the HUB Obligations, in each case whether or not such interest is an allowable claim under any such law or in any case or proceeding thereunder ("Postpetition Interest"). The term "Junior Obligations," as used in this Agreement, shall mean the Liabilities of Ormat Nevada to the Junior Lender under the Second Junior Credit Facility (including extensions, modifications, refinancings, renewals and refundings thereof). The term "HUB Obligations," as used in this Agreement, shall mean the principal amount of and premium, if any, and interest (including, without limitation, Postpetition Interest) on all Obligations of Ormat Nevada to Hudson United under the HUB Credit Agreement together with all fees, costs and expenses relating thereto, whether direct or contingent, now or hereafter existing, due or to become due to, or held or to be held by, Hudson United (including extensions, modifications, refinancings, renewals and refundings thereof). (b) The Junior Lender shall not receive or accept any payment on the Junior Obligations, whether as principal, premium, interest or otherwise (including by setoff or right of recoupment) if, and for so long as, a Default has occurred under the HUB Credit Agreement or a Default would occur under the HUB Credit Agreement as a result of any such payment, unless and until all the HUB Obligations including, without limitation, all Post-petition Interest have been paid in full in cash. (c) Any amounts received by the Junior Lender as payment on the Junior Obligations in violation of this Agreement shall be held in trust for Hudson United and, as soon as possible, turned over to Hudson United and applied against the HUB Obligations until the Commitment has been terminated, the HUB Obligations have been paid in full in cash and all Letters of Credit have (at Ormat Nevada's option or if required by the HUB Credit Agreement) been fully cash collateralized or have terminated or expired. (d) The Junior Lender will not commence any action or proceeding against Ormat Nevada to recover all or any part of the Junior Obligations or join with any creditor, unless Hudson United shall also have joined, in bringing against Ormat Nevada any such proceeding including, without limitation, any proceeding under any bankruptcy, insolvency or similar law or any other proceeding the result of which could give rise to an Insolvency Event until the date on which the Commitment has been terminated, the HUB Obligations have been paid in full in cash and all Letters of Credit have (at Ormat Nevada's option or if required by the HUB Credit Agreement) been fully cash collateralized or have terminated or expired. (e) Upon the occurrence of any Insolvency Event of Ormat Nevada or in the event of a sale of all or substantially all of the assets or any other marshaling of the assets and liabilities, or any recapitalization, refinancing or reorganization of Ormat Nevada, the HUB Obligations shall first be paid in full in cash before the Junior Lender shall be entitled to receive any money, distributions or other assets in any such proceeding. In any such event, Hudson United may (without having any obligation to do so), and is hereby irrevocably authorized and granted an exclusive power (which power is coupled with an interest), but without imposing any obligation upon Hudson United, to demand, sue for, collect or receive every such payment or distribution of cash, property, stock or obligations, and to give acquittance therefor, to file claims and proofs of claim in any statutory or nonstatutory proceeding, to exercise the rights of the Junior Lender arising under or relating to the Second Junior Credit Facility and to vote the claim under the Second Junior Credit Facility in its sole discretion in connection with any such event, including, without limitation, the right to participate in any composition of creditors and to vote -2- at creditors' meetings for the election of trustees, acceptances of plans of reorganization and any other matter upon which the Junior Lender is entitled to vote. In furtherance of the foregoing, at the request of Hudson United, the Junior Lender shall execute and deliver to Hudson United a power of attorney and such further powers and instruments as Hudson United may request to enable Hudson United to enforce its rights under this subsection. (f) Hudson United may, at any time and from time to time, without the consent of or notice to the Junior Lender, without incurring responsibility or liability to the Junior Lender and without impairing or releasing any right or remedy of Hudson United hereunder: (i) With the written consent of Ormat Nevada, change the manner, place or terms of payment or change or extend the time of payment of, or renew, increase or alter the HUB Obligations, amend the HUB Credit Agreement or any other Loan Document in any manner or enter into or amend in any manner any other agreement relating to the HUB Obligations; (ii) Exchange, release, dispose of or otherwise deal with any cash collateral or other property by whomsoever at any time pledged to secure, or howsoever securing, the HUB Obligations, in each case in accordance with the terms of the HUB Credit Agreement or with the written consent of, or at the request of, Ormat Nevada; (iii) Release any Person liable in any manner for the payment or collection of any of the HUB Obligations; (iv) Exercise or refrain from exercising any rights against Ormat Nevada or any other Person; or (v) Apply any sums by whomsoever paid or however realized to the HUB Obligations. (g) The Junior Lender waives notice of acceptance of this Agreement. (h) The Junior Lender will cause the Credit Facility and any other instrument that evidences any Junior Obligations to bear upon its face a statement or legend to the effect that such instrument is subordinated to the HUB Obligations in the manner and to the extent set forth in this Agreement. The Junior Lender shall reflect on its financial statements that the Junior Obligations are so subordinated to the Senior Obligations. (i) Subject to the payment in full of the HUB Obligations in immediately available funds, the Junior Lender shall be subrogated to Hudson United's rights to receive payments or distributions in cash or property applicable to the HUB Obligations, and no payment or distribution made to Hudson United by virtue of this Agreement that otherwise would have been made to the Junior Lender shall be deemed to be a payment by Ormat Nevada on account of the Junior Obligations, it being understood that the provisions of this Section 2 are -3- intended solely for the purpose of defining the relative rights of the Junior Lender, on the one hand, and Hudson United, on the other hand. (j) The Junior Lender will not sell, assign, transfer or otherwise dispose of all or any part of the Junior Obligations to any Person without having first obtained such Person's agreement in writing to be bound as the Junior Lender's successor by the terms of this Agreement. Nothing contained in this Agreement is intended to or shall impair, as between Ormat Nevada, its creditors (other than Hudson United) and the Junior Lender, the obligation of Ormat Nevada, which is absolute and unconditional, to pay to the Junior Lender the principal of and the premium, if any, and the interest on the Junior Obligations as and when the same shall become due and payable in accordance with, and subject to, the terms of this Agreement and the Second Junior Credit Facility, or to affect the relative rights of the Junior Lender and the creditors of Ormat Nevada (other than Hudson United). Nothing contained in this Agreement is intended to subordinate or shall be construed as subordinating, to any obligation whatsoever, including the HUB Obligations, any payment or obligation now or hereafter due and payable from Ormat Nevada to the Junior Lender, other than the Junior Obligations. Hudson United hereby acknowledges that the rights of the Junior Lender under the Second Junior Credit Facility may be subordinated in the future to the rights of other creditors of Ormat Nevada. SECTION 3. TERMINATION. This Agreement shall terminate and cease to be of further effect upon (a) the termination of the Commitment, the payment in full in cash of the HUB Obligations and the termination or expiration or (at Ormat Nevada's request or if required by the HUB Credit Agreement) cash collateralization in full of all Letters of Credit or (b) Ormat Nevada's certification to Hudson United that subordination of the Junior Obligations hereunder is no longer required for compliance by Ormat Nevada with Sections 7.1 and 7.2 of the HUB Credit Agreement and requesting termination of this Agreement, the delivery to the Junior Lender of Hudson United's written consent (which shall not be unreasonably withheld or delayed) to the termination of this Agreement. SECTION 4. BENEFIT OF AGREEMENT. Nothing in this Agreement, expressed or implied, shall give or be construed to give to any Person including, without limitation, Ormat Nevada (but excluding the Junior Lender and Hudson United) any legal or equitable right, remedy or claim under this Agreement, or under any covenant or provision herein contained, all such covenants and provisions being for the sole benefit of Hudson United or the Junior Lender, as applicable. SECTION 5. NOTICES. Except as otherwise provided herein, all notices and other communications hereunder shall be in writing and sent by certified or registered mail, return receipt requested, by overnight delivery service, with all charges prepaid, or by telecopier followed by a hard copy sent by regular mail, if to Hudson United, then to Hudson United Bank, -4- 87 Post Road East, Westport, Connecticut 06880, Telecopy: (203) 328 9339, Attention: Mr. Jerome P. Peters, Jr., Senior Vice President, with a copy to Luskin, Stern & Eisler LLP, 330 Madison Avenue, New York, New York 10017, Telecopy: (212) 293 2705, Attention: Nathan M. Eisler, Esq., and if to the Junior Lender or Ormat Nevada, then to c/o Ormat Technologies, Inc., 980 Greg Street, Sparks, Nevada 89431, Telecopy: (775) 356-9039, Attention: President, or, in each case, to such other address as a party may specify to the other parties in the manner required hereunder. All such notices and correspondence shall be deemed given (i) if sent by certified or registered mail, three Business Days after being postmarked, (ii) if sent by overnight delivery service, when received at the above stated addresses or when delivery is refused and (iii) if sent by telecopier transmission, when such transmission is confirmed. SECTION 6. AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of this Agreement, or consent to any departure by the Junior Lender or Ormat Nevada therefrom, shall in any event be effective unless the same shall be in writing and signed by the party to be charged thereby. SECTION 7. DELAYS; PARTIAL EXERCISE OF REMEDIES. No delay or omission of Hudson United to exercise any right or remedy hereunder shall impair any such right or operate as a waiver thereof. No single or partial exercise by Hudson United of any right or remedy shall preclude any other or further exercise thereof, or preclude any other right or remedy. SECTION 8. COUNTERPARTS; TELECOPIED SIGNATURES. This Agreement and any waiver or amendment hereto may be executed in counterparts and by the parties hereto in 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. This Agreement may be executed and delivered by telecopier or other facsimile transmission all with the same force and effect as if the same was a fully executed and delivered original manual counterpart. SECTION 9. SEVERABILITY. In case any provision in or obligation under this Agreement 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. SECTION 10. ENTIRE AGREEMENT; SUCCESSORS AND ASSIGNS; CONFLICT. This Agreement constitutes the entire agreement among the parties in respect of the subject matter hereof, supersedes any prior written and verbal agreements among them in respect of the subject matter hereof and shall bind and benefit the parties (including, without limitation, Hudson United) and their respective successors and permitted assigns. In the event of any express conflict between any term, covenant or condition of this Agreement and any term, covenant or condition of any of the HUB Credit Agreement or the Loan Documents or the Second Junior Credit Facility, the provisions of this Agreement shall control. This Agreement shall constitute a Loan Document. SECTION 11. SPECIFIC PERFORMANCE. HUDSON UNITED IS HEREBY AUTHORIZED TO DEMAND SPECIFIC PERFORMANCE OF THIS AGREEMENT AT ANY TIME WHEN THE JUNIOR LENDER SHALL HAVE FAILED TO -5- COMPLY WITH ANY OF THE PROVISIONS OF THIS AGREEMENT APPLICABLE TO IT. THE JUNIOR LENDER HEREBY IRREVOCABLY WAIVES ANY DEFENSE BASED ON THE ADEQUACY OF A REMEDY AT LAW THAT MIGHT BE ASSERTED AS A BAR TO SUCH REMEDY OF SPECIFIC PERFORMANCE. SECTION 12. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT AND ANY DISPUTE ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR OTHERWISE, SHALL BE GOVERNED BY THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW) AND DECISIONS OF THE STATE OF NEW YORK. SECTION 13. SUBMISSION TO JURISDICTION. ALL DISPUTES BETWEEN THE JUNIOR LENDER AND HUDSON UNITED ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE AND FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK, AND THE COURTS TO WHICH AN APPEAL THEREFROM MAY BE TAKEN; PROVIDED, HOWEVER, THAT HUDSON UNITED SHALL HAVE THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE JUNIOR LENDER IN ANY LOCATION REASONABLY SELECTED BY HUDSON UNITED IN GOOD FAITH TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF HUDSON UNITED. THE JUNIOR LENDER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH HUDSON UNITED HAS COMMENCED A PROCEEDING CONSISTENT WITH THIS SECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON FORUM NON CONVENIENS. SECTION 14. JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO (I) THIS AGREEMENT OR (II) ANY CONDUCT, ACTS OR OMISSIONS OF THE JUNIOR LENDER, ORMAT NEVADA, HUDSON UNITED OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR OTHER AFFILIATES, IN EACH CASE WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR OTHERWISE. -6- IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be executed by its proper and duly authorized officer as of the date first set forth above. ORMAT TECHNOLOGIES, INC. By: /s/ Connie Stechman ----------------------------------- Connie Stechman Authorized Representative HUDSON UNITED BANK By: /s/ Jerome Peters ----------------------------------- Jerome P. Peters, Jr. Senior Vice President -7- ACKNOWLEDGEMENT Ormat Nevada Inc. hereby acknowledges the provisions of the foregoing Subordination Agreement and agrees to abide by the terms thereof. ORMAT NEVADA INC. By: /s/ Connie Stechman --------------------------------- Connie Stechman Authorized Representative
Exhibit 10.3.29 89A.1 GEOOC2 03-02-89 EXECUTION COPY PLANT CONNECTION AGREEMENT FOR THE GEO EAST MESA LIMITED PARTNERSHIP UNIT NO. 2 BETWEEN IMPERIAL IRRIGATION DISTRICT AND GEO EAST MESA LIMITED PARTNERSHIP EXECUTION COPY 03-02-89 TABLE OF CONTENTS ----------------- SECTION TITLE PAGE ------- ----- ---- 1 PARTIES . . . . . . . . . . . . . . . . . . 1 2 RECITALS . . . . . . . . . . . . . . . . . . 1 3 AGREEMENT . . . . . . . . . . . . . . . . . . 2 4 DEFINITIONS . . . . . . . . . . . . . . . . . 2 5 EFFECTIVE DATE AND TERM . . . . . . . . . . . . . . 3 6 CONNECTION OF PLANT . . . . . . . . . . . . . . . 3 7 ELECTRIC SERVICE TO PRODUCER . . . . . . . . . . . . . 3 8 METERING OF ENERGY DELIVERIES . . . . . . . . . . . . . 3 9 PRODUCER'S DELIVERY AND IID ACCEPTANCE OF ENERGY FROM PLANT . . . . . 3 10 PRODUCER'S GENERAL OBLIGATIONS . . . . . . . . . . . . . 4 11 IID'S GENERAL OBLIGATIONS . . . . . . . . . . . . . . 5 12 BILLING . . . . . . . . . . . . . . . . . . 6 13 AUTHORIZED REPRESENTATIVES . . . . . . . . . . . . . 6 14 METERS . . . . . . . . . . . . . . . . . . 7 15 CONTINUITY OF SERVICE . . . . . . . . . . . . . . 8 16 LIABILITY . . . . . . . . . . . . . . . . . 9 17 UNCONTROLLABLE FORCES . . . . . . . . . . . . . . 10 18 INTEGRATION AND AMENDMENTS . . . . . . . . . . . . . 11 19 NON-WAIVER . . . . . . . . . . . . . . . . . 11 20 NO DEDICATION OF FACILITIES . . . . . . . . . . . . . 12 21 SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . 12 22 EFFECT OF SECTION HEADINGS . . . . . . . . . . . . . 12 23 GOVERNING LAW . . . . . . . . . . . . . . . . 13 24 ARBITRATION . . . . . . . . . . . . . . . . . 13 25 ENTIRE AGREEMENT . . . . . . . . . . . . . . . 15 26 NOTICES . . . . . . . . . . . . . . . . . . 15 27 SEVERAL OBLIGATIONS . . . . . . . . . . . . . . . 15 28 SIGNATURE CLAUSE . . . . . . . . . . . . . . . 16 ATTACHMENTS ----------- EXHIBIT "A" - RATE SCHEDULES GL AND A2 . . . . . . . . 17 EXHIBIT "B" - METERING ONE-LINE DIAGRAM . . . . . . . 21 EXHIBIT "C" - FUNDING AND CONSTRUCTION AGREEMENT HEBER-MIRAGE TRANSMISSION PROJECT . . . . . 22 ii1. PARTIES ------- The parties to this Agreement are IMPERIAL IRRIGATION DISTRICT ("IID"), organized under the Water Code of the State of California and GEO EAST MESA LIMITED PARTNERSHIP ("Producer"), hereinafter referred to individually as "Party", and collectively as "Parties". 2. RECITALS -------- 2.1 Producer intends to construct and operate, as owner or lessee, a megawatt generating facility with a maximum 27.5 megawatt net operating capacity at the East Mesa (KGRA), Imperial County, California, and to sell the Plant electrical output to Southern California Edison Company ("SCE"). 2.2 SCE entered into the Power Purchase Agreement dated May 20, 1988, ("Purchase Agreement") with Producer, to purchase all the electrical output from the Plant. 2.3 SCE and Producer agree that the terms and conditions regarding transmission of the Plant's Energy to an IID/SCE point of interconnection shall be pursuant to a Transmission Service Agreement to be entered into between IID and Producer. 2.4 Since the Plant will be built in the IID service territory, it will be convenient to connect the Plant to the IID electric system. Producer hereby grants the IID the right to enter the Plant site for any reasonable purposes connected with this Agreement, by previous arrangements with the Plant manager. Those reasonable purposes include maintenance and repairs to IID equipment in Producer's facilities, observing tests of said facilities, reading of kilowatt-hour meters, and the like. 2.5 Producer desires to purchase and IID desires to sell the electrical energy necessary to satisfy the operation and maintenance power consumption requirements of the Plant for the life of the Plant that is not normally generated by the Plant itself, or portable generating equipment. 2.6 The Parties desire, by means of this Agreement, to interconnect the Plant to the IID electrical system and to establish the terms, conditions and obligations of the Parties relating to such interconnection. 3. AGREEMENT --------- The Parties agree as follows: 4. DEFINITIONS ----------- 4.1 Agreement: This Plant Connection Agreement between IID and Producer, and all Exhibits hereto, as may be amended from time to time. 4.2 Authorized Representative: The representative of a Party designated accordance with Section 13. 4.3 Energy: Electric energy in excess of Producer's electric energy requirements, expressed in kilowatt-hours, generated by the Plant and measured and delivered to the Point of Delivery. 4.4 Funding and Construction Agreement: An agreement entered into by IID and others dated June 29, 1987, providing for the funding and construction of the Heber-Mirage Transmission Project, to which a form of this Agreement is attached as Exhibit C. 4.5 Operation Date: The day on which the Plant Energy is first accepted by IID for delivery to SCE. 4.6 Plant: A maximum of 27.5 MW net operating capacity Geothermal facility operated by Producer, as owner or lessee, including all associated equipment and improvements necessary for generating electric energy and transmitting it to the high voltage side of the power transformer. 2 4.7 Point of Delivery: The point on the high voltage side of Producer's switchyard where IID's metering equipment measures the delivery of Energy to the IID system as shown on Exhibit "B". 4.8 System Emergency: A condition on IID's system which is likely to result in imminent significant disruption of service to customers or is imminently likely to endanger life or property. 5. EFFECTIVE DATE AND TERM ----------------------- This Agreement shall become effective upon the Operation Date of the Plant, and shall remain in effect until the earlier of (i) April 15, 2015, or (ii) thirty six (36) months from the date the Plant has ceased to operate at the option of IID. It is understood that (i) if the Completion Date, as the term Completion Date is defined in Article I of Funding and Construction Agreement does not occur, or (ii) if the Operation Date does not occur within five (5) years after the date this Agreement was executed, this Agreement shall be of no force or effect. 6. CONNECTION OF PLANT ------------------- 6.1 Producer may electrically connect its Plant, in accordance with the provisions of this Agreement, so that it can operate in parallel with the IID electric system. Parallel operation will not commence until IID has inspected and approved the interconnection facilities and operational procedures. 6.2 Notwithstanding the provision that Producer has furnished the high voltage switchyard complete, including the high voltage oil circuit breakers and disconnect switches, the control of the high voltage oil circuit breakers and disconnect switches shall be under the control of the IID dispatcher. 3 7. ELECTRIC SERVICE TO PRODUCER ---------------------------- IID shall provide electric service to Producer pursuant to Section 12. 8. METERING OF ENERGY DELIVERIES ----------------------------- Metering for electric service to Producer and for energy deliveries by Producer to IID for delivery to SCE shall be at the Point of Delivery as shown on Exhibit "B." Four meters shall be installed which shall measure and record flows in each direction as shown on Exhibit "B." 9. PRODUCER'S DELIVERY AND IID ACCEPTANCE OF ENERGY FROM PLANT ----------------------------------------------------------- Whenever electric output from the Plant exceeds Producer's power requirements, Producer shall deliver all such excess output to IID for delivery to SCE and IID shall accept such output for delivery to SCE and deliver such output to SCE pursuant to a transmission service agreement to be entered into between Producer and IID. 10. PRODUCER'S GENERAL OBLIGATIONS ------------------------------ Producer shall: 10.1 Operate the Plant in a manner consistent with applicable electric utility industry standards, good engineering practice, and without degradation of quality or reliability of service to IID customers. 10.2 Deliver the Plant's net electrical output to IID for the account of SCE at the Point of Delivery. 10.3 Each Party shall provide the reactive kilovolt-ampere (KVA) requirements of its own system so that there will be no interchange of reactive KVA between systems. The Parties shall cooperate to control the flow of reactive KVA to prevent the introduction of objectionable operating conditions on the system of either Party. 4 10.4 Coordinate, to the greatest extent practicable, major overhaul and inspection outages of the Plant with IID. 10.5 Give IID a written schedule on or before June 1, and December 1, each year of the estimated amounts and rates of delivery of energy to be delivered to IID for the account of SCE at the Point of Delivery during each month of the succeeding twelve-month (12) period commencing July 1, and January 1. 10.6 Give IID a written schedule on or before the fifteenth (15th) day of each month of the estimated amounts and rates of delivery of energy to be delivered to IID for the account of SCE at the Point of Delivery during each day of the succeeding calendar month. 10.7 Give IID a schedule on or before 12:01 p.m. on Tuesday of each seven-day (7) period of the estimated amounts and rates of delivery of energy to be delivered to IID for the account of SCE at the Point of Delivery during each hour of the succeeding seven-day (7) period commencing at 12:01 a.m. on the following Monday; provided, however, that if any changes in the hourly deliveries so scheduled become necessary, Producer shall notify IID of such changes as far in advance as possible. 10.8 Provide IID any reasonable rights-of-way and access required for testing and reading of meters by previous arrangement with the Plant manager. 10.9 Carry out the directions of the Authorized Representatives with respect to the matters set forth in this Agreement. 11. IID'S GENERAL OBLIGATIONS ------------------------- IID shall: 11.1 Design, acquire, construct, operate and maintain, or cause to be designed, acquired, constructed, operated and maintained, and shall own, a connecting transmission line between 5 IID's transmission system and the Plant. Following the completion of such line, IID may bill and Producer shall pay IID's costs of designing, acquiring and constructing such line. Producer shall have the right to audit IID's records and accounts to verify the cost of such line. 11.2 Accept the Plant's net electrical output for the account of SCE at the Point of Delivery and simultaneously deliver an equal amount of electric energy (less applicable transmission losses) to the SCE system at IID/SCE point(s) of interconnection. 11.3 Coordinate, to the greatest extent practicable, major overhaul and inspection outages of IID transmission facilities with Producer and notify Producer of any changes as far in advance as possible. 11.4 Carry out the directions of the Authorized Representative with respect to the matters set forth in this Agreement. 11.5 Operate its system in a manner consistent with applicable utility industry standards and good engineering practices. 12. BILLING ------- 12.1 IID shall read the meters monthly according to its regular meter reading schedule beginning no more than thirty (30) days after the date that electric energy is first supplied to Producer. IID monthly shall send Producer within ten (10) working days after the meter is read a bill for electric service. Producer shall pay IID the total amount billed within thirty (30) days of receipt of the bill. 12.2 IID shall bill Producer for Producer's consumption of energy from IID's resources in accordance with Rate Schedule GL or Rate Schedule A-2, as applicable, as it may be revised from time to time. Copies of current Rate Schedule GL and current Rate Schedule A-2 are attached as Exhibit "A." 6 12.3 If Producer disputes a bill, payment shall be made as if no dispute existed pending resolution of the dispute by the Authorized Representatives. If the bill is determined to be in error, the disputed amount shall be refunded by IID including interest at the rate of one and one-half percent (1 1/2%) per month, compounded monthly, from the date of payment to the date the refund check or adjusted bill is mailed. 13. AUTHORIZED REPRESENTATIVES -------------------------- 13.1 Within thirty (30) days after the date this Agreement is signed, each Party shall designate, by written notice to the other Party, an Authorized Representative who is authorized to act in its behalf in the implementation of this Agreement and with respect to those matters contained herein which are the functions and responsibilities for the Authorized Representatives. Either Party may, at any time, change the designation of it Authorized Representative by written notice to the other Party. 13.2 IID's Authorized Representative shall develop detailed written procedures necessary and convenient to administer this Agreement within six (6) months after the date signed. Such procedures shall be submitted to Producer's Authorized Representative for review, comment, discussion and concurrence before they are put into effect. Such procedures shall include, without limitation: (i) communication between Producer and IID's electric system dispatcher with regard to daily operating matters, (ii) billing and payments, (iii) specified equipment tests, and (iv) operating matters which affect or may affect quality and reliability of service to electric customers and continuity of deliveries to SCE. 13.3 The Authorized Representative shall have no authority to modify any of the provisions of this Agreement. 7 14. METERS ------ 14.1 All meters shall be sealed and the seal shall be broken only upon occasions when the meters are to be inspected, tested or adjusted. 14.2 IID shall inspect and test all meters upon their installation and at least once every year thereafter. If requested to do so by Producer, IID shall inspect or test a meter more frequently than every year, but the expense of such inspection or test shall be paid by Producer unless the meter is found to register inaccurately by more than two percent (2%) from the measurement made by a standard meter. Each Party shall give reasonable notice to the other Party of the time when any inspection or test shall take place and that Party may have representatives present at the test or inspection. If a meter is found to be inaccurate or defective, it shall be adjusted, repaired or replaced in order to provide accurate metering. All adjustments due to inaccurate meters shall be limited to the preceding six (6) months. 14.3 If a meter fails to register, or if the measurement made by a meter during a test varies by more than two percent (2%) from the measurement made by the standard meter used in the test, adjustment shall be made correcting all measurements made by the inaccurate meter for: (i) the actual period during which inaccurate measurements were made, if the period can be determined, or if not, (ii) the period immediately preceding the test of the meter equal to one-half (1/2) the time from the date of the last previous test of the meter; provided, however, that the period covered by the correction shall not exceed six (6) months. 14.4 Producer shall telemeter information to IID's Dispatch Center regarding the kilowatts, kilowatt-hours, kilovars and kilovar-hours delivered to or received from IID at the Point of Delivery over phone line leased by Producer. 8 IID shall purchase, own, and shall design, install, operate, maintain, or cause to be designed, installed, operated, and maintained, equipment to automatically transmit from the Plant to IID's Dispatch Center continuous values of Plant output expressed as megawatts, megavars and megawatt-hours. IID may thereupon bill and Producer shall promptly pay IID's cost of design, purchase and installation of said equipment. Producer shall have the right to audit IID's records and accounts to verify the cost of said equipment. 15. CONTINUITY OF SERVICE --------------------- IID shall not be obligated to accept and IID may require Producer to temporarily curtail, interrupt or reduce deliveries of energy upon advance notice to Producer, when such curtailment, interruption or reduction is required in order for IID to construct, install, maintain, repair, replace, remove, investigate or inspect any of its equipment or any part of its system or if IID determines that such curtailment, interruption or reduction is necessary because of a System Emergency, forced outages or abnormal operating conditions on its system. IID shall use reasonable efforts to keep interruptions and curtailments to a minimum time. 16. LIABILITY --------- 16.1 Except for any loss, damage, claim, costs, charge or expense resulting from Willful Action, neither Party (the "released Party"), its directors or other governing body, officers or employees shall be liable to the other Party for any loss, damage, claim, cost, charge, or expense of any kind or nature incurred by the other Party (including direct, indirect or consequential loss, damage, claim, cost, charge or expense; and whether or not resulting from the negligence of a Party, its directors or other governing body, officers, employees or any person or entity whose negligence would be imputed to a Party) from engineering, repair, supervision, inspection, testing, protection, operation, maintenance, replacement, reconstruction, use or ownership of the 9 released Party's electrical system, Plant(s) or associated facilities in connection with the implementation of this Agreement. Except for any loss, damage, claim, cost, charge or expense resulting from Willful Action, each Party releases the other Party, its directors or other governing body, officers and employees from any such liability. 16.2 For the purpose of this Section 16, Willful Action shall be defined as action taken or not taken by a Party at the direction of its directors or other governing body, officers or employees having management or administrative responsibility affecting its performance under this Agreement, as follows: 16.2.1 Action which is knowingly or intentionally taken or not taken with conscious indifference to the consequences thereof or with intent that injury or damage would result or would probably result therefrom. 16.2.2 Action which has been determined by final arbitration award or final judgment or judicial decree to be a material default under this Agreement and which occurs or continues beyond the time specified in such arbitration award or judgment or judicial decree for curing such default or, if no time to cure is specified therein, occurs or continues thereafter beyond a reasonable time to cure such default. 16.2.3 Action which is knowingly or intentionally taken or not taken with the knowledge that such action taken or not taken is a material default under this Agreement. 16.3 Willful Action does not include any act or failure to act which is merely involuntary, accidental or negligent. 16.4 The phrase "employees having management or administrative responsibility," as used in Section 16.2, means the employees of a Party who are responsible for one or more of the 10 executive functions of planning, organizing, coordinating, directing, controlling and supervising such Party's performance under this Agreement with responsibility for results. 16.5 Subject to the foregoing provisions of this Section 16, each Party agrees to defend, indemnify and save harmless the other Party, its officers, agents, or employees against all losses, claims, demands, costs or expenses for loss of or damage to property, or injury or death of persons, which directly or indirectly arise out of the indemnifying Party's performance pursuant to this Agreement; provided, however, that a Party shall be solely responsible for any such losses, claims, demands, costs or expenses which result from its sole negligence or Willful Action. 17. UNCONTROLLABLE FORCES --------------------- Neither Party shall be considered to be in default in the performance of any of its obligations under this Agreement when a failure of performance shall be due to an uncontrollable force. The term "uncontrollable force" shall mean any cause beyond the control of the Party affected including, but not restricted to, failure of or threat of failure of facilities which have been maintained in accordance with generally-accepted engineering and operating practices in the electrical utility industry, flood, drought, earthquake, tornado, storm fire, pestilence, lightning and other natural catastrophes, epidemic, war, riot, civil disturbance or disobedience, strike, labor dispute, labor or material shortage, sabotage, government priorities and restraint by court order or public authority (whether valid or invalid) and actions or nonaction by or inability to obtain or keep the necessary authorizations or approvals from any governmental agency or authority, which by exercise of due diligence such Party could not reasonably have been expected to avoid and which by exercise of due diligence it has been unable to overcome. Nothing contained herein shall be construed as to require a Party to settle any strike or labor dispute in which it may be 11 involved. Either Party rendered unable to fulfill any of its obligations under this Agreement by reason of an uncontrollable force shall give prompt written notice of such fact to the other Party and shall exercise due diligence to remove such inability with all reasonable dispatch. 18. INTEGRATION AND AMENDMENTS -------------------------- This Agreement constitutes the entire agreement between the Parties relating to the interconnection of Producer's Plant to IID's electric system, the acceptance of energy by IID from Producer and the providing of electric service by IID. No oral agreement or prior written agreement between the Parties shall be of any effect whatsoever; provided, however, that any arrangements agreed upon by the Authorized Representatives within the limits of their authority, and consistent with this Agreement shall be binding upon the Parties. All changes to this Agreement shall be in writing and shall be signed by an officer of each Party. 19 NON-WAIVER ---------- None of the provisions of this Agreement shall be considered waived by either Party except when such waiver is given in writing. The failure of either Party to insist in any one or more instances upon strict performance of any of the provisions of this Agreement or to take advantage of any of its rights hereunder shall not be construed as a waiver of any such provisions or the relinquishment of any such rights for the future; but the same shall continue and remain in full force and effect. 20. NO DEDICATION OF FACILITIES --------------------------- Any undertaking by one Party to the other Party under any provision of this Agreement shall not constitute the dedication of the system or any portion thereof by the Party to the public or to the other Party, and it is understood and agreed that any such undertaking under any 12 provision of this Agreement by a Party shall cease upon the termination of its obligations hereunder. 21. SUCCESSORS AND ASSIGNS ---------------------- 21.1 This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Parties. 21.2 This Agreement may be assigned by Producer only (i) to a purchaser or co-owner of the Plant or to a person who will operate the Plant pursuant to a contract or other arrangement with such purchaser and in either case with the prior written consent of IID (which shall not be unreasonably withheld) or (ii) for security purposes, to a bank or other entity which provides financing for the Plant or any electrical transmission facilities associated therewith. Producer and IID agree that nothing in this Section 21.2 may be amended, modified or waived without the prior written consent of each and every Party to the Funding and Construction Agreement (except for any Parties in default thereunder.) 22. EFFECT OF SECTION HEADINGS -------------------------- Section heading appearing in this Agreement are inserted for convenience only, and shall not be construed as interpretations of text. 23. GOVERNING LAW ------------- This Agreement shall be interpreted, governed and construed under the laws of the State of California or the laws of the United States, as applicable. 24. ARBITRATION ----------- 24.1 Any dispute arising out of or relating to this Agreement, or the breach thereof, which is not resolved by the Parties acting through their Authorized Representatives shall be settled by arbitration to the extent permitted by the laws applicable to the Parties; provided, 13 however, that no Party to the dispute shall be bound to any greater extent than any other Party to the dispute. Arbitration shall not apply to any dispute or matter that is within the jurisdiction of any regulatory agency. 24.2 Any demand for arbitration shall be made by written notice ot the other Party setting forth in adequate detail the nature of the dispute, the issues to be arbitrated, the amount or amounts, if any, involved in t he dispute, and the remedy sought. Within twenty (20) drays from the receipt of such notice, the other Party may submit its own written statement of the dispute and may set forth in adequate detail any additional related matters or issues to be arbitrated. 24.3 Within thirty (30) days after delivery of the written notice demanding arbitration the Parties acting through their Authorized Representatives shall meet for the purpose of selecting an arbitrator. The Parties may agree upon a singe arbitrator, but in the event that they cannot agree, three arbitrators shall be used. Each Party shall designate one arbitrator, and the two arbitrators shall then select a third arbitrator. All arbitrators hall be persons skilled and experienced in the field in which the dispute has arisen and no person shall be eligible for appointment as an arbitrator who is or has been an officer or employee of either of the Parties or otherwise interested in the matter to be arbitrated. Should either party refuse or neglect to appoint an arbitrator or to furnish the arbitrators with any papers or information demanded, the arbitrators are empowered, by both Parties, to proceed without the participation or assistance of that Party. 24.4 Except as otherwise provided in this Section, the arbitration shall be governed by the rules and practices of the American Arbitration Association, or a similar organization if the American Arbitration Association should not at the time exist. 24.5 Arbitration proceedings shall be held in Imperial, California, at a time and place to be selected by the arbitrators. The arbitrators shall hear evidence submitted by the Parties and 14 may call for additional information which shall be furnished by the Party having such information. The arbitrators shall have no authority to call for information not related to the issues included in the dispute or to determine other issues not in dispute. 24.6 If there is only one arbitrator, his decision shall be binding and conclusive on the Parties. If there are three arbitrators, the decision of any two shall be binding and conclusive. The decision of the arbitrators shall contain findings regarding the issues involved in the dispute, including the merits of the positions of the Parties, the materiality of any default, and the remedy or relief to which a Party shall be entitled. The arbitrators may not grant any remedy or relief which is inconsistent with this Agreement, nor shall be arbitrators make findings or decide issues not in dispute. 24.7 The fees and expenses of the arbitrators shall be shared equally by the Parties, unless the decision of the arbitrators specifies some other apportionment. All other expenses and costs of the arbitration shall be borne by the Party incurring such expenses and costs. 24.8 Any decision or award granted by the arbitrators shall be final and judgment may be entered on it in any court of competent jurisdiction. This agreement to arbitrate shall be specifically enforceable. 25. ENTIRE AGREEMENT ---------------- 25.1 The complete agreement of the Parties is set forth in this Agreement and all communications regarding subject interconnected operations whether oral or written, are hereby abrogated and withdrawn. 15 26. NOTICES ------- Any formal communication or notice in connection with this Agreement shall be in writing and shall be deemed properly given if delivered in person or sent first class mail, postage prepaid to the person specified below: GEO EAST MESA LIMITED PARTNERSHIP P.O. Box 748 Holtville, CA 92250 IMPERIAL IRRIGATION DISTRICT c/o General Manager P. O. Box 937 Imperial, California 92251 27. SEVERAL OBLIGATIONS ------------------- Except where specifically stated in this Agreement to be otherwise, the duties, obligations and liabilities of the Parties are intended to be several and not joint or collective. Nothing contained in this Agreement shall ever be construed to create an association, trust, partnership, or joint venture, or impose a trust or partnership duty, obligation or liability on or with regard to either Party. Each Party shall be individually and severally liable for its own obligations under this Agreement. 28. SIGNATURE CLAUSE ---------------- The Parties have caused this Agreement to be executed in their respective names, in duplicate, by their respective officers hereunto this 21st day of March, 1989. GEO EAST MESA LIMITED PARTNERSHIP By /s/ Indecipherable ----------------------------------- 3-16-89 16 ATTEST: By /s/ Indecipherable -------------------------------- Secretary IMPERIAL IRRIGATION DISTRICT By /s/ Indecipherable --------------------------------------- President, Board of Directors ATTEST: By /s/ Larry E. Beck --------------------------------- Secretary 17 EXHIBIT "A" IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 166 Imperial, California Cancelling Sheet No. 139 SCHEDULE A-2 GENERAL WHOLESALE POWER SERVICE APPLICABILITY Applicable to general wholesale power service for industrial, commercial and agricultural purposes, subject to special conditions hereinafter stated. Applicable to standby or breakdown service where the entire electric power requirements on the customer's premises are not regularly supplied by the District. MONTHLY RATE The monthly rate shall be the sum of A, B, C and D. A. Demand Charge ................. $2.52 per kilowatt of Billing Demand B. Energy Charge ................. 5.60 CENTS per kwh. C. Energy Cost Adjustment - The amount computed in accordance with Schedule ECA. D. Power Factor Adjustment - A charge of $0.25 per kilovar of reactive demand as measured by the incoming kilovar demand meter for each kilovar in excess of .60 times the kilowatt demand measured and supplied by the District. MINIMUM CHARGE The minimum charge shall be the demand charge, but in no case shall the minimum charge be less than the demand charge (A) multiplied by 75% of the highest maximum demand established in the preceding 11 months. SPECIAL CONDITIONS (a) Vo1tage: This schedule applies to service rendered at a transmission voltage of 34.5-kV or above. It shall be the responsibility of the customer to furnish transformation to any other voltages required. (b) Billing Demand: The billing demand shall be the kilowatts of measured maximum demand but in no case less than 75 percent of the highest maximum demand established in the preceding 11 months. The measured maximum demand in any month will be the average kilowatt delivery indicated or recorded by the District's demand meter in the 15-minute interval in which such delivery is greater than any other 15-minute interval. In case the load is intermittent or subject to violent fluctuations, the District may base the demand upon a 5-minute interval instead of a 15-minute interval. Board Resolution Date Effective July 3, 1984 August 1, 1984 - 17 - IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 167 Imperial, California Cancelling Sheet No. 139 SCHEDULE A-2 (Continued) GENERAL WHOLESALE POWER SERVICE (c) A minimum connected load of 5000 kw shall be required. (d) Parallel Operation: A customer may operate its generating plant in parallel with the District's system if such customer installs and operates such control and protective equipment as required by the District. (e) Metering: The District will provide the normal metering equipment for the size and type of load served. Additional metering which may be required by the District shall be furnished by the customer and tested in accordance with requirements of the District. Meters shall not allow reverse registration. (f) Regulations Governing Sale of Electric Energy: Service under this rate schedule is subject to the District's Regulations Governing the Sale of Electric Energy. Board Resolution Date Effective July 3, 1984 August 1, 1984 - 18 - EXHIBIT "A" IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 152 Imperial, California Cancelling Sheet No. 137 SCHEDULE GL LARGE GENERAL SERVICE APPLICABILITY Applicable to general service having a demand of 100 kilowatts or higher. Not applicable for standby, supplemental or resale service. MONTHLY RATE The monthly rate shall be the sum of A, B and C. A. Demand Charge ................. $2.65 per kilowatt of Billing Demand B. Energy Charge ................. 5.90 CENTS per kwh C. Energy Cost Adjustment - The amount computed in accordance with Schedule ECA. SPECIAL CONDITIONS (a) Voltage: Service under this schedule normally will be supplied at standard voltage available at the location. Where 240-volt three- phase power is to be combined with single-phase, and 4-wire service is available, service will be supplied through one meter. In 240-volt areas, where, as determined by District, it is not practical to provide a 4-wire service, such single-phase and three-phase service will be supplied and metered separately, the meter readings, both kwh and demands, being combined for the purpose of computing charges on this schedule. Where service is taken at 480-volts or higher, a three-phase service at one voltage only will be supplied. (b) Billing Demand: The billing demand shall be the higher of (i) the highest 15-minute integrated or thermal kilowatt demand measured during the billing period, or (ii) 50% of highest demand measured during the five summer months (May-September) of the 12-months ending with the current month, or (iii) 20% of the highest measured demand during the seven winter months (October-April) of the 12-months ending with the current month, or (iv) the demand specified in a contract, or (v) 50 kilowatts. When the monthly demand exceeds 100 KW in any billing month, billing will be under Rate Schedule GL, and thereafter continue under Rate Schedule GL until monthly demands have been less than 100 KW for a period of twelve consecutive months.Board Resolution Date Effective January 18, 1983 February 1, 1983 - 19 - (c) Seasonal Loads: When any customer disconnects service and resumes service within 12-months from date of last disconnection, the customer will be required to pay all charges which would have been billed if the customer had not been disconnected. (d) Wind Machines: Wind machines for frost protection may be served under this schedule provided the load will be limited to existing unused capacity of lines and substations as determined by the District. Provisions (ii), (iii) and (v) of (b) shall not apply to wind machines. (e) Vacuum Cooling Loads: Portable vacuum cooling loads will be served on existing facilities where adequate capacity is avaliable provided the customer pays any up-and-down cost necessary to provide service and deposits a nonrefundable amount equal to the minimum charge for the succeeding 12-month period. One twelfth of such deposit will be applied or prorated to any monthly billing during the 12-month period. (f) Regulations Governing Sale of Electric Energy: Service under this rate schedule is subject to the District's Regulations Governing the Sale of Electric Energy. Board Resolution Date Effective January 18, 1983 February 1, 1983 - 20 -IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 153 Imperial, California Cancelling Sheet No. 138 SCHEDULE GL (Continued) LARGE GENERAL SERVICE Exhibit B [Graphic: Simplified Switch Connection Diagram of Imperial Irrigation District to Geo East Mesa #2 Single Line Diagram (GEM2)] 13 EXHIBIT C FUNDING AND CONSTRUCTION AGREEMENT (Heber-Mirage Transmission Project) June 29, 1987 Exhibit C FUNDING AND CONSTRUCTION AGREEMENT THIS FUNDING AND CONSTRUCTION AGREEMENT, made and entered into as of June 29, 1987, by and among IMPERIAL IRRIGATION DISTRICT, organized under the Water Code of the State of California (hereinafter referred to as "IID"), and the persons listed as Participants in Exhibit 1 attached hereto (hereinafter referred to individually as "Participant" and collectively as "Participants"), WITNESSETH: Whereas each Participant or its Associated Producer (as defined in Article I) presently owns and operates, or proposes to construct, in the Imperial Valley, a small power producing facility which is or will be a Qualifying Facility under the Public Utility Regulatory Policies Act of 1978; and Whereas each Participant or its Associated Producer has entered into a contract which entitles it to deliver electric power generated by its Qualifying Facility to the electric system operated by Southern California Edison Company ("Edison"); and Whereas the electric transmission system operated by IID has insufficient capacity at present to enable IID to enter into contracts for the transmission of all such power to the electric system operated by Edison; and -1- Whereas the Participants therefore propose to fund the construction of a new transmission line in IID's service territory, which will enable IID to enter into transmission service agreements with them or their Associated Producers; and Whereas the Participants and IID wish to define the terms and conditions on which such funding will take place and such line will be constructed: NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I Definitions For purposes of this Agreement, the following defined terms, whether used in the singular or the plural, shall have the meanings set forth in this Article. The Article and Section numbers and Exhibit references used herein refer to Articles and Sections of this Agreement and Exhibits annexed hereto unless otherwise specifically described. Additional Capacity The term "Additional Capacity" means, as regards the entry into Transmission Agreements or the granting of -2- Transmission Service Entitlements relative to the transmission of power from the Midway substation, an amount, expressed in megawatts, equal to the Deemed Capacity less the sum of IID's Reserved Capacity and the Transmission Service Entitlements of the Participants and their Associated Producers. The term "Additional Capacity" means, as regards the entry into Transmission Agreements or the granting of Transmission Service Entitlements relative to the transmission of electric power from the Highline substation, an amount, expressed in megawatts, equal to the lesser of (i) an amount calculated as provided in the preceding sentence or (ii) three hundred (300) megawatts less the sum of IID's Reserved Capacity and the Transmission Service Entitlements of the Participants and their Associated Producers with regard to Qualifying Facilities connected to the Highline substation. Additional Participant The term "Additional Participant" means a person whose name does not appear in the list of Participants in Exhibit 1 at the time this Agreement is originally executed but who later executes and becomes a party to this Agreement in accordance with the procedures set forth in Article VIII. Affiliate The term "Affiliate" means, with respect to a particular Participant or Associated Producer, any corporation, partnership, firm, association or business organization which directly or indirectly controls, is -3- controlled by, or is under common control with, such Participant or Associated Producer. Agreement The term "this Agreement" means this Funding and Construction Agreement (Heber-Mirage Transmission Project) among IID and the Participants, and all Exhibits attached hereto, as amended from time to time. Associated Producer The term "Associated Producer" means, as to a particular Participant (i) an Affiliate thereof which owns or operates or proposes to construct a Qualifying Facility or (ii) a firm which owns or operates or proposes to construct a Qualifying Facility and purchases or will purchase geothermal energy for use therein from such Participant or its Affiliate. Capacity Nomination The term "Capacity Nomination" means the transmission capacity, expressed in megawatts, specified by a Participant for use by such Participant or its Associated Producer in transmitting electric power to Edison's Electric System, either at the time this Agreement is originally executed or later pursuant to Section 8.02. A Participant's Capacity Nomination may be adjusted pursuant to Section 3.07 or increased pursuant to Section 8.06. -4- Completion Date The term "Completion Date" means the date on which the Transmission Project is fully tested and accepted by IID. Credit Installment Period The term "Credit Installment Period" means the ten-year period beginning on the first day of the calendar month in which the Completion Date occurs. Credit Installment Year The term "Credit Installment Year" means a twelve (12) month period beginning on the first day of the Credit Installment Period or any anniversary of such day during the Credit Installment Period. Deemed Capacity The term "Deemed Capacity" means an electric transmission capacity equal to six hundred (600) megawatts. Edison The term "Edison" means Southern California Edison Company. Edison's Electric System The term "Edison's Electric System" means the electric system operated by Edison. IID or District The terms "IID" or "the District" mean Imperial Irrigation District, organized under the Water Code of the State of California. -5- IID-Edison Agreement The term "IID-Edison Agreement" means the IID-Edison Transmission Service Agreement for Alternative Resources dated September 26, 1985 between IID and Edison. IID's Reserved Capacity The term "IID's Reserved Capacity" means the transmission capacity in the Project, expressed in megawatts, which is reserved for use by IID as provided in Section 6.05. IID's Transmission System The term "IID's Transmission System" means the electric transmission system owned and operated by IID, including (after it is constructed) the Transmission Project. Imperial Valley Transmission Study Group The term "Imperial Valley Transmission Study Group" means the group formed by companies interested in the development of the Transmission Project under that certain Study Group Agreement dated as of October 15, 1985. Management Committee The term "Management Committee" means the Management Committee established pursuant to Section 5.01. Manager The term "Manager" means the Participant or other person designated as Manager pursuant to Section 5.02. -6- Normal Transmission Capacity The term "Normal Transmission Capacity" means the maximum electrical power transfer capability of the Project, expressed in megawatts, available to transmit electrical power to Edison's Mirage substation. Such transfer capability as determined by IID, in its sole judgment, shall be consistent with prudent operating procedures and with generally accepted engineering and operating practices in the electric utility industry and shall be contingent on the ability of Edison's Electric System to accept the amount of electric power received at Edison's Mirage substation from IID's Transmission System. It is understood that, unless IID agrees otherwise, no more than one-half of the Normal Transmission Capacity can be utilized by generation connected to the Highline substation. Original Capacity Nomination The term "Original Capacity Nomination" means the Capacity Nomination specified by each Participant at the time this Agreement is originally executed, as shown in Exhibit 1, or prior to the Completion Date pursuant to Section 8.02 (as modified by Section 8.09) or Section 8.08(b), as such Original Capacity Nomination may be adjusted pursuant to Section 3.07. Participant The term "Participant" means a person which has executed and is a party to this Agreement, including both -7- the Participants which originally executed this Agreement and any Additional Participants and, unless otherwise specified, any Participants in default hereunder. Person The term "person" (whether or not the initial letter is capitalized) means an individual, corporation, partnership, association, trust, government, governmental agency or other entity. Plant Connection Agreement The term "Plant Connection Agreement" means an agreement between IID and a Participant or its Associated Producer substantially similar to the form of Exhibit 6. Prime Rate The term "Prime Rate" means the prime rate for U.S. banks on the relevant date, as published in the "Money Rates" column of the Wall Street Journal. If the date on which the Prime Rate is to be determined is a Saturday, Sunday or legal holiday, the Prime Rate shall be determined on the last business day prior thereto. Project Contribution The term "Project Contribution" means a contribution to the cost of the Transmission Project to be made by or on behalf of a Participant (i) pursuant to Section 3.02 in response to a cash call, (ii) pursuant to any agreement or understanding among the Participants to make such contributions in the event of the default of one or more other Participants hereunder or (iii) with respect to Additional -8- Participants which become such before the Completion Date, pursuant to Section 8.02 (as modified by Section 8.09). The term "Project Contribution" shall not include any interest payable pursuant to Section 3.05 or insurance proceeds remitted to IID pursuant to Section 2.08(b), and in computing the total amount of Project Contributions made by a Participant a deduction shall be made for any amounts received by such Participant from Additional Participants which become such before the Completion Date, pursuant to Section 8.02 (as modified by Section 8.09). Project Cost The term "Project Cost" means a dollar amount equal to the total of all costs in respect of which the Participants are to receive Transmission Credits, as provided in Section 7.01. Project Share The term "Project Share" means the Original Capacity Nomination of a Participant as a percentage of the aggregate Original Capacity Nominations of all Participants, as shown in Exhibit 1, as such Project Share may be recomputed pursuant to Section 8.09(b). Qualifying Facility The term "Qualifying Facility" means a small power producing facility in the Imperial Valley which is a "Qualifying Facility" within the meaning of the Public Utility Regulatory Policies Act of 1978 and regulations issued thereunder. -9- Shared Costs The term "Shared Costs" means the costs of the Transmission Project which the Participants have agreed to share, as defined in Section 3.01. Standard Form Transmission Agreement The term "Standard Form Transmission Agreement" means a Transmission Agreement between IID and a Participant or its Associated Producer substantially in the form of Exhibit 2. Total Budget The term "Total Budget" means the total budgeted cost of the Transmission Project as shown in Exhibit 4, as the same may be modified pursuant to Section 4.01. Transmission Agreement The term "Transmission Agreement" means an agreement between IID and another person which provides for the transmission of electric power over IID's Transmission System for delivery to Edison's Electric System. The Standard Form Transmission Agreement is one form of Transmission Agreement. Transmission Credits The term "Transmission Credits" means the credits against transmission charges payable under a Transmission Agreement which are to be received by the Participants pursuant to Section 7.01. -10- Transmission Project or Project The terms "Transmission Project" or "Project" mean the 230-kV and 92-kV transmission lines to be funded and constructed pursuant to this Agreement, including the facilities described in Exhibit 3 and all real property interests and other property and rights associated therewith. Transmission Service Entitlement The term "Transmission Service Entitlement" means the total amount of electric power transmission service, expressed in megawatts, which is to be provided by IID and paid for by the other party pursuant to a Transmission Agreement, for all Qualifying Facilities covered thereby; provided that prior to the end of the Trial Period (as defined in the Standard Form Transmission Agreement) for any Qualifying Facility, the amount of electric power transmission service to be provided by IID with respect to such Qualifying Facility shall be deemed for purposes of this definition to be the Maximum Transmission Service Entitlement therefor, as set forth in said Standard Form Transmission Agreement. ARTICLE II The Transmission Project Section 2.01. Description of the Project. The Project shall consist of transmission lines and associated -11- facilities extending from Edison's Mirage substation in the north through Niland to the Heber area in the south, as described and specified in Exhibit 3. The Normal Transmission Capacity of the Project upon completion is estimated to be four hundred (400) megawatts. The Project does not include the existing single circuit, single 1033 mcm ACSR conductor presently in place from Edison's Mirage substation to IID's Coachella Valley substation (the "existing circuit") or the existing facilities at the Coachella Valley substation, but IID shall reserve sufficient capacity in the existing circuit to assure the Participants that a transmission capacity at least equal to the Normal Transmission Capacity less IID's Reserved Capacity is available to the Participants and their Associated Producers, as well as any persons who desire to become Additional Participants, for the transmission of electric power to Edison's Mirage substation. The Transmission Project shall be constructed in accordance with the standards contained in General Order 95 of the Public Utilities Commission of the State of California. IID shall own, operate and maintain the Transmission Project. Section 2.02. Contract and Bidding Procedures. IID shall acquire all lands and interests therein necessary for the construction of the Project, using its power of eminent domain where necessary, and shall enter into one or more contracts providing for the supply of all materials and services necessary to complete the construction of the -12- Project. To the extent possible, such contracts shall be firm-price contracts. As soon as practicable, IID shall prepare one or more requests for proposals for all materials and services necessary to acquire and complete the Transmission Project. Such requests for proposals may be sent to any firm which is designated by either IID or a Participant. In response to each request for proposals, IID shall accept the lowest evaluated (responsive and responsible) bid from a qualified firm. Section 2.03. Construction Schedule. IID shall use reasonable efforts to acquire all necessary materials, services and real property interests so as to insure that the Project is constructed and completed in accordance with the following schedule: August 1985 Begin preparation of Environmental Impact Report (EIR). February 1987 Begin right-of-way acquisition activity. May 1987 Obtain EIR certification. November 1987 Complete right-of-way acquisition for Coachella Valley-Midway corridor and begin construction of transmission line on said corridor and on Midway substation. March 1988 Complete right-of-way acquisition for Midway-Highline corridor, and begin construction on said corridor and on Highline substation. October 1988 Complete construction on Coachella Valley-Midway corridor, and energize Midway substation. -13-December 1988 Complete construction on Midway- Highline corridor, and energize Highline substation. Section 2.04. Review and Consultation. The Participants shall have the right, through the Manager or a consultant, to consult with and make suggestions to IID concerning any aspect of the Project. The Participants shall be entitled to receive from IID (a) at least monthly, a written status report on the Project, including the current status of engineering, procurement, and construction (including but not limited to the number of towers constructed, the miles of conductors strung and the status of substation construction) and the amount of expenditures to date and a forecast of the expenditures necessary to complete the Project; and (b) oral briefings on the status of the Project, conducted periodically as agreed by IID and the Manager. IID shall include appropriate provisions in its contract with the general contractor to secure the foregoing rights for the Participants. With the prior approval of IID's representatives, IID shall grant the Participants and their representatives (including the Manager) reasonable access to areas where construction of the Project is taking place and to supplies and equipment to be used in constructing the Project. -14-Section 2.05. Standard of Care. In the handling and disbursement of funds needed for the acquisition and construction of the Project and in carrying out its other responsibilities under this Article II, IID shall act with the same degree of diligence, care and skill that an ordinary prudent businessman would exercise in the management of his own personal business affairs. Without limiting the generality of the foregoing, (a) except where the acquisition of a fee interest is necessary for the proper operation of the Project, the District will acquire appropriate easements in the real property on which the Project is to be located; and (b) IID shall employ sound cash management practices in the payment of bills for materials and services acquired for the Project. Section 2.06. Indemnification. (a) Subject to the Participants' obligation to pay the Shared Costs as provided in Section 3.01, IID shall indemnify, defend and hold harmless each Participant, its Associated Producer and their respective officers, directors, employees, shareholders, partners and Affiliates from and against any loss, damage, liability or expense, including attorneys' fees, which arises or results from any claim, lawsuit or other legal proceeding brought by any person not a party to this Agreement and which relates in any manner to the acquisition or construction of the Transmission Project or any portion -15- thereof (whether or not such claim, lawsuit or other legal proceeding is based on the alleged active or passive negligence of IID, its officers, employees or agents or any other person not a party to this Agreement), including without limitation any loss or expense which arises or results from the injury to or death of any individual in connection with the acquisition or construction of the Project (including the employees and agents of IID and the Participants) or any damage to or loss of property in connection with the acquisition or construction of the Project. Each Participant shall promptly notify IID of any such claim, lawsuit or other legal proceeding and shall allow IID to control the defense thereof at IID's expense. Any such Participant shall be entitled to monitor such claim, lawsuit or other legal proceeding, and shall be entitled to employ an attorney for such purpose at its own expense. To the extent that IID includes provisions in any contracts awarded by it for the acquisition of materials or services in connection with the Project under which IID is indemnified against or released from liability in specified situations or circumstances, IID shall include language in each such contract granting each Participant protection equivalent to the protection provided to IID. (b) Notwithstanding anything in this Section 2.06 to the contrary, each Participant shall indemnify, defend and hold harmless IID and the other Participants, and their respective officers, directors, employees, shareholders, -16- partners and Affiliates, from and against any loss, damage, liability or expense, including attorneys' fees, and any claim thereof, which relates to the acquisition or construction of the Project and results or arises from the active or passive negligence or willful misconduct of the indemnifying Participant, its Associated Producer or their respective officers, employees or agents. Section 2.07. Maintenance of Transmission Project. IID shall operate and maintain the Transmission Project in accordance with generally accepted engineering and operating practices in the electric utility industry. In the event of any loss or destruction of the Transmission Project or any portion thereof, or the partial or complete loss of the use thereof, on or after the Completion Date, by reason of an "uncontrollable force" as defined in Section 16 of the Standard Form Transmission Agreement, IID shall exercise due diligence to remedy such loss or destruction with all reasonable dispatch; provided that IID shall not be obligated to expend more than $250,000 in repairing or reconstructing the Transmission Project as a result of any single occurrence which occurs prior to the end of the Credit Installment Period. Subject to Section 3.01(a)(9), the costs of repairing or rebuilding the Project as a result of damage or destruction which occurs prior to the Completion Date shall be treated as Shared Costs. Section 2.08. Insurance. (a) Without limiting IID's obligations under Section 2.06, prior to the commence- -17- ment of the construction of the Project IID shall obtain and, until the Completion Date shall maintain in force, comprehensive general liability and property insurance with respect to the Transmission Project, with limits of $20,000,000 and $40,000,000, respectively. Beginning on the Completion Date and continuing until the end of the Credit Installment Period, IID shall maintain in force, property insurance with respect to the Transmission Project, with a deductible of $250,000 for each occurrence. IID and the Manager shall consult with respect to the limits, deductibles (except as specifically provided in the preceding sentence) and exclusions under all such property insurance, and in this regard IID shall abide by the decision of the Management Committee, which decision may be modified from time to time. Such insurance (i) shall be placed with an insurer or insurers of recognized reputation and responsibility, (ii) shall name IID as the insured and each Participant as an additional insured and (iii) shall provide that if such insurance is cancelled or materially changed, or allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to any Participant until thirty (30) days after receipt by such Participant of written notice by the insurer of such cancellation or lapse or of any material change in policy terms or conditions. Upon request by any Participant at any time, IID shall provide a certificate from the insurer stating that such insurance is in effect. -18- (b) IID shall use any insurance proceeds received by it as a result of damage to or destruction of the Project to repair or rebuild the same. If any Participant receives proceeds from the property insurance provided for in this Section 2.08 as a result of damage to or destruction of the Project, such Participant shall promptly remit such proceeds to IID for IID's use in repairing or rebuilding the Project. The amount of any such remittance shall not be deemed a Project Contribution. If any of the proceeds from such insurance are not needed for the repair or rebuilding of the Project, IID shall apply the same to any of the costs described in Section 3.01(a) so as to reduce the amount requested in cash calls issued by IID pursuant to Section 3.02. ARTICLE III Funding of Transmission Project Section 3.01. Shared Costs. Subject to the terms of this Article III, the Participants shall bear the following costs associated with the Transmission Project, (a) All out-of-pocket costs incurred by IID, whether incurred prior to or after the date of this Agreement, in order to plan, permit, design, engineer, acquire and construct the Transmission Project and to acquire the right of way for the Transmission Project, including by way of illustration and not limitation, the following: -19- (1) The cost of acquisition of all lands, rights, rights of way, easements and interests acquuired or used for the Transmission Project, including the cost of any mitigation requirements; provided, however, that any real property interests owned by IID and necessary or useful for the Project shall be contributed by IID at no charge and shall not be included in the Shared Costs. (2) The cost of all materials, supplies, machinery and equipment and of all labor and services necessary to construct the Transmission Project. (3) The cost of engineering, financial services, plans, specifications, studies, surveys, expenses of recordation and printing, and other expenses necessary or incident to determining the feasibility of constructing the Transmission Project or incident to the construction thereof. (4) The cost of (i) comprehensive general liability and property insurance with respect to the Project, as required by Section 2.08, for the period prior to -20- the Completion Date, and (ii) property insurance with respect to the Project, as required by Section 2.08, for the period from the Completion Date until the end of the Credit Installment Period. If the property insurance referred to in (ii) above can reasonably be purchased for a single lump-sum premium payable in advance, the cost of such insurance shall be the amount of such premium. If the property insurance referred to in (ii) above cannot reasonably be purchased for a lump-sum premium payable in advance, the cost of such insurance for purposes of this paragraph (4) shall be deemed to be an amount equal to 6.7 times the annual premium payable therefor for coverage during the first year following the Completion Date. (5) The cost of legal services and court costs necessary or incident to the planning or construction of the Project, unless IID is reimbursed for such costs by insurance or otherwise, provided that any such costs incurred in connection -21- with legal actions brought against IID with respect to personal injury or property damage shall be included in the Shared Costs only if IID is ultimately successful in defending the action. (6) The cost of expanding the interconnection facilities at Edison's Mirage substation to accommodate the electric power to be delivered by the Participants or their Associated Producers to Edison, in an amount up to the Normal Transmission Capacity of the Project, whether such work is performed by or on behalf of IID or by or on behalf of Edison and reimbursed by IID. (7) The cost of relocating IID's "E" line to accommodate a portion of the Project, if such relocation is necessary. (8) In the event of the termination of the Project pursuant to Section 3.08, any costs incurred in (i) maintaining and holding the property related to the Project for the three (3) year period referred to in paragraph (b) thereof or (ii) restoring real property -22- to its original condition as provided in paragraph (b) thereof. (9) In the event of damage to or destruction of the Project or any portion thereof prior to the Completion Date, any of the foregoing costs or expenses incurred in repairing or rebuilding the Project and not paid with the proceeds of an insurance policy. (b) The salary and other employee costs incurred by IID as a result of the activities of IID's accounting and financial personnel in implementing the cash call procedure set forth in this Article III and otherwise in conducting IID's relations with the Participants in connection with their Project Contributions; (c) Although it is not contemplated that IID will advance its own funds to pay the costs referred to in paragraph (a) of this Section 3.01, if IID should elect to do so, interest on any such advance at the Prime Rate (or the maximum rate allowed by law, whichever is less) in effect on the date thereof, until the date on which IID is reimbursed for such advance by the Participants; (d) The following costs incurred by the Participants and their Affiliates in connection with the planning and construction of the Project: -23- (1) All costs incurred by way of cash contributions to the Imperial Valley Transmission Study Group (the "IVTSG"). (2) All transportation, lodging and meal expenses incurred in connection with the attendance of personnel at meetings of the IVTSG on or after October 16, 1985 and at meetings held to organize the IVTSG on the following dates in 1985: March 22, April 12, June 19, July 12 and 19, August 12 and September 16. (3) All transportation, lodging, meal, reproduction and miscellaneous out-of-pocket expenses incurred in furtherance of the business of the IVTSG, including expenses related to negotiation or informational meetings with IID, Edison, Associated Southern Engineers, David A. Hodges or R. W. Beck. (4) Any other costs actually incurred in connection with the planning and construction of the Project, if approved by the Management Committee. The Manager shall bill the District for such costs as soon as practicable after the date of this -24- Agreement, including with such bill such supporting documentation as the District may reasonably require. Such bill shall be payable within thirty (30) days after receipt. The payment for such costs shall be distributed to each Participant in accordance with the amount paid by such Participant and its Affiliates. (e) The fees and expenses of the Manager and of any consultant retained by the Participants to monitor the construction of the Project, including in such expenses the costs of travel, telephone and supplies. The Manager shall bill IID for such fees and expenses at the end of each month, including with the bill such supporting documentation as IID may reasonably request. Such bills shall be payable within thirty (30) days after receipt. Notwithstanding the foregoing, the Shared Costs shall not include any loss or expense (including attorneys' fees, except as provided in paragraph (a)(5) above) which arises or results from the injury to or death of any individual in connection with the acquisition or construction of the Project (including the employees and agents of IID and the Participants) or, except as provided in paragraph (a)(9) above, from any damage to or loss of property or property rights in connection with the acquisition or construction of the Project (other than real property and interests therein -25- on which the Project is to be located), or any loss or expense which is attributable to the gross negligence or willful misconduct of IID or its officers, employees or agents. The Project Budget contained in Exhibit 4 includes all costs referred to in this Section 3.01 which IID and the Participants presently anticipate will be incurred. Section 3.02. Cash Call Procedure. (a) On the first business day of each month IID shall issue a cash call to the Manager. The amount of such cash call shall be equal to the sum of (i) the anticipated Shared Costs to be incurred by the District from the due date thereof (as set forth below) until the due date for the next succeeding cash call, (ii) any amount of Shared Costs paid or to be paid by IID prior to the due date thereof and not covered by earlier cash calls and (iii) a reasonable margin for unanticipated expenses and cost overruns. The cumulative total of all cash calls issued by IID up to any date shall be consistent with the anticipated progress on the Project up to such date, as set forth in the construction and supply contracts entered into by IID. (b) Within three (3) business days after receipt of a cash call from IID the Manager shall issue an individual cash call to each Participant (including the Manager itself if the Manager is a Participant) other than any Participant which is in default hereunder and has failed to cure such default as provided in Section 3.05. The -26- Manager shall send a copy of each individual cash call issued to a Participant to such Participant's bank or other lender, if so indicated in Exhibit 7. The Participants shall pay or cause to be paid the amounts indicated in such individual cash calls so that the funds are received by IID no later than the fifteenth (15th) day of the calendar month after the month of issuance thereof, or if such day falls on a Saturday, Sunday or legal holiday the next succeeding business day (the "due date"). The amount of the individual cash call issued by the Manager to each Participant shall be equa1 to C(t) X PS(i) ----- 100% where C(t) is the amount of the cash call received from IID and PS(i) is the Project Share of the Participant to which the individual cash call is issued. (c) The Manager shall send IID a copy of each individual cash call issued by it to any Participant, whether the same is issued pursuant to this Section 3.02 or pursuant to any understanding or agreement among the Participants to make Project Contributions in the event of the default of any Participant. (d) All Project Contributions received by IID from any Participant shall be applied to individual cash calls issued to such Participant (whether the same were issued pursuant to this Section 3.02 or in respect of the -27- default of another Participant) in the chronological order in which such individual cash calls were issued. Section 3.03. Obligation Unconditional. The obligation of each Participant to respond to individual cash calls as set forth in Section 3.02 shall be irrevocable and unconditional except as this Agreement may specifically provide otherwise. Without limiting the generality of the foregoing, such obligation shall not be affected by the modification or abandonment of the Participant's (or its Associated Producer's) plans to construct a Qualifying Facility or by the partial or complete failure or a Qualifying Facility owned or operated by the Participant or its Associated Producer, or of any equipment, plant, geothermal resource, or facility associated therewith. Section 3.04. Deposit of Cash Call Funds. IID shall promptly deposit all funds it receives in response to any cash call into an interest-bearing account at the Bank of America or such other bank as may be agreed to from time to time by the Management Committee and IID. Interest on the funds on deposit in such account shall be retained in the account and used to pay Shared Costs of the Project. IID shall make withdrawals from such account only as necessary to pay Shared Costs. Any funds remaining in such account after all of the Shared Costs to be paid hereunder have been paid shall be refunded to the Participants in accordance with their respective Project Shares. -28- Section 3.05. Failure To Respond to Cash Call. If any participant shall fail to cause funds indicated in an individual cash call (including any individual cash call issued as a consequence of another Participant's default) to be delivered to IID by the fifteenth (15th) day of the calendar month after the month of issuance thereof (or if such day falls on a Saturday, Sunday or legal holiday, the next succeeding business day), or by such earlier due date as may be indicated on the face of the individual cash call, such Participant shall be deemed to be in default hereunder, and IID shall promptly send a notice of default to such Participant, with a copy to the Manager (or, in the case of such a default by the Manager, to any person which the Participants, by written notice in the form described in Section 5.02, have informed IID is acting as Alternate Manager). The Participant in default shall have fifteen (15) days after IID's transmittal of the notice of default in which to cure the default by causing to be paid the amount in default plus interest for each day after the due date to and including the date payment is received by the District at a rate equal to 125% of the Prime Rate (or the maximum rate allowed by law, whichever is less) in effect on the due date. No Participant shall be entitled to cure a default under this Agreement as of right except as specifically provided in this Section 3.05. After the fifteen (15) day period specified above, a Participant in default shall be permitted to cure its default only with the -29- approval of and on such terms as may be specified by the Management Committee, one of such terms being that the defaulting Participant shall pay or cause to be paid the amount in default plus interest thereon at a rate equal to 125% of the Prime Rate (or the maximum rate allowed by law, whichever is less), determined on the due date and on the first business day of each calendar quarter thereafter, for the period during which the payment was in default. Any payment of a Project Contribution made by or on behalf of a Participant after the due date therefor shall be accompanied by interest calculated as provided in this Section 3.05, and any such payment received by IID after the due date shall, as necessary, be allocated between the Project Contribution and the intereste due thereon calculated as provided herein. Upon the payment of any Project Contribution by or on behalf of a Participant after the fifteen (15) day cure period with respect thereto has expired, IID shall promptly refund to every other Participant an amount equal to the total of any Project Contributions which it made as a result of the failure of such Project Contribution to be made by the end of the fifteen (15) day cure period, plus interest calculated as provided herein. Section 3.06. Failure To Cure Default. If a Participant shall fail to cure a default within the fiteen (15) day period provided in Section 3.05, IID shall promptly notify the Manager in writing of such failure. The Participants or any of them shall be entitled to cause the amount -30- in default to be paid, in which case IID shall be obligated to continue the acquisition and construction of the Project as provided in this Agreement. Notwithstanding the foregoing, IID and each of the Participants shall have the right to obtain any remedy available at law or in equity in consequence of the default of IID or any Participant under this Agreement, including damages or specific performance where appropriate. Subject to Section 3.10, a Participant in default hereunder shall be liable for all unpaid amounts included in individual cash calls issued to such Participant as well as all amounts which would have been included in individual cash calls issued to such Participant pursuant to Section 3.02 if such default had not occurred. Section 3.07. Automatic Adjustment of Original Capacity Nominations. If one or more Participants shall fail to cure a default as provided in Section 3.05, the Original Capacity Nomination of each Participant (including any Participant in default] shall, after all Project Contributions have been made, be automatically adjusted to an amount, expressed in megawatts, equal to PC(i) OCN(i) = OCN(t) X ----- PC(t) where OCN(i) is the adjusted Original Capacity Nomination of the Participant, OCN(t) is the total of the Original Capacity Nominations of all Participants, PC(i) is the total -31- of the Project Contributions made by such Participant, and PC(t) is the total of the Project Contributions made by all Participants (including any Participants in default). Section 3.08. Termination of Project. (a) The Participants shall be entitled to cease making Project Contributions at any time and for any reason, subject to the following: (i) All of the Participants shall execute and deliver to IID a document stating their intention to terminate the Project pursuant to this Section 3.08. (ii) In accordance with the procedures set forth in this Article III, the Participants shall pay all Shared Costs which are committed to be paid and the payment of which cannot be avoided. For this purpose, any costs incurred by IID as a result of such termination shall be deemed to be included in the Shared Costs. (b) IID shall retain all rights, interests and property, real and personal, acquired for the Project for a period of three (3) years following the delivery of the document referred to in paragraph (a)(i) above, to enable the Participants or any of them to find a suitable means of financing the completion of the Project. Upon notice executed and delivered to IID by the Participants during such three (3) year period, IID shall transfer to the Participants or their designee all right, title and interest in -32- and to all or any portion of the towers, cable, transformers and other tangible personal property and fixtures the acquisition of which was funded by the Participants pursuant to this Agreement and which is specified in such notice (the "acquired equipment"). The acquired equipment, if acquired by the Participants, shall be transferred to and held by the Participants in fractional undivided interests equal to the following: PC(i) I(i) = ------ PC(tn) where I(i) is the Participant's interest, PC(i) is the total of the Project Contributions made by the Participant, and PC(tn) is the total of the Project Contributions made by all Participants not in default. Within sixty (60) days after its receipt of the notice referred to in this paragraph (b), IID may, at its option and upon written notice given to the Manager, elect to compensate the Participants for all amounts paid by IID in connection with the acquisition of the acquired equipment and included in cash calls issued by IID pursuant to Section 3.02 (including taxes, freight and the cost of installing the towers and any other fixtures). Such compensation shall be paid to the Manager and shall be distributed among the Participants in accordance with the foregoing formula. Following the transfer of the acquired equipment or the payment of compensation by IID as provided in this paragraph (b), or the elapse of the foregoing three (3) year period, IID shall have no further obligation under -33- this Agreement to any Participant with respect to any property, rights or interests acquired by IID pursuant to this Agreement, and as requested by IID the Participants shall pay the cost of restoring any real property disturbed by the construction of the Project to its condition prior to the commencement of such construction. (c) For purposes of this Section 3.08 the term "Participants" shall mean all Participants which are not in default under this Agreement on the date of delivery of the document referred to in paragraph (a)(i) above. Section 3.09. IID's Obligation Contingent. Notwithstanding any other provision of this Agreement, IID shall be obligated to proceed with the acquisition and construction of the Project if, but only if, the Participants provide all of the Shared Costs as required by this Article III. If the Participants fail to provide all of the Shared Costs as required by this Article III, IID may terminate the Projuect upon ninety (90) days' written notice to each Participant, unless the Participants shall cause any Shared Costs due and owing to be paid within the ninety (90) day period, and subject to the rights of the Participants to deliver the document referred to in Section 3.08(a)(i) prior to the end of the ninety (90) day period and thereupon exercise their rights under said Section. Section 3.10. Limit on Contributions. Notwithstanding any other provision of this Agreement, in no event shall any Participant be required to make any Project -34- Contribution after the cumulative total of Project Contributions made by or on behalf of that Participant equals PS(i) TB x ----- x 1.2 100% where TB is the Total Budget as of the date of this Agreement and PS(i) is the Project Share of that Participant. Section 3.11. Right To Audit. Each party to this Agreement shall maintain true and correct records of all expenses incurred, amounts charged, and other transactions in connection with this Agreement until the expiration of three (3) years after the Completion Date. Upon request, each party (the "audited party") shall permit any other party or its representative to audit any or all of such records in the audited party's possession or control for the purpose of determining the accuracy of any amount charged by the audited party or otherwise determining whether a party has complied with the terms of this Agreement. The cost of any such audit shall be borne by the party or parties requesting the same. Section 3.12. Payment of All Shared Costs. When all Shared Costs paid or to become payable by the Participants have been paid, IID shall promptly send a letter to the Manager so stating, signed by its General Manager. ARTICLE IV Cost Controls Section 4.01. Budget. Exhibit 4 contains a budget for the acquisition and construction of the Transmis- -35- sion Project. IID may modify such budget from time to time by giving notice to the Manager, provided that any increase in the Total Budget shall require the approval of the IID Board of Directors acting in public session if the amount of such increase, plus the aggregate of all budget increases since the date hereof or the last such approval, whichever is later, exceeds $100,000. Under no circumstances shall the cumulative total of the cash calls issued by IID pursuant to Section 3.02 exceed the Total Budget. Section 4.02. Relations with Contractors. IID shall actively enforce the provisions of the contracts into which it will enter with respect to the acquisition and construction of the Project so as to minimize the cost of the Project to the Participants. At the request of the Manager, IID will consult on matters concerning the administration and enforcement of any such contract. ARTICLE V Administration Section 5.01 Management Committee. (a) The implementation of this Agreement on behalf of the Participants shall be undertaken by a Management Committee. The Management Committee shall consist of one regular member representing each Participant. In addition, each Participant shall be entitled to designate one alternate member who shall be entitled to attend meetings of the Management Committee in the absence of its regular member. Notwith- -36- standing the foregoing, no Participant which is in default hereunder shall be entitled to be represented on the Management Committee. (b) The Management Committee shall hold regular meetings at such times and places as it may determine. Special meetings may be called at any time by the Manager at its own instance or at the request of a Participant. Whenever a Participant is acting as Manager, the member or alternate member representing such Participant shall serve as the chairman of the Management Committee. Whenever a person other than a Participant is acting as Manager, the chairman of the Management Committee shall be chosen by a vote of the Management Committee. Except as specifically provided herein, the Management Committee shall be free to determine its rules of procedure. (c) Each member or alternate member of the Management Committee shall have a vote commensurate with the Project Share of the Participant which he represents. Except as may otherwise be provided in this Agreement, all decisions of the Management Committee shall be by an affirmative vote of members (or alternate members) representing Participants whose aggregate Project Shares equal or exceed 66-2/3% of the aggregate Project Shares of the Participants entitled to be represented on the Management Committee. Section 5.02 Manager. The Participants shall designate one of their number or another person to act as Manager. The Manager shall serve at the pleasure of the -37- Management Committee, which shall have the power to remove the Manager at any time with or without cause; provided, however, that a Participant shall be automatically disqualified from serving as Manager if it is in default hereunder. Upon the removal, disqualification or resignation of the Manager, the Management Committee shall designate a successor. The initial Manager shall be Rosendo J. Pont. IID shall be entitled to consider such person (and any of its successors as Manager) to continue as the Manager until such time as the District receives a written notice designating a successor Manager and signed by Participants who represent in such notice that their aggregate Project Shares equal or exceed 66-2/3% of the aggregate Project Shares of the Participants entitled to be represented on the Management Committee. Section 5.03. Duties of Manager. The Manager shall be entitled to represent to IID the views of the Participants on any issue or other matter which may arise in connection with the funding or construction of the Project, including the decisions of the Management Committee, and to undertake such other duties as are stated in this Agreement or as may be specified by the Management Committee from time to time. Nothing in this Article V shall be construed as prohibiting the District and any Participant or Participants from consulting or holding discussions concerning any aspect of the funding or construction of the Project. -38- Section 5.04. Copies of Correspondence; Reports. IID shall send the Manager (a) copies of all notices, letters, and other communications directed by it to any Participant and pertaining to the Transmission Project; (b) copies of all notices, reports, letters and other communications received by it from, or transmitted by it to, any contractor or supplier and pertaining to the Transmission Project; (c) copies of all contracts, and all amendments and supplements thereto, entered into with any contractor or other person in connection with the Transmission Project; and (d) at the end of each month, a report showing the total amount of funds theretofore received in response to cash calls, uses of such funds, cash on hand, and interest income. ARTICLE VI Transmission Agreements Section 6.01. Agreement To Execute. (a) In consideration of the funds to be provided hereunder by the Participants, at any time on or after the date hereof IID shall upon the request of any Participant or its Associated Producer enter into (i) a Standard Form Transmission Agreement which gives such Participant or its Associated Producer the right to transmission service over IID's Transmission -39- System to Edison's Electric System in an aggregate amount equal to such Participant's Capacity Nomination, and (ii) Plant Connection Agreements which allow such Participant or its Associated Producer to connect each of its Qualifying Facilities listed in Exhibit 1 to IID's Transmission System. The amount of transmission service to which a Participant or its Associated Producer is entitled shall be reflected as the sum of the Maximum Transmission Service Entitlements (as defined in the Standard Form Transmission Agreement) entered in clause 4 of Exhibit II and any succeeding Exhibits to the Standard Form Transmission Agreement, and shall be subject to adjustment as provided therein. The amount of transmission service available to each Qualifying Facility associated with a Participant or its Associated Producer shall be as indicated in Exhibit 1, as the same may be amended from time to time, and shall be entered as the Maximum Transmission Service Entitlement in an appropriate Exhibit to the Standard Form Transmission Agreement. At the request of a Participant, Exhibit 1 shall be amended so as to add or delete Qualified Facilities, to add to or reduce the transmission capacity available to one or more Qualified Facilities, or to shift transmission capacity from one Qualified Facility to another; provided that all such Qualified Facilities shall be Qualified Facilities owned or operated by such Participant or one or more of its Associated Producers; and provided further that the total of the Maximum Transmission Service -40- Entitlements designated for such Qualified Facilities in Exhibit 1 shall not exceed the Participant's then current Capacity Nomination; and provided further that, unless IID agrees otherwise, no such amendment of Exhibit 1 shall result in an increase of the sum of IID's Reserved Capacity and the Maximum Transmission Service Entitlements of all Qualifying Facilities connected to the Highline substation to a level greater than one-half the Normal Transmission Capacity. At the request of a Participant, IID shall from time to time enter into such Standard Form Transmission Agreements and agree to such amendments or terminations thereof as are necessary to secure for such Participant and its Associated Producers the rights to transmission service indicated in Exhibit 1, as the same may be amended from time to time. (b) The effectiveness of each Standard Form Transmission Agreement shall be contingent upon the completion of the Project, and if the Original Capacity Nomination of any Participant is adjusted pursuant to Section 3.07, the Standard Form Transmission Agreement entered into by such Participant or its Associated Producer shall be amended to provide for an amount of transmission service (reflected as described above) equal to such Participant's Original Capacity Nomination as so adjusted. Section 6.02. Future Transmission Agreements. IID agrees that, prior to the end of the Credit Installment -41- Period, and so long as the Additional Capacity is greater than zero, it will not (a) grant any Participant or its Associated Producer a Transmission Service Entitlement under a Transmission Agreement if the sum obtained by adding such Transmission Service Entitlement to the Transmission Service Entitlements granted under any other Transmission Agreements in effect between such Participant or its Associated Producer and IID would be greater than such Participant's Capacity Nomination, as the same may be increased pursuant to Section 8.06; or (b) enter into a Transmission Agreement with any person other than a Participant or its Associated Producer unless such person has complied with the provisions of Article VIII and has specified a Capacity Nomination pursuant to Section 8.02 which is at least as large as the maximum amount of transmission service allowed under such Transmission Agreement; provided, however, that nothing in this Agreement shall prevent or restrict IID from entering into a Transmission Agreement with Colmac Energy Inc. providing for the transmission of up to 50 megawatts of electric power for delivery to Edison via the Coachella Valley substation and the Coachella Valley-Mirage transmission line; and provided, further, that the foregoing shall not -42- alter IID's obligations under the third sentence of Section 2.01. For purposes of this Section 6.02, the term "Transmission Agreement" shall include any agreement providing for a buy-sell transaction or other arrangement under which IID is to act functionally as a provider of transmission service over IID's Transmission System to Edison's Electric System, but shall not include (i) any agreement providing for the exchange of electric power between IID and another utility unless the power received by IID pursuant to the exchange is generated by a Qualifying Facility which is located in IID's service area and is constructed after the date of this Agreement or (ii) any agreement with another utility which provides for the transmission of electrical power to Edison's Electrical System during an emergency. Except as specifically provided herein, nothing herein shall alter or affect the rights and obligations under any Transmission Agreement or other agreement providing for the transmission of electric power over IID's Transmission System for delivery to Edison's Electric System entered into prior to the date of this Agreement. Section 6.03. Written Agreement Required. Prior to the end of the Credit Installment Period, and so long as the Additional Capacity is greater than zero, IID shall not transmit electric power over IID's Transmission System for delivery to Edison's Electric System for any person (other -43- than itself) except pursuant to a written agreement providing for such transmission. Section 6.04. Nondiscrimination. Each Transmission Agreement entered into with a Participant or its Associated Producer shall be substantially in the form of the Standard Form Transmission Agreement and shall be non-discriminatory among the Participants. Section 6.05. IID's Use of the Project. IID shall have the unrestricted right to use the Transmission Project for the transmission of electric power up to IID's Reserved Capacity, which shall be a transmission capacity equal to the greater of (i) six and two-thirds percent (6-2/3%) of the Normal Transmission Capacity or (ii) the difference between the Normal Transmission Capacity and the sum of the Capacity Nominations of all Participants; provided that in no event shall IID's Reserved Capacity be less than twenty-six (26) megawatts or greater than forty (40) megawatts. IID's Reserved Capacity may increase within the limits set forth in the foregoing sentence, but in no event shall IID's Reserve Capacity decrease from the level in existence at any given time. IID shall have the right to use the Project at all times for the transmission of electric power in excess of IID's Reserved Capacity, provided that such transmission does not conflict with the transmission of electric power for any Participant (including any Additional Participant) or its Associated Producer in accordance with -44- the terms of one or more Transmission Agreements entered into by such Participant or its Associated Producer. Section 6.06. Transmission Under Existing IID-Edison Agreement. To the extent that electric power produced by a Participant or its Associated Producer is being transmitted to Edison's Electric System pursuant to the IID-Edison Agreement, such Participant or its Associated Producer may elect to continue such transmission pursuant to the IID-Edison Agreement in lieu of transmission pursuant to a Transmission Agreement entered into by such Participant or its Associated Producer and IID pursuant to Section 6.01 or Section 8.08. A Participant or Associated Producer may make the foregoing election only with respect to the entire output of a particular Qualifying Facility, and each Participant agrees that neither it nor its Associated Producer will designate electric power from any such Qualifying Facility for transmission pursuant to the IID-Edison Agreement in an amount larger than the Maximum Transmission Service Entitlement for such Qualifying Facility, as shown in Exhibit 1. If a Participant or its Associated Producer makes an election pursuant to this Section 6.06, the right of such Participant or its Associated Producer to transmission service under a Transmission Agreement entered into pursuant to Section 6.01 or Section 8.08 shall, so long as such election remains in effect, be reduced by an amount equal to the Maximum Transmission Service Entitlement for -45- any Qualifying Facility with respect to which such election was made, as shown in Exhibit 1. Section 6.07. Existing Plant Connection Agreements. Upon the execution of a Plant Connection Agreement between a Participant or its Associated Producer and IID with respect to a particular Qualifying Facility, pursuant to Section 6.01 or Section 8.08, the parties shall terminate any existing plant connection agreement relating to such Qualifying Facility; provided, however, that a Participant or its Associated Producer which makes an election pursuant to Section 6.06 with respect to such Qualifying Facility may elect at its option to continue in effect the existing plant connection agreement for such Qualifying Facility, but IID may require such existing plant connection agreement to be amended so as to provide for the connection of such Qualifying Facility to the Transmission Project. ARTICLE VII Credits Against Transmission Service Charges Section 7.01. Amount of Credits. IID shall grant each Participant (including any Participants in default) Transmission Credits equal in dollar value to the sum of the following: (a) The total amount of the Project Contributions made by or on behalf of the Participant; and -46- (b) The construction period financing costs incurred by the Participant, computed from the date of each Project Contribution to the Completion Date. Such financing costs shall be calculated by applying the following interest rates: (1) If the Participant financed its Project Contributions by arrangement with a bank or other lender, its financing costs shall be calculated at the interest rate actually in effect from time to time under the terms of such financing arrangement with the bank or other lender. (2) If the Participant did not so finance its Project Contributions, its financing costs for each calendar quarter or portion thereof shall be calculated at a rate equal to 125% of the Prime Rate (or the maximum rate allowed by law, whichever is less) in effect on the first day of the quarter; and (c) Any fee paid by the Participant or its Affiliate to an investment banking or other firm for providing financial advisory services or arranging financing for such Participant's Project Contributions and any fee paid by the Participant or its Affiliate to obtain a letter of credit from -47- a bank or other financial institution in support of such Participant's obligation to make Project Contributions, provided that the amount of Transmission Credits granted to a Participant pursuant to this paragraph (c) shall not exceed the lesser of $250,000 or 3% of the limit on Project Contributions for that Participant determined pursuant to Section 3.10 as of the date hereof. Any fee paid by a Participant or its Affiliate to an investment banking or other firm for arranging financing for such Participant's Project Contributions as well as other financing required by such Participant or its Affiliate shall, for purposes of this paragraph (c), be allocated to such Participant's Project Contributions on a pro rata basis, in proportion to the relative magnitude of such Project Contributions and other financing. Following the Completion Date, each Participant shall present IID with such documentation as the District may reasonably require to support the amounts referred to in items (b) and (c) above, if applicable. IID shall promptly issue a letter to each such Participant confirming the amount of Transmission Credits available to such Participant. Section 7.02. Use of Credits. The Transmission Credits shall be applicable on a dollar-for-dollar basis -48- against any charges or fees imposed on a Participant or its Associated Producer under any Transmission Agreement entered into by such Participant or Associated Producer and IID. Each Participant shall inform IID of the persons, selected from among itself and its Associated Producers, which are to use the Transmission Credits issued to it. Such selections will be subject to change upon written notice to IID. If a Participant or its Associated Producer elects to continue transmission under the IID-Edison Agreement, as provided in Section 6.06, IID shall, at the request of such Participant or its Associated Producer, apply transmission credits held by such Participant or its Associated Producer so as to reduce IID's charges to Edison for the transmission of electric power on behalf of such Participant or its Associated Producer under the IID-Edison Agreement. Section 7.03. Schedule of Availability. The Transmission Credits received by each Participant shall be divided into ten (10) equal installments, and a single such installment shall become available for use during each successive Credit Installment Year. Any Transmission Credits which are available for use but are not used in a given Credit Installment Year may be carried forward and used in later Credit Installment Years, provided that any Transmission Credits not applied against charges or fees due and payable under a Transmission Agreement within fifteen (15) years after the beginning of the Credit Installment Period shall expire and be of no further force or effect. -49- Section 7.04. Assignability of Credits. During the Credit Installment Period the Transmission Credits shall not be assignable by any holder thereof except to (i) a Participant (including an Additional Participant) for application against amounts payable under a Transmission Agreement entered into by such Participant or its Associated Producer, (ii) a bank or other lender, as security for a loan or letter of credit provided by such person to finance or provide credit support for a Participant's Project Contributions, or (iii) an assignee of a Participant's interest in this Agreement as permitted by Section 9.04, in conjunction with the assignment of such interest, for application against amounts payable under a Transmission Agreement entered into or assumed by such assignee or its Associated Producer. Following the Credit Installment Period, the Transmission Credits shall be assignable to any person for application against any charges or fees payable to IID for the transmission of electric power to Edison's Electric System. No assignment of Transmission Credits shall change the Credit Installment Year in which they become available for use pursuant to Section 7.03. No assignment of Transmission Credits (except an assignment for security purposes) shall be effective unless and until the assignor gives IID a written notice thereof. The right to receive payments in exchange for Transmission Credits, as provided in Sections 8.02 and 8.03, may be assigned in conjunction with an assignment of Transmission Credits, and -50- the foregoing notice to IID shall indicate whether such right is being assigned. Section 7.05. Addition of Cost of Project to Rate Base. For purposes of determining the transmission service charges payable under the Transmission Agreements entered into by the Participants (as set forth in Exhibit I to the Standard Form Transmission Agreement), IID shall add the cost of the Transmission Project to its investment in plant as shown on its books ("Transmission Plant") as follows. IID shall on each January 1 prior to the fifteenth (15th) anniversary of the beginning of the Credit Installment Period add an amount to its Transmission Plant equal to the following: DC - IRC TPA = C(t) x -------- DC where TPA is the amount to be added to IID's Transmission Plant, C(t) is the total amount of Transmission Credits applied by the Participants or their Associated Producers or any permitted assignees thereof against transmission charges and fees due and payable in the preceding calendar year, DC is the Deemed Capacity, and IRC is IID's Reserved Capacity, which for purposes of this Section 7.05 only shall be deemed to be forty (40) megawatts. On the first January 1 on or after the fifteenth (15th) anniversary of the beginning of -51- the Credit Installment Period, IID shall add an amount to its Transmission Plan equal to the following: DC - IRC TPA = (P-C(p)) x -------- DC where TPA, DC, and IRC are defined as above, P is the Project Cost, and C(p) is the amount previously added to IID's Transmission Plant with respect to the application of Transmission Credits by the Participants or their Associated Producers or any permitted assignees thereof against transmission charges and fees. The amount to be added by IID to its Transmission Plant with respect to the acquisition and construction of the Project shall not exceed the Project Cost multiplied by DC - IRC , -------- DC where DC and IRC are defined as above. Section 7.06. Record of Transmission Credits. IID shall be responsible for keeping a record on its books of the amount of Transmission Credits used and remaining for use, as well as the dates of availability, for each holder of Transmission Credits. Such information shall be available on request to any holder or prospective holder of Transmission Credits. -52- ARTICLE VIII Additional Participants Section 8.01. Obligation To Become Additional Participant. Prior to the end of the Credit Installment Period, and so long as the Additional Capacity is greater than zero, any person which desires to enter into a Transmission Agreement shall become an Additional Participant by following the procedure set forth in this Article VIII. Section 8.02. Reallocation of Costs. To become an Additional Participant, such person shall specify a Capacity Nomination of no less than one (1) megawatt and shall bear a portion of the Project Cost equal to: M(r) CN(i) P(i) = P X ---- X ------------ M(t) CN(t) + CN(i) where P(i) is the portion of the Project Cost to be borne by the Additional Participant, P is the Project Cost, M(r) is the number of full calendar months remaining in the Credit Installment Period, M(t) is the total number of months in the Credit Installment Period, CN(i) is the Capacity Nomination of the Additional Participant, and CN(t) is the total of the Capacity Nominations of all existing Participants (including any other Additional Participants). The Additional Participant shall remit the foregoing sum to IID, which shall within thirty (30) days after receipt distribute such amount among the Participants (including any other -53- Additional Participants) in accordance with the following formula: C(i) D(i) = P(i) x ---- C(t) where D(i) is the amount to be distributed to a particular Participant, P(i) is the total amount to be distributed, C(i) is the total amount of unused Transmission Credits held by the Participant receiving such distribution immediately prior to the payment of the foregoing sum by the Additional Participant, and C(t) is the total amount of unused Transmission Credits held by all Participants immediately prior to the payment of the foregoing sum by the Additional Participant. All unused transmission credits usable by a Participant or its Associated Producers, regardless of when they first become available for use under Section 7.03, shall be deemed "held" by the Participant for purposes of this Section 8.02 and Section 8.05. Section 8.03. Transfer of Transmission Credits to Additional Participant. In return for the payment received from the Additional Participant as provided in Section 8.02, IID shall transfer unused Transmission Credits on its books from each of the existing Participants to the Additional Participant. The dollar value of Transmission Credits received by the Additional Participant shall be equal to the amount of its payment to IID pursuant to Section 8.02. The dollar value of unused Transmission Credits transferred from each existing Participant shall be equal to the payment received by such Participant pursuant to Section 8.02. -54- Transmission Credits shall be transferred from each existing Participant in the following order of priority: (a) Unused Transmission Credits which became available for use in prior Credit Installment Years or in the present Credit Installment Year shall first be transferred. (b) Transmission Credits which will become available for use in later Credit Installment Years shall then be transferred in equal dollar amounts for each such year. The Credit Installment Year in which any Transmission Credit shall become available for use shall not be affected by the transfer of such Transmission Credit to an Additional Participant pursuant to this Section 8.03. In the event that the dollar amount to be distributed to a Participant pursuant to Section 8.02 exceeds the dollar value of Transmission Credits held by such Participant, the excess shall not be distributed to such Participant and shall be refunded to the Additional Participant. Section 8.04. Risk Compensation. In order to compensate each of the Participants whose name appears in the list of Participants in Exhibit 1 at the time this Agreement is originally executed (the "Original Participants") for the substantial risk it incurred in funding the planning, engineering and construction of the Transmission Project, an Additional Participant shall pay IID additional sum equal to fifteen percent (15%) of the amount -55- paid by it pursuant to Section 8.02 (without regard to any amount refunded to the Additional Participant pursuant to Section 8.03). IID shall distribute such amount among the Original Participants as follows: PC(i) A(i) = A(t) x ----- PC(t) where A(i) is the amount to be distributed to each Original Participant, A(t) is the total amount to be distributed to all Original Participants pursuant to this Section 8.04, PC(i) is the total of the Project Contributions made by the Original Participant receiving the distribution as of the date of such distribution, and PC(t) is the total of the Project Contributions made by all Original Participants as of such date. Section 8.05. Special Rule in Case of Preemption. Notwithstanding anything to the contrary in Sections 8.02 through 8.04, the following rule shall apply to the extent that the Capacity Nomination specified by an Additional Participant preempts transmission capacity which was formerly held by another Participant by operation of Section 6.3 of the Standard Form Transmission Agreement or a provision of another form of Transmission Agreement similar in substance thereto. The Additional Participant shall remit to IID for distribution to the Participant whose capacity was so preempted (the "preempted Participant") an amount equal to the lesser of (a) the dollar value of the Transmission -56- Credits then held by the preempted Participant or (b) a dollar amount equal to: M(r) CP P X ---- X --------- M(t) NTC - IRC Where P, M(r) and M(t) are defined as in Section 8.02, CP is the amount of capacity so preempted from the preempted Participant, NTC is the Normal Transmission Capacity of the Project at the time in question, and IRC is IID's Reserved Capacity. In return for such payment, IID shall transfer unused Transmission Credits on its books from the preempted Participant to the Additional Participant in an amount equal to the dollar amount so paid by the Additional Participant. In lieu of the payment and distribution required by Section 8.04, if the preempted Participant is an Original Participant and the capacity so preempted is part of its Original Capacity Nomination, the Additional Participant shall in addition pay IID for distribution to the preempted Participant an amount equal to fifteen percent (15%) of the amount calculated pursuant to the formula set forth in clause (b) above. For purposes of the foregoing sentence, capacity shall be deemed to be preempted from an Original Participant in the following order of priority: first, capacity, if any, which is part of an Original Participant's increase in Capacity Nomination pursuant to Section 8.06, and second, capacity which is part of an Original Participant's Original Capacity Nomination. An example of the operation of the foregoing is set forth in Exhibit 5. -57- Section 8.06. Increases in Capacity Nominations. Any Participant which prior to the end of the Credit Installment Period wishes to increase its Capacity Nomination shall be treated as an Additional Participant as to such increase and shall follow all of the procedures set forth in this Article VIII (including without limitation the obligation to make the payments required by Section 8.02 and Section 8.04). For purposes of calculating the payments and Transmission Credit transfers required by this Article VIII, the increase in Capacity Nomination requested by such Participant shall be treated as its Capacity Nomination (CN(i) in Section 8.02) and its Capacity Nomination prior to the increase shall be treated as part of the Capacity Nominations of the existing Participants (CN(t) in Section 8.02). Section 8.07. Execution of Agreement. Each Additional Participant shall execute and become a party to this Agreement and, except as specifically provided herein, shall have the rights and duties of a Participant under every provision of this Agreement other than those provisions which by their terms apply only to the Original Participants. Section 8.08. Commitment of IID. IID agrees that the foregoing provisions represent a reasonable means of assuring that the Participants are fairly compensated for the costs and risks they incurred in connection with the construction of the Transmission Project. To protect the -58- Participants' rights to such compensation, IID agrees that, prior to the end of the Credit Installment Period, (a) it will not grant a Transmission Service Entitlement or enter into any Transmission Agreement except as provided in Section 6.02, and (b) so long as the Additional Capacity is greater than zero, it will (i) enter into a Transmission Agreement (and appropriate Plant Connection Agreement) with any person which desires to do so and (ii) allow any Participant upon request to increase its Capacity Nomination as provided by Section 8.06, provided that such person or Participant complies with the procedure set forth in this Article VIII (including the obligation to pay for such capital additions as IID may require pursuant to Section 8.11). Section 8.09. Additional Participants Prior to Completion Date. All of the provisions of this Article VIII shall apply to a person which desires to become an Additional Participant prior to the Completion Date, with the following modifications and adjustments: (a) For purposes of Section 8.02, the term "Project Cost" shall mean the total of the costs referred to in Section 7.01 incurred by the Participants on or before the date of such person's payment pursuant to Section 8.02, and the term "unused Transmission Credits" shall mean the -59- portion of the Project Cost, so defined, incurred by each Participant prior to the date of such payment. The fraction C(i)/C(t) in the second formula therein, shall be computed as of the date of such person's remittance to IID pursuant to Section 8.02. In computing the total amount of Project Contributions made by a Participant, there shall be a deduction for any amounts received by such Participant from payments made by an Additional Participant pursuant to Section 8.02, as modified by this paragraph (a). (b) The Project Shares of all Participants shall be recomputed as of the date of such person's remittance to IID pursuant to Section 8.02, the Capacity Nomination specificed by such person pursuant to Section 8.02 being deemed such person's Original Capacity Nomination for this purpose and for purposes of Section 3.07. (c) Such person shall respond to all cash calls from IID due after the date of such person's remittance to IID pursuant to Section 8.02, in accordance with the terms of this Agreement. The Manager shall issue appropriate adjusted individual cash calls with respect to any cash call issued by IID before, but due after, the date of such remittance. -60- (d) With respect to Section 8.03, such person shall be entitled to receive Transmission Credits, in accordance with the terms of this Agreement, in an amount equal to the amount of its remittance to IID pursuant to Section 8.02. The entitlements of the remaining Participants to Transmission Credits shall be reduced by the amount of the distribution received by each of them, respectively, pursuant to Section 8.02. (e) Such person shall make the payment required by Section 8.04, calculated as provided therein. (f) With respect to Section 8.07, such person shall be required in addition to execute and become a party to and satisfy the requirements of any other agreement among the Participants relating to the funding and construction of the Transmission Project. (g) Exhibit 1 shall be amended to reflect such person's Capacity Nomination, the name(s) of its Qualifying Facility(ies), its Maximum Transmission Service Entitlement(s) and its Project Share. Section 8.10. Study Group Costs of Additional Participants. Notwithstanding anything to the contrary in this Agreement, an Additional Participant shall be entitled to be reimbursed for costs incurred by it and its Affiliates -61- pursuant to Section 3.01(d) if, but only if, such Additional Participant executes this Agreement and makes the payments required by Sections 8.02 and 8.04 (as modified by Section 8.09) on or before December 31, 1987. The Manager shall bill IID for such costs as soon as practicable after the date on which such payments are made. Section 8.11. Capital Additions to Project. The parties understand and acknowledge that certain capital additions to the Project may be necessary to enable the Project to transmit power for an Additional Participant or its Associated Producer. The parties agree that, notwithstanding any other provision of this Agreement, IID may at its option require any Additional Participant to pay for any capital additions to the Project which are necessary to transmit the electric power to be generated by such Additional Participant or its Associated Producer. The obligation of such Additional Participant to pay for such capital additions shall not alter or affect in any way its obligation under this Article VIII or the other provisions of this Agreement, nor shall the Participants which are then parties to this Agreement be required to pay any portion of the cost of such capital additions as a consequence of the transmission of electric power within their Capacity Nominations. -62- ARTICLE IX General Section 9.01. Governing Law. This Agreement and the performance of the obligations created herein shall be governed by and construed and enforced in accordance with the laws of California, without reference to any rules or principles relating to conflicts of law. Section 9.02. Entire Agreement. This Agreement and the Exhibits and other attachments hereto set forth the entire Agreement and understanding of the Participants and IID in respect of the transactions contemplated hereby. This Agreement supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof, including without limitation that certain Memorandum of Understanding among IID and certain of the Participants dated August 1, 1986, as amended. No representation, promise, inducement or statement of intention has been made by IID to any Participant or by any Participant to IID on the subject matter hereof except as specifically stated herein, and neither IID nor any Participant shall be bound by or liable for any alleged representation, promise, inducement or statement of intention not so set forth. Section 9.03. Amendment; Waiver. This Agreement may be amended, modified, superseded or cancelled, and any of the terms, covenants, representations or conditions hereof may be waived, only by a written instrument executed by IID and each Participant not in default hereunder, or in -63- the case of a waiver, by or on behalf of the party waiving compliance; provided, however, that no such amendment or modification may adversely affect the rights of a defaulting Participant without its written consent unless the rights of all Participants are similarly affected. The failure of any party hereto at any time or times to require performance of any provisions hereof shall in no manner affect the right at a later time to enforce the same. No waiver by any party of any condition, or of any breach of any term, covenant, representation or warranty contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of any breach of any other term, covenant or representation. Section 9.04. Assignment. Except as herein provided, neither this Agreement nor any right, privilege, duty or obligation created herein may be assigned by any party to any other person, voluntarily or by operation of law, without the prior written consent of each of the other parties (excluding any Participants in default), which consent shall not be unreasonably withheld. Any attempted assignment by any party without such consent shall be void and of no force or effect. Notwithstanding the foregoing, without such consent (a) a Participant shall be entitled to assign its entire or a partial interest in this Agreement (i) to its Affiliate, (ii) to a person -64- with which such Participant has an agreement or relationship involving sharing in a Qualifying Facility or in the proceeds therefrom or in the resources supplying such facility or in the proceeds from the sale of such resources to a Qualifying Facility or to a purchaser of an interest in any of the foregoing or (iii) to a bank or other lender, as security for a loan or letter of credit provided by such person to finance or provide credit support for such Participant's Project Contributions; (b) Transmission Credits may be separately assigned as provided in Section 7.04 and Article VIII but in no other manner; and (c) the Participants as a group shall be entitled to assign any or all of their rights and obligations under this Agreement to any California public utility which is authorized by the California Public utilities Commission to fund the cost of constructing the Transmission Project, provided that no such assignment shall affect the rights of the Participants or their Associated Producers to enter into the Standard Form Transmission Agreement as provided in Article VI. Notwithstanding the foregoing, the right of a Participant or its Associated Producer to enter into a Transmission Agreement as provided in Article VI shall not be assignable -65- except (i) to a co-owner, operator or purchaser of the Qualifying Facility to which such right relates, and then only to the extent of the amount of transmission service to be provided for such Qualifying Facility, all as set forth in Exhibit 1, (ii) to an Affiliate of such Participant or (iii) to a bank or other lender, as security for a loan or letter of credit provided by such person to finance or provide credit support for such Participant's Project Contributions, it being the intention of the Participants that the assignment of such right not be used as a means of circumventing the obligation of nonparties to become Additional Participants as a condition of receiving the benefits of Transmission Agreements. No assignment permitted under this Section 9.04 shall operate to relieve the assignor of any duty or obligation under this Agreement, unless the assignor is released therefrom by every other party hereto, and unless the assignee shall expressly and in writing assume all such duties and obligations of the assignor. Subject to the foregoing restrictions on assignment, all of the terms, covenants, representations and conditions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by, each of the parties and their respective successors, permitted assigns and legal representatives. Section 9.05. Intent Concerning Regulation. It is the Participants' understanding, and IID confirms and represents, that IID and IID's Transmission System are free -66- from public utility rate regulation, either under the California Public Utilities Code or the Federal Power Act. If any regulatory authority hereafter asserts that any Participant is a public utility and is subject to regulation by reason of its participation in the construction and funding of the Transmission Project as provided herein, the parties will meet to consider how to proceed so that such Participant may be shown not to be a public utility, while still preserving, to the extent possible, the economic effect of the proposed transactions for all Participants and IID. Notwithstanding anything to the contrary herein, no Participant shall be obligated to continue its performance under this Agreement if any regulatory agency has issued a final order or other instrument alleging or declaring that such Participant is a public utility on account of its involvement in the funding, construction or use of the Transmission Project. Section 9.06. Term. This Agreement shall be effective when executed by the Original Participants and IID and shall continue in effect until such time as all duties and all obligations of the parties hereunder have been satisfied or discharged. Section 9.07. Notices. All notices, requests, demands and communications required or permitted to be given hereunder shall be given in writing and delivered personally, or mailed first-class mail, postage prepaid, or transmitted by telecopier, to the addresses of the parties -67- and the Manager as shown in Exhibit 7. Any party or the Manager may change the address to which such communications are to be directed to it by giving written notice to each of the other parties and the Manager in the manner provided above. Section 9.08. No Partnership, etc. Nothing in this Agreement shall be construed as creating a partnership, association, agency, trust or other entity among the parties hereto or any of them. In entering into and performing this Agreement, the parties are acting solely as independent contractors. The obligations of the parties under this Agreement shall be several and not joint or joint and several. Section 9.09. No Third Party Beneficiaries. Except as specifically provided in Section 8.08(b) with respect to a person who desires to enter into a Transmission Agreement, this Agreement is solely for the benefit of the parties and their successors and permitted assigns and shall not be construed to create any rights or privileges in any other person or entity (including without limitation any person not a party hereto who entered into a Transmission Agreement prior to the date hereof). Section 9.10. Headings; Counterparts. The article and section headings contained in this Agreement are for convenient reference only, and shall not in any way affect the meaning or interpretation of this Agreement. This Agreement may be executed in two or more counterparts, -68- each of which shall be deemed an original, but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. IMPERIAL IRRIGATION DISTRICT By /s/ Illegible ----------------------------------- CHEVRON GEOTHERMAL DESERT POWER COMPANY COMPANY OF CALIFORNIA By /s/ Illegible By /s/ Illegible ------------------------------------ ----------------------------------- GEO EAST MESA NO. 2, INC. EARTH ENERGY, INC. By /s/ Illegible By /s/ Illegible ------------------------------------ ----------------------------------- HEBER GEOTHERMAL COMPANY GEO EAST MESA NO. 3, INC. By /s/ Illegible By /s/ Illegible ------------------------------------ ----------------------------------- ORMESA GEOTHERMAL MAGMA POWER COMPANY By /s/ Illegible By /s/ Illegible ------------------------------------ ----------------------------------- -69- ORMESA GEOTHERMAL II UNION OIL COMPANY OF CALIFORNIA By /s/ Illegible By /s/ Illegible ----------------------------------- ----------------------------------- VULCAN/BN GEOTHERMAL POWER COMPANY By ----------------------------------- -70- EXHIBIT 1 Maximum Transmission Original Service Capacity Project Participant QF Entitlement Nomination Share ----------- -- ----------- ---------- ----- Chevron Geothermal HGC Power 15.8 MW 15.8 MW 4.225% Company of California Plant Desert Power Company Salton Sea No. 3 50.0 MW 50.0 MW 13.369% Earth Energy, Inc. Salton Sea No. 1 26.0 MW 26.0 MW 6.952% and No. 2 GEO East GEO East 27.5 MW 27.5 MW 7.353% Mesa No. 2, Inc. Mesa No. 2 GEO East GEO East 27.5 MW 27.5 MW 7.353% Mesa No. 3, Inc. Mesa No. 3 Heber Geothermal Company HGC Power Plant 23.5 MW 23.5 MW 6.283% Magma Power Company Del Ranch Power Plant 38.0 MW J. J. Elmore 38.0 MW Power Plant J. M. Leathers 38.0 MW 114.0 MW 30.481% Power Plant Ormesa Geothermal Ormesa 24.0 MW Ormesa IE 6.0 MW 30.0 MW 8.021% Ormesa Geothermal II Ormesa II 18.0 MW 18.0 MW 4.813% Page 1 of 2Maximum Transmission Original Service Capacity Project Participant QF Entitlement Nomination Share ----------- -- ----------- ---------- ----- Union Oil Company of HGC Power Plant 7.7 MW 7.7 MW 2.059% California Vulcan/BN Geothermal Vulcan Plant 34.0 MW 34.0 MW 9.091% Power Company -------- -------- 374.0 MW 100.0% Page 2 of 2EXHIBIT 2 --------- TRANSMISSION SERVICE FOR THE POWER PLANT UNIT NO. -------------------- ------------------------- EII-1. DESCRIPTION: EII-2. APPLICABILITY: Applicable to the transmission service to be provided by IID to Producer for transmitting the electrical output from the______________________________________________________________ Point of Receipt to the Point(s) of Delivery. EII-3. PLANT CONNECTION AGREEMENT: The__________________________ Plant Connection Agreement to be executed between IID and Producer. EII-4. MAXIMUM TRANSMISSION SERVICE ENTITLEMENT: __ MW. TRANSMISSION SERVICE ENTITLEMENT: __ MW, as specified in accordance with Sections 6.2 and 6.3. EII-5. POINT OF RECEIPT: EII-6. POINT(S) OF DELIVERY: EII-7. TERM: The term of the Transmission Service Entitlement for the _________________________________________________________________ shall be effective from the Date of Initial Service and shall terminate on__________________________________________________ [*] EII-8. TRANSMISSION SERVICE CHARGE: $ per kilowatt-month, or as revised in accordance with Section 8.2, times Transmission Service Entitlement. EII-9. SCHEDULING FEE: $________________________________________ per month or as revised in accordance with Section 8.3. EII-10. TRANSMISSION LOSSES: ____% or as revised in accordance with Section 7. [* Insert expiration date of applicable power sales contract between Producer and Edison.] 1EXHIBIT 3 Description of Project Scope The project includes upgrading the Mirage-Coachella Valey link, constructing a new 230-kV line from IID's Coachella Valey substation to the (new) Highline substation, constructing said substation and a new substation (Midway) in the Niland area, and constructing 92-kV transmission lines from the Midway substation to the Salton Sea KGRA and from the Highline substation to the Heber KGRA. The major project scope components are as follows: 1. Existing Facilities Upgrade One new circuit added on existing structures between the Mirage and Coachella Valey substations, using bundled 1033 MCM ACSR conductor. Length: 20 miles Breakers and appurtances as necessary, including relays and controls, for looping additional 230-kV circuits in and out of the Mirage and Coachella Valey substations. 2. Coachella Valley-Midway Transmission Line A double circuit transmission line using steel lattice towers and steel poles from the Coachella Valley substation to the Midway substation, capable of carrying two bundled circuits of 1033 MCM ACSR but carrying only one bundled and one unbundled circuit. Length: Approximately 53 miles 3. 92-kV Transmission Line Extensions (a) Two (2) double circuit 92-kV transmission lines, using 795 MCM all-aluminum conductor on wooden poles, from the intersection of English and Simpson Roads to the Midway substation. Length: Approximately 5-1/2 miles (b) One single circuit 92-kV transmission line using 795 MCM all-aluminum conductor on wooden pooles capable of eventually carrying two (2) circuits, from the Highline substation to a location to be determined by IID near the intersection of Pitzer and Correll roads. Page 1 of 3 Length: Approximately 17 miles 4. Midway Substation 230-kV/92-kV electrical substation utilizing two (2) three-phase transformers with a top rating of 225 MVA and two (2) 92-kV bays per each transformer. Substation is to be located at the approximate northwest intersection of Simpson Road and the East Highline Canal. 5. Midway-Highline Transmission Line A transmission line using steel poles from the Midway substation paralleling approximately the west bank of the East Highline Canal south to the Highline substation, capable of carrying two (2) circuists of single 1033 MCM ACSR conductor, but carrying only one such circuit. Length: Approximately 30 miles 6. Highline Substation 230 kV/92-kV electrical substation capable of accommodating two (2) three-phase transformers with a top rating of 225 MVA and two (2) 92-kV bays per each transformer. Only one such transformer and two (2) 92-kV bays are included in the Transmission Project. SUMMARY OF PROPOSED TRANSMISSION LINE FACILITIES Facility Description -------- ----------- Structure: Lattice steel towers and multi-sided hollow tubular steel poles. See Figures 3.1 and 3.2 for typical configurations and dimensions. Strength requirements shall be in accordance with General Order 95 of the Public Utilities Commission of the State of California ("G.O. 95"). Footings: Concrete piles cast in place. Strength requirements shall be in accordance with G.O. 95. Conductors: Bundled or unbundled, 1033 MCM, Aluminum Conductor, Steel Reinforced (ACSR) cable. Strength requirements shall be in accordance with G.O. 95. Page 2 of 3Groundwire: One groundwire, approximately 0.5 inch in diameter, attached to the top of tower or pole. Insulator/Hardware Assemblies: Vertical ("V" or "I") configuration of 15 to 18 porcelain insulators per phase for tangent towers. Two strings in parallel of 17 to 20 insulators each per phase for dead-end towers. Access Roads: Existing roads will be utilized and improved only if necessary. Approximately 15 miles of new bladed roads will be needed where line crosses undeveloped areas. Substations: Two new and one existing substations are involved. Each new substation uses 225 MVA 230-kV/92-kV transformer banks with 230-kV and 92-kV switchyards. Each switchrack includes wide flange steel structures for line, bus and transformer dead-ends, a suspension bus system with mid-span taps for line and transformer connections, circuit breakers and air disconnets for line and equipment switching, fault protection and isolation during maintenance and necessary coupling capacitors, wave traps and potential devices for metering and control. Each substation will have a relay/control house equippedd for remote operation. Page 3 of 3EXHIBIT 4 Project Budget Item Budgeted Amount ---- --------------- Right of Way Acquisition $ 1,417,000 Right of Way Purchase Cost 4,500,000 Land clearing and facility relocation 1,900,000 Environmental Mitigation 543,000 1,250,000 Modifications to Edison Mirage substation Engineering and Construction Item 1 of Project Description $ 3,395,000 Item 2 of Project Description 14,578,000 Item 3a of Project Description 1,203,000 Item 3b of Project Description 1,870,000 Item 4 of Project Description 9,163,000 Item 5 of Project Description 5,516,000 Item 6 of Project Description 4,545,000 ----------- Subtotal $40,271,000 40,271,000 Insurance Charges 500,000 IID Administrative Costs 250,000 Participants' Costs 1,000,000 Manager fees and expenses 100,000 ----------- Subtotal $51,731,000 Contingency allowance (5%) 2,586,000 Total Budget $54,317,000 Page 1 of 1EXHIBIT 5 Example of Operation of Section 8.05 Assumptions: 1. The Transmission Project has a Normal Transmission Capacity of 140 MW. 2. There are three Participants with the following Capacity Nominations and Transmission Service Entitlements (under their Transmission Agreements). Capacity Transmission Participant Nomination Service Entitlement ---------- ---------- ------------------- A 30 MW 30 MW B 30 MW 20 MW C 30 MW 20 MW 3. Since the sum of the Capacity Nominations of the Participants is 90 MW, under the formula of Section 6.05 IID's Reserved Capacity is 40 MW. 4. The Project Cost was $50 million. The Credit Installment Period is 10 years (120 months) of which 5 years (60 months) remain. 5. D desires to become an Additional Participant and to connect to the Midway substation with a Capacity Nomination of 20 MW.Calculation: There remain 10 MW of capacity in the Project over and above the Capacity Nominations of the Participants (total of 90 MW) and IID's Reserved Capacity (40 MW). As to this capacity no preemption is required and, under the first formula in Section 8.02, $2.5M is collectede by IID and distributed among A, B and C: $50M x 60 months x 10 MW = $2.5 M ---------- ------------- 120 months 90 MW + 10 MW The distribution to A, B and C takes place in accordance with the second formula in Section 8.02. In addition, under Section 8.04 an amount equal to 15%T of $2.5M ($375,000) is collected from D by IID and, assuming A, B and C are all Original Participants, is split equally among them. Page 1 of 2As for the remaining 10 MW desired by D, this capacity cannot be obtained without preempting a portion of the Capacity Nominations of B and C. (A is protected from preemption because its Transmission Service Entitlement (under its Transmission Agreement) covers its entire Capacity Nomination.) Assume that after following the procedure set forth in Section 6.3 of the Standard Form Transmission Agreement, IID preempts 5 MW of capacity from B and 5 MW of capacity from CD, for use by D. Under Section 8.05, $1.25M is distributed to B and C each, assuming that each of them has $1.25M in Transmission Credits left. This is obtained as follows: $50M x 60 months x 5 MW = $1.25 M ---------- -------------- 120 months 140 MW - 40 MW In addition, B and C each receive an amount equal to 15% of $1.25M, or $187,500. In summary, as a result of this cost reallocation A, B and C have received the following amounts:A B C $833,333,33* $ 833,333.33* $ 833,333.33* 125,000.00 125,000.00 125,000.00 1,250,000.00 1,250,000.00 187,500.00 187,500.00 ----------- ------------- ------------- $958,333.33 $2,395,833.33 $2,395,833.33 for a total of $5,750,000; and they have transferred to D $5,000,000 in Transmission Credits. -------------------- * This assumes that the amount of unused Transmission Credits held by each Participant (C(i) in the second formula of Section 8.02) is the same and equals or exceeds $833,333.33. Page 2 of 2EXHIBIT 6 PLANT CONNECTION AGREEMENT FOR THE ---------------------------- BETWEEN IMPERIAL IRRIGATION DISTRICT AND ---------------------------- TABLE OF CONTENTS ----------------- SECTION TITLE PAGE ------- ----- ---- 1 PARTIES ............................................................. 1 2 RECITALS ............................................................ 1 3 AGREEMENT ........................................................... 2 4 DEFINITIONS ......................................................... 2 5 EFFECTIVE DATE AND TERM ............................................. 3 6 CONNECTION OF PLANT ................................................. 3 7 ELECTRIC SERVICE TO PRODUCER ........................................ 3 8 METERING OF ENERGY DELIVERIES ....................................... 4 9 PRODUCER'S DELIVERY AND IID ACCEPTANCE OF ENERGY FROM PLANT ......... 4 10 PRODUCER'S GENERAL OBLIGATIONS ...................................... 4 11 IID'S GENERAL OBLIGATIONS ........................................... 5 12 BILLING ............................................................. 6 13 AUTHORIZED REPRESENTATIVES .......................................... 7 14 METERS .............................................................. 7 15 CONTINUITY OF SERVICE ............................................... 9 16 LIABILITY ........................................................... 9 17 UNCONTROLLABLE FORCES ............................................... 11 18 INTEGRATION AND AMENDMENTS .......................................... 12 19 NON-WAIVER .......................................................... 12 20 NO DEDICATION OF FACILITIES ......................................... 12 21 SUCCESSORS AND ASSIGNS .............................................. 13 22 EFFECT OF SECTION HEADINGS .......................................... 13 23 GOVERNING LAW ....................................................... 13 24 ARBITRATION ......................................................... 13 i 25 ENTIRE AGREEMENT .................................................... 15 26 NOTICES ............................................................. 15 27 SEVERAL OBLIGATIONS ................................................. 15 28 SIGNATURE CLAUSE .................................................... 17 ATTACHMENTS ----------- EXHIBIT "A" ......................................................... 18 EXHIBIT "B" ......................................................... 22 ii1. PARTIES The parties to this Agreement are IMPERIAL IRRIGATION DISTRICT ("IID"), organized under the Water Code of the State of California and ____ ("Producer"), hereinafter referred to individually as "Party", and collectively as "Parties". 2. RECITALS 2.1 Producer intends to construct and operate, as owner or lessee, a ______________ generating facility with a maximum________ megawatt net operating capacity at the__________________________________________ and to sell the Plant electrical output to Southern California Edison Company ("SCE"). 2.2 SCE has entered into the Power Purchase Agreement dated ___________________, ("Purchase Agreement") with Producer, to purchase all the electrical output from the Plant. 2.3 SCE and Producer agree that the terms and conditions regarding transmission of the Plant's Energy to an IID/SCE point of interconnection shall be pursuant to a Transmission Service Agreement to be entered into between IID and Producer. 2.4 Since the Plant will be built in the IID service territory, it will be convenient to connect the Plant to the IID electric system. Producer hereby grants the IID the right to enter the Plant site for any reasonable purposes connected with this Agreement, by previous arrangements with the Plant manager. Those reasonable purposes include maintenance and repairs to IID equipment in Producer's facilities, observing tests of said facilities, reading of kilowatt-hour meters, and the like. 2.5 Producer desires to purchase and IID desires to sell the electrical energy necessary to satisfy the operation and maintenance power consumption requirements of the Plant for the life of the Plant that is not normally generated by the Plant itself, or portable generating equipment. -1- 2.6 The Parties desire, by means of this Agreement, to interconnect the Plant to the IID electrical system and to establish the terms, conditions and obligations of the Parties relating to such interconnection. 3. AGREEMENT The Parties agree as follows: 4. DEFINITIONS 4.1 Agreement: This Plant Connection Agreement between IID and Producer, and all Exhibits hereto, as may be amended from time to time. 4.2 Authorized Representative: The representative of a Party designated in accordance with Section 13. 4.3 Energy: Electric energy in excess of Producer's electric energy requirements, expressed in kilowatt-hours, generated by the Plant and measured and delivered to the Point of Delivery. 4.4 Funding and Construction Agreement: An agreement entered into by IID and others dated ____, 1987, providing for the funding and construction of the Heber-Mirage Transmission Project, to which a form of this Agreement is attached as Exhibit 6. 4.5 Operation Date: The day on which the Plant Energy is first accepted by IID for delivery to SCE. 4.6 Plant: A maximum of____________________________MW net operating capacity facility operated by Producer, as owner or lessee, including all associated equipment and improvements necessary for generating electric energy and transmitting it to the high voltage side of the power transformer. 4.7 Point of Delivery: The point on the high voltage side of Producer's switchyard where IID's metering equipment measures the delivery of Energy to the IID system as shown on Exhibit "B". -2- 4.8 System Emergency: A condition on IID's system which is likely to result in imminent significant disruption of service to customers or is imminently likely to endanger life or property. 5. EFFECTIVE DATE AND TERM This Agreement shall become effective upon the Operation Date of the Plant, and shall remain in effect until the earlier of (i) __*__ or (ii) thirty six (36) months from the date the Plant has ceased to operate at the option of IID. It is understood that (i) if the Completion Date, as the term Completion Date is defined in Article I of Funding and Construction Agreement does not occur, or (ii) if the Operation Date does not occur within five (5) years after the date this Agreement was executed, this Agreement shall be of no force or effect. 6. CONNECTION OF PLANT 6.1 Producer may electrically connect its Plant, in accordance with the provisions of this Agreement, so that it can operate in parallel with the IID electric system. Parallel operation will not commence until IID has inspected and approved the interconnection facilities and operational procedures. 6.2 Notwithstanding the provision that Producer has furnished the high voltage switchyard complete, including the high voltage oil circuit breakers and disconnect switches, the control of the high voltage oil circuit breakers and disconnect switches shall be under the control of the IID dispatcher. 7. ELECTRIC SERVICE TO PRODUCER IID shall provide electric service to Producer pursuant to Section 12. (* Insert expiration date of applicable power sales agreement between Producer and SCE.) -3- 8. METERING OF ENERGY DELIVERIES Metering for electric service to Producer and for energy deliveries by Producer to IID for delivery to SCE shall be at the Point of Delivery as shown on Exhibit "B". Four meters shall be installed which shall measure and record flows in each direction as shown on Exhibit "B". 9. PRODUCER'S DELIVERY AND IID ACCEPTANCE OF ENERGY FROM PLANT Whenever electric output from the Plant exceeds Producer's power requirements, Producer shall deliver all such excess output to IID for delivery to SCE and IID shall accept such output for delivery to SCE and deliver such output to SCE pursuant to a transmission service agreement to be entered into between Producer and IID. 10. PRODUCER'S GENERAL OBLIGATIONS Producer shall: 10.1 Operate the Plant in a manner consistent with applicable electric utility industry standards, good engineering practice, and without degradation of quality or reliability of service to IID customers. 10.2 Deliver the Plant's net electrical output to IID for the account of SCE at the Point of Delivery. 10.3 Each Party shall provide the reactive kilovolt-ampere (KVA) requirements of its own system so that there will be no interchange of reactive KVA between systems. The Parties shall cooperate to control the flow of reactive KVA to prevent the introduction of objectionable operating conditions on the system of either Party. 10.4 Coordinate, to the greatest extent practicable, major overhaul and inspection outages of the Plant with IID. 10.5 Give IID a written schedule on or before June 1, and December 1, each year of the estimated amounts and rates of delivery of energy to be deli- -4- vered to IID for the account of SCE at the Point of Delivery during each month of the succeeding twelve-month (12) period commencing July 1, and January 1. 10.6 Give IID a written schedule on or before the fifteenth (15th) day of each month of the estimated amounts and rates of delivery of energy to be delivered to IID for the account of SCE at the Point of Delivery during each day of the succeeding calendar month. 10.7 Give IID a schedule on or before 12:01 p.m. on Tuesday of each seven-day (7) period of the estimated amounts and rates of delivery of energy to be delivered to IID for the account of SCE at the Point of Delivery during each hour of the succeeding seven-day (7) period commencing at 12:01 a.m. on the following Monday; provided, however, that if any changes in the hourly deliveries so scheduled become necessary, Producer shall notify IID of such changes as far in advance as possible. 10.8 Provide IID any reasonable rights-of-way and access required for testing and reading of meters by previous arrangement with the Plant manager. 10.9 Carry out the directions of the Authorized Representatives with respect to the matters set forth in this Agreement. 11. IID'S GENERAL OBLIGATIONS IID shall: 11.1 Design, acquire, construct, operate and maintain, or cause to be designed, acquired, constructed, operated and maintained, and shall own, a connecting transmission line between IID's transmission system and the Plant. Following the completion of such line, IID may bill and Producer shall pay IID's costs of designing, acquiring and constructing such line. Producer shall have the right to audit IID's records and accounts to verify the cost of such line. 11.2 Accept the Plant's net electrical output for the account of SCE at the Point of Delivery and simultaneously deliver an equal amount of electric -5- energy (less applicable transmission losses) to the SCE system at IID/SCE point(s) of interconnection. 11.3 Coordinate, to the greatest extent practicable, major overhaul and inspection outages of IID transmission facilities with Producer and notify Producer of any changes as far in advance as possible. 11.4 Carry out the directions of the Authorized Representative with respect to the matters set forth in this Agreement. 11.5 Operate its system in a manner consistent with applicable utility industry standards and good engineering practices. 12. BILLING 12.1 IID shall read the meters monthly according to its regular meter reading schedule beginning no more than thirty (30) days after the date that electric energy is first supplied to Producer. IID monthly shall send Producer within ten (10) working days after the meter is read a bill for electric service. Producer shall pay IID the total amount billed within thirty (30) days of receipt of the bill. 12.2 IID shall bill Producer for Producer's consumption of energy from IID's resources in accordance with Rate Schedule GL or Rate Schedule A-2, as applicable, as it may be revised from time to time. Copies of current Rate Schedule GL and current Rate Schedule A-2 are attached as Exhibit "A". 12.3 If Producer disputes a bill, payment shall be made as if no dispute existed pending resolution of the dispute by the Authorized Representatives. If the bill is determined to be in error, the disputed amount shall be refunded by IID including interest at the rate of one and one-half percent (1-1/2%) per month, compounded monthly, from the date of payment to the date the refund check or adjusted bill is mailed. -6- 13. AUTHORIZED REPRESENTATIVES 13.1 Within thirty (30) days after the date this Agreement is signed, each Party shall designate, by written notice to the other Party, an Authorized Representative who is authorized to act in its behalf in the implementation of this Agreement and with respect to those matters contained herein which are the functions and responsibilities for the Authorized Representatives. Either Party may, at any time, change the designation of its Authorized Representative by written notice to the other Party. 13.2 IID's Authorized Representative shall develop detailed written procedures necessary and convenient to administer this Agreement within six (6) months after the date signed. Such procedures shall be submitted to Producer's Authorized Representative for review, comment, discussion and concurrence before they are put into effect. Such procedures shall include, without limitation: (i) communication between Producer and IID's electric system dispatcher with regard to daily operating matters, (ii) billing and payments, (iii) specified equipment tests, and (iv) operating matters which affect or may affect quality and reliability of service to electric customers and continuity of deliveries to SCE. 13.3 The Authorized Representative shall have no authority to modify any of the provisions of this Agreement. 14. METERS 14.1 All meters shall be sealed and the seal shall be broken only upon occasions when the meters are to be inspected, tested or adjusted. 14.2 IID shall inspect and test all meters upon their installation and at least once every year thereafter. If requested to do so by Producer, IID shall inspect or test a meter more frequently than every year, but the expense of such inspection or test shall be paid by Producer unless the meter is found -7- to register inaccurately by more than two percent (2%) from the measurement made by a standard meter. Each Party shall give reasonable notice to the other Party of the time when any inspection or test shall take place and that Party may have representatives present at the test or inspection. If a meter is found to be inaccurate or defective, it shall be adjusted, repaired or replaced in order to provide accurate metering. All adjustments due to inaccurate meters shall be limited to the preceding six (6) months. 14.3 If a meter fails to register, or if the measurement made by a meter during a test varies by more than two percent (2%) from the measurement made by the standard meter used in the test, adjustment shall be made correcting all measurements made by the inaccurate meter for: (i) the actual period during which inaccurate measurements were made, if the period can be determined, or if not, (ii) the period immediately preceding the test of the meter equal to one-half (1/2) the time from the date of the last previous test of the meter; provided, however, that the period covered by the correction shall not exceed six (6) months. 14.4 Producer shall telemeter information to IID's Dispatch Center regarding the kilowatts, kilowatt-hours, kilovars and kilovar-hours delivered to or received from IID at the Point of Delivery over phone line leased by Producer. IID shall purchase, own, and shall design, install, operate, maintain, or cause to be designed, installed, operated, and maintained, equipment to automatically transmit from the Plant to IID's Dispatch Center continuous values of Plant output expressed as megawatts, megavars and megawatt-hours. IID may thereupon bill and Producer shall promptly pay IID's cost of design, purchase -8- and installation of said equipment. Producer shall have the right to audit IID's records and accounts to verify the cost of said equipment. 15. CONTINUITY OF SERVICE IID shall not be obligated to accept and IID may require Producer to temporarily curtail, interrupt or reduce deliveries of energy upon advance notice to Producer, when such curtailment, interruption or reduction is required in order for IID to construct, install, maintain, repair, replace, remove, investigate or inspect any of its equipment or any part of its system or if IID determines that such curtailment, interruption or reduction is necessary because of a System Emergency, forced outages or abnormal operating conditions on its system. IID shall use reasonable efforts to keep interruptions and curtailments to a minimum time. 16. LIABILITY 16.1 Except for any loss, damage, claim, costs, charge or expense resulting from Willful Action, neither Party (the "released Party"), its directors or other governing body, officers or employees shall be liable to the other Party for any loss, damage, claim, cost, charge, or expense of any kind or nature incurred by the other Party (including direct, indirect or consequential loss, damage, claim, cost, charge or expense; and whether or not resulting from the negligence of a Party, its directors or other governing body, officers, employees or any person or entity whose negligence would be imputed to a Party) from engineering, repair, supervision, inspection, testing, protection, operation, maintenance, replacement, reconstruction, use or ownership of the released Party's electrical system, Plant(s) or associated facilities in connection with the implementation of this Agreement. Except for any loss, damage, claim, cost, charge or expense resulting from Willful -9- Action, each Party releases the other Party, its directors or other governing body, officers and employees from any such liability. 16.2 For the purpose of this Section 16, Willful Action shall be defined as action taken or not taken by a Party at the direction of its directors or other governing body, officers or employees having management or administrative responsibility affecting its performance under this Agreement, as follows: 16.2.1 Action which is knowingly or intentionally taken or not taken with conscious indifference to the consequences thereof or with intent that injury or damage would result or would probably result therefrom. 16.2.2 Action which has been determined by final arbitration award or final judgment or judicial decree to be a material default under this Agreement and which occurs or continues beyond the time specified in such arbitration award or judgment or judicial decree for curing such default or, if no time to cure is specified therein, occurs or continues thereafter beyond a reasonable time to cure such default. 16.2.3 Action which is knowingly or intentionally taken or not taken with the knowledge that such action taken or not taken is a material default under this Agreement. 16.3 Willful Action does not include any act or failure to act which is merely involuntary, accidental or negligent. 16.4 The phrase "employees having management or administrative responsibility," as used in Section 16.2, means the employees of a Party who are responsible for one or more of the executive functions of planning, organizing, coordinating, directing, controlling and supervising such Party's performance under this Agreement with responsibility for results. -10- 16.5 Subject to the foregoing provisions of this Section 16, each Party agrees to defend, indemnify and save harmless the other Party, its officers, agents, or employees against all losses, claims, demands, costs or expenses for loss of or damage to property, or injury or death of persons, which directly or indirectly arise out of the indemnifying Party's performance pursuant to this Agreement; provided, however, that a Party shall be solely responsible for any such losses, claims, demands, costs or expenses which result from its sole negligence or Willful Action. 17. UNCONTROLLABLE FORCES Neither Party shall be considered to be in default in the performance of any of its obligations under this Agreement when a failure of performance shall be due to an uncontrollable force. The term "uncontrollable force" shall mean any cause beyond the control of the Party affected including, but not restricted to, failure of or threat of failure of facilities which have been maintained in accordance with generally-accepted engineering and operating practices in the electrical utility industry, flood, drought, earthquake, tornado, storm fire, pestilence, lightning and other natural catastrophes, epidemic, war, riot, civil disturbance or disobedience, strike, labor dispute, labor or material shortage, sabotage, government priorities and restraint by court order or public authority (whether valid or invalid) and actions or nonaction by or inability to obtain or keep the necessary authorizations or approvals from any governmental agency or authority, which by exercise of due diligence such Party could not reasonably have been expected to avoid and which by exercise of due diligence it has been unable to overcome. Nothing contained herein shall be construed as to require a Party to settle any strike or labor dispute in which it may be involved. Either Party rendered unable to fulfill any of its obligations under this Agreement by reason -11- of an uncontrollable force shall give prompt written notice of such fact to the other Party and shall exercise due diligence to remove such inability with all reasonable dispatch. 18. INTEGRATION AND AMENDMENTS This Agreement constitutes the entire agreement between the Parties relating to the interconnection of Producer's Plant to IID's electric system, the acceptance of energy by IID from Producer and the providing of electric service by IID. No oral agreement or prior written agreement between the Parties shall be of any effect whatsoever; provided, however, that any arrangements agreed upon by the Authorized Representatives within the limits of their authority, and consistent with this Agreement shall be binding upon the Parties. All changes to this Agreement shall be in writing and shall be signed by an officer of each Party. 19. NON-WAIVER None of the provisions of this Agreement shall be considered waived by either Party except when such waiver is given in writing. The failure of either Party to insist in any one or more instances upon strict performance of any of the provisions of this Agreement or to take advantage of any of its rights hereunder shall not be construed as a waiver of any such provisions or the relinquishment of any such rights for the future; but the same shall continue and remain in full force and effect. 20. NO DEDICATION OF FACILITIES Any undertaking by one Party to the other Party under any provision of this Agreement shall not constitute the dedication of the system or any portion thereof by the Party to the public or to the other Party, and it is understood and agreed that any such undertaking under any provision of this Agreement by a Party shall cease upon the termination of its obligations hereunder. -12- 21. SUCCESSORS AND ASSIGNS 21.1 This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Parties. 21.2 This Agreement may be assigned by Producer only (i) to a purchaser or co-owner of the Plant or to a person who will operate the Plant pursuant to a contract or other arrangement with such purchaser and in either case with the prior written consent of IID (which shall not be unreasonably withheld) or (ii) for security purposes, to a bank or other entity which provides financing for the Plant or any electrical transmission facilities associated therewith. Producer and IID agree that nothing in this Section 21.2 may be amended, modified or waived without the prior written consent of each and every Party to the Funding and Construction Agreement (except for any Parties in default thereunder.) 22. EFFECT OF SECTION HEADINGS Section headings appearing in this Agreement are inserted for convenience only, and shall not be construed as interpretations of text. 23. GOVERNING LAW This Agreement shall be interpreted, governed and construed under the laws of the State of California or the laws of the United States, as applicable. 24. ARBITRATION 24.1 Any dispute arising out of or relating to this Agreement, or the breach thereof, which is not resolved by the Parties acting through their Authorized Representatives shall be settled by arbitration to the extent permitted by the laws applicable to the Parties; provided, however, that no Party to the dispute shall be bound to any greater extent than any other Party to the dispute. Arbitration shall not apply to any dispute or matter that is within the jurisdiction of any regulatory agency. -13- 24.2 Any demand for arbitration shall be made by written notice to the other Party setting forth in adequate detail the nature of the dispute, the issues to be arbitrated, the amount or amounts, if any, involved in the dispute, and the remedy sought. Within twenty (20) days from the receipt of such notice, the other Party may submit its own written statement of the dispute and may set forth in adequate detail any additional related matters or issues to be arbitrated. 24.3 Within thirty (30) days after delivery of the written notice demanding arbitration, the Parties acting through their Authorized Representatives shall meet for the purpose of selecting an arbitrator. The Parties may agree upon a single arbitrator, but in the event that they cannot agree, three arbitrators shall be used. Each Party shall designate one arbitrator, and the two arbitrators shall then select a third arbitrator. All arbitrators shall be persons skilled and experienced in the field in which the dispute has arisen and no person shall be eligible for appointment as an arbitrator who is or has been an officer or employee of either of the Parties or otherwise interested in the matter to be arbitrated. Should either party refuse or neglect to appoint an arbitrator or to furnish the arbitrators with any papers or information demanded, the arbitrators are empowered, by both Parties, to proceed without the participation or assistance of that Party. 24.4 Except as otherwise provided in this Section, the arbitration shall be governed by the rules and practices of the American Arbitration Association, or a similar organization if the American Arbitration Association should not at the time exist. 24.5 Arbitration proceedings shall be held in Imperial, California, at a time and place to be selected by the arbitrators. The arbitrators shall hear evidence submitted by the Parties and may call for additional information -14- which shall be furnished by the Party having such information. The arbitrators shall have no authority to call for information not related to the issues included in the dispute or to determine other issues not in dispute. 24.6 If there is only one arbitrator, his decision shall be binding and conclusive on the Parties. If there are three arbitrators, the decision of any two shall be binding and conclusive. The decision of the arbitrators shall contain findings regarding the issues involved in the dispute, including the merits of the positions of the Parties, the materiality of any default, and the remedy or relief to which a Party shall be entitled. The arbitrators may not grant any remedy or relief which is inconsistent with this Agreement, nor shall the arbitrators make findings or decide issues not in dispute. 24.7 The fees and expenses of the arbitrators shall be shared equally by the Parties, unless the decision of the arbitrators specifies some other apportionment. All other expenses and costs of the arbitration shall be borne by the Party incurring such expenses and costs. 24.8 Any decision or award granted by the arbitrators shall be final and judgement may be entered on it in any court of competent jurisdiction. This agreement to arbitrate shall be specifically enforceable. 25. ENTIRE AGREEMENT 25.1 The complete agreement of the Parties is set forth in this Agreement and all communications regarding subject interconnected operations whether oral or written, are hereby abrogated and withdrawn. -15- 26. NOTICES Any formal communication or notice in connection with this Agreement shall be in writing and shall be deemed properly given if delivered in person or sent first class mail, postage prepaid to the person specified below: ----------------------------- ----------------------------- ----------------------------- IMPERIAL IRRIGATION DISTRICT c/o General Manager P. O. Box 937 Imperial, California 92251 27. SEVERAL OBLIGATIONS Except where specifically stated in this Agreement to be otherwise, the duties, obligations and liabilities of the Parties are intended to be several and not joint or collective. Nothing contained in this Agreement shall ever be construed to create an association, trust, partnership, or joint venture, or impose a trust or partnership duty, obligation or liability on or with regard to either Party. Each Party shall be individually and severally liable for its own obligations under this Agreement. -16- 28. SIGNATURE CLAUSE The Parties have caused this Agreement to be executed in their respective names, in duplicate, by their respective officers hereunto this ________ day of _______________________________, 1987. ----------------------------- By -------------------------------------- ATTEST: By ----------------------------- Secretary IMPERIAL IRRIGATION DISTRICT By -------------------------------------- President, Board of Directors ATTEST: By ----------------------------- Secretary -17- EXHIBIT "A" IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 166 Imperial, California Cancelling Sheet No. 139 SCHEDULE A-2 GENERAL WHOLESALE POWER SERVICE APPLICABILITY Applicable to general wholesale power service for industrial, commercial and agricultural purposes, subject to special conditions hereinafter stated. Applicable to standby or breakdown service where the entire electric power requirements on the customer's premises are not regularly supplied by the District. MONTHLY RATE The monthly rate shall be the sum of A, B, C and D. A. Demand Charge .............................$2.52 per kilowatt of Billing Demand B. Energy Charge ...............................5.60(cents) per kwh. C. Energy Cost Adjustment - The amount computed in accordance with Schedule ECA. D. Power Factor Adjustment - A charge of $0.25 per kilovar of reactive demand as measured by the incoming kilovar demand meter for each kilovar in excess of .60 times the kilowatt demand measured and supplied by the District. MINIMUM CHARGE The minimum charge shall be the demand charge, but in no case shall the minimum charge be less than the demand charge (A) multiplied by 75% of the highest maximum demand established in the preceding 11 months. SPECIAL CONDITIONS (a) Voltage: This schedule applies to service rendered at a transmission voltage of 34.5-kV or above. It shall be the responsibility of the customer to furnish transformation to any other voltages required. (b) Billing Demand: The billing demand shall be the kilowatts of measured maximum demand but in no case less than 75 percent of the highest maximum demand established in the preceding 11 months. The measured maximum demand in any month will be the average kilowatt delivery indicated or recorded by the District's demand meter in the 15-minute interval in which such delivery is greater than any other 15-minute interval. In case the load is intermittent or subject to violent fluctuations, the District may base the demand upon a 5-minute interval instead of a 15-minute interval. -18- Board Resolution Date; Effective July 3, 1984 August 1, 1984 SCHEDULE A-2 (Continued) GENERAL WHOLESALE POWER SERVICE (c) A minimum connected load of 5000 kw shall be required. (d) Parallel Operation: A customer may operate its generating plant in parallel with the District's system if such customer installs and operates such control and protective equipment as required by the District. (e) Metering: The District will provide the normal metering equipment for the size and type of load served. Additional metering which may be required by the District shall be furnished by the customer and tested in accordance with requirements of the District. Meters shall not allow reverse registration. (f) Regulations Governing Sale of Electric Energy: Service under this rate schedule is subject to the District's Regulations Governing the Sale of Electric Energy. -19- Board Resolution Date Effective July 3, 1984 August,1,1984IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 167 Imperial, California Cancelling Sheet No. 139 EXHIBIT "A" IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 152 Imperial, California Cancelling Sheet No. 137 SCHEDULE GL LARGE GENERAL SERVICE APPLICABILITY Applicable to general service having a demand of 100 kilowatts or higher. Not applicable for standby, supplemental or resale service. MONTHLY RATE The monthly rate shall be the sum of A, B and C. A. Demand Charge ...................$2.65 per kilowatt of Billing Demand B. Energy Charge ...................5.90(cents) per kwh C. Energy Cost Adjustment - The amount computed in accordance with Schedule ECA. SPECIAL CONDITIONS (a) Voltage: Service under this schedule normally will be supplied at standard voltage available at the location. Where 240-volt three-phase power is to be combined with single-phase, and 4-wire service is available, service will be supplied through one meter. In 240-volt areas, where, as determined by District, it is not practical to provide a 4-wire service, such single-phase and three-phase service will be supplied and metered separately, the meter readings, both kwh and demands, being combined for the purpose of computing charges on this schedule. Where service is taken at 480-volts or higher, a three-phase service at one voltage only will be supplied. (b) Billing Demand: The billing demand shall be the higher of (i) the highest 15-minute integrated or thermal kilowatt demand measured during the billing period, or (ii) 50% of highest demand measured during the five summer months (May-September) of the 12 months ending with the current month, or (iii) 20% of the highest measured demand during the seven winter months (October-April) of the 12 months ending with the current month, or (iv) the demand specified in a contract, or (v) 50 kilowatts. When the monthly demand exceeds 100 KW in any billing month, billing will be under Rate Schedule GL, and thereafter continue under Rate Schedule GL until monthly demands have been less than 100 KW for a period of twelve consecutive months. -20- Board Resolution Date Effective January 18, 1983 February 1, 1983 SCHEDULE GL (Continued) (c) Seasonal Loads: When any customer disconnects service and resumes service within 12 months from date of last disconnection, the customer will be required to pay all charges which would have been billed if the customer had not been disconnected. (d) Wind Machines: Wind machines for frost protection may be served under this schedule provided the load will be limited to existing unused capacity of lines and substations as determined by the District. Provisions (ii), (iii) and (v) of (b) shall not apply to wind machines. (e) Vacuum Cooling Loads: Portable vacuum cooling loads will be served on existing facilities where adequate capacity is available provided the customer pays any up-and-down cost necessary to provide service and deposits a nonrefundable amount equal to the minimum charge for the succeeding 12-month period. One twelfth of such deposit will be applied or prorated to any monthly billing during the 12-month period. (f) Regulations Governing Sale of Electric Energy: Service under this rate schedule is subject to the District's Regulations Governing the Sale of Electric Energy. -21- Board Resolution Date Effective January 18, 1983 February 1, 1983IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 153 Imperial, California Cancelling Sheet No. 138 EXHIBIT "B" [METERING ONE-LINE DIAGRAM] -22- EXHIBIT 7 Addresses of Parties Imperial Irrigation District: Operating Headquarters P.O. Box 937 Imperial, California 92251 Telecopier: (619) 339-9423 Chevron Geothermal Company of California: P.O. Box 7147 San Francisco, California 94120-7147 Telecopier: (415) 894-8930 Desert Power Company: 1201 West 5th Street P.O. Box 7600 Los Angeles, California 90051 Telecopier: (213) 977-6402 Earth Energy, Inc.: 1201 West 5th Street P.O. Box 7600 Los Angeles, California 90051 Telecopier: (213) 977-6402 GEO East Mesa No. 2, Inc.: 1825 South Grant Street Suite 900 San Mateo, California 94403 Telecopier: (415) 349-4801 GEO East Mesa No. 3, Inc.: 1825 South Grant Street Suite 900 San Mateo, California 94403 Telecopier: (415) 349-4801 Page 1 of 2 Heber Geothermal Company: P.O. Box 2857 El Centro, California 92244 Telecopier: (619) 353-8852 Magma Power Company: 11770 Bernardo Plaza Court Suite 366 San Diego, California 92128 Telecopier: (619) 487-9416 Ormesa Geothermal: 500 Dermody Way Sparks, Nevada 89431 Telecopier: (702) 356-9125 Ormesa Geothermal II: 500 Dermody Way Sparks, Nevada 89431 Telecopier: (702) 356-9125 Union Oil Company of California: 1201 West 5th Street P.O. Box 7600 Los Angeles, California 90051 Telecopier: (213) 977-6402 Vulcan/BN Geothermal Power Company: 11770 Bernardo Plaza Court Suite 366 San Diego, California 92128 Telecopier: (619) 487-9416 Manager: Mr. Rosendo J. Pont c/o Centennial Energy, Inc. 650 California Street 32nd Floor San Francisco, CA 94108 Telecopier: (415) 982-7374 Page 2 of 2
Exhibit 10.3.30 89A.1 GE00C3 03-02-89 EXECUTION COPY PLANT CONNECTION AGREEMENT FOR THE GEO EAST MESA LIMITED PARTNERSHIP UNIT NO. 3 BETWEEN IMPERIAL IRRIGATION DISTRICT AND GEO EAST MESA LIMITED PARTNERSHIP EXECUTION COPY 03-02-89 TABLE OF CONTENTS ----------------- SECTION TITLE PAGE ------- ----- ---- 1 PARTIES ........................................................................1 2 RECITALS........................................................................1 3 AGREEMENT.......................................................................2 4 DEFINITIONS.....................................................................2 5 EFFECTIVE DATE AND TERM.........................................................3 6 CONNECTION OF PLANT.............................................................3 7 ELECTRIC SERVICE TO PRODUCER....................................................3 8 METERING OF ENERGY DELIVERIES...................................................3 9 PRODUCER'S DELIVERY AND IID ACCEPTANCE OF ENERGY FROM PLANT...........................................................3 10 PRODUCER'S GENERAL OBLIGATIONS..................................................4 11 IID'S GENERAL OBLIGATIONS ......................................................5 12 BILLING.........................................................................6 13 AUTHORIZED REPRESENTATIVES......................................................6 14 METERS..........................................................................7 15 CONTINUITY OF SERVICE...........................................................8 16 LIABILITY.......................................................................9 17 UNCONTROLLABLE FORCES..........................................................10 18 INTEGRATION AND AMENDMENTS.....................................................11 19 NON-WAIVER.....................................................................11 20 NO DEDICATION OF FACILITIES ...................................................12 i 21 SUCCESSORS AND ASSIGNS.........................................................12 22 EFFECT OF SECTION HEADINGS.....................................................12 23 GOVERNING LAW..................................................................13 24 ARBITRATION....................................................................13 25 ENTIRE AGREEMENT...............................................................15 26 NOTICES........................................................................15 27 SEVERAL OBLIGATIONS............................................................15 28 SIGNATURE CLAUSE...............................................................16 ATTACHMENTS ----------- EXHIBIT "A" - RATE SCHEDULES GL AND A2.............................................17 EXHIBIT "B" - METERING ONE-LINE DIAGRAM............................................21 EXHIBIT "C" - FUNDING AND CONSTRUCTION AGREEMENT HEBER-MIRAGE TRANSMISSION PROJECT.................................................22 ii1. PARTIES The parties to this Agreement are IMPERIAL IRRIGATION DISTRICT ("IID"), organized under the Water Code of the State of California and GEO EAST MESA LIMITED PARTNERSHIP ("Producer"), hereinafter referred to individually as "Party", and collectively as "Parties". 2. RECITALS 2.1 Producer intends to construct and operate, as owner or lessee, a megawatt generating facility with a maximum 27.5 megawatt net operating capacity at the East Mesa (KGRA), Imperial County, California, and to sell the Plant electrical output to Southern California Edison Company ("SCE"). 2.2 SCE has entered into the Power Purchase Agreement dated May 20, 1988, ("Purchase Agreement") with Producer, to purchase all the electrical output from the Plant. 2.3 SCE and Producer agree that the terms and conditions regarding transmission of the Plant's Energy to an IID/SCE point of interconnection shall be pursuant to a Transmission Service Agreement to be entered into between IID and Producer. 2.4 Since the Plant will be built In the IID service territory, it will be convenient to connect the Plant to the IID electric system. Producer hereby grants the IID the right to enter the Plant site for any reasonable purposes connected with this Agreement, by previous arrangements with the Plant manager. Those reasonable purposes include maintenance and repairs to IID equipment in Producer's facilities, observing tests of said facilities, reading of kilowatt-hour meters, and the like. 2.5 Producer desires to purchase and IID desires to sell the electrical energy necessary to satisfy the operation and maintenance power consumption requirements of the Plant for the life of the Plant that is not normally generated by the Plant itself, or portable generating equipment. 2.6 The Parties desire, by means of this Agreement, to Interconnect the Plant to the IID electrical system and to establish the terms, conditions and obligations of the Parties relating to such Interconnection. 3. AGREEMENT The Parties agree as follows: 4. DEFINITIONS 4.1 Agreement: This Plant Connection Agreement between IID and Producer, and all Exhibits hereto, as may be amended from time to time. 4.2 Authorized Representative: The representative of a Party designated in accordance with Section 13. 4.3 Energy: Electric energy in excess of Producer's electric energy requirements, expressed in kilowatt-hours, generated by the Plant and measured and delivered to the Point of Delivery. 2 4.4 Funding and Construction Agreement: An agreement entered into by IID and others dated June 29, 1987, providing for the funding and construction of the Heber-Mirage Transmission Project, to which a form of this Agreement is attached as Exhibit C. 4.5 Operation Date: The day on which the Plant Energy is first accepted by IID for delivery to SCE. 4.6 Plant: A maximum of 27.5 MW net operating capacity Geothermal facility operated by Producer, as owner or lessee, including all associated equipment and improvements necessary for generating electric energy and transmitting it to the high voltage side of the power transformer. 4.7 Point of Delivery: The point on the high voltage side of Producer's switchyard where IID's metering equipment measures the delivery of Energy to the IID system as shown on Exhibit "5". 4.8 System Emergency: A condition on IID's system which is likely to result in imminent significant disruption of service to customers or is imminently likely to endanger life or property. 5. EFFECTIVE DATE AND TERM ----------------------- This Agreement shall become effective upon the Operation Date of the Plant, and shall remain in effect until the earlier of (i) April 15, 2015, or (ii) thirty six (36) months from the date the Plant has ceased to operate at the option of IID. It is understood that (i) if the Completion Date, as the term Completion Date is defined in Article I of Funding and Construction Agreement does not occur, or (ii) if the Operation Date does 3 not occur within five (5) years after the date this Agreement was executed, this Agreement shall be of no force or effect. 6. CONNECTION OF PLANT ------------------- 6.1 Producer may electrically connect its Plant, in accordance with the provisions of this Agreement, so that it can operate in parallel with the IID electric system. Parallel operation will not commence until IID has inspected and approved the interconnection facilities and operational procedures. 6.2 Notwithstanding the provision that Producer has furnished the high voltage switchyard complete, including the high voltage oil circuit breakers and disconnect switches, the control of the high voltage oil circuit breakers and disconnect switches shall be under the control of the IID dispatcher. 7. ELECTRIC SERVICE TO PRODUCER ---------------------------- IID shall provide electric service to Producer pursuant to Section 12. 8. METERING OF ENERGY DELIVERIES ----------------------------- Metering for electric service to Producer and for energy deliveries by Producer to IID for delivery to SCE shall be at the Point of Delivery as shown on Exhibit "B." Four meters shall be installed which shall measure and record flows in each direction as shown on Exhibit "B." 9. PRODUCER'S DELIVERY AND IID ACCEPTANCE OF ENERGY FROM PLANT ----------------------------------------------------------- Whenever electric output from the Plant exceeds Producer's power requirements, Producer shall deliver all such excess output to IID for delivery to SCE and 4 IID shall accept such output for delivery to SCE and deliver such output to SCE pursuant to a transmission service agreement to be entered into between Producer and IID. 10. PRODUCER'S GENERAL OBLIGATIONS ------------------------------ Producer shall: 10.1 Operate the Plant in a manner consistent with applicable electric utility industry standards, good engineering practice, and without degradation of quality or reliability of service to IID customers. 10.2 Deliver the Plant's net electrical output to IID for the account of SCE at the Point of Delivery. 10.3 Each Party shall provide the reactive kilovolt-ampere (KVA) requirements of its own system so that there will be no interchange of reactive KVA between systems. The Parties shall cooperate to control the flow of reactive KVA to prevent the introduction of objectionable operating conditions on the system of either Party. 10.4 Coordinate, to the greatest extent practicable, major overhaul and inspection outages of the Plant with IID. 10.5 Give IID a written schedule on or before June 1, and December 1, each year of the estimated amounts and rates of delivery of energy to be delivered to IID for the account of SCE at the Point of Delivery during each month of the succeeding twelve-month (12) period commencing July 1, and January 1. 5 10.6 Give IID a written schedule on or before the fifteenth (15th) day of each month of the estimated amounts and rates of delivery of energy to be delivered to IID for the account of SCE at the Point of Delivery during each day of the succeeding calendar month. 10.7 Give IID a schedule on or before 12:01 p.m. on Tuesday of each seven-day (7) period of the estimated amounts and rates of delivery of energy to be delivered to IID for the account of SCE at the Point of Delivery during each hour of the succeeding seven-day (7) period commencing at 12:01 a.m. on the following Monday; provided, however, that if any changes In the hourly deliveries so scheduled become necessary, Producer shall notify IID of such changes as far in advance as possible. 10.8 Provide IID any reasonable rights-of-way and access required for testing and reading of meters by previous arrangement with the Plant manager. 10.9 Carry out the directions of the Authorized Representatives with respect to the matters set forth in this Agreement. 11. IID'S GENERAL OBLIGATIONS ------------------------- IID shall: 11.1 Design, acquire, construct, operate and maintain, or cause to be designed, acquired, constructed, operated and maintained, and shall own, a connecting transmission line between IID's transmission system and the Plant. Following the completion of such line, IID may bill and Producer shall pay IID's costs of designing, 6 acquiring and constructing such line. Producer shall have the right to audit IID's records and accounts to verify the cost of such line. 11.2 Accept the Plant's net electrical output for the account of SCE at the Point of Delivery and simultaneously deliver an equal amount of electric energy (less applicable transmission losses) to the SCE system at IID/SCE point(s) of interconnection. 11.3 Coordinate, to the greatest extent practicable, major overhaul and inspection outages of IID transmission facilities with Producer and notify Producer of any changes as far in advance as possible. 11.4 Carry out the directions of the Authorized Representative with respect to the matters set forth in this Agreement. 11.5 Operate its system in a manner consistent with applicable utility industry standards and good engineering practices. 12. BILLING ------- 12.1 IID shall read the meters monthly according to its regular meter reading schedule beginning no more than thirty (30) days after the date that electric energy is first supplied to Producer. IID monthly shall send Producer within ten (10) working days after the meter is read a bill for electric service. Producer shall pay IID the total amount billed within thirty (30) days of receipt of the bill. 12.2 IID shall bill Producer for Producer's consumption of energy from IID's resources in accordance with Rate Schedule GL or Rate Schedule A-2, as applicable, as it 7 may be revised from time to time. Copies of current Rate Schedule GL and current Rate Schedule A-2 are attached as Exhibit "A." 12.3 If Producer disputes a bill, payment shall be made as if no dispute existed pending resolution of the dispute by the Authorized Representatives. If the bill is determined to be in error, the disputed amount shall be refunded by IID including interest at the rate of one and one-half percent (l 1/2%) per month, compounded monthly, from the date of payment to the date the refund check or adjusted bill is mailed. 13. AUTHORIZED REPRESENTATIVES -------------------------- 13.1 Within thirty (30) days after the date this Agreement is signed, each Party shall designate, by written notice to the other Party, an Authorized Representative who is authorized to act in its behalf in the implementation of this Agreement and with respect to those matters contained herein which are the functions and responsibilities for the Authorized Representatives. Either Party may, at any time, change the designation of its Authorized Representative by written notice to the other Party. 13.2 IID's Authorized Representative shall develop detailed written procedures necessary and convenient to administer this Agreement within six (6) months after the date signed. Such procedures shall be submitted to Producer's Authorized Representative for review, comment, discussion and concurrence before they are put into effect. Such procedures shall include, without limitation: (i) communication between Producer and IID's electric system dispatcher with regard to daily operating matters, (ii) billing and payments, (iii) specified equipment tests, and (iv) operating matters which 8 affect or may affect quality and reliability of service to electric customers and continuity of deliveries to SCE. 13.3 The Authorized Representative shall have no authority to modify any of the provisions of this Agreement. 14. METERS ------ 14.1 All meters shall be sealed and the seal shall be broken only upon occasions when the meters are to be inspected, tested or adjusted. 14.2 IID shall inspect and test all meters upon their installation and at least once every year thereafter. If requested to do so by Producer, IID shall inspect or test a meter more frequently than every year, but the expense of such inspection or test shall be paid by Producer unless the meter is found to register inaccurately by more than two percent (2%) from the measurement made by a standard meter. Each Party shall give reasonable notice to the other Party of the time when any inspection or test shall take place and that Party may have representatives present at the test or inspection. If a meter is found to be inaccurate or defective, it shall be adjusted, repaired or replaced in order to provide accurate metering. All adjustments due to accurate meters shall be limited to the preceding six (6) months. 14.3 If a meter fails to register, or if the measurement made by a meter during a test varies by more than two percent (2%) from the measurement made by the standard meter used in the test, adjustment shall be made correcting all measurements made by the inaccurate meter for: 9 (i) the actual period during which inaccurate measurements were made, if the period can be determined, or if not, (ii) the period immediately preceding the test of the meter equal to one-half (1/2) the time from the date of the last previous test of the meter; provided, however, that the period covered by the correction shall not exceed six (6) months. 14.4 Producer shall telemeter information to IID's Dispatch Center regarding the kilowatts, kilowatt-hours, kilovars and kilovar-hours delivered to or received from IID at the Point of Delivery over phone line leased by Producer. IID shall purchase, own, and shall design, install, operate, maintain, or cause to be designed, installed, operated, and maintained, equipment to automatically transmit from the Plant to IID's Dispatch Center continuous values of Plant output expressed as megawatts, megavars and megawatt-hours. IID may thereupon bill and Producer shall promptly pay IID's cost of design, purchase and installation of said equipment. Producer shall have the right to audit IID's records and accounts to verify the cost of said equipment. 15. CONTINUITY OF SERVICE --------------------- IID shall not be obligated to accept and IID may require Producer to temporarily curtail, interrupt or reduce deliveries of energy upon advance notice to Producer, when such curtailment, interruption or reduction is required in order for IID to construct, install, maintain, repair, replace, remove, investigate or inspect any of its equipment or any part of its 10 system or if IID determines that such curtailment, interruption or reduction is necessary because of a System Emergency, forced outages or abnormal operating conditions on its system. IID shall use reasonable efforts to keep interruptions and curtailments to a minimum time. 16. LIABILITY --------- 16.1 Except for any loss, damage, claim, costs, charge or expense resulting from Willful Action, neither Party (the "released Party"), its directors or other governing body, officers or employees shall be liable to the other Party for any loss, damage, claim, cost, charge, or expense of any kind or nature incurred by the other Party (including direct, indirect or consequential loss, damage, claim, cost, charge or expense; and whether or not resulting from the negligence of a Party, its directors or other governing body, officers, employees or any person or entity whose negligence would be imputed to a Party) from engineering, repair, supervision, inspection, testing, protection, operation, maintenance, replacement, reconstruction, use or ownership of the released Party's electrical system, Plant(s) or associated facilities in connection with the implementation of this Agreement. Except for any loss, damage, claim, cost, charge or expense resulting from Willful Action, each Party releases the other Party, its directors or other governing body, officers and employees from any such liability. 16.2 For the purpose of this Section 16, Willful Action shall be defined as action taken or not taken by a Party at the direction of its directors or other governing 11 body, officers or employees having management or administrative responsibility affecting its performance under this Agreement, as follows: 16.2.1 Action which is knowingly or intentionally taken or not taken with conscious indifference to the consequences thereof or with intent that injury or damage would result or would probably result therefrom. 16.2.2 Action which has been determined by final arbitration award or final judgment or judicial decree to be a material default under this Agreement and which occurs or continues beyond the time specified in such arbitration award or judgment or judicial decree for curing such default or, if no time to cure is specified therein, occurs or continues thereafter beyond a reasonable time to cure such default. 16.2.3 Action which is knowingly or intentionally taken or not taken with the knowledge that such action taken or not taken is a material default under this Agreement. 16.3 Willful Action does not include any act or failure to act which is merely involuntary, accidental or negligent. 16.4 The phrase "employees having management or administrative responsibility," as used in Section 16.2, means the employees of a Party who are responsible for one on more of the executive functions of planning, organizing, coordinating, directing, controlling and supervising such Party's performance under this Agreement with responsibility for results. 16.5 Subject to the foregoing provisions of this Section 16, each Party agrees to defend, indemnify and save harmless the other Party, its officers, agents, or employees 12 against all losses, claims, demands, costs or expenses for loss of or damage to property, or injury or death of persons, which directly or indirectly arise out of the indemnifying Party's performance pursuant to this Agreement; provided, however, that a Party shall be solely responsible for any such losses, claims, demands, costs or expenses which result from its sole negligence or Willful Action. 17. UNCONTROLLABLE FORCES --------------------- Neither Party shall be considered to be in default in the performance of any of its obligations under this Agreement when a failure of performance shall be due to an uncontrollable force. The term "uncontrollable force" shall mean any cause beyond the control of the Party affected including, but not restricted to, failure of or threat of failure of facilities which have been maintained in accordance with generally-accepted engineering and operating practices in the electrical utility industry, flood, drought, earthquake, tornado, storm fire, pestilence, lightning and other natural catastrophes, epidemic, war, riot, civil disturbance or disobedience, strike, labor dispute, labor or material shortage, sabotage, government priorities and restraint by court order or public authority (whether valid or invalid) and actions or nonaction by or inability to obtain or keep the necessary authorizations or approvals from-any governmental agency or authority, which by exercise of due diligence such Party could not reasonably have been expected to avoid and which by exercise of due diligence it has been unable to overcome. Nothing contained herein shall be construed as to require a Party to settle any strike or labor dispute in which it may be involved. Either Party rendered unable to fulfill any of 13 its obligations under this Agreement by reason of an uncontrollable force shall give prompt written notice of such fact to the other Party and shall exercise due diligence to remove such inability with all reasonable dispatch. 18. INTEGRATION AND AMENDMENTS -------------------------- This Agreement constitutes the entire agreement between the Parties relating to the interconnection of Producer's Plant to IID's electric system, the acceptance of energy by IID from Producer and the providing of electric service by IID. No oral agreement or prior written agreement between the Parties shall be of any effect whatsoever; provided, however, that any arrangements agreed upon by the Authorized Representatives within the limits of their authority, and consistent with this Agreement shall be binding upon the Parties. All changes to this Agreement shall be in writing and shall be signed by an officer of each Party. 19. NON-WAIVER None of the provisions of this Agreement shall be considered waived by either Party except when such waiver is given in writing. The failure of either Party to insist in any one or more instances upon strict performance of any of the provisions of this Agreement or to take advantage of any of its rights hereunder shall not be construed as a waiver of any such provisions or the relinquishment of any such rights for the future; but the same shall continue and remain in full force and effect. 14 20. NO DEDICATION OF FACILITIES --------------------------- Any undertaking by one Party to the other Party under any provision of this Agreement shall not constitute the dedication of the system or any portion thereof by the Party to the public or to the other Party, and it is understood and agreed that any such undertaking under any provision of this Agreement by a Party shall cease upon the termination of its obligations hereunder. 21. SUCCESSORS AND ASSIGNS ---------------------- 21.1 This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Parties. 21.2 This Agreement may be assigned by Producer only (i) to a purchaser or co-owner of the Plant or to a person who will operate the Plant pursuant to a contract or other arrangement with such purchaser and in either case with the prior written consent of IID (which shall not be unreasonably withheld) or (ii) for security purposes, to a bank or other entity which provides financing for the Plant or any electrical transmission facilities associated therewith. Producer and IID agree that nothing in this Section 21.2 may be amended, modified or waived without the prior written consent of each and every Party to the Funding and Construction Agreement (except for any Parties in default thereunder.) 22. EFFECT OF SECTION HEADINGS -------------------------- Section headings appearing in this Agreement are inserted for convenience only, and shall not be construed as interpretations of text. 15 23. GOVERNING LAW ------------- This Agreement shall be interpreted, governed and construed under the laws of the State of California or the laws of the United States, as applicable. 24. ARBITRATION ----------- 24.1 Any dispute arising out of or relating to this Agreement, or the breach thereof, which is not resolved by the Parties acting through their Authorized Representatives shall be settled by arbitration to the extent permitted by the laws applicable to the Parties; provided, however, that no Party to the dispute shall be bound to any greater extent than any other Party to the dispute. Arbitration shall not apply to any dispute or matter that is within the jurisdiction of any regulatory agency. 24.2 Any demand for arbitration shall be made by written notice to the other Party setting forth in adequate detail the nature of the dispute, the issues to be arbitrated, the amount or amounts, if any, involved in the dispute, and the remedy sought. Within twenty (20) days from the receipt of such notice, the other Party may submit its own written statement of the dispute and may set forth in adequate detail any additional related matters or issues to be arbitrated. 24.3 Within thirty (30) days after delivery of the written notice demanding arbitration, the Parties acting through their Authorized Representatives shall meet for the purpose of selecting an arbitrator. The Parties may agree upon a single arbitrator, but in the event that they cannot agree, three arbitrators shall be used. Each Party shall designate one arbitrator, and the two arbitrators shall then select a third arbitrator. All 16 arbitrators shall be persons skilled and experienced in the field in which the dispute has arisen and no person shall be eligible for appointment as an arbitrator who is or has been an officer or employee of either of the Parties or otherwise interested in the matter to be arbitrated. Should either party refuse or neglect to appoint an arbitrator or to furnish the arbitrators with any papers or information demanded, the arbitrators are empowered, by both Parties, to proceed without the participation or assistance of that Party. 24.4 Except as otherwise provided in this Section, the arbitration shall be governed by the rules and practices of the American Arbitration Association, or a similar organization if the American Arbitration Association should not at the time exist. 24.5 Arbitration proceedings shall be held in Imperial, California, at a time and place to be selected by the arbitrators. The arbitrators shall hear evidence submitted by the Parties and may call for additional information which shall be furnished by the Party having such information. The arbitrators shall have no authority to call for information not related to the issues included in the dispute or to determine other issues not in dispute. 24.6 If there is only one arbitrator, his decision shall be binding and conclusive on the Parties. If there are three arbitrators, the decision of any two shall be binding and conclusive. The decision of the arbitrators shall contain findings regarding the issues involved in the dispute, including the merits of the positions of the Parties, the materiality of any default, and the remedy or relief to which a Party shall be entitled. The 17 arbitrators may not grant any remedy or relief which is inconsistent with this Agreement, nor shall the arbitrators make findings or decide issues not in dispute. 24.7 The fees and expenses of the arbitrators shall be shared equally by the Parties, unless the decision of the arbitrators specifies one other apportionment. All other expenses and costs of the arbitration shall be borne by the Party incurring such expenses and costs. 24.8 Any decision or award granted by the arbitrators shall be final and judgement may be entered on it in any court of competent jurisdiction. This agreement to arbitrate shall be specifically enforceable. 25. ENTIRE AGREEMENT ---------------- 25.1 The complete agreement of the Parties is set forth in this Agreement and all communications regarding subject interconnected operations whether oral or written, are hereby abrogated and withdrawn. 26. NOTICES ------- Any formal communication or notice in connection with this Agreement shall be in writing and shall be deemed properly given if delivered in person or sent first class mail, postage prepaid to the person specified below: GEO EAST MESA LIMITED PARTNERSHIP P.O. Box 748 Holtville, CA 92250 18 IMPERIAL IRRIGATION DISTRICT c/o General Manager P. O. Box 937 Imperial, California 92251 27. SEVERAL OBLIGATIONS ------------------- Except where specifically stated in this Agreement to be otherwise, the duties, obligations and liabilities of the Parties are intended to be several and not joint or collective. Nothing contained in this Agreement shall ever be construed to create an association, trust, partnership, or joint venture, or impose a trust or partnership duty, obligation or liability on or with regard to either Party. Each Party shall be individually and severally liable for its own obligations under this Agreement. 19 28. SIGNATURE CLAUSE ---------------- The Parties have caused this Agreement to be executed in their respective names, in duplicate, by their respective officers hereunto this 21st day of March, 1989. GEO EAST MESA LIMITED PARTNERHIP By /s/ M.N. Brunano --------------------------------- ATTEST: By /s/ Letitia D. Davis --------------------------- Secretary IMPERIAL IRRIGATION DISTRICT By /s/ Lester A. Bornt ------------------------------- President, Board of Directors ATTEST: By /s/ Larry E. Beck --------------------------- Secretary 20 EXHIBIT "A" IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 166 Imperial, California Cancelling Sheet No. 139 SCHEDULE A-2 GENERAL WHOLESALE POWER SERVICE APPLICABILITY Applicable to general wholesale power service for industrial, commercial and agricultural purposes, subject to special conditions hereinafter stated. Applicable to standby or breakdown service where the entire electric power requirements on the customer's premises are not regularly supplied by the District. MONTHLY RATE The monthly rate shall be the sum of A, B, C and D. A. Demand Charge ...... $2.52 per kilowatt of Billing Demand B. Energy Charge ...... 5.60CENTS per kwh. C. Energy Cost Adjustment - The amount computed in accordance with Schedule ECA. D. Power Factor Adjustment - A charge of $0.25 per kilovar of reactive demand as measured by the incoming kilovar demand meter for each kilovar in excess of .60 times the kilowatt demand measured and supplied by the District. MINIMUM CHARGE The minimum charge shall be the demand charge, but in no case shall the minimum charge be less than the demand charge (A) multiplied by 75% of the highest maximum demand established in the preceding 11 months. SPECIAL CONDITIONS (a) Voltage: This schedule applies to service rendered at a transmission voltage of 34.5-kV or above. It shall be the responsibility of the customer to furnish transformation to any other voltages required. (b) Billing Demand: The billing demand shall be the kilowatts of measured maximum demand but in no case less than 75 percent of the highest maximum demand established in the preceding 11 months. The measured maximum demand in any month will be the average kilowatt delivery indicated or recorded by the District's demand meter in the 15-minute interval in which such delivery is greater than any other 15-minute interval. In case the load is intermittent or subject to violent fluctuations, the District may base the demand upon a 5-minute interval instead of a 15-minute interval. Board Resolution Date Effective July 3, 1984 August 1, 1984 - 17 - IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 167 Imperial, California Cancelling Sheet No. 139 SCHEDULE A-2 (Continued) GENERAL WHOLESALE POWER SERVICE (c) A minimum connected load of 5000 kw shall be required. (d) Parallel Operation: A customer may operate its generating plant in parallel with the District's system if such customer installs and operates such control and protective equipment as required by the District. (e) Metering: The District will provide the normal metering equipment for the size and type of load served. Additional metering which may be required by the District shall be furnished by the customer and tested in accordance with requirements of the District. Meters shall not allow reverse registration. (f) Regulations Governing Sale of Electric Energy: Service under this rate schedule is subject to the District's Regulations Governing the Sale of Electric Energy. Board Resolution Date Effective July 3, 1984 August 1,1984 - 18 - EXHIBIT "A" IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 152 Imperial, California Cancelling Sheet No. 137 SCHEDULE GL LARGE GENERAL SERVICE APPLICABILITY Applicable to general service having a demand of 100 kilowatts or higher. Not applicable for standby, supplemental or resale service. MONTHLY RATE The monthly rate shall be the sum of A, B and C. A. Demand Charge................... $2.65 per kilowatt of Billing Demand B. Energy Charge................... 5.90CENTS per kwh C. Energy Cost Adjustment - The amount computed in accordance with Schedule ECA. SPECIAL CONDITIONS (a) Voltage: Service under this schedule normallv will be supplied at standard voltage available at the location. Where 240-volt three- phase power is to be combined with single-phase, and 4-wire service is available, service will be supplied through one meter. In 240-volt areas, where, as determined by District, it is not practical to provide a 4-wire service, such single-phase and three-phase service will be supplied and metered separately, the meter readings, both kwh and demands, being combined for the purpose of computing charges on this schedule. Where service is taken at 480-volts or higher, a three-phase service at one voltage only will be supplied. (b) Billing Demand: The billing demand shall be the higher of (i) the highest 15-minute integrated or thermal kilowatt demand measured during the billing period, or (ii) 50% of highest demand measured during the five summer months (May-September) of the 12-months ending with the current month, or (iii) 20% of the highest measured demand during the seven winter months (October-April) of the 12-months ending with the current month, or (iv) the demand specified in a contract, or (v) 50 kilowatts. When the monthly demand exceeds 100 KW in any billing month, billing will be under Rate Schedule GL, and thereafter continue under Rate Schedule GL until monthly demands have been less than 100 KW for a period of twelve consecutive months.Board Resolution Date Effective January 18, 1983 February 1,1983 - 19 - (c) Seasonal Loads: When any customer disconnects service and resumes service within 12-months from date of last disconnection, the customer will be required to pay all charges which would have been billed if the customer had not been disconnected. (d) Wind Machines: Wind machines for frost protection may be served under this schedule provided the load will be limited to existing unused capacity of lines and substations as determined by the District. Provisions (ii), (iii) and (v) of (b) shall not apply to wind machines. (e) Vacuum Cooling Loads: Portable vacuum cooling loads will be served on existing facilities where adequate capacity is available provided the customer pays any up-and-down cost necessary to provide service and deposits a nonrefundable amount equal to the minimum charge for the succeeding 12-month period. One twelfth of such deposit will be applied or prorated to any monthly billing during the 12-month period. (f) Regulations Governing Sale of Electric Energy: Service under this rate schedule is subject to the District's Regulations Governing the Sale of Electric Energy. Board Resolution Date Effective January 18, 1983 February 1, 1983 - 20 -IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 153 Imperial, California Cancelling Sheet No. 138 SCHEDULE GL (Continued) LARGE GENERAL SERVICE Exhibit B [Graphic: Simplified Switch Connection Diagram of Imperial Irrigation District to Geo East Mesa #3 Single Line Diagram (GEM-9)] 14 EXHIBIT C FUNDING AND CONSTRUCTION AGREEMENT (Heber-Mirage Transmission Project) June 29, 1987 Exhibit C FUNDING AND CONSTRUCTION AGREEMENT THIS FUNDING AND CONSTRUCTION AGREEMENT, made and entered into as of June 29, 1987, by and among IMPERIAL IRRIGATION DISTRICT, organized under the Water Code of the State of California (hereinafter referred to as "IID"), and the persons listed as Participants in Exhibit 1 attached hereto (hereinafter referred to individually as "Participant" and collectively as "Participants"), WITNESSETH: Whereas each Participant or its Associated Producer (as defined in Article I) presently owns and operates, or proposes to construct, in the Imperial Valley, a small power producing facility which is or will be a Qualifying Facility under the Public Utility Regulatory Policies Act of 1978; and Whereas each Participant or its Associated Producer has entered into a contract which entitles it to deliver electric power generated by its Qualifying Facility to the electric system operated by Southern California Edison Company ("Edison"); and Whereas the electric transmission system operated by IID has insufficient capacity at present to enable IID to enter into contracts for the transmission of all such power to the electric system operated by Edison; and -1- Whereas the Participants therefore propose to fund the construction of a new transmission line in IID's service territory, which will enable IID to enter into transmission service agreements with them or their Associated Producers; and Whereas the Participants and IID wish to define the terms and conditions on which such funding will take place and such line will be constructed: NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I Definitions For purposes of this Agreement, the following defined terms, whether used in the singular or the plural, shall have the meanings set forth in this Article. The Article and Section numbers and Exhibit references used herein refer to Articles and Sections of this Agreement and Exhibits annexed hereto unless otherwise specifically described. Additional Capacity The term "Additional Capacity" means, as regards the entry into Transmission Agreements or the granting of -2- Transmission Service Entitlements relative to the transmission of power from the Midway substation, an amount, expressed in megawatts, equal to the Deemed Capacity less the sum of IID's Reserved Capacity and the Transmission Service Entitlements of the Participants and their Associated Producers. The term "Additional Capacity" means, as regards the entry into Transmission Agreements or the granting of Transmission Service Entitlements relative to the transmission of electric power from the Highline substation, an amount, expressed in megawatts, equal to the lesser of (i) an amount calculated as provided in the preceding sentence or (ii) three hundred (300) megawatts less the sum of IID's Reserved Capacity and the Transmission Service Entitlements of the Participants and their Associated Producers with regard to Qualifying Facilities connected to the Highline substation. Additional Participant The term "Additional Participant" means a person whose name does not appear in the list of Participants in Exhibit 1 at the time this Agreement is originally executed but who later executes and becomes a party to this Agreement in accordance with the procedures set forth in Article VIII. Affiliate The term "Affiliate" means, with respect to a particular Participant or Associated Producer, any corporation, partnership, firm, association or business organization which directly or indirectly controls, is -3- controlled by, or is under common control with, such Participant or Associated Producer. Agreement The term "this Agreement" means this Funding and Construction Agreement (Heber-Mirage Transmission Project) among IID and the Participants, and all Exhibits attached hereto, as amended from time to time. Associated Producer The term "Associated Producer" means, as to a particular Participant (i) an Affiliate thereof which owns or operates or proposes to construct a Qualifying Facility or (ii) a firm which owns or operates or proposes to construct a Qualifying Facility and purchases or will purchase geothermal energy for use therein from such Participant or its Affiliate. Capacity Nomination The term "Capacity Nomination" means the transmission capacity, expressed in megawatts, specified by a Participant for use by such Participant or its Associated Producer in transmitting electric power to Edison's Electric System, either at the time this Agreement is originally executed or later pursuant to Section 8.02. A Participant's Capacity Nomination may be adjusted pursuant to Section 3.07 or increased pursuant to Section 8.06. -4- Completion Date The term "Completion Date" means the date on which the Transmission Project is fully tested and accepted by IID. Credit Installment Period The term "Credit Installment Period" means the ten-year period beginning on the first day of the calendar month in which the Completion Date occurs. Credit Installment Year The term "Credit Installment Year" means a twelve (12) month period beginning on the first day of the Credit Installment Period or any anniversary of such day during the Credit Installment Period. Deemed Capacity The term "Deemed Capacity" means an electric transmission capacity equal to six hundred (600) megawatts. Edison The term "Edison" means Southern California Edison Company. Edison's Electric System The term "Edison's Electric System" means the electric system operated by Edison. IID or District The terms "IID" or "the District" mean Imperial Irrigation District, organized under the Water Code of the State of California. -5- IID-Edison Agreement The term "IID-Edison Agreement" means the IID-Edison Transmission Service Agreement for Alternative Resources dated September 26, 1985 between IID and Edison. IID's Reserved Capacity The term "IID's Reserved Capacity" means the transmission capacity in the Project, expressed in megawatts, which is reserved for use by IID as provided in Section 6.05. IID's Transmission System The term "IID's Transmission System" means the electric transmission system owned and operated by IID, including (after it is constructed) the Transmission Project. Imperial Valley Transmission Study Group The term "Imperial Valley Transmission Study Group" means the group formed by companies interested in the development of the Transmission Project under that certain Study Group Agreement dated as of October 15, 1985. Management Committee The term "Management Committee" means the Management Committee established pursuant to Section 5.01. Manager The term "Manager" means the Participant or other person designated as Manager pursuant to Section 5.02. -6- Normal Transmission Capacity The term "Normal Transmission Capacity" means the maximum electrical power transfer capability of the Project, expressed in megawatts, available to transmit electrical power to Edison's Mirage substation. Such transfer capability as determined by IID, in its sole judgment, shall be consistent with prudent operating procedures and with generally accepted engineering and operating practices in the electric utility industry and shall be contingent on the ability of Edison's Electric System to accept the amount of electric power received at Edison's Mirage substation from IID's Transmission System. It is understood that, unless IID agrees otherwise, no more than one-half of the Normal Transmission Capacity can be utilized by generation connected to the Highline substation. Original Capacity Nomination The term "Original Capacity Nomination" means the Capacity Nomination specified by each Participant at the time this Agreement is originally executed, as shown in Exhibit 1, or prior to the Completion Date pursuant to Section 8.02 (as modified by Section 8.09) or Section 8.08(b), as such Original Capacity Nomination may be adjusted pursuant to Section 3.07. Participant The term "Participant" means a person which has executed and is a party to this Agreement, including both -7- the Participants which originally executed this Agreement and any Additional Participants and, unless otherwise specified, any Participants in default hereunder. Person The term "person" (whether or not the initial letter is capitalized) means an individual, corporation, partnership, association, trust, government, governmental agency or other entity. Plant Connection Agreement The term "Plant Connection Agreement" means an agreement between IID and a Participant or its Associated Producer substantially similar to the form of Exhibit 6. Prime Rate The term "Prime Rate" means the prime rate for U.S. banks on the relevant date, as published in the "Money Rates" column of the Wall Street Journal. If the date on which the Prime Rate is to be determined is a Saturday, Sunday or legal holiday, the Prime Rate shall be determined on the last business day prior thereto. Project Contribution The term "Project Contribution" means a contribution to the cost of the Transmission Project to be made by or on behalf of a Participant (i) pursuant to Section 3.02 in response to a cash call, (ii) pursuant to any agreement or understanding among the Participants to make such contributions in the event of the default of one or more other Participants hereunder or (iii) with respect to Additional -8- Participants which become such before the Completion Date, pursuant to Section 8.02 (as modified by Section 8.09). The term "Project Contribution" shall not include any interest payable pursuant to Section 3.05 or insurance proceeds remitted to IID pursuant to Section 2.08(b), and in computing the total amount of Project Contributions made by a Participant a deduction shall be made for any amounts received by such Participant from Additional Participants which become such before the Completion Date, pursuant to Section 8.02 (as modified by Section 8.09). Project Cost The term "Project Cost" means a dollar amount equal to the total of all costs in respect of which the Participants are to receive Transmission Credits, as provided in Section 7.01. Project Share The term "Project Share" means the Original Capacity Nomination of a Participant as a percentage of the aggregate Original Capacity Nominations of all Participants, as shown in Exhibit 1, as such Project Share may be recomputed pursuant to Section 8.09(b). Qualifying Facility The term "Qualifying Facility" means a small power producing facility in the Imperial Valley which is a "Qualifying Facility" within the meaning of the Public Utility Regulatory Policies Act of 1978 and regulations issued thereunder. -9- Shared Costs The term "Shared Costs" means the costs of the Transmission Project which the Participants have agreed to share, as defined in Section 3.01. Standard Form Transmission Agreement The term "Standard Form Transmission Agreement" means a Transmission Agreement between IID and a Participant or its Associated Producer substantially in the form of Exhibit 2. Total Budget The term "Total Budget" means the total budgeted cost of the Transmission Project as shown in Exhibit 4, as the same may be modified pursuant to Section 4.01. Transmission Agreement The term "Transmission Agreement" means an agreement between IID and another person which provides for the transmission of electric power over IID's Transmission System for delivery to Edison's Electric System. The Standard Form Transmission Agreement is one form of Transmission Agreement. Transmission Credits The term "Transmission Credits" means the credits against transmission charges payable under a Transmission Agreement which are to be received by the Participants pursuant to Section 7.01. -10- Transmission Project or Project The terms "Transmission Project" or "Project" mean the 230-kV and 92-kV transmission lines to be funded and constructed pursuant to this Agreement, including the facilities described in Exhibit 3 and all real property interests and other property and rights associated therewith. Transmission Service Entitlement The term "Transmission Service Entitlement" means the total amount of electric power transmission service, expressed in megawatts, which is to be provided by IID and paid for by the other party pursuant to a Transmission Agreement, for all Qualifying Facilities covered thereby; provided that prior to the end of the Trial Period (as defined in the Standard Form Transmission Agreement) for any Qualifying Facility, the amount of electric power transmission service to be provided by IID with respect to such Qualifying Facility shall be deemed for purposes of this definition to be the Maximum Transmission Service Entitlement therefor, as set forth in said Standard Form Transmission Agreement. ARTICLE II The Transmission Project Section 2.01. Description of the Project. The Project shall consist of transmission lines and associated -11- facilities extending from Edison's Mirage substation in the north through Niland to the Heber area in the south, as described and specified in Exhibit 3. The Normal Transmission Capacity of the Project upon completion is estimated to be four hundred (400) megawatts. The Project does not include the existing single circuit, single 1033 mcm ACSR conductor presently in place from Edison's Mirage substation to IID's Coachella Valley substation (the "existing circuit") or the existing facilities at the Coachella Valley substation, but IID shall reserve sufficient capacity in the existing circuit to assure the Participants that a transmission capacity at least equal to the Normal Transmission Capacity less IID's Reserved Capacity is available to the Participants and their Associated Producers, as well as any persons who desire to become Additional Participants, for the transmission of electric power to Edison's Mirage substation. The Transmission Project shall be constructed in accordance with the standards contained in General Order 95 of the Public Utilities Commission of the State of California. IID shall own, operate and maintain the Transmission Project. Section 2.02. Contract and Bidding Procedures. IID shall acquire all lands and interests therein necessary for the construction of the Project, using its power of eminent domain where necessary, and shall enter into one or more contracts providing for the supply of all materials and services necessary to complete the construction of the -12- Project. To the extent possible, such contracts shall be firm-price contracts. As soon as practicable, IID shall prepare one or more requests for proposals for all materials and services necessary to acquire and complete the Transmission Project. Such requests for proposals may be sent to any firm which is designated by either IID or a Participant. In response to each request for proposals, IID shall accept the lowest evaluated (responsive and responsible) bid from a qualified firm. Section 2.03. Construction Schedule. IID shall use reasonable efforts to acquire all necessary materials, services and real property interests so as to insure that the Project is constructed and completed in accordance with the following schedule: August 1985 Begin preparation of Environmental Impact Report (EIR). February 1987 Begin right-of-way acquisition activity. May 1987 Obtain EIR certification. November 1987 Complete right-of-way acquisition for Coachella Valley-Midway corridor and begin construction of transmission line on said corridor and on Midway substation. March 1988 Complete right-of-way acquisition for Midway-Highline corridor, and begin construction on said corridor and on Highline substation. October 1988 Complete construction on Coachella Valley-Midway corridor, and energize Midway substation. -13-December 1988 Complete construction on Midway- Highline corridor, and energize Highline substation. Section 2.04. Review and Consultation. The Participants shall have the right, through the Manager or a consultant, to consult with and make suggestions to IID concerning any aspect of the Project. The Participants shall be entitled to receive from IID (a) at least monthly, a written status report on the Project, including the current status of engineering, procurement, and construction (including but not limited to the number of towers constructed, the miles of conductors strung and the status of substation construction) and the amount of expenditures to date and a forecast of the expenditures necessary to complete the Project; and (b) oral briefings on the status of the Project, conducted periodically as agreed by IID and the Manager. IID shall include appropriate provisions in its contract with the general contractor to secure the foregoing rights for the Participants. With the prior approval of IID's representatives, IID shall grant the Participants and their representatives (including the Manager) reasonable access to areas where construction of the Project is taking place and to supplies and equipment to be used in constructing the Project. -14-Section 2.05. Standard of Care. In the handling and disbursement of funds needed for the acquisition and construction of the Project and in carrying out its other responsibilities under this Article II, IID shall act with the same degree of diligence, care and skill that an ordinary prudent businessman would exercise in the management of his own personal business affairs. Without limiting the generality of the foregoing, (a) except where the acquisition of a fee interest is necessary for the proper operation of the Project, the District will acquire appropriate easements in the real property on which the Project is to be located; and (b) IID shall employ sound cash management practices in the payment of bills for materials and services acquired for the Project. Section 2.06. Indemnification. (a) Subject to the Participants' obligation to pay the Shared Costs as provided in Section 3.01, IID shall indemnify, defend and hold harmless each Participant, its Associated Producer and their respective officers, directors, employees, shareholders, partners and Affiliates from and against any loss, damage, liability or expense, including attorneys' fees, which arises or results from any claim, lawsuit or other legal proceeding brought by any person not a party to this Agreement and which relates in any manner to the acquisition or construction of the Transmission Project or any portion -15- thereof (whether or not such claim, lawsuit or other legal proceeding is based on the alleged active or passive negligence of IID, its officers, employees or agents or any other person not a party to this Agreement), including without limitation any loss or expense which arises or results from the injury to or death of any individual in connection with the acquisition or construction of the Project (including the employees and agents of IID and the Participants) or any damage to or loss of property in connection with the acquisition or construction of the Project. Each Participant shall promptly notify IID of any such claim, lawsuit or other legal proceeding and shall allow IID to control the defense thereof at IID's expense. Any such Participant shall be entitled to monitor such claim, lawsuit or other legal proceeding, and shall be entitled to employ an attorney for such purpose at its own expense. To the extent that IID includes provisions in any contracts awarded by it for the acquisition of materials or services in connection with the Project under which IID is indemnified against or released from liability in specified situations or circumstances, IID shall include language in each such contract granting each Participant protection equivalent to the protection provided to IID. (b) Notwithstanding anything in this Section 2.06 to the contrary, each Participant shall indemnify, defend and hold harmless IID and the other Participants, and their respective officers, directors, employees, shareholders, -16- partners and Affiliates, from and against any loss, damage, liability or expense, including attorneys' fees, and any claim thereof, which relates to the acquisition or construction of the Project and results or arises from the active or passive negligence or willful misconduct of the indemnifying Participant, its Associated Producer or their respective officers, employees or agents. Section 2.07. Maintenance of Transmission Project. IID shall operate and maintain the Transmission Project in accordance with generally accepted engineering and operating practices in the electric utility industry. In the event of any loss or destruction of the Transmission Project or any portion thereof, or the partial or complete loss of the use thereof, on or after the Completion Date, by reason of an "uncontrollable force" as defined in Section 16 of the Standard Form Transmission Agreement, IID shall exercise due diligence to remedy such loss or destruction with all reasonable dispatch; provided that IID shall not be obligated to expend more than $250,000 in repairing or reconstructing the Transmission Project as a result of any single occurrence which occurs prior to the end of the Credit Installment Period. Subject to Section 3.01(a)(9), the costs of repairing or rebuilding the Project as a result of damage or destruction which occurs prior to the Completion Date shall be treated as Shared Costs. Section 2.08. Insurance. (a) Without limiting IID's obligations under Section 2.06, prior to the commence- -17- ment of the construction of the Project IID shall obtain and, until the Completion Date shall maintain in force, comprehensive general liability and property insurance with respect to the Transmission Project, with limits of $20,000,000 and $40,000,000, respectively. Beginning on the Completion Date and continuing until the end of the Credit Installment Period, IID shall maintain in force, property insurance with respect to the Transmission Project, with a deductible of $250,000 for each occurrence. IID and the Manager shall consult with respect to the limits, deductibles (except as specifically provided in the preceding sentence) and exclusions under all such property insurance, and in this regard IID shall abide by the decision of the Management Committee, which decision may be modified from time to time. Such insurance (i) shall be placed with an insurer or insurers of recognized reputation and responsibility, (ii) shall name IID as the insured and each Participant as an additional insured and (iii) shall provide that if such insurance is cancelled or materially changed, or allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to any Participant until thirty (30) days after receipt by such Participant of written notice by the insurer of such cancellation or lapse or of any material change in policy terms or conditions. Upon request by any Participant at any time, IID shall provide a certificate from the insurer stating that such insurance is in effect. -18- (b) IID shall use any insurance proceeds received by it as a result of damage to or destruction of the Project to repair or rebuild the same. If any Participant receives proceeds from the property insurance provided for in this Section 2.08 as a result of damage to or destruction of the Project, such Participant shall promptly remit such proceeds to IID for IID's use in repairing or rebuilding the Project. The amount of any such remittance shall not be deemed a Project Contribution. If any of the proceeds from such insurance are not needed for the repair or rebuilding of the Project, IID shall apply the same to any of the costs described in Section 3.01(a) so as to reduce the amount requested in cash calls issued by IID pursuant to Section 3.02. ARTICLE III Funding of Transmission Project Section 3.01. Shared Costs. Subject to the terms of this Article III, the Participants shall bear the following costs associated with the Transmission Project, (a) All out-of-pocket costs incurred by IID, whether incurred prior to or after the date of this Agreement, in order to plan, permit, design, engineer, acquire and construct the Transmission Project and to acquire the right of way for the Transmission Project, including by way of illustration and not limitation, the following: -19- (1) The cost of acquisition of all lands, rights, rights of way, easements and interests acquuired or used for the Transmission Project, including the cost of any mitigation requirements; provided, however, that any real property interests owned by IID and necessary or useful for the Project shall be contributed by IID at no charge and shall not be included in the Shared Costs. (2) The cost of all materials, supplies, machinery and equipment and of all labor and services necessary to construct the Transmission Project. (3) The cost of engineering, financial services, plans, specifications, studies, surveys, expenses of recordation and printing, and other expenses necessary or incident to determining the feasibility of constructing the Transmission Project or incident to the construction thereof. (4) The cost of (i) comprehensive general liability and property insurance with respect to the Project, as required by Section 2.08, for the period prior to -20- the Completion Date, and (ii) property insurance with respect to the Project, as required by Section 2.08, for the period from the Completion Date until the end of the Credit Installment Period. If the property insurance referred to in (ii) above can reasonably be purchased for a single lump-sum premium payable in advance, the cost of such insurance shall be the amount of such premium. If the property insurance referred to in (ii) above cannot reasonably be purchased for a lump-sum premium payable in advance, the cost of such insurance for purposes of this paragraph (4) shall be deemed to be an amount equal to 6.7 times the annual premium payable therefor for coverage during the first year following the Completion Date. (5) The cost of legal services and court costs necessary or incident to the planning or construction of the Project, unless IID is reimbursed for such costs by insurance or otherwise, provided that any such costs incurred in connection -21- with legal actions brought against IID with respect to personal injury or property damage shall be included in the Shared Costs only if IID is ultimately successful in defending the action. (6) The cost of expanding the interconnection facilities at Edison's Mirage substation to accommodate the electric power to be delivered by the Participants or their Associated Producers to Edison, in an amount up to the Normal Transmission Capacity of the Project, whether such work is performed by or on behalf of IID or by or on behalf of Edison and reimbursed by IID. (7) The cost of relocating IID's "E" line to accommodate a portion of the Project, if such relocation is necessary. (8) In the event of the termination of the Project pursuant to Section 3.08, any costs incurred in (i) maintaining and holding the property related to the Project for the three (3) year period referred to in paragraph (b) thereof or (ii) restoring real property -22- to its original condition as provided in paragraph (b) thereof. (9) In the event of damage to or destruction of the Project or any portion thereof prior to the Completion Date, any of the foregoing costs or expenses incurred in repairing or rebuilding the Project and not paid with the proceeds of an insurance policy. (b) The salary and other employee costs incurred by IID as a result of the activities of IID's accounting and financial personnel in implementing the cash call procedure set forth in this Article III and otherwise in conducting IID's relations with the Participants in connection with their Project Contributions; (c) Although it is not contemplated that IID will advance its own funds to pay the costs referred to in paragraph (a) of this Section 3.01, if IID should elect to do so, interest on any such advance at the Prime Rate (or the maximum rate allowed by law, whichever is less) in effect on the date thereof, until the date on which IID is reimbursed for such advance by the Participants; (d) The following costs incurred by the Participants and their Affiliates in connection with the planning and construction of the Project: -23- (1) All costs incurred by way of cash contributions to the Imperial Valley Transmission Study Group (the "IVTSG"). (2) All transportation, lodging and meal expenses incurred in connection with the attendance of personnel at meetings of the IVTSG on or after October 16, 1985 and at meetings held to organize the IVTSG on the following dates in 1985: March 22, April 12, June 19, July 12 and 19, August 12 and September 16. (3) All transportation, lodging, meal, reproduction and miscellaneous out-of-pocket expenses incurred in furtherance of the business of the IVTSG, including expenses related to negotiation or informational meetings with IID, Edison, Associated Southern Engineers, David A. Hodges or R. W. Beck. (4) Any other costs actually incurred in connection with the planning and construction of the Project, if approved by the Management Committee. The Manager shall bill the District for such costs as soon as practicable after the date of this -24- Agreement, including with such bill such supporting documentation as the District may reasonably require. Such bill shall be payable within thirty (30) days after receipt. The payment for such costs shall be distributed to each Participant in accordance with the amount paid by such Participant and its Affiliates. (e) The fees and expenses of the Manager and of any consultant retained by the Participants to monitor the construction of the Project, including in such expenses the costs of travel, telephone and supplies. The Manager shall bill IID for such fees and expenses at the end of each month, including with the bill such supporting documentation as IID may reasonably request. Such bills shall be payable within thirty (30) days after receipt. Notwithstanding the foregoing, the Shared Costs shall not include any loss or expense (including attorneys' fees, except as provided in paragraph (a)(5) above) which arises or results from the injury to or death of any individual in connection with the acquisition or construction of the Project (including the employees and agents of IID and the Participants) or, except as provided in paragraph (a)(9) above, from any damage to or loss of property or property rights in connection with the acquisition or construction of the Project (other than real property and interests therein -25- on which the Project is to be located), or any loss or expense which is attributable to the gross negligence or willful misconduct of IID or its officers, employees or agents. The Project Budget contained in Exhibit 4 includes all costs referred to in this Section 3.01 which IID and the Participants presently anticipate will be incurred. Section 3.02. Cash Call Procedure. (a) On the first business day of each month IID shall issue a cash call to the Manager. The amount of such cash call shall be equal to the sum of (i) the anticipated Shared Costs to be incurred by the District from the due date thereof (as set forth below) until the due date for the next succeeding cash call, (ii) any amount of Shared Costs paid or to be paid by IID prior to the due date thereof and not covered by earlier cash calls and (iii) a reasonable margin for unanticipated expenses and cost overruns. The cumulative total of all cash calls issued by IID up to any date shall be consistent with the anticipated progress on the Project up to such date, as set forth in the construction and supply contracts entered into by IID. (b) Within three (3) business days after receipt of a cash call from IID the Manager shall issue an individual cash call to each Participant (including the Manager itself if the Manager is a Participant) other than any Participant which is in default hereunder and has failed to cure such default as provided in Section 3.05. The -26- Manager shall send a copy of each individual cash call issued to a Participant to such Participant's bank or other lender, if so indicated in Exhibit 7. The Participants shall pay or cause to be paid the amounts indicated in such individual cash calls so that the funds are received by IID no later than the fifteenth (15th) day of the calendar month after the month of issuance thereof, or if such day falls on a Saturday, Sunday or legal holiday the next succeeding business day (the "due date"). The amount of the individual cash call issued by the Manager to each Participant shall be equa1 to C(t) X PS(i) ----- 100% where C(t) is the amount of the cash call received from IID and PS(i) is the Project Share of the Participant to which the individual cash call is issued. (c) The Manager shall send IID a copy of each individual cash call issued by it to any Participant, whether the same is issued pursuant to this Section 3.02 or pursuant to any understanding or agreement among the Participants to make Project Contributions in the event of the default of any Participant. (d) All Project Contributions received by IID from any Participant shall be applied to individual cash calls issued to such Participant (whether the same were issued pursuant to this Section 3.02 or in respect of the -27- default of another Participant) in the chronological order in which such individual cash calls were issued. Section 3.03. Obligation Unconditional. The obligation of each Participant to respond to individual cash calls as set forth in Section 3.02 shall be irrevocable and unconditional except as this Agreement may specifically provide otherwise. Without limiting the generality of the foregoing, such obligation shall not be affected by the modification or abandonment of the Participant's (or its Associated Producer's) plans to construct a Qualifying Facility or by the partial or complete failure or a Qualifying Facility owned or operated by the Participant or its Associated Producer, or of any equipment, plant, geothermal resource, or facility associated therewith. Section 3.04. Deposit of Cash Call Funds. IID shall promptly deposit all funds it receives in response to any cash call into an interest-bearing account at the Bank of America or such other bank as may be agreed to from time to time by the Management Committee and IID. Interest on the funds on deposit in such account shall be retained in the account and used to pay Shared Costs of the Project. IID shall make withdrawals from such account only as necessary to pay Shared Costs. Any funds remaining in such account after all of the Shared Costs to be paid hereunder have been paid shall be refunded to the Participants in accordance with their respective Project Shares. -28- Section 3.05. Failure To Respond to Cash Call. If any participant shall fail to cause funds indicated in an individual cash call (including any individual cash call issued as a consequence of another Participant's default) to be delivered to IID by the fifteenth (15th) day of the calendar month after the month of issuance thereof (or if such day falls on a Saturday, Sunday or legal holiday, the next succeeding business day), or by such earlier due date as may be indicated on the face of the individual cash call, such Participant shall be deemed to be in default hereunder, and IID shall promptly send a notice of default to such Participant, with a copy to the Manager (or, in the case of such a default by the Manager, to any person which the Participants, by written notice in the form described in Section 5.02, have informed IID is acting as Alternate Manager). The Participant in default shall have fifteen (15) days after IID's transmittal of the notice of default in which to cure the default by causing to be paid the amount in default plus interest for each day after the due date to and including the date payment is received by the District at a rate equal to 125% of the Prime Rate (or the maximum rate allowed by law, whichever is less) in effect on the due date. No Participant shall be entitled to cure a default under this Agreement as of right except as specifically provided in this Section 3.05. After the fifteen (15) day period specified above, a Participant in default shall be permitted to cure its default only with the -29- approval of and on such terms as may be specified by the Management Committee, one of such terms being that the defaulting Participant shall pay or cause to be paid the amount in default plus interest thereon at a rate equal to 125% of the Prime Rate (or the maximum rate allowed by law, whichever is less), determined on the due date and on the first business day of each calendar quarter thereafter, for the period during which the payment was in default. Any payment of a Project Contribution made by or on behalf of a Participant after the due date therefor shall be accompanied by interest calculated as provided in this Section 3.05, and any such payment received by IID after the due date shall, as necessary, be allocated between the Project Contribution and the intereste due thereon calculated as provided herein. Upon the payment of any Project Contribution by or on behalf of a Participant after the fifteen (15) day cure period with respect thereto has expired, IID shall promptly refund to every other Participant an amount equal to the total of any Project Contributions which it made as a result of the failure of such Project Contribution to be made by the end of the fifteen (15) day cure period, plus interest calculated as provided herein. Section 3.06. Failure To Cure Default. If a Participant shall fail to cure a default within the fiteen (15) day period provided in Section 3.05, IID shall promptly notify the Manager in writing of such failure. The Participants or any of them shall be entitled to cause the amount -30- in default to be paid, in which case IID shall be obligated to continue the acquisition and construction of the Project as provided in this Agreement. Notwithstanding the foregoing, IID and each of the Participants shall have the right to obtain any remedy available at law or in equity in consequence of the default of IID or any Participant under this Agreement, including damages or specific performance where appropriate. Subject to Section 3.10, a Participant in default hereunder shall be liable for all unpaid amounts included in individual cash calls issued to such Participant as well as all amounts which would have been included in individual cash calls issued to such Participant pursuant to Section 3.02 if such default had not occurred. Section 3.07. Automatic Adjustment of Original Capacity Nominations. If one or more Participants shall fail to cure a default as provided in Section 3.05, the Original Capacity Nomination of each Participant (including any Participant in default] shall, after all Project Contributions have been made, be automatically adjusted to an amount, expressed in megawatts, equal to PC(i) OCN(i) = OCN(t) X ----- PC(t) where OCN(i) is the adjusted Original Capacity Nomination of the Participant, OCN(t) is the total of the Original Capacity Nominations of all Participants, PC(i) is the total -31- of the Project Contributions made by such Participant, and PC(t) is the total of the Project Contributions made by all Participants (including any Participants in default). Section 3.08. Termination of Project. (a) The Participants shall be entitled to cease making Project Contributions at any time and for any reason, subject to the following: (i) All of the Participants shall execute and deliver to IID a document stating their intention to terminate the Project pursuant to this Section 3.08. (ii) In accordance with the procedures set forth in this Article III, the Participants shall pay all Shared Costs which are committed to be paid and the payment of which cannot be avoided. For this purpose, any costs incurred by IID as a result of such termination shall be deemed to be included in the Shared Costs. (b) IID shall retain all rights, interests and property, real and personal, acquired for the Project for a period of three (3) years following the delivery of the document referred to in paragraph (a)(i) above, to enable the Participants or any of them to find a suitable means of financing the completion of the Project. Upon notice executed and delivered to IID by the Participants during such three (3) year period, IID shall transfer to the Participants or their designee all right, title and interest in -32- and to all or any portion of the towers, cable, transformers and other tangible personal property and fixtures the acquisition of which was funded by the Participants pursuant to this Agreement and which is specified in such notice (the "acquired equipment"). The acquired equipment, if acquired by the Participants, shall be transferred to and held by the Participants in fractional undivided interests equal to the following: PC(i) I(i) = ------ PC(tn) where I(i) is the Participant's interest, PC(i) is the total of the Project Contributions made by the Participant, and PC(tn) is the total of the Project Contributions made by all Participants not in default. Within sixty (60) days after its receipt of the notice referred to in this paragraph (b), IID may, at its option and upon written notice given to the Manager, elect to compensate the Participants for all amounts paid by IID in connection with the acquisition of the acquired equipment and included in cash calls issued by IID pursuant to Section 3.02 (including taxes, freight and the cost of installing the towers and any other fixtures). Such compensation shall be paid to the Manager and shall be distributed among the Participants in accordance with the foregoing formula. Following the transfer of the acquired equipment or the payment of compensation by IID as provided in this paragraph (b), or the elapse of the foregoing three (3) year period, IID shall have no further obligation under -33- this Agreement to any Participant with respect to any property, rights or interests acquired by IID pursuant to this Agreement, and as requested by IID the Participants shall pay the cost of restoring any real property disturbed by the construction of the Project to its condition prior to the commencement of such construction. (c) For purposes of this Section 3.08 the term "Participants" shall mean all Participants which are not in default under this Agreement on the date of delivery of the document referred to in paragraph (a)(i) above. Section 3.09. IID's Obligation Contingent. Notwithstanding any other provision of this Agreement, IID shall be obligated to proceed with the acquisition and construction of the Project if, but only if, the Participants provide all of the Shared Costs as required by this Article III. If the Participants fail to provide all of the Shared Costs as required by this Article III, IID may terminate the Projuect upon ninety (90) days' written notice to each Participant, unless the Participants shall cause any Shared Costs due and owing to be paid within the ninety (90) day period, and subject to the rights of the Participants to deliver the document referred to in Section 3.08(a)(i) prior to the end of the ninety (90) day period and thereupon exercise their rights under said Section. Section 3.10. Limit on Contributions. Notwithstanding any other provision of this Agreement, in no event shall any Participant be required to make any Project -34- Contribution after the cumulative total of Project Contributions made by or on behalf of that Participant equals PS(i) TB x ----- x 1.2 100% where TB is the Total Budget as of the date of this Agreement and PS(i) is the Project Share of that Participant. Section 3.11. Right To Audit. Each party to this Agreement shall maintain true and correct records of all expenses incurred, amounts charged, and other transactions in connection with this Agreement until the expiration of three (3) years after the Completion Date. Upon request, each party (the "audited party") shall permit any other party or its representative to audit any or all of such records in the audited party's possession or control for the purpose of determining the accuracy of any amount charged by the audited party or otherwise determining whether a party has complied with the terms of this Agreement. The cost of any such audit shall be borne by the party or parties requesting the same. Section 3.12. Payment of All Shared Costs. When all Shared Costs paid or to become payable by the Participants have been paid, IID shall promptly send a letter to the Manager so stating, signed by its General Manager. ARTICLE IV Cost Controls Section 4.01. Budget. Exhibit 4 contains a budget for the acquisition and construction of the Transmis- -35- sion Project. IID may modify such budget from time to time by giving notice to the Manager, provided that any increase in the Total Budget shall require the approval of the IID Board of Directors acting in public session if the amount of such increase, plus the aggregate of all budget increases since the date hereof or the last such approval, whichever is later, exceeds $100,000. Under no circumstances shall the cumulative total of the cash calls issued by IID pursuant to Section 3.02 exceed the Total Budget. Section 4.02. Relations with Contractors. IID shall actively enforce the provisions of the contracts into which it will enter with respect to the acquisition and construction of the Project so as to minimize the cost of the Project to the Participants. At the request of the Manager, IID will consult on matters concerning the administration and enforcement of any such contract. ARTICLE V Administration Section 5.01 Management Committee. (a) The implementation of this Agreement on behalf of the Participants shall be undertaken by a Management Committee. The Management Committee shall consist of one regular member representing each Participant. In addition, each Participant shall be entitled to designate one alternate member who shall be entitled to attend meetings of the Management Committee in the absence of its regular member. Notwith- -36- standing the foregoing, no Participant which is in default hereunder shall be entitled to be represented on the Management Committee. (b) The Management Committee shall hold regular meetings at such times and places as it may determine. Special meetings may be called at any time by the Manager at its own instance or at the request of a Participant. Whenever a Participant is acting as Manager, the member or alternate member representing such Participant shall serve as the chairman of the Management Committee. Whenever a person other than a Participant is acting as Manager, the chairman of the Management Committee shall be chosen by a vote of the Management Committee. Except as specifically provided herein, the Management Committee shall be free to determine its rules of procedure. (c) Each member or alternate member of the Management Committee shall have a vote commensurate with the Project Share of the Participant which he represents. Except as may otherwise be provided in this Agreement, all decisions of the Management Committee shall be by an affirmative vote of members (or alternate members) representing Participants whose aggregate Project Shares equal or exceed 66-2/3% of the aggregate Project Shares of the Participants entitled to be represented on the Management Committee. Section 5.02 Manager. The Participants shall designate one of their number or another person to act as Manager. The Manager shall serve at the pleasure of the -37- Management Committee, which shall have the power to remove the Manager at any time with or without cause; provided, however, that a Participant shall be automatically disqualified from serving as Manager if it is in default hereunder. Upon the removal, disqualification or resignation of the Manager, the Management Committee shall designate a successor. The initial Manager shall be Rosendo J. Pont. IID shall be entitled to consider such person (and any of its successors as Manager) to continue as the Manager until such time as the District receives a written notice designating a successor Manager and signed by Participants who represent in such notice that their aggregate Project Shares equal or exceed 66-2/3% of the aggregate Project Shares of the Participants entitled to be represented on the Management Committee. Section 5.03. Duties of Manager. The Manager shall be entitled to represent to IID the views of the Participants on any issue or other matter which may arise in connection with the funding or construction of the Project, including the decisions of the Management Committee, and to undertake such other duties as are stated in this Agreement or as may be specified by the Management Committee from time to time. Nothing in this Article V shall be construed as prohibiting the District and any Participant or Participants from consulting or holding discussions concerning any aspect of the funding or construction of the Project. -38- Section 5.04. Copies of Correspondence; Reports. IID shall send the Manager (a) copies of all notices, letters, and other communications directed by it to any Participant and pertaining to the Transmission Project; (b) copies of all notices, reports, letters and other communications received by it from, or transmitted by it to, any contractor or supplier and pertaining to the Transmission Project; (c) copies of all contracts, and all amendments and supplements thereto, entered into with any contractor or other person in connection with the Transmission Project; and (d) at the end of each month, a report showing the total amount of funds theretofore received in response to cash calls, uses of such funds, cash on hand, and interest income. ARTICLE VI Transmission Agreements Section 6.01. Agreement To Execute. (a) In consideration of the funds to be provided hereunder by the Participants, at any time on or after the date hereof IID shall upon the request of any Participant or its Associated Producer enter into (i) a Standard Form Transmission Agreement which gives such Participant or its Associated Producer the right to transmission service over IID's Transmission -39- System to Edison's Electric System in an aggregate amount equal to such Participant's Capacity Nomination, and (ii) Plant Connection Agreements which allow such Participant or its Associated Producer to connect each of its Qualifying Facilities listed in Exhibit 1 to IID's Transmission System. The amount of transmission service to which a Participant or its Associated Producer is entitled shall be reflected as the sum of the Maximum Transmission Service Entitlements (as defined in the Standard Form Transmission Agreement) entered in clause 4 of Exhibit II and any succeeding Exhibits to the Standard Form Transmission Agreement, and shall be subject to adjustment as provided therein. The amount of transmission service available to each Qualifying Facility associated with a Participant or its Associated Producer shall be as indicated in Exhibit 1, as the same may be amended from time to time, and shall be entered as the Maximum Transmission Service Entitlement in an appropriate Exhibit to the Standard Form Transmission Agreement. At the request of a Participant, Exhibit 1 shall be amended so as to add or delete Qualified Facilities, to add to or reduce the transmission capacity available to one or more Qualified Facilities, or to shift transmission capacity from one Qualified Facility to another; provided that all such Qualified Facilities shall be Qualified Facilities owned or operated by such Participant or one or more of its Associated Producers; and provided further that the total of the Maximum Transmission Service -40- Entitlements designated for such Qualified Facilities in Exhibit 1 shall not exceed the Participant's then current Capacity Nomination; and provided further that, unless IID agrees otherwise, no such amendment of Exhibit 1 shall result in an increase of the sum of IID's Reserved Capacity and the Maximum Transmission Service Entitlements of all Qualifying Facilities connected to the Highline substation to a level greater than one-half the Normal Transmission Capacity. At the request of a Participant, IID shall from time to time enter into such Standard Form Transmission Agreements and agree to such amendments or terminations thereof as are necessary to secure for such Participant and its Associated Producers the rights to transmission service indicated in Exhibit 1, as the same may be amended from time to time. (b) The effectiveness of each Standard Form Transmission Agreement shall be contingent upon the completion of the Project, and if the Original Capacity Nomination of any Participant is adjusted pursuant to Section 3.07, the Standard Form Transmission Agreement entered into by such Participant or its Associated Producer shall be amended to provide for an amount of transmission service (reflected as described above) equal to such Participant's Original Capacity Nomination as so adjusted. Section 6.02. Future Transmission Agreements. IID agrees that, prior to the end of the Credit Installment -41- Period, and so long as the Additional Capacity is greater than zero, it will not (a) grant any Participant or its Associated Producer a Transmission Service Entitlement under a Transmission Agreement if the sum obtained by adding such Transmission Service Entitlement to the Transmission Service Entitlements granted under any other Transmission Agreements in effect between such Participant or its Associated Producer and IID would be greater than such Participant's Capacity Nomination, as the same may be increased pursuant to Section 8.06; or (b) enter into a Transmission Agreement with any person other than a Participant or its Associated Producer unless such person has complied with the provisions of Article VIII and has specified a Capacity Nomination pursuant to Section 8.02 which is at least as large as the maximum amount of transmission service allowed under such Transmission Agreement; provided, however, that nothing in this Agreement shall prevent or restrict IID from entering into a Transmission Agreement with Colmac Energy Inc. providing for the transmission of up to 50 megawatts of electric power for delivery to Edison via the Coachella Valley substation and the Coachella Valley-Mirage transmission line; and provided, further, that the foregoing shall not -42- alter IID's obligations under the third sentence of Section 2.01. For purposes of this Section 6.02, the term "Transmission Agreement" shall include any agreement providing for a buy-sell transaction or other arrangement under which IID is to act functionally as a provider of transmission service over IID's Transmission System to Edison's Electric System, but shall not include (i) any agreement providing for the exchange of electric power between IID and another utility unless the power received by IID pursuant to the exchange is generated by a Qualifying Facility which is located in IID's service area and is constructed after the date of this Agreement or (ii) any agreement with another utility which provides for the transmission of electrical power to Edison's Electrical System during an emergency. Except as specifically provided herein, nothing herein shall alter or affect the rights and obligations under any Transmission Agreement or other agreement providing for the transmission of electric power over IID's Transmission System for delivery to Edison's Electric System entered into prior to the date of this Agreement. Section 6.03. Written Agreement Required. Prior to the end of the Credit Installment Period, and so long as the Additional Capacity is greater than zero, IID shall not transmit electric power over IID's Transmission System for delivery to Edison's Electric System for any person (other -43- than itself) except pursuant to a written agreement providing for such transmission. Section 6.04. Nondiscrimination. Each Transmission Agreement entered into with a Participant or its Associated Producer shall be substantially in the form of the Standard Form Transmission Agreement and shall be non-discriminatory among the Participants. Section 6.05. IID's Use of the Project. IID shall have the unrestricted right to use the Transmission Project for the transmission of electric power up to IID's Reserved Capacity, which shall be a transmission capacity equal to the greater of (i) six and two-thirds percent (6-2/3%) of the Normal Transmission Capacity or (ii) the difference between the Normal Transmission Capacity and the sum of the Capacity Nominations of all Participants; provided that in no event shall IID's Reserved Capacity be less than twenty-six (26) megawatts or greater than forty (40) megawatts. IID's Reserved Capacity may increase within the limits set forth in the foregoing sentence, but in no event shall IID's Reserve Capacity decrease from the level in existence at any given time. IID shall have the right to use the Project at all times for the transmission of electric power in excess of IID's Reserved Capacity, provided that such transmission does not conflict with the transmission of electric power for any Participant (including any Additional Participant) or its Associated Producer in accordance with -44- the terms of one or more Transmission Agreements entered into by such Participant or its Associated Producer. Section 6.06. Transmission Under Existing IID-Edison Agreement. To the extent that electric power produced by a Participant or its Associated Producer is being transmitted to Edison's Electric System pursuant to the IID-Edison Agreement, such Participant or its Associated Producer may elect to continue such transmission pursuant to the IID-Edison Agreement in lieu of transmission pursuant to a Transmission Agreement entered into by such Participant or its Associated Producer and IID pursuant to Section 6.01 or Section 8.08. A Participant or Associated Producer may make the foregoing election only with respect to the entire output of a particular Qualifying Facility, and each Participant agrees that neither it nor its Associated Producer will designate electric power from any such Qualifying Facility for transmission pursuant to the IID-Edison Agreement in an amount larger than the Maximum Transmission Service Entitlement for such Qualifying Facility, as shown in Exhibit 1. If a Participant or its Associated Producer makes an election pursuant to this Section 6.06, the right of such Participant or its Associated Producer to transmission service under a Transmission Agreement entered into pursuant to Section 6.01 or Section 8.08 shall, so long as such election remains in effect, be reduced by an amount equal to the Maximum Transmission Service Entitlement for -45- any Qualifying Facility with respect to which such election was made, as shown in Exhibit 1. Section 6.07. Existing Plant Connection Agreements. Upon the execution of a Plant Connection Agreement between a Participant or its Associated Producer and IID with respect to a particular Qualifying Facility, pursuant to Section 6.01 or Section 8.08, the parties shall terminate any existing plant connection agreement relating to such Qualifying Facility; provided, however, that a Participant or its Associated Producer which makes an election pursuant to Section 6.06 with respect to such Qualifying Facility may elect at its option to continue in effect the existing plant connection agreement for such Qualifying Facility, but IID may require such existing plant connection agreement to be amended so as to provide for the connection of such Qualifying Facility to the Transmission Project. ARTICLE VII Credits Against Transmission Service Charges Section 7.01. Amount of Credits. IID shall grant each Participant (including any Participants in default) Transmission Credits equal in dollar value to the sum of the following: (a) The total amount of the Project Contributions made by or on behalf of the Participant; and -46- (b) The construction period financing costs incurred by the Participant, computed from the date of each Project Contribution to the Completion Date. Such financing costs shall be calculated by applying the following interest rates: (1) If the Participant financed its Project Contributions by arrangement with a bank or other lender, its financing costs shall be calculated at the interest rate actually in effect from time to time under the terms of such financing arrangement with the bank or other lender. (2) If the Participant did not so finance its Project Contributions, its financing costs for each calendar quarter or portion thereof shall be calculated at a rate equal to 125% of the Prime Rate (or the maximum rate allowed by law, whichever is less) in effect on the first day of the quarter; and (c) Any fee paid by the Participant or its Affiliate to an investment banking or other firm for providing financial advisory services or arranging financing for such Participant's Project Contributions and any fee paid by the Participant or its Affiliate to obtain a letter of credit from -47- a bank or other financial institution in support of such Participant's obligation to make Project Contributions, provided that the amount of Transmission Credits granted to a Participant pursuant to this paragraph (c) shall not exceed the lesser of $250,000 or 3% of the limit on Project Contributions for that Participant determined pursuant to Section 3.10 as of the date hereof. Any fee paid by a Participant or its Affiliate to an investment banking or other firm for arranging financing for such Participant's Project Contributions as well as other financing required by such Participant or its Affiliate shall, for purposes of this paragraph (c), be allocated to such Participant's Project Contributions on a pro rata basis, in proportion to the relative magnitude of such Project Contributions and other financing. Following the Completion Date, each Participant shall present IID with such documentation as the District may reasonably require to support the amounts referred to in items (b) and (c) above, if applicable. IID shall promptly issue a letter to each such Participant confirming the amount of Transmission Credits available to such Participant. Section 7.02. Use of Credits. The Transmission Credits shall be applicable on a dollar-for-dollar basis -48- against any charges or fees imposed on a Participant or its Associated Producer under any Transmission Agreement entered into by such Participant or Associated Producer and IID. Each Participant shall inform IID of the persons, selected from among itself and its Associated Producers, which are to use the Transmission Credits issued to it. Such selections will be subject to change upon written notice to IID. If a Participant or its Associated Producer elects to continue transmission under the IID-Edison Agreement, as provided in Section 6.06, IID shall, at the request of such Participant or its Associated Producer, apply transmission credits held by such Participant or its Associated Producer so as to reduce IID's charges to Edison for the transmission of electric power on behalf of such Participant or its Associated Producer under the IID-Edison Agreement. Section 7.03. Schedule of Availability. The Transmission Credits received by each Participant shall be divided into ten (10) equal installments, and a single such installment shall become available for use during each successive Credit Installment Year. Any Transmission Credits which are available for use but are not used in a given Credit Installment Year may be carried forward and used in later Credit Installment Years, provided that any Transmission Credits not applied against charges or fees due and payable under a Transmission Agreement within fifteen (15) years after the beginning of the Credit Installment Period shall expire and be of no further force or effect. -49- Section 7.04. Assignability of Credits. During the Credit Installment Period the Transmission Credits shall not be assignable by any holder thereof except to (i) a Participant (including an Additional Participant) for application against amounts payable under a Transmission Agreement entered into by such Participant or its Associated Producer, (ii) a bank or other lender, as security for a loan or letter of credit provided by such person to finance or provide credit support for a Participant's Project Contributions, or (iii) an assignee of a Participant's interest in this Agreement as permitted by Section 9.04, in conjunction with the assignment of such interest, for application against amounts payable under a Transmission Agreement entered into or assumed by such assignee or its Associated Producer. Following the Credit Installment Period, the Transmission Credits shall be assignable to any person for application against any charges or fees payable to IID for the transmission of electric power to Edison's Electric System. No assignment of Transmission Credits shall change the Credit Installment Year in which they become available for use pursuant to Section 7.03. No assignment of Transmission Credits (except an assignment for security purposes) shall be effective unless and until the assignor gives IID a written notice thereof. The right to receive payments in exchange for Transmission Credits, as provided in Sections 8.02 and 8.03, may be assigned in conjunction with an assignment of Transmission Credits, and -50- the foregoing notice to IID shall indicate whether such right is being assigned. Section 7.05. Addition of Cost of Project to Rate Base. For purposes of determining the transmission service charges payable under the Transmission Agreements entered into by the Participants (as set forth in Exhibit I to the Standard Form Transmission Agreement), IID shall add the cost of the Transmission Project to its investment in plant as shown on its books ("Transmission Plant") as follows. IID shall on each January 1 prior to the fifteenth (15th) anniversary of the beginning of the Credit Installment Period add an amount to its Transmission Plant equal to the following: DC - IRC TPA = C(t) x -------- DC where TPA is the amount to be added to IID's Transmission Plant, C(t) is the total amount of Transmission Credits applied by the Participants or their Associated Producers or any permitted assignees thereof against transmission charges and fees due and payable in the preceding calendar year, DC is the Deemed Capacity, and IRC is IID's Reserved Capacity, which for purposes of this Section 7.05 only shall be deemed to be forty (40) megawatts. On the first January 1 on or after the fifteenth (15th) anniversary of the beginning of -51- the Credit Installment Period, IID shall add an amount to its Transmission Plan equal to the following: DC - IRC TPA = (P-C(p)) x -------- DC where TPA, DC, and IRC are defined as above, P is the Project Cost, and C(p) is the amount previously added to IID's Transmission Plant with respect to the application of Transmission Credits by the Participants or their Associated Producers or any permitted assignees thereof against transmission charges and fees. The amount to be added by IID to its Transmission Plant with respect to the acquisition and construction of the Project shall not exceed the Project Cost multiplied by DC - IRC , -------- DC where DC and IRC are defined as above. Section 7.06. Record of Transmission Credits. IID shall be responsible for keeping a record on its books of the amount of Transmission Credits used and remaining for use, as well as the dates of availability, for each holder of Transmission Credits. Such information shall be available on request to any holder or prospective holder of Transmission Credits. -52- ARTICLE VIII Additional Participants Section 8.01. Obligation To Become Additional Participant. Prior to the end of the Credit Installment Period, and so long as the Additional Capacity is greater than zero, any person which desires to enter into a Transmission Agreement shall become an Additional Participant by following the procedure set forth in this Article VIII. Section 8.02. Reallocation of Costs. To become an Additional Participant, such person shall specify a Capacity Nomination of no less than one (1) megawatt and shall bear a portion of the Project Cost equal to: M(r) CN(i) P(i) = P X ---- X ------------ M(t) CN(t) + CN(i) where P(i) is the portion of the Project Cost to be borne by the Additional Participant, P is the Project Cost, M(r) is the number of full calendar months remaining in the Credit Installment Period, M(t) is the total number of months in the Credit Installment Period, CN(i) is the Capacity Nomination of the Additional Participant, and CN(t) is the total of the Capacity Nominations of all existing Participants (including any other Additional Participants). The Additional Participant shall remit the foregoing sum to IID, which shall within thirty (30) days after receipt distribute such amount among the Participants (including any other -53- Additional Participants) in accordance with the following formula: C(i) D(i) = P(i) x ---- C(t) where D(i) is the amount to be distributed to a particular Participant, P(i) is the total amount to be distributed, C(i) is the total amount of unused Transmission Credits held by the Participant receiving such distribution immediately prior to the payment of the foregoing sum by the Additional Participant, and C(t) is the total amount of unused Transmission Credits held by all Participants immediately prior to the payment of the foregoing sum by the Additional Participant. All unused transmission credits usable by a Participant or its Associated Producers, regardless of when they first become available for use under Section 7.03, shall be deemed "held" by the Participant for purposes of this Section 8.02 and Section 8.05. Section 8.03. Transfer of Transmission Credits to Additional Participant. In return for the payment received from the Additional Participant as provided in Section 8.02, IID shall transfer unused Transmission Credits on its books from each of the existing Participants to the Additional Participant. The dollar value of Transmission Credits received by the Additional Participant shall be equal to the amount of its payment to IID pursuant to Section 8.02. The dollar value of unused Transmission Credits transferred from each existing Participant shall be equal to the payment received by such Participant pursuant to Section 8.02. -54- Transmission Credits shall be transferred from each existing Participant in the following order of priority: (a) Unused Transmission Credits which became available for use in prior Credit Installment Years or in the present Credit Installment Year shall first be transferred. (b) Transmission Credits which will become available for use in later Credit Installment Years shall then be transferred in equal dollar amounts for each such year. The Credit Installment Year in which any Transmission Credit shall become available for use shall not be affected by the transfer of such Transmission Credit to an Additional Participant pursuant to this Section 8.03. In the event that the dollar amount to be distributed to a Participant pursuant to Section 8.02 exceeds the dollar value of Transmission Credits held by such Participant, the excess shall not be distributed to such Participant and shall be refunded to the Additional Participant. Section 8.04. Risk Compensation. In order to compensate each of the Participants whose name appears in the list of Participants in Exhibit 1 at the time this Agreement is originally executed (the "Original Participants") for the substantial risk it incurred in funding the planning, engineering and construction of the Transmission Project, an Additional Participant shall pay IID additional sum equal to fifteen percent (15%) of the amount -55- paid by it pursuant to Section 8.02 (without regard to any amount refunded to the Additional Participant pursuant to Section 8.03). IID shall distribute such amount among the Original Participants as follows: PC(i) A(i) = A(t) x ----- PC(t) where A(i) is the amount to be distributed to each Original Participant, A(t) is the total amount to be distributed to all Original Participants pursuant to this Section 8.04, PC(i) is the total of the Project Contributions made by the Original Participant receiving the distribution as of the date of such distribution, and PC(t) is the total of the Project Contributions made by all Original Participants as of such date. Section 8.05. Special Rule in Case of Preemption. Notwithstanding anything to the contrary in Sections 8.02 through 8.04, the following rule shall apply to the extent that the Capacity Nomination specified by an Additional Participant preempts transmission capacity which was formerly held by another Participant by operation of Section 6.3 of the Standard Form Transmission Agreement or a provision of another form of Transmission Agreement similar in substance thereto. The Additional Participant shall remit to IID for distribution to the Participant whose capacity was so preempted (the "preempted Participant") an amount equal to the lesser of (a) the dollar value of the Transmission -56- Credits then held by the preempted Participant or (b) a dollar amount equal to: M(r) CP P X ---- X --------- M(t) NTC - IRC Where P, M(r) and M(t) are defined as in Section 8.02, CP is the amount of capacity so preempted from the preempted Participant, NTC is the Normal Transmission Capacity of the Project at the time in question, and IRC is IID's Reserved Capacity. In return for such payment, IID shall transfer unused Transmission Credits on its books from the preempted Participant to the Additional Participant in an amount equal to the dollar amount so paid by the Additional Participant. In lieu of the payment and distribution required by Section 8.04, if the preempted Participant is an Original Participant and the capacity so preempted is part of its Original Capacity Nomination, the Additional Participant shall in addition pay IID for distribution to the preempted Participant an amount equal to fifteen percent (15%) of the amount calculated pursuant to the formula set forth in clause (b) above. For purposes of the foregoing sentence, capacity shall be deemed to be preempted from an Original Participant in the following order of priority: first, capacity, if any, which is part of an Original Participant's increase in Capacity Nomination pursuant to Section 8.06, and second, capacity which is part of an Original Participant's Original Capacity Nomination. An example of the operation of the foregoing is set forth in Exhibit 5. -57- Section 8.06. Increases in Capacity Nominations. Any Participant which prior to the end of the Credit Installment Period wishes to increase its Capacity Nomination shall be treated as an Additional Participant as to such increase and shall follow all of the procedures set forth in this Article VIII (including without limitation the obligation to make the payments required by Section 8.02 and Section 8.04). For purposes of calculating the payments and Transmission Credit transfers required by this Article VIII, the increase in Capacity Nomination requested by such Participant shall be treated as its Capacity Nomination (CN(i) in Section 8.02) and its Capacity Nomination prior to the increase shall be treated as part of the Capacity Nominations of the existing Participants (CN(t) in Section 8.02). Section 8.07. Execution of Agreement. Each Additional Participant shall execute and become a party to this Agreement and, except as specifically provided herein, shall have the rights and duties of a Participant under every provision of this Agreement other than those provisions which by their terms apply only to the Original Participants. Section 8.08. Commitment of IID. IID agrees that the foregoing provisions represent a reasonable means of assuring that the Participants are fairly compensated for the costs and risks they incurred in connection with the construction of the Transmission Project. To protect the -58- Participants' rights to such compensation, IID agrees that, prior to the end of the Credit Installment Period, (a) it will not grant a Transmission Service Entitlement or enter into any Transmission Agreement except as provided in Section 6.02, and (b) so long as the Additional Capacity is greater than zero, it will (i) enter into a Transmission Agreement (and appropriate Plant Connection Agreement) with any person which desires to do so and (ii) allow any Participant upon request to increase its Capacity Nomination as provided by Section 8.06, provided that such person or Participant complies with the procedure set forth in this Article VIII (including the obligation to pay for such capital additions as IID may require pursuant to Section 8.11). Section 8.09. Additional Participants Prior to Completion Date. All of the provisions of this Article VIII shall apply to a person which desires to become an Additional Participant prior to the Completion Date, with the following modifications and adjustments: (a) For purposes of Section 8.02, the term "Project Cost" shall mean the total of the costs referred to in Section 7.01 incurred by the Participants on or before the date of such person's payment pursuant to Section 8.02, and the term "unused Transmission Credits" shall mean the -59- portion of the Project Cost, so defined, incurred by each Participant prior to the date of such payment. The fraction C(i)/C(t) in the second formula therein, shall be computed as of the date of such person's remittance to IID pursuant to Section 8.02. In computing the total amount of Project Contributions made by a Participant, there shall be a deduction for any amounts received by such Participant from payments made by an Additional Participant pursuant to Section 8.02, as modified by this paragraph (a). (b) The Project Shares of all Participants shall be recomputed as of the date of such person's remittance to IID pursuant to Section 8.02, the Capacity Nomination specificed by such person pursuant to Section 8.02 being deemed such person's Original Capacity Nomination for this purpose and for purposes of Section 3.07. (c) Such person shall respond to all cash calls from IID due after the date of such person's remittance to IID pursuant to Section 8.02, in accordance with the terms of this Agreement. The Manager shall issue appropriate adjusted individual cash calls with respect to any cash call issued by IID before, but due after, the date of such remittance. -60- (d) With respect to Section 8.03, such person shall be entitled to receive Transmission Credits, in accordance with the terms of this Agreement, in an amount equal to the amount of its remittance to IID pursuant to Section 8.02. The entitlements of the remaining Participants to Transmission Credits shall be reduced by the amount of the distribution received by each of them, respectively, pursuant to Section 8.02. (e) Such person shall make the payment required by Section 8.04, calculated as provided therein. (f) With respect to Section 8.07, such person shall be required in addition to execute and become a party to and satisfy the requirements of any other agreement among the Participants relating to the funding and construction of the Transmission Project. (g) Exhibit 1 shall be amended to reflect such person's Capacity Nomination, the name(s) of its Qualifying Facility(ies), its Maximum Transmission Service Entitlement(s) and its Project Share. Section 8.10. Study Group Costs of Additional Participants. Notwithstanding anything to the contrary in this Agreement, an Additional Participant shall be entitled to be reimbursed for costs incurred by it and its Affiliates -61- pursuant to Section 3.01(d) if, but only if, such Additional Participant executes this Agreement and makes the payments required by Sections 8.02 and 8.04 (as modified by Section 8.09) on or before December 31, 1987. The Manager shall bill IID for such costs as soon as practicable after the date on which such payments are made. Section 8.11. Capital Additions to Project. The parties understand and acknowledge that certain capital additions to the Project may be necessary to enable the Project to transmit power for an Additional Participant or its Associated Producer. The parties agree that, notwithstanding any other provision of this Agreement, IID may at its option require any Additional Participant to pay for any capital additions to the Project which are necessary to transmit the electric power to be generated by such Additional Participant or its Associated Producer. The obligation of such Additional Participant to pay for such capital additions shall not alter or affect in any way its obligation under this Article VIII or the other provisions of this Agreement, nor shall the Participants which are then parties to this Agreement be required to pay any portion of the cost of such capital additions as a consequence of the transmission of electric power within their Capacity Nominations. -62- ARTICLE IX General Section 9.01. Governing Law. This Agreement and the performance of the obligations created herein shall be governed by and construed and enforced in accordance with the laws of California, without reference to any rules or principles relating to conflicts of law. Section 9.02. Entire Agreement. This Agreement and the Exhibits and other attachments hereto set forth the entire Agreement and understanding of the Participants and IID in respect of the transactions contemplated hereby. This Agreement supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof, including without limitation that certain Memorandum of Understanding among IID and certain of the Participants dated August 1, 1986, as amended. No representation, promise, inducement or statement of intention has been made by IID to any Participant or by any Participant to IID on the subject matter hereof except as specifically stated herein, and neither IID nor any Participant shall be bound by or liable for any alleged representation, promise, inducement or statement of intention not so set forth. Section 9.03. Amendment; Waiver. This Agreement may be amended, modified, superseded or cancelled, and any of the terms, covenants, representations or conditions hereof may be waived, only by a written instrument executed by IID and each Participant not in default hereunder, or in -63- the case of a waiver, by or on behalf of the party waiving compliance; provided, however, that no such amendment or modification may adversely affect the rights of a defaulting Participant without its written consent unless the rights of all Participants are similarly affected. The failure of any party hereto at any time or times to require performance of any provisions hereof shall in no manner affect the right at a later time to enforce the same. No waiver by any party of any condition, or of any breach of any term, covenant, representation or warranty contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of any breach of any other term, covenant or representation. Section 9.04. Assignment. Except as herein provided, neither this Agreement nor any right, privilege, duty or obligation created herein may be assigned by any party to any other person, voluntarily or by operation of law, without the prior written consent of each of the other parties (excluding any Participants in default), which consent shall not be unreasonably withheld. Any attempted assignment by any party without such consent shall be void and of no force or effect. Notwithstanding the foregoing, without such consent (a) a Participant shall be entitled to assign its entire or a partial interest in this Agreement (i) to its Affiliate, (ii) to a person -64- with which such Participant has an agreement or relationship involving sharing in a Qualifying Facility or in the proceeds therefrom or in the resources supplying such facility or in the proceeds from the sale of such resources to a Qualifying Facility or to a purchaser of an interest in any of the foregoing or (iii) to a bank or other lender, as security for a loan or letter of credit provided by such person to finance or provide credit support for such Participant's Project Contributions; (b) Transmission Credits may be separately assigned as provided in Section 7.04 and Article VIII but in no other manner; and (c) the Participants as a group shall be entitled to assign any or all of their rights and obligations under this Agreement to any California public utility which is authorized by the California Public utilities Commission to fund the cost of constructing the Transmission Project, provided that no such assignment shall affect the rights of the Participants or their Associated Producers to enter into the Standard Form Transmission Agreement as provided in Article VI. Notwithstanding the foregoing, the right of a Participant or its Associated Producer to enter into a Transmission Agreement as provided in Article VI shall not be assignable -65- except (i) to a co-owner, operator or purchaser of the Qualifying Facility to which such right relates, and then only to the extent of the amount of transmission service to be provided for such Qualifying Facility, all as set forth in Exhibit 1, (ii) to an Affiliate of such Participant or (iii) to a bank or other lender, as security for a loan or letter of credit provided by such person to finance or provide credit support for such Participant's Project Contributions, it being the intention of the Participants that the assignment of such right not be used as a means of circumventing the obligation of nonparties to become Additional Participants as a condition of receiving the benefits of Transmission Agreements. No assignment permitted under this Section 9.04 shall operate to relieve the assignor of any duty or obligation under this Agreement, unless the assignor is released therefrom by every other party hereto, and unless the assignee shall expressly and in writing assume all such duties and obligations of the assignor. Subject to the foregoing restrictions on assignment, all of the terms, covenants, representations and conditions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by, each of the parties and their respective successors, permitted assigns and legal representatives. Section 9.05. Intent Concerning Regulation. It is the Participants' understanding, and IID confirms and represents, that IID and IID's Transmission System are free -66- from public utility rate regulation, either under the California Public Utilities Code or the Federal Power Act. If any regulatory authority hereafter asserts that any Participant is a public utility and is subject to regulation by reason of its participation in the construction and funding of the Transmission Project as provided herein, the parties will meet to consider how to proceed so that such Participant may be shown not to be a public utility, while still preserving, to the extent possible, the economic effect of the proposed transactions for all Participants and IID. Notwithstanding anything to the contrary herein, no Participant shall be obligated to continue its performance under this Agreement if any regulatory agency has issued a final order or other instrument alleging or declaring that such Participant is a public utility on account of its involvement in the funding, construction or use of the Transmission Project. Section 9.06. Term. This Agreement shall be effective when executed by the Original Participants and IID and shall continue in effect until such time as all duties and all obligations of the parties hereunder have been satisfied or discharged. Section 9.07. Notices. All notices, requests, demands and communications required or permitted to be given hereunder shall be given in writing and delivered personally, or mailed first-class mail, postage prepaid, or transmitted by telecopier, to the addresses of the parties -67- and the Manager as shown in Exhibit 7. Any party or the Manager may change the address to which such communications are to be directed to it by giving written notice to each of the other parties and the Manager in the manner provided above. Section 9.08. No Partnership, etc. Nothing in this Agreement shall be construed as creating a partnership, association, agency, trust or other entity among the parties hereto or any of them. In entering into and performing this Agreement, the parties are acting solely as independent contractors. The obligations of the parties under this Agreement shall be several and not joint or joint and several. Section 9.09. No Third Party Beneficiaries. Except as specifically provided in Section 8.08(b) with respect to a person who desires to enter into a Transmission Agreement, this Agreement is solely for the benefit of the parties and their successors and permitted assigns and shall not be construed to create any rights or privileges in any other person or entity (including without limitation any person not a party hereto who entered into a Transmission Agreement prior to the date hereof). Section 9.10. Headings; Counterparts. The article and section headings contained in this Agreement are for convenient reference only, and shall not in any way affect the meaning or interpretation of this Agreement. This Agreement may be executed in two or more counterparts, -68- each of which shall be deemed an original, but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. IMPERIAL IRRIGATION DISTRICT By /s/ Illegible ----------------------------------- CHEVRON GEOTHERMAL DESERT POWER COMPANY COMPANY OF CALIFORNIA By /s/ Illegible By /s/ Illegible ------------------------------------ ----------------------------------- GEO EAST MESA NO. 2, INC. EARTH ENERGY, INC. By /s/ Illegible By /s/ Illegible ------------------------------------ ----------------------------------- HEBER GEOTHERMAL COMPANY GEO EAST MESA NO. 3, INC. By /s/ Illegible By /s/ Illegible ------------------------------------ ----------------------------------- ORMESA GEOTHERMAL MAGMA POWER COMPANY By /s/ Illegible By /s/ Illegible ------------------------------------ ----------------------------------- -69- ORMESA GEOTHERMAL II UNION OIL COMPANY OF CALIFORNIA By /s/ Illegible By /s/ Illegible ----------------------------------- ----------------------------------- VULCAN/BN GEOTHERMAL POWER COMPANY By ----------------------------------- -70- EXHIBIT 1 Maximum Transmission Original Service Capacity Project Participant QF Entitlement Nomination Share ----------- -- ----------- ---------- ----- Chevron Geothermal HGC Power 15.8 MW 15.8 MW 4.225% Company of California Plant Desert Power Company Salton Sea No. 3 50.0 MW 50.0 MW 13.369% Earth Energy, Inc. Salton Sea No. 1 26.0 MW 26.0 MW 6.952% and No. 2 GEO East GEO East 27.5 MW 27.5 MW 7.353% Mesa No. 2, Inc. Mesa No. 2 GEO East GEO East 27.5 MW 27.5 MW 7.353% Mesa No. 3, Inc. Mesa No. 3 Heber Geothermal Company HGC Power Plant 23.5 MW 23.5 MW 6.283% Magma Power Company Del Ranch Power Plant 38.0 MW J. J. Elmore 38.0 MW Power Plant J. M. Leathers 38.0 MW 114.0 MW 30.481% Power Plant Ormesa Geothermal Ormesa 24.0 MW Ormesa IE 6.0 MW 30.0 MW 8.021% Ormesa Geothermal II Ormesa II 18.0 MW 18.0 MW 4.813% Page 1 of 2Maximum Transmission Original Service Capacity Project Participant QF Entitlement Nomination Share ----------- -- ----------- ---------- ----- Union Oil Company of HGC Power Plant 7.7 MW 7.7 MW 2.059% California Vulcan/BN Geothermal Vulcan Plant 34.0 MW 34.0 MW 9.091% Power Company -------- -------- 374.0 MW 100.0% Page 2 of 2EXHIBIT 2 --------- TRANSMISSION SERVICE FOR THE POWER PLANT UNIT NO. -------------------- ------------------------- EII-1. DESCRIPTION: EII-2. APPLICABILITY: Applicable to the transmission service to be provided by IID to Producer for transmitting the electrical output from the______________________________________________________________ Point of Receipt to the Point(s) of Delivery. EII-3. PLANT CONNECTION AGREEMENT: The__________________________ Plant Connection Agreement to be executed between IID and Producer. EII-4. MAXIMUM TRANSMISSION SERVICE ENTITLEMENT: __ MW. TRANSMISSION SERVICE ENTITLEMENT: __ MW, as specified in accordance with Sections 6.2 and 6.3. EII-5. POINT OF RECEIPT: EII-6. POINT(S) OF DELIVERY: EII-7. TERM: The term of the Transmission Service Entitlement for the _________________________________________________________________ shall be effective from the Date of Initial Service and shall terminate on__________________________________________________ [*] EII-8. TRANSMISSION SERVICE CHARGE: $____ per kilowatt-month, or as revised in accordance with Section 8.2, times Transmission Service Entitlement. EII-9. SCHEDULING FEE: $________________________________________ per month or as revised in accordance with Section 8.3. EII-10. TRANSMISSION LOSSES: ____% or as revised in accordance with Section 7. [* Insert expiration date of applicable power sales contract between Producer and Edison.] 1EXHIBIT 3 Description of Project Scope The project includes upgrading the Mirage-Coachella Valey link, constructing a new 230-kV line from IID's Coachella Valey substation to the (new) Highline substation, constructing said substation and a new substation (Midway) in the Niland area, and constructing 92-kV transmission lines from the Midway substation to the Salton Sea KGRA and from the Highline substation to the Heber KGRA. The major project scope components are as follows: 1. Existing Facilities Upgrade One new circuit added on existing structures between the Mirage and Coachella Valey substations, using bundled 1033 MCM ACSR conductor. Length: 20 miles Breakers and appurtances as necessary, including relays and controls, for looping additional 230-kV circuits in and out of the Mirage and Coachella Valey substations. 2. Coachella Valley-Midway Transmission Line A double circuit transmission line using steel lattice towers and steel poles from the Coachella Valley substation to the Midway substation, capable of carrying two bundled circuits of 1033 MCM ACSR but carrying only one bundled and one unbundled circuit. Length: Approximately 53 miles 3. 92-kV Transmission Line Extensions (a) Two (2) double circuit 92-kV transmission lines, using 795 MCM all-aluminum conductor on wooden poles, from the intersection of English and Simpson Roads to the Midway substation. Length: Approximately 5-1/2 miles (b) One single circuit 92-kV transmission line using 795 MCM all-aluminum conductor on wooden pooles capable of eventually carrying two (2) circuits, from the Highline substation to a location to be determined by IID near the intersection of Pitzer and Correll roads. Page 1 of 3 Length: Approximately 17 miles 4. Midway Substation 230-kV/92-kV electrical substation utilizing two (2) three-phase transformers with a top rating of 225 MVA and two (2) 92-kV bays per each transformer. Substation is to be located at the approximate northwest intersection of Simpson Road and the East Highline Canal. 5. Midway-Highline Transmission Line A transmission line using steel poles from the Midway substation paralleling approximately the west bank of the East Highline Canal south to the Highline substation, capable of carrying two (2) circuists of single 1033 MCM ACSR conductor, but carrying only one such circuit. Length: Approximately 30 miles 6. Highline Substation 230 kV/92-electrical substation capable of accommodating two (2) three-phase transformers with a top rating of 225 MVA and two (2) 92-kV bays per each transformer. Only one such transformer and two (2) 92-kV bays are included in the Transmission Project. SUMMARY OF PROPOSED TRANSMISSION LINE FACILITIES Facility Description -------- ----------- Structure: Lattice steel towers and multi-sided hollow tubular steel poles. See Figures 3.1 and 3.2 for typical configurations and dimensions. Strength requirements shall be in accordance with General Order 95 of the Public Utilities Commission of the State of California ("G.O. 95"). Footings: Concrete piles cast in place. Strength requirements shall be in accordance with G.O. 95. Conductors: Bundled or unbundled, 1033 MCM, Aluminum Conductor, Steel Reinforced (ACSR) cable. Strength requirements shall be in accordance with G.O. 95. Page 2 of 3Groundwire: One groundwire, approximately 0.5 inch in diameter, attached to the top of tower or pole. Insulator/Hardware Assemblies: Vertical ("V" or "I") configuration of 15 to 18 porcelain insulators per phase for tangent towers. Two strings in parallel of 17 to 20 insulators each per phase for dead-end towers. Access Roads: Existing roads will be utilized and improved only if necessary. Approximately 15 miles of new bladed roads will be needed where line crosses undeveloped areas. Substations: Two new and one existing substations are involved. Each new substation uses 225 MVA 230-kV/92-kV transformer banks with 230-kV and 92-kV switchyards. Each switchrack includes wide flange steel structures for line, bus and transformer dead-ends, a suspension bus system with mid-span taps for line and transformer connections, circuit breakers and air disconnets for line and equipment switching, fault protection and isolation during maintenance and necessary coupling capacitors, wave traps and potential devices for metering and control. Each substation will have a relay/control house equippedd for remote operation. Page 3 of 3EXHIBIT 4 Project Budget Item Budgeted Amount ---- --------------- Right of Way Acquisition $ 1,417,000 Right of Way Purchase Cost 4,500,000 Land clearing and facility relocation 1,900,000 Environmental Mitigation 543,000 1,250,000 Modifications to Edison Mirage substation Engineering and Construction Item 1 of Project Description $ 3,395,000 Item 2 of Project Description 14,578,000 Item 3a of Project Description 1,203,000 Item 3b of Project Description 1,870,000 Item 4 of Project Description 9,163,000 Item 5 of Project Description 5,516,000 Item 6 of Project Description 4,545,000 ----------- Subtotal $40,271,000 40,271,000 Insurance Charges 500,000 IID Administrative Costs 250,000 Participants' Costs 1,000,000 Manager fees and expenses 100,000 ----------- Subtotal $51,731,000 Contingency allowance (5%) 2,586,000 Total Budget $54,317,000 Page 1 of 1EXHIBIT 5 Example of Operation of Section 8.05 Assumptions: 1. The Transmission Project has a Normal Transmission Capacity of 140 MW. 2. There are three Participants with the following Capacity Nominations and Transmission Service Entitlements (under their Transmission Agreements). Capacity Transmission Participant Nomination Service Entitlement ---------- ---------- ------------------- A 30 MW 30 MW B 30 MW 20 MW C 30 MW 20 MW 3. Since the sum of the Capacity Nominations of the Participants is 90 MW, under the formula of Section 6.05 IID's Reserved Capacity is 40 MW. 4. The Project Cost was $50 million. The Credit Installment Period is 10 years (120 months) of which 5 years (60 months) remain. 5. D desires to become an Additional Participant and to connect to the Midway substation with a Capacity Nomination of 20 MW.Calculation: There remain 10 MW of capacity in the Project over and above the Capacity Nominations of the Participants (total of 90 MW) and IID's Reserved Capacity (40 MW). As to this capacity no preemption is required and, under the first formula in Section 8.02, $2.5M is collectede by IID and distributed among A, B and C: $50M x 60 months x 10 MW = $2.5 M ---------- ------------- 120 months 90 MW + 10 MW The distribution to A, B and C takes place in accordance with the second formula in Section 8.02. In addition, under Section 8.04 an amount equal to 15%T of $2.5M ($375,000) is collected from D by IID and, assuming A, B and C are all Original Participants, is split equally among them. Page 1 of 2As for the remaining 10 MW desired by D, this capacity cannot be obtained without preempting a portion of the Capacity Nominations of B and C. (A is protected from preemption because its Transmission Service Entitlement (under its Transmission Agreement) covers its entire Capacity Nomination.) Assume that after following the procedure set forth in Section 6.3 of the Standard Form Transmission Agreement, IID preempts 5 MW of capacity from B and 5 MW of capacity from CD, for use by D. Under Section 8.05, $1.25M is distributed to B and C each, assuming that each of them has $1.25M in Transmission Credits left. This is obtained as follows: $50M x 60 months x 5 MW = $1.25 M ---------- -------------- 120 months 140 MW - 40 MW In addition, B and C each receive an amount equal to 15% of $1.25M, or $187,500. In summary, as a result of this cost reallocation A, B and C have received the following amounts:A B C $833,333,33* $ 833,333.33* $ 833,333.33* 125,000.00 125,000.00 125,000.00 1,250,000.00 1,250,000.00 187,500.00 187,500.00 ----------- ------------- ------------- $958,333.33 $2,395,833.33 $2,395,833.33 for a total of $5,750,000; and they have transferred to D $5,000,000 in Transmission Credits. -------------------- * This assumes that the amount of unused Transmission Credits held by each Participant (C(i) in the second formula of Sdection 8.02) is the same and equals or exceeds $833,333.33. Page 2 of 2EXHIBIT 6 PLANT CONNECTION AGREEMENT FOR THE ---------------------------- BETWEEN IMPERIAL IRRIGATION DISTRICT AND ---------------------------- TABLE OF CONTENTS ----------------- SECTION TITLE PAGE ------- ----- ---- 1 PARTIES ............................................................. 1 2 RECITALS ............................................................ 1 3 AGREEMENT ........................................................... 2 4 DEFINITIONS ......................................................... 2 5 EFFECTIVE DATE AND TERM ............................................. 3 6 CONNECTION OF PLANT ................................................. 3 7 ELECTRIC SERVICE TO PRODUCER ........................................ 3 8 METERING OF ENERGY DELIVERIES ....................................... 4 9 PRODUCER'S DELIVERY AND IID ACCEPTANCE OF ENERGY FROM PLANT ......... 4 10 PRODUCER'S GENERAL OBLIGATIONS ...................................... 4 11 IID'S GENERAL OBLIGATIONS ........................................... 5 12 BILLING ............................................................. 6 13 AUTHORIZED REPRESENTATIVES .......................................... 7 14 METERS .............................................................. 7 15 CONTINUITY OF SERVICE ............................................... 9 16 LIABILITY ........................................................... 9 17 UNCONTROLLABLE FORCES ............................................... 11 18 INTEGRATION AND AMENDMENTS .......................................... 12 19 NON-WAIVER .......................................................... 12 20 NO DEDICATION OF FACILITIES ......................................... 12 21 SUCCESSORS AND ASSIGNS .............................................. 13 22 EFFECT OF SECTION HEADINGS .......................................... 13 23 GOVERNING LAW ....................................................... 13 24 ARBITRATION ......................................................... 13 i 25 ENTIRE AGREEMENT .................................................... 15 26 NOTICES ............................................................. 15 27 SEVERAL OBLIGATIONS ................................................. 15 28 SIGNATURE CLAUSE .................................................... 17 ATTACHMENTS ----------- EXHIBIT "A" ......................................................... 18 EXHIBIT "B" ......................................................... 22 ii1. PARTIES The parties to this Agreement are IMPERIAL IRRIGATION DISTRICT ("IID"), organized under the Water Code of the State of California and ____ ("Producer"), hereinafter referred to individually as "Party", and collectively as "Parties". 2. RECITALS 2.1 Producer intends to construct and operate, as owner or lessee, a ______________ generating facility with a maximum________ megawatt net operating capacity at the__________________________________________ and to sell the Plant electrical output to Southern California Edison Company ("SCE"). 2.2 SCE has entered into the Power Purchase Agreement dated ___________________, ("Purchase Agreement") with Producer, to purchase all the electrical output from the Plant. 2.3 SCE and Producer agree that the terms and conditions regarding transmission of the Plant's Energy to an IID/SCE point of interconnection shall be pursuant to a Transmission Service Agreement to be entered into between IID and Producer. 2.4 Since the Plant will be built in the IID service territory, it will be convenient to connect the Plant to the IID electric system. Producer hereby grants the IID the right to enter the Plant site for any reasonable purposes connected with this Agreement, by previous arrangements with the Plant manager. Those reasonable purposes include maintenance and repairs to IID equipment in Producer's facilities, observing tests of said facilities, reading of kilowatt-hour meters, and the like. 2.5 Producer desires to purchase and IID desires to sell the electrical energy necessary to satisfy the operation and maintenance power consumption requirements of the Plant for the life of the Plant that is not normally generated by the Plant itself, or portable generating equipment. -1- 2.6 The Parties desire, by means of this Agreement, to interconnect the Plant to the IID electrical system and to establish the terms, conditions and obligations of the Parties relating to such interconnection. 3. AGREEMENT The Parties agree as follows: 4. DEFINITIONS 4.1 Agreement: This Plant Connection Agreement between IID and Producer, and all Exhibits hereto, as may be amended from time to time. 4.2 Authorized Representative: The representative of a Party designated in accordance with Section 13. 4.3 Energy: Electric energy in excess of Producer's electric energy requirements, expressed in kilowatt-hours, generated by the Plant and measured and delivered to the Point of Delivery. 4.4 Funding and Construction Agreement: An agreement entered into by IID and others dated ____, 1987, providing for the funding and construction of the Heber-Mirage Transmission Project, to which a form of this Agreement is attached as Exhibit 6. 4.5 Operation Date: The day on which the Plant Energy is first accepted by IID for delivery to SCE. 4.6 Plant: A maximum of____________________________MW net operating capacity facility operated by Producer, as owner or lessee, including all associated equipment and improvements necessary for generating electric energy and transmitting it to the high voltage side of the power transformer. 4.7 Point of Delivery: The point on the high voltage side of Producer's switchyard where IID's metering equipment measures the delivery of Energy to the IID system as shown on Exhibit "B". -2- 4.8 System Emergency: A condition on IID's system which is likely to result in imminent significant disruption of service to customers or is imminently likely to endanger life or property. 5. EFFECTIVE DATE AND TERM This Agreement shall become effective upon the Operation Date of the Plant, and shall remain in effect until the earlier of (i) __*__ or (ii) thirty six (36) months from the date the Plant has ceased to operate at the option of IID. It is understood that (i) if the Completion Date, as the term Completion Date is defined in Article I of Funding and Construction Agreement does not occur, or (ii) if the Operation Date does not occur within five (5) years after the date this Agreement was executed, this Agreement shall be of no force or effect. 6. CONNECTION OF PLANT 6.1 Producer may electrically connect its Plant, in accordance with the provisions of this Agreement, so that it can operate in parallel with the IID electric system. Parallel operation will not commence until IID has inspected and approved the interconnection facilities and operational procedures. 6.2 Notwithstanding the provision that Producer has furnished the high voltage switchyard complete, including the high voltage oil circuit breakers and disconnect switches, the control of the high voltage oil circuit breakers and disconnect switches shall be under the control of the IID dispatcher. 7. ELECTRIC SERVICE TO PRODUCER IID shall provide electric service to Producer pursuant to Section 12. (* Insert expiration date of applicable power sales agreement between Producer and SCE.) -3- 8. METERING OF ENERGY DELIVERIES Metering for electric service to Producer and for energy deliveries by Producer to IID for delivery to SCE shall be at the Point of Delivery as shown on Exhibit "B". Four meters shall be installed which shall measure and record flows in each direction as shown on Exhibit "B". 9. PRODUCER'S DELIVERY AND IID ACCEPTANCE OF ENERGY FROM PLANT Whenever electric output from the Plant exceeds Producer's power requirements, Producer shall deliver all such excess output to IID for delivery to SCE and IID shall accept such output for delivery to SCE and deliver such output to SCE pursuant to a transmission service agreement to be entered into between Producer and IID. 10. PRODUCER'S GENERAL OBLIGATIONS Producer shall: 10.1 Operate the Plant in a manner consistent with applicable electric utility industry standards, good engineering practice, and without degradation of quality or reliability of service to IID customers. 10.2 Deliver the Plant's net electrical output to IID for the account of SCE at the Point of Delivery. 10.3 Each Party shall provide the reactive kilovolt-ampere (KVA) requirements of its own system so that there will be no interchange of reactive KVA between systems. The Parties shall cooperate to control the flow of reactive KVA to prevent the introduction of objectionable operating conditions on the system of either Party. 10.4 Coordinate, to the greatest extent practicable, major overhaul and inspection outages of the Plant with IID. 10.5 Give IID a written schedule on or before June 1, and December 1, each year of the estimated amounts and rates of delivery of energy to be deli- -4- vered to IID for the account of SCE at the Point of Delivery during each month of the succeeding twelve-month (12) period commencing July 1, and January 1. 10.6 Give IID a written schedule on or before the fifteenth (15th) day of each month of the estimated amounts and rates of delivery of energy to be delivered to IID for the account of SCE at the Point of Delivery during each day of the succeeding calendar month. 10.7 Give IID a schedule on or before 12:01 p.m. on Tuesday of each seven-day (7) period of the estimated amounts and rates of delivery of energy to be delivered to IID for the account of SCE at the Point of Delivery during each hour of the succeeding seven-day (7) period commencing at 12:01 a.m. on the following Monday; provided, however, that if any changes in the hourly deliveries so scheduled become necessary, Producer shall notify IID of such changes as far in advance as possible. 10.8 Provide IID any reasonable rights-of-way and access required for testing and reading of meters by previous arrangement with the Plant manager. 10.9 Carry out the directions of the Authorized Representatives with respect to the matters set forth in this Agreement. 11. IID'S GENERAL OBLIGATIONS IID shall: 11.1 Design, acquire, construct, operate and maintain, or cause to be designed, acquired, constructed, operated and maintained, and shall own, a connecting transmission line between IID's transmission system and the Plant. Following the completion of such line, IID may bill and Producer shall pay IID's costs of designing, acquiring and constructing such line. Producer shall have the right to audit IID's records and accounts to verify the cost of such line. 11.2 Accept the Plant's net electrical output for the account of SCE at the Point of Delivery and simultaneously deliver an equal amount of electric -5- energy (less applicable transmission losses) to the SCE system at IID/SCE point(s) of interconnection. 11.3 Coordinate, to the greatest extent practicable, major overhaul and inspection outages of IID transmission facilities with Producer and notify Producer of any changes as far in advance as possible. 11.4 Carry out the directions of the Authorized Representative with respect to the matters set forth in this Agreement. 11.5 Operate its system in a manner consistent with applicable utility industry standards and good engineering practices. 12. BILLING 12.1 IID shall read the meters monthly according to its regular meter reading schedule beginning no more than thirty (30) days after the date that electric energy is first supplied to Producer. IID monthly shall send Producer within ten (10) working days after the meter is read a bill for electric service. Producer shall pay IID the total amount billed within thirty (30) days of receipt of the bill. 12.2 IID shall bill Producer for Producer's consumption of energy from IID's resources in accordance with Rate Schedule GL or Rate Schedule A-2, as applicable, as it may be revised from time to time. Copies of current Rate Schedule GL and current Rate Schedule A-2 are attached as Exhibit "A". 12.3 If Producer disputes a bill, payment shall be made as if no dispute existed pending resolution of the dispute by the Authorized Representatives. If the bill is determined to be in error, the disputed amount shall be refunded by IID including interest at the rate of one and one-half percent (1-1/2%) per month, compounded monthly, from the date of payment to the date the refund check or adjusted bill is mailed. -6- 13. AUTHORIZED REPRESENTATIVES 13.1 Within thirty (30) days after the date this Agreement is signed, each Party shall designate, by written notice to the other Party, an Authorized Representative who is authorized to act in its behalf in the implementation of this Agreement and with respect to those matters contained herein which are the functions and responsibilities for the Authorized Representatives. Either Party may, at any time, change the designation of its Authorized Representative by written notice to the other Party. 13.2 IID's Authorized Representative shall develop detailed written procedures necessary and convenient to administer this Agreement within six (6) months after the date signed. Such procedures shall be submitted to Producer's Authorized Representative for review, comment, discussion and concurrence before they are put into effect. Such procedures shall include, without limitation: (i) communication between Producer and IID's electric system dispatcher with regard to daily operating matters, (ii) billing and payments, (iii) specified equipment tests, and (iv) operating matters which affect or may affect quality and reliability of service to electric customers and continuity of deliveries to SCE. 13.3 The Authorized Representative shall have no authority to modify any of the provisions of this Agreement. 14. METERS 14.1 All meters shall be sealed and the seal shall be broken only upon occasions when the meters are to be inspected, tested or adjusted. 14.2 IID shall inspect and test all meters upon their installation and at least once every year thereafter. If requested to do so by Producer, IID shall inspect or test a meter more frequently than every year, but the expense of such inspection or test shall be paid by Producer unless the meter is found -7- to register inaccurately by more than two percent (2%) from the measurement made by a standard meter. Each Party shall give reasonable notice to the other Party of the time when any inspection or test shall take place and that Party may have representatives present at the test or inspection. If a meter is found to be inaccurate or defective, it shall be adjusted, repaired or replaced in order to provide accurate metering. All adjustments due to inaccurate meters shall be limited to the preceding six (6) months. 14.3 If a meter fails to register, or if the measurement made by a meter during a test varies by more than two percent (2%) from the measurement made by the standard meter used in the test, adjustment shall be made correcting all measurements made by the inaccurate meter for: (i) the actual period during which inaccurate measurements were made, if the period can be determined, or if not, (ii) the period immediately preceding the test of the meter equal to one-half (1/2) the time from the date of the last previous test of the meter; provided, however, that the period covered by the correction shall not exceed six (6) months. 14.4 Producer shall telemeter information to IID's Dispatch Center regarding the kilowatts, kilowatt-hours, kilovars and kilovar-hours delivered to or received from IID at the Point of Delivery over phone line leased by Producer. IID shall purchase, own, and shall design, install, operate, maintain, or cause to be designed, installed, operated, and maintained, equipment to automatically transmit from the Plant to IID's Dispatch Center continuous values of Plant output expressed as megawatts, megavars and megawatt-hours. IID may thereupon bill and Producer shall promptly pay IID's cost of design, purchase -8- and installation of said equipment. Producer shall have the right to audit IID's records and accounts to verify the cost of said equipment. 15. CONTINUITY OF SERVICE IID shall not be obligated to accept and IID may require Producer to temporarily curtail, interrupt or reduce deliveries of energy upon advance notice to Producer, when such curtailment, interruption or reduction is required in order for IID to construct, install, maintain, repair, replace, remove, investigate or inspect any of its equipment or any part of its system or if IID determines that such curtailment, interruption or reduction is necessary because of a System Emergency, forced outages or abnormal operating conditions on its system. IID shall use reasonable efforts to keep interruptions and curtailments to a minimum time. 16. LIABILITY 16.1 Except for any loss, damage, claim, costs, charge or expense resulting from Willful Action, neither Party (the "released Party"), its directors or other governing body, officers or employees shall be liable to the other Party for any loss, damage, claim, cost, charge, or expense of any kind or nature incurred by the other Party (including direct, indirect or consequential loss, damage, claim, cost, charge or expense; and whether or not resulting from the negligence of a Party, its directors or other governing body, officers, employees or any person or entity whose negligence would be imputed to a Party) from engineering, repair, supervision, inspection, testing, protection, operation, maintenance, replacement, reconstruction, use or ownership of the released Party's electrical system, Plant(s) or associated facilities in connection with the implementation of this Agreement. Except for any loss, damage, claim, cost, charge or expense resulting from Willful -9- Action, each Party releases the other Party, its directors or other governing body, officers and employees from any such liability. 16.2 For the purpose of this Section 16, Willful Action shall be defined as action taken or not taken by a Party at the direction of its directors or other governing body, officers or employees having management or administrative responsibility affecting its performance under this Agreement, as follows: 16.2.1 Action which is knowingly or intentionally taken or not taken with conscious indifference to the consequences thereof or with intent that injury or damage would result or would probably result therefrom. 16.2.2 Action which has been determined by final arbitration award or final judgment or judicial decree to be a material default under this Agreement and which occurs or continues beyond the time specified in such arbitration award or judgment or judicial decree for curing such default or, if no time to cure is specified therein, occurs or continues thereafter beyond a reasonable time to cure such default. 16.2.3 Action which is knowingly or intentionally taken or not taken with the knowledge that such action taken or not taken is a material default under this Agreement. 16.3 Willful Action does not include any act or failure to act which is merely involuntary, accidental or negligent. 16.4 The phrase "employees having management or administrative responsibility," as used in Section 16.2, means the employees of a Party who are responsible for one or more of the executive functions of planning, organizing, coordinating, directing, controlling and supervising such Party's performance under this Agreement with responsibility for results. -10- 16.5 Subject to the foregoing provisions of this Section 16, each Party agrees to defend, indemnify and save harmless the other Party, its officers, agents, or employees against all losses, claims, demands, costs or expenses for loss of or damage to property, or injury or death of persons, which directly or indirectly arise out of the indemnifying Party's performance pursuant to this Agreement; provided, however, that a Party shall be solely responsible for any such losses, claims, demands, costs or expenses which result from its sole negligence or Willful Action. 17. UNCONTROLLABLE FORCES Neither Party shall be considered to be in default in the performance of any of its obligations under this Agreement when a failure of performance shall be due to an uncontrollable force. The term "uncontrollable force" shall mean any cause beyond the control of the Party affected including, but not restricted to, failure of or threat of failure of facilities which have been maintained in accordance with generally-accepted engineering and operating practices in the electrical utility industry, flood, drought, earthquake, tornado, storm fire, pestilence, lightning and other natural catastrophes, epidemic, war, riot, civil disturbance or disobedience, strike, labor dispute, labor or material shortage, sabotage, government priorities and restraint by court order or public authority (whether valid or invalid) and actions or nonaction by or inability to obtain or keep the necessary authorizations or approvals from any governmental agency or authority, which by exercise of due diligence such Party could not reasonably have been expected to avoid and which by exercise of due diligence it has been unable to overcome. Nothing contained herein shall be construed as to require a Party to settle any strike or labor dispute in which it may be involved. Either Party rendered unable to fulfill any of its obligations under this Agreement by reason -11- of an uncontrollable force shall give prompt written notice of such fact to the other Party and shall exercise due diligence to remove such inability with all reasonable dispatch. 18. INTEGRATION AND AMENDMENTS This Agreement constitutes the entire agreement between the Parties relating to the interconnection of Producer's Plant to IID's electric system, the acceptance of energy by IID from Producer and the providing of electric service by IID. No oral agreement or prior written agreement between the Parties shall be of any effect whatsoever; provided, however, that any arrangements agreed upon by the Authorized Representatives within the limits of their authority, and consistent with this Agreement shall be binding upon the Parties. All changes to this Agreement shall be in writing and shall be signed by an officer of each Party. 19. NON-WAIVER None of the provisions of this Agreement shall be considered waived by either Party except when such waiver is given in writing. The failure of either Party to insist in any one or more instances upon strict performance of any of the provisions of this Agreement or to take advantage of any of its rights hereunder shall not be construed as a waiver of any such provisions or the relinquishment of any such rights for the future; but the same shall continue and remain in full force and effect. 20. NO DEDICATION OF FACILITIES Any undertaking by one Party to the other Party under any provision of this Agreement shall not constitute the dedication of the system or any portion thereof by the Party to the public or to the other Party, and it is understood and agreed that any such undertaking under any provision of this Agreement by a Party shall cease upon the termination of its obligations hereunder. -12- 21. SUCCESSORS AND ASSIGNS 21.1 This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Parties. 21.2 This Agreement may be assigned by Producer only (i) to a purchaser or co-owner of the Plant or to a person who will operate the Plant pursuant to a contract or other arrangement with such purchaser and in either case with the prior written consent of IID (which shall not be unreasonably withheld) or (ii) for security purposes, to a bank or other entity which provides financing for the Plant or any electrical transmission facilities associated therewith. Producer and IID agree that nothing in this Section 21.2 may be amended, modified or waived without the prior written consent of each and every Party to the Funding and Construction Agreement (except for any Parties in default thereunder.) 22. EFFECT OF SECTION HEADINGS Section headings appearing in this Agreement are inserted for convenience only, and shall not be construed as interpretations of text. 23. GOVERNING LAW This Agreement shall be interpreted, governed and construed under the laws of the State of California or the laws of the United States, as applicable. 24. ARBITRATION 24.1 Any dispute arising out of or relating to this Agreement, or the breach thereof, which is not resolved by the Parties acting through their Authorized Representatives shall be settled by arbitration to the extent permitted by the laws applicable to the Parties; provided, however, that no Party to the dispute shall be bound to any greater extent than any other Party to the dispute. Arbitration shall not apply to any dispute or matter that is within the jurisdiction of any regulatory agency. -13- 24.2 Any demand for arbitration shall be made by written notice to the other Party setting forth in adequate detail the nature of the dispute, the issues to be arbitrated, the amount or amounts, if any, involved in the dispute, and the remedy sought. Within twenty (20) days from the receipt of such notice, the other Party may submit its own written statement of the dispute and may set forth in adequate detail any additional related matters or issues to be arbitrated. 24.3 Within thirty (30) days after delivery of the written notice demanding arbitration, the Parties acting through their Authorized Representatives shall meet for the purpose of selecting an arbitrator. The Parties may agree upon a single arbitrator, but in the event that they cannot agree, three arbitrators shall be used. Each Party shall designate one arbitrator, and the two arbitrators shall then select a third arbitrator. All arbitrators shall be persons skilled and experienced in the field in which the dispute has arisen and no person shall be eligible for appointment as an arbitrator who is or has been an officer or employee of either of the Parties or otherwise interested in the matter to be arbitrated. Should either party refuse or neglect to appoint an arbitrator or to furnish the arbitrators with any papers or information demanded, the arbitrators are empowered, by both Parties, to proceed without the participation or assistance of that Party. 24.4 Except as otherwise provided in this Section, the arbitration shall be governed by the rules and practices of the American Arbitration Association, or a similar organization if the American Arbitration Association should not at the time exist. 24.5 Arbitration proceedings shall be held in Imperial, California, at a time and place to be selected by the arbitrators. The arbitrators shall hear evidence submitted by the Parties and may call for additional information -14- which shall be furnished by the Party having such information. The arbitrators shall have no authority to call for information not related to the issues included in the dispute or to determine other issues not in dispute. 24.6 If there is only one arbitrator, his decision shall be binding and conclusive on the Parties. If there are three arbitrators, the decision of any two shall be binding and conclusive. The decision of the arbitrators shall contain findings regarding the issues involved in the dispute, including the merits of the positions of the Parties, the materiality of any default, and the remedy or relief to which a Party shall be entitled. The arbitrators may not grant any remedy or relief which is inconsistent with this Agreement, nor shall the arbitrators make findings or decide issues not in dispute. 24.7 The fees and expenses of the arbitrators shall be shared equally by the Parties, unless the decision of the arbitrators specifies some other apportionment. All other expenses and costs of the arbitration shall be borne by the Party incurring such expenses and costs. 24.8 Any decision or award granted by the arbitrators shall be final and judgement may be entered on it in any court of competent jurisdiction. This agreement to arbitrate shall be specifically enforceable. 25. ENTIRE AGREEMENT 25.1 The complete agreement of the Parties is set forth in this Agreement and all communications regarding subject interconnected operations whether oral or written, are hereby abrogated and withdrawn. -15- 26. NOTICES Any formal communication or notice in connection with this Agreement shall be in writing and shall be deemed properly given if delivered in person or sent first class mail, postage prepaid to the person specified below: ----------------------------- ----------------------------- ----------------------------- IMPERIAL IRRIGATION DISTRICT c/o General Manager P. O. Box 937 Imperial, California 92251 27. SEVERAL OBLIGATIONS Except where specifically stated in this Agreement to be otherwise, the duties, obligations and liabilities of the Parties are intended to be several and not joint or collective. Nothing contained in this Agreement shall ever be construed to create an association, trust, partnership, or joint venture, or impose a trust or partnership duty, obligation or liability on or with regard to either Party. Each Party shall be individually and severally liable for its own obligations under this Agreement. -16- 28. SIGNATURE CLAUSE The Parties have caused this Agreement to be executed in their respective names, in duplicate, by their respective officers hereunto this ________ day of _______________________________, 1987. ----------------------------- By -------------------------------------- ATTEST: By ----------------------------- Secretary IMPERIAL IRRIGATION DISTRICT By -------------------------------------- President, Board of Directors ATTEST: By ----------------------------- Secretary -17- EXHIBIT "A" IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 166 Imperial, California Cancelling Sheet No. 139 SCHEDULE A-2 GENERAL WHOLESALE POWER SERVICE APPLICABILITY Applicable to general wholesale power service for industrial, commercial and agricultural purposes, subject to special conditions hereinafter stated. Applicable to standby or breakdown service where the entire electric power requirements on the customer's premises are not regularly supplied by the District. MONTHLY RATE The monthly rate shall be the sum of A, B, C and D. A. Demand Charge .............................$2.52 per kilowatt of Billing Demand B. Energy Charge ...............................5.60(cents) per kwh. C. Energy Cost Adjustment - The amount computed in accordance with Schedule ECA. D. Power Factor Adjustment - A charge of $0.25 per kilovar of reactive demand as measured by the incoming kilovar demand meter for each kilovar in excess of .60 times the kilowatt demand measured and supplied by the District. MINIMUM CHARGE The minimum charge shall be the demand charge, but in no case shall the minimum charge be less than the demand charge (A) multiplied by 75% of the highest maximum demand established in the preceding 11 months. SPECIAL CONDITIONS (a) Voltage: This schedule applies to service rendered at a transmission voltage of 34.5-kV or above. It shall be the responsibility of the customer to furnish transformation to any other voltages required. (b) Billing Demand: The billing demand shall be the kilowatts of measured maximum demand but in no case less than 75 percent of the highest maximum demand established in the preceding 11 months. The measured maximum demand in any month will be the average kilowatt delivery indicated or recorded by the District's demand meter in the 15-minute interval in which such delivery is greater than any other 15-minute interval. In case the load is intermittent or subject to violent fluctuations, the District may base the demand upon a 5-minute interval instead of a 15-minute interval. -18- Board Resolution Date; Effective July 3, 1984 August 1, 1984 SCHEDULE A-2 (Continued) GENERAL WHOLESALE POWER SERVICE (c) A minimum connected load of 5000 kw shall be required. (d) Parallel Operation: A customer may operate its generating plant in parallel with the District's system if such customer installs and operates such control and protective equipment as required by the District. (e) Metering: The District will provide the normal metering equipment for the size and type of load served. Additional metering which may be required by the District shall be furnished by the customer and tested in accordance with requirements of the District. Meters shall not allow reverse registration. (f) Regulations Governing Sale of Electric Energy: Service under this rate schedule is subject to the District's Regulations Governing the Sale of Electric Energy. -19- Board Resolution Date Effective July 3, 1984 August,1,1984IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 167 Imperial, California Cancelling Sheet No. 139 EXHIBIT "A" IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 152 Imperial, California Cancelling Sheet No. 137 SCHEDULE GL LARGE GENERAL SERVICE APPLICABILITY Applicable to general service having a demand of 100 kilowatts or higher. Not applicable for standby, supplemental or resale service. MONTHLY RATE The monthly rate shall be the sum of A, B and C. A. Demand Charge ...................$2.65 per kilowatt of Billing Demand B. Energy Charge ...................5.90(cents) per kwh C. Energy Cost Adjustment - The amount computed in accordance with Schedule ECA. SPECIAL CONDITIONS (a) Voltage: Service under this schedule normally will be supplied at standard voltage available at the location. Where 240-volt three-phase power is to be combined with single-phase, and 4-wire service is available, service will be supplied through one meter. In 240-volt areas, where, as determined by District, it is not practical to provide a 4-wire service, such single-phase and three-phase service will be supplied and metered separately, the meter readings, both kwh and demands, being combined for the purpose of computing charges on this schedule. Where service is taken at 480-volts or higher, a three-phase service at one voltage only will be supplied. (b) Billing Demand: The billing demand shall be the higher of (i) the highest 15-minute integrated or thermal kilowatt demand measured during the billing period, or (ii) 50% of highest demand measured during the five summer months (May-September) of the 12 months ending with the current month, or (iii) 20% of the highest measured demand during the seven winter months (October-April) of the 12 months ending with the current month, or (iv) the demand specified in a contract, or (v) 50 kilowatts. When the monthly demand exceeds 100 KW in any billing month, billing will be under Rate Schedule GL, and thereafter continue under Rate Schedule GL until monthly demands have been less than 100 KW for a period of twelve consecutive months. -20- Board Resolution Date Effective January 18, 1983 February 1, 1983 SCHEDULE GL (Continued) (c) Seasonal Loads: When any customer disconnects service and resumes service within 12 months from date of last disconnection, the customer will be required to pay all charges which would have been billed if the customer had not been disconnected. (d) Wind Machines: Wind machines for frost protection may be served under this schedule provided the load will be limited to existing unused capacity of lines and substations as determined by the District. Provisions (ii), (iii) and (v) of (b) shall not apply to wind machines. (e) Vacuum Cooling Loads: Portable vacuum cooling loads will be served on existing facilities where adequate capacity is available provided the customer pays any up-and-down cost necessary to provide service and deposits a nonrefundable amount equal to the minimum charge for the succeeding 12-month period. One twelfth of such deposit will be applied or prorated to any monthly billing during the 12-month period. (f) Regulations Governing Sale of Electric Energy: Service under this rate schedule is subject to the District's Regulations Governing the Sale of Electric Energy. -21- Board Resolution Date Effective January 18, 1983 February 1, 1983IMPERIAL IRRIGATION DISTRICT Revised Sheet No. 153 Imperial, California Cancelling Sheet No. 138 EXHIBIT "B" [METERING ONE-LINE DIAGRAM] -22- EXHIBIT 7 Addresses of Parties Imperial Irrigation District: Operating Headquarters P.O. Box 937 Imperial, California 92251 Telecopier: (619) 339-9423 Chevron Geothermal Company of California: P.O. Box 7147 San Francisco, California 94120-7147 Telecopier: (415) 894-8930 Desert Power Company: 1201 West 5th Street P.O. Box 7600 Los Angeles, California 90051 Telecopier: (213) 977-6402 Earth Energy, Inc.: 1201 West 5th Street P.O. Box 7600 Los Angeles, California 90051 Telecopier: (213) 977-6402 GEO East Mesa No. 2, Inc.: 1825 South Grant Street Suite 900 San Mateo, California 94403 Telecopier: (415) 349-4801 GEO East Mesa No. 3, Inc.: 1825 South Grant Street Suite 900 San Mateo, California 94403 Telecopier: (415) 349-4801 Page 1 of 2 Heber Geothermal Company: P.O. Box 2857 El Centro, California 92244 Telecopier: (619) 353-8852 Magma Power Company: 11770 Bernardo Plaza Court Suite 366 San Diego, California 92128 Telecopier: (619) 487-9416 Ormesa Geothermal: 500 Dermody Way Sparks, Nevada 89431 Telecopier: (702) 356-9125 Ormesa Geothermal II: 500 Dermody Way Sparks, Nevada 89431 Telecopier: (702) 356-9125 Union Oil Company of California: 1201 West 5th Street P.O. Box 7600 Los Angeles, California 90051 Telecopier: (213) 977-6402 Vulcan/BN Geothermal Power Company: 11770 Bernardo Plaza Court Suite 366 San Diego, California 92128 Telecopier: (619) 487-9416 Manager: Mr. Rosendo J. Pont c/o Centennial Energy, Inc. 650 California Street 32nd Floor San Francisco, CA 94108 Telecopier: (415) 982-7374 Page 2 of 2
Exhibit 10.5.5 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated as of November __, 2004 (this "Agreement"), by and among Ormat Technologies, Inc., a Delaware corporation (the "Company"), Ormat Industries Ltd., an Israeli corporation ("OIL"), and any other Person that may be designated by OIL from time to time and that agrees to become a party to this Agreement in accordance with the provisions hereof. W I T N E S S E T H: - - - - - - - - - - WHEREAS, OIL is the holder of outstanding Common Stock (as defined below); WHEREAS, OIL has granted, and from time to time after the date hereof may continue to grant, to a number of directors, officers and employees of OIL or of any subsidiary thereof options to purchase from OIL shares of Common Stock held by OIL ("Options"); WHEREAS, the parties hereto desire to enter into this Agreement which sets forth the registration rights, and certain other related covenants, applicable to the shares of Common Stock that are (i) held from time to time by OIL and/or any of its subsidiaries or (ii) acquired from time to time by directors, officers or employees of OIL or of any subsidiary thereof upon the exercise of Options. NOW, THEREFORE, in consideration of the premises and the mutual obligations, covenants and agreements herein contained, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. For purposes of this Agreement, the following terms shall have the meanings set forth below: "Affiliate" shall mean, with respect to any given Person, any other Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person, and when used with respect to any individual shall also include the Relatives of such individual. The term "control" (including, with correlative meaning, the terms "controlled by" and "under common control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Business Day" means any day other than a Saturday, Sunday or any other day on which commercial banks in New York City are authorized or required by law to close. "Commission" means the United States Securities and Exchange Commission or any successor agency of the United States government administering the Securities Act. "Common Stock" means the common stock, par value $0.001 per share, of the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and any similar or successor federal statute, and the rules and regulations of the Commission promulgated thereunder, as in effect at the time. "NYSE" shall mean the New York Stock Exchange, Inc. or any successor corporation thereto. "Option Holder" means any current or former director, officer or employee of OIL or of any subsidiary thereof that holds one or more Options or any Registrable Securities acquired upon the exercise of one or more Options. "Options" has the meaning set forth in the recitals hereto. "Person" means a corporation, an association, a trust, a partnership, a limited liability company, a joint venture, an organization, a business, an individual, a government or political subdivision thereof, or a governmental body. "Prospectus" means the prospectus included in any Registration Statement, together with and including any amendment or supplement to such prospectus, covering the public offering of any portion of the Registrable Securities covered by a Registration Statement, and all material incorporated by reference in such Prospectus. "Registering Shareholder" means any Shareholder whose Registrable Securities are included in a Registration Statement filed pursuant to this Agreement. "Registrable Securities" means: (i) the shares of Common Stock held by OIL or any subsidiary thereof on the date hereof or that may be acquired by OIL or any subsidiary thereof from time to time after the date hereof; (ii) the shares of Common Stock acquired before or after the date hereof upon the exercise of Options and held by any Shareholder; and (iii) any shares or other securities into which or for which the shares of Common Stock referred to in clauses (i) and (ii) above may be changed, converted or exchanged after the date hereof and any other shares or securities issued after the date hereof in respect of such shares (or such shares or other securities into which or for which such shares are so changed, converted or exchanged), in each case, upon any reclassification, stock combination, stock subdivision, stock dividend, share exchange, merger, consolidation or similar transaction held by a shareholder; provided, however, that a security will cease to be a Registrable Security when it (i) has been effectively registered under the Securities Act and disposed of in accordance with the Registration Statement covering it or (ii) is sold pursuant to Rule 144 (or any similar rule then in force) under the Securities Act. "Registration Statement" means a registration statement filed or to be filed by the Company with the Commission covering Registrable Securities. "Relatives" means, with respect to any individual, the spouse, parents, siblings and descendants of such individual and their respective issue (whether by blood or adoption and including stepchildren) and the spouses of such persons. 2 "Securities Act" means the Securities Act of 1933, as amended, or any successor federal statute, together with the rules and regulations of the Commission promulgated thereunder, as in effect at the time. "Shareholder" means (i) OIL, any subsidiary thereof or successor thereto that holds Registrable Securities or (ii) any Option Holder that agrees to become a party to this Agreement in accordance with the provisions hereof. ARTICLE II REGISTRATION RIGHTS 2.1 Demand Registration. (a) Request for Registration. Subject to the provisions hereof, at any time and from time to time, OIL may make a written request (a "Demand") that the Company prepare and file with the Commission a Registration Statement on Form S-1 or, if the Company is then eligible to do so, that the Company prepare and file with the Commission a Registration Statement on Form S-3, so as to permit a public offering and sale of Registrable Securities held by any Shareholder. Any Demand shall specify the number of Registrable Securities proposed to be registered and the intended method of disposition thereof. A registration effected pursuant to this Section 2.1 is hereinafter referred to as a "Demand Registration." (b) Limitation on Demand Rights. Notwithstanding anything to the contrary set forth in Section 2.1(a) hereof: (i) no Demand may be made less than (A) one hundred and eighty (180) days following the effective date of the Registration Statement on Form S-1 filed by the Company in connection with an initial public offering of the Common Stock or (B) one hundred and twenty (120) days following the effective date of any Registration Statement filed by the Company pursuant to Section 2.1 hereof; and (ii) OIL shall not be entitled to make more than one Demand that the Company prepare and file with the Commission a Registration Statement on Form S-l. (c) Right to Delay Demand Registration. If, at any time when a Demand is received by the Company, (i) the Company has undertaken to prepare a registration statement which is intended to be filed within one hundred and twenty (120) days from the date the Demand was received, or (ii) the Company's Board of Directors determines in good faith that filing a Registration Statement in response to such Demand either (A) would require the Company to make a public disclosure of information which would have a material adverse effect upon the Company or would be significantly disadvantageous to the Company or its shareholders or (B) could interfere with, or would require the Company to accelerate public disclosure of, any material financing, acquisition, disposition, corporate reorganization or other material transaction involving the Company or its subsidiaries, then the Company may, at its sole option, cause the registration requested pursuant to the Demand to be delayed for a period not in excess of one hundred and twenty (120) days from the effective date of the registration statement which the Company is preparing or from the date such Demand was received (such right to delay a request pursuant to clause (ii) of this Section 2.1(c) may be exercised by the Company not more than twice in any calendar year). If there is a postponement under this Section 2.1(c), OIL may 3 withdraw such Demand by giving notice in writing to the Company. In such case, no Demand will have been delivered for the purposes of this Section 2.1. (d) Company Participation. The Company may elect to register in any Registration Statement prepared pursuant to a Demand made under this Section 2.1 any additional shares of Common Stock (including, without limitation, any shares of Common Stock to be distributed in a primary offering made by the Company). Such election, if made, shall be made by the Company giving written notice to OIL stating (i) that the Company proposes to include additional shares of Common Stock in such Registration Statement and (ii) the number of shares of Common Stock proposed to be so included. (e) Withdrawal Right. OIL shall have the right to withdraw any Demand by giving written notice to the Company of its request to withdraw; provided, however, that (i) such withdrawal request must be made in writing prior to the earlier of (A) the execution of the underwriting agreement or the execution of the custody agreement with respect to such Demand Registration or (B) in the absence of any such agreement, the date on which the Registration Statement filed pursuant to such Demand is declared effective, and (ii) such withdrawal shall be irrevocable and, after making such withdrawal, OIL shall not be entitled to make any subsequent Demand for a period of one hundred and twenty (120) days after the date of such withdrawal. (f) Effective Demand. For purpose of clause (ii) of Section 2.1(b) hereof, a Demand, if made pursuant to Section 2.1(a) and not withdrawn in accordance with Section 2.1(e), shall be deemed to have been made only if (i) in response thereto, the Company shall have filed a Registration Statement, (ii) such Registration Statement shall have been declared effective under the Securities Act and (iii) such Registration Statement shall not have become the subject of any stop order, injunction or other order or requirement of the Commission or any other governmental or administrative agency which prevents the sale of the relevant Registrable Securities pursuant to such Registration Statement, and no court prevents or otherwise limits the sale of such securities pursuant to such Registration Statement; provided, however, that, notwithstanding anything to the contrary set forth in this Section 2.1(f), a Demand shall be deemed to have been made by OIL, if OIL made a Demand and either (x) OIL withdrew such Demand after the earlier of (A) the execution of the underwriting agreement or the execution of the custody agreement with respect to such Demand Registration or (B) in the absence of any such agreement, the date on which the Registration Statement filed pursuant to such Demand is declared effective, or (y) the failure of one or more of the conditions set forth in clauses (i), (ii) or (iii) of this Section 2.1(f) to be satisfied is attributable to the acts or omissions of OIL. 2.2 Piggyback Registration. (a) Notice of Registration. If, at any time, the Company proposes to file a registration statement with the Commission in connection with any public offering of Common Stock (other than in connection with its initial public offering of Common Stock), whether for the account of the Company or any other Person (other than a registration statement on Form S-4 or Form S-8 (or any successor forms under the Securities Act) or other registrations relating solely to employee benefit plans or any transaction governed by Rule 145 under the Securities Act), the Company shall give written notice of such proposed filing and the proposed date 4 thereof to each Shareholder that owns Registrable Securities at least twenty (20) days before the anticipated filing of such registration statement, offering such Shareholder the opportunity to offer and sell Registrable Securities owned by such Person, by means of the prospectus contained in such registration statement. If such Shareholder desires to have its Registrable Securities registered under such registration statement pursuant to this Section 2.2, such Shareholder shall advise the Company thereof in writing within ten (10) days from the provision of the Company's notice (which request shall set forth the number of Registrable Securities for which registration is requested). Subject to Section 2.3 hereof, the Company shall include in such registration statement, if filed, all Registrable Securities so requested by such Shareholder to be included so as to permit such securities to be sold or disposed of in the manner and on the terms set forth in such request. Such registration shall hereinafter be called a "Piggyback Registration." The Company shall have the right at any time to delay or discontinue, without liability to the Shareholders, any Piggyback Registration under this Section 2.2 at any time prior to the effective date of the Registration Statement if the proposed offering of Common Stock contemplated thereunder is discontinued. (b) Withdrawal Right. Any Shareholder shall have the right to withdraw its request for inclusion of its Registrable Securities in any Registration Statement pursuant to this Section 2.2 by giving written notice to the Company of its request to withdraw; provided, however, that (i) such withdrawal request must be made in writing prior to the earlier of the execution of the underwriting agreement or the execution of the custody agreement with respect to such Piggyback Registration and (ii) such withdrawal shall be irrevocable and, after making such withdrawal, such Shareholder shall no longer have any right to include Registrable Securities in the Piggyback Registration from which such Shareholder withdrew. 2.3 Allocation of Securities Included in Registration Statements. In connection with any Registration Statement in which the Shareholders have requested to include Registrable Securities which relates to an underwritten public offering, if the managing underwriter(s) of such offering advise(s) that the inclusion in such Registration Statement of some or all of the shares sought to be registered thereunder exceeds the number of shares (the "Saleable Number") that can be sold in an orderly fashion without a substantial risk that the price per share to be derived from such registration will be materially and adversely affected, then the number of shares offered thereunder shall be limited to the Saleable Number and shall be allocated, subject to Section 3.5 below, as follows: (i) if such registration is being effected in connection with any Piggyback Registration requested by the Shareholders for inclusion pursuant to Section 2.2 hereof, (1) first, to all the shares of Common Stock that the Company proposes to register for its own account, (2) second, the difference, if any, between the Saleable Number and the number of shares to be included pursuant to clause (1) above, to Registrable Securities of OIL, (3) third, the difference, if any, between the Salable Number and the number of shares to be included pursuant to clauses (1) and (2) above, to Registrable Securities of the other Shareholders, pro rata on the basis of the number of Registrable Securities requested to be included in such Piggyback Registration by each such Shareholder, until such 5 Shareholders have sold all such Registrable Securities, and (4) fourth, the difference, if any, between the Saleable Number and the number of shares to be included pursuant to clauses (1), (2) and (3) above, to all other selling shareholders, pro rata on the basis of the number of shares offered for sale by each such shareholder; and (ii) if the registration is being effected pursuant to a Demand Registration requested by OIL pursuant to Section 2.1 hereof, (1) first, to Registrable Securities of OIL, (2) second, the difference, if any, between such number and the number of shares to be included in such Demand Registration pursuant to clause (1) above, to Registrable Securities of the other Shareholders participating in the offering, pro rata, on the basis of the number of Registrable Securities requested to be included in such Demand Registration by each such Shareholder, until such Shareholders have sold all such Registrable Securities, (3) third, the difference, if any, between the Saleable Number and the number of shares to be included pursuant to clauses (1) and (2) above, to shares that the Company proposes to register for its own account, and (4) fourth, the difference, if any, between the Saleable Number and the number of shares to be included pursuant to clauses (1), (2) and (3) above, to all other selling shareholders, pro rata on the basis of the number of shares requested to be included by each such shareholder. 2.4 Certain Notices; Suspension of Sales. The Company may, upon written notice to the Registering Shareholders, suspend such Registering Shareholder's use of any Prospectus (which is a part of any Registration Statement) for a reasonable period not to exceed one hundred and twenty (120) days if the Company in its reasonable judgment believes it may possess material non-public information the disclosure of which in its reasonable judgment would have a material adverse effect on the Company and/or its subsidiaries. Each Registering Shareholder of Registrable Securities agrees by its acquisition of such Registrable Securities to hold any communication by the Company pursuant to this Section 2.4 in confidence. ARTICLE III REGISTRATION PROCEDURES 3.1 Registration Procedures. Subject to the terms of this Agreement, whenever the Company is required to effect or cause the registration of Registrable Securities pursuant to Article II hereof, the Company shall use its best efforts to effect the registration of such Registrable Securities in accordance with the intended method of disposition thereof as quickly as practicable. In connection with any Demand Registration, the Company shall, except as set forth in Section 2.1(c), as expeditiously as possible (and in no event more than one hundred and twenty (120) days from the date of receipt of a Demand) prepare and file with the Commission a Registration Statement on such form (including Form S-3) for which the Company then qualifies as the Company shall deem appropriate and which shall be available for the sale of the Registrable Securities to be registered thereunder in accordance with the provisions of this 6 Agreement and in accordance with the intended method of disposition of such Registrable Securities. The Company shall use its best efforts to cause any Registration Statement filed hereunder to be declared effective as soon as reasonably practicable after the filing thereof with the Commission, including, without limitation, preparing and/or filing with the Commission such other documents as may be necessary to comply with the provisions of the Securities Act. Subject to the provisions of Section 2.4 hereof, the Company shall, as expeditiously as possible, prepare and file with the Commission such amendments and supplements to any Registration Statement filed hereunder and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement effective (pursuant to Rule 415 under the Securities Act or otherwise) until the earlier of (i) the date on which all of the Registrable Securities registered therein shall have been sold, and (ii) ninety (90) days after such Registration Statement is declared effective. The Company shall use its best efforts to cause all shares of Common Stock so registered to be listed, commencing not later than the effective date of the applicable registration statement, on the NYSE or such other national securities exchange (including the Nasdaq National Market) on which the Company's shares of Common Stock are listed at such time, and the Company shall enter into all related customary agreements, including a listing application and indemnification agreement in customary form, and provide a transfer agent and registrar for the shares of Common Stock being registered not later than the effective date of the applicable registration statement. The Company shall take such other actions as are reasonable and necessary to comply with the Securities Act, the Exchange Act and all applicable rules and regulations promulgated thereunder, or with the reasonable request of any Registering Shareholder with respect to the registration, qualification and distribution of the shares of Common Stock to be registered. 3.2 Copies; Review. (a) At least five (5) Business Days before filing a Registration Statement or Prospectus or any amendment or supplement thereto (whether before or after effectiveness), the Company will furnish to the Registering Shareholders copies of all such documents proposed to be filed. Such documents will be subject to the review of the Registering Shareholders. The Company will immediately amend such Registration Statement and Prospectus to include such reasonable changes as the Registering Shareholders and the Company reasonably agree should be included therein. Any Registering Shareholder requesting a change which, in its reasonable judgment, is unreasonably refused by the Company may withdraw its Registrable Securities from such Registration Statement. (b) The Company shall make available for inspection by any Registering Shareholder, any underwriter(s) participating in any disposition pursuant to a Registration Statement, and any attorney, accountant or other agent retained by any such Shareholder or underwriter (collectively, the "Inspectors"), all material financial and other records, pertinent documents and properties of the Company as shall be necessary to enable them to exercise their due diligence responsibility. The Company shall cause its officers, directors and employees to supply all material information requested by any such Inspector in connection with any such Registration Statement. 3.3 Amendments. Subject to Section 2.4 hereof, the Company shall (a) prepare and file with the Commission such amendments and post-effective amendments to the Registration 7 Statement as may be necessary to keep the Registration Statement effective for the applicable time period required herein, (b) cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act, and (c) comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended methods of disposition by the Registering Shareholders set forth in such Registration Statement or Prospectus supplement. 3.4 Notification. The Company shall promptly notify the Registering Shareholders and (if requested by any such Person) confirm such notification in writing, (a) when the Prospectus has been filed, and, with respect to the Registration Statement, when it has become effective, (b) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (c) of the issuance of any stop order suspending the effectiveness of the Registration Statement, or the refusal or suspension of qualification of registration of Registrable Securities, or the initiation of any proceedings for that purpose, (d) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose, and (e) of any event that makes any material statement made in the Registration Statement, the Prospectus or any document incorporated therein by reference untrue or that requires the making of any changes in the Registration Statement, the Prospectus or any document incorporated therein by reference in order to make the statements therein, in light of the circumstances under which they were made, not misleading in any material respect. Subject to Section 2.4 hereof, the Company will make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment. If any event contemplated by clause (e) occurs, subject to Section 2.4 hereof, the Company shall promptly prepare a supplement or post-effective amendment to the Registration Statement or the Prospectus or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Upon receipt of any notice from the Company that any event of the kind described in clause (b), (c), (d) or (e) has happened, each Registering Shareholder shall discontinue offering the Registrable Securities until the Registering Shareholder receives the copies of the supplemented or amended Prospectus contemplated by the previous sentence, or until it is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus. 3.5 Information Included. The Company may require each Registering Shareholder to furnish in writing to the Company such information regarding the Registering Shareholder and the distribution of the Registrable Securities as the Company may from time to time reasonably require for inclusion in the Registration Statement, and such other information as may be legally required in connection with such registration including, without limitation, all such information as may be requested by the Commission or the NYSE or any other applicable national exchange upon which the Common Stock is listed or to be listed. Each Registering Shareholder shall provide such information in writing and signed by such Shareholder and stated to be specifically for inclusion in the Registration Statement. The Company may exclude from such registration 8 the Registrable Securities of any Registering Shareholder that fails to furnish such information within a reasonable time after receiving such request. Each Registering Shareholder agrees to furnish to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Registering Shareholder not misleading. If requested by the Registering Shareholders, the Company will, as soon as practicable, incorporate in a Prospectus supplement or post-effective amendment such information as the Registering Shareholders reasonably request be included therein relating to the sale of the Registrable Securities, including, but not limited to, information with respect to the number of Registrable Securities being sold and any other terms of the distribution of the Registrable Securities to be sold in such Offering. Subject to Section 2.4 hereof, the Company will make all required filings of such Prospectus supplement or post-effective amendment as promptly as practicable after being notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment. 3.6 Underwritten Offerings. In the event that the distribution of the Registrable Securities covered by a Registration Statement filed hereunder shall be effected by means of an underwriting, the following provisions shall apply: (a) if such distribution of Registrable Securities is being effected pursuant to a Demand Registration, the underwriter(s) shall be designated by OIL; (b) the Company shall (i) cooperate with the underwriter(s), including attending any road shows and providing such assistance as the underwriter(s) may reasonably request in connection with the preparation of any materials necessary or desirable to effect such underwriting, (ii) enter into any such underwriting agreement as shall be appropriate under the circumstances, (iii) use its best efforts to comply with and satisfy all of the terms and conditions of each such underwriting agreement to which it shall be a party, and (iv) comply with all applicable rules and regulations of the Commission including, without limitation, applicable reporting requirements under the Exchange Act; (c) if such distribution of Registrable Securities is being effected pursuant to a Demand Registration, including, without limitation, in any primary offering by the Company, any over-allotment option to be granted to the managing underwriter(s) shall be allocated to and granted by any Person designated by OIL, and if such distribution is being effected pursuant to a Piggyback Registration, any over-allotment option to be granted to the managing underwriter(s) shall be allocated to and granted by the Company (in the event of any primary offering by the Company) and all selling shareholders pro-rata based on the number of shares sold pursuant to such offering; and (d) the Registering Shareholder(s) shall enter into underwriting agreement(s), power(s) of attorney and custody agreement(s), which agreements and powers shall contain customary provisions as shall be appropriate under the circumstances. 3.7 Copies. The Company will (i) promptly furnish to the Registering Shareholders without charge, at least one signed copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference), and 9 (ii) promptly deliver to the Registering Shareholders without charge, as many copies of the Prospectus (including each Preliminary Prospectus) and any amendment or supplement thereto as such Persons may reasonably request. The Company consents to the use of the Prospectus or any amendment or supplement thereto by the Registering Shareholders in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto. 3.8 Blue Sky Registration. Prior to any offering of Registrable Securities covered by a Registration Statement under Section 2.1 or 2.2, the Company will register or qualify or cooperate with the Registering Shareholders and their respective counsel in connection with the registration or qualification of such Registrable Securities under the securities or blue sky laws of any such jurisdictions in the United States as the Registering Shareholders reasonably request in writing, and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of such Registrable Securities. The Company will not be required to take any actions under this Section 3.8 if such actions would require the Company to (i) qualify to do business in any jurisdiction where it is not then so qualified, (ii) submit to the general taxation of any jurisdiction where it is not then so subject or (iii) file in any jurisdiction any general consent to service of process. 3.9 Certificates. The Company will cooperate with the Registering Shareholders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold that do not bear any restrictive legends. Such certificates will be in such denominations and registered in such names as the Registering Shareholders request at least two (2) Business Days prior to any sale of Registrable Securities. 3.10 Section 11(a) Notice. The Company will make generally available to its shareholders the information required pursuant to the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder. 10 3.11 Registration Expenses. --------------------- (a) Company Expenses. Subject to the provisions of Section 3.11(b) below, the Company shall pay all expenses incident to the Company's performance of or compliance with this Agreement, including, but not limited to, all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, fees and expenses incurred in connection with the quotation or listing of the Registrable Securities on the NYSE (or any other national securities exchange on which such securities are then listed), transfer agent fees, printing expenses, messenger expenses, telephone and delivery expenses, and fees and disbursements of counsel to the Company, counsel to the underwriter(s) of any underwritten offering (but only to the extent that the Company or the Registering Shareholders are contractually required to bear such fees and disbursements pursuant to the applicable underwriting agreement(s)) and of independent certified public accountants of the Company. The Company shall also pay for (i) the fees and expenses of one firm of legal counsel, if any, retained to represent all the Registering Shareholders in connection with any Registration Statement filed hereunder, (ii) the Company's internal expenses, including the expense of any annual audit, (iii) the fees and expenses of any Person retained by the Company, and (iv) the cost of furnishing copies of each preliminary Prospectus, each final Prospectus and each such amendment or supplement thereto to the underwriters, dealers and other purchasers of shares of Common Stock. (b) Shareholder Expenses. The Registering Shareholders shall pay all underwriting fees, commissions and discounts with respect to the sale of any Registrable Securities and any transfer taxes incurred in respect of such sale. Each Registering Shareholder shall also be responsible for the payment of all fees and expenses of legal counsel retained by it, other than the fees and expenses of the firm of legal counsel retained to represent all the Registering Shareholders in connection with any Registration Statement filed hereunder for which the Company is responsible pursuant to Section 3.11(a) above. ARTICLE IV INDEMNIFICATION 4.1 Indemnification by the Company. The Company will indemnify and hold harmless each of the Registering Shareholders and each Person, if any, who controls a Registering Shareholder (within the meaning of Section 15 of the Securities Act ) (each, a "Shareholder Control Person") from and against any and all losses, claims, damages and liabilities ("Losses") reasonably incurred in connection with, and any amount paid in settlement of, any action suit or proceeding or any claim asserted to which the Registering Shareholder or Shareholder Control Person may become subject under the Securities Act, the Exchange Act or other federal or state securities laws or regulations, at common law or otherwise, insofar as such Losses arise out of or are based upon (a) any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary prospectus or any amendment or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (b) any violation by the Company of the Securities Act or the Exchange Act, or other federal or state securities laws 11 applicable to the Company and relating to any action or inaction required of the Company in connection with such registration. In addition, the Company will reimburse the Registering Shareholder and Shareholder Control Person(s) for any reasonable investigation, legal or other expenses incurred by such Registering Shareholder or Shareholder Control Person(s) in connection with investigating or defending any such Loss. Notwithstanding anything herein to the contrary, the Company will not be liable with respect to the portion of any such Loss that (i) arises out of or is based upon any alleged untrue statement or alleged omission made in such Registration Statement, preliminary Prospectus, Prospectus, or amendment or supplement in reliance upon and in conformity with written information furnished to the Company by the Registering Shareholders specifically for use therein or (ii) attributable to a Registering Shareholder's (A) use of a Prospectus after being notified by the Company to suspend use thereof pursuant to Section 3.4 above or (B) failure to deliver a final Prospectus to the Person asserting any losses, claims, damages and liabilities and judgments caused by any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such material misstatement or omission or alleged material misstatement or omission was cured in an amended or supplemented Prospectus prepared by the Company and delivered to the Registering Shareholder at or prior to the time written confirmation of sale to such Person was required to be made. The foregoing indemnity will remain in full force and effect regardless of any investigation made by or on behalf of the Registering Shareholder or Shareholder Control Person, and will survive the transfer of such securities by the Registering Shareholder. 4.2 Indemnification by Registering Shareholders. If a Registering Shareholder sells Registrable Securities under a Prospectus that is part of a Registration Statement, the Registering Shareholder shall indemnify and hold harmless the Company, its directors, each officer who signed such Registration Statement and each Person who controls the Company (within the meaning of Section 15 of the Securities Act) (each, a "Controlling Person") under the same circumstances as the foregoing indemnity from the Company to the Registering Shareholders and Shareholder Control Persons, but only to the extent that such Losses arise out of or are based upon any untrue or allegedly untrue statement of a material fact or omission or alleged omission of a material fact that was made in the Prospectus, the Registration Statement, any preliminary prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information relating to a Registering Shareholder or a Shareholder Control Person furnished to the Company by a Registering Shareholder expressly for use therein. In no event will the aggregate liability of a Registering Shareholder and/or a Shareholder Control Person exceed the amount of the net proceeds received by the Registering Shareholder upon the sale of the Registrable Securities giving rise to such indemnification obligation. Such indemnity will remain in full force and effect regardless of any investigation made by or on behalf of the Company or such officer, director, employee or Controlling Person and will survive the transfer of such securities by the Registering Shareholder. 4.3 Contribution. If the indemnification provided for in Section 4.1 or 4.2 is unavailable to an indemnified party, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, will have a joint and several obligation to contribute to the amount paid or payable by such indemnified party as a result of such Losses. Such contribution will be in such proportion as is appropriate to reflect the relative fault of the indemnifying party, 12 on the one hand, and such indemnified party, on the other hand, in connection with the actions, statements or omissions that resulted in such Losses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party, on the one hand, and indemnified party, on the other hand, will be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been taken or made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent any such action, statement or omission. The amount paid or payable by a party as a result of any such Losses will be deemed to include any investigation, legal or other fees or expenses incurred by such party in connection with any investigation or proceeding, to the extent such party would have been indemnified for such expenses if the indemnification provided for in Section 4.1 or 4.2 was available to such party. If, however, the allocation provided above is not permitted by applicable law, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative faults but also the relative benefits of the indemnifying party and the indemnified party as well as any other relevant equitable considerations. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 4.3 were to be determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the preceding sentences of this Section 4.3. 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. 4.4 Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder will (a) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification, and (b) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided that the failure to give such notice shall not relieve an indemnifying party of liability except to the extent it has been prejudiced as a result of such failure. Any Person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in (but not control) the defense of such claim, but the fees and expenses of such counsel will be at the expense of such Person and not of the indemnifying party unless (x) the indemnifying party has agreed to pay such fees or expenses, (y) the indemnifying party has failed to assume the defense of such claim and employ counsel reasonably satisfactory to such Person within a reasonable period of time pursuant to this Agreement, or (z) a conflict of interest exists between such Person and the indemnifying party with respect to such claims that would make such separate representation required under applicable ethical rules. In the case of clause (z) above, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person. If such defense is not assumed by the indemnifying party, the indemnifying party shall not be subject to any liability for any settlement made without its consent (but such consent shall not be unreasonably withheld). No indemnified party will be required to consent to entry of any judgment or enter into any settlement that does not include as an unconditional term the giving of a release, by all claimants or plaintiffs to such indemnified party from all liability with respect to such claim or litigation. Any indemnifying party who is not entitled to, or elects not to, assume the defense of a claim 13 will not be obligated to pay the fees and expenses of more than one counsel (other than required local counsel) for all parties indemnified by such indemnifying party with respect to such claim. ARTICLE V OTHER AGREEMENTS 5.1 Restrictions on Public Sale by the Shareholders. If requested by the managing underwriter(s) of an underwritten public offering, the Shareholders will not effect any public sale or distribution of securities of the same class (or securities exchangeable or exercisable for or convertible into securities of the same class) as the securities included in such offering (including, but not limited to, a sale pursuant to Rule 144 of the Securities Act) during the 10-day period prior to and the 180-day period beginning on the effective date of, such 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 of 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. 5.2 Rule 144. The Company shall file, on a timely basis, all reports required to be filed by it under the Securities Act and the Exchange Act, and will take such further action and provide such documents as the Shareholders may reasonably request, all to the extent required from time to time to enable the Shareholders to sell Registrable Securities without registration under the Securities Act within the limitation of the conditions provided by (i) Rule 144 under the Securities Act, as such rule may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the Commission. Upon the request of a Shareholder, the Company will deliver to the Shareholder a statement verifying that it has complied with such information and requirements. ARTICLE VI MISCELLANEOUS 6.1 Amendments; Waivers. This Agreement may not be amended, changed, supplemented, waived or otherwise modified or terminated, except upon the execution and delivery of a written agreement executed by the parties hereto. 6.2 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto pertaining to its subject matter and supersedes and replaces all prior agreements and understandings of the parties in connection with such subject matter. 6.3 Notices. All notices and other communications hereunder shall be given in writing and delivered personally, by registered or certified mail (postage prepaid return receipt requested), by overnight courier (postage prepaid), facsimile transmission or similar means, to the party to receive such notices or communications at the address set forth below (or such other 14 address as shall from time to time be designated by such party to the other parties in accordance with this Section 6.3): If to the Company: Ormat Technologies, Inc. 980 Greg Street Sparks, Nevada 89431 Attention: President Facsimile: (775) 356-9039 If to OIL: Ormat Industries Ltd. Industrial Area Scydlowski Road PO Box 68 Yavne, 81100 Israel Attention: President Facsimile: +972- 8-943-9901 All such notices and communications hereunder shall be deemed given when received, as evidenced by the signed acknowledgment of receipt of the person to whom such notice or communication shall have been personally delivered, the acknowledgment of receipt returned to the sender by the applicable postal authorities, the confirmation of delivery rendered by the applicable overnight courier service, or the confirmation of a successful facsimile transmission of such notice or communication. A copy of any notice or other communication given by any party to any other party hereto, with reference to this Agreement, shall be given at the same time to the other parties to this Agreement. 6.4 GOVERNING LAW. THE PARTIES HERETO AGREE THAT THIS AGREEMENT, AND THE RESPECTIVE RIGHTS, DUTIES AND OBLIGATIONS OF THE PARTIES HEREUNDER, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAW THEREUNDER. 6.5 Assignment. No Shareholder shall be permitted to assign any of its rights or obligations hereunder by operation of law or otherwise without the prior written consent of the Company; provided, that a Shareholder may assign any of its rights or obligations hereunder to any Affiliate of such Shareholder without obtaining the prior written consent of the Company so long as such Affiliate agrees in writing to be bound by the provisions of this Agreement that are applicable to such Shareholder as if such Affiliate was an original party hereto. Notwithstanding any such assignment, such Shareholder shall continue to be liable for the performance of all obligations of such Shareholder and those of its assignee hereunder. 6.6 Severability. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law. If any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or portion of any 15provision in such jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein. 6.7 No Waiver. The failure of any party hereto to exercise any right, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by any other party hereto with its obligations hereunder, and any custom or practice of the parties at variance with the terms hereof, shall not constitute a waiver by such party of its right to exercise any such or other right, power or remedy or to demand such compliance. 6.8 No Third Party Beneficiaries. This Agreement is not intended to be for the benefit of, and shall not be enforceable by, any Person who or which is not a party hereto. Any Person who or which is not a party hereto shall not be entitled to any benefit hereunder except that any Option Holder designated in writing by OIL from time to time shall be entitled to become a party hereto by executing a counterpart to this Agreement in the form annexed hereto as Exhibit A. If such Option Holder executes a counterpart to this Agreement in the form annexed hereto as Exhibit A such Option Holder shall thereafter be deemed to have agreed to be bound by the provisions hereof applicable to Shareholders as if such Option Holder was an original party hereto, and such Option Holder shall thereafter be entitled to all benefits accorded to a Shareholder hereunder. 6.9 Headings. The Section headings in this Agreement are for convenience of reference only and are not intended to be a part of this Agreement or to affect the meaning or interpretation of this Agreement. 6.10 Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one agreement. IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights Agreement as of the date first set forth above. ORMAT TECHNOLOGIES, INC. By: ------------------------------------- Name: [ ] Title:[ ] ORMAT INDUSTRIES LTD. 16 By: --------------------------------------- Name: [ ] Title:[ ] 17 EXHIBIT A COUNTERPART SIGNATURE PAGE TO THE REGISTRATION RIGHTS AGREEMENT DATED JULY __, 2004 REFERENCE IS MADE to the Registration Rights Agreement, dated as of July __, 2004 (the "Agreement"), by and among Ormat Technologies, Inc. (the "Company"), Ormat Industries Ltd. ("OIL") and the other parties, if any, thereto. Capitalized terms defined in the Agreement and not otherwise defined herein shall have the meanings ascribed to them in the Agreement. THE UNDERSIGNED hereby represents to the Company that (i) the undersigned is a current or former director, officer and/or employee of OIL or of any subsidiary thereof or an Affiliate of a current or former director, officer or employee, and (ii) the undersigned beneficially owns one or more options to purchase from OIL shares of common stock, par value $0.001 per share, of the Company ("Common Stock") or the undersigned beneficially owns shares of Common Stock acquired upon the exercise of such options. The undersigned hereby irrevocably agrees to be a party to the Agreement and to be bound by all provisions thereof applicable to Shareholders, as if the undersigned was an original party thereto. IN WITNESS THEREOF, the undersigned has executed this counterpart to the Agreement on this __ day of ______________, _____. ----------------------------------- Name:
ORMAT TECHNOLOGIES, INC. 2004 INCENTIVE COMPENSATION PLAN 1. PURPOSE OF PLAN The purpose of the Ormat Technologies, Inc. 2004 Incentive Compensation Plan (the "Plan") is to assist Ormat Technologies, Inc. and its Subsidiaries (the "Corporation") in securing and retaining Eligible Individuals of outstanding ability by making it possible to offer them increased incentives, which may include a proprietary interest in the Corporation, to join or continue in the service of the Corporation and to increase their efforts for its welfare. 2. DEFINITIONS As used in the Plan, the following words have the following meanings: (a) "AWARD" means an award or grant made to a Participant pursuant to the Plan, including, without limitation, an award or grant of an Option, Stock Appreciation Right, Restricted Stock, Stock Units, Phantom Stock, Incentive Bonuses, Performance Awards, or any combination of such types of Awards. (b) "BOARD OF DIRECTORS" means the Board of Directors of Ormat. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means the Compensation Committee of the Board of Directors. Prior to the creation of the Committee by the Board of Directors, any reference to "Committee" in the Plan or in an Award means the Board of Directors. (e) "COMMON STOCK" means the common stock of Ormat, par value $.001. (f) "CORPORATION" means Ormat and its Subsidiaries. (g) "EFFECTIVE DATE" means the date specified in Section 20 of the Plan. (h) "ELIGIBLE INDIVIDUAL" means an employee, a member of the Board of Directors or an independent contractor of the Corporation. (i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (j) "FOREIGN TAX ELIGIBLE INDIVIDUALS" means Eligible Individuals who are subject to the tax laws of nations other than the United States. (k) "FREESTANDING STOCK SAR" means the type of SAR described in Section 2(x)(ii) of the Plan. (l) "GRANT COMMITTEE" means the Committee, excluding those members of the Committee who are not at the time of the grant of the Award both "outside directors" as defined for purposes of Section 162(m) and the regulations under such section of the Code and "Non-Employee Directors" as defined in Rule 16b-3(b)(3)(i) under the Exchange Act, for purposes of Section 16 of the Exchange Act and the rules under the Exchange Act. (m) "INCENTIVE BONUS" means an Award of a right to receive cash or shares of Common Stock, whether or not subject to performance goals and performance periods. (n) "INCENTIVE STOCK OPTION" means an Option to purchase shares of Common Stock which is intended to qualify as an incentive stock option as defined in Code Section 422. (o) "NAMED EXECUTIVE OFFICER" means (i) all individuals serving as the Corporation's CEO or acting in a similar capacity during the last completed fiscal year, regardless of compensation level; (ii) the Corporation's four most highly compensated executive officers other than the CEO who were serving as executive officers at the end of the last completed fiscal year; and; (iii) up to two additional individuals for whom disclosure would have been provided pursuant to clause (ii) of the definition of Named Executive Officer herein but for the fact that the individual was not serving as an executive officer of the Corporation at the end of the last completed fiscal year, as defined in Item 402(a)(3) of Regulation S-K. (p) "NONQUALIFIED STOCK OPTION" means an Option to purchase shares of Common Stock which is not intended to qualify as an incentive stock option as defined in Code Section 422. (q) "OPTION" means an Award of the right to purchase a specified number of shares of Common Stock at a specified price for a specified period. 2 Two types of Options may be awarded under the Plan: (i) Incentive Stock Options; and (ii) Nonqualified Stock Options. (r) "ORMAT" means Ormat Technologies, Inc. (s) "PARTICIPANT" means an Eligible Individual to whom one or more Awards have been granted that have not all been forfeited or terminated under the Plan. (t) "PERFORMANCE AWARD" means an Award granted pursuant to Section 11 of the Plan. (u) "PHANTOM STOCK" means an Award of a right to receive an amount in cash equal to the fair market value of a share of Common Stock at a specified date. (v) "PLAN" means the Ormat Technologies, Inc. 2004 Incentive Compensation Plan. (w) "RESTRICTED STOCK" means an Award of shares of Common Stock that is subject to restrictions on transfer for a specified period. (x) "RETIREMENT" means Termination of Service upon attainment of age 65. (y) "STOCK APPRECIATION RIGHT" or "SAR" means an Award of a right which: (i) when granted in conjunction with all or any part of any Option, upon exercise of such right, entitles a Participant to surrender such Option, or any part of such Option, and to receive instead a payment in cash or in shares of Common Stock equal to the excess of (x) the fair market value on the date of exercise of the shares of Common Stock covered by the Option, or part of such Option, over (y) the purchase price of such shares of Common Stock pursuant to the Option (a Tandem SAR); or (ii) when granted separate and apart from any Option, entitles the Participant, upon exercise of such right, to receive a payment in cash or in Common Stock measured by the increase in the fair market value of a number of shares of Common Stock designated by such SAR from the date of such SAR to the date on which the Participant exercises such SAR (a Freestanding SAR). (z) "STOCK UNIT" means an Award of the right to receive a fixed number of shares of Common Stock at a future date. 3 (aa) "SUBSIDIARY" means any corporation or entity, other than Ormat, in an unbroken chain of corporations or other entities beginning with Ormat if each of the corporations, or other entities other than the last corporation or entity in the unbroken chain owns 50% or more of the voting stock in one of the other corporations in such chain, except that with respect to Incentive Stock Options, "Subsidiary" means "subsidiary corporation" as defined in Code Section 424(f). (bb) "TANDEM SAR" means the type of SAR described in Section 2(x)(i) of the Plan. (cc) "TERMINATION OF SERVICE" means: (i) for an employee, termination of employment with the Corporation for any reason; (ii) for a member of the Board of Directors, termination as a member of the Board of Directors for any reason; or (iii) for an independent contractor of the Corporation, termination of the relationship as an independent contractor of the Corporation for any reason. 3. ADMINISTRATION OF PLAN (a) General Administration. The Plan will be administered by the Committee consisting of at least three members of the Board of Directors. The Committee will determine the aggregate amount of shares of Common Stock to be the subject of Awards granted under the Plan each year to all Eligible Individuals and will make any adjustments under Section 16 of the Plan. The Committee will also determine the amount of any Awards granted to Eligible Individuals and the terms of such Awards, except that Performance Awards under Section 11 of the Plan will only be granted to Eligible Individuals by the Committee, in accordance with the requirements of Code Section 162(m). The Committee may delegate to the Chief Executive Officer of the Corporation (the "CEO") the right to designate other Eligible Individuals (other than the CEO) to receive Awards and to determine the amount of any Awards granted to such Eligible Individuals and the terms of such Awards, except that Performance Awards under Section 11 of the Plan to any of the Corporation's Named Executive Officers will only be granted to such Named Executive Officers by the Committee, in accordance with the requirements of Code Section 162(m). The members of the Committee will qualify to administer the Plan for purposes of Rule 16b-3 (and any other applicable rule) promulgated under Section 16(b) of the Exchange Act and must be independent directors under the New York Stock Exchange rules. The Committee may adopt its own rules of procedure, and the action of a majority of the Committee members, taken at a meeting, or taken without a meeting by unanimous written consent of the members of the Committee or otherwise in accordance with the Committee's charter, will constitute action by the Committee. 4 The Committee, in its sole and absolute discretion and authority, will determine the amount, timing and restrictions on the Awards and will administer, construe and interpret the Plan, make rules for carrying out the interpretations of the Committee and make changes to such rules. Any such determination, interpretation or change by the Committee will be final, conclusive and binding on all parties, including the Corporation and each Participant. (b) Administration of Section 11 of the Plan. Notwithstanding any language in the Plan to the contrary, the Grant Committee, in its sole and absolute discretion and authority, will have the exclusive power to grant Awards and to determine the amount, timing and restrictions on the Awards under Section 11 of the Plan and will administer, construe and interpret Section 11 of the Plan, make rules carrying out the interpretations of the Grant Committee and make changes to such rules. Any such determination, interpretation or change by the Grant Committee under Section 11 of the Plan will be final, conclusive and binding on all parties, including the Corporation and each Participant. 4. AWARDS The Committee or the CEO, or his or her delegate, may from time to time make such Awards under the Plan in accordance with Sections 5 through 10 of the Plan to such Eligible Individuals and in such form and having such terms, conditions and limitations as the Committee or the CEO, or his or her delegate, may determine. Awards may be granted singly, in combination or in tandem. The amount of each Award granted under the Plan and the terms, conditions and limitations of each such Award will be set forth in writing on a form approved by the Committee, consistent, however, with the terms and conditions of the Plan. The provisions of Awards need not be the same with respect to each Participant. In case of any discrepancy between the terms in any Award and the Plan, the Plan will govern. 5. AWARDS OF OPTIONS The terms and conditions with respect to each Award of Options under the Plan will be consistent with the following: (a) Option Price. The Option price per share will not be less than the fair market value per share of Common Stock at the time the Award is granted. Awards of Incentive Stock Options for certain Eligible Individuals may be required to be granted at up to 110% of the fair market value per share of Common Stock. 5 (b) Incentive Stock Options. Awards of Incentive Stock Options will be granted only to employees. (c) Exercise Period. The exercise of an Award may be conditioned upon completion of all or a part of a vesting schedule specified in the Award and/or the satisfaction of performance or other criteria as specified in the Award. The Award will be exercisable, in whole or in part, from time to time beginning as stated in the Award and ending at the expiration of ten years from the date of grant of the Award, unless an earlier expiration date will be stated in the Award or the Option expires because of the exercise of a Tandem SAR as provided in Sections 5(f) and 6(a) of the Plan. (d) Limit on Incentive Stock Options. To the extent that the aggregate fair market value of shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year exceeds $100,000, such Options will be treated as Nonqualified Stock Options. This subclause (d) will be applied by taking Options into account in the order in which they were granted. For purposes of this subclause (d), the fair market value of any share of Common Stock will be determined at the time of the Award. If this subclause (d) results in a portion of an Incentive Stock Option exceeding the $100,000 limitation, only such excess will be treated as a Nonqualified Stock Option. (e) Payment for Shares of Common Stock. Payment in full of the Option price must be made upon exercise of each Option and may be made in cash, or, to the extent provided in the Award, by the delivery (either actual delivery or by attestation procedures established by Ormat) of shares of Common Stock with a fair market value determined as of the date of exercise equal to the Option price, or in a combination of cash and shares of Common Stock whose fair market value on the date of exercise together with such cash will equal the Option price. The Committee may also permit Participants, either on a selective or aggregate basis, simultaneously to exercise Options and to sell the shares of Common Stock thereby acquired pursuant to a brokerage or similar arrangement, approved in advance by the Committee and to use the proceeds from such sale as payment of the purchase price of such shares of Common Stock subject to the Option. (f) Tandem SARs. Each Award may provide for related SARs. To the extent an Award is exercised, in whole or in part, any Tandem SAR granted in respect of such Option (or part of such Option) will immediately terminate and cease to be exercisable. To the extent a Tandem SAR Award is exercised, in whole or in part, any accompanying Option will immediately terminate and cease 6 to be exercisable and the shares of Common Stock covered by the terminated Option will not again be available for Awards pursuant to the Plan. 6. AWARDS OF STOCK APPRECIATION RIGHTS (SARS) The terms and conditions with respect to each Award of SARs under the Plan will be consistent with the following: (a) Awards of Tandem SARs. An Award of Options may provide for Tandem SARs. Alternatively, during the term of the Option, Tandem SARs for such Options may be awarded. A Tandem SAR will be exercisable only during the period in which the Option (or part of such Option) in respect of which such SAR was granted is exercisable. To the extent a Tandem SAR Award is exercised, in whole or in part, any accompanying Option will immediately terminate and cease to be exercisable and the shares of Common Stock covered by the terminated Option will not again be available for Awards pursuant to the Plan. (b) Awards of Freestanding SARs. Freestanding SARs may be awarded without an accompanying Option. Exercise of a Freestanding SAR may be conditioned upon completion of all or a part of a vesting schedule specified in the Award and/or the satisfaction of performance or other criteria as specified in the Award. The Freestanding SAR will be exercisable, in whole or in part, from time to time as stated in the Award. (c) Payment. When the vesting schedule and/or specified performance or other criteria have been satisfied, the Participant will be paid in accordance with the terms of the Award an amount in cash or in shares of Common Stock valued at fair market value on the date of exercise. Any payment which is made in shares of Common Stock will be valued at fair market value as of the last trading day of the week preceding the day of the Committee's determination to make payment in shares of Common Stock. The earned portion of an Award may be paid currently or on a deferred basis and may be credited with interest or an earnings equivalent as specified in the Award or as determined by the Committee. 7. AWARDS OF RESTRICTED STOCK The terms and conditions with respect to each Award of Restricted Stock under the Plan will be consistent with the following: 7 (a) Terms. The Award may specify a vesting schedule and performance or other criteria for each Award. The Restricted Stock will be forfeited to the extent the vesting schedule and/or specified performance or other criteria have not been satisfied, except as otherwise provided in the Plan or the Award. (b) Book-Entry Accounts. Restricted Stock will be held in book-entry accounts subject to the direction of Ormat (or if Ormat elects, certificates may be issued in the Participant's name but delivered to and held by Ormat). Unless the Committee determines otherwise at the time of the Award, any dividends that may be paid in cash or otherwise on the Restricted Stock will be delivered to and held by Ormat on the book-entry accounts or reinvested in Restricted Stock, at the discretion of the Committee, so long as the Restricted Stock remains subject to the restrictions of the vesting schedule and/or specified performance or other criteria. (c) Payment. When the vesting schedule and/or specified performance or other criteria have been satisfied, the Participant will have the right to direct the transfer of such Restricted Stock. In addition, the book-entry accounts will reflect that the Restricted Stock has been released. Certificates will be issued for the Restricted Stock (as Common Stock) and any dividends held by Ormat will also be delivered to the Participant. The Participant may be paid interest on the amount of cash dividends so delivered computed at the same rate and in the same manner as interest is credited from time to time on Ormat's corporate cash balances, as determined by the Committee. 8. AWARDS OF STOCK UNITS The terms and conditions with respect to each Award of Stock Units under the Plan will be consistent with the following: (a) Terms. The Award may specify a vesting schedule and performance or other criteria for each Award. No payment will be made under the Award to the extent the vesting schedule and/or specified performance or other criteria have not been satisfied, except as otherwise provided in the Plan or the Award. (b) Payment. Stock Units will be credited to an account to be maintained on behalf of the Participant. When the vesting schedule and/or specified performance or other criteria have been satisfied, the Participant will be paid in accordance with the terms of the Award in shares of Common Stock. Any payment made in shares of Common Stock will be valued at fair market value as 8 of the last trading day of the week preceding the day of the Committee's determination to make payment in shares of Common Stock. The earned portion of an Award may be paid currently or on a deferred basis and may be credited with interest or an earnings equivalent as specified in the Award or as determined by the Committee. 9. AWARDS OF PHANTOM STOCK The terms and conditions with respect to each Award of Phantom Stock under the Plan will be consistent with the following: (a) Terms. The Award may specify a vesting schedule and performance or other criteria for each Award. No payment will be made under the Award to the extent the vesting schedule and/or specified performance or other criteria have not been satisfied, except as otherwise provided in the Plan or the Award. (b) Payment. Phantom Stock will be credited to an account to be maintained on behalf of the Participant. When the vesting schedule and/or specified performance or other criteria have been satisfied, the Participant will be paid in accordance with the terms of the Award an amount in cash equal to the fair market value of such Phantom Stock at such time. The earned portion of an Award may be paid currently or on a deferred basis and may be credited with interest or an earnings equivalent as specified in the Award or as determined by the Committee. 10. AWARDS OF INCENTIVE BONUSES The terms and conditions with respect to each Award of an Incentive Bonus under the Plan will be consistent with the following: (a) Terms. Incentive Bonuses will be credited to an account to be maintained on behalf of the Participant. The Award may specify a vesting schedule and performance or other criteria for each Award. No payment will be made under the Award to the extent the vesting schedule and/or specified performance or other criteria have not been satisfied, except as otherwise provided in the Plan or the Award. (b) Payment. When the vesting schedule and/or specified performance or other criteria have been satisfied, the Participant will be paid in accordance with the terms of the Award an amount in cash or in shares of Common Stock (or 9 Restricted Stock). Any payment which is made in shares of Common Stock will be valued at fair market value as of the last trading day of the week preceding the day of the Committee's determination to make payment in shares of Common Stock. The earned portion of an Award may be paid currently or on a deferred basis and may be credited with interest or an earnings equivalent as specified in the Award or as determined by the Committee. 11. PERFORMANCE AWARDS The terms and conditions with respect to each Performance Award made by the Grant Committee to key employees will be consistent with the following: (a) Description of Performance Award. The Committee or the Grant Committee (and in the case of Awards to Named Executive Officers, only the Grant Committee) may, from time to time, make Awards under this Section 11 of the Plan of Options, SARs, Restricted Stock, Stock Units, Phantom Stock, and Incentive Bonus Awards ("Performance Awards") to key employees in such form and having such terms, conditions and limitations as the Committee or the Grant Committee, as the case may be, may determine in order that such Performance Award constitutes qualified performance-based compensation under Code Section 162(m). Performance Awards may be granted singly, in combination or in tandem. (b) Performance Goals. Pursuant to this Section 11 of the Plan, for each Award of Restricted Stock, Stock Units, Phantom Stock and Incentive Bonus Awards, the Committee or the Grant Committee, as the case may be, will (on or before the 90th day of the applicable performance period) establish, in writing, a performance period, applicable performance goals and the performance objectives to be used in determining whether and to what extent Performance Awards will be deemed to be earned. The performance goals will be based on one or more of the following objective performance criteria selected by the Committee or the Grant Committee, as the case may be, to measure the performance of the Corporation: sales; gross margin; operating income; income before or after interest, taxes, depreciation or amortization; net income; basic or diluted earnings per share; return on capital; return on equity; return on assets; cash flow; working capital; stock price; total shareowner return; pretax income before allocation of corporate overhead and bonus; market share; gross profits; and/or reductions in costs. Such performance goals and performance objectives also may be based solely on the Corporation's performance or based on the relative performance of other companies or upon comparisons of any of the indicators of performance relative to other companies. Each such performance criterion will be determined in 10 accordance with generally accepted accounting principles as consistently applied by the Corporation and, if so determined by the Committee or the Grant Committee, as the case may be, at the time the Performance Award is made, and to the extent permitted under Code Section 162(m), adjusted to omit the effects of extraordinary items, gain or loss on the disposal of a business segment, unusual or infrequently occurring events and transactions and cumulative effects of changes in accounting principles. Once established for a performance period, Performance Award performance goals will not be amended or otherwise modified if and to the extent such amendment or modification would cause the compensation payable pursuant to the Award to fail to constitute qualified performance-based compensation under Code Section 162(m). (c) Determination of Award Earned. A Participant will be eligible to receive payment in respect of a Performance Award only to the extent that the performance goals for that Performance Award are achieved. As soon as practicable after the close of each performance period, the Committee or the Grant Committee, as the case may be, will review and determine whether, and to what extent, the performance goals for the performance period have been achieved and, if so, determine the amount of the Performance Award earned by the Participant for such performance period. The Committee or the Grant Committee, as the case may be, will then determine the actual amount of the Performance Award to be paid to the Participant and, in so doing, may in its sole discretion decrease, but not increase, the amount of the Performance Award otherwise payable to the Participant based upon such performance. (d) Payment. Performance Awards will be paid as provided in the Plan, according to payment rules provided under each type of Award. (e) Performance Award Limitations. The shares of Common Stock underlying Performance Awards of Options, SARs, Restricted Stock, Stock Units and Phantom Stock made pursuant to this Section 11 of the Plan to any key employee in any fiscal year of Ormat may not exceed 400,000, as increased or decreased by Section 16, which limitation will be applied in a manner consistent with the requirements of Code Section 162(m). The maximum dollar amount of any Award of Incentive Bonuses granted pursuant to this Section 11 of the Plan that may be paid to any key employee in any fiscal year of Ormat may not exceed $10 million. 12. DIVIDEND EQUIVALENTS 11 Any Awards (other than Awards of Options, SARs and Incentive Bonuses) under the Plan may, in the discretion of the Committee, earn dividend equivalents. In respect of any such Award which is outstanding on a dividend record date for Common Stock, the Participant may be credited with an amount equal to the cash or stock dividends or other distributions that would have been paid on the shares of Common Stock covered by such Award had such covered shares of Common Stock been issued and outstanding on such dividend record date. The Committee will establish such rules and procedures governing the crediting of dividend equivalents, including the timing, form of payment and payment contingencies of such dividend equivalents, as it deems are appropriate or necessary. 13. EFFECT OF TERMINATION OF SERVICE (a) Termination of Service Upon Death or Retirement and Exercise of Award. If a Participant incurs a Termination of Service by reason of death or because of Retirement and the Participant (or a permitted transferee) holds an outstanding Award, such Participant will immediately forfeit any portion of the Award which has not yet vested, unless the Committee deems a certain portion of the Award will be considered vested, taking into account such other factors as in its sole discretion it deems appropriate. The portion of the Award that has not yet been exercised, if applicable, may be exercised from and after the date of the death or date of Retirement of the Participant for a period of one year (or until the expiration date specified in the Award if earlier) and only to the extent the Participant (or a permitted transferee) was entitled to exercise the Award at the time of the death or Retirement, unless and except to the extent the Committee determines to extend such period. (b) Termination of Service For Any Other Reason and Exercise of Award. If a Participant incurs a Termination of Service before the end of a vesting schedule for any reason other than death or Retirement, such Participant will immediately forfeit any portion of the Award which has not yet vested, unless the Committee deems a certain portion of the Award will be considered vested, taking into account such other factors as in its sole discretion it deems appropriate. The portion of the Award that has not yet been exercised, if applicable, may be exercised only within three months after the Termination of Service (or until the expiration date specified in the Award if earlier) and only to the extent the Participant (or a permitted transferee) was entitled to exercise the Award at the time of the Termination of Service, unless and except to the extent the Committee determines to extend such period. 14. LIMITATIONS AND CONDITIONS 12 (a) Maximum Shares of Common Stock Available Under Plan As Awards. The total number of shares of Common Stock that may be made subject to Awards (all of which may be Options) under the Plan is 1,250,000 shares of Common Stock, subject to adjustment in accordance with Section 16 of the Plan. Such total number of shares of Common Stock may consist, in whole or in part, of unissued shares of Common Stock or reacquired shares of Common Stock. The specified number of shares of Common Stock may be increased or decreased by the events set forth in Section 16 of the Plan. If the Corporation makes an acquisition or is a party to a merger or consolidation and the Corporation assumes the Options or other awards consistent with the purpose of the Plan of the company acquired, merged or consolidated which are administered pursuant to the Plan, shares of Common Stock subject to the assumed Options or other awards will not count as part of the total number of shares of Common Stock that may be made subject to Awards under the Plan. (b) Reuse of Shares of Common Stock. Any shares of Common Stock that have been made subject to an Award that cease to be subject to the Award (other than by reason of exercise or payment of the Award to the extent that it is settled in shares of Common Stock) will again be available for an Award and will not be considered as having been previously made subject to an Award. Any shares of Common Stock delivered upon exercise of an Option in payment of all or part of the Option, or delivered or withheld in satisfaction of withholding taxes with respect to an Award, will be additional shares of Common Stock available for an Award under the Plan. After a Phantom Stock Award has been paid out, the shares of Common Stock underlying the Award will again be available for an Award and will not be considered as having been previously made subject to an Award. (c) Maximum Period. No Awards will be made under the Plan after November __,1* 2014, but the terms of Awards granted on or before the expiration date may extend beyond such expiration date. At the time an Award is granted or amended or the terms or conditions of an Award are changed, the Committee may provide for limitations or conditions on such Award. ---------------------- * Insert a date 10 years after the effective date of the Registration Statement for the Corporation's IPO. 13 (d) Transferability. No Award or portion of the Award will be transferable by a Participant otherwise than by will or by the laws of descent and distribution, except that an Option and Tandem SAR may be transferred pursuant to a domestic relations order or by gift to a family member of the holder to the extent permitted in the applicable Award. A Tandem SAR may never be transferred except to the transferee of the related Option. During the lifetime of the Participant, an Award will be exercisable only by the Participant unless it has been transferred to a family member of the holder, in which case it will be exercisable only by such transferee. For the purpose of this provision, a "family member" has the meaning set forth in the General Instructions to Form S-8 Registration Statement under the Securities Act of 1933. (e) No Rights as Shareholder. No person who receives an Award under the Plan which includes shares of Common Stock or the right to acquire shares of Common Stock (which may include shares of Restricted Stock pursuant to Section 7 of the Plan) will have any rights of a stockholder: (i) as to shares of Common Stock under Option until, after proper exercise of the Option, such shares of Common Stock have been recorded on Ormat's official stockholder records as having been issued or transferred; (ii) as to shares of Common Stock to be delivered following exercise of a SAR until, after proper exercise of the SAR and determination by the Committee to make payment for the SAR in shares of Common Stock, such shares of Common Stock will have been recorded on Ormat's official stockholder records as having been issued or transferred; or (iii) as to shares of Common Stock included in Awards of Restricted Stock, Stock Units or Incentive Bonuses, until such shares of Common Stock will have been recorded on Ormat's official stockholder records as having been issued or transferred, except for any dividend equivalent rights provided in Section 12 of the Plan. (f) Ormat's Obligations. Ormat will not be obligated to deliver any shares of Common Stock until they have been listed (or authorized for listing upon official notice of issuance) upon each stock exchange upon which outstanding shares of Common Stock at the time are listed or until there has been compliance with such laws or regulations as Ormat may deem applicable. Ormat will use its best efforts to effect such listing and compliance. No fractional shares of Common Stock will be delivered. (g) No Rights to Continue Status. Nothing contained in the Plan will affect the right of the Corporation to cause the Participant to incur a Termination of Service at any time or for any reason. 14 (h) ERISA. Notwithstanding any language in the Plan to the contrary, no deferral will be permitted under the Plan if it will result in the Plan becoming an "employee benefit plan" under Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Plan is not intended to constitute an employee benefit plan subject to ERISA. 15. TRANSFERS AND LEAVES OF ABSENCE For purposes of the Plan: (a) a transfer of a Participant's employment, transfer as a director or transfer as an independent contractor without an intervening period from Ormat to a Subsidiary or another entity in which Ormat owns, directly or indirectly, an equity interest or vice versa, or from one Subsidiary or another entity in which Ormat owns, directly or indirectly, an equity interest to another, or vice versa, will not be deemed a Termination of Service and such Participant will be deemed to remain in the employ of the Corporation, to remain a director of the Corporation or to remain an independent contractor of the Corporation, and (b) a Participant who is granted in writing a leave of absence will be deemed to have remained in the employ of the Corporation, remained as a director of the Corporation, or remained as an independent contractor to the Corporation. 16. CORPORATE CHANGES, DIVESTITURES AND PLAN TERMINATION (a) Corporate Changes. If there is a merger, consolidation, stock or other non-cash dividend, extraordinary cash dividend, split-up, spin-off, combination or exchange of shares, reorganization or recapitalization or change in capitalization, or any other similar corporate event, the Committee may make such adjustments in: (i) the aggregate number of shares of Common Stock subject to the Plan and the number of shares of Common Stock that may be made subject to Awards to any individual Participant as well as the aggregate number of shares of Common Stock that may be made subject to any type of Award; (ii) the number and kind of shares of Common Stock that are subject to any Option (including any Option outstanding after Termination of Service) and the Option price per share without any change in the aggregate Option price to be paid for the Option upon exercise of the Option; (iii) the number and kind of SARs granted or that may be granted under the Plan; (iv) the number and kind of shares of outstanding Restricted Stock; (v) the number and kind of shares of Common Stock covered by Stock Units or Phantom Stock; and (vi) the number of outstanding dividend equivalents, as the Committee will deem appropriate in the circumstances. The determination by the Committee as to the terms of any such adjustments will be final, conclusive and binding. 15 (b) Divestitures. In the case of a Participant whose principal employer is a Subsidiary, he or she serves as a director on a Subsidiary's board of directors or he or she provides services to a Subsidiary as an independent contractor, then such Participant will be deemed to have incurred a Termination of Service for purposes of Awards as of the date on which such Subsidiary ceases to be a Subsidiary (the "Divestiture Date") and, except to the extent otherwise determined by the Committee and set forth in the applicable Award, with respect to Awards held by such Participant, the vesting schedule will be deemed satisfied as of the Divestiture Date, but only as to that portion of such Award as is equivalent to the portion of the vesting schedule applicable to the Award that has been satisfied as of the Divestiture Date without regard to this Section 16(b); as of the Divestiture Date, the portion of the Award as to which the vesting schedule is deemed satisfied pursuant to this Section 16(b) will become nonforfeitable and the other portion of the Award as to which the vesting schedule has not been satisfied will be forfeited. Payments under Awards, if any, will be determined in accordance with the provisions of Section 13 of the Plan. (c) Plan Termination. If the Plan terminates, then each Participant will be deemed to have incurred a Termination of Service solely for purposes of the Award as of the date of such termination of the Plan and, except to the extent otherwise determined by the Committee and set forth in the applicable Award, the provisions of Section 16(c) of the Plan will apply to such Participant's Award with the same effect as if the date of such termination of the Plan were a Divestiture Date. Payments under Awards, if any, will be determined in accordance with the provisions of Section 13 of the Plan. 16 17. AMENDMENT AND TERMINATION (a) Amendment. The Board of Directors has the power to amend the Plan, including the power to change the amount of the aggregate fair market value of the shares of Common Stock subject to Incentive Stock Options first exercisable in any calendar year under Section 5 of the Plan to the extent provided in Code Section 422, or any successor Code provision. The Board of Directors will not, however, except as otherwise provided in the Plan, without approval of the stockholders of Ormat, increase the maximum number of shares of Common Stock authorized for the Plan, nor reduce the basis upon which the minimum Option price is determined, nor extend the period within which Awards under the Plan may be granted, nor provide for an Option that is exercisable more than ten years from the date it is granted except if the Participant dies, nor amend Section 11 of the Plan relating to Performance Awards. The Board of Directors will have no power to change the terms of any Award previously granted under the Plan so as to impair the rights of a Participant without the consent of the Participant whose rights would be affected by such change except to the extent, if any, provided in the Plan or in the Award or except to the extent that the Board of Directors determines that such amendment is desirable or appropriate to comply with the requirements of Section 885 of the American Jobs Creation Act of 2004. (b) Termination. The Board of Directors may suspend or terminate the Plan at any time. No such suspension or termination will affect Options or SARs then in effect. 18. AWARDS TO FOREIGN TAX ELIGIBLE INDIVIDUALS The Committee may grant Awards to Foreign Tax Eligible Individuals, which Awards may have terms and conditions that differ from the terms provided elsewhere in the Plan for the purpose of complying with the foreign tax laws. The terms and conditions of the Awards will be specified in one or more subplans to be approved by the Committee. 19. WITHHOLDING TAXES The Corporation will have the right to deduct from any cash payment made under the Plan any federal, state or local income or other taxes required by law to be withheld with respect to such payment. It will be a condition to the obligation of Ormat to deliver payment of Awards that upon such payment, exercise or settlement the Participant pay to the Corporation such amount as may be requested by the Corporation for the purpose of 17 satisfying any liability for such withholding taxes. Any Award may provide that the Participant may elect, in accordance with any conditions set forth in such Award to pay any withholding taxes in shares of Common Stock. 20. Effective Date The Plan will be effective as of November __,* 2004 upon approval by the Board of Directors and upon approval of the stockholders of Ormat. -------- * Insert a date 10 years after the effective date of the Registration Statement for the Corporation's IPO. 18
Exhibit 10.6.2 INCENTIVE STOCK OPTION AGREEMENT Date: Company: (Company) Date(s) First Exercisable: Date of Grant: Number: No. of shares of Common Stock: (Number) Number: Option price per share of Common Stock: $ Number: PERSONAL AND CONFIDENTIAL (Name and Address) Dear (Name): We are pleased to inform you that as an eligible employee of the Company referred to above you have been granted a Stock Option under the Ormat Technologies, Inc. 2004 Incentive Compensation Plan. By your signature, you agree that these Options are granted under and governed by the Ormat Technologies, Inc. 2004 Incentive Compensation Plan and the Incentive Stock Option Terms and Conditions, and acknowledge receipt of both documents, as well as the form[s] of Notice of Exercise of Stock Option, together with the Plan Prospectus. As set forth in Paragraph 1 of the Incentive Stock Option Terms and Conditions, a signed copy of this agreement must be received by the Corporate Secretary of the Company, c/o Ormat Industries Ltd, Industrial Area, P.O. Box 68, Yavneh 8100 Israel before 5:00 P.M. EST (New York time) on the 30th day after the grant date. If the 30th day is a holiday in the United States or in Israel, such signed copy of this agreement will be considered timely received if it is received by 5:00 P.M. EST (New York time) of the following business day in the United States and Israel after such holiday. Failure to return a signed copy of this agreement will terminate this Option.Sincerely yours, ORMAT TECHNOLOGIES, INC. ----------------------------- ---------------------------- [Officer Name] Signature of Employee ---------------------------- Date 2 INCENTIVE STOCK OPTION TERMS AND CONDITIONS As a participant in the Ormat Technologies, Inc. 2004 Incentive Compensation Plan (the Plan), you will be able to purchase shares of Common Stock of Ormat Technologies, Inc. (Ormat) provided that you accept your Award as set forth in Paragraph 1 below. Subject to the terms and conditions below and the terms and conditions of the Plan, the minimum amount which may be purchased at any one time is 100 shares of Common Stock, unless you have fewer remaining shares of Common Stock covered by your Option. Note that all capitalized terms in this Stock Option Agreement are defined in the Plan, except as indicated in the Stock Option Agreement. All terms of the Plan are hereby incorporated into these Term and Conditions. The date of the grant, the maximum number of shares of Common Stock the Option entitles you to purchase, the Option price per share of Common Stock and the date or dates on which the Option will ordinarily be first exercisable are listed at the top of the Stock Option Agreement. For United States employees, the Option is intended (but not guaranteed) to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code. The classification of options as incentive stock options or nonqualified stock options is relevant for U.S. employees (i.e. individuals who are either U.S. citizens or U.S. tax residents or who are or who have worked in the United States). For those employees, incentive stock options may provide more favorable tax treatment for recipients under the Internal Revenue Code. 1. Acceptance of Option. The Option cannot be exercised unless you sign the Stock Option Agreement and return it, so that it is received by the Corporate Secretary of the Company, c/o Ormat Industries Ltd, Industrial Area, P.O. Box 68, Yavneh 8100 Israel (or to such other person and place as Ormat may specify in writing), before 5:00 P.M. EST (New York time) on the 30th day after the date of grant. If the 30th day is a holiday in the United States or in Israel, such signed copy of this agreement will be considered timely received if it is received by 5:00 PM EST (New York time) of the following business day in the United States and Israel after such holiday. If the Corporate Secretary does not receive your signed Stock Option Agreement by this time, then the Option will terminate immediately. Your signing and delivering of a copy of the Stock Option Agreement to which these Terms and Conditions are attached will not commit you to purchase any of the shares of Common Stock under the Option but will indicate your acceptance of the Option upon these terms and conditions. 2. Exercise. (a) Except as provided in this Paragraph 2 and in Paragraph 4, the Option will be exercisable during the period beginning on the date or dates set forth under the heading "Date(s) First Exercisable" in the Stock Option Agreement and ending ten years from the date of grant (its expiration date). During this period, the Option is exercisable in whole or in part from time to time in amounts of not less than 100 shares of Common Stock (except that if you have fewer than 100 shares of Common Stock remaining covered by the Option, the Option may be exercised for the full number of remaining shares of Common Stock). (b) The Option will not become exercisable, except as provided in the Vesting Schedule in (c) and (d) below. (c) The Option will be exercisable in accordance with the Vesting Schedule as follows: [Insert Vesting Schedule] (d) Despite the language in (c) above, the unexercisable portion of the Option hereby granted (in accordance with the Vesting Schedule) will terminate on the date of your Termination of Service for any reason. If you incur a Termination of Service for any reason other than death or Retirement, the exercisable portion of the Option hereby granted will be exercisable for thirty days following your Termination of Service; provided that in no event will the Option be exercisable after the expiration of ten years from the date of grant. If you incur a Termination of Service because you die or because of Retirement, your personal representative or you, respectively, may exercise the exercisable portion of the Option hereby granted for one year following the Termination of Service (but not later than ten years from the date of grant) because you died or because of Retirement. For purposes of the Stock Option Agreement, your employment by a Subsidiary will be considered terminated on the date that your employer is no longer a Subsidiary. Note that if a Tandem Stock Appreciation Right is granted in conjunction with this Option, either the Stock Appreciation Right or the Option may be exercised when exercisable, not both, and the non-exercised SAR or Option is forfeited. (e) For U.S employees, to the extent that the aggregate fair market value of shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by you during any calendar year exceeds $100,000, such Options will be treated as Nonqualified Stock Options. This subclause (e) will be applied by taking Options into account in the order in which they were granted. For purposes of this subclause (e), the fair market value of any share of Common Stock will be determined at the time of the grant of the Option. If this subclause (e) results in a portion of an Incentive Stock Option exceeding the $100,000 limitation, only the excess will be treated as a Nonqualified Stock Option. 3. Transferability of Option. You will not be able to transfer the Option except: (i) if you die, by will or by the laws of descent or distribution; (ii) pursuant to a domestic relations order; or (iii) by gift to your Family Member, as defined in Section 14(d) of the Plan. 4. Death or Retirement. If you incur a Termination of Service at Ormat or at a Subsidiary because you die or because of Retirement, the Option will only be exercisable to the extent it was exercisable under the Vesting Schedule specified in Paragraph 2(c) on the date of your death or on the date of your Retirement. Notwithstanding Paragraph 2, if you incur a Termination of Service because you die or 2 because of Retirement, your personal representative or you, respectively, may exercise the exercisable portion of the Option hereby granted for one year following the Termination of Service (but not later than ten years from the date of grant) because you died or because of Retirement. 5. Stock Exchange Listing. Ormat is not obligated to deliver any shares of Common Stock until they have been listed on each stock exchange on which Ormat's Common Stock is listed and until Ormat is satisfied that all applicable laws and regulations have been met. Ormat agrees to use its best efforts to list the shares of Common Stock and meet all legal requirements so that the shares of Common Stock can be delivered. No fractional shares of Common Stock will be delivered. 6. Transfer of Service; Leave of Absence. For purposes of this Stock Option Agreement, (a) if you transfer between Ormat and a Subsidiary or from one Subsidiary to another Subsidiary, without an intervening period, it will not be considered a Termination of Service, and (b) any leave of absence granted in writing will not constitute an interruption in your service with Ormat. 7. Adjustments. If there is a merger, consolidation, stock or other non-cash dividend, extraordinary cash dividend, split-up, spin-off, combination or exchange of shares, reorganization or recapitalization or change in capitalization, or any other similar corporate event, the Committee may make such adjustments in: (i) the aggregate number of shares of Common Stock subject to the Plan and the number of shares of Common Stock that may be made subject to Awards to any individual Participant in the Plan as well as the aggregate number of shares of Common Stock that may be made subject to any type of Award; (ii) the number and kind of shares of Common Stock that are subject to any Option (including any Option outstanding after Termination of Service) and the Option price per share without any change in the aggregate Option price to be paid for the Option upon exercise of the Option; and (iii) the number and kind of SARs granted or that may be granted under the Plan. The determination by the Committee as to the terms of any such adjustments will be final, conclusive and binding. 8. Stockholder Rights. Neither you nor any other person will have any rights of a stockholder as to shares of Common Stock under the Option until, after proper exercise of the Option, such shares of Common Stock will have been recorded on Ormat's official stockholder records as having been issued or transferred. 9. Notice of Exercise. Subject to these Terms and Conditions, the Option may be exercised, by a written notice of exercise on a form approved by the Committee that: (i) is signed by the person or persons permitted to exercise the Option; (ii) is delivered to the Corporate Secretary of the Company, c/o Ormat Industries Ltd, Industrial Area, P.O. Box 68, Yavneh 8100 Israel (or to such other person and place as Ormat may specify in writing); (iii) elects to exercise the Option as indicated in the notice of exercise; (iv) states the number of shares of Common Stock as to which the Option is being exercised; and (v) unless otherwise provided in the notice of exercise, is accompanied by payment in full of the Option price of such shares of Common Stock. The notice of exercise may be delivered by facsimile transmission or electronic mail. 3 Any notice of exercise delivered as required by this paragraph will be effective only in accordance with the provisions of and to the extent set forth in the notice of exercise. If a properly executed notice of exercise is not delivered to Corporate Secretary (or other person designated by Ormat) by 5:00 P.M. EST (New York time) of the applicable expiration date specified in Paragraphs 2 and 4, the notice will be deemed null and void and of no effect. If notice of exercise of the Option is given by a person other than you, Ormat may require as a condition to exercising the Option that appropriate proof of the right of such person to exercise the Option be submitted to Ormat. Certificates for any shares of Common Stock purchased upon exercise will be issued and delivered as soon as practicable. 10. Payment of Option Price. You may pay the Option price for shares of Common Stock: (i) in cash; (ii) by the delivery of shares of Ormat Common Stock that you have held for at least one year and that have a total fair market value equal to the Option price; or (iii) by a combination of cash and such shares of Common Stock that you have held for a period of at least one year and that have a total fair market value which, together with such cash, equals the Option price. The "fair market value" of shares or per share of Ormat Common Stock as of any date means the value determined by reference to the closing price of a share of Ormat Common Stock as finally reported on the New York Stock Exchange or other stock exchange on which Ormat Common Stock is traded for the trading day next preceding such date. You may also pay the Option price from the proceeds of the sale of shares of Common Stock covered by the Option (called a "cashless exercise"), to the extent provided in the notice of exercise referred to in Paragraph 9. 11. Tax Withholding for U.S. Employees. If you are a U.S. citizen or a U.S. tax resident or you are working or have worked in the United States for Ormat, you agree to notify the Corporate Secretary if the shares of Common Stock you acquired upon exercise of any portion of your Option are sold or otherwise disposed of within one year from the date of exercise. If and to the extent Federal income tax withholding (and state and local income tax withholding, if applicable) may be required by Ormat in respect of taxes on income you realize upon or after exercise of any portion of the Option, or upon disposition of the shares of Common Stock acquired by the Option, Ormat may withhold such required amounts from your future paychecks or may require that you deliver to Ormat the amounts to be withheld. You may also pay the minimum required Federal income tax withholding (and state and local income tax withholding, if applicable) by electing either to have Ormat withhold a portion of the shares of Common Stock otherwise issuable upon exercise of the Option, or to deliver other shares of Common Stock you own, in either case having a fair market value (on the date that the withholding amount is to be determined) of the minimum amount required to be withheld, provided that the election will be irrevocable and will be subject to such rules as the Committee may adopt. You may also arrange to have any tax (or taxes) paid directly to Ormat on your behalf from the proceeds of the sale of Common Stock to the extent provided in the notice of exercise referred to in Paragraph 9. 4 12. Tax Withholding For Israeli Employees. (a) Any tax liability, of any kind due to the Plan, or resulting from it (including, without derogating from the aforementioned, income tax, capital gains tax, social security and health tax), and any other obligatory payment applicable as a result of the grant of the Options, their exercise and the sale of the Common Stock derived from such exercise ("the Option Shares"), will be fully borne by the Employee. (b) The Company recommends that you consult with professional advisors and that you consider the tax implications, including the result of the application of Section 102 of the Israeli Tax Ordinance [New Version], of the grant of the Options, of their exercise and of the sale of the Option Shares. (c) In accordance with the provisions of Section 102 of the Israeli Tax Ordinance [New Version], as in force on the date hereof, the Trustee (as defined below) will hold the Options in trust for the benefit of the Employee until the Options are exercised, if at all (or until the termination of the exercise period, to the extent the Options remain unexercised, as applicable). For purposes of this Paragraph 12, "Trustee" will mean whoever is approved by Israel's Commissioner of Inland Revenue to act in this capacity for the purpose of Section 102 of the Israeli Tax Ordinance [New Version]. Consequently, the Trustee will hold the Options and/or the Option Shares (including any bonus shares or shares derived from issuance of rights exercised during the Option's exercise period) in trust for the benefit of the Employee for at least 24 months following the termination of the year during which the Options were allotted (the "minimal restriction period"), and will not transfer the Options and the Options Shares to the Employee prior to the full payment of the applicable taxes. Transfer of the Option Shares from the Trustee to the Employee or their sale by the Trustee prior to the termination of the minimal restriction period, might involve tax implications (which the Employee should consider prior to taking any such action). (d) The Company has contracted with the Trustee with respect to the Options and the Option Shares (the "trust agreement") and the provisions of the trust agreement will apply and obligate any Employee who receives Options under the Plan. The main provisions of the trust agreement are: (i) the Company will not allot Options to its Employees but will allot them to the Trustee who will hold them for at least the minimal restriction period; (ii) during the minimal restriction period, the Options and the Option Shares will not be transferable; and (iii) after termination of the minimal restriction period, the Employee will be entitled to demand that the Trustee transfer the Option Shares to the Employee's name, provided either: (A) the tax applicable to the Employee under Section 102 of the Israeli Tax Ordinance [New Version] has been paid and the Trustee holds a conformation for the payment issued by the tax authorities; or (B) the Trustee has transferred to the tax authorities 25% of the consideration received by it for the sale of the Option Shares, on account of the applicable tax. The Plan and the trust agreement will apply to any bonus shares and/or rights granted to the Employee, mutatis mutandis. 5 (e) The Company has undertaken not to allot securities to Employees under Section 102 of the Israeli Tax Ordinance [New Version], unless it received a confirmation from the Employee that the Employee undertakes vis-a-vis the tax authorities not to exercise the Options prior to the termination of the minimal restriction period. (f) The transfer of the Option Shares from the Trustee to the Employee or their sale by the Trustee for the benefit of the Employee, all in accordance with the Employee's order (which may only take place after the termination of the minimal restriction period, i.e - after 24 months have passed since the end of the year during which the Options were allotted), is possible and may be done in accordance and under the rules, conditions and arrangements to be agreed between the Company and the Trustee and in accordance and subject to applicable law and arrangements (if existing) with the tax authorities. (g) The provisions of Section 102 of the Israeli Tax Ordinance [New Version] will apply on the Options to be granted to the Employees, (i.e., allotment via Trustee), in the capital lane. Any tax debit to the Employee will occur upon the earlier of the time the Option Shares will be transferred from the Trustee to the Employee or the time of the sale of the securities by the Trustee, without any debit occurring at the time the Options will be allotted. (h) In accordance with Paragraph 12(g) above, and since the Company has chosen the capital gains lane, as specified in section 102, any income from the realization of the benefit by the Employee will be deemed as a capital gain and will be taxed at the rate of 25%, excluding the portion of the income equaling the difference between the exercise price and the average price of the Common Stock during the 30 trading days prior to the allotment, which will be deemed as working income and will be subject to income tax, according to the rate applicable to the Employee, and social security tax and health tax. 13. Tax Withholding For Other Non-U.S. Employees [Local Counsel to provide] 6
Exhibit 10.6.3 NONQUALIFIED STOCK OPTION AGREEMENT Date: Company: (Company) Date(s) First Exercisable: Date of Grant: Number: No. of shares of Common Stock: (Number) Number: Option price per share of Common Stock: $ Number: PERSONAL AND CONFIDENTIAL (Name and Address) Dear (Name): We are pleased to inform you that as an Eligible Individual of the Company referred to above you have been granted a Stock Option under the Ormat Technologies, Inc. 2004 Incentive Compensation Plan. By your signature, you agree that these Options are granted under and governed by the Ormat Technologies, Inc. 2004 Incentive Compensation Plan and the Nonqualified Stock Option Terms and Conditions, and acknowledge receipt of both documents, as well as the form[s] of Notice of Exercise of Stock Option, together with the Plan Prospectus. As set forth in Paragraph 1 of the Nonqualified Stock Option Terms and Conditions, a signed copy of this agreement must be received by the Corporate Secretary of the Company, c/o Ormat Industries Ltd, Industrial Area, P.O. Box 68, Yavneh 8100 Israel before 5:00 P.M. EST (New York time) on the 30th day after the grant date. If the 30th day is a holiday in the United States or in Israel, such signed copy of this agreement will be considered timely received if it is received by 5:00 P.M. EST (New York time) of the following business day in the United States and Israel after such holiday. Failure to return a signed copy of this agreement will terminate this Option.Sincerely yours, ORMAT TECHNOLOGIES, INC. ----------------------------- ---------------------------- [Officer Name] Signature of Optionee ---------------------------- Date NONQUALIFIED STOCK OPTION TERMS AND CONDITIONS As a participant in the Ormat Technologies, Inc. 2004 Incentive Compensation Plan (the Plan), you will be able to purchase shares of Common Stock of Ormat Technologies, Inc. (Ormat) provided that you accept your Award as set forth in Paragraph 1 below. Subject to the terms and conditions below and the terms and conditions of the Plan, the minimum amount which may be purchased at any one time is 100 shares of Common Stock unless you have fewer remaining shares of Common Stock covered by your Option. Note that all capitalized terms in this Stock Option Agreement are defined in the Plan, except as indicated in the Stock Option Agreement. All terms of the Plan are hereby incorporated into these Term and Conditions. The date of the grant, the maximum number of shares of Common Stock the Option entitles you to purchase, the Option price per share of Common Stock and the date or dates on which the Option will ordinarily be first exercisable are listed at the top of the Stock Option Agreement. For United States employees, the Option is not intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code. The classification of options as incentive stock options or nonqualified stock options is relevant for U.S. employees (i.e. individuals who are either U.S. citizens or U.S. tax residents or who are or who have worked in the United States). For those employees, incentive stock options may provide more favorable tax treatment for recipients under the Internal Revenue Code. 1. Acceptance of Option. The Option cannot be exercised unless you sign the Stock Option Agreement and return it, so that it is received by the Corporate Secretary of the Company, c/o Ormat Industries Ltd, Industrial Area, P.O. Box 68, Yavneh 8100 Israel (or to such other person and place as Ormat may specify in writing), before 5:00 P.M. EST (New York time) on the 30th day after the date of grant. If the 30th day is a holiday in the United States or in Israel, such signed copy of this agreement will be considered timely received if it is received by 5:00PM EST (New York time) of the following business day in the United States and Israel after such holiday. If the Corporate Secretary does not receive your signed Stock Option Agreement by this time, then the Option will terminate immediately. Your signing and delivering of a copy of the Stock Option Agreement to which these Terms and Conditions are attached will not commit you to purchase any of the shares of Common Stock under the Option but will indicate your acceptance of the Option upon these terms and conditions. 2. Exercise. (a) Except as provided in this Paragraph 2 and in Paragraph 4, the Option will be exercisable during the period beginning on the date or dates set forth under the heading "Date(s) First Exercisable" in the Stock Option Agreement and ending ten years from the date of grant (its expiration date). During this period, the Option is exercisable in whole or in part from time to time in amounts of not less than 100 shares of CommonStock (except that if you have fewer than 100 shares of Common Stock remaining covered by the Option, the Option may be exercised for the full number of remaining shares of Common Stock). (b) The Option will not become exercisable, except as provided in the Vesting Schedule in (c) and (d) below. (c) The Option will be exercisable in accordance with the Vesting Schedule as follows: [Insert Vesting Schedule] (d) Despite the language in (c) above, the unexercisable portion of the Option hereby granted (in accordance with the Vesting Schedule) will terminate on the date of your Termination of Service for any reason. If you incur a Termination of Service for any reason other than death or Retirement, the exercisable portion of the Option hereby granted will be exercisable for thirty days following your Termination of Service; provided that in no event will the Option be exercisable after the expiration of ten years from the date of grant. If you incur a Termination of Service because you die, or because of Retirement, your personal representative or you, respectively, may exercise the exercisable portion of the Option hereby granted for one year following the Termination of Service (but not later than ten years from the date of grant) because you died or because of Retirement. For purposes of the Stock Option Agreement, you will incur a Termination of Service on the date that the entity granting you this Option is no longer a Subsidiary. Note that if a Tandem Stock Appreciation Right is granted in conjunction with this Option, either the Stock Appreciation Right or the Option may be exercised when exercisable, not both, and the non-exercised SAR or Option is forfeited. 3. Transferability of Option. You will not be able to transfer the Option except: (i) if you die, by will or by the laws of descent or distribution; (ii) pursuant to a domestic relations order; or (iii) by gift to your Family Member, as defined in Section 14(d) of the Plan. 4. Death or Retirement. If you incur a Termination of Service at Ormat or at a Subsidiary because you die or because of Retirement, the Option will only be exercisable to the extent it was exercisable under the Vesting Schedule specified in Paragraph 2(c) on the date of your death or on the date of your Retirement. Notwithstanding Paragraph 2, if you incur a Termination of Service because you die or because of Retirement, your personal representative or you, respectively, may exercise the exercisable portion of the Option hereby granted for one year following the Termination of Service (but not later than ten years from the date of grant) because you died or because of Retirement. 5. Stock Exchange Listing. Ormat is not obligated to deliver any shares of Common Stock until they have been listed on each stock exchange on which Ormat's Common Stock is listed and until Ormat is satisfied that all applicable laws and regulations have been met. Ormat agrees to use its best efforts to list the shares of Common Stock and meet all legal requirements so that the shares of Common Stock can be delivered. No fractional shares of Common Stock will be delivered. 2 6. Transfer of Service; Leave of Absence. For purposes of this Stock Option Agreement, (a) if you transfer between Ormat and a Subsidiary or from one Subsidiary to another Subsidiary as an employee, as a director or as an independent contractor, without an intervening period, it will not be considered a Termination of Service, and (b) any leave of absence granted in writing will not constitute an interruption in your service with Ormat. 7. Adjustments. If there is a merger, consolidation, stock or other non-cash dividend, extraordinary cash dividend, split-up, spin-off, combination or exchange of shares, reorganization or recapitalization or change in capitalization, or any other similar corporate event, the Committee may make such adjustments in: (i) the aggregate number of shares of Common Stock subject to the Plan and the number of shares of Common Stock that may be subject to Awards to any individual Participant in the Plan as well as the aggregate number of shares of Common Stock that may be made subject to any type of Award; (ii) the number and kind of shares of Common Stock that are subject to any Option (including any Option outstanding after Termination of Service) and the Option price per share without any change in the aggregate Option price to be paid for the Option upon exercise of the Option; and (iii) the number and kind of SARs granted or that may be granted under the Plan. The determination by the Committee as to the terms of any such adjustments will be final, conclusive and binding. 8. Stockholder Rights. Neither you nor any other person will have any rights of a stockholder as to shares of Common Stock under the Option until, after proper exercise of the Option, such shares of Common Stock will have been recorded on Ormat's official stockholder records as having been issued or transferred. 9. Notice of Exercise. Subject to these Terms and Conditions, the Option may be exercised, by a written notice of exercise on a form approved by the Committee that: (i) is signed by the person or persons permitted to exercise the Option; (ii) is delivered to the Corporate Secretary of the Company, c/o Ormat Industries Ltd, Industrial Area, P.O. Box 68, Yavneh 8100 Israel (or to such other person and place as Ormat may specify in writing); (iii) elects to exercise the Option as indicated in the notice of exercise; (iv) states the number of shares of Common Stock as to which the Option is being exercised; and (v) unless otherwise provided in the notice of exercise, is accompanied by payment in full of the Option price of such shares of Common Stock. The notice of exercise may be delivered by facsimile transmission or electronic mail. Any notice of exercise delivered as required by this paragraph will be effective only in accordance with the provisions of and to the extent set forth in the notice of exercise. If a properly executed notice of exercise is not delivered to Corporate Secretary (or other person designated by Ormat) by 5:00 P.M. EST (New York time) of the applicable expiration date specified in Paragraphs 2 and 4, the notice will be deemed null and void and of no effect. If notice of exercise of the Option is given by a person other than you, Ormat may require as a condition to exercising the Option that appropriate proof of the right of such person to exercise the Option be submitted to Ormat. Certificates for any shares of Common Stock purchased upon exercise will be issued and delivered as soon as practicable. 3 10. Payment of Option Price. You may pay the Option price for shares of Common Stock: (i) in cash; (ii) by the delivery of shares of Ormat Common Stock that you have held for at least one year and that have a total fair market value equal to the Option price; or (iii) by a combination of cash and such shares of Common Stock that you have held for a period of at least one year and that have a total fair market value which, together with such cash, equals the Option price. The "fair market value" of shares or per share of Ormat Common Stock as of any date means the value determined by reference to the closing price of a share of Ormat Common Stock as finally reported on the New York Stock Exchange or other stock exchange on which Ormat Common Stock is traded for the trading day next preceding such date. You may also pay the Option price from the proceeds of the sale of shares of Common Stock covered by the Option, (called a "cashless exercise"), to the extent provided in the notice of exercise referred to in Paragraph 9. 11. Tax Withholding for U.S. Employees. If you are a U.S. citizen or a U.S. tax resident or you are working or have worked in the United States for Ormat, if and to the extent Federal income tax withholding (and state and local income tax withholding, if applicable) may be required by Ormat in respect of taxes on income you realize after exercise of any portion of the Option, Ormat may withhold such required amounts from your future paychecks or may require that you deliver to Ormat the amounts to be withheld. You may also pay the minimum required Federal income tax withholding (and state and local income tax withholding, if applicable) by electing either to have Ormat withhold a portion of the shares of Common Stock otherwise issuable upon exercise of the Option, or to deliver other shares of Common Stock you own, in either case having a fair market value (on the date that the withholding amount is to be determined) of the minimum amount required to be withheld, provided that the election will be irrevocable and will be subject to such rules as the Committee may adopt. You may also arrange to have any tax (or taxes) paid directly to Ormat on your behalf from the proceeds of the sale of Common Stock to the extent provided in the notice of exercise referred to in Paragraph 9. 12. Tax Withholding For Israeli Employees (a) Any tax liability, of any kind due to the Plan, or resulting from it (including, without derogating from the aforementioned, income tax, capital gains tax, social security and health tax), and any other obligatory payment applicable as a result of the grant of the Options, their exercise and the sale of the Common Stock derived from such exercise ("the Option Shares"), will be fully borne by the Optionee. (b) The Company recommends that you consult with professional advisors and that you consider the tax implications, including the result of the application of Section 102 of the Israeli Tax Ordinance [New Version], of the grant of the Options, of their exercise and of the sale of the Option Shares. (c) In accordance with the provisions of Section 102 of the Israeli Tax Ordinance [New Version], as in force on the date hereof, the Trustee (as defined below) will hold the Options in trust for the benefit of the Optionee until the Options are 4 exercised, if at all (or until the termination of the exercise period, to the extent the Options remain unexercised, as applicable). For purposes of this Paragraph 12, "Trustee" will mean whoever is approved by Israel's Commissioner of Inland Revenue to act in this capacity for the purpose of Section 102 of the Israeli Tax Ordinance [New Version]. Consequently, the Trustee will hold the Options and/or the Option Shares (including any bonus shares or shares derived from issuance of rights exercised during the Option's exercise period) in trust for the benefit of the Optionee for at least 24 months following the termination of the year during which the Options were allotted (the "minimal restriction period"), and will not transfer the Options and the Options Shares to the Optionee prior to the full payment of the applicable taxes. Transfer of the Option Shares from the Trustee to the Optionee or their sale by the Trustee prior to the termination of the minimal restriction period, might involve tax implications (which the Optionee should consider prior to taking any such action). (d) The Company has contracted with the Trustee with respect to the Options and the Option Shares (the "trust agreement") and the provisions of the trust agreement will apply and obligate any Optionee who receives Options under the Plan. The main provisions of the trust agreement are: (i) the Company will not allot Options to its Optionees but will allot them to the Trustee who will hold them for at least the minimal restriction period; (ii) during the minimal restriction period, the Options and the Option Shares will not be transferable; and (iii) after termination of the minimal restriction period, the Optionee will be entitled to demand that the Trustee transfer the Option Shares to the Optionee's name, provided either: (A) the tax applicable to the Optionee under Section 102 of the Israeli Tax Ordinance [New Version] has been paid and the Trustee holds a conformation for the payment issued by the tax authorities; or (B) the Trustee has transferred to the tax authorities 25% of the consideration received by it for the sale of the Option Shares, on account of the applicable tax. The Plan and the trust agreement will apply to any bonus shares and/or rights granted to the Optionee, mutatis mutandis. (e) The Company has undertaken not to allot securities to Optionees under Section 102 of the Israeli Tax Ordinance [New Version], unless it received a confirmation from the Optionee that the Optionee undertakes vis-a-vis the tax authorities not to exercise the Options prior to the termination of the minimal restriction period. (f) The transfer of the Option Shares from the Trustee to the Optionee or their sale by the Trustee for the benefit of the Optionee, all in accordance with the Optionee's order (which may only take place after the termination of the minimal restriction period, i.e - after 24 months have passed since the end of the year during which the Options were allotted), is possible and may be done in accordance and under the rules, conditions and arrangements to be agreed between the Company and the Trustee and in accordance and subject to applicable law and arrangements (if existing) with the tax authorities. (g) The provisions of Section 102 of the Israeli Tax Ordinance [New Version] will apply on the Options to be granted to the Optionees, (i.e., allotment via Trustee), in the capital lane. Any tax debit to the Optionee will occur upon the earlier of 5 the time the Option Shares will be transferred from the Trustee to the Optionee or the time of the sale of the securities by the Trustee, without any debit occurring at the time the Options will be allotted. (h) In accordance with Paragraph 12(g) above, and since the Company has chosen the capital gains lane, as specified in section 102, any income from the realization of the benefit by the Optionee will be deemed as a capital gain and will be taxed at the rate of 25%, excluding the portion of the income equaling the difference between the exercise price and the average price of the Common Stock during the 30 trading days prior to the allotment, which will be deemed as working income and will be subject to income tax, according to the rate applicable to the Optionee, and social security tax and health tax. 13. Tax Withholding For Other Non-U.S. Employees [Local Counsel to provide] 6
Exhibit 10.10.1 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement"), dated as of January 1, 2004, between ORMAT NEVADA INC., a Delaware corporation ("Employer"), and YEHEZKEL RAM ("Employee"). W I T N E S S E T H WHEREAS, Employer desires to employ Employee upon the terms and conditions set forth herein; and WHEREAS, Employee is willing to provide services to Employer upon the terms and conditions set forth herein; A G R E E M E N T S NOW, THEREFORE, for and in consideration of the foregoing premises and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, Employer and Employee hereby agree as follows: 1. EMPLOYMENT. Employer will employ and Employee will accept employment by Employer as Vice President, responsible for Business Development in North America. Employee will perform the duties assigned to him and such other duties as may be assigned from time to time by the Employer, its subsidiaries and affiliates or any business ventures in which Employer or its subsidiaries may participate. Employee's regular place of employment is the Employer's corporate offices in Nevada but it is agreed that; a) Employee is required to perform frequent business trips in and out of the United States, As a managerial Employee, Employee is expected to render work in accordance with the requirement and demands of the Job and will not be entitled to any overtime pay for working beyond eight (8) hours a day, or during weekends, holidays, etc. 1 Employee will be required to follow (a) all work and administrative rules (including travel expenses reimbursement) of Employer as in current use and as may be amended from time to time; (b) all national or local law, ordinance or regulation of the country in which Employee's work is performed. 2. ATTENTION AND EFFORT. Employee will devote his full time, ability, attention and effort to Employer" business and will skillfully serve its interests during the term of this Agreement. 3. TERM. Unless otherwise terminated pursuant to paragraph 6 of this Agreement, Employee's term of employment under this Agreement shall commence on January 1, 2004 and shall expire on December 31, 2004. COMPENSATION. During the term of this Agreement, Employer agrees to pay or cause to be paid to Employee, and Employee agrees to accept in exchange for the services rendered hereunder by him, the following compensation; 4.1 BASE SALARY. Employee's compensation shall consist of a yearly base salary of One Hundred and Seventy Five Thousand Dollars ($175,000.00) before all customary payroll deductions. Such yearly base salary shall be paid monthly in arrears. 4.3 NO OTHER PAYMENTS. This Agreement describes all payments and compensations Employee is entitled to, and no other allowances, bonuses or expense reimbursement will be made without prior written authorization. Employee may not accept any payment from any third party, except for passive investments. 5. BENEFITS. 5.1 VACATION. Total four weeks per year, not cumulative from year to year without specific written authorization from Employer, this authorization must be made no later than 90 days before the end of the year in which the vacation is due. Maximum length of single vacation period is two weeks, unless specifically authorized. 52 MEDICAL AND HOSPITALIZATION INSURANCE. Employee will be entitled to receive Employer's standard medical insurance benefits. 5.3 HOLIDAYS. Employee will be entitled to all legal holidays of the U.S.A. any other time off for holidays, including Israeli holidays, will count against Employee's vacation time. 2 5.4 SICK LEAVE. Employee will be entitled to time off for illness as approved by Employer, and supported by a physician's letter if for single period of 3 days or more, up to a maximum of 30 days per year. 5.5 401(k): Employee will be enrolled to Employer's Simple 401(k) program, in accordance with the terms of the program from time to time. 6. TERMINATION. Employment of Employee pursuant to this Agreement may be terminated as follows, but in any case, the provisions of paragraph 8 hereof shall survive the termination of this Agreement and the termination of Employee's employment hereunder; 6.1 BY EMPLOYER. With or without Cause (as defined below), Employer may terminate the employment of Employee at any time during the term of employment upon giving Notice of Termination (as defined below). 6.2 BY EMPLOYEE. Employee may terminate his or her employment at any time, for any reason, upon giving Notice of Termination. 6.3 NOTICE. The term "Notice of Termination" shall mean at least 90 days written notice of termination of Employee's employment, if such notice is given by Employer and at least 90 days written notice of termination of Employee's employment if such notice is given by Employee, during which period Employee's employment and performance of services will continue; provided, however, that Employer may, upon notice to Employee and without reducing Employee's compensation during such period, excuse Employee from any or all of his duties during such period. The effective date of the termination of Employee's employment hereunder shall be the date on which such 90 days period, as the case may be, expires, provided however that Employer may, at its sole option prepay the termination payment in which case the effective date of termination will be the date the termination payments were made. 7. TERMINATION OF PAYMENTS. In the event of termination of the employment of Employee, all compensation and benefits set forth in this Agreement shall terminate except as specifically provided in this paragraph 7; 7.1 TERMINATION BY EMPLOYER. If Employer terminates Employee's employment without Cause, Employee shall be entitled to received Employee's monthly salary during the 90 day period specified in paragraph 6.3, provided, however, that if Employee is terminated by Employer for any Cause, Employee shall not be entitled to receive any of the foregoing benefits. 7.2 TERMINATION BY EMPLOYEE. In the case of the termination of Employee's employment by Employee, Employee shall not be entitled to receive any payments for services provided subsequent to the date of termination. 3 7.3 EXPIRATION OF TERM. In the case of the termination of Employee's employment as a result of the expiration of the term of this Agreement, Employee shall not be entitled to receive any payments hereunder, other than any unpaid base salary. 7.4 CAUSE. Wherever reference is made in this Agreement to termination being with or without Cause, "Cause" means cause given by Employer to Employee and is limited to the occurrence of one or more of the following events; (i) Habitual unjustifiable failure or refusal to perform the lawful duties of Employee described in Section 1 and 2 hereof; (ii) Violation by Employee of a state or federal criminal law involving the commission of a crime against Employer or a felony; (iii) Habitual or repeated misuses by Employee of alcohol or controlled substances; deception, fraud, misrepresentation of dishonesty by Employee; ; any intentional act or omission by Employee which substantially impairs Employer's business, good will or reputation; or (iv) Any other material violation of any provision of this Agreement. 8. NONCOMPETITION AND NONSOLICITATION 8.1 APPLICABILITY. This paragraph 8 shall survive the termination of Employee's employment with Employer except that Section 8.2 shall terminate and be of no effect if Employee is terminated without Cause. 8.2 SCOPE OF NON-COMPETITION. Employee agrees that he will not, directly or indirectly, during his employment and for a period of [one) year from the date on which his employment with Employer terminates (unless terminated by Employer without Cause), be employed by, consult with or otherwise perform services for, own, manage, operate, join, control or participate in the ownership, management, operation or control of or be connected with, in any manner, any Competitor (as hereinafter defined) unless released from such obligation in writing by Employer. A "Competitor" shall include any entity which competes with Employer in the , geothermal and waste heat field (and industries as expended in addendum to this contract, from time to time) worldwide, or any entity which is developing energy products or services that will be in competition with the energy products or services of Employer. Employee shall be deemed to be related to or connected with a Competitor if such Competitor is (a) a partnership in which he is a general or limited partner or employee, (b) a corporation or association which he is a shareholder, officer, employee or director, or (c) if Employee is a member, consultant or agent of such Competitor; provided, however, that nothing herein shall prevent the purchase or ownership by Employee of shares which constitute less than five percent of the 4 outstanding equity securities of a publicly or privately held corporation, if Employee has no other relationship with such corporation. 8.3 SCOPE OF NONSOLICITATION. Employee shall not directly or indirectly solicit, influence or entice, or attempt to solicit, influence or entice, any employee or consultant of Employer to cease his relationship with Employer or solicit, influence, entice or in any way divert any customer, distributor, partner, joint venturer or supplier for Employer to do business or in any way become associated with any Competitor to the detriment of Employer. This subparagraph 8.3 shall apply during the time period described in subparagraph 82 hereof. 8.4 NONDISCLOSURE: RETURN OF MATERIALS. During the term of his employment by Employer and following termination of such employment, he will not disclose (except as required by duties to Employer), any Confidential Information (as defined below) to any third party. All documents, procedural manuals, guides, specifications, plans, drawings, designs, computer programs and similar materials, lists of present, past or future customers, customer proposals, invitations to submit proposals, price lists and data relating to pricing of Employer's products and services, records, notebooks and similar repositories of or containing any Confidential Information (including all copies thereof) coming into Employee's possession or control by reason of Employee's employment by Employer, whether prepared by Employee or others; (i) are the property of the Employer, (ii) will not be used by Employee in any way adverse to Employer, (iii) will not be removed from Employer's premises or photocopied (except as Employee's employment by Employer shall require) and (iv) at the termination of Employee's employment will be left with, or forthwith returned to, Employer. As used in this Agreement, "Confidential Information" shall mean secret or proprietary information of whatever kind of nature disclosed to Employee or becoming known to Employee (whether or not invented, discovered or developed by Employee), at any time during Employee's employment by Employer or his pervious employment by Employer's affiliates as a consequence or through such employment. Such secret or proprietary information shall include (unless such information is generally known in the industry through no action of Employee) information relating to design, manufacture, application, know-how, research and development relating to Employer's present, past or prospective products, sources of supplies and materials, operating and other cost data, lists of present customers, customer proposals, price lists and data relating to pricing of Employer's products or services. Such secret or proprietary information shall specifically include, without limitation all information contained in Employer's manuals, memoranda, formulae, plans, drawings and designs, specifications, data supply sources, computer programs and records legends or otherwise identified by Employer as confidential information. Confidential Information shall not, however, include information which is now or hereafter becomes generally known or available to the public through no act or failure to act on the part of Employee, is received by Employee from another person 5 that is free to disclose the same without restriction, or is independently developed by a third party who have had no access to that or similar Confidential Information as disclosed pursuant to this Agreement. Employee's obligations under this Section 8.4 shall terminate five (5) years after the termination of Employee's employment. 8.5 RIGHTS TO INVENTIONS. (i) The know-how, Inventions (as defined below) and such other data that will be developed in the course Employee's employment of, and all modifications thereof even if made after Termination of shall belong to Employer, and Employer will be the sole and exclusive owner of any and all right pertaining thereto. (ii) Employees shall keep signed, witnessed and dated records of any and all ideas, inventions, improvements and discoveries (whether or not patentable), made, conceived or first reduced to practice by Employee in the course of his employment under this Agreement, together with all supporting evidence such as notes, sketches, drawings, models and data pertaining thereto. Employee shall promptly make full disclosure to Employer of any Inventions or modifications thereof. At the time of this Agreement, Employee has not been issued any patents for any device, process, design or invention of any kind which may be used by or needed by Employer in connection with Employer's activities, services, and product and which he has not assigned to Employer and duly recorded in the United States Patent Office. Employee agrees that all inventions developed by Employee while he was employed by Employer and prior to the date of this Agreement while he was employed by Employer's affiliates are the property of Employer and subject to the terms of this paragraph 8. (iii) Employer will have the right to submit patent application based on such inventions. Such patents will identify the original inventors, as required by patent law in the U.S., and also in other countries, even if not required by law. Employee shall, at Employer's expense, promptly execute formal applications for patents and also do all other acts and things (including, among other, executing and delivering instruments of further assignments, registration, assurance or confirmation) deemed by Employer necessary or desirable at any time or times in order to effect the full assignment to Employer of Employee's rights, title, and interest to such Inventions and/or modifications, without payment therefore and without further compensation beyond Employee's agreed compensation for employment. The absence of a request by Employer for information, or for the making of an oath, or for the 6 execution of any document, shall in no way be construed to constitute a waiver of the rights of Employer. Should Employer determine that it has no intent to make a patent application for an Invention, and that it has no reason to keep such inventions confidential, Employee will have the right, after receiving Employer's approval in writing, to pursue patent application at its own risk and expense. It is expressly understood that Employer may withhold such approval as it deems necessary at its sole discretion. (iv) As used in this Agreement, "Inventions" shall mean those discoveries, developments, inventions and works of authorship, whether or not patentable, relating to Employer's present, past or prospective activities, services and products, which activities, services and products are known by Employee at any time during Employee's employment by Employer as a consequence of such employment, including any patents, models, trade secrets, trademarks, services marks, copyrightable subject matter and any copyrights therein, proprietary information, design of a useful article (whether the design is ornamental or otherwise), computer programs and related documentation, and other writings, code, algorithms and information and related documentation and materials which the Employee has made, written or conceived or may make, write or conceive, during Employee's employment by Employer, either solely or jointly with others, and either on or off Employer's premises (A) while providing services to Employer, or (B) with the use of time, materials or facilities of Employer, or (C) relating to any Company product, service present, past or prospective activities, services and products, which activities, services and products are known by Employee at any time during Employee's employment by Employer as a consequence of such employment, including any patents, models, trade secrets, trademarks, services marks, copyrightable subject matter and any copyrights therein, proprietary information, design of a useful article (whether the design is ornamental or otherwise), computer programs and related documentation, and other writings, code, algorithms and information and related documentation and materials which the Employee has made, written or conceived or may make, write or conceive, during Employee's employment by Employer, either solely or jointly with others, and either on or off Employer's premises (A) while providing services to Employer, or (B) with the use of time, materials or facilities of Employer, or (C) relating to any Company product, service or activity of which Employee has knowledge, or (D) suggested by or resulting from any work performed by or for Employer. Such term shall not be limited to the meaning of "invention" under the United States patent laws. 8.6 EQUITABLE RELIEF. Employee acknowledges that the provisions of this paragraph 8 are essential to Employer, that Employer would not enter into this Agreement if it did not include this paragraph 8 and that damages sustained by Employer as a result 7 of a breach of this paragraph 8 cannot be adequately remedied by damages, and Employee agrees that Employer, notwithstanding any other provision of this Agreement, and in addition to any other remedy it may have under this Agreement or at law, shall be entitled to injunctive and other equitable relief, without the necessity for posting a bond, to prevent or curtail any breach of any provision of this Agreement, including, without limitation, this paragraph 8. 8.7 DEFINITION OF EMPLOYER. For purposes of subparagraph 8.2 and subparagraphs 8.3 hereof, "Employer" shall include all subsidiaries and affiliates of Employer, and any business ventures in which Employer or its subsidiaries and affiliates may participate. 9. SEVERABILITY: To the extent any provision of this Agreement shall be invalid, illegal or unenforceable in any respect, it shall be considered deleted herefrom, and the remainder of such provision and of this Agreement shall be construed as if such invalid, illegal or unenforceable provision (or portion thereof) had never been contained herein. In furtherance and not in limitation of the foregoing, should the duration or geographical extent of, or business activities covered by any provision of this Agreement be in excess of that which is valid an enforceable under applicable law, then such provision shall be construed to cover only that duration, extent or activities which may validly and enforceably be covered. 10. Employee acknowledges that the terms of this Agreement are personal and confidential and should not be discussed with any third party within the Employer's organization, or outside of the organization. 11. FORM OF NOTICE. All notices given hereunder shall be given in writing, shall specifically refer to this Agreement and shall be personally delivered or sent by telecopy or other electronic facsimile transmission or by registered or certified mail, return receipt requested, at the address set forth below notice given in compliance with the terms hereof; If to Employee: Hezy Ram 7000 Mae Anne Reno, NV 89523 If to Employer: Ormat Nevada Inc., 980 Greg St. Sparks, NV 89431 Attn: President 8If notice is mailed, such notice shall be effective after 10 days of mailing, or if notice is personally delivered or sent by electronic facsimile transmission, it shall be effective upon receipt. 12. WAIVERS. No delay or failure by any party hereto in exercising, protecting or enforcing any of its rights, titles, interests or remedies hereunder, and no course of dealing or performance with respect thereto, shall constitute a waiver thereof. The express waiver by a party hereto of any right, title, interest or remedy in a particular instance or circumstance shall not constitute a waiver thereof in any other instance or circumstance. All rights and remedies shall be cumulative and not exclusive of any or the rights or remedies. 13. AMENDMENTS IN WRITING. No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure therefrom by either party hereto, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated or discharged and signed by Employer and Employee. 14. APPLICABLE LAW. This Agreement shall be in all respects, including all matters of construction, validity and performance, be governed by, construed and enforced in accordance with, the laws of the state of Nevada, without regard to any rules governing conflicts of laws. 15. HEADINGS. All headings used herein are for convenience only and shall not in any way affect the construction of, or be taken into consideration in interpreting, this Agreement. 16. ENTIRE AGREEMENT. This Agreement on and as of the date hereof constitutes the entire Agreement between Employer and Employee with respect to the subject matter hereof and all prior or contemporaneous oral or written communications, understandings or agreements between Employer and Employee with respect to such subject matter are hereby superseded and nullified in their entireties. IN WITNESS WHEREOF, the parties have executed and entered into this Agreement on the date set forth above. EMPLOYEE: /s/ Hezy Ram --------------------------------- EMPLOYER: BY: /s/ Connie Stechman ------------------------------ Its: Controller ----------------------------- 9
Exhibit 10.10.2 AMENDMENT NUMBER 1 to Employment Agreement dated as of January 1, 2004 between ORMAT NEVADA INC and YEHEZKEL RAM (the EMPLOYMENT AGREEMENT) entered this 12 day of October 2004 The Employment Agreement is hereby amended as follows: Section 3 of the Employment Agreement is hereby amended by changing the expiration date from December 31, 2004 to December 31, 2007. All other terms of the Employment Agreement remain unchanged. IN WITNESS WHEREOF, the parties have executed and entered into this Employment Agreement on the date set forth above EMPLOYEE /s/ Hezy Ram ------------------------ EMPLOYER By: /s/ L.Y. Bronicki --------------------- Its: Chairman --------------------
Exhibit 10.11 ORMAT TECHNOLOGIES, INC. FORM OF INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT, made as of _____, 2004 between Ormat Technologies, Inc., a Delaware corporation (the "Company"), and ______ (the "Indemnitee"). WHEREAS, the Company is aware that competent and experienced persons are increasingly reluctant to serve as directors or officers of corporations unless they are protected by adequate indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no reasonable relationship to the compensation of such directors and officers; WHEREAS, the statutes and judicial decisions regarding the duties of directors and officers are often difficult to apply, ambiguous, or conflicting, and therefore fail to provide such directors and officers with adequate, reliable knowledge of legal risks to which they are exposed or information regarding the proper course of action to take; WHEREAS, plaintiffs often seek damages in such large amounts and the costs of litigation may be so great (whether or not the case is meritorious), that the defense and/or settlement of such litigation is usually beyond the personal resources of directors and officers; WHEREAS, based upon their experience as business managers, the Board of Directors has concluded that, to retain and attract talented and experienced individuals to service as officers and directors of the Company and its Subsidiaries (as defined below in Section 1) and to encourage such individuals to take the business risks necessary for the success of the Company and its Subsidiaries, it is necessary for the Company to contractually indemnify its directors and certain of its officers, and the directors and certain of the officers of its Subsidiaries, and to assume for itself maximum liability for expenses and damages in connection with claims against such officers and directors in connection with their service to the Company and its Subsidiaries, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Company and its Subsidiaries and the Company's stockholders; WHEREAS, the Indemnitee is a member of the Board of Directors of the Company and/or an officer of the Company and its Subsidiaries and in such capacity is performing a valuable service for the Company; WHEREAS, the Company's Amended and Restated By-laws (the "By-laws") provide for indemnification to the fullest extent permitted by the Delaware General Corporation Law from time to time in effect (provided that in the case of any subsequent amendment or interpretation only to the extent that such amendment or interpretation permits the Company to provide broader indemnification rights than were previously permitted prior thereto) (the "Indemnification Statute"); WHEREAS, the Indemnification Statute provides that the indemnification rights provided thereunder are not exclusive, and that agreements may be entered into between the Company and members of its Board of Directors and officers with respect to indemnification; and WHEREAS, the Company deems it desirable and in its best interests for it to enter into this contract with the Indemnitee. NOW, THEREFORE, the parties hereto agree as follows: 1. Mandatory Indemnification. The Company shall, to the fullest extent allowed by applicable law (including the indemnification permitted by Section 145 of the Delaware General Corporation Law ("DGCL")) indemnify and hold harmless the Indemnitee from and against any and all expenses (including reasonable attorneys' fees), amounts paid or incurred in satisfaction of settlements, judgments, fines, penalties, liabilities and similar or related items incurred or suffered or threatened to be incurred or suffered in any pending, threatened or completed actions, suits or proceedings, whether civil, criminal, administrative, arbitrative or investigative (including any appeal therein and any inquiry or investigation which could lead to such suit, action or procedure) by reason of the Indemnitee's being or having been (or to the fullest extent permitted by law otherwise related to the fact that he is or was) (a) a director, officer, employee or agent of the Company or of any constituent corporation absorbed by the Company in a consolidation or merger or (b) a director, officer, trustee, employee or agent of any direct or indirect subsidiary of the Company (collectively, "Subsidiary") or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise or entity of any kind or nature (collectively, including such Subsidiaries, "Other Enterprises"), at which the Indemnitee served in such capacity at the request of the Company or any such constituent corporation (collectively, "Proceedings"). To the fullest extent permitted by applicable law, the Indemnitee shall be entitled to a conclusive presumption that any service as a director, officer, employee or agent for a Subsidiary was at the request of the Company, and the confirmation in any one or more instances that such service was at the request of the Company shall not alter such conclusive presumption. The foregoing right to indemnification applies to any Proceeding in which the Indemnitee is made, or is threatened to be made, a party. It is understood that the Company shall not be obligated pursuant to the terms of this Agreement to indemnify the 2 Indemnitee if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. In this respect, the Indemnitee has been advised that the Securities and Exchange Commission takes the position that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable. In addition, notwithstanding anything else in this Agreement, the indemnification provided hereunder to any Indemnitee who is also an officer or director of or controlling party in Ormat Industries Ltd. shall be subject to the same limitations on such indemnification as are applicable to the indemnification provided to such person by Ormat Industries Ltd. 2. Indemnification as Witness. Notwithstanding any other provision of this Agreement, to the extent the Indemnitee is, by reason of the fact that the Indemnitee is or was a director, officer, employee or agent of the Company or Other Enterprises, a witness in any proceeding, the Indemnitee shall be indemnified against any and all expenses actually and reasonably incurred by or for the Indemnitee in connection therewith. 3. Mandatory Advancement of Expenses. The Company shall to the fullest extent permitted by the Section 145 of the DGCL advance all costs and expenses (including attorneys' fees and expenses) incurred by the Indemnitee with respect to any one or more Proceedings, whether civil, criminal, administrative or investigative. The Indemnitee hereby agrees to repay such costs and expenses if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Company under the DGCL. Such mandatory obligation to advance costs and expenses shall, to the extent permitted by law, include costs and expenses incurred in asserting affirmative defenses, counterclaims and cross-claims. The advances to be made hereunder shall be paid by the Company to the Indemnitee within ten (10) days following delivery of a written request therefore by the Indemnitee to the Company. 4. Continuation of Indemnification. All obligations of the Company hereunder shall continue during the period the Indemnitee is a director, officer, employee or agent of the Company (or is serving at the request of the Company as a director, officer, employee, trustee or agent of any Other Enterprise) and shall continue thereafter so long as the Indemnitee shall be subject to any possible Proceeding by reason of the fact that the Indemnitee is or was a director, officer, employee or agent of the Company or is or was serving on behalf of any Other Enterprise in any capacity referred to in Paragraph 1 hereof. 5. Procedural Requirements. (a) Notice by Indemnitee. The Indemnitee shall, as a condition precedent to the Indeminitee's right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claims made against such Indemnitee for which such Indemnittee believes that indemnification with respect thereto may be sought from the Company under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the 3 signature page of this Agreement or such other address as the Company shall designate in writing to the Indemnitee. (b) Notice to Insurer. If, at the time of the receipt of a notice of the commencement of a proceeding pursuant to Section 5(a) above, the Company has in effect an insurance policy or policies providing directors' and officers' liability insurance, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter make all commercially relevant efforts to take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (c) Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee. The Indemnitee shall execute all documents required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company to effectively bring suit to enforce such rights. (d) Selection of Counsel. In the event the Company shall be obligated hereunder to pay the expenses of any claims, the Company, if appropriate, shall be entitled to assume the defense of such claims with counsel approved by the Indemnitee (such approval not to be unreasonably withheld), upon the delivery to such Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to such Indemnitee under this Agreement for any fees of any other counsel subsequently incurred by such Indemnitee with respect to the same claims, provided that (i) the Indemnitee shall have the right to employ counsel in any such claims at such Indemnitee's expense and (ii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and such Indemnitee in the conduct of such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such claims, then the fees and expenses of the Indemnitee's counsel shall be at the expense of the Company. 6. Non-Exclusive Provisions Re: Indemnification and Advancement. The indemnification against settlements, judgments, expenses and other matters and the advancement of costs and expenses provided for in this Agreement shall not be deemed exclusive of any other rights to indemnification and/or advancement which the Indemnitee may be entitled under any agreement, any vote of stockholders and/or disinterested directors, the Company's Amended and Restated Certificate of Incorporation or Restated By-laws, or otherwise. 4 7. Exceptions. (a) Claims Initiated by Indemnitee. Notwithstanding any other provision herein to the contrary, the Company shall not be obligated under the terms of this Agreement to indemnify or advance expenses to the Indemnitee with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and by way of defense or counterclaims asserted by Indemnitee in a proceeding brought against Indemnitee, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under the DGCL, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate. (b) Lack of Good Faith. Notwithstanding any other provision herein to the contrary, the Company shall not be obligated under the terms of this Agreement to indemnify the Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by the Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was frivolous or made in bad faith. (c) Unauthorized Settlements. Notwithstanding any other provision herein to the contrary, the Company shall not be obligated under the terms of this Agreement to indemnify the Indemnitee for any amount paid in settlement of a proceeding effected without the prior written consent of the Company. The Company agrees not to unreasonably withhold its consent to any settlement. (d) No Duplicative Payment. The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Imdemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. (e) Claims under Section 16(b). Notwithstanding any other provision herein to the contrary, the Company shall not be obliged to indemnify the Indemnitee for expenses and the payments of profits arising from the purchase and sale by the Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 8. Burden of Proof. In making a determination with respect to the Indemnitee's right to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. 5 9. Other Provisions. (a) Enforcement of Rights. It is understood that the parties intend this Agreement to be interpreted and enforced so as to provide indemnification and advancement of expenses to the Indemnitee to the fullest extent permitted by applicable law as then in effect. Without limiting the generality of Section 1 hereof or the preceding sentence, if the Indemnitee is successful in any material respect in bringing any action to enforce any rights under this Agreement, the Indemnitee shall, to the fullest extent permitted by law, be entitled to recover all reasonable fees and expenses in bringing and pursuing such action. In addition, the Indemnitee may in his sole discretion apply to any court of competent jurisdiction for specific performance and/or injunctive relief in order to enforce, or prevent any violations of, the provisions of this Agreement. (b) Severability. If any provision of this Agreement or the application thereof to any entities or individuals ("Persons") or circumstance(s) shall be invalid or unenforceable to any extent, (i) the remainder of this Agreement and the application of such provision to other Persons or circumstance(s) shall not be effected thereby; and (ii) each such provision shall be enforced to the greatest extent permitted by law. (c) Construction. Use of the words "hereby," "herein," "hereto," "hereof," "hereunder," and similar words, shall be deemed to refer to this Agreement in its entirety, and not solely to the Section or Subsection in which any such word appears; "including," "includes," or "include" shall mean "including but not limited to," "includes but is not limited to," and "include but not limited to." All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural, and vice versa. Titles of Sections are for convenience only, and shall not modify rights and obligations created by this Agreement. (d) Survival Successors and Assigns. The Indemnitee's rights under this Agreement shall continue after the Indemnitee has ceased to serve as a director or an officer of the Company. This Agreement shall be binding on and inure to the benefit of successors, assigns, legatees, distributees, heirs, executors, guardians, administrators, estates and other legal representatives. (e) Modification. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated orally, but only by an instruction in writing, signed by the party against which enforcement of such change, waiver, discharge or termination is sought. (f) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken 6 together shall constitute but one Agreement. It shall not be necessary that any counterpart be signed by the parties so long as each Party shall have executed a counterpart. (g) Entire Agreement. This Agreement constitutes the entire understanding between the parties with respect to the subject matter hereof and supersedes any prior understandings, agreements or representations between the parties, written or oral, which may relate to the subject matter hereof; provided, that the provisions of this Agreement are supplementary to, and not in place of any provisions relating to indemnification and/or liability of directors and officers contained in the Company's Amended and Restated Certificate of Incorporation and Restated By-Laws and rights and remedies provided under any insurance policy. (h) Governing Law. This Agreement shall be governed by and construed according to the laws of the State of Delaware, without giving effect to principles of conflicts of law in Delaware. 7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. ORMAT TECHNOLOGIES, INC. By: -------------------------------------- Name: Title: Address: 980 Greg Street, Sparks, NV 89431 INDEMNITEE Name: ------------------------------------ ------------------------------------ 8
EXHIBIT 21.1 LIST OF SIGNIFICANT SUBSIDIARIES OF THE COMPANY, THE STATE OR JURISDICTION OF INCORPORATION OR ORGANIZATION OF EACH, AND THE NAMES UNDER WHICH SUCH SUBSIDIARIES DO BUSINESS -------------------------------------------------------------------------- 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 California Company L.P. -------------------------------------------------------------------------- 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 -------------------------------------------------------------------------- Puna Geothermal Venture, L.P. Hawaii --------------------------------------------------------------------------
EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the use in this Registration Statement on Form S-1 of our reports dated as follows: o July 19, 2004, except for Note 20 as to which the date is September 26, 2004, and Note 21 as to which the date is October 21, 2004, relating to the financial statement of Ormat Technologies, Inc. and subsidiaries, o April 30, 2004, except for Notes 3 and 9, as to which the date is July 1, 2004, relating to the financial statements of Puna Geothermal Venture, o July 19, 2004 relating to the financial statements of Combined Heber and Affiliates, and o January 26, 2004 relating to the financials statements of Mammoth-Pacific L.P. These reports appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Sacramento, California October 21, 2004
Exhibit 23.6 CONSENT FORM I, Yoram Bronicki, hereby consent to the inclusion of my name as a nominee director of Ormat Technologies Inc. (the "company") and to the inclusion of my biographical information in the company's Registration Statement on Form S-1 (File No. 333-117527) filed with the Securities Exchange Commission. Date: October 15, 2004 Name: Yoram Bronicki Signature: /s/ Yoram Bronicki -------------------