ITEM 4: Information on Ellomay

A.           History and Development of Ellomay

Our legal and commercial name is Ellomay Capital Ltd. Our office is located at 9 Rothschild Boulevard, 2 nd floor, Tel-Aviv 66881, Israel, and our telephone number is +972-3-7971111. Our registered agent in the United States is CT Corporation System, 111 Eight Avenue, New York, New York 10011.

We were incorporated as an Israeli corporation under the name Nur Advertisement Industries 1987 Ltd. on July 29, 1987. On August 1, 1993, we changed our name to NUR Advanced Technologies Ltd., on November 16, 1997 we again changed our name to NUR Macroprinters Ltd. and on April 7, 2008, in connection with the closing of the sale of our business to HP, we again changed our name to Ellomay Capital Ltd. Our corporate governance is controlled by the Israeli Companies Law, 1999, as amended (the “Companies Law”).

 

Our ordinary shares are currently listed on the NYSE Amex under the trading symbol “ELLO.”

Recent Developments

PV Plants

On March 12, 2012, Ellomay Spain S.L., a company in which we indirectly own 85% of the outstanding shares (“Ellomay Spain”), entered into share purchase agreements and an asset purchase agreement (together, the “Rinconada II Agreements”) with Conergy España, S.L.U (“Conergy España”) in connection with the acquisition of a photovoltaic plant with fixed technology located in Municipality of Córdoba, Andalusia, Spain with a total nominal output of approximately 1.89 MWp, and a peak power output of approximately 2.275 MWp (the “Rinconada II PV Plant”) and of related licenses. The remaining 15% of Ellomay Spain are held by a Spanish company engaged in providing construction, operating and maintenance services for photovoltaic plants in Europe and elsewhere, whose subsidiary has built and is currently providing operation and maintenance services for several of our Italian PV Plants. The Rinconada II PV Plant is constructed and operational and has been connected to the Spanish national grid since July 2010. The Rinconada II PV Plant is entitled to receive the Spanish special economic regime for renewable energies. Pursuant to the Rinconada II Agreements, Ellomay Spain purchased all of the outstanding shares of Spanish companies holding the licenses to produce electricity in the Rinconada PV II Plant and also separately purchased the Rinconada II PV Plant. The consideration paid by Ellomay Spain in connection with the acquisition of the Rinconada II PV Plant and the related licenses, including all applicable taxes and expenses, amounts to approximately Euro 7 million.

Investments in Israel

MVNO

In November 2010, Ellomay Capital Communications Ltd. (“Ellomay Communications”), our wholly-owned subsidiary, entered into a binding Memorandum of Understanding (the “MVNO MOU”) with Alon Ribua Communications Ltd. (“Alon Ribua”), and Novosti Communications Ltd. (“Novosti”), with respect to the launch of a virtual mobile operator in Israel by a joint SPC entity - Alon Ribua Telecom  Ltd (“Alon Ribua Telecom”). During 2011 we decided not to pursue this project, and, therefore, Ellomay Communications entered into an agreement with Alon Ribua and Alon Ribua Telecom pursuant to which, subject to certain regulatory approvals, Ellomay Communication will sell its holdings in Alon Ribua Telecom and its rights with respect to shareholders loans extended to Alon Ribua Telecom, in consideration for an amount of approximately $0.1 million.

 

Delek Farmout Agreements

On February 22, 2011 (the “Licenses Effective Date”) we entered into two Farmout Agreements (the “Delek Farmout Agreements”), contemplating the acquisition of participating interests in four exploration licenses (the “Exploration Licenses”) as follows: (i) a Farmout Agreement among Delek Drilling Limited Partnership (“Delek”), Avner Oil Exploration Limited Partnership (“Avner”) and us contemplating the acquisition by us of 10% of the participating interests in each of the “337/Aviah” and “338/Qeren” drilling licenses (respectively, the “Aviah License” and the “Qeren License”); and (ii) a Farmout Agreement among Delek, Avenr, Noble Energy Mediterranean Ltd. (“Noble”) and us contemplating the acquisition by us of 15% of the participating interests in each of the “Ruth D” and “Alon E” drilling licenses (respectively, the “Ruth License” and the “Alon License”) (the transferors of the participating interests are referred to herein as “Farmors” and the transferees of the participating interests are referred to herein as “Farmees”). The consideration paid in connection with the acquisition of the participating interests is expected to be an aggregate of approximately $710,000 as reimbursement for past expenditures incurred by the Farmors in connection with operations under the Exploration Licenses until the Licenses Effective Date. In addition, we will be required to reimburse the Farmors for certain costs billed to us under the provisions of the relevant JOAs (as hereinafter defined) during the period between the Licenses Effective Date and the closing of the transactions contemplated by the Delek Farmout Agreements, based on criteria set forth in the Delek Farmout Agreements. In connection with the Delek Farmout Agreements, we further undertook that it will not, prior to the earlier of: (i) the commencement of the drilling of the first well in any of the Exploration Licenses or (ii) December 31, 2011, sell, assign or otherwise transfer, directly or indirectly, whole or part of the participating interests (other than to an affiliate), without the prior written consent of the relevant Farmors. In the event such consent is granted, we undertook to pay to the relevant Farmors an aggregate of 35% of (x) the difference between the consideration paid under the Delek Farmout Agreement and the consideration received by us in connection with the sale of the interests, less any reimbursement for past expenditures, and (y) any overriding royalty interest granted to us in connection with the sale of the interests. In connection with the Delek Farmout Agreements, we entered into Overriding Royalty Deeds with the Farmors, providing them with an aggregate overriding royalty interest of 3% of the participating interest per each Exploration License. We further granted to each of the Farmors a one-time option to convert part or all of their participating interests in any of the Exploration Licenses, but not more than 3.33% in aggregate with respect to the Aviah License and the Qeren License and 15% in the aggregate with respect to the Ruth License and Alon License, into overriding royalty interests, exercisable at any time prior to the spudding of the first well in any of the Exploration Licenses and provided that such option shall also be exercised with respect to the other Farmees, on a pro rata basis. The conversion option provides for each 1% participating interest to be converted into 0.03% overriding royalty interest. In connection with the execution of the Delek Farmout Agreements related to the Aviah License and Qeren License, we also entered into Joint Operating Agreements (“JOAs”) with the other holders of participating interests in such Exploration Licenses and with ATP Oil & Gas Corporation (NASDAQ: ATPG), which will be the operator of under such Exploration Licenses. In connection with the execution of the Delek Farmout Agreements related to the Ruth License and Alon License, we, the other relevant Farmees and the Farmors entered into a novation agreement pursuant to which we and such Farmees joined the existing JOAs among the Farmors, under which Noble is acting as the operator. The closing of the Delek Farmout Agreements is subject to various conditions, including the receipt of approval of the Israeli Ministry of National Infrastructures and the approval of the unit holders of Avner and Delek. In the event we elect, in our sole discretion, to participate in the drilling operations of the first well in any one of the Ruth License and Alon License, we will be required to bear, in addition to our pro rata portion of the cost of the drilling, certain additional drilling costs that would otherwise be borne by the Farmors, which additional drilling costs will not exceed $2,250,000. Similarly, in the event we elect, in our sole discretion, to participate in the drilling operations of the first well in any one of the Aviah License and Qeren License, we will be required to bear, in addition to our pro rata portion of the cost of the drilling, certain additional drilling costs that would otherwise be borne by the Farmors, which additional drilling costs will not exceed $500,000. Simultaneously with the execution of the Delek Farmout Agreements with us, the Farmors entered into similar farmout agreements with third parties and, in the event the transfers of participating interests contemplated by such all such additional farmout agreements are consummated, Delek and Avner are expected to hold an aggregate of 25% of each of the Aviah License and Qeren License and Delek, Avner and Noble are expected to hold an aggregate of 50% of each of the Ruth License and Alon License. In December 2011, the Israeli Petroleum Commissioner published its decision not to extend the terms of the Aviah License, the Qeren License, the Ruth License and the Alon License and as of April 1, 2012 all four licenses have expired and the Petroleum Commissioner announced that they will not be renewed. The current owners of these licenses have announced that they are considering taking legal action in connection with the termination of the licenses but we cannot at this stage estimate or foresee which actions will be taken by the current owners of these licenses as a result of such decision, if any, and what effect these actions will have on the likelihood of the consummation of the transactions. As these transactions were not consummated, as of March 15, 2012, we made no expenditures in connection with these licenses. Therefore, we do not believe that our current involvement with these licenses is material to us as of the date of filing of this annual report.

 

Adira Farm-out Agreement in connection with the Yitzchak License

On December 5, 2011 Ellomay Oil and Gas 2011 LP (“Ellomay Oil and Gas”) a limited partnership whose general partner is a wholly-owned subsidiary of Ellomay, entered into a Farm-out Agreement (the “Adira Farm-out Agreement”) with Adira Energy Israel Ltd., an energy exploration company  for oil and gas in Israel (“Adira”), a wholly-owned subsidiary of Adira Energy Ltd. (TSXV: ADL, OTCBB: ADENF, FRANKFURT: AORLB8) for the farm-in of Ellomay Oil and Gas to 20% of the participating interests in the Yitzchak License. The Yitzchak License covers a total area of approximately 127.7 square kilometers (or 31,555 acres) and is in relatively shallow water with depths between 60 and 250 meters.

 

As published by Adira, simultaneously with the execution of the Adira Farm-out Agreement, Adira entered into a farm-out agreement with the AGR Group (“AGR”) to farm-out 5% in the Yitzchak License to AGR as Lead Operator in accordance with Israeli regulations applying to an “Operator” with the continued involvement of Adira as co-operator and formalized a letter of intent with Brownstone Energy Inc. (“Brownstone”) in respect of the Yitzchak License, enabling the formal registration of Brownstone’s 15% participating interest in the Israeli Petroleum Registry.
 

Pursuant to the Adira Farm-out Agreement, at the closing of the transactions contemplated by the Farm-out Agreement, Ellomay Oil and Gas will reimburse Adira for its proportionate share of the costs incurred by Adira to date of closing plus interest of LIBOR + 1%. This amount is currently expected to be approximately US$320,000. Ellomay Oil and Gas will also pay Adira a 3% overriding royalty interest (“ORRI”) on Ellomay Oil and Gas’s share of revenues from sold petroleum until repayment of Ellomay Oil and Gas’s expenditures in the work program plus interest of LIBOR + 1%, and 4.5% ORRI following such repayment.
 

 

In addition, following the closing of the transaction, each of Ellomay Oil and Gas and the other holders of the participating interests in the License will be required to bear and pay its respective share of all of the expenditures approved in relation to the License and to bear and pay its share of the carried interest with respect to AGR’s 5% participating interest (such payments will be reimbursed to Ellomay Oil and Gas by AGR from its proceeds for oil and gas attributed to its interest in the Yitzchak License).
 

Subject to professional assessments as to the prospects for successful exploration, Ellomay Oil and Gas further committed to finance its share of the anticipated expenditures in an amount of up to $2 million, less the amount that will be paid at closing as reimbursement of expenses. Thereafter, if Ellomay Oil and Gas does not contribute its share of expenditures in excess of such $2 million, it will be permitted to sell its participating interest to a third party and, if not sold, its holdings in the Yitzchak License would be diluted pro rata to the total expenditures in connection with the Yitzchak License. Our decision to invest funds beyond the $2 million will likely be influenced by our ability to obtain financing for such additional investment from outside sources and the terms of such financing.

 

Subject to the terms and conditions set out in the Adira Farm-out Agreement, in the event Adira solicits a strategic investor into the Yitzchak License, Ellomay Oil and Gas will reduce its participating interests pro rata to the entry of such investor.

 

The transaction contemplated by the Adira Farm-out Agreement was consummated on January 9, 2012. As of March 15, 2012 the holders of the Yitzchak License have not yet executed a Joint Operating Agreement. The holdings in the Yitzchak License are currently as follows: Adira 60%; Ellomay Oil and Gas 20%; Brownstone 15%; and AGR 5%. As of March 15, 2012, our expenditures in connection with the Yitzchak License amount to approximately $0.4 million. Therefore, we do not believe that our involvement with the Yitzchak Licenses is material to us as of such date.

Principal Capital Expenditures and Divestitures

During 2009 we did not have any principal capital expenditures or divestitures. During 2010, 2011 and up to the date of filing of this report, we made or accrued capital expenditures of an aggregate amount of approximately $50 million in connection with the Italian PV Plants, net of penalties due to delay in connection to the national grid of some of the PV Plants. During this period we also made a capital expenditure in the amount of approximately $0.2 million in connection with the MVNO project. Our aggregate capital expenditure in connection with the acquisition of shares in Dori Energy Infrastructure Ltd. was $14 million and our aggregate capital expenditure in connection with the Yitzchak License up to March 15, 2012 amounts to approximately $0.4 million. Our aggregate capital expenditure in connection with the Rinconada II PV Plant   capital expenditures up to March 15, 2012 amount to approximately $7.3 million. As of March 15, 2012 we have in progress principal capital expenditures (that were not accrued as of December 31, 2011 or paid prior to March 15, 2012) in connection with the Yitzchak License in the amount of approximately $0.4 million.

For information on our financing activities please refer to “Item 4.B: Business Overview” and “Item 5: Operating and Financial Review and Prospects.”

 

B.           Business Overview

Our current plan of operation is to operate in the Italian and Spanish PV field and to manage our investments in the Israeli market and, with respect to the remaining funds we hold, to identify and evaluate additional suitable business opportunities in the energy and infrastructure fields, including in the renewable energy field, through the direct or indirect investment in energy manufacturing plants, the acquisition of all or part of an existing business, pursuing business combinations or otherwise.

PV Plants

Photovoltaic Industry Background

Electric power accounts for a growing share of overall energy use. While a majority of the world’s current electricity supply is generated from fossil fuels such as coal, oil and natural gas, these traditional energy sources face a number of challenges including rising prices, security concerns over dependence on imports from a limited number of countries, and growing environmental concerns over the climate change risks associated with power generation using fossil fuels. As a result of these and other challenges facing traditional energy sources, governments, businesses and consumers are increasingly supporting the development of alternative energy sources, including solar energy.

Solar energy is one of the most direct and unlimited energy sources. It is the underlying energy source for renewable fuel sources, including biomass fuels and hydroelectric energy. By extracting energy directly from the sun and converting it into an immediately usable form, either as heat or electricity, intermediate steps are eliminated.

The most common ways that solar energy can be converted into usable forms of energy are either through the photovoltaic effect (generating electricity from photons) or by generating heat (solar thermal energy).

Global trends in the industry

According to EPIA (European Photovoltaic Industry Association) the solar power market has grown significantly in the past decade. Despite the rapid growth, solar energy constitutes only a small fraction of the world’s energy output and therefore may have significant growth potential. According to EPIA, the global photovoltaic installations in 2010 reached 15 GW and may reach a total capacity of 688 GW by 2020 and 1,845 GW by 2030 as a function of the amount of incentives that are in place, such as FiT, further explained in “Item 4.B: Material Effects of Government Regulations on the PV Plants.”

 

Anatomy of a Solar Power Plant

Solar power systems convert the energy in sunlight directly into electrical energy within solar cells based on the photovoltaic effect. Multiple solar cells, which produce DC power, are electrically interconnected into solar panels. A typical solar panel may have several dozens of individual solar cells. Multiple solar panels are electrically wired together and are electrically wired to an inverter, which converts the power from DC to AC and interconnects with the utility grid.

Solar electric cells convert light energy into electricity at the atomic level. The conversion efficiency of a solar electric cell is defined as the ratio of the sunlight energy that hits the cell divided by the electrical energy that is produced by the cell. The earliest solar electric devices converted about 1%-2% of sunlight energy into electric energy. Current solar electric devices convert 5%-25% of light energy into electric energy (the overall efficiency for solar panels is lower than solar cells because of the panel frame and gaps between solar cells), and current mass produced panel systems are substantially less expensive than earlier systems. Effort in the industry is currently being directed towards the development of new solar cell technology to reduce per watt costs and increase area efficiencies .

Solar electric panels are composed of multiple solar cells, along with the necessary internal wiring, aluminum and glass framework, and external electrical connections.

Inverters convert the DC power from solar panels to the AC power used in buildings. Grid-tie inverters synchronize to utility voltage and frequency and only operate when utility power is stable (in the case of a power failure these grid-tie inverters shut down to safeguard utility personnel from possible harm during repairs). Inverters also operate to maximize the power extracted from the solar panels, regulating the voltage and current output of the solar array based on sun intensity.

Monitoring . There are two basic approaches to access information on the performance of a solar power system. The most accurate and reliable approach is to collect the solar power performance data locally from the counters and the inverter with a hard-wired connection and then transmit that data via the internet to a centralized database. Data on the performance of a system can then be accessed from any device with a web browser, including personal computers and cell phones. As an alternative to web-based remote monitoring, most commercial inverters have a digital display on the inverter itself that shows performance data and can also display this data on a nearby personal computer with a hard-wired or wireless connection.

Tracker Technology vs. Fixed Technology

As described above, some of our PV Plants use fixed solar panels while others use panels equipped with single or dual axis tracking technology. Tracking technology is used to minimize the angle of incidence between the incoming light and a photovoltaic panel. As photovoltaic panels accept direct and diffuse light energy and panels using tracking technology always gather the available direct light, the amount of energy produced by such panels, compared to panels with a fixed amount of installed power generating capacity, is higher. As the double axis trackers allow the photovoltaic production to stay closer to maximum capacity for many additional hours, an increase of approximately 20% (single) - 30% (dual) of the photovoltaic modules plane irradiation can be estimated.

 

Solar Power Benefits

The direct conversion of light into energy offers the following benefits compared to conventional energy sources:

 

·

Economic - An increase in solar power generation will reduce dependence on fossil   fuels. Worldwide demand for electricity is expected to nearly double by 2025, according to the U.S. Department of Energy. Additionally, according to International Energy Agency, over 60% of the world’s electricity is generated from fossil fuels such as coal, natural gas and oil. The combination of declining finite fossil fuel energy resources and increasing energy demand is depleting natural resources as well as driving up electricity costs, underscoring the need for reliable renewable energy production. Solar power systems are renewable energy sources that rely on the sun as an energy source and do not require a fossil fuel supply. As such, they are well positioned to offer a sustainable long-term alternative means of power generation. Once a solar power system is installed, the cost of generating electricity is relatively stable over the lifespan of the system. There are no risks that fuel prices will escalate or fuel shortages will develop, although cash paybacks for systems range depending on the level of incentives, electric rates, annualized sun intensity, installation costs and derogation in the efficiency of the panels.

 

·

Convenience - Solar power systems can be installed on a wide range of sites, including small residential roofs, the ground, covered parking structures and large industrial buildings. Most solar power systems also have few, if any, moving parts and are generally guaranteed to operate for 20-25 years, resulting in low maintenance and operating costs and reliability compared to other forms of power generation.

 

·

Environmental - Solar power is one of the cleanest electric generation sources, capable of generating electricity without air or water emissions, noise, vibration, habitat impact or waste generation. In particular, solar power does not generate greenhouse gases that contribute to global climate change or other air pollutants, as power generation based on fossil fuel combustion does, and does not generate radioactive or other wastes as nuclear power and coal combustion do. It is anticipated that greenhouse gas regulation will increase the costs and constrain the development of fossil fuel based electric generation and increase the attractiveness of solar power as a renewable electricity source.

 

·

Security - Producing solar power improves energy security both on an international level (by reducing fossil energy purchases from hostile countries) and a local level (by reducing power strains on local electrical transmission and distribution systems).

These benefits have impacted our decision to enter into the solar photovoltaic market. We believe escalating fuel costs, environmental concerns and energy security make it likely that the demand for solar power production will continue to grow. Many countries, including Italy and Spain, have put incentive programs in place that directly spur the installation of grid-tied solar power systems. For further information please see “Item 4.B: Material Effects of Government Regulations on the PV Plants.”

 

There are several risk factors associated with the photovoltaic market. See “Item 3.D: Risk Factors - Risks Relating to the PV Plants.”

 

Our Photovoltaic Plants

 

 

The following table includes information concerning our PV Plants:

The construction and operation of the PV Plants entail the engagement of Contractors, in order to build, assemble, install, test, commission, operate and maintain the photovoltaic power plants, for the benefit of our wholly-owned subsidiaries.

Each of the PV Plants is constructed and operates on the basis of the following agreements:

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an Engineering Procurement & Construction projects Contract (an “EPC Contract”), which governs the installation, testing and commissioning of a photovoltaic plant by the respective Contractor;

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an O&M Agreement, which governs the operation and maintenance of the photovoltaic plant by the respective Contractor;

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when applicable, an agreement between our relevant subsidiary and the Contractor, whereby the panels required for the construction of the photovoltaic plant will be purchased by such subsidiary directly from a third party supplier of such panels, and then transferred to the Contractor;

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a number of ancillary agreements, including:

o

one or more “surface rights agreements” with the land owners, which provide the terms and conditions for the lease of land on which the photovoltaic plants are constructed and operated;

o

with respect to our Italian PV Plants –

·

standard “incentive agreements” with Gestore dei Servizi Elettrici (“GSE”), Italy’s energy regulation agency responsible, inter alia , for incentivizing and developing renewable energy sources in Italy and purchasing energy and re-selling it on the electricity market. Under such agreement, it is anticipated that GSE will grant the applicable FiT governing the purchase of electricity (FiTs are further detailed in “Item 4.B: Material Effects of Government Regulations on the Italian PV Plants”);

·

one or more “power purchase agreements” with GSE, specifying the power output to be purchased by GSE for resale and the consideration in respect thereof (in the event of sale via the “Dedicated Withdrawal System” as more fully described under “Item 4.B: Material Effects of Government Regulations on the Italian PV Plants”); and

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one or more “interconnection agreements” with the Enel Distribuzione S.p.A (“ENEL”), the Italian national electricity grid operator, which provide the terms and conditions for the connection to the Italian national grid.

o

with respect to our Spanish PV Plant –

·

Standard “power evacuation agreements” with the Spanish power distribution grid company Endesa Distribución Eléctrica, S.L.U. (“Endesa”) regarding the rights and obligations of each party, concerning, inter alia, the evacuation of the power generated in the facility to the grid; and

 

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Standard “representation agreements” with an entity that will represent the PV Principal in its dealings with the Spanish National Energy Commission (“CNE”) and the bid system managed by the operator of the market, Operador del Mercado Ibérico de Energía, Polo Español, S.A. (“OMEL”), who are responsible for payment of the FiT as more fully set described under “Item 4.B: Material Effects of Government Regulations on the Spanish PV Plants.” The representation agreements in connection with Rinconada II are with Nexus Energía, S.A (“Nexus”).

 

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optionally, one or more “project financing agreements” with financing entities, as were already executed with respect to several of the PV Plants and as more fully described below, and as may be executed in the future with respect to one or more of the remaining PV Plants;

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a stock purchase agreement in the event we acquire an existing company that owns a photovoltaic plant that is under construction or is already constructed.

As all of our PV Plants are operational, the summaries below describe the material terms of the the O&M Agreements executed in connection with such PV Plants. The EPC Contracts and forms of O&M Agreements executed in connection with the Del Bianco and Giaché PV Plants were filed with the SEC as exhibits to our annual report for fiscal year ended December 31, 2009 and the EPC Contract executed in connection with the Pedale (Corato) PV Plant was filed with the SEC as an exhibit to our annual report for fiscal year ended December 31, 2010.

Operation and Maintenance Agreements

 

General

As mentioned above, each of the PV Plants is operated and maintained by a local contractor pursuant to an O&M Agreement executed between such Contractor and our subsidiary that owns the PV Plant (the “PV Principal”). Each O&M Agreement sets out the terms under which each of the Contractors is to operate and maintain the PV Plant once it becomes operational, i.e. starting from the issuance of a Provisional Acceptance Certificate pursuant to the applicable EPC Contracts and for a period of 20 years thereafter. The O&M Agreement is subsequently automatically extended for successive two (2) year periods, unless one party notifies the other party of its intention not to renew the agreement at least 6 months before the anticipated date of expiry of the applicable term.

A technical adviser, appointed by the PV Principal or the Financing Entity, is responsible for monitoring the performance of the services (the “Technical Adviser”). Our current Technical Adviser in Italy is a leading technical firm in Italy which appears in the Italian banks’ white list.

Currently many EPC companies provide O&M services to photovoltaic plants and we expect that, if required, we will be able to replace some or all of our current O&M Contractors with other contractors and service providers. However, we cannot ensure that if such replacement shall take place we will be able to receive the same warranties from the new contractor.

With respect to Rinconada II, the PV Plant is currently operated under an O&M Agreement executed by Conergy España, which sold Rinconada II to us. We expect to enter into a different O&M Agreement following negotiations with the contractor chosen by us to provide these services but as of March 15, 2012 have not entered into such new O&M Agreement yet.

 

The Services

Each O&M Agreement governs the provision of the following services: (i) Subscription Services, which include Preventive Maintenance Services (maintenance services such as cleaning of panels and taking care of vegetation, surveillance, remote supervision of operation and full operational status of the PV Plant) and Corrective Maintenance Services (services to correct incidents arising at the PV Plant or to remedy any anomaly in the operation of the PV Plant), and (ii) Non-Subscription Services, which are all services that are outside of the scope of the Subscription Services.

The Consideration

Based on the range of services offered by the Contractor, the annual consideration for the Subscription Services varies from Euro 19,000 to Euro 45,000 per MWp (linked in accordance with the Italian inflation rate) for each of the PV Plants, paid on a quarterly basis. The Subscription Services fee is fixed and the Contractor is not entitled to request an increase in the price due to the occurrence of unforeseen circumstances. This annual consideration does not include the price of the insurance policies to be obtained by the PV Principal to the extent they have an exposure, including industrial accidents in favor of PV Principal’s employees, civil liability for workers and insurance to cover vehicle civil liability.

Additional charges apply for the Non-Subscription Services that are approved by the Financing Entity and the Technical Adviser.

 

Modifications to the scope of services (which can occur either at PV Principal’s request with the prior approval of the Financing Entity and the Technical Adviser, or if the Contractor deems that changes are necessary or appropriate to improve the quality, efficiency or safety of the PV Plant, its facilities or its supplies) are also subject to price changes. Moreover, changes to the scope of services due to a change in applicable laws may also involve a price increase, subject to the approval of the Financing Entity and the Technical Adviser, and provided that the prices take into account the Contractor’s official rates and do not exceed the cost of the additional work or supplies.

Bonus Malus

The O&M Agreements sometimes provide for a bonus to be paid to the Contractor if the annual performance benchmarks of the PV Plant guaranteed by the Contractor are exceeded, and on the other hand the Contractor shall owe a penalty to the PV Principal if the PV Plant’s performance is below these benchmarks. The penalties and bonuses start to apply only upon the issuance of the Final Acceptance Certificate, i.e. two years after the PV Plant is operational.

 

Contractor’s Obligations, Representations and Warranties

The Contractor’s obligations under the O&M Agreement include, inter alia , the duty to diligently perform the operation and maintenance services in compliance with the applicable law and permits in a workmanlike manner and using the most advanced technologies, to contract for adequate insurance with the PV Principal and the Financing Entity as additional insured parties, to guarantee the availability of spare parts and replenish the inventory as needed, and to assist the PV Principal and the Financing Entity in dealing with the authorities (including GSE and ENEL) by providing the necessary information required by such authorities. The Contractor represents and warrants, inter alia , that it holds the necessary permits and authorizations, and that it has the necessary skills and experience to perform the services contemplated by the O&M Agreement.

Guarantees

The Contractor is required (either under the O&M Agreement or under a separate agreement) to provide an insurance bond, satisfactory to both the PV Principal and the Financing Entity, for an amount equal to 15% - 100% of the annual applicable price (the “O&M Guarantee”) to be renewed annually.

Intellectual Property License

Pursuant to the O&M Agreement, the Contractor grants an irrevocable, royalty-free license to the creations, plans, specifications, drawings, procedures, methods, products or inventions prepared or developed by the Contractor pursuant to the O&M Agreement, for use in the specific PV Plant. This license is not transferable, except in conjunction with all of the rights and obligations of the PV Principal under this agreement or in relation with the PV Plant.

Financing Entity

The O&M Agreement contemplates the financing of the planning, realization, operation and maintenance of the PV Plant by a Financing Entity, and states that adaptations may need to be made to the O&M Agreement in consideration of the terms agreed to with such Financing Entity and that the Contractor undertakes to enter into such direct agreement with the Financing Entity, if necessary, within 15 days of the Financing Entity’s or the PV Principal’s request to that effect.

Termination

The O&M Agreement is terminated automatically, subject to the Financing Entity’s consent, to the extent applicable, if the related EPC Contract is terminated for any reason.

Each party may terminate the O&M Agreement if the other is in breach of any of its obligations that remains uncured for 30 days following written notice thereof.

The PV Principal may terminate the O&M Agreement only after obtaining approval from the Financing Entity, to the extent applicable. Termination of the O&M Agreement by the PV Principal due to certain breaches by the Contractor ( inter alia , due to the Contractor’s failure to enter into a direct agreement with the Financing Entity, to issue the Final Acceptance Certificate or to comply with the spare parts guarantee, or in the event that the maximum amount of liquidated damages is exceeded), entitle the PV Principal to liquidated damages calculated as a percentage of the applicable price for the relevant year, without prejudice to other damages that the PV Principal may incur.

 

In the event of termination by the Contractor due to a breach of the PV Principal, the PV Principal must pay the Contractor compensation calculated as a percentage of the applicable price for the relevant year.

The O&M Agreement is automatically terminated if the Contractor is liquidated or becomes bankrupt or insolvent, and on other similar grounds.

In addition to termination due to breach, the parties to the O&M Agreement may withdraw from it as follows:

o

The PV Principal may terminate the agreement at any time, by giving a 6-month - 12-month prior written notice to the Contractor. In the case of such withdrawal, the PV Principal may pay to the Contractor, in lieu of the notice, the amount the Contractor would have been entitled to receive during the applicable notice period.

o

Under some of the O&M Agreements, the Contractor can withdraw from the O&M Agreement at the tenth anniversary thereof by sending a 12-month prior written notice to the PV Principal.

Additional termination provisions exist with respect to termination due to ongoing circumstances of “force majeure” as defined in the O&M Agreement.

In the event of termination of the O&M Agreement, the Contractor is obligated, inter alia , to deliver the PV Plant to the PV Principal within 30 days from the termination. Should the Contractor not comply with this obligation within the above mentioned term, then the Contractor shall pay to the PV Principal delay liquidated damages for each day of delay.

Assignment

The Contractor may not assign the O&M Agreement without the prior written consent of the PV Principal. The PV Principal is authorized to assign the agreement to the Financing Entity or any person appointed by the Financing Entity. If such assignment is by means of a line of business assignment, the Contractor may not withdraw from the agreement. In addition, the O&M Agreement stipulates that all receivables arising from this agreement may be assigned or pledged to the Financing Entity as a security for the loan agreement with such entity.

Governing Law and Dispute Resolution

The O&M Agreement, like the EPC Contract, is governed and construed in accordance with local law. Disputes are generally subject to arbitration, although certain disputes may be resolved, at the request of one party, by a technical expert.

Additional Payments

In addition to payments to the Contractors under the O&M Agreements, the PV Principal will also be making annual payments to the owners of the land, pursuant to the building right agreements.

 

Financing Agreements

We executed several project finance agreements in connection with six of the PV Plants and may in the future exercise additional project finance agreements with respect to one or more of the remaining PV Plants. The following is a brief description of the project finance agreements that exist in connection with several of the PV Plants.

Leasint

On December 31, 2010, Ellomay PV Five S.r.l. and Ellomay PV Six S.r.l., our wholly-owned Italian subsidiaries that are the PV Principal for the Troia 9 and Troia 8 PV Plants, respectively, entered into Financial Leasing Agreements (the “Leasing Agreements”) with Leasint S.p.A. (“Leasint”).

Pursuant to the Leasing Agreements, each of Ellomay PV Five and Ellomay PV Six sold the PV Plants owned by them for a Euro 3.795 million before applicable VAT (such amount included payments to the EPC Contractors) and Leasint, in turn, leases the PV Plant to each of these entities in consideration for a down-payment equals approximately to 21% of the consideration and monthly payments of approximately Euro 20,000 commencing 210 days following the transfer of ownership of the relevant PV Plant to Leasint, for the duration of the Leasing Agreement (17 years), representing a nominal annual interest rate of 3.43%. The monthly payments are linked to the monthly EURIBOR (Euro Interbank Offered Rate). At the end of term of the Leasing Agreement, each of the respective subsidiaries has the option to purchase the PV Plant from Leasint for 1% of the consideration.

The Leasing Agreements provide that the PV Principals shall be responsible and liable to Leasint for the acceptance of the plant, for the adherence with applicable laws, shall undertake any risk in connection with the PV Plant, including, inter alia , the operation and the maintenance of the PV system and further includes indemnification undertakings towards Leasint. The Leasing Agreements further also provides Leasint with the rights to independently verify the correct performance of the works.

The Leasing Agreements prohibits assignment of the agreement or granting third parties with the right to use the PV Plant without the prior written consent of Leasint. The Leasing Agreements permit the PV Principal to commence legal action against the Contractor or third parties in connection with breach of contract but prohibits termination of any contract by the PV Principal.

Each of the Leasing Agreements may be terminated by Leasint automatically following a failed, delayed or partial fulfillment of certain obligations of the PV Principal under the Leasing Agreement, including, inter alia , the PV Principal’s duties and obligations in connection with the oversight and use of the PV Plant and maintenance of insurance policies. Leasint may withdraw from each of the Leasing Agreements following the occurrence of various events set forth in the Leasing Agreements, including, inter alia , a substantial modification of the PV Principal or its guarantors’ corporate structure, material modification or interruption of the PV Principal’s activity and hindrance to the use of the PV Plant as a result of the issue of judicial or administrative measures attributable to the PV Principal or third parties for certain periods. The Leasing Agreements further provides for automatic termination in the event of destruction, total loss of the assets, definitive impossibility to use for any reason whatsoever, including force majeure, act or fact of the PV Principal or third parties. In the event of termination of the Leasing Agreement and the transfer of possession of the PV Plant to Leasint, Leasint is obligated to notify the PV Principal of the price determined for sale of the PV Plant and to provide the PV Principal with the right to have a third party purchase the PV Plant under better conditions.

 

The Leasing Agreements may not be assigned by the PV Principals. In connection with the Leasing Agreements, the relevant PV Principals assigned their rights to receive credits from GSE to Leasint (to be used for payment of the monthly installments).

In connection with the Leasing Agreements, Ellomay Luxemburg, our wholly-owned subsidiary and the parent company of Ellomay PV Five and Ellomay PV Six, (i) undertook not to transfer its holdings in these companies without the prior written consent of Leasint, (ii) provided a pledge on the shares it holds in such companies in favor of Leasint in order to guarantee the obligations of these companies under the respective Leasing Agreement and (iii) agreed to the subordination of any receivables it may be entitled to receive from these companies. In connection with the Leasing Agreements and the foregoing undertakings by Ellomay Luxemburg, we undertook not to transfer more than 20% of our holdings of Ellomay Luxemburg without the prior written consent of Leasint.

As of March 15, 2012, we utilized the available funds under the Leasing Agreements amounting to approximately Euro 6 million.

 

Centrobanca

On February 17, 2011, Ellomay PV One S.r.l., our wholly-owned Italian subsidiary that is the PV Principal for the Del Bianco and Costantini PV Plants, entered into a project finance facilities credit agreement (the “Finance Agreement”) with Centrobanca – Banca di Credito Finanziario e Mobiliare S.p.A. (“Centrobanca”).

Pursuant to the Finance Agreement, Ellomay PV One received two lines of credit in the aggregate amount of Euro 4.65 million divided into:

(i)

a Senior Loan, to be applied to the costs of construction of the PV Plants (up to 80% of the relevant amount),  in the amount of Euro 4.1 million, accruing interest at the EURIBOR rate, increased by a margin of 200 basis points per annum, repaid semi annually with a maturity date of December 31, 2027; and

(ii)

a VAT Line, for payment of VAT due on the costs of construction in the amount of Euro 0.55 million, accruing interest at the EURIBOR rate, increased by 160 basis points per annum, repaid in one payment until December 31, 2013.

The Finance Agreement also requires the payment of commitment fees per annum, calculated as a certain percentage of the undrawn and un-cancelled amount of both the Senior Loan and the VAT Line and certain additional payments, including an arranging fee and an annual agency fee.

 

 

The Finance Agreements provide for a defaults interest that will accrue upon the occurrence of certain events, including a delay in payments, acceleration, termination and withdrawal. The outstanding loans may be prepaid on predetermined dates, upon payment of a fee equal to 2% of the prepaid amount. The Finance Agreement also provides for mandatory prepayment upon the occurrence of certain events, including in the event the present value of cash flow available for debt services/debt outstanding (the Loan Life Coverage Ratio) is lower than a pre-determined ratio and in the event of a change of more than 49% of the ownership of Ellomay PV One (unless Centrobanca resolves to maintain the financing in force based on the identity and undertakings of the new shareholder). The Finance Agreement includes various customary representations, warranties and covenants, including covenants to maintain certain financial ratios.

 

No amount re-paid or pre-paid under the Finance Agreement may be re-borrowed by Ellomay PV One. Ellomay PV One may not transfer any of the credits or other rights or obligations under the Finance Agreement without the prior consent of Centrobanca.

The Finance Agreement grants Centrobanca the right to terminate the agreement upon the occurrence of certain “Relevant Events”, including nonpayment, breach of certain obligations and cross default under certain other financial indebtedness, the right to accelerate payments (provided in addition to the termination and other remedies available under the Finance Agreement and applicable law) upon the occurrence of certain other “Relevant Events”, including insolvency of Ellomay PV One and the right to withdraw from the Finance Agreement upon the occurrence of any of the “Relevant Events.”

In connection with the Finance Agreement, Ellomay PV One provided securities to Centrobanca, including a mortgage on the PV Plants and an assignment of receivables deriving from the project contracts (including the agreements with GSE) and VAT credits (to be used for repayment of the outstanding loans).

In connection with the Finance Agreement, Ellomay Luxemburg, our wholly-owned subsidiary and the parent company of Ellomay PV One (i) provided a pledge on the shares it holds in this company in favor of Centrobanca in order to guarantee the obligations  of this company under the Finance Agreement and related documents, (ii) agreed to the subordination of any receivables it may be entitled to receive from these companies and (iii) entered into an equity contribution agreement with Ellomay PV One. In connection with the Finance Agreement and the foregoing undertakings by Ellomay Luxemburg, we undertook to Ellomay Luxemburg that for so long as we remain its sole shareholder and it remains the sole shareholder of the Ellomay PV One and if it does not have sufficient funds, we will provide it with sums necessary to enable Ellomay Luxembourg to contribute equity to Ellomay PV One in order to, inter alia , cover part of the costs of the PV Project and ensure that the Debt/Equity Ratio meets the requirements of the Finance Agreement.

As of March 15, 2012, we utilized the available funds under the Finance Agreement amounting to approximately Euro 4.4 million.

Unicredit

On December 20, 2011, Ellomay PV Two S.r.l., our wholly-owned Italian subsidiary that is the PV Principal for the Giaché and Massaccesi PV Plants, entered into a loan agreement (the “Loan Agreement”) with Unicredit S.p.A. (“Unicredit”). Pursuant to the Loan Agreement, Ellomay PV Two received a line of credit up to an amount of Euro 5.047 million bearing an interest at the EURIBOR 6 month rate plus a range of 5.15%-5.35% per annum, depending on the period in which interest is accrued during the term of the Loan Agreement. The principal and interest on the loan are repaid semi-annually. The final maturity date of this loan is December 31, 2029.

 

 

The Loan Agreement provides for a defaults interest that will accrue upon a delay in payments. The outstanding loans may be prepaid subject to the provision of a prepayment notice and the requirement for prepayment of amounts that are not less than certain thresholds set forth in the Loan Agreement. The Loan Agreement also provides for mandatory prepayment upon the occurrence of certain events, including in the event the borrower receives insurance or indemnity compensation and in the event of a change in control of the borrower without Unicredit’s consent. The Loan Agreement includes various customary representations, warranties and covenants, including covenants to maintain certain financial ratios.

 

No amount re-paid or pre-paid under the Loan Agreement may be re-borrowed by Ellomay PV Two. Ellomay PV Two may not transfer any of the credits or other rights or obligations under the Loan Agreement.

The Loan Agreement grants Unicredit the right to terminate or withdraw from the agreement and to accelerate payments, in addition to remedies available under applicable law, upon the occurrence of certain “Relevant Events” that remain uncured within the periods specified therein, including nonpayment of any amount, breach of representations and warranties, insolvency of Ellomay PV Two, breach of certain obligations, waiver, suspension or interruption of the relevant PV Plants for certain periods and cross default under certain other financial indebtedness of Ellomay PV Two or Ellomay Luxemburg.

In connection with the Loan Agreement, Ellomay PV Two provided securities to Unicredit, including a mortgage on the PV Plants and an assignment of receivables deriving from the project contracts (including the agreements with GSE, credits resulting from the EPC Contracts and O&M Agreements and insurances).

In connection with the Loan Agreement, Ellomay Luxemburg, our wholly-owned subsidiary and the parent company of Ellomay PV Two (i) provided a pledge on the shares it holds in this company in favor of Unicredit in order to guarantee the obligations of this company under the Loan Agreement and related documents and (ii) agreed to the subordination of any receivables it may be entitled to receive from Ellomay PV Two. In addition, we and Ellomay Luxemburg entered into an equity contribution agreement with Ellomay PV Two and Unicredit that provides for Ellomay Luxemburg’s obligation to contribute funds to Ellomay PV Two and our obligation to cure Ellomay Luxemburg’s failure to do so, both under limited circumstances (certain additional project costs and failure of Ellomay PV Two to deliver warranty bonds under the Loan Agreement) and for limited amounts.

As of March 15, 2012, we utilized the available funds under the Loan Agreement amounting to approximately Euro 5 million.

 

Competition

Our competitors are mostly other entities that seek land and contractors to construct new power plants on their behalf or seek to purchase existing photovoltaic power plants due to the changing regulatory regime relating to newly built photovoltaic plants. The market for solar energy is intensely competitive and rapidly evolving, and many of our competitors who strive to construct new solar power plants have established more prominent market positions and are more experienced in this field. Our competitors in this market include Etrion Corporation (ETX.TO), Sunflower Sustainable Investments Ltd. (SNFL.TA), Allerion Cleanpower S.p.A., Origis Energy and Foresight Group . If we fail to attract and retain ongoing relationships with solar plants developers, we will be unable to reach additional agreements for the development and operation of additional solar plants, should we wish to do so.

Seasonality

Solar power production has a seasonal cycle due to its dependency on the direct and indirect sunlight and the effect the amount of sunlight has on the output of energy produced. Although we received the technical calculation of the average production recorded in the area of each of our PV Plants from our technical advisors and incorporated such data into our financial models, adverse meteorological conditions can have a material impact on the PV Plants’ output and could result in production of electricity below expected output.

Sources and Availability of Components of the Solar Power Plant

As noted above, the construction of our PV Plants entails the assembly of solar panels and inverters that are purchased from third party suppliers. One of the critical factors in the success of our PV Plants is the existence of reliable panel suppliers, who guaranty the performance and quality of the panels supplied. Degradation in such performance above a certain minimum level is guaranteed by the panel suppliers, however, if any of the suppliers is unreliable or becomes insolvent, it may default on warranty obligations. In addition, as photovoltaic plants installations have increased over the past few years, the demand for such components has also increased. To the extent such increase in demand continues and is not met by a sufficient increase in supply, the availability of such components may decrease and the prices may increase.

There are currently sufficient numbers of solar panel manufacturers at sufficient quality and we are not currently dependent on one or more specific suppliers.

In addition, silicon is a dominant component of the solar panels, and although manufacturing abilities have increased over-time, any shortage of silicon, or any other material component necessary for the manufacture of the solar panels, may adversely affect our business.

Material Effects of Government Regulations on the PV Plants

The construction and operation of the PV Plants is subject to complex legislation covering, inter alia , building permits, licenses and the governmental long-term incentive scheme. The following is a brief summary of the regulations applicable to our PV Plants.

 

Material Effects of Government Regulations on the Italian PV Plants

The regulatory framework surrounding the Italian PV Plants consists of legislation at the Italian national and local level. Relevant European legislation has been incorporated into Italian legislation, as described below.

National Legislation

(i)           Construction Authorizations

Construction of the PV Plants is subject to receipt of appropriate construction authorizations, pursuant to Legislative Decree no. 380 of 2001 (“Decree 380”), and Legislative Decree 29 December 2003 no. 387 (“Decree 387”), the latter of which implements European Directive no. 77 of 2001 on the promotion of electricity produced from renewable energy sources in the internal electricity market.

Decree 387 aims to promote renewable energies, inter alia by simplifying the procedures required to commence constructions. In particular, it regulates the so-called Autorizzazione Unica (“AU”) in relation to renewable energy plants. The AU is an authorization issued by the Region in which the construction is to take place, or by other local competent authorities, and which joins together all permits, authorizations and opinions that would otherwise be necessary to begin construction (such as, building licenses, landscape authorizations, permits for the interconnection facilities, etc.). The only authorization not included in the AU is the environmental impact assessment ( valutazione di impatto ambientale , or “VIA”,   see below), which needs to be obtained before the AU procedure is started. The AU is issued following a procedure called Conferenza di Servizi in which all relevant entities and authorities participate. Such procedure is expected to be completed within 180 days of the filing of the relevant application, but such term is not mandatory and cannot entirely be relied upon.

Decree 380, which is the general law on building administrative procedures, provides another track for obtaining the construction permit. Pursuant to this decree, the construction authorization can be obtained through a permesso di costruire (“Building Permit”), which is an express authorization granted by the competent municipality. Upon positive outcome of the municipality’s review, the Building Permit is granted. Works must start, under penalty of forfeiture of the Building Permit, within one year following the date of issuance, and must be completed within the following three years.

Decree 380 also regulates the so-called Dichiarazione di inizio attività (“DIA”) procedure. DIA is a self-certification process whereby the applicant declares that the project in question complies with all relevant requirements and conditions. The competent authority can deny the authorization within 30 days of receipt of DIA; should such a denial not be issued within such term - which is mandatory - the authorization shall be deemed granted and the applicant is allowed to start the works. The DIA procedure can be used in relation to plants whose power is lower than 20 kW. Since the expected power output of the PV Plants exceeds 20kW, the DIA is not available for the PV Plants. However, this is not applicable in the Puglia region, where regional legislation has increased the limit within which the DIA procedure can be used (see relevant section below).

The PV Plants rely on one AU, three DIAs and six Building Permits. Pedale is the PV Plant that relies on the AU. Please see below for more information on the suspension of Pedale’s AU.

 

 

 (ii)           Connection to the National Grid

 

The procedures for the connection to the national grid are provided by the Authority for Electric Energy and Gas (“AEEG”). Currently, the procedure to be followed for the connection is regulated by the AEEG Resolution no. 99 of 2008 ( Testo Integrato delle Connessioni Attive , so-called “TICA”) which replaces previous legislation and has subsequently been integrated and partially amended by AEEG Resolutions no. 124/2010 and 125/2010. According to TICA, an application for connection must be filed with the competent local grid operator, after which the latter notifies the applicant the estimated time for connection (the “STMC”). The STMC shall be accepted within 45 days of issuance. However, in order for the authorization to the connection to become definitive, all relevant authorization procedures (such as easements, ministerial nulla osta , etc.) must be successfully completed.

 

There are three alternative modalities to sell electricity:

·

by way of sale on the electricity market (Italian Power Exchange IPEX), the so called “Borsa Elettrica”;

·

through bilateral contracts with wholesale dealers;

·

via the so-called “Dedicated Withdrawal Plant” introduced by AEEG Resolution no. 280/07 and subsequent amendments. This is the most common way of selling electricity, as it affords direct and quick negotiations with the national energy handler (GSE), which will in turn deal with energy buyers on the market. We sell electricity though this method.

 

Regional Regulation Applicable to the Marche Region

Marche Regional Law no. 7 of 2004 requires certain types of projects to be subjected to an Environmental Impact Assessment (the “VIA Procedure”) and states that the VIA Procedure is expressly excluded for photovoltaic plants whose surface is less than 5000 m 2 (unless such plants are not listed as national protected areas pursuant to law no. 394 of December 6 th 1991). Specific provisions prevent constructors from avoiding such limits by building various plants with a surface of less than 5.000 m 2 .

 

In addition, Regional Law no. 7 of 2004 has been amended by Law no. 99 of 2009,   which specifies that the VIA Procedure is expressly excluded for plants with a nominal power lower than 1 MW. In the case of the PV Plants, the target nominal power for each PV Plant is less than 1 MW, such that the PV Plants are expected to be exempt from the VIA Procedure.

 

Regional Regulation Applicable to the Puglia Region

Regional Law 19 February 2008 no. 1 has established that the construction of renewable energy plants in Puglia whose power capacity is up to 1 MW can be authorized with DIA (without prejudice to applicable provisions on environmental impact assessment), in the case of photovoltaic plants located on industrial, commercial and service buildings, and/or located on the ground within industrial, commercial and service parks.

 

In this regard, by Circolare no. 38/8763 the Puglia Region pointed out the so-called “cluster issue” (i.e. group of plants whose capacity is lower than 1 MW each, located in the same agricultural area and authorized by means of DIAs, rather than under the AU procedure), providing that if plants cannot be deemed as single plants, the simplified DIA procedure shall be considered elusive of Legislative Decree no. 387/2003 and therefore the AU Procedure should be followed. The Circolare identified as signals to the occurrence of a cluster: (i) single point of connection for more than one plant; (ii) same landowner(s) for adjacent plants; or (iii) same economic and industrial initiative (i.e. same directors or shareholders, same developer, etc.).

Regional Law 21 October 2008 no. 31 has subsequently provided a new regulation of the terms according to which the DIA procedure can be used in connection with plants having nominal power up to 1 MWp. Said law applies to DIA which have become effective after 7 November 2008 and provides that the commencement of the works concerning photovoltaic plants, whose power ranges from 20 kW up to 1 MW to be built on agricultural lands, can be authorized by way of DIA, provided that:

·	the area to be enslaved ( asservimento ) is at least twice the size of the radiant surface; and

·	the portion of the plot of land which is not occupied by the photovoltaic plant is used exclusively for agricultural activities.

However, on March 26, 2010 Regional Law no. 31/2008 was annulled by the Constitutional Court (the “Court”) in so far as, contrary to what is set forth in Legislative Decree no. 387/2003, it increases up to 1 MWp the maximum power threshold (20 kW) established by Law no. 244/2007 for application of the DIA procedure. DIA issued according to Regional Law no. 31/2008 can therefore be voided on the basis of the Court judgment provided that they are successfully challenged by a third party having an interest or by the administrative bodies acting in self-protection (“ autotutela ”). As noted above, three of the PV Plants rely on DIAs that were issued under Regional Law 31/2008; however, as those PV Plants are already built and have been operating for the past several months, the period for a challenge by third parties or administrative bodies are deemed to have expired.

The Incentive Tariff System for Photovoltaic Plants

The Italian government promotes renewable energies by providing certain incentives. In particular, with Ministerial Decree 19.2.2007 (“Second Conto Energia”) the production of renewable electric energy from photovoltaic sources has been promoted by granting a fixed FiT for a period of 20 years from connection of PV plants. The FiT is determined with reference to the nominal power of the plant, the characteristics of the plant (plants are divided into non-integrated; partially integrated and architecturally integrated) and the year on which the plant has been connected to the grid. The FiT provided for by the Second Conto Energia are as follows:

Nominal Power kWp	Non-Integrated	Partially Integrated	Arch. Integrated
1 kW ≤ P ≤ 3 kW	0.40 Euro/kWh	0.44 Euro/kWh	0.49 Euro/kWh
3 kW < P ≤ 20 kW	0.38 Euro/kWh	0.42 Euro/kWh	0.46 Euro/kWh
P > 20 kW	0.36 Euro/kWh 2	0.40 Euro/kWh	0.44 Euro/kWh

The figures above refer to plants which started operation within December 31, 2008. For plants which commence operation between January 1, 2010 and December 31, 2010, the FiT will be reduced by 2% for each calendar year following 2008.

 

 

 

Pursuant to Ministerial Decree 6 August 2010 (“Third Conto Energia”) a fixed FiT is granted for a period of 20 years from the date on which the plant is connected to the grid in relation to plants that enter into operation after December 31, 2010 and until December 31, 2013. The FiT provided for by the Third Conto Energia are as follows:

	A		B		C
Nominal Power	Plants entered in operation after December 31, 2010 and by April 30, 2011		Plants entered in operation after April 30, 2011 and by August 31, 2011		Plants entered in operation after August 31, 2011 and by December 31, 2011
	PV plants on buildings	Other PV plants	PV plants on buildings	Other PV plants	PV plants on buildings	Other PV plants
[kW]	[€ /kWh]	[€/kWh]	[€/kWh]	[€/kWh]	[€/kWh]	[€/kWh]
1 ≤ P ≤ 3	0.402	0.362	0.391	0.347	0.380	0.333
3< P ≤20	0.377	0.339	0.360	0.322	0.342	0.304
20< P ≤200	0.358	0.321	0.341	0.309	0.323	0.285
200< P ≤1000	0.355	0.314	0.335	0.303	0.314	0.266
1000<P≤5000	0.351	0.313	0.327	0.289	0.302	0.264
P>5000	0.333	0.297	0.311	0.275	0.287	0.251

The plants entering into operation in 2012 and 2013 will be granted the tariff referred to in column C above deducted by 6% each year.

The FiT is payable by GSE upon the grant of an incentive agreement between the producer and GSE. Notwithstanding the foregoing, the first payment of the FiT to the producer is made retroactively, 6 months following connection to the national grid.

However, a new decree entered into force on March 29, 2011 (the “Romani Decree”) provides that the Third Conto Energia shall apply only to photovoltaic plants whose grid connection has been achieved by May 31, 2011.

The Romani Decree provides that, starting from its entry into force, ground mounted PV plants installed on agricultural lands, will benefit from incentives, provided that:

 

a)	the power capacity of the plant is not higher than 1 MW and - in the case of lands owned by the same owner - the PV plants are installed at a distance of at least 2 km; and

 

b)	the installation of the PV plants does not cover more than 10% of the surface of agricultural land which is available to the applicant.

 

Such provisions shall not apply to ground mounted PV plants installed on agricultural lands provided either that they have been admitted to incentives within the date of entry into force of the Romani Decree, or the authorization for the construction of the PV plant was obtained, or the application there for submitted, by January 1, 2011; and provided that in any case the PV plant commences operations within one year from the date of entry into force of the Romani Decree. However, all PV Plants have been already connected to the national grid and, except for the Acquafresca and D’Angella PV Plants, have already been awarded the incentives agreed under the relevant EPC Contract.

As an implementation to the Romani Decree, a new Decree was issued on 5 May 2011 (the “Fourth Conto Energia”) setting out the new FiT for PV plants entering into operations after May 31, 2011.

The three following tables provide the FiT that will apply to PV plants entering into operations from June 1, 2011 until December 31, 2012 on the basis of the Fourth Conto Energia:

 

	June 2011		July 2011		August 2011
	PV plants on buildings	Other plants	PV plants on buildings	Other PV plants	PV plants on buildings	Other PV plants
	[€/kWh]	[€/kWh]	[€/kWh]	[€/kWh]	[€/kWh]	[€/kWh]
1≤P≤ 3	0.387	0.344	0.379	0.337	0.368	0.327
3<P≤20	0.356	0.319	0.349	0.312	0.339	0.303
20<P≤200	0.338	0.306	0.331	0.300	0.321	0.291
200<P≤1000	0.325	0.291	0.315	0.276	0.303	0.263
1000<P≤5000	0.314	0.277	0.298	0.264	0.280	0.250
P>5000	0.299	0.264	0.284	0.251	0.269	0.238

 

	September 2011		October 2011		November 2011		December 2011
	PV plants on buildings	Other PV plants	PV plants on buildings	Other PV plants	PV plants on buildings	Other PV plants	PV plants on buildings	Other PV plants
	[€/kWh]	[€/kWh]	[€/kWh]	[€/kWh]	[€/kWh]	[€/kWh]	[€/kWh]	[€/kWh]
1≤P≤ 3	0.361	0.316	0.345	0.302	0.320	0.281	0.298	0.261
3<P≤20	0.325	0.289	0.310	0.276	0.288	0.256	0.268	0.238
20<P≤200	0.307	0.271	0.293	0.258	0.272	0.240	0.253	0.224
200<P≤1000	0.298	0.245	0.285	0.233.	0.265	0.210	0.246	0.189
1000<P≤5000	0.278	0.243	0.256	0.223	0.233	0.201	0.212	0.181
P>5000	0.264	0.231	0.243	0.212	0.221	0.191	0.199	0.172

 

	January – June 2012		July – December 2012
	PV plants on buildings	Other PV plants	PV plants on buildings	Other PV plants
	[€/kWh]	[€/kWh]	[€/kWh]	[€/kWh]
1≤P≤3	0.274	0.240	0.252	0.221
3<P≤20	0.247	0.219	0.227	0.202
20<P≤200	0.233	0.206	0.214	0.189
200<P≤1000	0.224	0.172	0.202	0.155
1000<P≤5000	0.182	0.156	0.164	0.140
P>5000	0.171	0.148	0.154	0.133

The following table provides the FiT and the relevant reduction, which will apply to PV plants which will enter into operation after December 31, 2012 on the basis of the Fourth Conto Energia. Please note that commencing January 1, 2013 the FiT will include the price paid for the electricity generated by the plant (“ ritiro dedicato ”).

	PV plants on building		Other PV plants
	Omni-comprehensive tariff	Auto-consumption premium	Omni-comprehensive tariff	Auto-consumption premium
	[€/kWh]	[€/kWh]	[€/kWh]	[€/kWh]
1≤P≤3	0.375	0.230	0.346	0.201
3<P≤20	0.352	0.207	0.329	0.184
20<P≤200	0.299	0.195	0.276	0.172
200<P≤1000	0.281	0.183	0.239	0.141
1000<P≤5000	0.227	0.149	0.205	0.127
P>5000	0.218	0.140	0.199	0.121

 

 

Finally, a new decree entered into force on January 24, 2012 (the “Liberalizzazioni Decree”), and was converted into law by the Parliament on March 24, 2012 (and the conversion law entered into force on March 25, 2012). Article 65 of the Liberalizzazioni Decree, inter alia, provides that ground based PV plants located in agricultural areas will not be granted the FiT provided by the Romani Decree, unless they: (i) obtained the authorization for the construction of the PV plant or filed the application for the authorization by March 25, 2012 (i.e., the date of entry into force of the Decree conversion law), (ii) commence operations by September 21, 2012 (i.e, 180 days of the date of entry into force of the Decree conversion law), and (iii) comply with the Romani Decree requirements set forth above with respect to the power capacity of the plant, the distance between the PV plants and the percentage coverage of agricultural land of the PV plant. This provision applies the Romani Decree requirements to PV plants that were already authorized or applied for authorization by March 25, 2012 (while other PV plants will not be eligible for incentives). However, Article 65 of the Liberalizzazioni Decree also provides (by way of reference to the Romani Decree) that the incentive shall be granted to PV plants that do not meet the requirements in preceding item (iii) if they have obtained the authorization for the construction of the PV plant or filed the application for the authorization by January 1, 2011, provided that they commence operations within 60 days of March 25, 2012. This in particular applies to the Acquafresca and D’Angella Plants, which applied for the authorization prior to January 1, 2011 and already commenced operations.

 

Other Renewable Energy Incentives

Legislative Decree no. 79 of 1999 implements the so-called “priority of dispatch” principle to the marketing of renewable energies, which means that the demand for electricity must be first satisfied by renewable energies.

In other words, in light of the increasing demand of energy, the sale of the total output of power plants fuelled by renewable sources is required by law, and the government must buy power from solar power plants that wish to sell to it, before it can buy the remainder of its power needs from fossil fuel energy resources.

Suspension of Pedale’s AU

Following the acquisition of Pedale it became clear that the Contractor had implemented a variation in the layout as compared to the initially authorized project. Pedale’s technical advisor advised, however, that the variation could not be deemed substantial as it actually reduced the surface occupied by the PV Plant, thus having a lighter environmental impact.

Following discussions with local authorities, the municipality formally accepted the variation by issuing a nulla osta . Furthermore, the Contractor filed a specific implied-consent permit procedure to which the municipality did not raise any objections within the prescribed deadline.

However, on February 21, 2012 Pedale received a letter from the Region notifying it that the AU issued in connection with Pedale was suspended, mainly due to the implementation of the aforementioned building variation, and that an internal process that may lead to the revocation of the AU has commenced. Following receipt of this letter, Pedale appointed a local administrative counsel with the aim to deal with the Region on behalf of Pedale during the suspension procedure and argue in favor of the validity of the AU. This local counsel opined that the AU should be deemed valid and, in any case, the variation should be approved as it is not substantial. This has also been stated in a letter sent on behalf of Pedale to the Region. The local counsel also pointed out that in his opinion, pending the suspension of the AU, it is not required that the operation of the Pedale PV Plant be suspended, and indeed the PV Plant operating as of the date hereof.

 

We note that although the letter of the Region specified that the procedure was to be concluded within 30 days of receipt of the letter by Pedale (i.e. by March 21, 2012), such deadline is not mandatory and the procedure is as of the date hereof still pending we cannot predict when it will be concluded.

Under the EPC Contract applicable to Pedale, the Contractor is liable for the full suitability of the permits (including the AU). Suspension of the AU will entitle the relevant PV Principal (without prejudice to any further remedies) to terminate the EPC Contract for reasons attributable to the Contractor. The PV Principal has sent a letter to the Contactor reserving the right to terminate the EPC Contract within 120 days following receipt of the AU suspension letter.

Material Effects of Government Regulations on the Spanish PV Plants

General legal framework

The power production from renewable energy sources in Spain benefits from economic incentives under the so called “Special Regime.”

Royal Decree 661/2007, of May 25, 2007 (“RD 661/2007”) sets forth the general basis of the economic regime for any power production installation in the Special Regime regardless the technology (e.g. wind, thermosolar, photovoltaic, etc.). Royal Decree 1578/2008, of September 26, 2008 (“RD 1578/2008”) sets forth the procedure for the assignation of the feed-in tariff to PV solar plants commissioned after September 29, 2008 (the limit date under RD 661/2007).

Economic incentives of the Special Regime

Pursuant to RD 661/2007, the consideration for the electricity produced under the Special Regime may be paid by means of three different alternative schemes to be elected by the producer:

(a)

As a consequence of selling the electricity produced at the feed-in tariff;

(b)

As a consequence of selling the electricity produced on the wholesale power production market managed by the market operator (OMEL) at the market price plus a regulated premium. In this case, the premium is limited by a cap and there is a floor for the total remuneration to be received by the relevant power plant; or

(c)

As a consequence of selling the electricity produced at the price negotiated between the parties in a bilateral or forward contract, entered into by a producer and an off-taker.

Any power production facility in the Special Regime is entitled to choose between the feed-in tariff and the market price and may switch from one scheme to the other provided that a minimum period of one year has elapsed between one scheme and the other.

 

Feed in tariff applicable to PV solar plants under RD 1578/2008

RD 661/2007 embodies the general framework of the economic regime applicable to any PV solar technology and regulates the terms of the feed-in tariff applicable to PV solar plants commissioned on or before September 29, 2008. The economic regime set forth in RD 661/2007 is also applicable to the electricity produced by PV solar plants commissioned after September 29, 2008, except for (i) the requirements to the access to the feed-in tariff (i.e. the requirement of registration in the Pre-assignation Registry (as hereinafter defined) in order to qualify for the relevant feed-in tariff, as further explained below), which are different to those requirements established pursuant to the RD 1578/2008 and (ii) the values of the feed-in tariff applicable to PV solar technology.

RD 1578/2008 has introduced significant changes in the economic regime for the PV solar technology, including: (i) the establishment of a new classification of PV solar plants and setting of new power capacity limits, (ii) creation of the Registry for the Pre-assignation of tariff (“ Registro de Preasignacion de Retribución ”) (the “Pre-assignation Registry”), and (iii) setting forth new quotas of aggregate installed power capacity for PV solar technology and new feed-in tariff values which are directly connected with the Pre-assignation Registry.

Classification of PV solar plants

RD 1578/2008 establishes a new classification of PV solar plants distinguishing between two categories (article 3 RD 1578/2008):

(a)

Type I – PV solar roof plants (or plants developed in similar surfaces); and

(b)

Type II – Any  other type of PV solar plants (mainly, ground PV solar  plants).

Power capacity limits for PV solar plants under RD 1578/2008

The maximum capacity for the PV solar plants included in Type I shall not exceed 2MW and for plants included in Type II, the installed capacity shall not exceed 10 MW.

The criterion for the calculation of the power capacity of a given PV solar plant under RD 1578/2008 differs from that established in RD 661/2007. Pursuant to article 10 of RD 1578/2008 the power installed capacity of a PV solar plant is calculated as follows: Solar PV production units which are located in cadastral references with the same initial fourteen digits shall be considered as one single plant; hence their capacities shall be added together, and solar PV production units which are connected to the same point of the distribution or transportation network, or which have a common feed-in line, shall be considered as one single plant, hence their capacities shall be added together.

Access to the feed-in tariff

In order to be entitled to obtain the feed-in tariff of RD 1578/2008 any PV solar project (regardless of its type) shall be recorded with the Pre-Assignation Registry which is managed by the Spanish Ministry of Industry, Tourism and Commerce (“MITYC”). The registration in the Pre-assignation Registry does not eliminate the mandatory registration of the relevant PV solar plant in the Administrative Registry of Installations under the Special Regime (“RIPRE”).

 

In addition to the abovementioned registration, RD 1578/2008 also requires that within 16 months from the date of its registration in the Pre-assignation Registry the commissioning of the PV solar plant will be completed and the PV solar plant will start to sell the electricity produced. Otherwise the plant shall not be entitled to the feed-in tariff.

For registration purposes, the Spanish Government issues a call for registration for each following quarter (i.e. the call for registration takes place 4 times a year). The call for registration includes the maximum power capacity (in MW) that will be pre-assigned for that specific quarter and remunerated at the feed-in-tariff, as well as the feed-in-tariff, which decreases from quarter to quarter (i.e. the feed-in-tariff of the second quarter is lower than the feed-in-tariff of the first quarter).

 

The Pre-Assignation Registry is currently suspended pursuant to Royal Decree-Law of 1/2012, dated January 27, 2012. Thus, at the moment, no further PV solar technology developments are possible under the feed in tariff scheme.

Limitations on the feed-in tariff

Various regulations currently limit the right to receive the feed in tariff scheme. Royal Decree 1565/2010, of November 19, 2010 limits the right to receive the feed-in tariff to the first 30 years of the exploitation of a PV solar plant. Royal Decree-Law 14/2010 of December 23, 2010 provides that any given PV solar facility is only entitled to receive the feed in tariff for a certain amount of equivalent hours depending on the Climatic Solar Zone where the relevant facility is located. In accordance with the scope of application of the aforementioned regulations, the amendments include PV plants already commissioned at the date of entry into force of the said regulations in addition to future PV plants. Thus, the amendments introduced are retroactive concerning any PV plants which were already in operation when the regulations were approved.

Update of the feed in tariff

Pursuant to Article 12 of RD 1578/2008, feed-in tariffs shall be updated annually, starting on January 1 of the second year following the quarter in which they were established, according to the formulas and criteria set forth in Article 44.1 of RD 661/2007. Pursuant to Article 44 of RD 661/2007, feed-in tariffs and premiums shall be annually updated taking as a reference the increase of the Consumer Price Index (IPC) minus twenty-five basic points until December 31, 2012 and minus fifty basic points onwards.

The last update of the feed-in tariff for PV Solar plants under RD 661/2007 was adopted by means of Order ITC/3519/2009 of December 28, 2009.

General licensing procedure for PV Solar plants in the region of Andalusia

The inclusion of a PV Solar plant in the Special Regime implies that the PV Solar plant is prima facie entitled to receive the economic benefits of the Special Regime, as its main characteristics fulfil the legal requirements set-forth in Article 27 of Law 54/1997 of November 27, 1997 on the Electricity Sector ("Law 54/1997"). The Resolution in which the PV Solar plant is included in the Special Regime is to be granted by the Regional Energy Department.

 

Bank Guarantee

Pursuant to Section 7 of Regional Decree 50/2008 of February 19, 2008, regulating the administrative procedures of PV Solar plants to be located in he Autonomous Region of Andalusia (“Decree 50/2008”), enacted in accordance to section 66 bis of Royal Decree 1955/2000, of December 1, 2000, regulating the transmission, distribution, trading and supply activities and authorisation procedures for electrical power facilities, a bank guarantee in benefit of the Regional Economy and Finance Department of a total amount equivalent to Euro 500 per kW of installed capacity is required to secure the connection point of a PV solar plant to the power grid during the licensing procedure.

Assignment of the connection point by the power distribution company

The manager of the power distribution grid of the area is responsible for granting access and connection to the power grid to new power installations to be erected in its influence area. The assignment of the connection point implies that the PV Solar Plant is entitled to inject the electricity output into the grid in a specific connection point.

Administrative authorization and execution project.

The construction and operation of a PV Solar plant within the Special Regime is subject to the prior awarding of an administrative authorization and execution of a project approval by the Autonomous Region of Andalusia.

Pursuant to section 11 of Decree 50/2008 the administrative authorization and the execution project approval may be granted by a sole administrative decision (“ resolución administrativa única ”).

Apart from the abovementioned obligations, the construction and operation of a solar PV solar plant in the Region of Andalusia requires the granting of the appropriate authorizations, licenses and permits from the relevant Regional Environmental Department, as well as certain town and country planning licenses to be obtained from the City Council where the solar PV solar plant is to be located.

Once the solar PV plant has been granted with the relevant authorizations and licenses required by the applicable regulations, the PV solar plant may be registered with the Pre-Assignation Registry and therefore be able to benefit from the tariff established by RD 1578/2008; provided that the Plant is finally registered in the RIPRE and has started selling electricity within 16 months following the date of publication in the MITYC web page of the registration of the PV Installations in the Pre-assignation Registry.

After completion of the construction works of a PV solar plant, the owner shall apply for the Official Commissioning Record (“ acta de puesta en servicio ”) issued by the Regional Energy Department, which entitles the relevant company to run the PV Solar plant and to sell the power output. Provided that the Official Commissioning Record was obtained, the PV Solar plant shall apply for the Final Registration of the PV installations in RIPRE. The Final Registration in RIPRE is a prerequisite for a PV Solar plant to sell the power output under the Special Regime.

 

Rinconada II

Rinconada II is fully commissioned and is currently entitled to receive a feed-in tariff of 30.71893 c€/kWh, corresponding to the second quarter of year 2009 of the Pre-assignation Registry, in exchange for the electricity produced, limited to a total amount of 1,632 equivalent hours of production, during the first 30 year of its operation. Rinconada II has been awarded with all the permits and licenses required to its construction and exploitation except as for the activity license to be granted by the City Council of Córdoba. Under the asset purchase agreement and share purchase agreements executed in connection with the purchase of Rinconada II, the seller undertook, as one of the conditions subsequent, to obtain the activity license within a certain period from the execution of these agreements. If the seller does not obtain the activity license within the specified period, we will be entitled to terminate the agreement and recover the consideration paid under them.

Investment in Dori Energy

General

On November 25, 2010, Ellomay Clean Energy Ltd. (“Ellomay Energy”), our wholly-owned subsidiary, entered into an Investment Agreement (the “Dori Investment Agreement”) with U. Dori Group Ltd. (“Dori Group”), and U. Dori Energy Infrastructures Ltd. (“Dori Energy”), with respect to an investment by Ellomay Energy in Dori Energy. The Dori Investment Agreement provided that subject to the fulfillment of certain conditions precedent, Ellomay Energy shall invest a total amount of NIS 50 million (approximately $ 14.1 million) in Dori Energy, and shall be issued a 40% stake in Dori Energy’s share capital. The transaction contemplated by the Dori Investment Agreement (the “Dori Investment”) was consummated on January 27, 2011 (the “Dori Closing Date”), resulting in Ellomay Energy holding 40% of Dori Energy’s share capital and the remainder (60%) is held by Dori Group. Following the Dori Closing Date, the holdings of Ellomay Energy in Dori Energy were transferred to Ellomay Clean Energy Limited Partnership (“Ellomay Energy LP”), an Israeli limited partnership whose general partner is Ellomay Energy and whose sole limited partner is us. Ellomay Energy LP replaced Ellomay Energy with respect to the Dori Investment Agreement and the Dori SHA.

Ellomay Energy was also granted an option to acquire additional shares of Dori Energy that, if exercised, will increase Ellomay Energy’s percentage holding in Dori Energy to 49% and, subject to the obtainment of certain regulatory approvals – to 50%.

Concurrently with the consummation of the Dori Investment, Dori Energy entered into an agreement with Israel Discount Bank Ltd. (“Discount Bank” and the “Discount Bank Agreement”) pursuant to which Discount Bank extended to Dorad, as per Dori Energy’s request, a NIS 120 million (approximately $34 million) bank guarantee that was required to allow Dori Energy to extend its pro rata share of the equity required by Dorad for the power plant project. Ellomay Energy and we guaranteed, jointly and severally, 40% of the liabilities of Dori Energy towards Discount Bank under the Discount Bank Agreement. In addition, each of Ellomay Energy and U. Dori also pledged their holdings in Dori Energy in favor of Discount Bank as a security for the fulfillment of Dori Energy’s obligations to Discount Bank under the Discount Bank Agreement. The term of this guarantee was extended for one additional year and in the agreement authorizing such extension, each of Ellomay Energy LP and the Dori Group undertook to Discount Bank, that in the event Dorad requires funding from Dori Energy pursuant to the agreement between Dorad and its shareholders, each of Ellomay Energy LP and the Dori Group shall extend to Dori Energy its pro rata share of such funding.  Therefore, we may be required by Discount Bank to extend additional funding to Dori Energy although we believe that the Dori Group is obligated to extend such funding, in its entirety, under the Dori Investment Agreement. During 2011 and 2012, we extended an additional aggregate amount of $2 million to Dori Energy although we believe the Dori Group was obligated to extend this amount to Dori Energy under the Dori Investment Agreement. The differences between us and the Dori Group in connection with such financing obligations are now being mediated among us, the Dori Group and Dori Energy and may eventually be resolved in an arbitration process.

 

Concurrently with the execution of the Dori Investment Agreement, Ellomay Energy, Dori Energy and Dori Group have also entered into the Dori SHA that became effective upon the Dori Closing Date. The Dori SHA provides that each of Dori Group and Ellomay Energy is entitled to nominate two directors (out of a total of four directors) in Dori Energy. The Dori SHA also grants each of Dori Group and Ellomay Energy with equal rights to nominate directors in Dorad, provided that in the event Dori Energy is entitled to nominate only one director in Dorad, such director shall be nominated by Ellomay Energy for so long as Ellomay Energy holds at least 30% of Dori Energy. The Dori SHA further includes customary provisions with respect to restrictions on transfer of shares, a reciprocal right of first refusal, tag along, principles for the implementation of a BMBY separation mechanism, veto rights, etc.

The Dorad Project

Dori Energy is the holder of 18.75% of Dorad, a private Israeli company that is promoting the Dorad Project. Dori Energy LP’s representative on Dorad’s board of directors is currently Mr. Hemi Raphael, who is also a member of our Board of Directors. Dorad has entered into a credit facility agreement with a consortium lead by Bank Hapoalim Ltd., and financial closing of the Project was reached on January 27, 2011.

The Dorad Project entails the construction of a combined cycle power plant based on natural gas, with a production capacity of approximately 800 MW, on the premises of the Eilat-Ashkelon Pipeline Company (EAPC) located south of Ashkelon. The electricity produced is expected to be sold to end-users throughout Israel and to the National Electrical Grid. The transmission of electricity to the end-users shall be done via the existing transmission and distribution grid, in accordance with the provisions of the Electricity Sector Law and its Regulations, and the Standards and the tariffs determined by the Public Utility Authority - Electricity. The Dorad power plant will be based on combined cycle technology using natural gas. The combined cycle configuration is a modern technology to produce electricity, where gas turbines serve as the prime mover. After combustion in the gas turbine to produce electricity, the hot gases from the gas turbine exhaust are directed through an additional heat exchanger to produce steam. The steam powers a steam turbine connected to a generator, which produces additional electric energy.

The Dorad power plant is currently under construction and is expected to commence operations in September-October 2013. The Dorad power plant will be a bi-fuel plant, using natural gas as the main fuel and diesel oil in the event of an emergency.

 

Sources and Availability of Raw Materials for the Operations of the Dorad Power Plant

Dorad previously executed a gas sale agreement for the supply of natural gas for its operations with the Egyptian company, EMG.  In early 2011, riots in Egypt have led to political instability and to the resignation of the President of Egypt and the appointment of a new government. In addition, during 2011 several explosions of gas pipelines at the Egyptian National Grid in Sinai occurred causing the halt of supply of natural gas from Egypt for various periods pending repair of the gas pipelines. Due to the instability in the region and the continued disruptions in the supply of natural gas by EMG during the past year, Dorad may be required to procure natural gas from other sources. There are several additional potential suppliers of natural gas in the area, including companies holding oil and gas exploration and excavation licenses in the Mediterranean sea.

Material Effects of Government Regulations on Dorad’s Operations

The regulatory framework applicable to the production of electricity by the private sector in Israel is provided under the Israeli Electricity Sector Law, 1996 (the “Electricity Law”) and the regulations promulgated thereunder, including the Electricity Market Regulations (Terms and procedures for the granting of a license and the duties of the Licensee), 1997, the Electricity Market Principles (Transactions with the supplier of an essential service), 2000, and the Electricity Market Regulations (Conventional Private Electricity Manufacturer), 2005. In addition, standards, guidelines and other instructions published by the Israeli Public Utilities Authority – Electricity (established pursuant to Section 21 of the Electricity Law, the “Authority”) and\or by the Israeli Electric Company also apply to the production of electricity by the private sector in Israel.

In February 2010, the Authority granted Dorad a Conditional License, as defined by the Electricity Market Regulations (Conventional Private Electricity Manufacturer), 2005, (the “Conditional License”) for the construction of a natural gas (and alternative fuel for back up purposes) operated power plant in Ashkelon, Israel for the production of electricity, with an installed production capacity of 760-850 MWp. The Conditional License includes several conditions precedent to the entitlement of the holder of the Conditional License to produce and sell electricity to the Israeli Electric Company. The Conditional License shall be valid for a period of fifty four (54) months commencing from the date of its approval by the Israeli Minister of National Infrastructures, subject to compliance, by Dorad, with the milestones set forth therein, and the other provisions set forth therein. If Dorad shall comply with all the conditions and meet all the milestones, as detailed in the Conditional License, it is expected to be granted with a permanent electricity production license under the Conditional License. In September 2010, Dorad received a draft approval of conditional tariffs from the Authority that sets forth the tariffs applicable to the Dorad Project throughout the period of its operation.

In addition, in July 2009, the Licensing Authority of the National Planning and Construction Board for National Infrastructure established pursuant to the Israeli Zoning and Construction Law, 1996 (the “Construction Law”), granted a building permit with respect to the Dorad Project (Building License No. 2-01-2008), as required pursuant to the Construction Law.

 

Material Effects of Government Regulations - General

Investment Company Act of 1940

Regulation under the Investment Company Act governs almost every aspect of a registered investment company’s operations and can be very onerous. The Investment Company Act, among other things, limits an investment company’s capital structure, borrowing practices and transactions between an investment company and its affiliates, and restricts the issuance of traditional options, warrants and incentive compensation arrangements, imposes requirements concerning the composition of an investment company’s board of directors and requires shareholder approval of certain policy changes. In addition, contracts made in violation of the Investment Company Act are void.

An investment company organized outside of the United States is not permitted to register under the Investment Company Act without an order from the SEC permitting it to register and, prior to being permitted to register, it is not permitted to publicly offer or promote its securities in the United States.

As following sale of our business to HP we had no operations and substantially all of our assets consisted of the monetary consideration received from HP, we could then fall within the definition of an “investment company” under the Investment Company Act, if we invested more than 40% of our assets in “investment securities”, as defined in the Investment Company Act. Investments in securities of majority owned subsidiaries (defined for these purposes as companies in which we control 50% or more of the voting securities) are not “investment securities” for purposes of this definition. Unless we limited the nature of our investments to cash and cash equivalents (which are generally not “investment securities”) and succeeded in making strategic “controlling” investments, we could have been deemed to be an “investment company.”

We do not believe that our current asset structure results in our being deemed to be an “investment company,” as we control the Italian PV Plants via wholly-owned subsidiaries and the current fair value of the shares we hold in Dori Energy and of our interests in other activities as detailed above does not in our judgment exceed 40% of our aggregate assets, excluding our assets held in cash and cash equivalents. If we were deemed to be an “investment company,” we would not be permitted to register under the Investment Company Act without an order from the SEC permitting us to register because we are incorporated outside of the United States and, prior to being permitted to register, we would not be permitted to publicly offer or promote our securities in the United States. Even if we were permitted to register, it would subject us to additional commitments and regulatory compliance. Investments in cash and cash equivalents or in other assets that are not deemed to be “investment securities” might not be as favorable to us as other investments we might make if we were not potentially subject to regulation under the Investment Company Act. We seek to conduct our operations, including by way of investing our cash and cash equivalents, to the extent possible, so as not to become subject to regulation under the Investment Company Act. In addition, because we are actively engaged in exploring and considering strategic investments and business opportunities, and in fact have entered the Italian photovoltaic power plants market through controlling investments, we do not believe that we are currently engaged in “investment company” activities or business.

Shell Company Status

Following the consummation of the HP Transaction, we ceased conducting any operating activity and substantially all of our assets consisted of cash and cash equivalents. Accordingly, we may have been deemed to be a “shell company,” defined by Rule 12b-2 promulgated under the Securities Exchange Act of 1934 as (1) a company that has no or nominal operations; and (2) either: (i) no or nominal assets; (ii) assets consisting solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets.

 

Our characterization as a “shell company” subjected us to various restrictions and requirements under the U.S. Securities Laws. For example, in the event we consummated a transaction that caused us to cease being a “shell company,” we were required to file a report on Form 20-F within four business days of the closing of such transaction. We filed such Form 20-F that included full disclosure with respect to the PV Plants and our post-transaction status on March 10, 2010, following the execution of the EPC Contracts in connection with the Del Bianco and Costantini PV Plants.

Therefore, we believe that since the execution of the EPC Contracts on March 4, 2010, we have ceased being a “shell company.” However, as noted below, the fact that we previously could have been deemed to be a “shell company” continues to affect us in certain ways.

 

During the period in which we were deemed to be a “shell company” and for a period of sixty days thereafter, we could not use any Form S-8 we have on file in order to enable the issuance of our shares and the resale of such shares by our employees.

In addition, pursuant to the provisions of Rule 144(i) promulgated under the Securities Exchange Act of 1934, shares issued by us at the time we were deemed to be a “shell company” and thereafter can only be resold pursuant to the general provisions of Rule 144 subject to the additional conditions included in Rule 144(i), requiring that a one-year period elapse since the date in which we file our “Form 10 information” (March 10, 2010) and that we have filed all reports and other materials required to be filed by section 13 or 15(d) of the Exchange Act, as applicable, during the twelve month period preceding the use of Rule 144 for resale of such shares. These continuing restrictions may limit our ability to, among other things, raise capital via the private placement of our shares.

C.           Organizational Structure

Our Italian PV Plants are held by the following Italian companies, wholly-owned by Ellomay Luxembourg Holdings S.àr.l. (a Luxemburg company), which, in turn, is wholly-owned by us: (i) Ellomay PV One S.r.l., (ii) Ellomay PV Two S.r.l., (iii) Ellomay PV Five S.r.l., (iv) Ellomay PV Six S.r.l., (v) Energy Resources Galatina S.r.l., (vi) Pedale S.r.l., (vii) Luma Solar S.r.l. and (viii) Murgia Solar S.r.l. Our Spanish PV Plant is held by Ellomay Spain S.L., a Spanish company 85% owned by Ellomay Luxemburg. Ellomay Spain owns 21 Spanish companies, each holding a 90 kW solar installation portion of the Riconada II, the first named Energía Solar Fotovoltaica Parque 15, S.L. and the others bear a similar name with references to different numbers (16-34 and 69).

Our holdings in Dori Energy are held by Ellomay Clean Energy Limited Partnership, an Israeli limited partnership whose general partner is Ellomay Clean Energy Ltd., a company incorporated under the laws of the State of Israel wholly-owned by us.

D.           Property, Plants and Equipment

Our office space of approximately 306 square meters is located in Tel Aviv, Israel. This lease expires in April 2013 and we have an option to extend it until April 2016. We sub-lease a small part of our office space to a company controlled by Mr. Shlomo Nehama, at a price per square meter based on the price that we pay under our leases. This sub-lease agreement was approved by our Board of Directors.

 

The PV Plants are located in Italy and in Spain. Pursuant to the building right agreements executed by our subsidiaries that are PV Principals in connection with the PV Plants, our subsidiaries own the PV Plants and received the right to maintain the PV Plant on the land on which they are located (the “Lands”). The ownership of the Lands remains with the relevant owners of the Lands who are the grantors of the building rights under the respective building right agreements. In the case of the Galatina Plant our subsidiary owns the land on which the PV Plant is built. The following table provides information with respect to the Lands and the PV Plants:

 

For more information concerning the use of the properties in connection with the PV Plants, see “Item 4.A: History and Development of Ellomay” and “Item 4.B: Business Overview” above.