Submitted January 8, 1996; File Number 0-14452
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRELIMINARY PROXY STATEMENT
AMENDMENT NO. 2
Solicitation of Consent To the Sale of All
Partnership Assets, Distribution of the Proceeds to
Partners, and Termination of the Partnership
With Exhibits
THIS CONSENT IS SOLICITED BY THE GENERAL PARTNER OF THE FUND
Payment of Fee:
$125 per Exchange Act Rule 0-11(c)(1)(ii)
No offsetting fee has been previously paid
Registrant:
Far West Electric Energy Fund, L.P.
921 Executive Park Drive
Salt Lake City, Utah 84117
Tel (801) 268-4444
Fax (801) 266-5155
Correspondent:
Stanford Stoddard Smith
2921 Devon Drive
Bountiful, Utah 84010
Tel/Fax (801) 295-1444
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Solicitation Statement For Far West Electric Energy Fund, L.P.
CONSENT SOLICITATION
This Solicitation of Consent is dated _____, 1996
Voting on the Proposed Transaction will close _____, 1996
Table of Contents
Summary 3
The Proposed Transaction 14
The Fund 29
Federal Tax Consequences 38
Opinion of Financial Advisor 46
Exhibits 53
1. Purchase and Sale Agreement (previously submitted)
2. Tax Opinion of Robison Hill & Co. (previously submitted)
3. Fairness Opinion of Corporate Capital Consultants, Inc.
(previously submitted)
4. Form 10-QSB for quarter ending September 30, 1995 (previously
submitted)
5. Reply Card (previously submitted)
6. Form 10-KSB for December 31, 1995 (revised)
7. Commitment Letter to U.S. Envirosystems, Inc. from Smith
Management Company (previously submitted)
8. Commitment Letter to U.S. Envirosystems, Inc. from Gaines
Berland, Inc. (previously submitted)
9. SB-1 appraisal of Ronald P. Baldwin (previously submitted)
10. SB-1 Forecast of Corporate Capital Consultants (previously
submitted)
11. Letter to James Budge of SEC (previously submitted)
12. Unaudited condensed balance sheet of Far West Capital, Inc.
(revised, now appearing at page 40 of Exhibit 6)
13. USE's Pro Forma Condensed Combined Statement of Operations for
the year ended December 31, 1995
SUMMARY
Far West Capital, Inc. ("FWC"), the general partner of the Far West
Electric Energy Fund, L.P., a Delaware limited partnership (the
"Fund"), hereby solicits from the limited partners of the Fund (the
"Limited Partners") written consent to-
The sale of substantially all of the Fund's assets (the
"Assets") for $1,250,000;
Distribution of the proceeds of sale to the Limited Partners
(estimated to be approximately $33 per limited partnership
unit - a "Unit"); and
Termination of the Fund (generally resulting in approximately
$33 of taxable gain per Unit).
These three steps are collectively referred to in this Consent
Solicitation as the "Proposed Transaction."
As it has reported to Limited Partners in periodic letters and
reports, FWC has been seeking a purchaser for the Assets since
early 1993. It recommends that the Limited Partners vote to approve
the Proposed Transaction.
The following summary of certain information contained in this
solicitation of consent (the "Consent Solicitation") is not
intended to be complete; it is qualified in its entirety by the
more detailed information contained elsewhere in this Consent
Solicitation and the Exhibits hereto. Limited Partners are urged to
read this Consent Solicitation and the Exhibits in their entirety.
FWC has fixed the close of business April 1, 1996, as the
record date for determining the Limited Partners entitled to vote
on approval or disapproval of the Proposed Transaction and for
determining the Limited Partners entitled to receive the final
liquidating distribution.
FWC has set _____, 1996, as the date by which properly completed
Reply Cards (Exhibit 5 hereto) must be received from Limited
Partners wishing to vote on the Proposed Transaction.
Special Factors
The purpose of the Proposed Transaction is to sell the Fund's
Assets before they are lost in foreclosure by the project lender.
In December, 1996, the income of the Fund's sole power
plant, SB-1, will drop below the level necessary to cover operating
expenses, royalties, and debt service . On that date
the rate paid by Sierra Pacific Power Company ("Sierra"), the local
utility which purchases the electrical output of SB-1, declines
from the current rate of 7.17 cents per kwh to short-term avoided
cost rates (currently estimated to be 2.8 cents or less per kwh)
under the terms of the Fund's power sales agreement with
Sierra. The probable result of this decrease is that the Fund
will be unable to service the debt on SB-1, and the project
will be taken over through foreclosure by Westinghouse Credit
Corporation ("WCC"), the primary project lender, resulting in
financial loss and possible adverse tax consequences to the Limited
Partners.
The Fund has been seeking a purchaser for the Power Plant for the
past 3 years, believing that a financially capable purchaser may
succeed in locating an alternative purchaser for the power plant's
electricity, improving plant equipment, purchasing plant
indebtedness, and buying-out overriding royalty interests in the
plant's production, steps the Fund lacks the resources to pursue.
(See "The Proposed Transaction-Prior Offers".) This is the
only alternative measures deemed practical, and explored, by the
Fund.
On December 31, 1995, FWC was able to reach agreement U.S.
Envirosystems, Inc. ("USE") for the sale of the Fund's Assets. The
Proposed Transaction, which this Consent Solicitation describes in
detail, is being undertaken at this time to give USE as much time
as possible to prevent foreclosure on the Power Plants, and to
maximize the return to the Limited Partners.
The amount of consideration to be paid to the Fund was determined
by USE after discussions with FWC and conducting a full examination
of the Fund and the Power Plants. The structure of purchase is
described in "The Proposed Transaction-Steps of the Sales
Transaction."
In addition, to purchasing SB-1, USE proposes to acquire for
$275,000 the adjacent SB-1A power plant ("SB-1A") from 1-A
Enterprises, a Nevada general partnership controlled by the
principals of FWC. Collectively, these plants are referred to as
the "Power Plants."
The Fund has received an opinion from an outside financial advisor
to the effect that the Proposed Transaction is fair to the Limited
Partners from a financial point of view. (see "Opinion of
Financial Advisor" which is provided to Limited Partners as Exhibit
3 hereto). The method of selection and role of this firm is
described in "Opinion of Financial Advisor."
The effects of the Proposed Transaction upon FWC and the
Fund's unaffiliated security holders (the Limited Partners), and
the potential benefits and detriments of the Proposed Transaction,
are described in "The Proposed Transaction"; tax effects are
discussed in "Federal Tax Consequences."
In brief, if the Proposed Transaction is completed, the Fund will
sell its Assets and terminate, and the Limited Partners will
receive a final liquidating distribution of approximately $33 per
Unit. The financial position of FWC will be improved in that it
will no longer advance cash and services to the Fund (see "The
Fund-Moneys Owed to FWC."
Cash Offer for Fund Assets
The Fund has received a cash offer to purchase the Fund's Assets
for $1.25 million (plus assumption of liability to Westinghouse
Credit Corporation in the amount of $4,346,848) from U.S.
Envirosystems, Inc., a Delaware corporation ("USE"), on the terms
set forth in a draft Purchase and Sale Agreement (the "Sales
Agreement," appended as Exhibit 1). This agreement was executed by
the parties on December 31, 1995. On August 9, 1995, USE delivered
to FWC a non-refundable deposit of $50,000 as a show of
serious intent to complete the Proposed Transaction. Upon receipt
of these funds, FWC initiated work on the Consent Solicitation,
including contracting with legal, accounting, and financial
advisors.
Conditions of Sale
Performance of the Sales Agreement is subject to certain
pre-conditions (the "Conditions of Sale"):
The Fund's Limited Partners must approve the Proposed
Transaction; and
USE must raise the capital necessary to fund the purchase of
the Power Plants through an offering of its shares; USE shares
are publicly traded on the NASD OTC Bulletin Board.
Purchase Transaction Steps
To facilitate purchase of the Power Plants and related assets, USE
and FWC will create a Utah limited liability company to be called
Steamboat Envirosystems, L.L.C. ("SBE"), which will be owned 50% by
USE and 50% by FWC.
Under the terms of SBE's operating agreement, USE will receive on
a non-cumulative annual basis SBE's
net earnings up to 18%
(the "Preferred Return") of the amount USE will seek in public and
private offerings up to $10 million (see "Proposed
Transaction-Conditions of Sale"), to purchase the Power Plants and
related assets and pay off the balance of the Westinghouse loan.
SBE's net earnings in excess of this amount, if any, will
be divided equally with FWC. Because of the Preferred Return, FWC's
officers believe it is highly unlikely that FWC will receive any
income from SBE unless plant electrical output can be substantially
increased, a very favorable new power sales agreement can be
obtained, and/or the royalty load substantially reduced, all of
which appear very problematic .
The Westinghouse loan is described more fully in "Proposed
Transaction-Purchase of Debt"; the Preferred Return, in "Proposed
Transaction-The Purchaser."
The formation of SBE was negotiated by the parties as a way for USE
to retain
FWC's involvement with the Power Plants. FWC owns
other geothermal resource leases and power plants in the
area, and can provide operating expertise, assistance with
obtaining power sales agreements, aid in community relations, and
a uniform approach to resource management in the area.
The major steps of the transaction include the following:
FWC will establish an escrow account at a Utah bank in which it
will place executed instruments conveying to SBE the Power Plants
and related assets. This will occur if and when the Limited
Partners approve, and USE raises sufficient capital to complete,
the Proposed Transaction. FWC estimates that these events will
occur within 30 days of the date of this a favorable vote is
received pursuant to this Consent Solicitation.
Within approximately 5 days after the account is opened, USE will
deposit $2.525 million into the escrow account, SBE will be formed
and its operating agreement signed, and the escrowed documents and
moneys will be transferred to SBE.
Within approximately 5 days after the formation of SBE, it will
transfer $1.25 million to the Fund for purchase of the Assets and
$.275 million to 1-A for purchase of SB-1A and related assets.
Within approximately 5 days after transfer of moneys to the Fund,
the Fund shall make a final cash distribution to Limited Partners
of approximately $33 per Unit.
Tax Opinion
A tax opinion from Robison Hill & Co. Inc., Certified Public
Accountants (the "Tax Opinion"), addresses the significant tax
issues presented by the Proposed Transaction. It is summarized in
the section entitled "Federal Tax Consequences" and appended in
full as Exhibit 2 to this Consent Solicitation.
In brief, the authors of this opinion believe that a typical
Limited Partner able to utilize the Business credit would, over the
life of the Fund, have received approximately the following (per
unit of Fund ownership-a "Unit"):
A tax benefit of $299 for the Business credit;
Non-taxable cash distributions of $86;
If the Proposed Transaction is approved and completed, the
Limited Partner's Form K-1 will report, in the year of
closing, a cash distribution of approximately $33 and ordinary
taxable income of approximately $33. If the Fund's assets are
lost in foreclosure, the tax liability will be approximately
the same, but there will be no cash distributions to Limited
Partners.
Each Limited Partner's situation may vary; accordingly, partners
are encouraged to consult their own tax advisers.
Opinion of Financial Advisor
An opinion respecting the fairness of the Proposed Transaction (the
"Fairness Opinion") has been issued by the Fund's financial
advisor, Corporate Capital Consultants Inc. ("CCC"), and appended
hereto as Exhibit 3.
An independent appraiser of business assets, CCC concludes that the
Proposed Transaction is fair to the Limited Partners from a
financial point of view.
Vote Required to Approve the Proposed Transaction
Under sections 15.9 and 16.1 of the Fund's agreement of limited
partnership (the "Partnership Agreement"), the Proposed Transaction
must be approved by a majority of the Units casting votes, with a
quorum of at least 1% of the Units participating.
There are no arrangements relating to any security holder of the
Fund which are not identical to that relating to other security
holders of the same class of securities of the Fund.
The Proposed Transaction will not be completed unless a majority in
interest of Limited Partners participating by vote approve the
Proposed Transaction. No unaffiliated representative has been
retained by the Fund to act solely in behalf of the unaffiliated
security holders.
Recommendation of FWC
FWC will vote its 530 Units, 5.14% of the 10,306 total Fund Units,
in favor of the Proposed Transaction, and urges Limited Partners to
do likewise to prevent loss of the SB-1 Power Plant in foreclosure.
All directors of the general partner favor the Proposed
Transaction. No executive officer, director, or affiliate of the
Fund will receive any compensation or distributions in connection
with the Proposed Transaction or tender of Units.
In December, 1996, the income of the Fund's sole power plant, SB-1,
will drop below the level necessary to cover operating expenses,
royalties, and debt service. On that date the rate
paid by Sierra Pacific Power Company ("Sierra"), the local utility
which purchases the electrical output of SB-1, declines from the
current rate of 7.17 cents per kwh to short-term avoided cost rates
(currently estimated to be 2.8 cents or less per kwh) under the
terms of the Fund's power sales agreement with Sierra. The probable
result of this decrease is that the Fund will be unable to service
the debt on SB-1, and the project will taken over through
foreclosure by Westinghouse Credit Corporation ("WCC"), the primary
project lender, resulting in financial loss and possible adverse
tax consequences to the limited partners.
Incentive to Limited Partners to Approve
As an incentive to the Limited Partners to vote in favor of the
Proposed Transaction, and contingent upon such approval, FWC will-
Transfer to SBE all obligations owed by the Fund to FWC (as of
December 31, 1995, approximately $2,276,000,
consisting of $1,117,000 in cash advances, $488,000 interest
on those cash advances, and $671,000 owed for uncompensated
services provided by FWC); and
Decline its 6.09% share of the final liquidating distribution,
allocating these moneys (an estimated $19,898) to other
limited partners. (For the calculation of FWC's interest, see
"The Fund-Interest of FWC in the Fund.")
This combination of transfer of debt and declination of
distribution, a total of approximately $2,296,000, will make it
possible for the Limited Partners to receive approximately $33 in
liquidating distributions if the Proposed Transaction is
consummated (see "The Proposed Transaction-Cash to be
Distributed)."
Neither FWC nor any affiliate has purchased Units since the
commencement of the Fund's second full fiscal year preceding the
date of this Consent Solicitation.
Interest of FWC and its Principals
FWC is subject to conflicts of interest in connection with the
Proposed Transaction because (i) it will own a 50% interest in SBE,
the purchaser of the Power Plants, and (ii) its principals will
continue to own SB Geo, Inc., the operator of the Power Plants.
Because of the Preferred Return to USE under SBE's operating
agreement, FWC's officers and directors believe it is highly
unlikely that FWC will receive any income from SBE unless plant
electrical output can be substantially increased, a very
favorable new power sales agreement can be obtained, and/or the
royalty load substantially reduced, any of which will be
very difficult to accomplish.
The SBG operating agreement will provide, among other things, that
SBG will operate the Power Plants at rates competitive with those
charged by other independent operators. FWC officers expect
that SBG will be able to realize a profit from these operations.
Cash to be Distributed
FWC estimates that if the Proposed Transaction is approved, the
final distribution will be approximately $326,730, or a total of
approximately $33 per limited partnership Unit.
The exact amount to be distributed will depend in part upon (i) the
payments made to third-party creditors of the Fund at the time the
business of the Fund is wound up (currently $832,195), and (ii) the
final amount of expenses associated with this Consent Solicitation
(estimated to be $91,075),
. See "The Proposed Transaction
- -Cash to be Distributed."
Purchaser's Plans
USE is willing to enter the Sales Agreement despite the impending
drop in the power sales rate based on its belief that it can,
within 2-5 years, terminate the agreement with Sierra and locate
another purchaser for the projects' power at rate higher than
Sierra will pay.
Further, USE plans to improve SB-1's profitability by:
Buying out the WCC loan (with a balance of approximately
$4,346,848 as of January 2, 1996) at a discount; and
Spending approximately $1 million to make plant improvements
and to buy out royalty interests in SB-1 at a discount.
USE plans to take similar steps to improve the profitability of
1-A. The Fund is unable to take such action because:
The Fund lacks the resources to search for another purchaser
and put together any wheeling arrangements necessary to
deliver the power to the purchaser.
The Fund lacks the resources to cover Power Plant operating
expenses while the search is in progress.
The Fund lacks the resources to buy out the Westinghouse loan
at a discount, and hence must carry the full debt-service
burden. After the power sales rate decline in December 1996,
it is probable that the Fund will be unable to cover any debt
service, and the Power Plant will be lost in foreclosure.
The Fund lacks the resources to improve the Power Plants or
attempt to buy out royalty interests in the revenues of the
Power Plants.
Unit Holdings of FWC
The table below sets forth the Unit holdings of FWC, general
partner of the Fund, the only holder of more than 5% of the Fund's
Units.
Title of Class Name and address Amount and Percent of
of beneficial owner nature of class
beneficial
ownership
Units of FWC, 921 530 Units 5.14%
limited Executive Park
partnership Drive, Salt Lake
interest City, Utah 84117
No Units are held by individual FWC officers, directors, or
shareholders. To the best of FWC's knowledge, there are no
arrangements which may result in a change in control of the Fund.
No Principals or affiliates of FWC, or any pension or profit
sharing plans of the foregoing, have any other interest in the
Fund. No transaction in Units has been effected during the past 3
years by FWC or any affiliate or Principal.
Costs of Consent Solicitation
All costs associated with this Consent Solicitation will be borne
by the Fund. A cost breakdown is set forth in "The Proposed
Transaction -Cash Distributions." All expenses will be paid
by the Fund; if the Proposed Transaction is completed, these
expenses will be paid from proceeds of the sale of the Power Plant.
Management's Interest in Matters Voted On
FWC owns 6.09% of the total Fund interest (see "The Fund-Interest
of FWC in the Fund").
Messrs. Alan O. Melchior and Thomas A. Quinn, each owns 40% of FWC,
37.5% of 1-A Enterprises (owner of SB-1A), and 37.5% of SB Geo,
Inc. (operator of SB-1 and SB-1A). Ronald E. Burch, president of
FWC, owns 20% of FWC and 15% of SBG.
Financial and Other Information
The Fund's annual report on Form 10-KSB for the period ended
December 31, 1995 (containing audited financial statements) is
appended hereto as Exhibit 6 and incorporated herein by reference.
Limited Partners may obtain additional copies of any of these
reports upon request.
Responding to this Consent Solicitation
It is important that you review this proposal carefully and vote
either to approve or disapprove the Proposed Transaction. Please
use the stamped, self-addressed postcard (the "Reply Card")
contained in this package to convey your vote to the Fund. To be
counted, your vote must be postmarked no later than _____, 1996.
The Reply Card must be dated and signed with the name or names
appearing on the original subscription agreement submitted to the
Fund at the time of the initial investment in the Fund. Consents
may be revoked or changed by providing written notice to FWC at 921
Executive Park Drive, Salt Lake City, Utah 84117, on or before the
date voting is closed.
Voting & Termination
Under the terms of the Fund's Limited Partnership Agreement, each
Unit, the only class of Fund security, will have one vote; a
majority vote of the Units voting will bind all Partners.
Dissenting Partners have no right under Utah or Delaware law to
compel the Fund or FWC to refund their investment or purchase their
Units should the Proposed Transaction be approved.
The Fund's 10,306 outstanding Units are held by 1,103 investors. If
a majority of the votes cast favor the Proposed Transaction, the
Fund shall proceed as outlined in this Consent Solicitation. A copy
of this Consent Solicitation will be mailed to all Limited
Partners.
Reply cards will be tallied by FWC's clerical staff on _____, 1996;
no card bearing a postmark later than _____, 1996, will be counted.
No other persons shall be engaged to make solicitations or
recommendations to the Limited Partners. No oral solicitation will
be made by the Fund or any affiliate. The minority shall be bound
by vote of the majority of those voting (abstentions will be
counted as not participating).
The Fund's principals have directed preparation of the Fund's proxy
statement and Schedule 13e-3, and will, if the Proposed Transaction
is approved by Limited Partners, direct the completion of the
Proposed Transaction as described in the Consent Solicitation
section entitled "The Proposed Transaction."
Limited Partners have no dissenter's rights of appraisal under Utah
or Delaware law, nor will any be accorded. If a security holder
opposes the Proposed Transaction, such holder may vote against it
and seek to influence others to do likewise. The Proposed
Transaction does not involve the exchange of any debt securities.
FWC knows of no Units held by brokers.
Upon request of a Limited Partner, the Fund
will provide a
list of names and addresses of all Limited Partners. The Fund
knows of no legal impediments to the Proposed Transaction,
but understands that a court may block a transaction it determines
involves fraud, misrepresentation, breach of duty, or violation of
securities laws or regulations.
The Fund's agreement of limited partnership provides that
a Limited Partner may examine the Fund's records upon
reasonable notice. No provision has been made for any Limited
Partner to order an appraisal or obtain counsel at the expense of
the Fund or an affiliate.
If a majority of votes approves the Proposed Transaction, FWC will
proceed to sell the Fund's assets as described in this Consent
Solicitation. All Unit holders (except FWC), regardless of how they
voted, will be treated alike for cash distribution and all other
purposes. If less than a majority approves the Proposed
Transaction, FWC will terminate its arrangement with USE and seek
another purchaser. FWC doubts that another purchaser willing to
offer terms as favorable as USE can be found.
If Limited Partners approve the sale, but USE fails to raise the
necessary capital or the Proposed Transaction is not completed for
any other reason, FWC will seek another purchaser for the Assets.
If one is found, the Fund will again seek consent from Limited
Partners.
If the Proposed Transaction is approved, certificates evidencing
ownership of Units will become void at the time the final cash
distributions are mailed to Limited Partners of record as of April
1, 1996. This mailing shall occur with 15 days of the Fund's
receipt of the Power Plant purchase price from SBE. Limited
Partners will not be required to surrender Unit certificates to the
Fund.
Please act promptly. Return the enclosed, stamped postcard after
checking the appropriate box to indicate your approval or
disapproval of the Proposed Transaction, dating the consent form,
and signing your name.
THE PROPOSED TRANSACTION
FWC proposes that the Fund sell its assets, distribute the proceeds
of sale to Limited Partners, and terminate the Fund. As a result of
the dissolution, the Fund's registration pursuant to the Securities
Exchange Act of 1934 and its obligation to file reports thereunder
will terminate.
The Fund has received a cash offer to purchase substantially all
the assets of the Fund by U.S. Envirosystems, Inc. ("USE") on the
terms and conditions set forth in the Sales Agreement. This
agreement was executed by the parties on December 31, 1995.
Reasons for the Proposed Transaction
FWC believes the Fund should complete the Proposed Transaction for
the following reasons:
In December, 1996, the income of the Fund's sole power
plant, SB-1, will drop below the level necessary to cover
operating expenses, royalties, and debt service, probably
resulting in foreclosure by the project lender with
associated financial loss and possible adverse tax
consequences to the limited partners. If, however, the
Proposed Transaction is completed, Limited Partners will
receive approximately $33 per Unit. FWC's officers and
directors believe that it is highly unlikely that the
Fund will receive a comparable or more favorable offer to
purchase the Power Plant.
FWC is no longer willing (nor will it be indefinitely
able) to subsidize Fund operations. At present, the Fund
owes FWC more than $2.5 million for unpaid services and
cash advances to cover operating expenses. As described
below, FWC will waive payment for these services and
repayment of these advances as an incentive for Limited
Partners to approve the Proposed Transaction.
Prior Offers
In 1993, the Fund was approached by two companies which offered to
purchase the Power Plant solely for stock in these
companies . These approaches were rejected by FWC before any
formal negotiations began because (i) the firms were start-up
companies with no significant assets or public market for their
stock, (ii) initial public offerings with no guarantee of success
would have been required to provide cash for plant operations,
(iii) and such transactions may have created taxable income
for the Limited Partners without providing cash distributions to
pay the tax.
The contacts with USE described below represent the only
significant contacts, arrangements, or understandings respecting
sale of Fund Assets since the Fund was organized.
Negotiations with Purchaser
FWC first became acquainted with USE during early 1994. FWC and an
unaffiliated third party, Suma Corporation, had purchased a 17 mw
gas-powered power plant in Lehi, Utah out of a Utah bankruptcy
court proceeding in April, 1993. They formed Lehi Independent Power
Associates, L.C. ("LIPA"), to own and operate the plant. Mr. Carl
Clark, a person not affiliated with USE or FWC, introduced USE to
FWC, and USE subsequently purchased a 50% interest in LIPA; FWC and
Suma Corporation currently own 25% each.
In subsequent conversations with USE principals, FWC became
aware that USE wished to acquire additional power plants, and
suggested that USE consider SB-1 and SB-1A. A series of
conversations respecting the Power Plants followed during 1994 and
early 1995. USE principals Theodore Rosen (Chairman of the Board)
and Richard Nelson (President) visited the plant site in the Spring
of 1995.
On July 26, 1995, FWC officers Melchior and Quinn met with Messrs.
Rosen and Nelson in Chicago to negotiate terms for the possible
sale of the SB-1 and SB-1A. A preliminary understanding was reached
on that date which culminated in a letter of intent signed by the
parties on August 2, 1995; a Purchase and Sale Agreement entered
into as of December 31, 1995.
FWC determined to recommend limited partner acceptance of
the USE offer because FWC did not and does not believe it can
obtain another comparable or more favorable offer.
Fairness Determination
FWC, each of its officers and directors (see "The
Fund-Management"), and the Fund, believes the Proposed Transaction
is fair to the Limited Partners for the following reasons:
In December, 1996, the income of the Fund's sole power
plant, SB-1, will drop below the level necessary to cover
operating expenses, royalties, and debt service
, probably resulting in foreclosure by the project
lender with associated financial loss and possible
adverse tax consequences to the limited partners.
The Fund has received an opinion from Corporate Capital
Consultants, Inc., stating that the Proposed Transaction
is fair from a financial point of view. Messrs. Burch,
Quinn, and Melchior concur in the CCC analyses.
It is highly unlikely that the Fund will receive a
comparable or more favorable offer to purchase the Power
Plant. FWC has been attempting to locate a purchaser
since 1993 and has found that the market for the Power
Plant is extremely limited given the imminent drop in
power sales rates and the limited number of potential
buyers with knowledge of or interest in geothermal power
plants.
If the Proposed Transaction is completed, Limited
Partners will receive approximately $33 per Unit. If the
Power Plant is not sold before December, 1996, there will
be no cash distribution.
These four factors are stated in the order of relative weight given
to them by FWC, with such weight allocated among them 90%, 5%, 3%,
and 2% respectively.
The Power Plant was appraised by Ronald P. Baldwin on September 20,
1993 (see Exhibit 9 appended hereto). At the time of this
appraisal, the contract price for the sale of power to Sierra had
just over three years to run. At a price of 7.17 cents per kwh, the
plant was covering its mortgage payment obligation by accruing and
deferring substantial amounts of other interest and obligations to
the general partner. The Baldwin appraisal concluded that the
plant's gross value of $5,000,000 was offset by $5,000,000 in debt,
resulting in a net value of zero.
Because the Power Plant is facing a substantial reduction in its
revenue generating capability , other potential valuation
factors, such as market prices, book value, going concern value,
liquidation value, and comparable transactions , were not
deemed significant by FWC or its officers and directors.
At the present time, with the power sales rate scheduled to drop
more than 60% in December of 1996, the Power Plant is worth less
than at the time of the Baldwin appraisal. FWC believes that the
Power Plant has value only to a buyer knowledgeable in the
alternative energy business with resources to buy out project debt
and royalty obligations, make plant improvements, and carry the
project (for years if necessary), while seeking another purchaser
for the project's electricity and a way to deliver the power to
such purchaser. USE is the only such buyer FWC has been able to
locate in more than 3 years of searching.
Overview Steps of the Proposed Transaction
The sale of substantially all of the Fund's assets (the
"Assets") for $1,250,000;
Distribution of the proceeds of sale to the Limited
Partners (estimated to be approximately $33 per limited
partnership unit - a "Unit"); and
Termination of the Fund (generally resulting in
approximately $33 of taxable gain per Unit).
If the Proposed Transaction is approved, funded, and completed, the
Power Plant will be sold, the Fund terminated, and a final
liquidating cash distribution will be made to Limited Partners.
From an accounting standpoint, the Proposed Transaction will be
treated as a sale of assets.
The Fund has not provided pro forma data disclosing the effect of
the Proposed Transaction; if the Proposed Transaction is completed,
all the Fund's assets will be sold, the proceeds will be
distributed to Limited Partners, and the Fund will be terminated.
Limited Partners have no dissenter's rights of appraisal under Utah
or Delaware law, nor will any be accorded. If a security holder
opposes the Proposed Transaction, such holder may vote against it
and seek to influence others to do likewise. Upon request of a
Limited Partner, the Fund will provide a list of names and
addresses of all Limited Partners.
The Fund's agreement of limited partnership provides that a Limited
Partner may examine the Fund's records upon reasonable notice. No
provision has been made for any Limited Partner to order an
appraisal or obtain counsel at the expense of the Fund or an
affiliate.
The structure of the Proposed Transaction was determined by
negotiations between U.S. Envirosystems, Inc. and FWC. The Proposed
Transaction is being undertaken at this time to give the purchaser
of the Fund's assets as much time as possible to complete the
transaction before Power Plant's power sales rate drops in
December, 1996, and to maximize the return to the Limited Partners.
The information below summarizes certain portions of the Sales
Agreement which FWC believes to be significant; reference must be
made to the complete copy of the Sales Agreement appended to this
Consent Solicitation as Exhibit 1.
The Purchaser
Under the terms of the Sales Agreement, USE and FWC will form
Steamboat Envirosystems, L.C., a Utah limited liability company
("SBE") to acquire and operate the Power Plants. Although USE will
provide all funds for the purchase of the Power Plants, the actual
purchase of the Power Plants will be made by SBE.
Under the terms of SBE's operating agreement, USE will receive on
a non-cumulative annual basis the first SBE net earnings of up to
18% of the amount USE raises in its public and private offerings to
purchase the Power Plants (not to exceed $10 million); earnings
above this amount, if any, will be divided equally with FWC.
As a condition of its purchase, USE required, and FWC agreed, that
this Preferred Return will be based on USE's total capital raised,
up to $10 million, even though less than all of this amount may be
spent to purchase the Power Plants, pay off the Westinghouse loan,
make project improvements, and buy out royalty interests in the
project. USE expects that a portion of moneys raised will be
retained by USE for working capital. Such retained moneys, if any,
will not affect the purchase price to be paid for the Power Plant
or the final, liquidating cash distribution to Limited Partners.
Because of the Preferred Return to USE under SBE's operating
agreement, it is highly unlikely that FWC will receive any income
from SBE unless plant electrical output can be substantially
increased, a very favorable new power sales agreement can
be obtained, and/or the royalty load substantially reduced, all of
which appear very problematic to FWC's officers or
directors.
The formation of SBE, in which FWC would have an interest, was
required by USE as a way of retaining FWC involvement with the
Power Plants. FWC owns other geothermal resource leases and power
plants in the area, and can provide operating expertise, assistance
with obtaining power sales agreements, community relations aid, and
a uniform approach to resource management in the area.
USE will contribute to SBE the following:
$1.25million to purchase SB-1 and related assets;
$.275 million to purchase SB-1A and related assets;
$1 million to fund improvements in the power plants and
the purchase, at a discount, of royalty interests held by
third parties in the Power Plants (these funds will be
used as a reserve for operations if the royalty interests
are not purchased); and
Purchase and cancellation of the Westinghouse loan (the
"Loan") on SB-1, receiving from the Fund the $1,016,774
reserve for debt service. (If the Loan cannot be
purchased for an acceptable price, USE shall make all
Loan payments out of USE's share of SBE's earnings).
FWC will contribute to SBE transfer of its loans and deferred fees
incurred with respect to the Power Plants, and all its interest in
the Fund. As of December 31, 1995, The Fund owed FWC
approximately $2,276,000, consisting of $1,117,000 in cash
advances, $488,000 interest on those cash advances, and $671,000
owed for uncompensated services provided by FWC. 1A owed FWC in
excess of $950,000, consisting of construction loans with an
approximate principal balance of $632,000, cash advances of
approximately $88,000, and interest on the foregoing.
If the Proposed Transaction is completed, FWC will lose its
interest in the Fund (as a holder of both a 1% general partner's
interest and 530 Units), will no longer bear the burden of
providing administrative services for the Fund, and will in effect
exchange the $2,276,000 owed to it by the Fund for an interest in
SBE (from which it expects little or no income because of the
Preferred Return to USE).
Parties to the Sales Agreement
Listed below are the parties to the Sales Agreement, together with
a brief description of each.
Far West Electric Energy Fund, L.P. (the "Fund") is a Delaware
limited partnership with its principal place of business at 921
Executive Park Drive, Suite B, Salt Lake City, Utah 84117 (see "The
Fund"). The Fund is publicly held by approximately 1,100 Unit
holders; Fund Units are not publicly traded. The Fund is the owner
of SB-1 and related assets, and owns a royalty interest in SB-1A.
Far West Capital, Inc. ("FWC") is a privately held Utah corporation
with its principal place of business at 921 Executive Park Drive,
Suite B, Salt Lake City, Utah 84117. It is the general partner of
the Fund. Its shareholders are Alan O. Melchior, Thomas A. Quinn,
and Ronald E. Burch, who are also the major stockholders in SB Geo,
Inc., and partners in 1-A Enterprises, described below.
U.S. Envirosystems, Inc. ("USE"), is a Delaware corporation
engaging in the business of developing, owning and operating
co-generation and independent power facilities in the United States
and overseas. Its offices are located at 515 North Flagler Drive,
Suite 202, West Palm Beach, Florida 33401. Its stock is publicly
traded on the NASDAQ OTC Bulletin Board under the symbol "USEN."
Steamboat Envirosystems, L.C. ("SBE"), will be a Utah limited
liability company, qualified to do business in Nevada, with its
principal place of business located at 921 Executive Park Drive,
Suite B, Salt Lake City, UT 84117. SBE will be formed by USE and
FWC to purchase the Fund's Assets.
1-A Enterprises ("1-A") is a Nevada general partnership which owns
a geothermal power plant commonly referred to as SB-1A which is
located adjacent to the SB-1 power plant. The SB-1A power plant,
put on line in 1989, utilizes the tail stream from the SB-1 plant
to produce power. It has a nominal capacity of approximately 1.6
kwh, and on average produces approximately 14 million kwh per year.
Because SB-1A utilizes brine produced from SB-1 wells to produce
power, SB-1A pays a pumping charge and royalty to the Fund, which
constitute part of the Assets which SBE will purchase from the
Fund. The Fund received $144,000 in pumping charges and royalties
from 1-A in 1995.
SB Geo, Inc. ("SBG") is a Utah corporation with its principal place
of business at 921 Executive Park Drive, Suite B, Salt Lake City,
Utah 84117. SBG currently operates SB-1 and SB-1A without making a
profit because the operating agreement provides that SBG cannot
make a profit. This provision is enforced by WCC, which under the
terms of the project loan agreement must approve all
disbursements made from project income. In 1995, the
accrued obligations to SBG of $419,200 for fixed operations
and maintenance expenses and $158,872 for variable
expenses.
If the Proposed Transaction is consummated, SBE and SBG will
execute an operating agreement pursuant to which SBG will operate
the SB-1 and SB-1A geothermal power plants for SBE at rates
competitive with rates charged by other independent power plant
operators. Under this arrangement, it is probable that SBG may
realize a profit on its operation of the plants.
Purchase of Assets
Under the Sales Agreement, SBE proposes to purchase the Power
Plants and all related assets.
SB-1
The Fund owns a geothermal power plant located within the Steamboat
Springs Known Geothermal Resource Area located roughly 10 miles due
south of downtown Reno, Nevada near the intersection of U.S. 395
and the Mount Rose Highway. This SB-1 plant has a nominal net
capacity of approximately 4 MW and produces on the average
approximately 37.8 million kwh per year.
SB-1 sells its output under a twenty year power purchase agreement
with Sierra Pacific Power Company ("Sierra"), the local public
utility. That power purchase agreement provides in part that SB-1
will be paid 7.17 cents per kwh for the first ten years of
commercial operation and short-term avoided cost for the second ten
years of operation.
When SB-1 began commercial operations in December of 1986, it was
estimated by the parties that short-term avoided cost at the
beginning of the second ten years of commercial operation would be
in the 5-6 cents per kwh range. At present, however, Sierra's
short-term avoided cost is approximately 2.8 cents per kwh.
It is the opinion of FWC that the SB-1 plant cannot sell its output
at 2.8 cents and generate sufficient revenues to pay operating
expenses and royalties, and service project debt.
As of January 2, 1996, there was a balance of $4,346,848 on the
Westinghouse loan on SB-1 and a $1,016,774 debt reserve for the
loan held in escrow. In addition the Fund owes FWC approximately
$2,276,000 .
SB-1A
SB-1A sells its output to Sierra under a thirty year power purchase
agreement. Pursuant to that agreement during the first ten years of
commercial operation, which began in December of 1988, SB-1A is
paid a floating rate for energy and capacity based on the movement
of two different indices.
At present SB-1A is paid one rate for capacity and another for
energy. These rates vary at different times of the year. During
1995 the annual blended rate paid for SB-1A's output has been
0.05433 cents per kwh. During the balance of the power purchase
agreement beginning December of 1998, SB-1A will be paid for its
output at Sierra's short-term avoided cost which presently
approximates 2.8 cents per kwh.
1-A does not believe that SB-1A can sell its output at 2.8 cents
per kwh and generate sufficient revenues to pay operating expenses,
pumping charges, royalties, and debt service.
As of October 1, 1995 there was a balance due on the Westinghouse
loan on SB-1A of $1,746,470 and a debt reserve held in escrow of
$79,869. In addition 1-A owes FWC in excess of $950,000
representing (i) the balance and accrued interest due on a loan
made in connection with the construction of the SB-1A plant with a
principal balance of approximately $632,000), (ii) cash advances of
approximately $88,000, and (iii) interest on the foregoing.
Other Assets
The assets to be sold also include, without limitation, supplies,
inventory, plant, equipment, receivables and property; tangible and
intangible, real and personal including without limitation permits,
licenses, policies, contracts, choses in action, records, reports,
documents, computer records, power sales agreements, leases,
subleases, designs, operating records, bank accounts, escrow
accounts, funds, wells, rights to brine, and any other rights held
by the Fund or 1-A which are used or useful or pertain to the
ownership, operation and maintenance of the SB-1 and SB-1A
geothermal power plants owned by the Fund and 1-A.
Negotiations to Modify the Power Sales Agreements
FWC has initiated discussions with Sierra concerning renegotiating
the power purchase agreements applicable to the SB-1 and SB-1A
power plants, in an attempt to increase the rate to be paid for the
power generated by those plants during the period following the
first ten years of commercial operations. At this point FWC is not
optimistic that attempts to renegotiate the power purchase
agreement will be successful.
It may be possible for the owner of the Power Plants to terminate
the power purchase agreement with Sierra and find another market
for the output of SB-1 and SB-1A at a price that would exceed
Sierra's short-term avoided cost rate, but the possibility of that
result is unknown.
Cash Deposit
On August 9, 1995, USE paid to FWC a non-refundable deposit of
$50,000 to begin the consent solicitation process. FWC required
these moneys from USE as a show of serious intent to complete the
Proposed Transaction. Upon receipt of these funds, FWC initiated
work on the Consent Solicitation, including contracting with legal,
accounting, and financial advisors.
Conditions of Sale
Performance of the Sales Agreement is subject to certain conditions
precedent ("Conditions of Sale"):
USE raises approximately $10,000,000 in public and
private securities offerings; and
A majority of the Fund's Limited Partnership interest
which votes in response to this Consent Solicitation
approves the Proposed Transaction.
To raise the $10 million necessary to finance the Proposed
Transaction, USE has obtained a $3.5 million commitment from Smith
Management Company a private investment firm for a private
placement of USE's preferred stock (Exhibit 7), and an
underwriter's letter of intent from Gaines Berland, Inc. for a
public offering of $6.5 million of USE common stock and warrants
(Exhibit 8).
Steps of the Sales Transaction
The Proposed Transaction consists of the following steps:
The Fund will sell substantially all its Assets for
$1,250,000. FWC will establish an escrow account at a
Utah bank in which it will place executed instruments
conveying to SBE Power Plants and related assets. These
assets shall be free and clear of all claims or
encumbrances except those identified in the Sales
Agreement.
USE will deposit $2.525 million into the escrow account,
SBE will be formed, its operating agreement will be
executed by USE and FWC, and the moneys and instruments
of conveyance will be released to SBE.
SBE will (i) transfer $1.25 to the Fund for purchase of
the Assets, (ii) transfer $.275 million to 1-A for
purchase of SB-1A and related assets, and (iii) retain $1
million for plant improvements and possible buy-out of
royalty rights in the Power Plants.
All Fund and 1-A receivables, payables, and liabilities
shall be prorated as of the closing date. SBE shall
immediately assume responsibility for all direct
obligations and liabilities associated with the ownership
and operation of the SB-1 and SB-1A power plants
including, without limitation, operating costs,
royalties, debt service (if any), back feed electricity,
interconnect fees, etc.
SBG will begin operating the SB-1 and SB-1A power plants
at rates competitive with those charged by independent
operators.
The Fund will pay its obligations to third parties,
distribute the balance of the purchase price to the
Limited Partners (resulting in a cash distribution of
approximately $33 per Unit), and the Fund will be
terminated (resulting in taxable income of approximately
$33 per Unit). Certificates evidencing ownership of Units
will become void; Limited Partners will not be required
to surrender them to the Fund.
Incentive Offered to Limited Partners
As an incentive to the Limited Partners to vote in favor of the
Proposed Transaction, and contingent upon such approval, FWC will:
Transfer to SBE all obligations owed by the Fund to FWC
(as of December 31, 1995, approximately
$2,276,000, consisting of $1,117,000 in cash
advances, $488,000 interest on those cash
advances, and $671,000 owed for uncompensated
services provided by FWC); and
Decline its share of any final distribution. But for this
declination, FWC as a general partner and holder of Units
would be entitled to receive 6.09% of the cash to
be distributed in the final distribution (see "The
Fund-Interest of FWC in the Fund"), representing
approximately $19,898 .
By re-directing these moneys from itself to the other Fund unit
holders, FWC believes it is doing everything in its power to
maximize the cash distributions to the Limited Partners.
Cash to be Distributed
The Fund will (i) deduct from the purchase price the debts owed by
the Fund to third parties and the costs of this Consent
Solicitation, (ii) eliminate payments due to FWC but for its waiver
of moneys due it as described below, then (iii) distribute the
balance to the Limited Partners of the Fund.
As of February 1, 1996, the Fund's estimated third party
debts (debts not owed to FWC) and accounts payable were as follows:
Creditor Amount
First Security Bank $470,649
Royalties 34,226
Freedman, Levy & Kroll 172,519
Gardiner & Hintze 60,083
Coombs & Greely 4,484
Valley Foods 21,936
Robison Hill & Co. 27,876
SBG 40,422
Total $832,195
Estimated expenses of this Consent Solicitation are as follows:
Service Provider Estimated Cost
Corporate Capital Consultants, Inc. $43,000
Stanford Smith, attorney 30,000
Robison Hill & Co., accountants 13,000
Printing, postage and filing 5,075
Total $91,075
Deducting these costs ($832,195 in third party debts and $91,075 of
consent solicitation expenses) from the purchase price of $1.25
million leaves a balance of $326,730. Dividing this number by the
9,776 Units outstanding (10,306 total Units less the 530 Units held
by FWC) yields final liquidating cash distributions to Limited
Partners of approximately $33 per Unit.
All expenses of this Consent Solicitation will be paid by the Fund;
if the Proposed Transaction is completed, expenses will be paid
from the proceeds of sale. No part of such funds or other
consideration will be directly or indirectly loaned in the ordinary
course of business by a bank or otherwise borrowed.
FWC will attempt to reduce the amounts paid to third-party
creditors through negotiations. If these efforts are successful,
the final cash distribution to Limited Partners may be increased.
Improvement of Power Plants and Purchase of Royalty Interests
A total of $1,000,000 of the $2,525,000 contributed to SBE by USE
shall be used to finance improvements in the Power Plants and
attempt to buy at a discount the gross royalties and net revenue
royalties owned by GDA, Benson, Helzel and Schwartzoff and Ormat,
Inc. in the projects (see Exhibit 1). Any amounts not utilized for
those purposes shall be retained in the accounts of SBE to be used
in the operation and maintenance of the SB-1 and SB-1A power
plants.
Purchase of Debt
USE has negotiated to purchase the position of Westinghouse Credit
Corporation, the primary lender on both the SB-1 and SB-1A
projects. USE expects to acquire the total Westinghouse loan
balance ($6,456,012 as of October 1, 1995) at a discount.
At its election, USE may contribute that debt position to SBE as a
part of its capital contribution to SBE. If that is done, SBE may
cancel the debt and all related encumbrances on the SB-1 and SB-1A
projects. If so contributed and canceled, SBE shall immediately
assign to USE all of its right, title and interest in and to the
funds held in the SB-1 and SB-1A loan reserves. These reserves are
required under the terms of the WCC loan so that the Power Plants
can continue debt service in periods of low project income. As of
December 31, 1995, these reserves totaled
$1,122,022.
The Fund borrowed $8 million from Westinghouse Credit Corporation
on January 16, 1990, levelly amortized over 10 years, with payments
due quarterly at 11.5% interest. The proceeds were used to
refinance an initial project loan and establish a
reserve account for payment of debt service obligations
during periods of low project income.
Liabilities Not Assumed
Respecting Fund liabilities, the Agreement provides as follows:
All operating expenses, royalties, taxes, and other Fund
obligations shall be prorated between the SBE, the Fund,
and 1-A as of the closing date.
The parties to the Sales Agreement are not assuming any
of the following liabilities, contracts, commitments and
other obligations of any other party to the Sales
Agreement.
Any obligations or liabilities of any other party arising
under the Sales Agreement;
Any obligation of any other party to the Sales Agreement
for federal, state or local tax liability (including
interest and penalties) arising from the operation of
SB-1 or SB-1A by SBG, FWC, the Fund or 1-A up to the
closing date or arising out of the sale by the Fund or
1-A of their assets;
Any obligation of the Fund or 1-A for any transfer, sales
or other taxes, fees or levies arising out of the sale of
assets;
Any obligation of the Fund or 1-A for expenses incurred
in connection with the sale of the assets.
All real or personal property taxes attributable to any
of the assets shall be prorated as of the closing date;
any transfer, sales, use or other tax, including any real
estate excise tax or transfer, filing or recording fees,
payable upon or with respect to the sale of the assets
hereunder shall be paid when due by SBE.
Warranties of the Fund
As required by the Sales Agreement, the Fund and 1-A warrant that
to the best of their knowledge:
The assets will be duly and validly transferred to SBE
and upon the delivery to SBE of appropriate documents;
SBE will have good and marketable title to the assets,
free and clear of all liens, claims, encumbrances and
other rights of third parties except for certain
interests listed in Exhibit B to the Sales Agreement.
There are no pending or threatened claims that are or
could be asserted against the Fund which relate to any
toxic or hazardous substance having been improperly
generated, handled, released (or threatened to be
released), treated, stored or disposed of, or otherwise
deposited in, on, beneath or in close proximity to the
real property upon which the Power Plants are constructed
including, without limitation, the surface waters and
subsurface waters thereof. There are no underground tanks
that are or have been located on, in or in close
proximity to the plant site. There are no pending or
threatened environmental claims that are or could be
asserted against the Fund or 1-A or its predecessors,
which relate to the plant site.
There is no suit, action or proceeding pending or
threatened against the Fund or 1-A, and there is no
judgment, order, injunction, decree, regulation or ruling
of any court or governmental department, commission,
agency, instrumentality or arbitration outstanding
against the Fund or 1-A having or which, insofar as can
be foreseen in the future, may have any adverse effect on
the operation and use of the Power Plants.
There are no existing conditions at the Power Plant sites
that could cause those sites to become in violation of,
or in noncompliance with, any governmental rule or
regulation.
The Fund and 1-A have complied in all material respects
with all of the applicable rules, regulations and
requirements of all governmental licenses, permits and
authorizations held by each entity in connection with the
ownership, development and operation of their respective
power plants. All information and disclosures made on any
applications for licenses, permits or authorizations were
true when made. Neither the Fund nor 1-A has any
knowledge of any claimed violations from any governmental
agency or any other person with respect to the licenses,
permits and authorizations held by them in connection
with the operation of the Power Plants and neither the
Fund nor 1-A has any knowledge that any condition exists
which may give rise to a claim of violation in the
future.
All of the permits and contracts associated with the
ownership and operation of the Power Plants are in good
standing and in full force and effect, and there has been
no material adverse change in the status of the permits
and contracts which threatens, restricts or prohibits the
operation of the power plants.
Warranties of USE
Under the terms of the Agreement, USE warrants as follows:
USE is a corporation duly organized, validly existing and
in good standing under the laws of the state of Delaware
and is authorized or licensed to do business in all other
jurisdictions in which the failure so to qualify would
have a material and adverse impact on its business or
properties. USE has the power and authority to carry on
its business as now conducted and as proposed to be
conducted.
All necessary actions on the part of USE necessary for
the authorization, execution, delivery and performance of
the Sales Agreement and the consummation of the
transactions contemplated in the Sales Agreement will be
taken prior to closing. The Sales Agreement shall
constitute the legal, valid and binding obligation of
USE, enforceable against USE in accordance with its
terms.
Additional Documents of Transfer
Upon the reasonable request of SBE the parties shall execute,
acknowledge, and deliver all such further documents as may be
required to convey and transfer to and vest in SBE and protect its
right, title and interest in all of the assets purchased pursuant
to the Sales Agreement, and as may be otherwise appropriate to
carry out the transactions contemplated by the Sales Agreement.
At closing SBE shall receive a report from First American Title
Company of Reno indicating that there are no mortgages, claims,
liens, charges, encumbrances security interests, restrictions on
use or transfer or other defects of record with respect to the
Power Plants other than as set forth in Exhibit B to the Sales
Agreement.
Other Provisions
The Sales Agreement contains several other provisions, among which
are the following:
The Sales Agreement may not be amended or modified except
in a writing signed by each of the parties.
Each party to the Sales Agreement will indemnify and hold
harmless each other party from any commission, fee or
claim of any person, firm or corporation employed or
retained by, or claiming to be employed or retained by,
the indemnifying party to bring about, or to represent it
in, the transactions contemplated therein. The Proposed
Transaction involves no other indemnification
arrangements.
Each party will pay all expenses incurred by it and in
connection with the negotiation, execution and
performance of the Sales Agreement, whether or not the
transactions contemplated therein are consummated,
including the fees and expenses of agents,
representatives, accountants and counsel for each party.
Time is of the essence of the Sales Agreement and each
and every covenant, condition and provision of the Sales
Agreement.
Any dispute arising under the Sales Agreement which the
parties cannot resolve amicably, will first be mediated
and if that process does not resolve the dispute, the
dispute will be submitted to binding arbitration. Such
mediation and arbitration will take place in Salt Lake
City, Utah in accordance with the Rules of the American
Arbitration Association and the prevailing party shall be
entitled to reasonable attorney's fees in addition to any
other relief to which that party may be entitled.
THE FUND
Organization
Far West Electric Energy Fund L.P., a Delaware limited partnership
(the "Fund"), was originally organized in September 1984 under the
Uniform Limited Partnership Act of Utah as Far West Hydroelectric
Fund, Ltd. Its general partners were Far West Capital, Inc.
("FWC"), Alan O. Melchoir, and Thomas A. Quinn.
The Fund's principal business office is located at 921 Executive
Park Drive, Suite B, Salt Lake City, Utah 84117. Its 10,306 Units
are publicly held by 1,103 Unit holders as of March 15, 1996. The
Units are not publicly traded. During the past 3 years no public
offering of the Units has been made, nor has the Fund or any
affiliate purchased any Units. There are no arrangements relating
to any security holder of the Fund which are not identical to that
relating to other security holders of the same class of securities
of the Fund.
The principal revenue-producing activities of the Fund commenced as
of December 31, 1985, following the completion in November 1985 of
a public offering of its Units of limited partnership interests
registered under the Securities Act of 1933.
On December 20, 1988, the Fund changed its name to Far West
Electric Energy Fund, L.P. and changed its domicile to Delaware.
Messrs. Melchior and Quinn resigned as individual general partners
of the Fund effective January 1, 1995, leaving FWC as the sole
general partner.
Since 1986, the Fund has realized significant revenues from its
business of selling power generated by its plants to public
utilities pursuant to the Public Utility Regulatory Policies Act
("PURPA"), and in accordance with regulations of the Federal Energy
Regulatory Commission ("FERC") and of the state public utility
commissions of Idaho and Nevada.
No cash distributions to Limited Partners have been made during the
past two years. The sole income producing asset of the Fund, a
thermal-hydroelectric plant located near Reno, Nevada, (the "Power
Plant") has been unable to operate profitably.
The following table presents certain historical data respecting the
Fund's limited partnership Units as well as comparative equivalent
data after giving effect to the sale.
Per Unit Fund Data (in Dollars)
For the Year Ended December 31, 1995
Item Historical Pro Forma (1)
Book value per Unit 499 33
Cash Dividends 0 33
Income (loss) from
continuing operations 27 0
(1) Pro Forma information is presented as if the sale had taken
place at the beginning of the period for which information is
presented.
No transactions outside the ordinary course of business have
occurred between the Fund and any affiliate thereof since the
commencement of the Fund's second full fiscal year preceding the
date of this Schedule. No contacts, negotiations, or transactions
outside the ordinary course of business have occurred between the
Fund and any affiliate thereof since the commencement of the Fund's
second full fiscal year preceding the date of this Schedule. Except
as described in this Consent Solicitation, no material contacts or
negotiations have occurred since the commencement of the Fund's
second full fiscal year preceding the date of this Schedule between
(i) the Fund or any of its affiliates, or (ii) between the Fund (or
any affiliate) and any person who is not affiliated with the Fund.
Management
The Fund has no employees, but relies on the staff of FWC and
Messrs. Melchoir, Quinn, and Burch, who are officers, directors,
and shareholders of FWC and SBG.
The following individuals are the principal officers and directors,
and sole shareholders of FWC. Each is a full-time employee of FWC.
Ronald Burch, President and Director of FWC, age 44,
joined the company in July, 1991, having been previously
employed by Calpine Corporation, a California
corporation, as a Business Development Manager. He was
named president of FWC on March 19, 1996.
Alan O. Melchior, Chief Financial Officer and Director of
FWC, age 48. Mr. Melchior was a founder of FWC, which was
organized in May, 1983. He has been its President from
its inception until March 19, 1996. From December, 1981
to May, 1983, he was an account executive with Westlake
Securities, Inc., of Angora Hills, California. Mr.
Melchior received a B.S. in business from Brigham Young
University in 1971 and an M.B.A. degree from the
University of Utah in 1974.
Thomas A. Quinn, Vice President, General Counsel and
Director of FWC, age 60. Mr. Quinn was also a founder of
FWC. Since February, 1985, Mr. Quinn has been serving
full-time in his capacities with FWC. From 1968 to
February, 1985, he was engaged in the private practice of
law in Salt Lake City, Utah. He received a B.S. degree in
political science from Brigham Young University in 1959,
and a Juris Doctor, with honors, from George Washington
University Law School in 1963.
Messrs. Melchior and Quinn each own 40% of FWC, 37.5% of 1-A
Enterprises (owner of SB-1A), and 37.5% of SB Geo, Inc. (operator
of SB-1 and SB-1A). Ronald E. Burch owns 20% of FWC and 15% of SBG.
Messrs. Burch, Quinn, and Melchior The remaining 10% interest in
SBG is owned by Mr. Eric Call, SBG's operations supervisor. An
additional 4% of SBG ownership will be granted to Mr. Bill Price,
another supervisor, over a 4-year period, with the interest of the
other owners to be proportionately decreased.
The FWC board of directors consists of Messrs. Burch, Quinn, and
Melchior, as well as John S. Bo, Robert K. Mouritsen, Kenneth R.
Beck, and Richard V. Francis. The latter four persons have been
employed as officers of a FWC affiliate, FWC Properties, Inc.,
since its formation in 1994. Before their employment by FWC
Properties, Inc., Messrs. Bo, Mouritsen, and Francis were employed
by FWC. Before joining FWC properties, Inc. in 1994, Mr. Beck was
employed by Innkeepers, International, Inc. as CFO (1993) and
Transcontinental Properties, Inc. as executive vice president
(1986-92).
None of these individuals, the Fund, or FWC, has been convicted of
any criminal action during the past 5 years. Details of legal
proceedings are reported the attached Form 10-KSB and the section
herein entitled "The Fund-Legal Proceedings." The Fund and FWC are
entities organized in the United States; FWC's officers and
directors are United States Citizens.
The principal asset of the Fund is the single electric power
generation plant described below. The Fund previously owned a small
hydroelectric plant near Twin Falls, Idaho, known as the Crystal
Springs Hydroelectric Plant which was sold in March, 1995.
Interest of FWC in the Fund
Under the terms of the Fund's Limited Partnership Agreement, the
total Fund interest is allocated 1% to the general partner and 99%
to the limited partners. The limited partnership interest is
divided into Units (10, 306 outstanding as of March 1, 1996). In
addition to its FWC, the general partner of the Fund, is granted a
1% general partner's interest in net income of the Fund, FWC owns
plus 530 Fund Units (representing 5.14% of the Units). FWC thus
owns a total of 6.09% of the partnership interest calculated as
follow: 1% of the total interest as general partner, and 5.09% of
the total interest as a limited partner (5.14% times 99%).
The Steamboat Springs Thermal-hydroelectric Plant
The Steamboat Springs Plant ("SB-1") is described in "The Proposed
Transaction-Purchase of Assets" above. The present operating
agreement provides for SB Geo, Inc. ("SBG"), an affiliate of FWC,
to operate and maintain the SB-1 plant for a period of 10 years.
Under the terms of its operating agreement, SBG operates the plant
on a non-profit basis (salaries and expenses only).
While this change of operators generally has brought increased
power production and lower operating costs, the Fund incurred
increased cost associated with equipment repairs that otherwise
would have been covered by the Ormat warranty.
In October 1991, the Fund assigned its 77% ownership interest in
SBG, and 1-A Enterprises assigned its 23% ownership in SBG, to
Messrs. Melchior and Quinn, who accepted the assignments and SBG's
liabilities. These individuals later assigned a 15% interest to Mr.
Burch (officer of SBG and FWC), a 10% interest to Mr. Call (SBG
plant supervisor), and a 4% interest (full vesting in 1999) to Mr.
Price (SBG supervisor). FWC and SBG are thus controlled by Messrs.
Melchior, Quinn, and Burch.
According to an independent valuation firm, SBG had no value as of
the transfer date due to its obligations and its cost basis
operating status. Consequently, no gain or loss was recognized as
a result of the assignment.
Fund Revenues from the 1-A Plant
The 1-A geothermal plant ("1-A") is located adjacent to the
Steamboat Springs Plant. 1-A consists of two separate modules,
utilizing binary rankine cycle turbines with a combined net output
of 1.6 megawatts.
1-A was originally a Steamboat Springs expansion project, but was
sold in 1988 to a general partnership entitled 1-A Enterprises
which is owned 75% by Alan O. Melchior and Thomas A. Quinn. Until
their resignation effective January 1, 1995, these gentlemen were
individual general partners of the Fund; they are currently
officers and shareholders of FWC.
Use of the geothermal resource by 1-A has no adverse effect on the
operation or earnings of SB-1.
In a Second Amendment to Geothermal Resources Lease, provision was
made to accommodate 1-A on the SB-1 lease. A Geothermal Resources
Sublease was entered into granting rights and defining terms and
conditions for the siting and operation of 1-A and setting forth a
method of calculating royalty payments to be made to the Fund. This
Sublease was Revised and Restated on October 9, 1989.
As consideration for the sale of 1-A rights to 1-A Enterprises, the
Fund received a royalty interest in the net operating income of
1-A. Such royalties equal 10% in 1988 through 1992, 15% in 1993
through 1998, 40% in 1999 through 2010, and 45% in 2011, and
thereafter.
The Fund is paid an amount equivalent to the net profit that would
be realized by the Fund if 1-A were bearing 150 kwh of parasitic
power load (power consumed by the plant itself).
The net profit equivalent is calculated as follows: 1,200,000 kwh
x the rate at which power is sold to Sierra Pacific Power Company
under the power purchase agreement applicable to 1-A, less any
royalties, note payments, or net revenue interest or other expenses
associated with or payable out of such additional revenues assuming
that 1-A produced an additional 1,200,000 kwh per annum.
The total royalty payments and pumping charges paid by 1-A to the
Fund were $95,000 in 1989, $94,000 in 1990, $115,000 in 1991,
$102,000 in 1992, $135,000 in 1993, $144,000 in 1994, and $144,000
in 1995.
As described in the Sales Agreement, SBE will also purchase the
SB-1A power plant, which currently pays pumping charges and
royalties to the Fund, as described above. These rights to
royalties and pumping charges are included in the assets being sold
by the Fund, and were included in calculating the value of the
assets being sold.
Long-term Debt
In January 1990, the Fund received the proceeds of an $8,000,000
non-recourse refinancing of SB-1 with Westinghouse Credit
Corporation ("WCC"). The WCC loan, which is secured by the
Fund's assets including the resource lease, plant and equipment and
related contract rights, bears interest at 11.5% per annum and must
be repaid over ten years in 40 quarterly payments of principal and
interest.
On October 23, 1992 WCC gave the Fund a notice of default with
regard to the long-term financing of the project. The default
occurred because-
The Fund allowed the debt reserve account to fall below
$1 million plus an additional $70,000 annually for 7
years (together with interest) as required by the terms
of the loan; and
The Ormat arbitration award exceeded $25,000, breaching
a loan requirement.
Since that date the parties have met in negotiations on several
occasions. There has been no resolution of the default, but
Westinghouse has taken no action.
Simultaneously with its January 17, 1990 loan to the Fund, WCC made
a $3 million non-recourse loan to 1-A on the same terms as the loan
made to the Fund, but secured by the assets associated with 1-A. Of
this amount, $400,000 has been reloaned by 1-A Enterprises to the
Fund on the same terms the Fund received from WCC.
As of January 2, 1996, the outstanding principal balance of the
Westinghouse loan is $4,346,848.
Fund Financial Position
Summary financial information for the Fund is presented in the
following table:
Selected Fund Financial Data: 1991-1995 (in dollars)
Item 1995 1994 1993 1992 1991
Revenues 2,674,000 2,879,000 3,784,000 3,443,000 3,530,000
Net Income
(loss) before
extraordinary
item 283,000 73,000 527,000(1,141,000) (437,000)
- --Per Unit 27 7 51 (110) (42)
Distributions
to LPs 0 0 0 0 0
Total Assets 13,370,000 15,320,000 15,677,000 16,090,000 17,469,000
Long-Term
Debt 725,000 230,000 268,000 673,000 12,181,000
The Westinghouse loan was reclassified from long-term to current
debt in 1992 as a result of the Fund's default in that year.
Fund Operations
In 1987 the Steamboat Springs Plant produced electric power and
generated revenues at approximately 75% of expected operating
levels. The production shortfall was primarily due to shutdowns
required to effect certain equipment changes and modifications, and
to operation of that plant at a lower level than expected.
FWC determined that to achieve the expected capacity and the
performance requirements specified in the plant's purchase
contract, the vendor/operator would have to install additional
equipment and make some modifications to existing equipment. These
corrections were made at no cost to the Fund (although the
down-time for modifications and testing impacted revenues). The
modifications and repairs were completed in the summer of 1988, and
the Fund was informed by Ormat that the plant was performing at a
level that would produce 42,000,000 kwh per year.
The Steamboat Springs Plant increased production of electric power
from 32,797,000 kwh in 1987 to 36,142,000 kwh in 1988. Ormat, the
vendor/operator of the plant, installed additional equipment and
made equipment modifications which increased the plant's capacity
and performance. These additions and modifications were made at no
additional cost to the Fund.
In 1989 the Steamboat Springs Plant produced $2,564,000 in gross
revenues which was $448,000 and $576,000 less than would have been
received under the Ormat projected 42,000,000 kwh and 43,800,000
kwh agreed to under the purchase agreement per year respectively.
After reviewing plant performance with independent consultants, FWC
concluded that the deficiencies in plant performance were
attributable to both poor operating practices employed by Ormat,
the former operator, and certain problems in plant design.
Consequently, FWC notified Ormat that the Fund believed that Ormat
was in default under both its Operating and Purchase Agreements
with the Fund. FWC replaced Ormat as plant operator on October 11,
1990, and sought redress for plant deficiencies under the
arbitration clause of the Purchase Agreement. Arbitration
proceedings began October 29, 1990.
The arbitration panel denied the bulk of the Fund's claims and
Ormat's counter claims. The Fund was awarded $175,000 for well
field problems, and Ormat was awarded $254,000 for unpaid operating
and warranty service, the payment of which had been withheld
pending the completion of the Arbitration. The parties have all
complied with the ruling of the Arbitrators, including payment of
all awards.
In 1990 the plant produced $2,765,000 in gross revenues which was
an increase over 1989's revenues, but about $247,000 and $376,000
less than would have been received under the projected 42,000,000
and 43,800,000 kwh per year respectively.
In 1991 the plant produced $2,791,000 in gross revenues which was
$220,000 and $349,000 less than would have been received under the
projected 42,000,000 and 43,800,000 kwh per year respectively.
In 1992 the plant produced about $2,360,000 in gross revenues which
was $651,400 and $780,460 less than would have been received under
the projected 42,000,000 and 43,800,000 kwh per year respectively.
The poor performance in 1992 was directly due to excessive
equipment failures and breakdowns which resulted in plant downtime.
In 1993 the plant produced $2,625,000 in gross revenues which was
an increase over 1992's revenues but about $386,391 and $515,451
less than would have been received under the projected 42,000,000
and 43,800,000 kwh per year respectively.
In 1994 the plant produced $2,564,000 in gross revenues, a decrease
of $446,906 from the prior year and $575,966 less than projected.
In 1995 production was $2,580,000, an increase of $431,060 over the
prior year, but $560,120 less than projected.
The following table shows the annual production for SB-1; it does
not include SB-1A production:
SB-1 Output
Year Kwh's Produced Gross Revenues ($) % Change from
Prior Year
1987 32,797,000 2,352,000
1988 36,142,000 2,591,000 +10.16%
1989 35,760,000 2,564,000 -1.04%
1990 38,563,000 2,765,000 +7.84%
1991 38,926,000 2,791,000 +.94%
1992 32,915,000 2,360,000 -15.44%
1993 36,611,000 2,625,000 +11.23%
1994 35,988,000 2,564,000 -2.32%
1995 35,988,000 2,580,000 +0.62%
Compensation of the General Partner
Pursuant to the Amended and Restated Agreement of Limited
Partnership of Far West Electric Energy Fund, L.P., as
consideration for providing management services to the Fund, FWC is
entitled to the following compensation:
A one percent (1%) interest in the profits, losses, and
net income of the Fund; and
Units equal to five percent (5%) of the Units
outstanding, to be increased proportionately if and as
additional Units are issued in the future (as a result of
purchase of Units, FWC currently owns 530 Units
representing 5.14% of the total Units);
If and when Units are listed for public trading, or the
Limited Partners have received an amount equal to their
capital contributions to the Fund (reduced by the amount
of tax credits allocated to the Limited Partners)
together with a sum equal to a cumulative annual return
of 8%, FWC shall receive additional Units equal to ten
percent (10%) of the Units outstanding, and a total of
15% of any new Units issued.
Reasonable compensation in connection with the purchase
of projects from FWC or its affiliates, and provision of
services to the Fund which are normally provided by
outside consultants, provided any such payments are
competitive with charges for similar projects or
services. (No such payments were earned by or made to FWC
in fiscal 1995.)
Reimbursement on a monthly basis for all direct expenses
it incurs on behalf of the Fund and for that portion of
its administrative expenses allocable to the Fund.
Moneys Owed To FWC
Because SB-1 output has been below anticipated levels, and because
of higher than anticipated operating expenses, FWC has deferred
compensation due to it from the Fund, and has advanced moneys to
the Fund, as shown on the following table:
Fund Obligations to FWC (in dollars)
Year of Operation Unpaid Fees Earned by
FWC FWC Loans to the Fund
1988 -- --
1989 -- --
1990 42,000 16,000
1991 173,000 385,000
1992 170,000 350,000
1993 70,000 171,000
1994 118,000 83,000
1995 98,000 112,000
Total 671,000 1,117,000
The FWC loans to the Fund are unsecured, accrue interest at 13%,
and are payable upon demand.
Legal Proceedings
On January 29, 1993, a permanent injunction was entered by the
United States District Court, District of Utah, Central Division,
enjoining the Fund, FWC, and Principal Melchior (previously a
general partner of the Fund until his resignation effective January
1, 1995) from violating Sections 5(a), (b), and (c), and Sections
17(a)(2) and (3), of the Securities Act of 1933. No monetary awards
were granted by the Court. Details of this proceeding were reported
to Unit holders in the December 31, 1992 Form 10-K.
An action filed against the Fund, FWC, Principal Melchior and
others by the Arizona Corporation Commission was settled on May 19,
1993, without any expense to the Fund. The defendants were ordered
to cease and desist from offering or selling securities in Arizona
absent appropriate registration or an available exemption, or
making any material misrepresentations or omissions in connection
with offers or sales of securities. FWC, Principal Melchior, and
others were ordered to pay $86,690 in restitution to Arizona
investors in Little Wood Hydroelectric Ltd. Details of this
proceeding were reported to Unit holders in the December 31, 1993
Form 10-K.
FEDERAL INCOME TAX CONSEQUENCES
This description of certain federal income tax consequences of the
proposed sale of the assets of the Fund is included solely for the
information of the Limited Partners. No information is provided
with respect to the consequences of any applicable state, local or
foreign tax laws.
Applicability of the minimum tax and other tax consequences of the
proposed sale to a Limited Partner may depend upon the individual
situation of the Partner. Therefore, each Partner is urged to
consult his or her own tax adviser concerning the specific tax
consequences of the proposed sale to such Partner.
General Considerations
The following summary of the major income tax consequences of the
proposed sale is based, with respect to U.S. tax consequences, on
the pertinent provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the applicable regulations promulgated by the
Treasury Department under the Code (the "Regulations"), judicial
and administrative interpretations of the Code and Regulations.
Each Partner of the Fund should be aware that the Code, the
Regulations and interpretations are subject to change and that such
changes may be given retroactive effect.
The Revenue Reconciliation Act of 1990 (the "1990 Act") changes the
tax rates imposed upon individuals commencing January 1, 1991. The
new tax law imposes a 36% marginal tax rate plus a surtax resulting
in a 39.6% rate rather than a generally imposed 28% marginal tax
bracket on individual taxpayers, increases the alternative minimum
tax rate to 24% (rather than the previous rate of 21%), and phases
out personal exemptions and itemized deductions for persons with
substantial income.
The 1990 Act also limits the tax rate on long-term capital gains to
28% The 1990 Act itself does not have an effect upon the opinion of
the Tax Advisor items (a) through (g) set forth below, but owners
of limited partnership Units should be aware that the changes set
forth in the 1990 Act could have an effect on the rates imposed on
the taxpayer.
The Partners in the Fund are variously; corporations, individuals,
partnerships and nominees. Each type of entity may be taxed at
different rates or be taxed based on different sections of the Code
or Regulations. It is not feasible to comment on all of the federal
income tax consequences of the proposed sale.
This summary has been prepared based on the opinion of the Fund's
tax advisor, the Code, and the Regulations as now in effect and the
current judicial and administrative interpretations thereof.
There can be no assurance that the Internal Revenue Service will
agree with the interpretations of the Code and the Regulations set
forth below. The following summary does not include any discussion
with respect to the consequences of the proposed sale under state
and local taxation laws and regulations.
Opinion of Tax Advisor
The Tax Advisor to the Fund, Robison, Hill & Co. (a professional
corporation), has issued an opinion addressing certain tax
consequences of the proposed sale of the assets of the Fund. A
complete copy of the Tax Advisor's opinion is included in the
exhibits to this proxy statement. The opinion is to the effect that
if the sale occurs as set forth in the Purchase and Sale Agreement
and as described herein, it is more likely than not:
(a) The proposed sale will result in dissolution of the
partnership under the Certificate and Agreement of
Limited Partnership of Far West Hydroelectric Fund L.P.
(b) Any cash received by the Limited Partners of the Fund
will be treated as having been received in redemption of
the limited partner Units so cashed out, and will result
in taxable gain or loss. The amount of such gain or loss
will be the difference between the cash received and the
basis of the Units surrendered in exchange thereof.
(c) The partnership is not a "generic" tax shelter under
the two-pronged test and loss if any will be allowed.
(d) The $100,000 cancellation of indebtedness from First
Security Bank will result in taxable income and increase
earnings and profits to the Fund.
(e) The debt to FWC will be transferred to equity in the
new entity and is not forgiveness of debt and should not
be recognized as a distribution of money by the
partnership to the Limited Partners.
(f) Partners that did not receive tax benefits from the
energy tax credit are entitled to 50% of the basis
reduction as a credit on their income tax return.
(g) Because the Fund records income on an accrual basis
for tax purposes there will not be any unrealized
receivables or appreciated inventory sold that should be
recognized as ordinary income.
An opinion of a tax practitioner is not binding upon the IRS or the
Courts. It is uncertain whether the IRS would issue a favorable
ruling on the Proposed Sale. An opinion of Tax Advisors does not
provide the same degree of assurance with respect to the
consequences of a transaction as would a private letter ruling from
the IRS.
The Tax Advisor's opinion is subject to a number of assumptions and
qualifications that are critical to the opinion and is based on
certain factual assumptions, and upon certain representations and
assurances made by FWC, the Fund, USE and SBE. If such factual
information or the representations, warranties, or assumptions are
not true when made or subsequently change, the Tax Advisor's
opinion may be inapplicable. Robison, Hill & Co. has expressed no
opinion concerning the consequences of the proposed sale on the
Limited Partners under applicable state or local income tax laws.
Calculation of Individual Partner Per Unit Cost Basis
Based on the information provided from the Schedule K of Form 1065
as was filed by the Fund, a per-Unit basis of original issued Units
($1,000 per Unit) would be as indicated on the table below.
Tax Consequences of Fund Ownership Per Unit (in dollars)
Year of Cash Schedule K Cumulative Cumulative
Operation Distribution Income (Loss) Suspended Basis
Loss
Initial
purchase
of Unit 1,000
1985 (business
credit of $279) (28) 972
1986 (business
credit of $20) (386) 604
1987 31 (374) 199
1988 22 (420) (243)
1989 (366) (609)
1990 (297) (906)
1991 (6) (912)
1992 325 (587)
1993 125 (462)
1994 58 (404)
1995 158 (246)
1996 (Projected
without sale of
SB-1) 166 (80)
1996 (Projected
with sale of
SB-1) 33 743 630
The preceding table assumes that the Limited Partner is an
individual and was unable to deduct some of the losses at the times
they were incurred either because of the basis limitations or the
passive loss limitations.
In summary, assuming that the partner was able to utilize the
Business credit, the partner should have-
Received a tax benefit of $299 for the Business credit
Received non-taxable cash distributions of $86
If the proposed transaction is approved and completed, this Limited
Partner's Form K-1 will report ordinary income of approximately
$33.
Each Limited Partner's situation may vary from the above
assumptions, accordingly, partners are encouraged to consult their
own tax advisers.
Reduction of Basis
The Fund elected to reduce basis of property for which the energy
credit was claimed by 50% of the energy credit (Code Sec. 50). The
reduced basis was used in determining depreciation and gain on the
disposition of property.
In the event that a partner did not realize a tax benefit from the
investment credit for which a downward basis adjustment was made,
a deduction is allowed under Code Sec. 196 to the taxpayer for 50%
of the unused energy credit attributable to the basis reduction.
The Code also imposes an alternative minimum tax and excise taxes
on certain types of transactions. Applicability of such taxes is
usually controlled, in whole or part, by other matters unrelated to
the Proposed Sale or by unique characteristics of the particular
taxpayer.
Accordingly, partners are encouraged to consult their tax advisers
if they are or might be subject to such taxes.
Taxation of Partnerships in General
The partnership is not subject to federal income tax, it is an
entity which income or loss "flows through" to partners who are
taxable in their individual capacities on their distributive shares
of partnership taxable income. However, the partnership is a tax
reporting entity that must make an annual return of partnership
income or loss.
Each partner is required to treat partnership items on its return
in a manner consistent with the treatment of such items on the
partnership return and may be penalized for intentional disregard
of the consistency requirement (Code Sec. 6222).
The consistency requirement may be waived if the partner files a
statement (Form 8082) identifying the inconsistency or shows that
it resulted from an incorrect schedule furnished by the
partnership.
A partner is generally not taxed on distribution of cash or
property received from the partnership, except to the extent that
any money distributed exceeds the partner's adjusted basis in its
partnership interest immediately before the distribution (Code
Section 706(a)).
Each partner generally must account for its distributive share of
partnership taxable income in computing its income tax; thus, the
basis in its partnership interest is increased by its distributive
share of partnership taxable income.
It is this basis increase that generally allows distributions of
taxable income to be made without recognition of gain, since the
basis increase generally offsets corresponding decreases in basis
that result from such distributions (Code Secs. 705 and 731(a)).
Deductibility of Losses
The benefit of the net operating loss deduction is not allowed to
the partnership, but only to the partners. For purposes of
determining its individual net operating loss, each partner takes
into account its distributive share of income, gain, losses,
deductions, or credits of the partnership as if each item were
realized directly from the source from which realized by the
partnership, or incurred in the same manner as incurred by the
partnership (Reg. 1.702-2).
Limitations on Deductibility of Losses
There are three commonly encountered limitations on a partner's
ability to take into account its share of a partnership's loss in
computing its individual tax liability. A partner is entitled to
deduct its share of the partnership's loss only after satisfying
all three of these rules.
Since the adoption of the 1954 Code through the present, the
partnership taxation rules have limited a partner's deductible
share of losses to its basis in its partnership interest.
Since 1976, the at-risk rules have limited a partner's deduction
for its share of losses to the amount it is considered to be
economically at-risk in the venture.
Beginning with the effective date of the Tax reform Act of 1986, if
a partner's share of the partnership's losses are considered
"passive losses," the partner must combine them with its passive
losses from other sources and is allowed to deduct the total only
to the extent of its passive income from all sources.
Losses that are disallowed due to any of these three limitations
are deductible in the year of the termination of a partnership
interest.
Capital Gain or Loss
A decrease in a partner's share of partnership liabilities is
treated as a distribution of money by the partnership, which
decreases the distributee partner's basis in its partnership
interest (but not below zero) (Code Secs. 733 and 752(b)). When a
partner's basis has been reduced to zero, such "deemed
distributions" can result in the recognition of gain.
Partners' shares of partnership liabilities (and corresponding
allocations of basis) depend upon whether the liability is
"recourse" or "nonrecourse." In addition, separate rules apply in
the case of nonrecourse debts of the partnership if a partner is
the lender or has guaranteed repayment of the debt.
A limited partner cannot be allocated recourse liabilities in
excess of its capital contribution unless it has agreed to restore
any deficit in its capital account. Article VIII of the partnership
agreement states that the "Units are not subject to assessment."
Nonrecourse liabilities are those for which no partner bears the
economic risk of loss.
Cancellation of Indebtedness
Cancellation of indebtedness usually results in taxable income and
increases earnings and profits. However, where the creditor's
adjusted basis in the debt is at least equal to the principal
amount of the debt forgiven, the forgiveness of debt by a
creditor-shareholder may be a capital contribution that does not
increase earnings and profits.
Where the amount of cancellation of indebtedness (COD) income
allocated to the partner is the same as his share of the liability
for the canceled debt, as in the Proposed Transaction, the partner
will recognize no gain, because the COD income will increase the
partner's basis sufficiently to cover the deemed distribution of
money to that partner.
But, in the absence of evidence indicating an intent to make a
capital contribution, the cancellation of indebtedness increases
earnings and profits (Rev. Rul. 58-546).
The Fund's tax advisor is of the opinion that the Limited Partners
will suffer no adverse tax consequences as a result of the Proposed
Transaction.
Termination of the Fund
The tax year of the partnership closes if there has been a
termination of the partnership. Article XVII (ii) of the
Certificate and Agreement of Limited Partnership states that the
sale of substantially all the assets of the Fund shall work an
immediate dissolution of the Fund.
The partnership agreement of the Fund states that the "holders of
the Units shall continue to share profits and or losses during the
period of liquidation in the same proportion as before the
dissolution.
Upon the completion of the liquidation of the partnership, the
partnership must file a short-period return for the resulting short
tax year. Code Section 708 provides that termination occurs only if
the business activities of the partnership are no longer carried on
by any of the partners or that at least one-half of the total
interest in partnership capital and profits is sold within a
12-month period.
Such sale or exchange includes a sale or exchange to another member
of the partnership and the exchange of the interest in one
partnership for an interest in another partnership (or limited
liability company).
A partnership is considered a continuing entity and observes its
regular tax year unless it is terminated under the rules above,
accordingly, the dissolution or liquidation of the partnership
under state law does not necessarily cause a partnership's tax year
to close (Reg. 1.706-1(c)).
Effect of Liquidation
In the case of a liquidating partnership, a relatively simple set
of rules governs the distributee's gain, loss, and basis in
distributed assets, if there are no disproportionate distributions
of unrealized receivables and substantially appreciated inventory
items. There are no tax consequences to the partnership.
If unrealized receivables and substantially appreciated inventory
are not distributed, a liquidation results in gain only to the
extent that a partner receives money in excess of its partnership
interest's adjusted basis (Code Sec. 731(a)).
Liquidating distributions always involve a complete termination of
liability for any share of partnership debt because the partnership
ceases to exist. The termination of partnership requires that
decreases in the partner's share of partnership liabilities be
netted with any liabilities the partner takes over from the
partnership (Reg. 1.752-1(f)).
Net debt relief is treated as additional money received (Code Sec.
752 (b) and Reg. 1.752-1(f)). If a partner takes over only its pro
rata share of the partnership debt, there will be no deemed cash
receipt or payment.
A loss may be recognized when only one or more of three types of
assets, and no other property, are distributed in the liquidation.
If the liquidated partner receives only cash, inventory, and/or
unrealized receivables and their bases to the partnership are less
than its basis in its partnership interest, it is allowed to deduct
the difference as a capital loss (Code Sec. 731(a)(2)).
Partner's Cost Basis
A partner's basis in its partnership interest must be adjusted
periodically to ensure that the partnership remains a conduit for
tax purposes. Income and deductions are to be taxed only once (Code
Sec. 701).
Tax-exempt income, nondeductible expenditures, and distributions
made from previously taxed income and contributions are not to be
taken into account in computing tax liability at all.
The transferor partner's adjusted basis in its partnership interest
at the time of the transfer is the sum of its basis on the day it
acquired its interest plus adjustments reflecting operations during
its holding period.
The calculation of a partner's initial basis varies according to
whether it acquired its interest through a contribution to the
partnership or by transfer from another partner (Code Sec. 742 and
Reg.1.742-1).
The original basis of a partner's interest is the amount of money
and the adjusted basis of property contributed to a partnership
when the partnership interest is acquired (Code Secs. 705(a) and
722). This basis is increased by any further capital contributions
and by the sum of the partner's distributive share of taxable
income of the partnership, tax-exempt receipts of the partnership,
and The excess of depletion deductions over basis of the depletable
property. Code Sec. 705(a)(1) and Reg. 1.705-1(a)(2).
The basis is decreased (but not below zero) by distributions from
the partnership as provided under Code Sec. 733, and by the sum of
the partner's distributive share of:
Fund losses, including capital losses (Code Sec.
705(a)(2)(A)),
Nondeductible partnership expenditures which are not
capital expenditures (Code Sec. 705(a)(2) and Reg.
1.705-1(a)(3)),
The amount of the partner's deduction for depletion for
partnership oil and gas property to the extent the
deduction does not exceed the partner's share of the
adjusted basis of the property (Code Sec. 705(a)(3) and
Reg. 1.705-1(a)(4), and
Loss from the disposition by the partnership of a
domestic oil or gas property (Reg. 1.705-1(a)(5)).
In all cases when downward adjustments to basis are required, the
statute expressly provides that basis is not to be reduced below
zero (Code Sec. 705(b)). A basis in a partnership interest never
has a value below zero. While a negative capital account is very
common, a negative basis is impossible.
The preceding is intended to be only a summary of income tax
consequences relating to the Proposed Sale.
Limited Partners of the Fund should consult their own tax advisors
with respect to issues not covered by the opinion or regarding
their own particular circumstances.
OPINION OF FINANCIAL ADVISOR
Far West Capital, Inc. retained Corporate Capital Consultants, Inc.
("CCC") as financial advisor to the Far West Electric Energy Fund,
L.P. in connection with determining whether the offer by U.S.
Envirosystems, Inc. for the SB-1 plant and certain other assets of
the Fund liabilities, was fair, from a financial point of view, to
the limited partners of the Fund.
In its capacity as an investment banking firm, CCC is regularly
engaged in the valuation of business and their securities in
connection with mergers and acquisitions and other corporate
transactions. CCC is a New York City-based investment banking firm
organized in 1974 which specializes in providing corporate
valuations, often in conjunction with pending purchase offers. It
has issued many "fairness opinions" to public companies and others.
This firm was recommended to the Fund by Mr. Theodore Rosen,
Chairman of the Board of U.S. Envirosystems, Inc. There is no
material relationship between CCC and the Fund or its affiliates,
or, to the best of FWC's knowledge, between CCC and USE.
The amount of consideration to be paid was determined by U.S.
Envirosystems, Inc., after discussions with FWC and conducting a
full examination of the Fund and the Power Plants. CCC did not take
part in the discussions between FWC and USE or otherwise make any
recommendations.
The procedures followed by CCC are set forth in detail in its
opinion (see Exhibit 3 to the Consent Solicitation-"Fairness
Opinion," which is incorporated herein by reference). A copy of
this opinion is appended to this Consent Solicitation.
No limitations were imposed by FWC with respect to the
investigations made or procedures followed by CCC in rendering its
opinion. CCC has not in the past provided investment banking
services to either the Fund or FWC and does not have any equity
interest in either company.
Investigation By CCC
In connection with its opinion CCC reviewed, among other things:
A draft of the Purchase and Sale Agreement concerning the
SB-1 power plant, with attendant documents;
Annual Reports on Form 10-K of the Fund for the five
years ended December 31, 1994, as well as tax returns for
the same period;
Certain Quarterly Reports on Form 10-Q of the Fund;
Certain Power Plant revenue and expense information
prepared by the management of the Fund;
Certain internal financial analyses and forecasts for the
assets if operated by SBE, as prepared by the management
of USE;
The Geothermal Resources Lease, as amended between Sierra
Pacific Power Company and Geothermal Development
Associates;
The Agreement for the Purchase and Sale of Electricity,
as amended, between Sierra and Geothermal Development
Associates;
The Operating Agreement between the Fund, 1-A
Enterprises, and SB Geo, Inc.;
The Term Loan Agreement among Westinghouse Credit
Corporation and the Fund, as well as the Term Loan
Agreement among WCC and 1-A, along with various Loan
Modification Agreements pertaining thereto;
The Revised and Restated Geothermal Resources Sublease
between the Fund and FWC;
The Long-Term Agreement for Purchase and Sale of Energy
between Sierra and FWC;
The Purchase Agreement between Bonneville Pacific
Corporation and FWC dated September, 1985;
The Certificate of Limited Partnership and the
Partnership Agreement of the Fund; and
Various documents pertaining to a loan from the First
Security Bank of Utah, N.A., including the Third
Extension and Modification Agreement pertaining thereto.
In addition, CCC held discussions with members of the senior
management of the Fund and USE regarding the past and current
business operations, financial condition, and future prospects of
the SB-1 plant and the Fund. CCC also held discussions with WCC and
Sierra.
Management of CCC also visited the SB-1 facility and met with
operating and management personnel at the site. Additionally, CCC
reviewed a two-year old appraisal of SB-1, a draft to the proposed
Form SB-2 prepared by USE, certain internal financial information
prepared by FWC, and information regarding certain other companies
in the independent power production industry specifically and in
other industries generally, and considered such other information,
held such other discussions, and performed such other studies and
analyses as it considered appropriate.
CCC relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed
by it for purposes of its opinion.
In addition, CCC did not make an independent valuation or appraisal
of the assets and liabilities of the Fund, FWC, or the SB-1
facility and, aside from the two-year old appraisal mentioned
above, was not furnished with any such evaluation or appraisal.
Terms of Engagement
The terms of the engagement of CCC by FWC are set forth in a letter
agreement dated September 15, 1995, between CCC and FWC (the
"Engagement Letter"). Pursuant to the Engagement Letter, FWC has
agreed to pay CCC a fee based on CCC's hourly rate of $300, with a
minimum fee of $10,000. It is anticipated that CCC's total fees
will aggregate approximately $43,000. This fee will be paid by the
Fund; if the Proposed Transaction is completed, the fee will be
paid from the proceeds of the Power Plant sale.
FWC has also agreed to reimburse CCC for its out-of-pocket
expenses, and to indemnify CCC against certain liabilities in
connection with its engagement, including certain liabilities under
the federal securities laws.
Financial Analyses Used
The following is a summary of the material financial analyses
utilized by CCC in connection with providing its opinion to FWC.
Stock Trading Analysis. Owing to the fact that the limited
partnership interests of the Fund have no public market and have
had virtually no trading activity since inception of the Fund ten
years ago, CCC considered this approach to be inappropriate.
Selected Company Analysis. CCC examined certain financial,
operating, and stock market information for selected companies in
the independent power production industry, specifically, the AES
Corporation, Destec Energy, Inc., KENETECH Corporation, and Sithe
Energies, Inc.
CCC noted that all of these companies have revenues of at least
$100 million and are considerably diversified. By contrast, the
Fund's single SB-1 facility has been generating revenues of under
$3 million and has been incurring losses before extraordinary items
steadily during the current year and in three of the last five
fiscal years.
Consequently, CCC concluded that a selected company analysis, under
these circumstances, was not a meaningful approach to employ,
except for terminal values in the discounted cash flow discussed
below.
Selected Transactions Analysis. CCC reviewed the recent acquisition
of Magna Power Company by California Energy Company, Inc. Owing to
the enormous size of both companies and their substantial
diversification, as well as the fact that this transaction was
accomplished partly through the issuance of stock by the acquirer,
CCC concluded that this analysis did not provide any reliable
indication of value of the SB-1 facility, and, accordingly, CCC did
not rely on this approach. CCC is not aware of any other similar
recent transactions.
Replacement Cost Analysis. CCC took into account estimates from
various industry sources regarding the replacement cost for
geothermal plants, with new plants generally valued at
approximately $2,000 per kilowatt.
This would imply a value of $7.5 million for a new plant with the
power-generation aspects of SB-1. However, CCC noted that the SB-1
plant is ten years old and subject to market conditions governing
the sale of power, which sharply limit the profitability on
investment in the facility. Therefore, CCC considered this approach
to have little or no probative value for purposes of this
valuation.
Appraisal of the SB-1 Plant by Ronald P. Baldwin Dated September
20, 1993. At the time of this appraisal, the contract price for the
sale of power to Sierra had just over three years to run. At a
price of 7.17 cents per kwh, the plant was covering its mortgage
payment obligation by accruing and deferring substantial amounts of
other interest and general partner obligations. The Baldwin
appraisal concluded that the plant's gross value of $5,000,000 was
offset by $5,000,000 in debt, for a net value of zero.
There was a possibility that, at the expiration of the contract,
market forces might permit a renegotiated price with Sierra which
would allow a reasonable operating cash flow which would continue
to service the mortgage, particularly if the mortgage lender would
renegotiate the loan terms. But even with that optimistic chain of
events, the appraiser determined that SB-1 had a $5 million value
against an approximately $5 million mortgage. Consequently, he
opined that there was effectively no equity in the plant.
Mr. Baldwin, of Los Angeles, California, was selected by FWC to
appraise the Power Plant because of his extensive experience in the
geothermal industry. He has had no material relationship with the
Fund or FWC. No limitations were placed on his investigation, nor
were any special instructions issued to him. As stated in his
appraisal, Mr. Baldwin visited the project site, met with the
responsible officers of FWC, and reviewed Fund records. The
appraisal relies on a cash flow analysis; after noting that the
power sales rate will decline in December, 1996, he concluded that
plant operations could not continue beyond that date unless somehow
plant efficiency were significantly improved, royalty reductions
made, or the power sales rate remained constant. Concluding that
none of these possibilities was realistic, he determined that the
plant had no value in excess of its liabilities.
That appraisal has not been updated. While CCC considers that
appraisal to have some credibility at the time, since it was
prepared by a person with considerable background in the geothermal
industry, the market for such power has become more competitive.
It is now highly likely that at the time the ten-year power
contract must be repriced at short-term avoided cost (January 1,
1997), both market and short-term avoided cost will be well below
break-even after debt service. A renegotiation of debt service also
seems unlikely. Thus, CCC concludes that the Baldwin appraisal is
optimistic in today's environment and with tomorrow's prospects.
Discounted Cash Flow Analysis. The change in selling price to
Sierra that is likely to occur requires an evaluation of the plant
based on what it will receive in 1996 and over the ten-year life of
the contract that starts January 1, 1997 compared to its operating
costs and debt service. The net cash flow after debt service should
then be discounted to present value at rates that reflect the risk,
and a terminal value should be determined at the end of the year
2006 based on a multiple of projected net cash flows.
CCC's discounted cash flow analysis was based upon estimates of
financial performance as prepared by FWC, but adjusted by CCC based
on due diligence conducted by CCC on the plant, its power market,
and its secured lender. CCC ran various projections of prices per
kwh, from 2.58 cents to 4.2 cents, with expenses at their current
level, discounted to the present.
No change in working capital and no capital expenditures were
assumed. Debt obligations were calculated at their present
projected levels according to the loan agreement, and also at
levels that assumed a voluntary reduction in interest and principal
as well as a revised long-term payout level.
The reduction in principal was assumed to be on the same basis as
currently being negotiated by USE to pay off the lender entirely.
It should be noted, however, that the lender had advised CCC that
it will not consider such a reduction and revision by the Fund
without a total payoff. The Fund has no independent means of
accomplishing this restructuring.
These forecasts, even in their most optimistic form, were
discounted at rates of 10% to 12% and 14%. The projected terminal
value was based upon a multiple of 10 times net cash flow in 2006,
discounted back at the above rates. The discount rates and terminal
value multiple used by CCC in its analyses were based upon its own
judgment as to required rates for the risk involved, and a discount
from average multiples of the group of power companies described
above.
CCC made a number of adjustments to Far West Capital's SB 1
projections. CCC used two different projections of revenues to
reflect the average gross kilowatt hours produced by SB-1 from
1987-1994, as well as a high salable kilowatt hours that assumed
that generator overhauls are able to increase output just over 5%.
The lowest energy rate used by FWC (2.8 cents or less /kwh) was
reduced to the rate estimated by CCC that would be actually paid by
the buyer starting January 1, 1997 (2.587 cents). CCC also used the
higher rate of 4.2 cents used by FWC in alternative iterations for
each scenario.
Operating expenses were modified from FWC's forecast to reflect the
higher of the Fund's projected operating and maintenance expenses
for 1997 and the annualization of the latest 6-month maintenance
expenses per the June 30, 1995 Form 10-QSB. From 1997 forward,
various expense items were increased annually from 1% to 4% to
account for inflation. Some items were lower than FWC's forecast.
The results do not vary greatly from FWC's forecast. Lease
royalties to Sierra Pacific Power which were used by CCC were
provided by FWC subsequent to the preparation of its forecast.
General & Administrative expenses were increased 3% by CCC to
account for inflation, a slightly lower rate than the one used by
FWC.
Debt service was modified to reflect different scenarios as
projected by CCC - the current debt service, a renegotiated debt
service extending the term to 10 years, and a reduction in
principal balance to reflect USE's discussions with Westinghouse.
The Net Royalty Payable changes from FWC as the forecasts change -
this is a function of the royalty agreements.
As a further check on its results, CCC computed the sales price of
power per kwh required to reach a value of $1,250,000 (the price
offered for purchase of SB-1 and associated assets) on a discounted
cash flow basis. This was determined to be 4.1 to 4.3 cents per kwh
for the most optimistic debt payment level. CCC is of the opinion
that achievement of such a price range is highly unlikely at the
start of 1997 due to the number of plants selling electricity in
the region at prices under 2 cents, the unlikely chance that that
short-term avoided cost (currently estimated to be 2.8 cents
per kwh) would change materially in the near future, the
fact that Sierra can buy power for less than that price and has
been for several years, and the likelihood that demand, while
improving, is not projected to exceed supply in the near future.
Conclusion
In arriving at the CCC opinion, CCC reviewed all of the above
analyses, relying most heavily on the discounted cash flow
analysis, and concluded that the results of such analyses, when
considered as a whole supports its opinion that the sale of SB-1
and associated assets on the terms contemplated is fair, from a
financial point of view, to the limited partners of the Fund.
Any estimates incorporated in such analyses, particularly in
discounted cash flow, are not necessarily indicative of actual past
or future results or values, which may be significantly more or
less favorable than such estimates, and which are inherently
subject to uncertainty.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this Consent Solicitation to
be signed on its behalf by the undersigned duly authorized persons
on the date indicated.
Far West Electric Energy Fund, L.P.,
By Far West Capital, Inc., its general partner
May 7, 1996
/s/_______________________________________
Thomas A. Quinn, Authorized Officer
EXHIBITS
1. Purchase and Sale Agreement (previously submitted)
2. Tax Opinion of Robison Hill & Co. (previously submitted)
3. Fairness Opinion of Corporate Capital Consultants, Inc.
(previously submitted)
4. Form 10-QSB for quarter ending September 30, 1995 (previously
submitted)
5. Reply Card (previously submitted)
6. Form 10-KSB for December 31, 1995 (revised)
7. Commitment Letter to U.S. Envirosystems, Inc. from Smith
Management Company (deleted)
8. Commitment Letter to U.S. Envirosystems, Inc. from Gaines
Berland, Inc. (deleted)
9. SB-1 appraisal of Ronald P. Baldwin (previously submitted)
10. SB-1 Forecasts of Corporate Capital Consultants (revised)
11. Letter to James Budge of SEC (previously submitted)
12. Unaudited Condensed Balance Sheet of Far West Capital, Inc.
(revised, now appearing at page 40 of Exhibit 6)
13. USE's Pro Forma Condensed Combined Statement of Operations for
the year ended December 31, 1995
Exhibit 1
Purchase and Sale Agreement
(Exhibits to the Purchase and Sale Agreement have been filed with
the Securities and Exchange Commission, File No. 0-14452, as a part
of these proxy materials, and are available to the Limited Partners
upon request to Far West Capital, Inc., (801) 268-4444.)
PURCHASE AND SALE AGREEMENT
This Agreement is made and entered into this 31st day of
December, 1995 by and between Far West Capital, Inc. ("FWC"); Far
West Electric Energy Fund, L.P. (the "Fund"); 1-A Enterprises
("1-A"); U.S. Envirosystems, Inc. ("USE") and Steamboat
Envirosystems, L.C. ("SBE").
RECITALS
A. FWC is a Utah corporation with its principal place of
business at 921 Executive Park Drive, Suite B, Salt Lake City, Utah
84117. FWC is the General Partner of the Fund. Thomas A. Quinn
and Alan O. Melchior who are officers, directors and majority
shareholders of FWC also own majority interest in SB Geo, Inc.
("SBG") and 1-A.
B. The Fund is a Delaware limited partnership with its
principal place of business at 921 Executive Park Drive, Suite B,
Salt Lake City, Utah 84117. The Fund is publicly held by
approximately 1,100 unit holders but the Fund units are not
publicly traded. The Fund owns a geothermal power plant located
within the Steamboat Springs Known Geothermal Resource Area located
roughly 10 miles due south of downtown Reno, Nevada near the
intersection of U.S. 395 and the Mount Rose Highway. This power
plant ("SB-1") has a nominal net capacity of approximately 4 MW and
produces on the average approximately 37.8 million KWH per year.
SB-1 sells its output under a twenty year power purchase agreement
with Sierra Pacific Power Company ("Sierra"), the local public
utility. That power purchase agreement provides in pertinent part,
that SB-1 will be paid 7.17 cents per KWH for the first ten years of
commercial operation and short-term avoided cost for the second ten
years of operation. When SB-1 began commercial operations in
December of 1986, it was estimated by the parties that short-term
avoided cost at the beginning of the second ten years of commercial
operation would be five to six cents per KW. At present Sierra's
short-term avoided cost approximates 2.8 cents per KWH. It is the
opinion of FWC that the SB-1 plant cannot sell its output at 2.8 cents
and generate sufficient revenues to pay the cost of owning and
operating the plant including debt service, royalties, operating
cost...etc. As of October 1, 1995 there was a balance of
$4,709,541.81 on the Westinghouse loan on SB-1 and a $1,016,774.16
debt reserve for the Loan held in escrow. In addition the Fund
owes FWC approximately $2,550,257 consisting of $1,069,270 in cash
advances, $825,163 in unpaid interest on those cash advances and
$655,824 in unpaid services.
C. 1-A is a Nevada General Partnership which owns a
geothermal power plant commonly referred to as SB-1A ("SB-1A")
which is located adjacent to the SB-1 power plant. The SB-1A power
plant utilizes the tail stream from the SB-1 plant to produce
power, has a nominal capacity of approximately 1.6 MW and on
average produces approximately 14 million KWH per year. Because
SB-1A utilizes brine produced from SB-1 wells to produce power,
SB-1A pays a pumping charge and royalty to the Fund. In 1995 it is
estimated that the total pumping charge and royalty payments to the
Fund will be $144,000.00. SB-1A sells its output to Sierra under
a thirty year power purchase agreement. Pursuant to that agreement
during the first ten years of commercial operation, which began in
December of 1988, SB-1A is paid a floating rate for its output
based on the movement of several indices. At present SB-1A is paid
one rate for capacity and another for energy. These rates vary at
different times of the day and year. During 1995 the annual
blended rate paid for SB-1A's output is 0.05433 cents per KWH. During
the balance of the power purchase agreement beginning December of
1998, SB-1A will be paid for its output at Sierra's short-term
avoided cost which presently approximates 2.8 cents per KWH. 1-A does
not believe that SB-1A can sell its output at 2.8 cents per KWH and
generate sufficient revenues to pay the cost of owning and
operating the plant including operating expenses, pumping charges,
royalties, debt service...etc. As of October 1, 1995 there was a
balance due on the Westinghouse loan on SB-1A of $1,746,470 and a
debt reserve held in escrow of $79,868.56. In addition 1-A owes
FWC in excess of $950,000 representing, (1) loans made in
connection with the construction of the SB-1A plant with a
principal balance of approximately $632,000, (2) cash advances of
approximately $88,000 and (3) interest on all of the above.
D. FWC has initiated discussions with Sierra concerning
renegotiating the power purchase agreements applicable to the SB-1
and SB-1A power plants to increase the rate to be paid for the
power generated by those plants during the period following the
first ten years of commercial operations. At this point FWC has no
reasonable basis on which to predict the outcome of those
negotiations:
E. SB Geo, Inc. ("SBG") is a Utah corporation with its
principal place of business at 921 Executive Park Drive, Suite B,
Salt Lake City, Utah 84117. SBG currently operates SB-1 and SB-1A
under a contract which provides that SBG does not make a profit on
the operations of those plants. In accordance with the terms of
this Agreement, SBE and SBG will executed an Operating Agreement (a
copy of which is attached hereto as Exhibit "C") pursuant to which
SBG will operate the SB-1 and SB-1A geothermal power plants for
SBE.
F. USE is a Delaware corporation with its principal place of
business at 515 N. Flagler Drive, Suite 202, West Palm Beach, FL
33401. USE is in the business of developing, owning and operating
power plants utilizing various technologies to generate
electricity.
G. USE desires to purchase the SB-1 and SB-1A power plants
under the terms described in this agreement. FWC, the Fund and 1-A
are willing to sell the SB-1 and SB-1A power plants subject to
approval of the transaction by the Fund's limited partners. To
facilitate this transaction, FWC has given USE the opportunity to
review any documents in the possession of FWC or its affiliates,
and interview any persons who might have information relating to
the operation, performance, output and design of SB-1 or SB-1A.
H. In furtherance of the proposed transaction, USE has
negotiated to purchase the position of Westinghouse who is the
primary lender on both the SB-1 and SB-1A projects. If USE
completes the purchase of Westinghouse's position on or before
January 15, 1996, USE will purchase the total Westinghouse loan
balance of (as of October 1, 1995) $6,456,012.11 for approximately
$4,600,000.
I. It is the intention of the parties as expressed in this
Agreement that SBE, a Utah Limited Liability Company qualified to
do business in Nevada, with its principal place of business at 921
Executive Park Drive, Suite B, Salt Lake City, UT 84117, will
acquire the SB-1 and SB-1A power plants and all associated assets
of any kind with funds provided by USE. SBE's Articles of
Organization and Operating Agreement (which are attached hereto as
Exhibit "A") provide, inter alia, that SBE is owned 50% each by FWC
and USE and that each year USE will receive a preferred 18% return
on all funds raised by USE in public and private fund raising
efforts up to $10,000,000.00 before FWC shall be entitled to any
distributions from SBE. Each year any net revenues in excess of
the amount needed to pay the 18% preferred target return to USE
will be divided 50% each to USE and FWC. The preferred 18% return,
however, is not guaranteed and any short fall in that return will
not accumulate from one year to the next. In the event that USE
does not buy out all of the Westinghouse debt or having acquired
the Westinghouse debt does not contribute that debt to SBE; any
debt amortization paid to Westinghouse or USE will be paid out of
USE's share of SBE's revenues and will count towards USE's
preferred 18% return. It is also intended that if USE acquires the
Westinghouse debt and this transaction is approved by the Fund's
limited partners and if USE shall contribute the Westinghouse debt
to SBE as further capitalization of SBE, USE shall have the right
to own and dispose of the SB-1 and SB-1A debt reserves held in
escrow at First Security Bank in Salt Lake City.
J. USE has previously paid FWC a $50,000.00 non-refundable
deposit towards the purchase of the SB-1 and SB-1A power plants.
K. USE's performance under this Agreement is conditioned
upon its raising $10,000,000 in public or private securities
offerings.
NOW THEREFORE, based on the foregoing and the mutual covenants
and representations contained herein and other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
1. Attached hereto as Exhibit "A" are the Articles of
Organization and Operating Agreement for SBE, a Utah Limited
Liability Company which have been executed by FWC and USE.
2. On or before March 1, 1996 USE will deposit into an
escrow account at Zions National Bank in Salt Lake City, Utah cash
in the amount of $2,525,000 in immediately available funds in U.S.
currency. On or before March 1, 1996 the Fund and 1-A shall
deposit in the same escrow account documents converting the assets
provided in paragraph 3 below to SBE.
3. As soon as the funding and conveyance documents are
released to SBE from escrow as provided in paragraph 13 below, SBE
shall transfer $275,000 to 1-A and $1,250,000 to the Fund in
exchange for an assignment of all of 1-A's and the Fund's right,
title and interest in and to all of their SB-1 and SB-1A related
assets, including; supplies, inventory, plant, equipment,
receivables and property; tangible and intangible, real and
personal including without limitation permits, licenses, policies,
contracts, chooses in action, records, reports, documents, computer
records, power sales agreements, leases, subleases, designs,
operating records, bank accounts, escrow accounts, funds, wells,
rights to brine; used or useful or pertaining to the ownership,
operation and maintenance of the SB-1 and SB-1A geothermal power
plants, prorated as of December 31, 1995. These assets are
described in more detail in Exhibit "D" hereto. These assets shall
be conveyed to SBE free and clear of all claims or encumbrances
except those disclosed in Exhibit "B" hereto. USE has previously
paid FWC a non-refundable deposit of $50,000 towards the purchase
of SB-1 and SB-1A on behalf of SBE. That deposit has been used by
FWC to defray the cost of this transaction including the cost of
the preparation and mailing of the Consent Solicitation Statement
for the Fund. The $50,000 deposit will be allocated $50,000
towards the purchase of SB-1.
4. Simultaneous with the actions taken in paragraph 3 above,
SBE and SBG shall execute the Operating Agreement attached hereto
as Exhibit "C".
5. Simultaneous with acquiring ownership of the SB-1 and
SB-1A power plants and related assets, SBE shall assume
responsibility for all direct obligations and liabilities
associated with the ownership and operation of the SB-1 and SB-1A
power plants including, without limitation, operating costs,
royalties, debt service (if any), back feed electricity,
interconnect fees .....etc. prorated as of December 31, 1995.
6. $1,000,000 of the $2,575,000 ($50,000 deposit used for
transaction cost plus $2,525,000 in cash at closing) contributed to
SBE by USE shall be used to attempt to buy out the gross royalties
and net revenue royalties owned by GDA, Benson, Helzel and
Schwartzoff and Ormat, Inc. in the SB-1 and SB-1A projects and to
finance improvements in the SB-1 and SB-1A power plants. Any
amounts not utilized for those purposes shall be retained in the
accounts of SBE to be used in the operation and maintenance of the
SB-1 and SB-1A power plants.
7. If USE purchases the Westinghouse loan position on the
SB-1 and SB-1A power plants, USE may contribute that debt position
to SBE as a part of its capital contribution to SBE and if that is
done SBE may cancel the debt and all related encumbrances on the
SB-1 and SB-1A projects. If so contributed and canceled, SBE shall
immediately assign to USE all of its right, title and interest in
and to the. funds held in the SB-1 and SB-1A loan reserves (as of
October 1, 1995 a total of $1,096,643).
CONDITIONS PRECEDENT
8. This Agreement is contingent upon obtaining the necessary
approval of the limited partners of the Fund as provided in the
Fund's limited partnership agreement. In order to solicit this
approval it will be necessary to prepare and transmit to the
limited partners a Consent Solicitation Statement in accordance
with the applicable regulations of the Securities and Exchange
Commission. FWC shall use its best efforts to obtain approval of
the Fund's limited partners consistent with its fiduciary
obligations as General Partner of the Fund. As an incentive to the
limited partners to approve this transaction, and contingent upon
such approval, FWC will agree to:
A. Decline to have the Fund pay debts owed by the Fund
to FWC (as of October 1, 1995, believed to be approximately
$2,550,257, consisting of $1,069,270 in cash advances $825,163
interest on those cash advances and $655,824 owed for uncompensated
services provided to the Fund by the general partner);
B. FWC shall decline its share of any final
distribution. But for this declination, FWC as a General Partner
and holder of limited partnership units would be entitled to
receive 6.1% of the cash to be distributed in the final
distribution.
This forgiveness of debt and declination of distribution will
serve to maximize the distribution of cash to limited partners when
the business of the Fund is wound up, third party debts are paid
and a final distribution is made to limited partners. At present
the estimated third party debts and accounts payable (debts not
owed to the General Partner) of the Fund (including cost of this
transaction) are approximately $896,872; consisting of bank debt
$470,649 unpaid professional services and royalties $385,801 and
$40,422 for unpaid operating services. It is estimated that if the
limited partners approve this Agreement the final distribution will
be a total of approximately $428,128 or $44.00 per limited
partnership unit.
9. This Agreement is contingent on the approval of the
partners in 1-A. As an incentive for the 1-A partners to approve
this transaction FWC will forgive 1-A's outstanding debt to FWC
believed to be in excess of $950,000.
10. This Agreement is also contingent upon USE successfully
completing public and/or private efforts to raise $10,000,000. USE
agrees that it will use its best efforts to successfully complete
these capital raising efforts.
11. This Agreement is further contingent upon obtaining the
necessary consent to assignment of the permits, Power Purchase
Agreements and Leases.
12. Anything to the contrary notwithstanding, USE and SBE are
not assuming and shall not assume any of the following liabilities,
contracts, commitments and other obligations of any other party to
this Agreement:
A. Any obligations or liabilities of any other party
arising under this Agreement;
B. Any obligation of any other party to this Agreement
for federal, state or local tax liability (including interest and
penalties) arising from the operation of SB-1 or SB-1A by SBG, FWC,
the Fund or 1-A up to the time of closing or arising out of the
sale by the Fund or 1-A of the assets sold pursuant hereto;
C. Any obligation of the Fund or 1-A for any transfer,
sales or other taxes, fees or levies arising out of the sale of the
assets pursuant hereto;
D. Any obligation of the Fund or 1-A for expenses
incurred in connection with the sale of the assets pursuant hereto;
and
13. The closing of the transactions contemplated by this
Agreement shall take place on December 31, 1995 at 2:00 p.m. at the
offices of FWC, 921 Executive Park Drive, Suite B, Salt Lake City,
UT 84117 or at such other date, time and place as the parties
shall mutually agree in writing. Conveyance, transfer, assignment
and delivery of the assets shall be by bills of sale, certificates
of transfer, endorsements, assignments and other instruments of
transfer and conveyance in such form as the parties shall mutually
agree. The parties recognize that as of the date of closing some
of the conditions precedent will not have been satisfied such as
the approval of this transaction by the limited partners of the
Fund. Therefore, the purchase price and documents of conveyance
and transfer shall be held in escrow pending satisfaction of all
conditions precedent. At such time as all of the conditions
precedent are satisfied, the parties hereto shall notify the escrow
agent to release the purchase price and the conveyance document to
SBE, the escrow agent shall be the Trust Department of Zions Bank,
One South Main Street, Salt Lake City, UT 84111.
14. Any transfer, sales, use or other tax, including any real
estate excise tax or transfer, filing or recording fees, payable
upon or with respect to the sale of the assets hereunder shall be
paid when due by SBE. All real or personal property taxes
attributable to any of the assets shall be prorated as of January
1, 1996.
15. The Fund and 1-A warrant with respect to the assets being
sold by each of them hereunder that to the best of their individual
knowledge:
A. The assets which are being purchased by SBE
hereunder when sold and delivered in accordance with the terms
hereof for the consideration expressed herein, will be duly and
validly transferred to SBE and upon the delivery to SBE of the
transfer and assignment documents contemplated hereby, SBE will
have good and marketable title to the assets, free and clear of all
liens, claims, encumbrances and other rights of third parties
except as disclosed in Exhibit "B".
B. There are no pending or threatened claims that are
or could be asserted against the Fund or 1-A which relate to any
toxic or hazardous substance having been improperly generated,
handled, released (or threatened to be released), treated, stored
or disposed of, or otherwise deposited in, on, beneath or in close
proximity to the real property upon which SB-1 and SB-1A is
constructed including, without limitation, the surface waters and
subsurface waters thereof, and there are no underground tanks that
are or have been located on, in or in close proximity to the plant
site. As of the date hereof, there are no pending or threatened
environmental claims that are or could be asserted against the Fund
or 1-A or its predecessors, which relate to the plant site.
C. There is no suit, action or proceeding pending or
threatened against the Fund or 1-A and there is no judgment, order,
injunction, decree, regulation or ruling of any court or
governmental department, commission, agency, instrumentality or
arbitration outstanding against the Fund or 1-A having or which,
insofar as can be foreseen in the future, may have any adverse
effect on the operation and use of the SB-1 or SB-1A power plants.
D. There are no existing conditions at the SB-1 and
SB-1A plant sites that could cause those sites to become in
violation of or in noncompliance with any governmental rule or
regulation.
E. The Fund and 1-A have complied in all material
respects with all of the applicable rules, regulations and
requirements of all governmental licenses, permits and
authorizations held by each entity in connection with the
ownership, development and operation of their respective power
plants. All information and disclosures made on any applications
for licenses, permits or authorizations were true when made.
Neither the Fund nor 1-A has any knowledge of any claimed
violations from any governmental agency or any other person with
respect to the licenses, permits and authorizations held by them in
connection with the operation of the SB-1 and SB-1A power plants
and neither the Fund nor 1-A has any knowledge that any condition
exists which may give rise to a claim of violation in the future.
F. All of the permits and contracts associated with the
ownership and operation of SB-1 and SB-1A are in good standing and
in full force and effect, and there has been no material adverse
change in the status of the permits and contracts which threatens,
restricts or prohibits the operation of the power plants.
16. USE represents and warrants that:
A. It is a corporation duly organized, validly existing
and in good standing under the laws of the state of Delaware and is
authorized or licensed to do business in all other jurisdictions in
which the failure to do so to qualify would have a material and
adverse impact on its business or properties. USE has the power
and authority to carry on its business as now conducted and as
proposed to be conducted.
B. All necessary actions on the part of USE necessary
for the authorization, execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
herein have been taken or will be taken prior to closing. This
Agreement, when executed and delivered, shall constitute the legal,
valid and binding obligation of USE, enforceable against USE in
accordance with its terms.
17. Each party will pay all expenses incurred by it and in
connection with the negotiation, execution and performance of this
Agreement, whether or not the transactions contemplated hereby are
consummated, including the fees and expenses of agents,
representatives, accountants and counsel for each party.
18. Upon the reasonable request of SBE the parties shall
execute, acknowledge and deliver all such further documents as may
be required to convey and transfer to and vest in SBE and protect
its right, title and interest in all of the assets purchased
pursuant to this Agreement, and as may be otherwise appropriate to
carry out the transactions contemplated by this Agreement.
19. At closing SBE shall receive a report from First American
Title Company of Reno indicating that there are no mortgages,
claims, liens, charges, encumbrances security interests,
restrictions on use or transfer or other defects of record with
respect to the SB-1 or SB-1A plants other than as set forth in
Exhibit "B".
20. All of the respective representations and warranties of
the parties to this Agreement shall survive the consummation of the
transactions contemplated hereby.
21. Each party hereto will indemnify and hold harmless each
other party from any commission, fee or claim of any person, firm
or corporation employed or retained by, or claiming to be employed
or retained by, the indemnifying party to bring about, or to
represent it in, the transactions contemplated hereby.
22. This Agreement shall not be amended or modified except in
a writing signed by each of the parties hereto.
23. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors,
heirs, administrators and assigns.
24. All notices or other communications hereunder shall be
deemed to have been given when personally delivered or when
deposited in the U.S. mail, registered or certified, postage
prepaid and addressed as follows:
Far West Electric Energy Fund, L.P.
c/o Far West Capital, Inc.
921 Executive Park Drive, Suite B
Salt Lake City, UT 84117
Attn: Thomas A. Quinn
Far West Capital, Inc.
921 Executive Park Drive, Suite B
Salt Lake City, UT 84117
Attn: Thomas A. Quinn
1-A Enterprises
c/o Far West Capital, Inc.
921 Executive Park Drive, Suite B
Salt Lake City, UT 84117
Attn: Thomas A. Quinn
To U.S. Envirosystems, Inc.
515 N. Flagler Drive, Suite 202
West Palm Beach, FL 33401
Attn: Richard Nelson
Steamboat Envirosystems, L.C.
515 N. Flagler Drive, Suite 202
West Palm Beach, FL 33401
25. If any provision of this Agreement is determined to be
illegal or unenforceable, such provision will be deemed amended to
the extent necessary to conform to applicable law or, if it cannot
be so amended without materially altering the intention of the
parties, it will be deemed stricken and the remainder of the
Agreement will remain in full force and effect.
26. No action taken pursuant to this Agreement, including any
investigation by or on behalf of any party, shall be deemed to
constitute a waiver by the party taking such action of compliance
with any representation, warranty, covenant or agreement contained
herein. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach.
27. This Agreement may be executed in any number of
counterparts, each of which, when executed, shall be deemed to be
an original, and all of which together shall be deemed to be one
and the same instrument.
28. Time is of the essence of this Agreement and each and
every covenant, condition and provision hereof.
29. Any dispute arising under this Agreement which the
parties cannot resolve amicably, will first be mediated and if that
process does not resolve the dispute, the dispute will be submitted
to binding arbitration. Such mediation and arbitration will take
place in Salt Lake City, Utah in accordance with the Rules of the
American Arbitration Association and the prevailing party shall be
entitled to reasonable attorney's fees in addition to any other
relief to which that party may be entitled.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
SELLER: FAR WEST CAPITAL, INC.
By: _____________________________
Its: ______________________________
FAR WEST ELECTRIC ENERGY FUND, L.P.
By: Far West Capital, Inc.
Its: General Partner
By: _____________________________
Its: ______________________________
1-A ENTERPRISES
By: _____________________________
Its: ______________________________
PURCHASER: US ENVIROSYSTEMS, INC.
By: _____________________________
Richard Nelson
Its: ______________________________
STEAMBOAT ENVIROSYSTEMS, L.C.
By: _____________________________
Richard Nelson
Its: ______________________________
EXHIBIT "A"
ARTICLES OF ORGANIZATION
OF
STEAMBOAT ENVIROSYSTEMS, L.C.
We the undersigned named natural persons of the age of
eighteen (18) or more, acting as the officers and agents of the
members of a limited liability company under the Utah Limited
Liability Company Act, adopt, execute, and file the following
Articles of Organization for such company in the formation of such
limited liability company.
ARTICLE I
COMPANY NAME
The name of this limited liability company is Steamboat
Envirosystems, L.C. (hereinafter the "Company").
ARTICLE II
PERIOD OF DURATION
The Company shall exist and continue for thirty (30) years
unless earlier dissolved from the date of filing of these Articles
of Organization with the Division of Corporations of the Utah
Department of Commerce and liquidation has been completed pursuant
to Utah Code Annotated Sec. 48-2b-137 or the Operating Agreement of
the Company.
ARTICLE III
PURPOSE AND POWERS
The Company shall have unlimited power to engage in and to do
any lawful act concerning any or all lawful business for which
limited liability companies may be organized under the Utah Limited
Liability Company Act. The purpose of the Company is to own and
operate the SB-1 and 1A geothermal power plants located within the
Steamboat Springs KGRA approximately 10 miles south of downtown
Reno, NV near the intersection of U.S. 395 and the Mt. Rose
Highway.
ARTICLE IV
REGISTERED OFFICE AND AGENT
The address of the initial registered office of the Company is
921 Executive Park Drive, Suite B, Salt Lake City, Utah 84117, and
the name and address of its initial registered agent is Thomas A.
Quinn at such address.
ARTICLE V
SERVICE OF THE DIVISION OF CORPORATIONS AND COMMERCIAL CODE
The Director of the Division of Corporations and Commercial
Code of the Department of Commerce of the State of Utah is
appointed the agent of the Company for service of process, if the
agent has resigned, the agent's authority has been revoked, or the
agent cannot be found or served with the exercise of reasonable
diligence.
ARTICLE VI
MANAGEMENT OF THE COMPANY
The Company shall be managed by the Members.
ARTICLE VII
INDEMNIFICATION
The Company will indemnify its manager and its members to the
fullest extent permitted by the Utah Limited Liability Company Act,
as the same may hereinafter be amended, or as otherwise permitted
by law.
ARTICLE VIII
MEMBERS
The names and addresses of the members are:
Far West Capital, Inc.
921 Executive Park Drive, Suite B
Salt Lake City, Utah 84117;
U.S. Envirosystems, Inc.
515 North Flagler Drive, Suite 202
West Palm Beach, FL 35401
Dated this ____ day of _______________, 1995.
MEMBERS:
Far West Capital, Inc.
By: ________________________
Its: ________________________
REGISTERED AGENT:
Thomas A. Quinn
U.S. Envirosystems, Inc.
By: ________________________
Thomas A. Quinn By:
________________________
Its: ________________________
EXHIBIT "A"
OPERATING AGREEMENT
FOR
STEAMBOAT ENVIROSYSTEMS, L.C.
THIS OPERATING AGREEMENT ("Agreement") is made and entered
into this _____ day of _____________, 1995, by and among U.S.
Envirosystems, Inc. ("USE") and Far West Capital, Inc., a Utah
Corporation ("FWC"), hereinafter referred to as "Members" and
individually as "Member".
The Members desire to organize a limited-liability company
pursuant to the laws of the State of Utah. Accordingly, in
consideration of the mutual covenants contained herein, the Members
agree and certify as follows:
ARTICLE I
THE LIMITED LIABILITY COMPANY
1.1 Organization. The Members hereby organize the limited
liability company, Steamboat Envirosystems, L.C. (the "Company"),
subject to the provisions of the Utah Limited Liability Company Act
as currently in effect (the "Act"). It is the desire and intent of
the Members that the Company be treated as a partnership for
purposes of federal and state income taxation. ___________ is
hereby designated as the "Tax Matters Partner" for the Internal
Revenue Service ("IRS") purposes in representing the Company before
the IRS and state and local taxing authorities.
1.2 Filing. In connection with the execution of this
Operating Agreement, the Members shall cause Articles of
Organization that comply with the requirements of the Act to be
properly filed with the Utah Division of Corporations and
Commercial Code, and shall execute such further documents
(including amendments to the Articles of Organization) and take
such further action as is appropriate to comply with the
requirements of law for the formation or operation of a limited
liability company in all states and countries where the Company may
conduct its business.
1.3 Name. The name of the Company shall be Steamboat
Envirosystems, L.C.
1.4 Registered Office, Registered Agent. The location of the
registered office of the Company shall be 921 Executive Park Drive,
Suite B, Salt Lake City, Utah 84117, and thereafter at such other
location as the Members may designate. The Company's registered
agent at such address shall be Thomas A. Quinn.
1.5 Term and Events of Dissolution. The Company shall
continue for a period of thirty (30) years from the date of the
filing of its Articles of Organization with the Utah Division of
Corporations and Commercial Code, unless sooner dissolved by:
(a) a seventy-five percent (75%) majority vote of the
Members' ownership interests;
(b) any event which makes it unlawful for the business
of the Company to be carried on by the Members; or,
(c) the expulsion, bankruptcy or dissolution of a
Member.
1.6 Continuance of Company. Notwithstanding the foregoing
provisions of Section 1.5, upon the occurrence of an event
described in Section 1.5(c), the remaining Members shall have the
right to continue the business of the Company. Such right can be
exercised only by the affirmative vote of a simple majority
ownership interest of the remaining Members present at a duly
constituted meeting called pursuant to Paragraph 1.12 below, within
90 days after the occurrence of an event described in Section
1.5(c), to continue the business of the Company. If not so
exercised, the right of the Members to continue the business of the
Company shall expire and the Company's affairs shall be wound up as
provided in Article VIII.
1.7 Management of Business. The Company shall be managed
jointly by USE and FWC with FWC designated initially as Manager.
USE designates Richard H. Nelson as its sole representative and FWC
designates Alan O. Melchior as its sole representative. All
decisions to be made by Members shall be made on unanimous consent
of the Members of the Company unless otherwise provided herein.
1.8 Purpose and Character of Business. The primary purpose
of the Company shall be to own and operate SB-1 and SB-1A
geothermal power plants located within the Steamboat Springs KGRA
approximately 10 miles south of downtown Reno, NV near the
intersection of U.S. 395 and the Mt. Rose Highway located on an
approximate 30 acre parcel of real property located in Washoe
County, Nevada, described in Exhibit "A" attached hereto and made
a part hereof. The Company shall have all powers necessary to the
accomplishment of such purpose.
It is agreed that SB Geo, Inc. shall act as operator of the
power plant commencing upon acquisition by the Company, under a
separate Operating Agreement to be executed by the Company and SB
Geo, Inc. and attached hereto as Exhibit "C".
1.9 Principal Place of Business. The location of the
principal place of business of the Company shall be at 921
Executive Park Drive, Suite B, Salt Lake City, Utah 84117, or at
such other place as the Members from time to time may select.
1.10 Members. The name and address of each of the Members are
as follows:
Far West Capital, Inc.
921 Executive Park Drive, Suite B
Salt Lake City, Utah 84117
U.S. Envirosystems, Inc.
515 North Flagler Drive, Suite 202
West Palm Beach, FL 33401
1.11 Rules Determining Rights and Duties of Members. The
rights and duties of the Members in relation to the Company shall
be determined, subject to any other written agreement between them,
by the following rules:
(a) No Member shall have the right to unilaterally
withdraw from the Company or to require that its interest in the
Company be redeemed in whole or in part.
(b) The Company shall reimburse each Member with respect
to any payment of any costs or expenses actually incurred by it in
the ordinary and proper conduct of the business of the Company
which were approved by the Manager in advance.
(c) Unless otherwise provided herein, no Member shall
receive any payment for services rendered to the Company, except as
may be authorized by a simple majority of Company interests present
at a duly constituted meeting pursuant to Paragraph 1.12 below
and/or as provided in the annual Budget.
(d) It is recognized that lenders may require the
submission of current financial statements by individual Members.
Each Member agrees, upon the request of any lender evaluating the
possibility of lending the Company money, to provide said lender
with a current statement of its Financial Condition (Balance Sheet)
and a current Statement of Earnings (Profit and Loss Statement), or
other similar comprehensive statement, hereinafter collectively
referred to as "Financial Statements". Financial Statements need
not be "audited" by a Certified Public Accountant; however, the
authenticity and accuracy of the Financial Statements shall be
certified by the Member's original signature on its Financial
Statement. All such Financial Statements shall be held in the
strictest confidence and only provided to a previously approved
lender for the specific purpose of meeting previously agreed upon
funding needs of the Company.
1.12 Meetings and Voting of Members.
(a) Annual or Special Meetings - Annual or special
meetings of the Members, for any purpose or purposes, unless
otherwise prescribed by statute, may, but need not be called by the
Manager at such times and places, for such purposes and based upon
such notice, rules and procedures as the Manager in its sole
discretion shall deem reasonable. In lieu of a meeting, in the
discretion of the Manager, any action or vote of Members required
or permitted under the terms of this Agreement may take place by
written ballot as more fully set forth by the provisions in Section
1.12(b) below.
(1) Members holding a total of twenty-five percent
(25%) ownership interest in the Company may call a special meeting
upon fifteen days' notice in writing to the Members. A duly
constituted meeting can be held only upon attendance of Members
holding at least a simple majority of the ownership interest in the
Company.
(b) Voting Rights of Members - All actions and votes
of Members required or permitted under the terms of this Agreement
may be conducted pursuant to the following terms and provisions in
the sole discretion of the Manager.
(1) Each Member shall have the right to cast one
vote for each percent of ownership of record on the books of the
Company by such Member. Members shall not be entitled to cumulate
their votes.
(2) The Manager shall set a record date for
determining the Members entitled to cast a ballot and to vote,
which date shall not be more than fifty (50) or less than twenty
(20) days prior to the date on which such ballots are deposited in
regular mail or otherwise delivered to the Manager. The Manager
shall give notice to each Member and shall transmit with any such
notice the following:
(i) description of each matter being voted
upon;
(ii) a ballot providing for each Member to cast
his number of votes for or against each matter being voted upon;
(iii) a statement of the date by which each
Member's ballot must be received by the Manager, which date shall
be not less than twenty (20) days from the date on which such
ballots are deposited in the regular mail or otherwise delivered to
the Members; and
(iv) an envelope self-addressed to the Manager
at the Manager's address.
(3) All ballots must be returned to the Manager not
later than the date indicated on the ballot pursuant to Section
(2)(iii) above. Ballots received after said date shall be
considered void.
(4) Within ten (10) days after the date indicated
on the ballot pursuant to Section (2) (iii) above, the Manager
shall count the vote. All ballots not returned, or returned after
the due date, shall not be counted in the vote. The Manager shall
within ten (10) days after tallying the vote notify the Members of
the outcome of said vote by written notice.
(5) Unless otherwise specified in this Agreement,
any matters which shall be submitted to a vote of the Members shall
be deemed approved if Members owning not less than seventy-five
percent (75%) of the ownership interest then owned by all Members,
in the aggregate, and who are entitled to vote in accordance with
the provisions of Section (1) above, shall cast their votes in
favor of any such matter.
ARTICLE II
CAPITAL CONTRIBUTIONS
2.1 Initial Contributions. The profits interest and voting
rights in the Company are owned by the Members in the shares of
percentages set opposite the name of each Member on Exhibit "B"
attached hereto and made a part hereof. The Members shall
initially contribute to the Company's capital the cash, property or
services described for each Member as follows:
2.2 Initial Contributions by USE. USE's contribution to the
Company will be cash in the amount of $2,575,000 in immediate
availability in U.S. currency for which it shall receive 50% of the
profits interest and voting rights in the Company. Up to
$1,000,000 of that amount will be used to buy out gross royalties,
net revenue royalties owned by BSH, GDA and Ormat, Inc. in the SB-1
and SB-1A projects and to finance improvements in the SB-1 and
SB-1A power plants. Any moneys not used for those purposes will
remain in the Company but in any event shall not increase USE's
profits or voting interest in the Company beyond 50%.
USE may purchase the Westinghouse balance of the Westinghouse
loan $6,456,012.11 (as of October 1, 1995) on the SB-1 and SB-1A
power plants for $4,600,000.00. If USE does purchase the
Westinghouse position, USE may contribute that debt position to SBE
as a part of its capital contribution to SBE. If that is done SBE
may cancel the debt and all related encumbrances on the SB-1 and
SB-1A projects. If the Westinghouse debt is so contributed and
canceled, SBE shall immediately assign to USE all of its right,
title and interest in and to the funds held in the SB-1 and SB-1A
loan reserves (as of October 1, 1995 a total of $1,096,642.72).
The contribution by USE of the Westinghouse loan position or the
subsequent cancellation of that position shall not affect USE's
ownership in the Company but will affect USE's distributions as
provided in Article III hereof.
2.3 Initial Contributions by FWC. FWC's initial contribution
to the Company will be the assignment thereto of outstanding debt
owed by Far West Electric Energy Fund, L.P. ("FWEEF") and 1-A
Enterprises ("1-A") to FWC in the estimated to be amount of
$2,500,000 and the assignment of the debt owed by 1-A to FWC
estimated to be in excess of $950,000. For these contributions FWC
shall receive 50% profits interest and voting rights in the
Company.
2.4 Interests in Capital. The respective interests of the
Members in the capital contributions to the Company are in
proportion to each Member's contributions, adjusted as provided in
Article III.
2.5 Additional Contributions. If, at any time, and in the
discretion of the Manager and upon an affirmative vote of at least
a simple majority of the ownership interests of the Members of the
Company present at a duly constituted meeting pursuant to Paragraph
1.12 above, the Manager may call for and receive from each Member,
such additional contributions as may be necessary to conduct the
business of the Company. The collection procedure of additional
capital shall be as follows:
(a) Each Member shall be entitled to contribute a
percent of the call equal to the Member's present ownership
percentage so as to maintain its same ownership percentage after
the call has been funded as the Member had before the call. Each
Member shall have five (5) business days from notice of the
issuance of the call to make it's contribution to maintain its
ownership percentage.
(b) If after ten (10) business days after notice of the
issuance of the call for additional contributions, there remains a
shortfall in the contributions required from the procedure in (a)
above, then the contribution remaining to be funded shall be funded
by any or all Members in proportions as they may agree to between
themselves with their Member ownership percentages being adjusted
accordingly. This shall be open to the Members for five (5)
business days after notice of a remaining shortfall.
(c) If after the ten (10) day period described in (b)
above, and a shortfall continues to exist in funds received and
funds requested in the call, then the Manager shall have sole
discretion to eliminate or close the shortfall either by obtaining
loans wherein the Company is the borrower, or notwithstanding the
provisions of Section 7.10 herein, to seek additional Members, or
to contribute or loan the additional remaining shortfall itself.
2.6 Interest. No interest shall be paid on the capital
accounts of the Members.
2.7 Capital Accounts.
(a) The ownership represents undivided interests in the
Company assets, subject to liabilities. A separate capital account
shall be maintained by the Company for each Member in accordance
with IRC Sec 704(b) and Treasury Regulations promulgated thereunder.
(b) There shall be credited to each Member's capital
account:
(1) The amount of cash contributed by the Member to
the Company including any amounts contributed pursuant to Section
2.5 above;
(2) The fair market value of property contributed
by a Member to the Company (net of liabilities secured by such
contributed property that the Company is considered to assume or
take subject to under IRC Sec 752); and
(3) The amount of Company liabilities which are
assumed by such Member wherein the Member takes full and complete
legal responsibility for payment of such liabilities and the
Company is legally released from such liabilities, or the Member
provides complete indemnification for such liabilities (other than
liabilities described in Subsection (c) (2) below which are assumed
by a distributee Member).
(c) Each Member's capital account shall be decreased by:
(1) The amount of money distributed to the Member
by the Company in reduction of Company capital;
(2) The fair market value of property distributed
to the Member by the Company (net of liabilities secured by such
property that such Member is considered to assume or take pursuant
to IRC Sec 752);
(3) Allocations to such Member of expenditures of
the Company described in IRC Sec 705(a) (2) (B); and
(4) The amount of such Member's individual
liabilities which are assumed by the Company (other than
liabilities described in Subsection 2.7(b)(2) above which are
assumed by the Company);
(d) The Book Value of an item of Company property shall
be increased or decreased, as the case may be, to equal its
Adjusted Tax Basis whenever an adjustment to the Adjusted Tax Basis
of such item of Company property arises under IRC Sections 732(d),
734 or 743 and such adjustment exceeds the difference between the
Book Value of such item of Company property and its adjusted tax
basis prior to making such adjustment. Such increase or decrease
in book value shall then be allocated to the capital accounts of
the Members in accordance with Regulations Section
1.704-1(b)(2)(iv)(m).
2.8 Loans to Company. If any Member shall make any loan to
the Company or advance money on its behalf, the loan or advance
shall not increase the lending Member's capital account, entitle
the lending Member to any greater share of Company distributions,
or subject the Member to any greater proportion of Company losses.
The amount of the loan or advance shall be a debt owed by the
Company to the lender Member, repayable on the terms and
conditions, and bearing interest at two percent over the Prime Rate
published in the Wall Street Journal.
ARTICLE III
PROFITS, LOSSES AND DISTRIBUTIONS
3.1 Profits and Losses. The Company's net profits or net
losses shall be determined on an annual basis in accordance with
generally accepted accounting principles, consistently applied, and
shall be allocated to the Members' for both financial and tax
accounting purposes in proportion to their respective interests in
profits and losses as set forth in Exhibit "B" attached hereto and
made a part hereof; provided, that prior to any allocation of
profits pursuant to Exhibit B, there shall be specially allocated
to USE in each year 100% of the profits of the Company or an amount
equal to the amount of the Preferred Payment to USE under Section
3.3 set forth below, whichever is less.
3.2 Distributions. The Company shall distribute available
funds to the Members in proportion to their respective interests in
sharing profits and losses following the preferred distribution to
USE described in Section 3.3. "Available Funds" for this purpose
means the Company's gross cash receipts, less the Company's
operating expenses, payments on loans as they come due,
establishing reasonable reserves to pay loans coming due in the
future, establishing a reasonable reserve for the replacement of
furniture, fixtures and equipment and less the amount that, in the
Manager's reasonable judgment, the Company should retain in order
to fulfill its business purposes.
3.3 USE Preferred Distributions. The intent of the parties
is that Available Funds will first be distributed to USE (the
"Preferred Payment") to pay an 18% return on the moneys up to ten
million dollars ($10,000,000) raised in USE's contemplated public
and private offerings (the "Offering Amount") to be used, among
other things, to make its contributions to the Company (described
in Section 2.2 above) and to take out the balance on the
Westinghouse Electric Corporation ("WEC") loan ("WEC Loan") of
approximately $6,456,000 total on both the "SB-1" and "SB-1A"
projects. If cash flow is insufficient to pay USE the full amount
of the Preferred Payment in any given year, the deficit shall not
carry over or become part of the Preferred Payment in the following
or any subsequent year. If USE acquires the entire interest in the
WEC Loan, contributes it to the Company and cancels it, USE will be
entitled to receive the reserve funds which secure the WEC Loan
(described in Section 2.2 above). If USE does not acquire the
entire interest in the WEC Loan, or does not cancel and contribute
the WEC Loan to the Company, any remaining debt amortization paid
by the Company on the WEC Loan balance will reduce dollar for
dollar (but not below zero) the amount of the Preferred Payment
that otherwise would have been payable to USE. The amount of
distributions to USE other than distributions of the Preferred
Payment or a distribution, if any, of the reserve funds will be
deemed to reduce the Offering Amount for purposes of this Section
3.3.
3.4 No Shift of Recapture Responsibility. In making the
allocation among the Members of gain or profit for income tax
purposes, the ordinary income portion, if any, of such gain or
profit caused by the recapture of cost recovery or any other
deductions and/or the gains on property contributed by any Member
shall be allocated among those Members who were previously
allocated the cost recovery or any other deductions or among those
Members who contributed property with an adjusted basis less than
fair market value in proportion to the amount of such deductions
previously allocated to them and/or in proportion to the
unrecognized gains on contributed property, in accordance with IRC
Sec. 704(c) and Treasury Regulations promulgated thereunder. It is
intended that the Members, as among themselves, shall bear the
burden of recapture caused by cost recovery or other deductions
which were previously allocated to them, in proportion to the
amount of such deductions which have been allocated to them,
notwithstanding that a Member's share of profits, losses or
liabilities may increase or decrease from time to time. Nothing in
this Article, however, shall cause the Members to be allocated more
or less gain or profit than would otherwise be allocated to them
pursuant to this Article.
ARTICLE IV
MANAGEMENT
4.1 Members. The liability of the Members shall be limited
as provided in the Act. The Manager of the Company shall take part
in whatever action is necessary with the powers set forth below in
the control, management, direction and operation of the Company's
affairs and shall have power to bind the Company and at all times
shall have the exclusive right to control and manage the Company
until the conditions of Section 4.2(a) below have been met. No
other Member shall have any authority to act for or to bind the
Company or any other Member nor participate in the general conduct
or control of the Company's affairs.
4.2 Management of the Company; Major Decisions.
(a) The overall management and control of the business
and affairs of the Company shall be vested in the Members'
committee as delegated to Manager in it's sole discretion for the
term of the Company, unless the following has occurred:
(1) Such Manager can no longer competently perform
the duties of Manager under the Operating Agreement as evidenced by
acts of gross negligence, violation of law, abandonment of its
duties, financial insolvency which means:
(i) The making of an assignment for the
benefit of creditors by such Manager;
(ii) The filing of a voluntary petition in
bankruptcy by such Manager;
(iii) The adjudication of such Manager as
bankrupt or insolvent;
(iv) The filing by such Manager of a
petition or answer seeking for such Manager any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or
similar relief under any status, law or regulation;
(v) The filing of an answer or other
pleading by such Manager admitting or failing to contest the
material allegations of a petition filed against such Manager in
any proceeding described in subsection (iv) above;
(vi) The seeking, consent to, or
acquiescence in by such Manager of the appointment of a trustee,
receiver, or liquidator of such Manager or of all or any
substantial part of such Manager's properties; or
(vii) The failure of any proceeding
against such Manager seeking reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation to be dismissed within
120 days after its commencement, or the failure of any appointment
without such Manager's consent or acquiescence of a trustee,
receiver or liquidator of such Manager or of all or any substantial
part of such Manager's properties to be vacated or stayed within 90
days after such appointment, or the failure of any such appointment
to be vacated within 90 days after the expiration of any stay.
or (2) Substitution of Manager has been agreed to by
consent of at least a simple majority of the ownership interests of
the Members of the Company present at a duly constituted meeting
pursuant to Paragraph 1.12 above and evidenced by written amendment
of this Operating Agreement and the Articles of Organization.
(b) Except where herein expressly provided to the
contrary, all decisions of the Manager with respect to the
management and control of the Company shall be binding on the
Company. The Manager shall be responsible for conducting the
ordinary and usual business and affairs of the Company as more
fully set forth in, and as limited by, this Agreement. The Manager
may contract with third parties, including entities related or
controlled by any one of the Members, for the performance of
certain specified duties under the Manager's control at established
and approved rates; provided that any such agreements shall be
disclosed in writing to the Members within 15 days prior to the
effective date.
(c) No act shall be taken, sum expended, decision made,
or obligation incurred by the Company, the Manager, or any Member
with respect to a matter within the scope of any of the major
decisions (hereinafter called "Major Decisions") as enumerated
below, unless such of the Major Decisions have been approved by an
affirmative unanimous vote of a simple majority ownership interests
of the Members of the Company present at a duly constituted meeting
pursuant to Paragraph 1.12 above. The Major Decisions shall
include:
(1) Acquisition of any land or interest therein and
any equipment;
(2) Sublease or other transfer of the Real Property
and/or improvements constituting the SB-1 or SB-1A power plants;
(3) Construction of any improvements or the making
of any capital improvements, repairs, alterations, or changes to
the power plants not provided for in the Budget in amount exceeding
$5,000; and
(4) Making any expenditure or incurring any
obligation by or for the Company through (i) increasing any
budgeted expense line item by more than fifteen percent (15%) of
its monthly budgeted amount and (ii) causing such increase in such
budgeted expense line item to be in excess of $10,000 for the
annual budgeted line item, pursuant to Section 6.8 hereof.
4.3 Avoiding Stalemates. It is anticipated that there will
be unanimity between the Members as to issues requiring the vote of
the Members; however, if there is disagreement on any issue which
results in a stalemate or deadlock, then such issue shall be
submitted to mediation pursuant to Article XIII of this Operating
Agreement.
4.4 Duties of Manager of the Company.
(a) The Manager for and on behalf of the Company, shall
be responsible to the Member and in good faith use its best efforts
to implement or cause to be implemented all Major Decisions
approved by the Members and assigned to it by a vote of the Members
and to conduct or cause to be conducted the ordinary and usual
business and affairs of the Company in accordance with and as
limited by this Agreement, including the following:
(1) Protect and preserve the title or interest of
the Company with respect to the power plants and property and other
assets owned by the Company;
(2) Pay all ad valorem taxes, assessments, and
other impositions applicable to the power plants and other assets
owned by the Company;
(3) Negotiate, and, enter into and supervise the
performance of contracts covering the operation of the power plants
and other improvements on the property and a contract for the
operation of the power plants;
(4) Keep all books of account and other records of
the Company;
(5) Retain, or employ and coordinate the services
of all supervisors, architects, engineers, accountants, attorneys,
and other persons necessary or appropriate to carry out the
business of the Company; provided, however, unless provided for in
the Budget the Manager will not engage the services of any
architect, engineer, accountant, or attorney unless and until
approved by the Members, and at any time thereafter the Manager, in
their sole discretion, may discharge and terminate the services of
any party who may be rendering services to the Company;
(6) To the extent that funds of the Company are
available therefore, pay, all debts and other obligations of the
Company, including amounts due under interim or permanent financing
of improvements and other loans to the Company and costs of
construction, operation, and maintenance of the Company property
and improvements thereof;
(7) Maintain all funds of the Company held by
Manager in a Company account in a bank or banks selected by the
Manager;
(8) Make distributions periodically to the Members
in accordance with the provisions of this Agreement;
(9) Coordinate the management and operation of all
improvements constructed on the property, including the performance
of such functions as the collection of accounts receivable, site
operations, and providing repair and maintenance services to be
furnished by the Company, all in accordance with and as limited by
this Agreement and any Operating Agreement in effect;
(10) Negotiate, and, when executed by the Company,
supervise the performance of contracts covering the purchase and
installation of equipment, project operation and management
contracts and contracts for the construction of buildings and other
improvements on the property;
(11) Perform other normal business functions and
otherwise operate and manage the business and affairs of the
Company in accordance with and as limited by this Agreement; and
(12) Perform other obligations provided elsewhere in
this Agreement to be performed by the Manager.
(b) The Manager shall be obligated to perform the
responsibilities and obligations of the Manager hereunder assigned
to it only to the extent that funds of the Company are available
therefor. Notwithstanding any other provision hereof, the Manager
shall be liable only for bad faith or breach of an express
provision of this Agreement, but in other respects shall not be
liable for mistakes of judgment.
(c) Any provision hereof to the contrary
notwithstanding, except for expenditures made and obligations
incurred in direct pursuance to a Budget approved by the Members,
Manager shall not have authority to make any expenditure or incur
any obligation by or for the Company by (i) increasing any budgeted
expense line item by more than fifteen percent (15%) of its monthly
budgeted amount and (ii) causing such increase in such budgeted
expense line item to be in excess of $5,000 for the annual budgeted
line item, pursuant to Section 6.8 hereof, unless approved by the
Members.
Notwithstanding any provision hereof, Manager shall exercise
good-faith efforts not to expend more than a reasonable sum of
money for any goods purchased or services engaged in on behalf of
the Company.
(d) Except as from time to time may be approved by the
Members or as provided in the Budget, no part of Manager's office
overhead or Manager's general or administrative expense shall be
deemed to be an expense of the Company, except for out of pocket
travel or a reasonable mileage allowance.
In exercise of its management powers, the Manager is
authorized to execute and deliver all contracts, conveyances,
assignments, leases, subleases, franchise agreements, licensing
agreements, management contracts and maintenance contracts covering
or affecting the assets of the Company; all checks, drafts, and
other orders for the payment of the Company's funds; all promissory
notes, mortgages, deeds of trust, security agreements and other
similar documents; and all other instruments of any kind or charter
relating to the Company's affairs, whether like or unlike the
foregoing as necessary to perform those tasks assigned to it.
4.5 Time Devoted to Business and Non-Competition Area. FWC
as initial Manager shall devote such time to the business of the
Company as the Manager, in its discretion, deems necessary for the
efficient operation of the Company's business. It is acknowledged
that FWC has ownership and management interests in other power
plants and businesses and is totally unrestricted in doing so.
4.6 Information Relating to Company. Upon request, Manager
shall supply to any Member information regarding the Company or its
activities in its possession. Each Member or its authorized
representative shall have access to and may inspect and copy all
books, records, and materials in the possession of the Manager
regarding the Company or its activities. The exercise of the
rights contained in this Section 4.6 shall be at the requesting
Member's expense.
4.7 Indemnity. The Company shall indemnify and hold
harmless, Manager and each officer, director, shareholder and
employee thereof from any and all liability which may arise or be
alleged to arise out of, or in connection with, contractual
obligations incurred in the discharge by the same of any
obligations of the Manager pursuant to this Agreement, provided
that any such contractual obligation shall have been incurred by
any of the same in good faith exercise of judgment consistent with
the Budget pursuant to Section 6.8, hereof, or with any other
provision of this Agreement.
Neither Manager nor any of its officers, directors or
employees who perform services under this Agreement shall, in the
performance of this Agreement, be liable to the Company or any
other person for any act or omission, negligent, tortious or
otherwise, of any agent or employee of Members or of Manager or of
the Company and Manager shall be entitled to be indemnified and
saved harmless by the Company from all liability, loss, damage,
cost or expense by reason of any of the foregoing acts or
omissions. More over, the Company will, at Manager's request,
assume the defense of any proceeding brought by any third party to
establish any such liability.
Notwithstanding the foregoing, Manager will be fully
responsible to the Company and shall indemnify and hold harmless
the Company and its Members from and against any and all claims,
liability, loss, damage or cost or expense resulting from the gross
negligence or willful misconduct of the personnel of Manager.
4.8 Cash Management Procedures.
(a) A checking account in the name of the Company will
be established with a bank located near the principal place of
business in Salt Lake City, Utah. All sales proceeds, capital
contributions, earnings, or other cash receipts will be deposited
into that account.
(b) The checking account will pay directly all costs and
expenses relating to the operation of the Company business.
(c) All disbursements from the account shall be made in
accordance with pre-determined Budgets approved by the Members in
accordance with Sections 4.2(c)(3),(c)(4) and 4.4(C).
4.9 Records at Principal Place of Business. The Manager
shall cause the Company to keep at its principal place of business
the following:
(a) a current list in alphabetical order of full name
and last known business street address of each Member;
(b) a copy of the stamped Articles of Organization and
all certificates of amendment thereto, together with executed
copies of any powers of attorney pursuant to which any certificate
of amendment has been executed;
(c) copies of the Company's federal, state and local
income tax returns and reports, if any, for the three most recent
years;
(d) copies of any financial statements of the Company,
if any, for the three most recent years; and
(e) a copy of the most recent Operating Agreement, with
amendments made pursuant to Article XI.
ARTICLE V
COMPENSATION
5.1 Reimbursements of Expenses to Manager. The Manager shall
be entitled at all times, on demand, to reimbursement from the
Company's funds for its actual Reimbursable Expenses.
"Reimbursable Expenses", as that term is used herein, are expenses
incurred by the Manager in furthering the Company's business and
for which the Manager has approved reimbursement to be made and
which are in accordance with the Budget. Reimbursable Expenses
shall have priority over all other distribution to the Members, and
if not reimbursed within 30 days after demand, such amounts shall
become interest-bearing debts of the Company, payable at a rate two
percent (2%) above the prevailing prime rate, as quoted in the Wall
Street Journal Money Rates Section from time to time during the
duration of the loan.
5.2 Fees for Services Rendered. FWC shall be paid a monthly
management fee of $_____________. FWC shall be paid an accounting
fee of ________________ per month for the maintenance of the
general ledger, the preparation of financial statements and tax
returns and other related accounting services. Any additional
compensation for the services of FWC or any other Member, other
than distribution of shares of profits must be authorized by a
unanimous vote of Members.
5.3 Salaries and Other Compensation. Unless otherwise
provided herein, no Member shall receive any payment for services
rendered to the Company, except as may be authorized by a unanimous
vote of Members and/or as provided in the annual Budget.
ARTICLE VI
BOOKS, RECORDS AND ACCOUNTS, STATEMENTS, AND TAX RETURNS
6.1 Accounting Decisions by Manager. All decisions as to
accounting principles and elections, whether for book or tax
purposes shall be made by ___________.
6.2 Fiscal Year; Accrual Basis Accounting Method. The fiscal
year of the Company shall be the calendar year. The Company shall
use the accrual basis method of accounting which, after having been
adopted, can only be changed by the Manager and with the approval
of the IRS as may be required.
6.3 Maintenance of Books and Records. FWC shall have
physical possession of the books and records of the Company.
Complete and accurate books of account of the Company's affairs
shall be maintained at the Company's principal place of business.
Any Member hereof or its authorized representatives may examine any
of the books and records of the Company at any time during the
normal business day and without notice.
6.4 Monthly and Annual Statements. Promptly (20 days) after
the end of each month, there shall be prepared and delivered to
each Member a statement showing the results of operations during
said month. Promptly (75 days) after the end of each fiscal year,
there shall be prepared a balance sheet showing the assets and
liabilities of the Company at the close of the year and a statement
of income showing the results of operations for the year.
6.5 Federal Income Tax Returns - Method of Disposition.
(a) The Company shall not elect, for federal income tax
purposes, to capitalize any items of expense which may properly be
deducted. The Members agree that the Company shall utilize an
accelerated cost recovery method for any property to which such
method may be legally applied.
(b) All elections required or permitted for federal
income tax purposes, except those made for the first taxable year
of the Company and referred to in paragraph (a), shall be made by
the Manager.
6.6 Tax Status and Returns.
(a) Any provision hereof to the contrary
notwithstanding, solely for United States federal income tax
purposes, each of the Members hereby recognizes that the Company
will be subject to all provisions of Subchapter K of Chapter 1 of
Subtitle A of the Internal Revenue Code of 1986.
(b) The Manager shall prepare or cause to be prepared
all tax returns and statements, if any, which must be filed on
behalf of the Company regarding this Agreement with any taxing
authority, and shall submit such returns and statements to all the
Members within 60 days after the close of the fiscal year and make
timely filing thereof. In addition, within 60 days after the close
of the fiscal year, the Manager shall prepare and furnish each
Member with a report of such Member's distributive share of income
and expense setting forth in sufficient detail all such data and
information regarding the business of the Company which shall
enable the Company and each Member to prepare its federal and state
tax returns.
6.7 Transfers During Year. To avoid an interim closing of
the Company's books, the share of profits and losses under Article
VII of a Member who transferred part or all of his interest in the
Company during the calendar year shall be determined by taking his
proportionate share of the amount of the profits and losses for the
year. The Manager shall make the proration based on the portion of
the calendar year that has elapsed prior to the transfer. The
Manager shall allocate the balance of the profits and losses
attributable to the transferee of such interest.
6.8 Budget. By December 1 of each year the Manager shall
prepare and submit to the Members for their consideration a budget
("Budget") setting forth the estimated receipts and expenditures
(capital, operating, and other) of the Company for the period
covered by the Budget. The Budget shall be considered to be
approved by the Members, unless a meeting of the Members to
consider approval of the Budget is requested in writing by Members
holding at least a simple majority of the ownership interests of
the Members in the Company within 15 days of the date of mailing of
the Budget to the Members. Any meeting so requested shall be
scheduled by the Manager within 15 days of the date the request is
received. Changes to the proposed Budget may be made by vote of a
simple majority of the ownership interests of the Members of the
Company present at a duly constituted meeting pursuant to Paragraph
1.12 above. The Manager shall implement the Budget and shall be
authorized, without the need for further approval by the Members,
to make the expenditures and incur the obligations provided for in
the Budget.
ARTICLE VII
TRANSFERS OF MEMBERS INTERESTS
7.1 Lifetime Restriction. Except as provided otherwise in
this Article VII, or as agreed to in writing by all Members, no
Member may, during the Member's lifetime, sell, assign, transfer,
or otherwise encumber any part of the Member's membership interest
which the Member now owns or hereafter acquires.
7.2 Related Parties. At any time, a Member may make an inter
vivos transfer of all or part of the Member's membership interest
to any of the following related parties: Member, Member's spouse,
children, grandchildren, father or mother or to a trust or trusts
for the benefit of such family members. Provided, however, that a
Member shall have this right to transfer only if all of the
following conditions are met:
(a) The assignor shall state his intention in the
instrument of assignment that the assignee shall become a
substituted Member;
(b) The assignor and assignee shall execute such other
instruments as the Manager deems necessary or desirable to effect
admission of the substituted Member;
(c) The assignee shall execute this Agreement;
(d) The assignee shall bear all reasonable expenses
incurred in effecting the substitution; and
(e) The Member making the transfer shall remain the
trustee of the trust to which the conveyance is made.
The assignee shall not become a substituted Member until
the Manager has consented to the substitution and has executed an
acceptance with the transferee Member. Further, if such a transfer
is made, the substituted Member shall be bound to the terms of this
Agreement.
7.3 Right of First Refusal. If at any time a Member receives
a bona fide written offer from a third party for the purchase of
all or a part of that Member's membership interest, and if the
Member desires to accept the offer, or, if a Member proposes to
make any other transfer or gift of the Member's interest, the
Company and the other Members shall have options, as provided in
this Section 7.3, to purchase such part of the interest which is
the subject of the offer.
(a) Notice. The Member desiring to sell, exchange or
transfer the membership ("Seller") shall give prompt written notice
to the Company and the other Members of the offer, and shall attach
to Seller's notice a copy of the written offer, or shall provide
notice of the intent to exchange or transfer. Seller shall include
in Seller's notice a statement setting forth the offering price,
the identity of the offeror, and all other terms and conditions of
the offer or transfer. If the interest is to be exchanged for
property other than cash, Seller shall include in Seller's notice
a reasonable dollar value of that property, valued as of the date
of the written offer.
(b) Company's Right. For ten (10) business days after
receipt of Seller's notice, the Company shall have the right to
purchase the interest which is the subject of the written offer,
either at the same price and upon the same terms and conditions as
set forth in the written offer, or at the Purchase Price set forth
in Section 7.6 below, and upon the terms and conditions set forth
in Section 7.7; but in no event shall the price paid by the Company
exceed the Purchase Price determined under Section 7.6.
(c) Member's Right. If the Company does not exercise
the right to purchase the interest Seller proposes to sell, that
same option to purchase, as described in paragraph (b) above, shall
be given to the other Members for an additional ten (10) business
days period, beginning on the date of expiration of the Company's
option. In no event shall the total purchase price paid by the
other Member or Members desiring to exercise the option hereby
("Purchasing Members") exceed the Purchase Price determined under
Section 7.6.
In the absence of a unanimous agreement among the
Purchasing Members, the interest which is subject to the written
offer shall be divided according to the proportion that each
Purchasing Member's Capital Account (as defined in Sections 2.6 and
3.1) bears to the total of the Capital Accounts of all Purchasing
Members, as of the date Seller sends notice of the written offer;
provided, however, that the Purchasing Members may not, in the
aggregate, purchase less than the entire interest which is the
subject of the written offer received by Seller.
Purchasing Members shall become substituted Members with
respect to interests purchased under this paragraph (c), as soon as
the purchase has been accomplished according to the terms hereof
and the Member-Manager has consented to the substitution and has
executed an acceptance with the transferee Member. Further, if
such a transfer is made, the substituted Member shall be bound to
the terms of this Agreement.
(d) Failure to Exercise. If neither the Company nor the
other Members exercise their option to purchase, Seller, upon
written agreement of non-selling Members owning a majority
ownership interest, may sell or exchange Seller's interest
according to the terms and conditions of the written offer Seller
received, or the gift or transfer may then be accomplished,
provided that such transfer be consummated within ten (10) business
days following the expiration of the other Members' option period.
Thereafter, or in the event Seller receives and desires to accept
a new written offer, or make any other such transfer, Seller must
again give the notice required by paragraph (a) above, and the
Company and the other Members shall again have option periods, one
following the other, as provided in this Section 7.3.
The purchaser or transferee of Seller's interest under
this paragraph (d) shall not be entitled to become a substituted
Member and shall have only a right to receive the distributions to
which Seller would otherwise have been entitled unless the Manager
approves of the substitution.
7.4 Involuntary Transfer. In the event a Member's interest
is transferred by operation of law, including, without limitation,
execution of judgment, or on the divorce, bankruptcy, dissolution
or insolvency of the Member, the transferee shall not be entitled
to become a substituted Member, and shall only have a right to
receive the distributions to which the transferor-Member would
otherwise have been entitled. Such involuntary transfer, or a
material breach of this Agreement not cured within 15 days after
written notice from the party or parties injured by the breach,
shall be considered an offer for sale or transfer as set forth at
Section 7.3 herein, and the Company and Members shall have the
right to purchase the interest transferred in accordance with the
price and terms allowed under Sections 7.6 and 7.7 herein. The
Company and the Members shall have the option to purchase the
interest as provided under Section 7.3 above, with the first option
period beginning the date the Member filing bankruptcy or whose
interest is executed upon provides notice thereof similar to the
notice required under Section 7.3 above. The Member shall give
Company and the other Members notice of the occurrence of
bankruptcy or execution upon a judgment as soon as it occurs.
Failure to provide such notice shall not affect the rights of the
Company or the remaining Members who at any time exercise their
rights hereunder, with or without notice.
7.5 Transfers on Death. In the event of the death of any
Member, the Company and the remaining Members shall have an
absolute right to purchase all of the deceased Member's interest,
as follows:
(a) Company Right. The Company shall have, for a period
of ninety (90) days after appointment of an executor, administrator
or personal representative for the deceased Member, an option to
purchase the deceased Member's entire interest in the Company. The
Purchase Price and payment terms shall be determined in accordance
with Sections 7.6 and 7.7 below.
(b) Members' Right. If the Company does not exercise
the right to purchase the deceased Member's entire interest by
giving notice to the deceased Member's executor, administrator, or
personal representative, in writing, within said ninety-day period,
the option to purchase shall be given to the remaining Members for
an additional ten (10) day period, beginning on the day that the
Company's right to purchase expires. In the absence of a unanimous
agreement among the remaining Member or Members who desire to
participate in the exercise of this option ("Purchasing Members"),
the interest owned by the deceased Member shall be divided
according to the proportion that each Purchasing Member's Capital
Account (as defined in Sections 2.11 and 3.1) bears to the total
Capital Accounts of all of the Purchasing Members, as of the date
of the deceased Member's death; provided, however, that the
Purchasing Members may not, in the aggregate, purchase less than
the entire interest of the deceased Member. The Purchase Price and
payment terms shall be determined in accordance with Sections 7.6
and 7.7 below.
Purchasing Members shall become substituted Members with
respect to interests purchased under this paragraph (b) only upon
the consent of the Manager.
(c) Failure to Purchase. In the event the option to
purchase is not exercised by the Company or the remaining Members
as provided above, the assignee of the executor, administrator, or
personal representative of the deceased Member shall not be
entitled to become substituted Members and shall have only the
right to receive the distributions to which the deceased Member
would otherwise have been entitled.
7.6 Purchase Price. The Purchase Price for a Member's
interest sold by a Member to the Company or to another Member under
Sections 7.3 or 7.4, or sold by a deceased Member's estate under
Section 7.5, shall be the fair market value ("FMV") of the
interest, determined as follows:
(a) The Valuation Date for determining FMV shall be the
date of the written offer received by Seller in the case of a sale
under Section 7.3, the date of filing of bankruptcy or date of
execution on a judgment for interests to be acquired pursuant to
Section 7.4, or the date of death of the deceased Member, in the
case of a sale by the deceased Member's estate under Section 7.5.
(b) For all real property or interest therein the
Company shall pay for and obtain an appraisal as of the Valuation
Date performed by an independent appraiser.
(c) All other assets shall be valued at their book value
using GAAP as promulgated by the American Association of Certified
Public Accountants except Marketable Securities and other assets
which have a readily discernible value, which will be expressed at
such realizable value.
(d) The FMV of the Company shall then be determined by
the following formula: Sum of (a)(b)&(c) above minus total Company
liabilities at Valuation Date.
(e) The Purchase Price of the interest being purchased
shall be the product of the percentage of the whole Company which
the subject interest represents (based upon relative Capital
Account balances) as of the Valuation Date, multiplied by the FMV
of the Company determined in paragraphs (b) through (d) above.
7.7 Payment and Terms. Payment by the Company or the Members
for a sale by a Member under Sections 7.3 or 7.4, or for a sale by
a deceased Member's estate under Section 7.5 shall be made as
follows:
(a) Thirty percent (30%) of the Purchase Price shall be
paid within two (2) months after the Valuation Date defined in
Section 7.6(a).
(b) The balance shall be paid in four (4) equal annual
installments beginning on the first annual anniversary of the
initial payment.
(c) Interest on the unpaid principal balance shall be
charged at the Applicable Federal Rate in effect as of the
Valuation Date, as the Applicable Federal Rate is defined in Sec 1274
(or a successor provision) of the Internal Revenue Code, compounded
semiannually. If there is no Applicable Federal Rate in effect as
of the Valuation Date, the interest rate shall be the prime rate in
effect on the Valuation Date as published in the Wall Street
Journal. Interest shall begin to accrue after the first payment
date, compounded annually. Interest payments shall be made at the
time principal payments are made.
7.8 Proration of Gains, etc. for Tax Purposes. In the event
of any transfer or assignment of membership interests other than at
and as of the close of the Company's fiscal year, all items of
gain, loss, deduction or credit for the entire fiscal year in which
the transfer or assignment takes place shall be allocated between
the transferor and the transferee (or assignor and assignee) by
proration based on the portion of the fiscal year that has elapsed
prior to the transfer or assignment, regardless of whether those
items have been realized as of the date the transfer or assignment
takes place.
7.9 Transfer of Capital Account. Upon the transfer of all or
part of an interest in the Company, as permitted herein, the
capital account of the transferor that is attributable to the
transferred interest shall carry over to the transferee Member.
7.10 Additional or Substituted Members. Additional Members
may be added, or substituted Members may be admitted, to the
Company with the consent of the Manager.
7.11 Authority of Manager. Upon the terms set forth in this
Article VII, the Manager is authorized (a) to exercise the power of
attorney granted in Article X to amend this Operating Agreement or
the Articles of Organization to reflect a substitution or addition;
and (b) to file any such amendment in the appropriate depositories.
7.12 General Restrictions on Transfer. No interest in the
Company has been registered under the Securities act of 1933 or
pursuant to the laws of the State of Utah or any other state.
Therefore, no interest may be sold or exchanged unless the
registration provisions of said act have been complied with unless
in the opinion of the Company's counsel, satisfactory to the
Company, compliance with such provisions is not required.
ARTICLE VIII
DISSOLUTION AND TERMINATION
8.1 Final Accounting. In case of the Company's dissolution,
a proper accounting shall be made from the date of the last
previous accounting to the date of dissolution.
8.2 Liquidation. Upon the Company's dissolution and the
failure of the remaining Members to continue the Company as
provided in Section 1.6, the Manager shall act as liquidator to
wind up the Company. The liquidator shall have full power and
authority to sell, assign and encumber any or all of the Company's
affairs in an orderly and prudent manner.
8.3 Distribution of Liquidation Proceeds. Pursuant to the
winding up of the Company's affairs, the Company assets and the
proceeds from the disposition of Company assets shall be applied in
order of priority as follows:
(a) First, to creditors of the Company other than
Members;
(b) Second, to the payment of compensation to which the
Manager is entitled by reason of its management of the Company and
to the payment of any debts incurred or advancements made by the
Manager;
(c) Third, to Members other than Manager for any debts
of the Company to such Members;
(d) Fourth, to Members in the amount of the final
balances in their respective Capital Accounts (after the allocation
of all Company Profits, Losses and specially allocated items).
Each Member shall look solely to the asset of the Company for
the return of such Member's investment in the Company, and if such
assets or the proceeds from the liquidation of such assets are
insufficient to return said investment, such Member shall have no
recourse against any other Member. Liquidating distributions to
Members shall be made by the later of (i) the end of the Company
taxable year in which Liquidation occurs, or (ii) ninety (90) days
after Liquidation.
8.4 Return of Capital Contributions. No Member shall be
entitled to the return of specific property contributed to the
Company nor to any payments in liquidation of such Member's
interest in the Company other than in cash.
8.5 Negative Capital Account Balance. Notwithstanding
anything to the contrary in this Agreement, upon a liquidation
within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), if
any Member has a deficit Capital Account balance (after giving
effect to all contributions, distributions, allocations and other
Capital Account adjustments for all taxable years, including the
year during which such liquidation occurs), such Member shall have
no obligation to make any contribution to the capital of the
Company, and the negative balance of such Member's Capital Account
shall not be considered a debt owed by such Member to the Company
or to any other person for any purpose whatsoever.
8.6 Articles of Dissolution. When all debts, liabilities and
obligations of the Company have been paid and discharged or
adequate provisions have been made therefor and all of the
remaining property and assets of the Company have been distributed
to the Members, Articles of Dissolution shall be executed and filed
pursuant to Act Sec 48-26-139 and -140. Upon issuance by the State
of Utah of a certificate of dissolution, the Company shall be
terminated.
ARTICLE IX
SALE OF COMPANY ASSETS
9.1 Right of First Refusal. If at any time the Company
receives a bona fide written offer for the purchase or exchange of
all or a part of the power plants and assets owned by the Company
and if the Company desires to accept the offer, the Members shall
have options as provided in this Article IX, to purchase such
property which is the subject of the offer.
9.2 Notice. The Manager shall give prompt written notice to
the Members of any offer received for the sale or exchange of all
or a part of the assets owned by the Company and shall attach to
the notice a copy of the written offer. The notice and attachment
shall include a statement setting forth the offering price, the
identity of the offeror, and all other terms and conditions of the
offer. If the interest is to be exchanged for property other than
cash, the Company shall include in the notice a reasonable dollar
value of that property, valued as of the date of the written offer.
9.3 Member's Right. For ten (10) business days after the
Company approves the terms of the offer described above, if
approved by a simple majority of the Company interests present at
a duly constituted meeting pursuant to Paragraph 1.12 above, any
Member or group of Members shall have the right to purchase the
property interest which is subject to the written offer at the same
price and upon the same terms and conditions as set forth in the
written offer. In absence of a unanimous agreement among the
Purchasing Members, the property interest which is subject to the
written offer shall be divided according to the portion that each
Purchasing Member's Capital Account (as defined in Sections 2.6 and
3.1) bears to the total of the Capital Account (as defined in
Sections 2.6 and 3.1) bears to the total of the Capital Accounts of
all Purchasing Members, as of the date the Manager sends notice of
the written offer; provided, however, that the Purchasing Member or
Members may not, in the aggregate, purchase less than the entire
property interest which is the subject of the written offer
received by the Company.
9.4 Failure to Exercise. If none of the Members exercise
their option to purchase, the Manager may sell or exchange such
property pursuant to Section 4.2(c)(2) above according to the terms
and conditions of the written offer the Company received, provided
that such transfer be consummated within ten (10) business days
following the expiration of the Members' option period.
Thereafter, or in the event the Company or Manager receives and
desires to accept a new written offer, or make other such transfer,
the Manager must again give notice required by Section 9.2 above,
and the Members shall again have option periods as provided in this
Article IX.
ARTICLE X
POWER OF ATTORNEY
10.1 Grant of Power. Subject to Article XI each of the
Members do hereby irrevocably constitute and appoint the Manager as
his true and lawful attorney and agent with full power and
authority in his name, place and stead to execute, acknowledge,
deliver, file and record documents which will include, but not be
limited to the following: (i) Articles of Organization, as well as
amendments thereto, under the laws of the State of Utah, or the
laws of any other state in which such Articles or equivalent are
required to be filed; (ii) any certificates, instruments and
documents, including Fictitious Name Certificates, as may be
required by, or may be appropriate under the laws of any state or
other jurisdiction in which the Company is doing or intends to do
business in connection with the use of the name of the Company by
the Company; (iii) any other instrument which may be required to be
filed by the Company under the laws of any state or by any
governmental agency, or which the Manager deems it advisable to
file; and (iv) any documents which may be required to effect the
continuation of the Company, the admission of any Additional or
Substituted Member, or the dissolution and termination of the
Company, provided such continuation, admission or dissolution and
termination are in accordance with the terms of the Agreement.
10.2 Survival. The power of attorney granted herein is
expressly intended by each Member to be a special power of attorney
coupled with an interest and irrevocable, and such power shall
survive the death of any Member and the delivery of any assignment
by a Member of all or any portion of his Member interest; except
that where the assignee thereof has been approved by the Manager
for admission to the Partnership as a Substitute Member, the Power
of Attorney shall survive the delivery of such assignment for the
sole purpose of enabling the Manager to execute, acknowledge and
file the instrument necessary to effect such substitution.
10.3 Further Action. Pursuant to the power of attorney
granted herein by the Members to the Manager, each Member
authorizes said attorney to take any further action which said
attorney shall consider necessary or convenient in connection with
any of the foregoing, hereby giving said attorney full power and
authority to do and perform each and every act and thing whatsoever
requisite and necessary to be done in and about the foregoing as
fully as said Member might or could do if personally present, and
hereby ratifying and confirming all that said attorney shall
lawfully do or cause to be done by virtue hereof.
10.4 Manager. The Manager, when exercising this power of
attorney for each Member, may do so by a facsimile signature by one
of its officers or by listing all of the Members executing any
instrument with a single signature of one of its officers as
attorney-in-fact for all of them.
10.5 No Amending. Nothing in this section shall be construed
to give the Manager the power to amend this Operating Agreement or
the Articles of Organization without the vote of the Members.
ARTICLE XI
AMENDMENT TO AGREEMENT OR ARTICLES
Except as otherwise provided herein, this Agreement or the
Articles of Organization may be amended or amended and restated at
any time upon the unanimous affirmative vote of the Members. Any
amendment to this Operating Agreement or to the Articles of
Organization may be proposed to the Members by the Manager. The
Manager shall submit to the Members any such proposed amendment and
the recommendation of the Manager as to its adoption within at
least fifteen (15) days of the date of the meeting of Members.
ARTICLE XII
NOTICES
12.1 Method for Notices. All notices hereunder shall be sent
by first certified mail, return receipt requested, postage prepaid
and addressed as set forth in Section 1.10 above (except that any
Member may from time to time give notice changing address for such
purpose) and shall be effective on the date of receipt or upon the
fifth day after mailing, whichever is earlier.
12.2 Computation of Time. In computing any period of time
under this Operating Agreement, the day of the act, event or
default from which the designated period of time begins to run
shall not be included. The last day of the period so computed
shall be included, unless it is a Saturday, Sunday or legal
holiday, in which event the period shall run until six o'clock p.m.
of the next day which is not a Saturday, Sunday or legal holiday.
ARTICLE XIII
GOVERNING LAW AND ATTORNEY'S FEES
This Agreement shall be construed in accordance with, governed
by the laws of, and enforced in, the State of Utah and in the event
of any unresolvable dispute, the parties agree to first submit the
issue to non-binding mediation to be paid for by the Company. If
mediation fails, then the Parties agree that any suit brought to
interpret or enforce this Agreement shall be in Salt Lake County,
Utah and that the prevailing party shall be entitled to reasonable
attorney's fees, costs and expenses.
ARTICLE XIV
GENERAL PROVISIONS
14.1 Entire Agreement. This Operating Agreement contains the
entire agreement among the parties and shall be binding upon and
shall insure to the benefit of the parties, and their respective
personal representatives, successors and assigns, except as set
forth above.
14.2 Construction Principles. Words in any gender shall be
deemed to include the other gender. The singular shall be deemed
to include the plural and vice versa. The headings and underlined
paragraph titles are for guidance only and shall have no
significance in the interpretation of this Operating Agreement.
14.3 Counterparts. The Agreement may be executed in any
number of counterparts, each of which shall be deemed an original
and as executed shall constitute one agreement, binding on all
Members even though all Members do not sign the same counterpart.
14.4 Severance Clause. The invalidity or unenforceability of
any part of this Agreement shall not invalidate or affect the
remainder, which shall continue to govern the relative rights and
duties of the parties as though the invalid or unenforceable part
were not a part hereof.
14.5 Attorney's Fees. In the event any Member or the Company
shall breach this Agreement, the non-breaching parties shall be
entitled to recover from the breaching party all attorney's fees
and costs incurred in enforcing this Agreement, with or without
suit.
14.6 Signatures. The individuals signing this Agreement on
behalf of their respective entities, certify, warrant and represent
their authority to do so and that their signatures herein are fully
authorized by and are binding upon such entity: (i) if the
respective Member is a corporation, pursuant to a resolution
adopted by vote of the requisite percentage of directors required
by the Articles of Incorporation or Bylaws of the Corporation; and
that said resolution has not been altered, amended or revoked, and
(ii) if the respective member is of a limited liability company,
pursuant to the Articles of Organization and Operating Agreement,
and (iii) if the respective Member is a partnership, pursuant to
the signatures of the general partners herein.
IN WITNESS WHEREOF, the Members have signed this Operating
Agreement to be effective as of the date first written above.
MEMBERS:
Far West Capital, Inc.
By: ___________________________
Alan O. Melchior
Its: President
U.S. Envirosystems, Inc.
By: _________________________
Its: _________________________
EXHIBIT "A"
REAL PROPERTY DESCRIPTION
EXHIBIT "B"
OWNERSHIP RATIOS
FOR SHARING OF PROFITS AND LOSSES
The Members' percent of ownership for sharing profits and
losses are as follows:
OWNERSHIP
MEMBER PERCENTAGE
FWC 50%
USE 50%
Total
100%
EXHIBIT "B"
PERMITTED EXCEPTIONS
1. Rights of way for roads, ditches, pipelines, pole and
transmission lines as set forth in instruments recorded in Book 39,
Page 189 of Deeds.
2. A Mortgage to secure various bond indentures recorded December
17, 1940 in Book 72, Page 298 of Mortgages, which has been
supplemented by various instruments of record.
Mortgagor: SIERRA PACIFIC POWER COMPANY
Mortgagee: THE NEW ENGLAND TRUST COMPANY, its successors
and assigns
3. A right of way and easement for roadway purposes according to
that certain indenture made and entered into on the 25th day of
June, 1946 by and between H. AL PEIGH and HUBERT V. HAILMAN and
NINA M. HAILMAN, his wife, Document No. 142754, recorded in Book
184 of Deeds, at Page 237, Records of Washoe County, Nevada.
4. Any easements as shown and disclosed on a Record of Survey
recorded June 24, 1971 as Document No. 210116, as Survey No. 683 of
Washoe County Official Records.
5. An easement for aerial communication facilities, poles,
anchors, guys, wires and incidental purposes as conveyed to Bell
Telephone Company of Nevada in an instrument recorded November 7,
1980 in Book 1566, Page 569 as Document No. 705103 of Official
Records.
6. The terms, covenants and provisions in an unrecorded
Geothermal Resources Lease dated November 18, 1983, executed by
SIERRA POWER COMPANY as Lessor, and Geothermal Development
Associates, as Lessee, as disclosed by a Memorandum of Lease,
recorded January 8, 1985 in Book 2115, Page 321, as Document No.
971913 of Official Records. Said Lease was amended by Letter
Amendment dated January 7, 1985 and Amended Memorandum of Lease
recorded January 11, 1985 in Book 2116, Page 812, as Document No.
972684 of Official Records, and as disclosed by that certain
Memorandum of Lease, Assignment of Lease and Purchase Agreement
recorded April 7, 1986 in Book 2317, Page 368, as Document No.
1062824 of Official Records. Then Lessee's interest under said
Lease has been assigned to FAR WEST HYDROELECTRIC FUND, LTD., a
Utah limited partnership by Assignment of Lease recorded December
31,1 985 in Book 2272, Page 756, as Document No. 1043168 of
Official Records, and as disclosed by that certain Memorandum of
Lease, Assignments of Lease and Purchase Agreement recorded April
7, 1986 in Book 2317, page 368 as Document No. 1062824 of Official
Records.
An assignment of royalties to Benson, Schwarzhoff and Helzel,
a California general partnership by assignment executed by FAR WEST
HYDROELECTRIC FUND, LTD., and recorded August 5, 1988 in Book 2778,
Page 707, as Document No. 1264804 of Official Records.
Said Lease was amended by an instrument entitled AMENDED
MEMORANDUM OF LEASE recorded November 13, 1989 in Book 2992, Page
660 as Document No. 1362214 of Official Records.
7. The terms, covenants and conditions of an unrecorded option
agreement dated July 3, 1985 between Benson, Schwarzhoff and Helzel
and Ormat Systems, Inc., the rights and obligations of Ormat
Systems, Inc., having been assigned to Far West Hydroelectric Fund,
Ltd., as disclosed by an assignment recorded August 5, 1988 in Book
2778, Page 707, as Document No. 1264804 of Official Records.
8. The terms, covenants and provisions in an unrecorded
Geothermal Resource Sublease dated October 28, 1988, executed by
Far West Hydroelectric Fund, Ltd., a Utah limited partnership, as
Lessor, and Far West Capital, Inc., a Utah corporation, as
disclosed by a Memorandum recorded January 5, 1989 as Document No.
129633 of Official Records.
Said Sub-Lease was amended by an instrument entitled
MEMORANDUM OF REVISED AND RESTATED GEOTHERMAL RESOURCES SUBLEASE as
recorded October 19, 1989 in Book 2980, Page 60, as Document No.
1356739 of Official Records. Said instrument discloses, among
other thins, an unrecorded assignment of the sublessee's interest
to 1-A Enterprises, a Nevada General Partnership. Said Assignment
was subsequently recorded on April 2, 1990 in Book 3056, Page 871,
as Document No. 1390164 of Official Records.
9. A Financing Statement recorded November 13, 1989 in Book 2992,
Page 667, as Document No. 1362215 of Official Records.
Debtor : 1-A ENTERPRISES, a Nevada general
partnership
Secured Party : SIERRA PACIFIC POWER COMPANY
10. A Deed of Trust to secure an indebtedness of $3,000,000.00,
and any other amounts due thereunder recorded January 16, 1990 in
Book 3022, Page 359, as Document No. 1374620 of Official Records.
Dated : December 28, 1989
Trustor : 1-A ENTERPRISES, a Nevada general
partnership
Trustee: : FIRST AMERICAN TITLE COMPANY OF NEVADA
Beneficiary : WESTINGHOUSE CREDIT CORPORATION
A Financing Statement recorded January 16, 1990 as Document
No. 1374621 of Official Records.
Debtor: : 1-A ENTERPRISES, a Nevada general partnership
Secured Party : WESTINGHOUSE CREDIT CORPORATION
11. A Deed of Trust to secure an indebtedness of $8,000,000.00,
and any other amounts due thereunder recorded January 16, 1990 in
Book 3022, Page 300, as Document No. 1374623 of Official Records.
Dated: : December 28, 1989
Trustor : FAR WEST ELECTRIC ENERGY FUND, L.P.
Trustee : FIRST AMERICAN TITLE COMPANY OF NEVADA
Beneficiary : WESTINGHOUSE CREDIT CORPORATION
A Financing Statement recorded January 16, 1990 as Document
No. 1374624 of Official Records.
Debtor : FAR WEST ELECTRIC ENERGY FUND, L.P.
Secured Party : WESTINGHOUSE CREDIT CORPORATION
12. A Judgment recorded March 19, 1991 in Book 3228, Page 372, as
Document No. 1466577 of Official Records.
Plaintiff : BRUCE D. BENSON, DALE L. SCHWARZHOFF, and LEO
B. HELZEL doing business as BENSON, SCHWARZHOFF &
HELZEL
Defendant: FAR WEST ELECTRIC ENERGY FUND, L.P., a Delaware
limited partnership, et al
Case No. : CV89-6059 in the SECOND JUDICIAL DISTRICT COURT
OF THE STATE OF NEVADA IN AND FOR THE COUNTY OF
WASHOE
A partial Satisfaction of Judgment was recorded June 14, 1991
in Book 3276, Page 664 as Document No. 1487126 of Official Records.
13. Terms, conditions and provisions of that certain AGREEMENT RE
PAYMENT OF ROYALTIES dated NOT SHOWN, by and between BRUCE D.
BENSON, DALE L. SCHWARZHOFF, and LEO B. HELZEL, collectively doing
business as a California general partnership known as BENSON,
SCHWARZHOFF and HELZEL and FAR WEST ELECTRIC ENERGY FUND, L.P., a
Delaware limited partnership and 1-A ENTERPRISES, a Nevada general
partnership, ALAN O. MELCHIOR, THOMAS A. QUINN MARK O. ZOBRIST,
general partners recorded May 21, 1991 in Book 3261, Page 662, as
Document No. 480966 of Official Records. Reference is hereby made
to said document for further and other particulars.
14. An Action commenced December 10, 1993, in the SECOND JUDICIAL
DISTRICT COURT OF THE STATE OF NEVADA IN AND FOR THE COUNTY OF
WASHOE, Case No. CV93-07371.
Plaintiff : THE STATE OF NEVADA, on relation of
its Department of Transportation
Defendant: SIERRA PACIFIC POWER COMPANY, a Nevada
corporation; ORMAT SYSTEMS, INC., a Delaware corporation; FAR WEST
ELECTRIC ENERGY FUND, L.P., a Delaware limited partnership; FAR
WEST CAPITAL, INC., a Utah corporation; 1-A ENTERPRISES, a Nevada
general partnership; WESTINGHOUSE CREDIT CORPORATION, a Delaware
corporation; FIRST AMERICAN TITLE COMPANY OF NEVADA; COUNTY OF
WASHOE, a political subdivision of the State of Nevada; and all
other persons unknown claiming any right, title, estate, lien or
interest in the real property described in the complaint
to/for : To obtain a judgment of condemnation
for public use.
Notice of Pendency of said action was recorded December 15,
1993, in Book 3928, Page 379, as Document No. 1743074 of Official
Records.
Please be advised that no Final Order of Condemnation has been
recorded, but the Washoe County Assessor has severed the land to
the Highway Department.
15. A UCC-1 Financing Statement recorded March 22, 1995, in Book
4268, Page 175, as Document No. 1879901, Official Records.
Debtor(s) : FAR WEST ELECTRIC ENERGY FUND, L.P.
Secured Party : WESTINGHOUSE ELECTRIC CORPORATION
(Successor to WESTINGHOUSE CREDIT
CORPORATION)
16. A UCC-1 Financing Statement recorded March 22, 1995, in Book
4268, Page 183, as Document No. 1879902, Official Records.
Debtor(s) : 1-A ENTERPRISES
Secured party : WESTINGHOUSE ELECTRIC CORPORATION
(Successor to WESTINGHOUSE CREDIT
CORPORATION)
SB-1 SCHEDULE OF ROYALTIES
FIRST 10 YEARS
PAYEE: % OF GROSS REVENUES
1. Sierra Pacific Power Company 10.00000%
P.O. Box 10100
Reno, NV 89520-0026
Attention: General Accounting
2. Benson, Schwarzhoff & Helzel 3.888%
5550 Redwood Road
Oakland, CA 94619-3120
Attention: Dale Schwarzhoff
3. Mr. G. Martin Booth III 0.08100%
c/o Geothermal Development Associates
251 Ralston Street
Reno, NV 89503
4. Richard W. Harris 0.08100%
P.O. Box 70250
Reno, NV 89570-0250
5. Geothermal Development Associates $50,000.00
/ year
Attn: Mr. G. Martin Booth III 4,166.67
/ month
251 Ralston Street
Reno, NV 89503
Development Costs
SECOND 10 YEARS
1. Sierra Pacific Power Company 10.00000%
P.O. Box 10100
Reno, NV 89520-0026
Attention: General Accounting
2. Benson, Schwarzhoff & Helzel 3.888%
5550 Redwood Road
Oakland, CA 94619-3120
Attention: Dale Schwarzhoff
3. Mr. G. Martin Booth III 0.08100%
c/o Geothermal Development Associates
251 Ralston Street
Reno, NV 89503
4. Richard W. Harris 0.08100%
P.O. Box 70250
Reno, NV 89570-0250
5. Geothermal Development Associates - 25% of Annual net
operating revenues.
251 Ralston Street
Reno, NV 89503
6. Benson, Schwarzhoff & Helzel - 1.667% of Annual net
operating revenues.
5550 Redwood Road
Oakland, CA 94619-3120
Attention: Dale Schwarzhoff
7. Ormat, Inc. - 3.333% of Annual net operating revenues.
980 Greg Street
Sparks, NV 89431
AFTER YEAR 20
1. Sierra Pacific Power Company 10.00000%
P.O. Box 10100
Reno, NV 89520-0026
Attention: General Accounting
2. Benson, Schwarzhoff & Helzel 0.03888%
5550 Redwood Road
Oakland, CA 94619-3120
Attention: Dale Schwarzhoff
3. Mr. G. Martin Booth III 0.08100%
c/o Geothermal Development Associates
251 Ralston Street
Reno, NV 89503
4. Richard W. Harris 0.08100%
P.O. Box 70250
Reno, NV 89570-0250
5. Geothermal Development Associates - 25% of Annual net
operating revenues.
251 Ralston Street
Reno, NV 89503
6. Benson, Schwarzhoff & Helzel - 8.333% of Annual net
operating revenues.
5550 Redwood Road
Oakland, CA 94619-3120
Attention: Dale Schwarzhoff
7. Ormat, Inc. - 16.667% of Annual net operating revenues.
980 Greg Street
Sparks, NV 89431
For purposes of calculating net revenue royalties net revenues
are defined as follows:
"Net Proceeds from electricity sales from Steamboat 1 less
royalties, including the BSH overriding production royalty and
other royalties and all reasonable, necessary, and normal expenses
of the Steamboat 1 power plant, as determined on an accrual basis
applicable to the year for which the determination is made,
including operation, maintenance, warranty work, parts, labor,
general overhead, services, severance and property taxes,
insurance, casualty loss, and any other cost or expense reasonably
calculated or necessary to maintain and operate the Steamboat 1
power plant and preserve its revenue stream so that Annual Net
Operating Revenues will consist of the net cash flow from the
Steamboat 1 power plant before debt service, income taxes,
distributions to equity investors (including the Fund and its
partners) and overhead associated with such equity investors.
Annual Net Operating Revenues shall be calculated for the twelve
months beginning March 1 of each year and ending with the last day
of February of the following year."
SCHEDULE 1
SB-1A ROYALTY PAYMENT SCHEDULE TO
SIERRA PACIFIC POWER COMPANY
At the end of the month during which Initial Operation occurs
(January 1989) and at the end of each monthly billing period
thereafter, the SB-1A shall pay to the Sierra Pacific Power Company
("SPPC") an amount equal to the product the royalty payment
percentage as noted below in Column II and the gross sales of
electricity from the Plant, during each such monthly billing
period. For the purposes of this Exhibit, a "year" shall be
defined as the period beginning on the date of initial operation
(December 8, 1988) and every anniversary thereof, and ending at
2400 hours on the following anniversary of the date of initial
operation.
Column I Column II Column III
Year After Royalty Payment
Eleventh Year
Initial Operation Percentage
Payment Percentage
1st 89 4% 6%
2nd 90 4% 6%
3rd 91 4% 6%
4th 92 4% 6%
5th 93 4% 6%
6th 94 4% 6%
7th 95 6% 4%
8th 96 8% 2%
9th thru 30th 97-18 10% 0
3. In addition to the payment described above, Lessee shall be
obligated to pay Lessor an amount, no later than 180 days after the
tenth anniversary of the date of initial operation, calculated as
follows ("Eleventh Year Payment"):
At the end of each monthly Billing Period during the first ten
years after initial operation, SPPC shall calculate the product of
the gross sales of electricity from the Plant for that monthly
billing period multiplied by the percentage listed for that year in
Column III above. The Eleventh Year Payment shall equal the sum of
the monthly amounts, described above, plus interest accrued monthly
at an annual rate of 11.9%.
SB-1A
SCHEDULE OF ROYALTIES
DURATION OF PLANT LIFE
FIRST 10 YEARS
PAYEE: % OF GROSS REVENUES
1. Sierra Pacific Power Company 10.00000%
accrued
P.O. Box 10100
Reno, NV 89520-0026
Attention: General Accounting
2. Benson, Schwarzhoff & Helzel 3.888%
5550 Redwood Road
Oakland, CA 94619-3120
Attention: Dale Schwarzhoff
3. Mr. G. Martin Booth III 0.08100%
c/o Geothermal Development Associates
251 Ralston Street
Reno, NV 89503
4. Richard W. Harris 0.08100%
P.O. Box 70250
Reno, NV 89570-0250
Royalties shown in paragraphs 3 and 4 are only applicable to
revenues from the first 43.8 million KWH from a combination of SB-1
and SB-1A.
At the end of the first ten years of operation the difference
between royalties paid and accrued royalties must be paid. (See
Schedule 1 attached).
EXHIBIT "C"
OPERATION AND MAINTENANCE AGREEMENT
BETWEEN
STEAMBOAT ENVIROSYSTEMS, L.C.
AND
S. B. GEO, INC.
DATED AS OF
March 1, 1996
Steamboat 1 & 1-A
Geothermal Facilities at
Steamboat Springs, Washoe County
Nevada
TABLE OF CONTENTS
Page
ARTICLE 1 DEFINITIONS 5
ARTICLE 2 TERM OF AGREEMENT; RELATIONSHIP OF PARTIES 10
2.1 Term 10
2.2 Parties' Representatives 10
2.3 Relationship of the Parties 10
2.4 Confidential Information 11
2.5 Access 11
ARTICLE 3 COVENANTS OF OPERATOR 12
3.1 Duties of Operator After Commencement Date 12
3.2 Records 14
3.3 Annual Operating Plan 14
3.4 Changes in Operation and Maintenance 15
3.5 Quarterly Reports 15
3.6 Testing 16
3.7 Maintenance of Qualifying Facility Status 16
3.8 Notice of Outages 16
3.9 Representations and Warranties 16
3.10 Obligations on Termination 17
3.11 Payment of Fines, Penalties and Liquidated Damages 17
ARTICLE 4 COVENANTS OF STEAMBOAT 18
4.1 Steamboat's Obligations 18
ARTICLE 5 PAYMENTS 18
5.1 Operation and Management Costs 18
5.2 Incentive Program 19
5.3 Payment of Fees and Bonus 20
ARTICLE 6 REPRESENTATIONS AND WARRANTIES 20
6.1 Representations and Warranties of Operator 20
6.2 Representations and Warranties of Steamboat 21
ARTICLE 7 DEFAULTS AND REMEDIES 22
7.1 Defaults by Operator 22
7.2 Remedies for Operator Default 23
7.3 Defaults by Steamboat 24
7.4 Remedies for Steamboat Default 24
7.5 Labor Difficulties 24
7.6 Uncontrollable Circumstance 25
7.7 Resumption of Performance 25
7.8 Continuing Uncontrollable Circumstance 25
ARTICLE 8 DISPUTE RESOLUTION 25
8.1 Arbitration 25
8.2 Availability of Arbitration 25
8.3 Arbitration Notice 25
8.4 Procedure 26
8.5 Additional Parties 26
8.6 Enforceability 26
8.7 Venue 27
8.8 Continuance of Contract Performance 27
8.9 Cost 27
ARTICLE 9 INDEMNIFICATION 27
9.1 Operator Indemnification 27
9.2 Cooperation Regarding Claims 27
9.3 Waiver of Subrogation 28
ARTICLE 10 INSURANCE 28
10.1 Operator Insurance Coverage 28
10.2 Evidence of Insurance 29
10.3 General Insurance Provisions 29
ARTICLE 11 MISCELLANEOUS 30
11.1 Assignment 30
11.2 Consequential Damages 30
11.3 Effect of Termination 30
11.4 Overdue Obligations to Bear Interest 30
11.5 Notices 30
11.6 Waiver 31
11.7 Entire Agreement; Modification 31
11.8 Governing Law 31
11.9 Counterparts 31
11.10 Severability 31
11.11 Further Assurances 31
11.12 Headings 32
11.13 Waiver of Liens 32
11.14 Appointment of Facilities Manager 32
11.15 Disposal of Materials and Equipment 32
EXHIBITS
Exhibit A - Anticipated Performance Standards
Exhibit B - Facilities Administrative Procedures
Exhibit C - Facility Work Force
Exhibit D - Operator's Operating Equipment
Exhibit E - Operator Approvals
OPERATION AND MAINTENANCE AGREEMENT
THIS OPERATION AND MAINTENANCE AGREEMENT (this "Agreement"),
entered into as of the 30th day of November, 1995, between SB GEO,
Inc., a Utah corporation ("Operator"), and STEAMBOAT ENVIROSYSTEMS,
L.C., a Utah limited liability company ("Steamboat"),
W I T N E S S E T H:
WHEREAS, Steamboat has been organized to own and operate two
(2) geothermal power plants and related geothermal wells and
interconnection equipment (respectively, the "Steamboat 1 Facility"
and the "Steamboat 1A Facility"), located in Washoe County, Nevada;
and
WHEREAS, Steamboat is assignee under an agreement with Sierra
Pacific Power Company for the purchase and sale of the electricity
produced by the Facilities; and
WHEREAS, Steamboat is assignee under a geothermal resources
lease with SPPC, pursuant to which Steamboat has the right to own
power plants and operate them and develop the geothermal resources
on certain property in Washoe County, Nevada; and
WHEREAS, Operator is willing to operate and maintain the
Facilities in accordance with the terms hereof;
NOW THEREFORE, in consideration of the covenants and
agreements and subject to the terms and conditions set forth
herein, and for other good and valuable consideration, the receipt
and adequacy of which are hereby specifically acknowledged,
Steamboat and Operator agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the
meanings set forth below such definitions to be equally applicable
to the singular and plural form of the terms defined):
"Affiliate" shall mean, with respect to any Person, a Person
that controls, is controlled by, or is under common control with,
such Person or any successor thereto.
"Annual Operating Plan" shall have the meaning set forth in
section 3.4.
"Anticipated Performance Standards" shall mean the electrical
power generation performance standards, set forth in Exhibit A
hereto.
"Approvals" shall mean all consents, rights, exemptions,
concessions, permits, easements, rights of way, licenses,
authorizations, certificates, orders, franchises, determinations or
other approvals of any Government Agency or Person required for the
development, design, construction, start-up and operation of the
Facilities, including but not limited to all approvals set out or
referred to in the Exhibits hereto.
"Arbitration Notice" shall have the meaning set forth in
section 8.3.
"Billing Period" shall mean a period of one (1) calendar
month, except that (a) the first Billing Period of each Contract
Year shall begin on the first day of such Contract Year and shall
continue to and including the last day of the month in which such
Contract Year begins and (b) the last Billing Period of each
Contract Year shall end on the last day of such Contract Year if
such day is not otherwise the last day of a Billing Period.
"Business Day" shall mean any day other than a Saturday,
Sunday or other day on which banks are authorized to be closed in
Nevada, Utah or New York.
"Commencement Date" shall mean, in respect of each Facility,
the date this Agreement is executed by the parties hereto.
"Contract Date" shall mean the date of this Agreement.
"Contract Term" shall have the meaning set forth in section
2.1.
"Contract Year" shall mean with respect to (i) the first
Contract Year, the period from and including the date of this
Agreement to the day preceding the first anniversary of said date,
and (ii) each subsequent Contract Year, the period beginning on the
day following the last day of the preceding beginning on the day
following the last day of the preceding Contract Year and ending on
the day preceding the next succeeding anniversary of the date of
this Agreement.
"Dispute" shall mean any claim, dispute, disagreement or
other matter in question between Operator and Steamboat that arises
with respect to the performance, nonperformance or breach by
Operator or Steamboat of their respective obligations under this
Agreement.
"Emission Standards" shall mean the air emissions limits
contained in the Approvals.
"Event of Default" shall have the meaning set forth in
sections 7.1 and 7.3 hereof.
"Exhibit" shall mean an exhibit which is incorporated in and
made a part of this Agreement, as such exhibit may be modified from
time to time in accordance with the terms hereof.
"Facility" shall mean each of the geothermal generating
facilities, known as Steamboat 1 and Steamboat 1A, respectively,
and related geothermal wells and interconnection equipment,
together with all additions, appurtenant leases and easements,
structures and equipment associated therewith and owned or
controlled by Steamboat and "Facilities" shall mean, collectively,
the Steamboat 1 Facility and the Steamboat 1A Facility.
"Facilities Administrative Procedures" shall mean, as a
minimum, but shall not be limited to, the procedures, implemented
independently or in combination, set forth in Exhibit B hereto, as
each of those procedures is more fully described in the Operator
Proposal.
"Facility Operating Standards" and "Operating Standards"
shall mean the standards set forth in (i) the Project Operations
and Maintenance Manual, (ii) Prudent Utility Practices, (iii) the
Power Purchase Agreement, (iv) this Agreement, including the
requirements set forth in each of the clauses of section 3.2
hereof, (v) the Annual Operating Plan for the current Contract
Year, (vi) the Emissions Standards, and (vii) the Facilities
Administrative Procedures.
"Facilities Site" shall mean the real property (including
easement rights) leased to Steamboat (as successor in interest to
Far West) as lessee by SPPC under the Facility Site Lease.
"Facility Site Lease" shall mean collectively the Geothermal
Resources lease, dated November 18, 1983, between SPPC and
Steamboat (as successor in interest) and the Revised and Restated
Geothermal Resources Sublease dated October 9, 1989 between
Steamboat as successor in interest of Far West Electric Energy
Fund, L.P. as Lessor and as successor in interest to 1-A
Enterprises as Lessee.
"Facility Tools" shall mean (i) any special tools which are
furnished by the manufacturer of equipment incorporated in the
Facilities to be used in connection with that equipment and (ii)
any and all tools, purchased for either Facility at any other time
which tools are required to carry on normal operation and repair of
the Facilities. For the purposes of this Agreement, "Facility
Tools" shall also include all furniture, fittings, fixtures and
office equipment of whatever nature (including, without limitation,
all computer hardware and software and associated equipment)
purchased by or on behalf of Steamboat for use at, or in connection
with, the operation of the Facilities from time to time.
"Facility Work Force" shall have the meaning set forth in
Exhibit C hereto, provided that the size and nature of the Facility
Work Force do not deviate in any material respect from those
described in the Operator Proposal, unless otherwise agreed by the
parties.
"Far West" shall mean Far West Capital, Inc., a Utah
corporation.
"Generally Accepted" shall mean with respect to any practice,
procedure or method herein, such practice, procedure or method,
consistent in all relevant respects with Prudent Utility Practices,
as would be employed or used by a person exercising good
professional judgment who is competent to perform such practice,
procedure or method.
"Gross Margin" shall mean, in respect of any Person, the
documented net pretax operating profit of that Person.
"Indemnified Party" shall have the meaning set forth in
section 9.1.
"Major Maintenance" shall mean, in respect of any Facility,
all necessary overhaul (with the exception of minor repairs),
replacement, major repair, calibration and cleaning of that
Facility and that Facility's mechanical and electrical equipment.
Overhaul and repair shall be performed in accordance with the
manufacturer's current recommendations, the reasonable
recommendations of Operator and Prudent Utility Practices. Such
work shall be consolidated to minimize the outage periods required
and to maximize power production availability.
"Management Fee" shall have the meaning set forth in section
5.2.
"Operating Plans" shall have the meaning set forth in section
3.4.
"Operator Approvals" shall mean those Approvals, other than
the Steamboat Approvals, necessary or appropriate for the
performance of Operator's responsibilities hereunder, including,
without limitation, the Approvals set forth on Exhibit E hereto.
Operator Approvals further include, without limitation, approvals
personal or peculiar to Operator such as business licenses, trade
and professional licenses, individual operator licenses, and
licenses or permits of the same or a similar nature.
"Operator Bonus" shall have the meaning set forth in section
5.3.
"Operator Fee" shall have the meaning set forth in section
5.2.
"Operator Proposal" shall mean the Operation and Maintenance
Plan prepared by Operator and submitted to Steamboat.
"Operator's Operating Equipment" shall have the meaning set
forth in Exhibit D hereto, provided that the type and amount of the
Operator's Operating Equipment do not deviate in any material
respect from those described in the Operator Proposal, unless
otherwise agreed by the parties.
"Person" shall mean a corporation, partnership, trust,
business trust, joint venture, company, cooperative, firm or other
entity or individual.
"Power Purchase Agreement" shall mean, collectively, the
Agreement for the Purchase and Sale of Electricity, Steamboat 1,
dated November 18, 1983, between Steamboat (as successor in
interest) and SPPC, and the Long Term Agreement for the Purchase
and Sale of Electricity, Steamboat 1A, dated October 29, 1988, by
and between Steamboat (as successor in interest) and SPPC, as the
same may be amended, restated or supplemented from time to time in
accordance with the respective terms thereof.
"Project Agreements" shall mean (i) this Agreement, (ii) the
Power Purchase Agreement, (iii) the Lease, (iv) the Special
Facilities Agreement, and (v) the Facility site Lease.
"Project Operations and Maintenance Manual" shall mean the
manual describing the proper operation and maintenance of the
Facilities, including appropriate safety precautions and
limitations.
"Prudent Utility Practices" shall mean those practices,
methods, equipment, specifications and standards of safety and
performance, as the same may change from time to time, as are
commonly used by electric generation stations generally throughout
the United States of America of a type and size similar to the
Facilities as good, safe and prudent engineering practices in
connection with the operation, maintenance, repair and use of
electrical and other equipment and facilities, with commensurate
standards of safety, performance, dependability, efficiency and
economy and which are consistent in all relevant respects with the
utility practices implemented by, and compliance with which is
required by SPPC.
"Regular Monthly Payment Date" shall have the meaning set
forth in section 5.4.
"Routine Repair and Maintenance" shall mean the repair and
preventative maintenance of a regular nature that must be performed
periodically and on an ongoing basis to maintain the Facilities in
good working order in accordance with Prudent Utility Practices,
including, but not limited to, lubrication, repacking of valves,
adjustments, labor for replacements of chemicals and consumables,
similar work, and general housekeeping.
"SPPC" shall mean Sierra Pacific Power Company, a Nevada
corporation.
"Special Facilities Agreement" shall mean that certain
Special Facilities Agreement by and between Steamboat (as successor
in interest) and SPPC, dated October 29, 1988 as it may be amended,
modified or supplemented in accordance with the terms thereof.
"Steamboat Approvals" shall mean all Approvals required for
ownership and commercial operation of the Facilities, including,
without limitation, federal, state and local environmental, water,
air, sewer and land use Approvals.
"Steamboat's Representative" shall mean that Person
designated in writing by Steamboat to Operator as its primary
representative in accordance with section 2.2 hereof.
"Stipulated Interest Rate" shall mean that rate per annum
designated by Morgan Guaranty Trust Company, or its successor
entity, from time to time as its reference rate plus three percent
(3%).
"Termination Date" shall have the meaning set forth in
section 7.6.
"Termination Payment" shall have the meaning set forth in
section 7.6.
"Uncontrollable Circumstances" shall mean acts of God, labor
disputes involving Persons other than Operator, labor disputes
involving Operator if any such labor dispute is the result of
breach of established labor agreements by employees of Operator, or
earthquake, flood or other sudden and unforeseeable weather
conditions. The non-availability of geothermal resource supply
(unless the same is directly or indirectly caused or exacerbated by
Operator) to generate capacity and energy from the Facilities and
any inability or unwillingness of SPPC to accept power generated at
the Facilities shall each be considered an Uncontrollable
Circumstance.
ARTICLE 2
TERM OF AGREEMENT; RELATIONSHIP OF PARTIES
2.1 Term. This Agreement shall commence as of the Contract
Date and shall continue for ten (10) successive periods or ten (10)
Contract Years, unless earlier terminated in accordance with the
provisions of this Agreement.
2.2 Parties' Representatives. Prior to the commencement of
mobilization services by Operator, as described in section 3.1
hereof, Steamboat and Operator shall each designate an individual
to act as its primary representative with respect to matters
concerning operation of the Facilities. Steamboat and Operator
shall each provide the other with written notice of the person
designated as its representative. At any time after the initial
designation by any party of its representative, such party may
designate a replacement by written notice to the other party in
accordance with the notice provisions herein.
2.3 Relationship of the Parties. Operator shall at all times
be deemed an independent contractor and neither it nor any of its
employees or the employees of any of its subcontractors shall be
considered an agent, servant or employee of Steamboat. Nothing in
this Agreement shall be deemed to constitute any party hereto a
partner, joint venturer, agent or legal representative of any other
party hereto or to create a fiduciary relationship between or among
such parties. Operator shall be solely responsible for all matters
relating to the payment of its employees, including compliance with
social security, withholding and all regulations governing such
matters. Operator shall be responsible for its own actions and
those of its subordinates, employees, agents, subcontractors and
consultants during the term of this Agreement. Unless otherwise
herein provided, Operator shall have no authority to make any
statements, representations or commitments of any kind or take any
action which shall be binding on Steamboat.
2.4 Confidential Information. If either party transmits to
the other any information (including, without limitation, drawings,
technology, reports and designs) which the disclosing party has
designated in writing as "proprietary information," the receiving
party shall receive and hold such proprietary information in
confidence, shall use it exclusively in connection with the
Facilities and shall not publish or otherwise disclose it to
others; provided, however, that the receiving party may make
necessary disclosures on a proprietary basis to any third party
directly engaged in the operation or financing of the Facilities
such as consultants, trustees and lenders engaged for that purpose
if such third party shall consent in writing to be bound by the
provisions of this section 2.4, but such disclosures may not be
made to suppliers to the Facilities without the prior written
consent of the transmitting party (which consent may be withheld in
such party's sole discretion).
Notwithstanding the foregoing restrictions, either party shall
have the right to disclose proprietary information furnished
hereunder (i) if such information becomes available from a source,
other than a party to this Agreement, who has no obligation of
confidentiality with respect to such information and who did not
obtain such information pursuant to a breach of this section 2.4;
(ii) if such information is developed independently or is within
the knowledge of the party to whom it is delivered prior to receipt
thereof; (iii) if such information is within, or later falls
within, the public domain without breach of this Agreement by the
party hereto receiving such information; (iv) if such disclosure is
required by order of any court of law, to the extent required by
such order; provided, however, that if a party is required to
disclose proprietary information by a court of law, it agrees to
give the other party prompt written notice of the disclosure
requirements of any such order; or (v) to a Government Agency to
the extent required by such Government Agency; provided, however,
that if such party undertakes to so disclose such proprietary
information to a Government Agency, it agrees to give the other
party advance written notice of such undertaking, to make
reasonable efforts to secure confidential treatment of such
proprietary information by the Government Agency in question and to
permit such other party to participate in discussions with such
Government Agency with regard to such confidential treatment. In
the event that efforts to secure confidential treatment are
unsuccessful, the party supplying the proprietary information shall
have the right, if legally permissible, to revise such proprietary
information to make it nonproprietary or to minimize the loss of
its proprietary value.
2.5 Access.
(a) Access by Steamboat. Steamboat and their representatives
including, without limitation, any independent technical
consultant, shall have the right at all times to visit and inspect
the Facilities and the Facilities Site, and Steamboat, their
representatives, including, without limitation, any independent
technical consultant, shall have the right, upon reasonable notice
and at reasonable times, to take visitors onto the Facilities Site
and into the Facilities; provided, however, that Operator shall
have the right to approve access to the Facilities by all proposed
visitors thereto, such approval not to be unreasonably withheld or
delayed, and that all visits shall be conducted in a manner so as
to minimize interference with Operator's performance hereunder; and
provided, further, that Steamboat and their representatives
including, without limitation, any independent technical
consultant, and invitees shall have the right to enter the
Facilities and the Facilities Site without notice in the event of
an emergency, including, without limitation, fire, vandalism or
other threats to public health and safety, or at any time when an
Event of Default has occurred and is continuing.
(b) Audits. Steamboat may employ accountants and other
auditors (i) to audit the record keeping practices and systems used
to generate the data required by sections 3.3, 3.6, 3.8, 5.2(b) and
5.3, (ii) to determine, if applicable, whether such practices and
systems are in accordance with generally accepted accounting
principles and (iii) to certify the results of such audit and
determination to Operator and Steamboat.
(c) Access by Others. Operator shall not interfere with the
rights of access to the Facilities granted to SPPC or other
customer under the Power Purchase Agreement or the access to the
Facilities Site granted under the Facility Site Lease.
(d) Operator Access From and After Commencement Date. During
the term of this Agreement, Steamboat shall provide Operator and
its agents, employees, subcontractors and consultants full and free
access at all times to the Facilities to the extent required to
perform the services required by this Agreement.
ARTICLE 3
COVENANTS OF OPERATOR
3.1 Duties of Operator After Commencement Date. Commencing
upon the Commencement Date for each Facility and continuing for the
term hereof, Operator shall be in care, custody and control of that
Facility and shall operate, maintain and repair that Facility in
accordance with the Facility Operating Standards. Such operation,
maintenance and repair services shall include, but not be limited
to, performance by Operator of the following:
(i) employment of a Facility Work Force consisting of
properly trained personnel. The control room of the Facilities
shall be staffed with a qualified operator during all hours of
power generation. For the purposes of the foregoing, the control
room shall be deemed to be staffed in accordance with this clause,
notwithstanding that a qualified operator may be absent therefrom
as duties require, provided that any such absence shall occur in
the ordinary course of operation of the Facilities and strictly in
accordance with Prudent Utility Practices;
(ii) operation and Routine Repair and Maintenance of each
Facility so as to keep it in good working order. Operator shall
utilize all Facility Tools as are necessary to carry on normal
operation and Routine Repair and Maintenance of each Facility;
(iii) the provision of materials and services to which
section 4.1(d) relates, when requested by Steamboat to provide the
same;
(iv) operation and repair of each Facility so as to deliver
electricity to SPPC in accordance with the Power Purchase
Agreement, the Special Facilities Agreement and the Annual
Operating Plan;
(v) compliance with the requirements of all warranties with
respect to each Facility or particular equipment contained therein;
(vi) operation of each Facility in compliance with all
applicable Approvals and other applicable laws and regulations
(including, without limitation, all federal, state and local
environmental, water, air, sewer and land use Approvals),
acquisition in a timely manner and maintenance of all Operator
Approvals and cooperation with and assistance of Steamboat in
Steamboat's efforts to obtain and maintain all Steamboat Approvals;
(vii) compliance with the terms of the Facility Site
Lease, the Special Facilities Agreement and the Power Purchase
Agreement;
(viii) procurement of all services necessary to keep and
maintain each Facility and the Facilities Site in a safe, secure,
clean, well-maintained, well-painted, orderly and attractive
condition;
(ix) efficient operation of each Facility so as to optimize
the useful life of the equipment, maximize conservation of the
geothermal resource (consistent with achievement of the Anticipated
Performance Standards), minimize downtime for repairs or Major
Maintenance and maximize net operating revenues, all in accordance
with the Facility Operating Standards;
(x) compliance with the terms of all insurance policies of
Steamboat and/or Operator applicable to each Facility;
(xi) arrangement of schedules maintenance in accordance with
the Annual Operating Plan, or otherwise in coordination with
Steamboat so as to minimize interruption of service to SPPC or
other purchaser;
(xii) safe operation of each Facility in accordance with
Prudent Utility Practices;
(xiii) arrangement with suppliers and transporters to
supply each Facility with backup electricity, water and sewage
disposal, sufficient to permit the continuous operation of that
Facility in accordance with the Annual Operating Plan;
(xiv) maintenance of an inventory of spare parts and
replacement equipment designated by Steamboat; and
(xv) upon expiration or termination of this Agreement,
Operator shall comply with the terms of section 3.11 hereof, remove
its personnel from each Facility and cooperate with Steamboat in
planning the closing of that Facility or the substitution of a
successor operator, as applicable. The parties shall mutually
agree to a schedule for the orderly removal of Operator from its
operational responsibilities.
3.2 Records. Operator shall maintain in a form acceptable to
Steamboat: (i) operating logs, records and reports relating to the
operation and maintenance of each Facility; and(ii) subject to the
prior approval of a Steamboat and Steamboat's Representative
current revisions of the Design Notebook and the Project Operation
and Maintenance Manual. Such records shall be maintained with
sufficient detail and accuracy as to provide an accurate and
complete history of the operation and maintenance of each Facility
in accordance with generally accepted practices of the electric
utility industry. All records prepared pursuant to this section
3.3 containing information consisting of equipment histories and
control, maintenance and lubrication log shall be retained by
Operator for the term of this Agreement and shall be promptly
delivered to Steamboat upon the expiration or earlier termination
hereof. Further, all records prepared pursuant to this section 3.3
shall be property of Steamboat and shall be maintained at a
location at each Facility designated by Steamboat.
3.3 Annual Operating Plan.
(a) Ninety (90) days prior to the commencement of each
Contract Year (and ninety (90) days prior to each expected
Commencement Date), Operator shall submit an annual operating plan
(the "Annual Operating Plan") for such Contract Year to Steamboat.
The Annual Operating Plan shall include, without limitation,
detailed plans for operating each Facility in accordance with the
Anticipated Performance Standards for such Contract Year. The
Annual Operating Plan shall also include, without limitation,
detailed plans with respect to the following: estimated costs of
Steamboat, scheduled Major Maintenance (including, without
limitation, major overhauls), Routine Repairs and Maintenance,
organization and staffing, training, materials, supplies, parts and
equipment acquisitions, hours of operation, contract services to be
purchased, fuel requirements, purchases of electricity from SPPC,
requirements for water and other consumables, data regarding
expected environmental requirements and performance, permit
renewals, requirements under all Approvals and plans for compliance
therewith, all filing requirements of whatever nature and plans for
compliance therewith, an inventory of spare parts and any other
matters as Steamboat may reasonably require with respect to the
operation and maintenance of each Facility.
(b) Operator shall provide all annual reports required by
Steamboat including the information required by sections 3.3 and
3.8.
(c) Steamboat shall accept or object to the terms of such
Annual Operating Plan within thirty (30) days of receipt thereof.
If Steamboat shall object to the terms of such Annual Operating
Plan, Steamboat and Operator shall attempt in good faith to agree
to revised terms of such Annual Operating Plan, but the terms
proposed by Operator shall be adopted absent agreement.
3.4 Changes in Operation and Maintenance.
(a) Steamboat shall have the right to request Operator to
make reasonable changes in the Facility Operating Standards and the
provisions for the performance thereof by Operator. Operator shall
consent to such requested changes, provided that such changes do
not have a material adverse effect on Operator's ability to perform
its obligations under this Agreement or material increase operator
cost of operations.
(b) Operator shall have the right to request the approval of
Steamboat for reasonable changes in the Facility Operating
Standards if consistence with section 3.2. Operator shall not make
such changes without the prior written approval of Steamboat. Any
such approved changes shall be reflected in the Project Operations
and Maintenance Manual.
(c) Notwithstanding the foregoing provisions of this section
3.5, Operator may take all such action which it considers necessary
or advisable in the event of an emergency or unit outage to
protect: (i) the Facilities and ensure the continued and efficient
operation of the same to the maximum extent possible, (ii) all
members of the Facility Work Force, (iii) all equipment located at
the Facilities Site and (iv) the Facility Tools, all in compliance
with Prudent Utility Practices; provided, however, that when taking
any action in accordance with this subsection (d), Operator shall
notify Steamboat of the nature of the emergency or unit outage and
the action taken by Operator as a result thereof as soon as
possible, and in any event, not later than twenty-four (24) hours
after Operator became aware, or should have become aware, of the
event giving rise to the emergency or unit outage as the case may
be.
3.5 Quarterly Reports.
(a) Operator shall, within ten (10) days after the last day
of each quarter, deliver to Steamboat a performance and costs
report with respect to each month showing achievement of and all
variances from the Annual Operating Plan. The report shall be in
a format acceptable to Steamboat and shall include, without
limitation: (i) the information required by section 3.3, (ii) the
total number of kwh of electricity produced by each Facility and
delivered to SPPC or other customer during such months with a
breakdown detailing deliveries as indicated by Steamboat and
information secured from SPPC or other customer concerning its
future energy requirements, together with details of monthly
parasitic load usage; provided, however, that where complete
collection or production of the foregoing information requires the
prior receipt of information from SPPC or other customer, such
information shall be delivered to Steamboat as soon as possible
after such receipt, although a preliminary report shall be
delivered to Steamboat, based upon Operator's own records during
each month, within the time period stipulated above; (iii) the
total number of kwh of electricity supplied by SPPC or other
supplier and consumed by each Facility during such month as a
result of outages at that Facility, with a breakdown detailing the
time of such consumption; (iv) a schedule of repair and maintenance
activities performed by or on behalf of Operator during such
period; (v) an itemization of any costs incurred during the month
which are outside the scope of the services to be provided by
Operator hereunder; (vi) such other information as Steamboat may
reasonably request to evaluate accomplishment of the Annual
Operating Plan and costs.
3.6 Testing. Operator shall perform such tests as are
generally accepted for the operation of facilities similar to the
Facilities, including:
(a) routine operating tests designed to monitor the safety
and performance of each Facility;
(b) tests designed to monitor the safety and performance of
each Facility following the performance of Major Maintenance;
(c) such other tests as Steamboat or Steamboat's
Representative shall reasonably request; and
(d) ongoing emissions testing to ensure compliance with all
applicable Approvals.
Steamboat has the right to reasonable advance notice of and to
have personnel present during such tests. Operator shall furnish
Steamboat with written results of the tests.
3.7 Maintenance of Qualifying Facility Status. Operator
shall operate each Facility in such a manner that it remains a
"Qualifying Small Power Production Facility" as such term is
defined in section 3(17) of the Federal Power Act, 16 U.S.C. Sec 796
(17) (1978), and part 292 of the regulations of the Federal Energy
Regulatory Commission, 18 C.F.R. 292.
3.8 Notice of Outages. Specific times for planned outages
for maintenance shall be scheduled annually as part of the Annual
Operating Plan so as to coordinate planned outages of each Facility
with other external factors; provided, however, in an emergency,
Operator shall be permitted to request a transmission or substation
clearance.
3.9 Representations and Warranties.
(a) Operator warrants that it will perform (or cause to be
performed) the operation, repair and maintenance services, required
under this Article 3, in a good and workmanlike manner in
accordance with generally accepted practices for the operation and
maintenance of facilities similar to the Facilities. Operator
shall cooperate with Steamboat in Steamboat's enforcement of any
manufacturer's warranty or Contractor guarantees or warranty or the
enforcement by Steamboat of any rights under the Construction
Contract in connection with the Facilities, the equipment
incorporated therein or any maintenance or repair services
performed thereon. Where Operator performs any services in
accordance herewith for which payment is subsequently received by
Steamboat under any manufacturer's warranty or Contractor guarantee
or warranty or as a result of the enforcement by Steamboat of any
rights under the Construction Contract in connection with the
Facilities, the equipment incorporated therein or any maintenance
or repair services performed thereon, the benefit of such payment
(or any part thereof) shall be passed on to Operator to, but not
beyond, the extent necessary to reimburse Operator for the actual
cost of any parts or materials utilized by it in the provision of
such services and the actual cost of any labor of subcontractors to
Operator, retained for the purpose of providing such services;
Operator shall not receive any payments, in addition to those
identified in Article 5, on account of its own labor costs in
providing such services. Operator shall notify Steamboat of all
manufacturer's warranties that Operator intends to obtain with
respect to any services to be performed hereunder. If more
complete warranty protection is available from any such
manufacturer, Operator shall notify Steamboat of such availability
and Steamboat may elect to obtain such additional protection.
(b) All repairs, replacements and other services to be
performed by or on behalf of Operator in accordance with the terms
of this Agreement shall be performed in a competent manner by
qualified personnel in accordance with Prudent Utility Practices.
All replacement equipment installed in the Facilities by or on
behalf of Operator shall be fit for its intended purpose, be of
quality at least equal to the standard in the industry and shall
have warranties enforceable by Steamboat at least comparable to
those standard in the industry.
3.10 Obligations on Termination. Upon termination of this
Agreement at any time and for whatever reason, Operator shall
replenish Steamboat's inventory of Facility Tools (which shall
remain at the Facilities as property of Steamboat), shall assist
(at Steamboat's request) in the training of personnel to provide
for a smooth transition, and shall update the Project Operation and
Maintenance Manuals.
3.11 Payment of Fines, Penalties and Liquidated Damages. If
at any time during the Contract Term any fine or penalty becomes
payable as a result of the failure of either one or both of the
Facilities to meet any environmental law, regulation, order or
permit promulgated thereunder, such fine or penalty shall be the
sole responsibility and at the cost of Operator; provided, however,
that Operator shall only be responsible for fines or penalties
which are the result of action or inaction on the part of Operator.
To the extent that any time during the Contract Term Steamboat
shall incur any liability to SPPC pursuant to the terms of the
Power Purchase Agreement, including, without limitation, liability
for liquidated damages, or any liability to SPPC, in either case
caused by the fault of Operator, Operator shall reimburse Steamboat
for all amounts paid by Steamboat in satisfaction of such
liability.
ARTICLE 4
COVENANTS OF STEAMBOAT
4.1 Steamboat's Obligations. From and after the Commencement
Date, Steamboat shall:
(a) make payments to Operator in accordance with Article 5 of
this Agreement;
(b) obtain and maintain all Steamboat Approvals; provided,
however, that Steamboat shall not be liable for any failure to
secure or maintain a permit which results from failure of either
one or both of the Facilities to meet the Facility Operating
Standards or any negligence or breach by Operator hereunder;
(c) pay all real property taxes, personal property taxes,
sales taxes, uses taxes, excise taxes, fees and premiums of
insurance due in connection with the Facilities; and
(d) procure all materials and services (including all
consumables and all contract services other than the normal
operation and Routine Repair and Maintenance services to be
performed by Operator's Facility Work Force hereunder) to the
extent necessary for the operation, repair and Major Maintenance of
the Facilities.
ARTICLE 5
PAYMENTS
5.1 Operation and Management Costs. Commencing on the
Commencement Date, Steamboat shall pay Operator for the management,
operation, Major Maintenance, Routine Repair and Maintenance, and
other services performed by Operator pursuant to Article 3, in the
following manner:
(a) In full compensation for the management, normal operation
and Routine Repair and Maintenance services to be performed by
Operator pursuant to Article 3 hereof (but excluding the services
described in section 3.1 hereof), a fee ("Operator Fee") to be
negotiated between the Company and the Operator per month during
the first Contract Year. In each subsequent Contract Year the
Operator Fee shall be increased by four percent (4%) of the
Operator Fee paid in the preceding Contract Year.
(b) Operator shall be entitled to an annual management fee
("Management Fee"), in accordance with the provisions of this
section. Payment of the Management Fee shall be based upon
achievement of an annual 5.48 MW average period net output goal as
follows:
Percentage of Average
Period Net Output Goal Achieved Management Fee
95% or less $
96% $
97% $
98% $
99% $
100% $
The Management Fee payable to Operator on the basis of actual
deliveries of energy from the Facilities throughout the relevant
Contract Year failing within the ranges specified above shall be
calculated by making all necessary prorations. Any Management Fee
earned by Operator in accordance with this section shall be payable
by Steamboat upon the delivery to Steamboat of documentation, from
both Operator and SPPC, confirming that the requisite operating
capacities have been achieved, in accordance with the foregoing,
and the acceptance of the same by Steamboat. The Management Fee
amounts contained in the preceding table shall be increased by four
percent (4%) each year, commencing in the second Contract Year.
(c) Steamboat shall reimburse Operator for all of Operator's
actual costs incurred in procuring equipment, materials and labor,
at the request and upon the authority of Steamboat, for the
purposes of performing services not otherwise required to be
provided by Operator hereunder (including, without limitation,
pursuant to section 4.1(d) hereof); provided that Operator shall
not receive any reimbursement on account of its own labor costs in
performing such additional services.
5.2 Incentive Program In any Contract Year in which a
Management Fee has been earned by Operator in accordance with
section 5.2(b), Operator may also earn an incentive fee ("Operator
Bonus") for superior plant operation and maintenance which results
in above proforma electrical production at the Facilities. Payment
of the Operator Bonus shall be based upon annual net salable
electrical output from the Facilities in accordance with the
following:
Annual MWHs Operator Bonus
53,000 or more $
52,000 $
51,000 $
50,000 $
49,000 $
48,000 or less $
The Operator Bonus payable to Operator on the basis of annual MWHs
failing within the ranges specified above shall be calculated by
making all necessary prorations. By way of example only, should
52,125 MWHs of electricity be delivered to SPPC from the Facilities
in any Contract Year, the Operator Bonus payable to Operator,
subject to section 5.6, would be the sum of __________________
($_________), adjusted as necessary in accordance with the last
sentence of this section. Any Operator Bonus to which Operator
shall be entitled in accordance with this section shall be payable
by Steamboat upon the delivery to Steamboat of annual generation
documentation prepared by, and obtained from, SPPC confirming the
annual MWHs produced at the Facilities, and the acceptance of the
same by Steamboat. The Operator Bonus amounts contained in the
preceding table shall be increased by four percent (4%) each year,
commencing in the second Contract Year.
5.3 Payment of Fees and Bonus. Steamboat shall pay the
Operator Fee on the fifth Business Day of the Billing Period in
which such fee commences to accrue pursuant to section 5.2 and on
the fifth Business Day of each and every subsequent Billing Period
(the "Regular Monthly Payment Date"). The first and final
installments of the Operator Fee payable hereunder shall be
prorated if they are for less than a full calendar month.
Steamboat shall pay Operator's actual costs for equipment,
materials and labor pursuant to section 5.1(c) hereof on the fifth
Business Day of the month after the month in which Operator
requests reimbursement of such costs. Steamboat shall pay any
Management Fee and Operator Bonus, when earned in accordance with
this Article.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES
6.1 Representations and Warranties of Operator. Operator
represents and warrants, as of the date hereof, as follows:
(a) it is a corporation duly organized, validly existing and
in good standing under the laws of the State of Utah and is duly
qualified to do business in and is in good standing in the State of
Nevada.
(b) it has taken all necessary action to authorize the
execution, delivery and performance of its obligations under this
Agreement, which action has not been superseded or modified, and
this Agreement constitutes the legal, valid and binding obligation
of Operator, enforceable in accordance with its terms;
(c) the execution, delivery and performance of this Agreement
do not violate (i) its articles of incorporation or bylaws or any
resolution of its Board of Directors or other committee charged
with the governance of its affairs, (ii) any contract to which it
or any of its Affiliates is a party or (iii) any law, rule,
regulation, order, writ, judgment, injunction, decree or
determination affecting Operator or any of its properties;
(d) it is regularly paying its debts as they become due, has
not filed any petition for relief under the bankruptcy laws of the
United States of America, has not made nor is making an assignment
for the benefit of creditors, initiated nor been the subject of any
proceeding seeking to have a receiver or trustee appointed to
liquidate or manage its affairs, and none of its properties is
subject to the jurisdiction of any bankruptcy court of the United
States of America or any receivership proceeding;
(e) no litigation is pending or, to its knowledge, threatened
which seeks to restrain it from performing its obligations
hereunder or the adverse outcome of which would materially affect
its business or its ability to perform its obligations hereunder;
(f) no authorization or approval or other action by, and no
notice to or filing with, any Government Authority or regulatory
body is required for the due execution, delivery and performance by
Operator of this Agreement which have not been obtained;
(g) it is experienced in the operation of geothermal
generating facilities, has complied with the provisions of all
laws, including environmental laws, respecting the operation of
such facilities and has not been and is not currently subject to
any judgment or settlement of any claim imposing significant
liability on it for noncompliance with law or mismanagement in its
operation of any geothermal generating facility or other electric
power generating facility;
(h) it is familiar with the terms of (i) the Power Purchase
Agreement, all other Project Agreements and all of the standards
incorporated within the Facility Operating Standards and guaranteed
performance levels expected to form the basis of the Initial
Anticipated Performance Standards hereunder and has the resources
necessary to enable it to effectively operate and maintain the
Facilities so as to meet or exceed such Anticipated Performance
Standards; and
(i) Operator is an equal opportunity employer.
6.2 Representations and Warranties of Steamboat. Steamboat
represents and warrants, as of the date hereof, as follows:
(a) it is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Utah
and is duly qualified to do business in and is in good standing in
the State of Nevada;
(b) it has taken all necessary action to authorize the
execution, delivery and performance of its obligations under this
Agreement, which action has not been superseded or modified, and
this Agreement represents the valid and binding obligation of
Steamboat, enforceable in accordance with its terms;
(c) the execution, delivery and performance of this Agreement
do not violate (i) its Operating Agreement or any resolution of its
Members or other committee charged with the governance of its
affairs, (ii) any contract to which it is a party or (iii) any law,
rule, regulation, order, writ, judgment, injunction, decree or
determination affecting Steamboat or any of its properties;
(d) it is regularly paying its debts as they become due, has
not filed any petition for relief under the bankruptcy laws of the
United States of America, has not made nor is making an assignment
for the benefit of creditors, has not initiated nor been the
subject of any proceeding seeking to have a receiver or trustee
appointed to liquidate or manage its affairs, and none of its
properties is subject to the jurisdiction of any bankruptcy court
of the United States of America or any receivership proceeding; and
(e) no litigation is pending or, to its knowledge, threatened
which seeks to restrain the performance of its obligations
hereunder or the adverse outcome of which could materially affect
its business or its ability to perform its obligations hereunder.
ARTICLE 7
DEFAULTS AND REMEDIES
7.1 Defaults by Operator. Each of the following shall
constitute an Event of Default on the part of Operator:
(a) failure of Operator to make any payment to Steamboat when
due in accordance with the terms of this Agreement, and such
failure continues for ten (10) days after receipt of notice of
nonpayment from Steamboat;
(b) any of the representations or warranties of Operator
contained in this Agreement shall prove to be materially false,
incomplete or misleading;
(c) any material failure of Operator to perform its
obligations under this Agreement (to the extent that such failure
is not due to an Uncontrollable Circumstance or the negligence of
or breach by Steamboat) and failure of Operator to cure such
failure for a period of ten (10) days after Operator first has
knowledge of such failure or, if the failure is such that it cannot
be cured within such period of time, such longer period of time as
may be necessary (but not to exceed ninety (90) days) for Operator
to cure such failure, provided that Operator diligently pursues
such action to completion;
(d) (i) ceasing to pay its debts as they become due or making
an arrangement with or for the benefit of its creditors or
consenting to or acquiescing in the appointment of a receiver,
trustee or liquidator for a substantial part of its property, (ii)
a bankruptcy, winding up, reorganization, insolvency, arrangement
or similar proceeding instituted by Operator under the law of any
jurisdiction, in which proceeding Operator is the debtor, (iii) any
such proceeding instituted against Operator under the law of any
jurisdiction, in which proceeding Operator is the debtor, that has
not been stayed or dismissed within forty-five (45) days after its
institution, (iv) any action or answer by Operator approving of,
consenting to, or acquiescing in, any such proceeding, or (v) the
levy of any attachment upon the property of Operator which shall
substantially interfere with its performance hereunder; and
(e) any failure of Operator (other than a material failure as
provided for in subsection (c) above) to perform any of its
obligations under this Agreement (to the extent that such failure
is not due to an Uncontrollable Circumstance or the negligence of
or breach by Steamboat) and failure of Operator to cure such
failure for a period of thirty (30) days after Operator receives
notice thereof from Steamboat or, if such failure cannot be cured
in such period of time, such longer period of time as may be
necessary (but not to exceed ninety (90) days) for Operator to cure
such failure, provided that Operator diligently pursues such action
to completion.
7.2 Remedies for Operator Default. If an Event of Default on
the part of Operator shall occur and be continuing hereunder,
Steamboat may do one or both of the following:
(a) terminate this Agreement and require Operator to (i)
continue to operate the Facilities in accordance with the terms of
this Agreement for a transition period specified by Steamboat which
shall not exceed six (6) months, after which period Operator shall
vacate the Facilities and the Facilities Site and make the
Facilities available to Steamboat, in which case Steamboat may, at
its option, select a replacement operator to operate the
Facilities, and (ii) pay to Steamboat for a period not to exceed
the balance of the then current one (1) year period all losses and
expenses incurred by Steamboat as a direct result of such Operator
Event of Default, including the costs of recruiting and training
the replacement Operator's personnel and the costs and expenses
incurred (including attorneys' fees) in negotiating an operation
and maintenance agreement with such replacement operator; or
(b) exercise all other remedies available to it at law or in
equity including bringing an action for recovery of any amount due
and unpaid by Operator and/or for damages which shall include,
without limitation, all losses and expenses incurred by Steamboat
as a result of such Operator Event of Default and all costs and
expenses reasonably incurred by Steamboat in the exercise of its
remedy (including, without limitation, attorneys' fees).
7.3 Defaults by Steamboat. Each of the following shall
constitute an Event of Default on the part of Steamboat:
(a) failure of Steamboat to make any payment to Operator when
due in accordance with the terms of this Agreement, and such
failure continues for ten (10) days after receipt of notice of
nonpayment from Operator;
(b) any material failure by Steamboat to perform its
obligations under this Agreement which failure materially affects
Operator's ability to operate the Facilities in accordance with the
terms hereof (to the extent that such failure is not due to an
Uncontrollable Circumstance or the negligence of or breach by
Operator hereunder) and failure of Steamboat to remedy such failure
for a period of ten (10) days after it first has knowledge of such
failure or, if the failure is such that it cannot be cured within
such period of time, such longer period of time as may be necessary
(but not to exceed ninety (90) days) for Steamboat to cure such
failure, provided that Steamboat diligently pursues such action to
completion; and
(c) (i) ceasing to pay its debts as they become due or
making an arrangement with or for the benefit of its creditors or
consenting to or acquiescing in the appointment of a receiver,
trustee or liquidator for a substantial part of its property, (ii)
a bankruptcy, winding up, reorganization, insolvency, arrangement
or similar proceeding instituted by Steamboat under the laws of any
jurisdiction, in which proceeding Steamboat is the debtor, (iii)
any such proceeding instituted against Steamboat under the laws of
any jurisdiction, in which proceeding Steamboat is the debtor, that
has not been stayed or dismissed within forty-five (45) days after
its institution, (iv) any action or answer by Steamboat approving
of, consenting to, or acquiescing in any such proceeding or (v) the
levy of any attachment upon the property of Steamboat which shall
substantially interfere with its performance hereunder.
7.4 Remedies for Steamboat Default. If an Event of Default
on the part of Steamboat shall occur and be continuing hereunder,
Operator may do one or both of the following, pursuant to section
7.10 hereof:
(a) terminate this Agreement upon sixty (60) days' prior
written notice to Steamboat, whereupon Operator shall immediately
vacate the Facilities and the Facilities Site at the end of the
sixty (60) day period; or
(b) exercise all remedies available to it at law or in equity
including bringing an action for recovery of any amounts due and
unpaid by Steamboat hereunder.
7.5 Labor Difficulties. In the event of a strike or other
form of labor action by Operator's personnel affecting the
operation of the Facilities, Steamboat shall have the right to
operate the Facilities and to retain such other personnel or agents
as Steamboat in its sole discretion deems necessary or advisable
for such purpose. Steamboat shall have no payment obligations to
Operator during any such occurrence for work performed by
Steamboat, its agents or other personnel.
7.6 Uncontrollable Circumstance. The performance of each
party's respective obligations under this Agreement, other than
failure or delay in payment of money hereunder, shall be excused
during such times and to the extent such performance is prevented
by reason of any Uncontrollable Circumstance.
7.7 Resumption of Performance. The party whose performance
is suspended, prevented or delayed by Uncontrollable Circumstance
shall promptly notify the other party of such occurrence and its
estimated duration, and shall promptly remedy such Uncontrollable
Circumstance if and to the extent reasonably possible and resume
such performance when possible.
7.8 Continuing Uncontrollable Circumstance. If a party is
prevented from substantially performing its obligations under this
Agreement by Uncontrollable Circumstance for a period of ninety
(90) days, the other party may terminate the Agreement without
further liability of either party to the other hereunder by ten
(10) days written notice given any time thereafter prior to
resumption of substantial performance is resumed during that ten
(10) day period.
ARTICLE 8
DISPUTE RESOLUTION
8.1 Arbitration. The parties agree to make a diligent, good
faith attempt to resolve all Disputes. If the parties are unable
to resolve a Dispute within fifteen (15) days after notice of
Dispute from one party to the other, such Dispute shall be
submitted promptly to the designated representatives of each party.
The designated representatives shall meet, in person or by
telephone, not later than seven (7) days after the date of
submission of such Dispute and shall issue a written opinion with
respect to the Dispute within ten (10) days thereafter. Subject to
the provisions of section 8.2, in the event that the designated
representatives cannot resolve the Dispute, such Dispute shall be
submitted to arbitration in accordance with the provisions of this
Article 8.
8.2 Availability of Arbitration. The provisions of the
remainder of this Article 8 shall be available only with respect to
Disputes as to which the parties have attempted but failed to
arrive at resolution by use of the procedures set forth in section
8.1.
8.3 Arbitration Notice.
(a) Filing and Timing of Arbitration Notice. Either party
may initiate arbitration of a Dispute by serving the other party
with an arbitration notice (the "Arbitration Notice") containing a
detailed description of the Dispute, including the amount claimed,
the position of the party requesting arbitration, the remedy sought
and the name of one (1) independent arbitrator.
(b) Response to Arbitration Notice. Within twenty (20) days
after receipt of an Arbitration Notice, the receiving party shall
send a response to the other party containing (i) a detailed
response to the claim giving the position of the party, any
counterclaim and the remedy sought and (ii) an acceptance of the
arbitrator designated in the Arbitration Notice or a designation of
a second arbitrator. In the event that the party receiving the
Arbitration Notice gives notice of a counterclaim, the party
instituting the arbitration shall have ten (10) days to provide a
written detailed response to the counterclaim setting forth that
party's position.
(c) Selection of Arbitrators. If the parties agree to a
single arbitrator, the arbitration shall be decided by such
arbitrator. If the parties each designate an arbitrator, the
arbitrators designated by the parties shall designate a third
arbitrator within ten (10) days after the date of the notice in
response to the Arbitration Notice, and the arbitration shall be
decided by the three (3) arbitrators. In the event the two (2)
arbitrators cannot or do not select a third independent arbitrator
within ten (10) days of such responsive notice, either party may
apply to the American Arbitration Association for the purpose of
appointing any Person listed with the American Arbitration
Association as the third independent arbitrator.
8.4 Procedure.
(a) Hearing. a hearing shall be held by the arbitrator(s)
and a decision of the matter submitted shall be rendered within
thirty (30) days after the hearing or as soon as practicable
thereafter.
(b) Procedural Rules. The arbitration shall be conducted
pursuant to the Commercial Industry Rules of the American
Arbitration Association or such other procedures as may be agreed
by the parties or required by the arbitrators. No party may
present a position or make any argument at the hearing that is not
provided to the other party in writing before the hearing, unless
the arbitrator(s) determines that such position or argument could
not reasonably have been prepared in advance of such hearing.
8.5 Additional Parties. Any arbitration may include any
other Person substantially involved in a common question of fact or
law whose presence is required if complete relief is to be accorded
in arbitration, provided such other Person has agreed to be bound
by such arbitration. The parties shall endeavor to include a
similar arbitration clause in all other contracts that they may
enter into in connection with the services to be performed by
Operator hereunder.
8.6 Enforceability. The foregoing agreement to arbitrate
shall be specifically enforceable and the decision rendered by the
arbitrator(s) shall be final, binding and conclusive on the
parties. Such decision may be confirmed or embodied in any order
or judgment entered upon it in accordance with applicable law in
any court having jurisdiction thereof.
8.7 Venue. The venue of any arbitration or court proceeding
shall be in Salt Lake City, Utah.
8.8 Continuance of Contract Performance. Unless otherwise
provided herein or otherwise agreed in writing, the parties shall
continue to perform under the terms and conditions of this
Agreement during any Dispute.
8.9 Cost. The entire cost of the arbitration, but not
including the parties' attorneys' and consultants' fees, which
shall be borne by the party incurring such fees, shall be allocated
by the arbitrator(s) in their judgment.
ARTICLE 9
INDEMNIFICATION
9.1 Operator Indemnification. Subject to the provisions of
section 11.2, Operator agrees that it shall protect, indemnify, and
hold harmless Steamboat, its respective directors, officials,
officers, partners, members, employees, trustees, agents,
successors and assigns (collectively, the "Indemnified Parties")
from and against all liabilities, damages, claims, demands,
judgments, losses, costs, expenses, suits, actions or proceedings
(including reasonable fees and disbursements or counsel) arising
out of (i) the acts, omissions or other conduct of Operator or any
of its officials, agents or employees, contractors or
subcontractors of any tier in connection with its work pursuant to
this Agreement or (ii) the operation of the Facilities by or under
the direction of Operator; provided, however, that Operator shall
not be required to reimburse or indemnify any Indemnified Party for
any loss or claim to the extent such a loss or claim is due to the
gross negligence or willful misconduct of that Indemnified Party.
9.2 Cooperation Regarding Claims.
(a) If any party hereto shall receive notice or have
knowledge of any claim, demand, action, suit or proceeding that
such party may have reason to believe may result in a claim for
indemnification pursuant to this Article 9, such party shall, as
promptly as possible, give the other party notice thereof. Such
notice shall include, to the extent known to such party: (i) a
reasonably detailed description of the facts and circumstances
relating to such claim, demand, action, suit or proceeding, (ii) a
complete copy o all related notices, pleadings and other papers and
(iii) a description in reasonable detail of the basis for the
potential claim for indemnification; provided, however, that
failure promptly to give notice or to provide such information and
documents shall not relieve any other party of any obligation of
indemnification it may have under this Article 9.
(b) The parties shall consult with each other regarding, and
cooperate in respect of the response to, and the defense of, any
claim, demand, action, suit or proceeding. Operator shall be
entitled to assume the defense or to represent the interests of the
party seeking indemnification in respect of such claim, demand,
action, suit or proceeding which shall include, without limitation,
the right to select legal counsel and other consultants
satisfactory to the indemnified party, appear in proceedings on
behalf of such party and to propose, accept or reject offers of
settlement, all at its sole cost; provided, however, that if the
defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have
reasonably concluded that there may be legal defenses available to
it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the
indemnified party shall have the right to select separate counsel
to defend such action on behalf of such indemnified party or
parties at the expense of the indemnifying party.
9.3 Waiver of Subrogation. Operator and Steamboat hereby
waive any and every claim for recovery from the other for any and
all loss or damage to each other resulting from the performance of
this Agreement, to the extent such loss or damage is recovered
under insurance policies described herein.
ARTICLE 10
INSURANCE
10.1 Operator Insurance Coverage. Operator shall secure and
maintain as a minimum during the term of this Agreement the
following insurance forms, at its own cost and expense (except in
the case of the insurance referred to in sections 10.1(d) and
10.1(e), which insurance shall be maintained at the cost and
expense of Steamboat) with deductibles or self-insured retention's
and with companies acceptable to Steamboat:
(a) Worker's Compensation, subject to statutory limits;
(b) Employer's Liability, with a minimum limit of one million
dollars ($1,000,000) per accident including occupational disease;
(c) Comprehensive Business Automobile Liability, in an amount
not less than a combined bodily injury and property damage limit of
five hundred thousand dollars ($500,000) per accident, in
comprehensive form and covering hired, owned and nonowned vehicles;
(d) Comprehensive (Commercial) General Liability Insurance
written on an occurrence basis in an amount equal to at least one
million dollars ($1,000,000) per occurrence, "single limit"
coverage. Such insurance shall include Premises/Operations,
Explosion, Collapse and Underground Hazards, Broad Form
Contractual, Independent Contractors, Products/Completed
Operations, Property Damage, Personal Injury, Cross Liability
(insured versus insured) and Broad Form Named Insured endorsement;
(e) Excess (or Umbrella) Liability insurance written on an
occurrence basis providing excess limits for, and following the
form of, the policies referred to in clauses (b), (c) and (d) above
so as to bring the total of each up to twenty-five million dollars
($25,000,000) per occurrence, and in the annual aggregate where
applicable.
Any insurance carried in accordance with this section 10.1
shall be endorsed to provide that:
(i) With the exception of worker's compensation
coverage, Steamboat shall be additional insureds with the
understanding that any obligation imposed upon Operator (including,
without limitation, the liability to pay premiums, subject to the
preamble to this section 10.1) shall be the sole obligation of
Operator;
(ii) The insurer thereunder waives all rights of
subrogation against Steamboat any right of set off and counterclaim
and any other right to deduction whether by attachment or
otherwise;
(iii) Such insurance shall be primary without right
of contribution of any other insurance carried by Steamboat with
respect to its interests as such in the Facilities; and
(iv) If such insurance is canceled for any reason
whatsoever, including nonpayment of premium, or any substantial
change is made in the coverage which affects the interests of
Steamboat, such cancellation or change shall not be effective as to
Steamboat for thirty (30) days after receipt by Steamboat of
written notice sent by registered mail from each insurer of such
cancellation or change.
Any insurance carried in accordance with section 10.1(c) or 10.1(d)
shall be endorsed to provide that, inasmuch as the policy is
written to cover more than one (1) insured, all terms, conditions,
insuring agreements and endorsements, with the exception of limits
of liability shall operate in the same manner as if there were a
separate policy covering such insured.
10.2 Evidence of Insurance. At the Commencement Date and at
each policy anniversary date thereafter, but not less than
annually, Operator shall furnish Steamboat with approved
certification of all required insurance effected by it in
compliance with this Article 10.
10.3 General Insurance Provisions. The provision of any
insurance obtained pursuant to this Agreement shall not be
construed to limit the liability of either party under this
Agreement.
ARTICLE 11
MISCELLANEOUS
11.1 Assignment. Operator may assign all or any part of its
rights or delegate all or any party of its duties hereunder without
the prior written consent of Steamboat. Steamboat may assign all
or any part of its rights and delegate all or any part of its
duties hereunder without the consent of Operator.
11.2 Consequential Damages. Neither party shall be liable to
the other hereunder for any indirect, consequential, incidental,
punitive or exemplary damages (including, without limitation,
damages on account of lost profits) arising hereunder.
11.3 Effect of Termination. Upon termination of this
Agreement, the obligations of Operator and Steamboat shall cease
except as provided in sections 3.11, 7.2(a), 9.1, 9.2 and 11.4;
provided, however, that Steamboat and Operator shall be entitled to
the amounts to which they would otherwise be entitled as of such
date under Article 5, with such amounts being prorated
approximately according to the portion of the Contract Year which
shall have elapsed prior to the date of termination.
11.4 Overdue Obligations to Bear Interest. All amounts due
hereunder, whether as damages, credits, revenue reimbursements,
that are not paid when due (less any amount which may be offset
against any such amount) shall bear interest, from the tenth day
after such amount is due hereunder, at the Stipulated Rate or, if
lower, the maximum interest rate permitted by law, on the amount
outstanding from time to time, on the basis of a three hundred
sixty-five (365) day year and the actual number of days elapsed.
11.5 Notices. Any notices or communications required or
permitted hereunder shall be in writing and sufficiently given if
delivered in person, sent by certified mail, return receipt
requested, postage prepaid, or sent by courier or delivery service
with charges therefor prepaid, and addressed as follows:
If to Operator: S. B. Geo, Inc.
921 Executive Park Drive, Suite
B
Salt Lake City, UT 84117
If to Steamboat: Steamboat Envirosystems,
L.C.
921 Executive Park Drive, Suite
B
Salt Lake City, UT 84117
Changes in the respective addresses to which such notices may be
directed may be made from time to time by any party by written
notice to the other party; provided, however, that such change of
address notice shall be effective only when received. Notices
shall be deemed to have been given on the date of receipt if
delivered personally, on the third day after posting if transmitted
by mail or on the day after dispatch if sent by courier or
overnight delivery service.
11.6 Waiver. The waiver of any party hereto of any rights
arising out of, or in connection with, a default or other breach or
failure under this Agreement by any other party hereto shall not
operate or be construed to operate as a waiver of any other or
subsequent default, breach, or failure. The making or the
acceptance of a payment by any party hereto with knowledge of the
existence of a default or other breach or failure shall not operate
or be construed to operate as a waiver of such default, breach or
failure, or any other or subsequent default, breach or failure.
11.7 Entire Agreement; Modification. The provisions of this
Agreement, including all Exhibits hereto, the Project Operation
and Maintenance Manual, the Design Notebook and the Annual
Operating Plan for the relevant Contract Year, together with any
other agreements specifically incorporated herein or therein by
reference, shall constitute the entire agreement among the parties
for the operation of the Facilities by Operator, superseding any
prior agreements executed by the parties hereto. Without prejudice
to the final sentence of section 7.10, neither this Agreement nor
any of the terms hereof may be terminated, amended, supplemented,
waived or modified orally, but only by an instrument in writing
signed by the party against which the enforcement of the
termination, amendment, supplement, waiver or modification shall be
sought, and no such termination, amendment, supplement, waiver or
modification shall be effective without the prior written consent
of GE Capital.
11.8 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Utah
applicable to agreements made and to be performed entirely within
that state, including all matters of construction, validity and
performance.
11.9 Counterparts. This Agreement may be executed in more
than one counterpart each of which shall be deemed to be an
original but all of which taken together shall be deemed a single
instrument.
11.10 Severability. In the event that any provision of
this Agreement shall for any reason be determined to be invalid,
illegal, or unenforceable in any respect, the parties hereto shall
attempt in good faith to agree to such amendments, modifications,
or supplements to this Agreement and take such other appropriate
actions as shall, to the maximum extent practicable in light of
such determination, implement and give effect to the intentions of
the parties as reflected herein. The provisions of this Agreement
not so affected shall remain in full force and effect.
11.11 Further Assurances. Operator and Steamboat further
covenant to cooperate with one another in all reasonable respects
necessary to consummate the transactions contemplated by this
Agreement, and each will take all reasonable actions within its
authority to secure cooperation of any necessary third parties.
11.12 Headings. The Table of Contents and the headings of
the Articles and sections of this Agreement are for convenience of
reference only and shall not affect the meanings or construction of
any provision of this Agreement.
11.13 Waiver of Liens. Operator hereby unconditionally
waives any existing or future lien or claim of lien which Operator
may have against the Facilities (or any part thereof) in connection
with performance of its obligations hereunder, under any statute
pertaining to mechanic's liens or any other statute or law, without
regard to whether Operator has been or is paid for the performance
of such obligations.
11.14 Appointment of Facilities Manager. Operator shall
give GE Capital prior written notice of the identity and
qualifications of any Person proposed to be appointed by Operator
to the position of plant manager, or other comparable position, at
the Facilities. GE Capital shall have the right to veto any
proposed appointment, within its discretion. With effect from the
date hereof, Operator appoints Eric Call to the position of, and to
perform all duties of, Facilities Manager in respect of both
Facilities.
11.15 Disposal of Materials and Equipment. Any materials
and/or equipment connected with or located at the Facilities which
is obsolete, surplus or dysfunctional shall be disposed of in
accordance with the instructions of Steamboat.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
STEAMBOAT ENVIROSYSTEMS, L.C.
By: __________________________
Its: __________________________
SB GEO, INC.
By: __________________________
Its: __________________________
EXHIBIT B
FACILITIES ADMINISTRATIVE PROCEDURES
Procedure Title
1. Administrative Procedure Description and Format
2. Review, Approval and Maintenance of Procedures
3. Watchstanding
4. Clearance Procedure
5. Responsibilities and Authorities
6. Records Management
7. Abnormal Tag Procedure
8. Control of Standing Orders
9. Hazardous Waste
10. Generation Dispatching Procedure
11. Receiving, Handling and Storage of Hazardous or Flammable
Materials
12. Work Requests
13. Operations Training Program
14. General Warehousing
15. Housekeeping
16. Transportation and Vehicle Use
17. Accident Prevention Program
18. Safety Meetings
19. Safety Inspections
20. Employee Indoctrination
21. Accident Reporting and Investigation
22. Fire Suppression System Testing
23. Joint Safety Advisory Committee
24. Barriers
25. Generation Outage Report
26. Scheduling Maintenance Outage
27. Accountability for Tools and Equipment
28. Plant Efficiency Testing
29. Timekeeping
30. Safety Glasses Purchase
Policy
31. Fitness of Duty Policy
32. Waste Sampling and Documentation
33. Hazardous Communication Program
34. Purchasing Procedure
35. Employee Benefits
36. Logs and Records
37. Budget and Tracking
38. Security
39. Medical Examination
40. Hearing Conservation
41. General Hazards
42. MSDS
43. Hydrogen Sulfide
44. Arsenic
45. Respirators
46. Decontamination Equipment
47. Welding and Cutting
48. Chlorine
49. Housekeeping
50. Isobutane Handling
51. Special Work Permit
52. Regulated Areas
53. Protective Clothing and Equipment
54. Respiratory Protection
55. Change Room Use
56. Handling Contaminated Tools and Equipment
57. Confined Spaces
58. I. H. Sampling Frequency
59. Noise Sampling
60. Arsenic Sample Collection
61. Airborne Arsenic Sampling
62. O2 and CO2 Sampling
63. Multi Gas Detector
64. Combustible Gases Sampling
65. Hydrogen Sulfide Sampling
EXHIBIT C
FACILITY WORK FORCE
Complete details of the Facility Work Force will be incorporated by
Operator in the Operating Plans pursuant to _____________ of this
Agreement.
EXHIBIT D
OPERATOR'S OPERATING EQUIPMENT
Complete details of Operator's Operating Equipment (in all cases to
be purchased by Steamboat and maintained by Operator) will be
incorporated by Operator in the Operating Plans pursuant to section
3.4 of this Agreement. All Operator's Operating Equipment is, and
upon termination of this Agreement shall remain, the property of
Steamboat.
EXHIBIT E
OPERATOR APPROVALS
1. Certificate, dated ___________________, of the Department of
Commerce of the State of Utah, certifying that Operator is duly
incorporated and in good standing.
2. Certificate, dated __________________, of the Utah State Tax
Commission certifying that Operator has paid all its franchise
taxes.
3. Certificate, dated _________________, of the Secretary of
State of Nevada that Operator is qualified as a foreign corporation
authorized to transact business therein and is in good standing as
a foreign corporation.
EXHIBIT "D"
DESCRIPTION OF ASSETS
All of the assets owned by the Fund or 1-A which relate to
SB-1 or SB-1A (collectively referred to herein as Owners) and are
otherwise described as:
(a) All the Owner's rights, and all Owner's title or
interest, in, to, or under the contracts and agreements listed in
APPENDIX D-2, which is incorporated herein by this reference.
Without limiting the generality of the foregoing, such rights
include but are not limited to, the rights to enforce such
contracts and agreements, to receive any refunds and to control and
enforce any claim(s) related to or pursuant to such contracts and
agreements, to direct performance and exercise options and
elections related to or pursuant to such contracts and agreements,
and any other rights of any description. (All the foregoing items
and types of property are referred to herein as the "Special
Contracts".)
(b) All furnishings, furniture, trade or other fixtures,
office equipment, supplies, and inventory located at or used in
connection with the premises described on APPENDIX D-1 in Washoe
County, Nevada (the "Premises"), or the 4.0 MW (net) and 1.6 MW
(net) geothermal electric generation facilities (the "Facilities")
located on the Premises and belonging to Owners.
(c) All inventories of every nature, wherever located,
including all goods intended for sale or lease or to be furnished
under contracts of service, all raw materials, work in process, and
finished goods, and all supplies, materials, and products of every
nature and description used or useable in connection with the
manufacture, packing, shipping, advertising, selling, leasing, or
furnishing of such goods which are related in any way to the
Facilities (the "Inventories").
(d) All equipment, machinery, motors, chattels, tools, dies,
trucks, automobiles, vehicles, boats, furniture, and fixtures, of
every nature, presently existing or hereafter acquired, wherever
located, and all additions and accessions thereto and substitutions
therefor and all parts, tools, components, and equipment which may
be attached to or which are necessary to the operation or use of
such personal property or fixtures, whether or not the same shall
be deemed to be affixed to real property, and all rights under or
arising out of contracts relating to the foregoing located on the
Premises or related in any way to the Facilities (the "Equipment").
Without limiting the generality of the foregoing, such assets
include, but are not limited to, the Facilities and all equipment
and other property described above associated with it, whether or
not constituting fixtures, located at the Premises.
(e) All general intangibles and intangible rights of every
nature related in any way to the Facilities including, without
limitation, good will, patents, trademarks, licensing agreements,
royalty payments, copyrights, service names, service marks, trade
names, logos, leases, contracts, claims, accounts receivable,
causes of action, computer software, computer service agreements,
governmental or regulatory licenses, permits, or authorizations of
any description, and all other rights of every description.
(f) All books, correspondence, credit files, data, records,
and other documents relating to the types of property described
herein, which are related in any way to the Facilities including,
without limitation, all tapes, cards, runs and other papers and
documents which belong to Owners or any of its agents, employees,
partners, affiliates, or subsidiaries, or any computer service
bureau.
(g) All improvements, buildings, components, and fixtures now
existing, whether or not attached to real property, located at the
Premises or which at any time are used in connection with the
operation of the Facilities, to the full extent of Owner's rights
therein.
(h) The Reserve Account and the Operating Account created
pursuant to Section 2.05 and 2.06 of the Term Loan Agreement dated
December 28, 1989 between Owner and Westinghouse Electric
Corporation.
(i) All technical data in possession of Owner and available
to it, now or hereafter existing with respect to the existence and
use of the natural resources, drilling, pumping and removal and u
se of the natural resources, surveys, reports, research and any
other information received, used or relied on in determining the
feasibility, operation, use and expansion of the natural resources
in connection with the Facilities or the Premises.
(j) As appropriate assets such as accounts receivable,
prepaid insurance, property taxes, etc. will be prorated as of the
date of closing.
(k) Anything to the contrary notwithstanding, nothing herein
will be construed to transfer technical know-how, equipment, tools,
computer programs or assets belonging to SB Geo, Inc.
APPENDIX D-1
All the real property situated in the County of Washoe, State
of Nevada, more particularly described as follows:
PARCEL 1
Beginning at the one-quarter corner between Sections 28 and
29, Township 18, North, Range 20 East, M.D.B.&M., running thence
North 583 feet to the south side of the county highway right of way
then along said right of way South 69o58' West 176.10 feet; thence
South 520 feet; thence East 415.50 feet to the place of beginning;
all of said described land is situated in the Southeast quarter of
the Southeast quarter of the Northeast quarter of Section 29,
Township 18 North, Range 20 East, M.D.B.&M.
PARCEL 2
The East half of the Northeast quarter of the Southeast
quarter of Section 29, Township 18 North, Range 20 East, M.D.B.&M.,
according to the official plat.
EXCEPTING FROM SAID PARCEL 2 the following described real
property, and subject to the condition that Lessee's use of the
remainder of Parcel 2 shall not cause subsidence or in any way
damage Lessor's facilities presently constructed or to be
constructed on the following described real property:
Commencing at the one-quarter corner between Sections 28 and
29, T18N, R20E, MDB&M; thence South 413.40 feet along the East line
of said Section 29; thence West 188.0 feet to the True Point of
Beginning; thence South 77.0 feet; thence east 85.5 feet; thence
South 410.0 feet; thence West 460.0 feet; thence North 272.0 feet;
thence East 289.0 feet; thence South 195.0 feet to the True Point
of Beginning. Containing 6.13 acres, more or less.
PARCEL 3
A portion of the Southeast one-quarter (SE 1/4) of the
Northeast one-quarter (NE 1/4), and a portion of the Southwest
one-quarter (SW 1/4) of the Northeast one-quarter (NE 1/4), all in
Section 29, Township 18 North, Range 20 East, M.D.B.&M., Washoe
County, Nevada, described as follows:
Beginning at a point marked by an iron pin on the South line
of the North one-half (N 1/2) of Section 29, Township 18 North,
Range 20 East, M.D.B.&M., said point further described as being the
Southwest corner of a 5.0 acre tract described by Document No.
174192, recorded in Book 236 of Deeds;
Records of Washoe County, Nevada from which point the East
one-quarter (E 1/4) corner of said Section 29 bears South 89o41'
East 415.5 feet (being East 415.5 according to said deed).
Thence, North 52o07' West 673.26 feet more or less to a point
on the Southerly right of way line of the Mount Rose Highway;
Thence South 57o37'30" West 759.97 feet more or less along the
Southerly right of way line of said highway to a point on the South
line of the North one-half (N 1/2) of said Section 29;
Thence, South 89o41' East 1173.24 feet more or less along the
South line of the North one-half (N 1/2) of said Section 29, to the
point of beginning.
Together with the right to use the easement 45.0 feet in width
described in that certain Easement Agreement dated October 18,
1971, and recorded November 3, 1971, as Document No. 224422 at Book
589, page 533 in the Official Records of Washoe County, Nevada, for
roadway and electric utility purposes over, upon and across the
property described therein and subject to the terms thereof.
APPENDIX D-2
1. Geothermal Resources Leases dated November 18, 1983 (the
"Lease") between Sierra Pacific Power Company, a Nevada corporation
("SPPC") and Geothermal Development Associates, a Nevada
corporation ("GDA"), as amended by a Letter Amendment to Geothermal
Resources Lease dated January 7, 1985 between SPPC and GDA, a
Second Amendment to Geothermal Resources Lease dated October 29,
1988 between SPPC and Owner, and a Third Amendment to Geothermal
Resources Lease dated October 2, 1989 between SPPC and the Fund.
2. Amended Memorandum of Lease dated January 7, 1985 between
SPPC and GDA.
3. Memorandum of Lease, Assignment of Lease and Purchase
Agreement dated December 31, 1985 among GDA, Ormat Systems, Inc.,
a Delaware corporation, now known as Ormat, Inc. ("Ormat"),
Bonneville Pacific Corporation, a Utah corporation ("Bonneville"),
Far West Capital, Inc., a Utah corporation doing business in Nevada
as Far West Resources, Inc. ("FWC"), the Fund and SPPC.
4. Amended Memorandum of Lease dated October 16, 1989
between SPPC and the Fund.
5. Revised and Restated Geothermal Resources Sublease dated
October 9, 1989 between the Fund and FWC.
6. Memorandum of Revised and Restated Geothermal Resources
Sublease dated October 9, 1989 between the Fund and FWC.
7. Consent and Agreement dated November 2, 1988 among the
Fund, FWC and SPPC.
8. Location and Occupancy Agreement dated December 31, 1985
between SPPC and the Fund.
9. Agreement for the Purchase and Sale of Electricity dated
November 18, 1983 between GDA as Seller and SPPC as buyer, as
amended by Amendment to Agreement for Purchase and Sale of
Electricity dated March 6, 1987 between the Fund as seller and SPPC
as buyer.
10. All permits, licenses, agreements and approvals related
to or necessary for the operation of the 4.0 MW (net) and 1.6 MW
(net) geothermal electric generation facilities (the "Facilities")
located on the property subject to the Lease (the "Premises"),
including, without limitation, all building and occupancy permits,
environmental permits and licenses, and Federal Energy Regulatory
Commission certification.
11. All technical data in possession of Owner and available
to it, now or hereafter existing with respect to the existence and
use of the natural resources, drilling, pumping and removal and use
of the natural resources, surveys, reports, research and any other
information received, used or relied on in determining the
feasibility, operation, use and expansion of the natural resources
in connection with the Facilities or the Premises.
Exhibit 2
Tax Opinion
ROBISON, HILL & CO.
January 4, 1996
Far West Capital, Inc.
General Partner
Far West Electric Energy Fund, L.P.
(formerly Far West Hydroelectric Fund Ltd.)
Salt Lake City, Utah
Gentlemen:
You have requested that we provide you with an explanation of the
limited partners, tax consequences of the purchase and sale
agreement between Far West Capital, Inc. (IIFWCII); Far West
Electric Energy Fund, L.P. (the "Fund"); 1-A Enterprises (111-All);
U.S. Envirosystems, Inc. ("USE") and Steamboat Envirosystems, L.C.
("SBEII) . The following is our explanation of the tax consequences
to the limited partners of the Fund.
FEDERAL INCOME TAX CONSEQUENCES
General Considerations
This description of certain federal income tax consequences of the
proposed sale of the assets of the Fund is included solely for the
information of the limited partners. No information is provided
with respect to the consequences of any applicable state, local or
foreign tax laws. Applicability of the minimum tax and other tax
consequences of the proposed sale to a Limited Partner may depend
upon the individual situation of the Partner. Therefore, each
Partner is urged to consult his or her own tax adviser concerning
the specific tax consequences of the proposed sale to such Partner.
The following summary of the major income tax consequences of the
proposed sale is based, with respect to U.S. tax consequences, on
the pertinent provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the applicable regulations promulgated by the
Treasury Department under the Code (the "Regulations"), Each
Partner of the Fund should be aware that the Code, the Regulations
and interpretations are subject to change and that such changes may
be given retroactive effect.
The Revenue Reconciliation Act of 1990 (the 111990 Act") changes
the tax rates imposed upon individuals commencing January 1, 1991.
The new tax law imposes a 36% marginal tax rate plus a surtax
resulting in 39.6% rate rather than a generally imposed 28%
marginal tax bracket on individual taxpayers, increases the
alternative minimum tax rate to 24% (rather than the previous rate
of 21%), and phases out personal exemptions and itemized deductions
for persons with substantial income. The 1990 Act also limits the
tax rate on long-term capital gains to 28% The 1990 Act itself does
not have an effect upon the opinion of the Tax Advisor items (a)
through (g) set forth below, but owners of limited partnership
units should be aware that the changes set forth in the 1990 Act
could have an effect on the rates imposed on the taxpayer.
The Partners in the Fund are variously; corporations, individuals,
partnerships and nominees. Each type of entity may be taxed at
different rates or be taxed based on different sections of the Code
or Regulations. It is not feasible to comment on all of the
federal income tax consequences of the proposed sale. This summary
has been prepared based on the opinion of the Fund's tax advisor,
the Code, and the Regulations as now in effect and the current
judicial and administrative interpretations thereof. There can be
no assurance that the Internal Revenue Service will agree with the
interpretations of the Code and the Regulations set forth below.
The following summary does not include any discussion with respect
to the consequences of the proposed sale under state and local
taxation laws and regulations.
Taxation of Partnership in General
The partnership is not subject to federal income tax, it is an
entity which income or loss "flows through" to partners who are
taxable in their individual capacities on their distributive shares
of partnership taxable income. However, the partnership is a tax
reporting entity that must make an annual return of partnership
income or loss. Each partner is required to treat partnership
items on its return in a manner consistent with the treatment of
such items on the partnership return and may be penalized for
intentional disregard of the consistency requirement (Code Sec.
6222). The consistency requirement may be waived if the partner
files a statement (Form 8082) identifying the inconsistency or
shows that it resulted from an incorrect schedule furnished by the
partnership.
A partner's distributive share of income, gain, losses, deductions
or credits is generally determined by the partnership agreement.
Allocations of any partnership item under the partnership agreement
must have substantial economic effect. If a partnership agreement
does not provide for the allocation of partnership items or if
partnership allocations lack substantial economic effect, the
partner's distributive share is determined in accordance with its
interest in the partnership (Code Sec. 704(a) and (b); Reg.
1.704-1(b)).
In determining tax, each partner must account separately for its
distributive share of the following partnership items (Code Sec.
702): (1) short-term capital gains and losses, (2) long-term
capital gains and losses, (3) gains and losses from sales or
exchanges of property used in a trade or business or subject to
involuntary conversion, (4) charitable contributions, (5) dividends
for which there is a dividends-received deduction, (6) taxes paid
or accrued to foreign countries and to U.S. possessions, (7)
taxable income or loss, exclusive of items requiring separate
computation, and (8) other items required to be stated separately
either by Reg. 1.702-1 or because separate statement could affect
the income tax liability of any partner, including the following:
recovery of bad debts, prior taxes, and delinquency amounts,
deductible investment expenses, intangible drilling and development
costs, alternative minimum tax adjustments and tax preference
items, investment tax credit recapture, recapture of mining
exploration expenditures, cost of recovery property being currently
expensed, investment interest, any items subject to a special
allocation under the partnership agreement.
Most elections affecting the computation of income derived from a
partnership must be made by the partnership. Thus, elections as to
methods of accounting, methods of computing depreciation, the
nonuse of the installment sales provision, the option to expense
intangible drilling and development costs, etc. , must be made by
the partnership and must apply to all partners, insofar as the
partnership transactions are concerned (Reg. 1.703i(b)).
Individual partners must make the elections to (1) use as a credit
or as a deduction their distributive shares of foreign taxes of the
partnership, (2) deduct or capitalize their shares of the
partnership's mining exploration expenditures, and (3) reduce basis
in connection with discharge of indebtedness under Code Sec. 108.
In an administrative or judicial proceeding concerning partnership
items, the determination of the tax treatment of partnership items
is made at the partnership level in a single administrative
partnership proceeding, rather than in separate proceedings with
the partners. Special rules govern proceedings that must be
conducted at the partnership level for the assessment and
collection of tax deficiencies or for tax refunds arising out of
the partner's distributive shares of income, deductions, credits,
etc. (Code Secs. 6221-6233).
A partner is generally not taxed on distribution of cash or
property received from the partnership, except to the extent that
any money distributed exceeds the partner's adjusted basis in its
partnership interest immediately before the distribution (Code
Section 706(a)).
Each partner generally must account for its distributive share of
partnership taxable income in computing its income tax; thus,
the basis in its partnership interest is increased by its
distributive share of partnership taxable income. It is this basis
increase that generally allows distributions of taxable income to
be made without recognition of gain, since the basis increase
generally offsets corresponding decreases in basis that result from
such distributions (Code Secs. 705 and 731(a)).
Deductibility of Partnership Losses
The benefit of the net operating loss deduction is not allowed to
the partnership, but only to the partners. For purposes of
determining its individual net operating loss, each partner takes
into account its distributive share of income, gain, losses,
deductions, or credits of the partnership as if each item were
realized directly from the source from which realized by the
partnership, or incurred in the same manner as incurred by the
partnership (Reg. 1.702-2).
There are three commonly encountered limitations on a partner's
ability to take into account its share of a partnership's loss in
computing its individual tax liability. A partner is entitled to
deduct its share of the partnership's loss only after satisfying
all three of these rules. First, since the adoption of the 1954
Code through the present, the partnership taxation rules have
limited a partner's deductible share of losses to its basis in its
partnership interest. Second, since 1976, the at-risk rules have
limited a partner's deduction for its share of losses to the amount
it is considered to be economically at-risk in the venture. Third,
beginning with the effective date of the Tax reform Act of 1986, if
a partner's share of the partnership's losses are considered
"passive losses,,' the partner must combine them with its passive
losses from other sources and is allowed to deduct the total only
to the extent of its passive income from all sources.
The amount of partnership loss (including capital loss) that may be
allowed to a partner is limited to the amount of the adjusted basis
(before reduction by the current year's loss) of its interest in
the partnership at the end of the partnership tax year in which the
loss occurred. The disallowed loss is carried forward to and may
be deducted by the partner in subsequent partnership tax years (to
the extent that the basis exceeds zero before deducting the loss)
(Reg. 1.704-1(d)).
Partners are subject to the at-risk rules. The amount of losses
deductible by a partner is limited to the amounts at risk in the
activity, which does not include any portion of a partnership
liability for which the partner has no personal liability. The at
risk loss limitation rules are applied before taking into account
the basis limitation for partners, losses or computing any passive
activity loss for the year.
The passive activity loss limitations apply to the partner level to
each partner's share of any loss or credit attributable to a
passive activity of the partnership. A partnership must report
separately a partner's share of income or losses and credits from
each (1) trade or business activity, (2) rental real estate
activity, and (3) rental activity other than rental real estate.
A partnership's portfolio income, which is excluded from passive
income, must also be separately reported.
Generally, a passive activity of a partner is (1) a trade or
business activity in which the partner does not materially
participate, or (2) any rental activity. Except as provided in
Temporary Reg. 1.469-ST(e)(2), an interest in an activity as a
limited partner in a limited partnership is not one in which the
partner materially participates. A limited partnership interest is
thus considered to be an interest in a passive activity subject to
the limits on passive losses. Thus, in any one taxable year,
passive activity expenses can be deducted only to the extent of the
taxpayer's passive activity income.
Losses that are disallowed due to any of these three limitations
are deductible in the year of the termination of a partnership
interest.
Capital Gain or Loss
Although the sale of a partnership interest generally gives rise to
capital gain or loss, amounts received by a partner allocable to
its share of unrealized receivables or substantially appreciated
inventory constitute ordinary income or loss whether the gain
results from a sale to nonpartners or to other partners. The term
"unrealized receivables" includes any rights to income that have
not been included in gross income under the method of accounting
employed by the partnership (Reg. 1.751-1(c)). For the most part,
the classification relates to cash-basis partnerships and in the
usual case, the term does not apply to an accrual-basis partnership
because it has already included unrealized receivables in gross
income. The term "unrealized receivable" also includes certain
property to the extent of the amount of gain that would have been
realized and treated as ordinary income (under Code Secs. 617, 995,
1245, 1248, 1250-1254) by the partnership if it had sold the
property at its fair market value at the time of the sale or
exchange of the partnership being considered.
A decrease in a partner's share of partnership liabilities is
treated as a distribution of money by the partnership, which
decreases the distributes partner's basis in its partnership
interest (but not below zero) (Code Secs. 733 and 752(b)). When a
partner's basis has been reduced to zero, such "deemed
distributions" can result in the recognition of gain.
Partners, shares of partnership liabilities (and corresponding
allocations of basis) depend upon whether the liability is
"recourse" or "nonrecourse.11 In addition, separate rules apply in
the case of nonrecourse debts of the partnership if a partner is
the lender or has guaranteed repayment of the debt. A limited
partner cannot be allocated recourse liabilities in excess of its
capital contribution unless it has agreed to restore any def icit
in its capital account. Article VIII of the partnership agreement
states that the "Units are not subject to assessment. 11
Nonrecourse liabilities are those for which no partner bears the
economic risk of loss.
The amount realized from a sale or other disposition of property
includes the amount of liabilities from which the transferor is
discharged as a result of the sale or disposition except:
(1) The amount realized on a sale or other disposition of property
that secures a recourse liability does not include amounts
that are income from the discharge of indebtedness under Code Sec
61(a)(12), or
(2) In the case of a liability incurred by reason of the
acquisition of the property, the liability is not included in the
amount realized to the extent that such liability was not taken
into account in determining the transferor's basis for such
property (Reg. 1.1001-2(a)).
Cancellation of Indebtedness
Cancellation of indebtedness usually results in taxable income and
increases earnings and profits. However, where the creditor's
adjusted basis in the debt is at least equal to the principal
amount of the debt forgiven, the forgiveness of debt by a creditor
shareholder may be a capital contribution that doesn't increase
earnings and profits. But, in the absence of evidence indicating
an intent to make a capital contribution, the cancellation of
indebtedness increases earnings and profits (Rev. RU1. 58-546).
Termination of Partnership
The tax year of the partnership closes if there has been a
termination of the partnership. Article XVII (ii) of the
Certificate and Agreement of Limited Partnership states that the
sale of substantially all the assets of the Partnership shall work
an immediate dissolution of the Partnership. Article XVIII states
that the "holders of the Units shall continue to share profits and
or losses during the period of liquidation in the same proportion
as before the dissolution. Upon the completion of the liquidation
of the partnership, the partnership must file a short-period return
for the resulting short tax year. Code Section 708 provides that
termination occurs only if the business activities of the
partnership are no longer carried on by any of the partners or that
at least one-half of the total interest in partnership capital and
profits is sold within a 12-month period. Such sale or exchange
includes a sale or exchange to another member of the partnership
and the exchange of the interest in one partnership for an interest
in another partnership (or limited liability company). A
partnership is considered a continuing entity and observes its
regular tax year unless it is terminated under the rules above,
accordingly, the dissolution or liquidation of the partnership
under state law does not necessarily cause a partnership's tax year
to close (Reg. 1.706-1(c)).
Effect of Liquidation
In the case of a liquidating partnership, a relatively simple set
of rules governs the distributee's gain, loss, and basis in
distributed assets, if there are no disproportionate distributions
of unrealized receivables and substantially appreciated inventory
items. There are no tax consequences to the partnership.
If unrealized receivables and substantially appreciated inventory
are not distributed, a liquidation results in gain only to the
extent that a partner receives money in excess of its partnership
interest's adjusted basis (Code Sec. 731(a)). Liquidating
distributions always involve a complete termination of
liability for any share of partnership debt because the
partnership
ceases to exist. The termination of partnership requires that
decreases in the partner's share of partnership liabilities be
netted with any liabilities the partner takes over from the
partnership (Reg. 1.752-1(f)). Net debt relief is treated as
additional money received (Code Sec. 752 (b) and Reg. 1.752-1(f)).
If a partner takes over only its pro rata share of the partnership
debt, there will be no deemed cash receipt or payment.
A loss may be recognized when only one or more of three types of
assets, and no other property, are distributed in the
liquidation. If the liquidated partner receives only cash,
inventory, and/or unrealized receivables and their bases to the
partnership are less than its basis in its partnership interest, it
is allowed to deduct the difference as a capital loss (Code Sec.
731(a)(2)).
The sale or exchange of a partnership interest is generally treated
as the sale of a single capital asset and not as the sale of a
partner's proportionate interest in each asset of the partnership
(Code Sec. 741). Capital gain or loss, as measured by the
difference between the amount realized and the adjusted basis of
the partnership interest, will result from the sale. If the
selling partner has a basis of zero and a deficit-capital account,
it also realizes additional capital gain to the extent that it has
been relieved of its obligation to repay the deficit.
AS is the situation with most sales of property, the amount
realized by the transferor partner equals the amount of cash and
the fair market value of any property received by it plus debt
relief (Regs. 1.1001-1(a)(1) and 1.1001-2(a)(1)). In the case of
sales of partnership interests, debt relief takes the form of a
decreased share of partnership liabilities (Reg. 1.10012 (a) (4)
(v) ) . An increase or a decrease in a partner Is share of the
partnership's liabilities is treated as a deemed money contribution
and distribution, respectively (Code Secs. 752(a) and 752(b)).
Deemed money contributions increase a partner's basis in its
interest (Code Sec. 722). Deemed distributions decrease its basis
in its interest to zero. Excess deemed distributions, ie., those
made after a partner's basis in its partnership interest has been
reduced to zero, are treated as taxable gain (Code Secs. 733(l) and
731(a)(1)). The limited partners of the Fund are not liable for
any of the partnership debt beyond the amount of their capital
account. Since the limited partners have negative capital accounts
none of the debt relief (if any) is attributable to the limited
partners.
Partner's Cost Basis
A partner's basis in its partnership interest must be adjusted
periodically to ensure that the partnership remains a conduit for
tax purposes. Income and deductions are to be taxed only once
(Code Sec. 701). Tax-exempt income, nondeductible expenditures,
and distributions made from previously taxed income and
contributions are not to be taken into account in computing tax
liability at all.
The transferor partner's adjusted basis in its partnership interest
at the time of the transfer is the sum of its basis on the day it
acquired its interest plus adjustments reflecting operations during
its holding period. The calculation of a partner's initial basis
varies according to whether it acquired its interest through a
contribution to the partnership or by transfer from another partner
(Code Sec. 742 and Reg.1.742-1). A partner has to determine the
adjusted basis of its interest in a partnership whenever it is
necessary for the determination of its tax liability, or that of
any other person. Ordinarily the determination is made as of the
end of the partnership's taxable year. However, where there has
been a sale of all or part of a partnership interest or a
liquidation of a partner's entire interest, the adjusted basis is
determined as of the date of sale or exchange or liquidation (Reg.
1.705-1(a)(1)).
The original basis of a partner's interest is the amount of money
and the adjusted basis of property contributed to a partnership
when the partnership interest is acquired (Code Secs. 705(a) and
722). This basis is increased by any further capital contributions
and by the sum of the partner's distributive share of:
(1) taxable income of the partnership,
(2) tax-exempt receipts of the partnership, and
(3) the excess of depletion deductions over basis of the
depletable property.
Code Sec. 705(a)(1) and Reg. 1.705-1(a)(2).
The basis is decreased (but not below zero) by distributions from
the partnership as provided under Code Sec. 733, and by the sum of
the partner's distributive share of:
(1) partnership losses, including capital losses (Code Sec.
705(a)(2)(A)),
(2) nondeductible partnership expenditures which are not capital
expenditures (Code Sec. 705 (a) (2) and Reg. 1. 705l(a)(3)),
(3) the amount of the partner's deduction for depletion for
partnership oil and gas property to the extent the deduction does
not exceed the partner's share of the adjusted basis of the
property (Code Sec. 705(a)(3) and Reg. 1.705-1(a)(4), and
(4) loss from the disposition by the partnership of a domestic oil
or gas property (Reg. 1.705-1(a)(5)).
in all cases when downward adjustments to basis are required, the
statute expressly provides that basis is not to be reduced below
zero (Code Sec. 705(b)). A basis in a partnership interest never
has a value below zero. While a negative capital account is very
common, a negative basis is impossible.
Calculation of Individual Partner Per Unit Cost Basis
Based on the information provided from the Schedule K of Form 1065
as was filed by the Partnership, a per unit basis of original
issued units would be:
10,000 units issued at $1,000 per unit.
Cash Sched.K Cumulative Cum-
Distri- Income Suspended Culative
bution (Loss) Loss Basis
Initial
Purchase $ - $ - $ - $1,000
1985
(Business
credit
$279) - (28) - 972
1986
(Business
credit
$20) - (368) - 604
1987 31 (374) - 199
1988 22 (420) (243) -
1989 - (366) (609) -
1990 - (297) (906) -
1991 - (6) (912) -
1992 - 325 (587) -
1993 - 125 (462) -
1994 - 58 (404) -
1995 (Projected
without Sale
of SB-1) - 114 (290) -
Projected Sale of
SB-1 44 559 - 225
The preceding table assumes that the limited partner is an
individual and was unable to deduct some of the losses at the times
they were incurred either because of the basis limitations or the
passive loss limitations. In summary, assuming that the partner
was able to utilize the Business credit, the partner should have
received a tax benefit of $299 for the Business credit, received
non-taxable cash distributions of $97, will have ordinary income of
$269 (net of suspended losses and assuming that the proposed sale
is completed during 1995) and will be able to deduct the remaining
basis as a capital loss of $225. Each limited partner's situation
may vary from the above assumptions, accordingly, partners are
encouraged to consult their own tax advisers.
The Partnership elected to reduce basis of property for which the
energy credit was claimed by 50% of the energy credit (Code Sec.
50). The reduced basis was used in determining depreciation and
gain on the disposition of property. In the event that a partner
did not realize a tax benefit from the investment credit for which
a downward basis adjustment was made, a deduction is allowed under
Code Sec. 196 to the taxpayer for 50% of the unused energy credit
attributable to the basis reduction.
The Code also imposes an alternative minimum tax and excise taxes
on certain types of transactions. Applicability of such taxes is
usually controlled, in whole or part, by other matters unrelated to
the Proposed Sale or by unique characteristics of the particular
taxpayer. Accordingly, partners are encouraged to consult their
tax advisers if they are or might be subject to such taxes.
Tax Shelter Consideration
The IRS may determine that the partnership is a tax shelter. Tax
shelters are treated as shams where the two-pronged test shows
that: (a) the transaction was entered into primarily for tax
avoidance, and (b) there was no reasonable possibility of profit
from the transaction, i.e., there was no economic substance.
Where a transaction contains the characteristics listed below, The
Tax Court treats the transaction as one entered into primarily, if
not solely, for tax avoidance under test (a), above and refers to
it as a "generic" tax shelter. Moreover, a "generic tax shelter is
treated as a sham where it is also found to have had no economic
substance (test (b), above) other than tax benefits (Rose, James,
(1987) 88 TC 386, affd on this issue (1989, CA6) 63 AFTR 2d 89-776,
868 F2d 851, 89-1 USTC 9191). The Tax Court's enumerated
characteristics common to "generic" tax shelters are: (1) tax
benefits are the focus of the promotional material, (2) investors
do not negotiate price, (3) assets involved consist of "rights"
difficult to value and substantially overvalued in relation to
tangible property involved, (4) the tangible property is created or
acquired for little cost shortly before the transactions, and (5)
most of the consideration is deferred by promissory notes,
nonrecourse in form or substance. For purposes of the tax shelter
rule, the requisite profit motive is determined at the partnership
level, as reflected by the motives and objectives of the promoters
and general partners of the partnership. Factors examined include:
experience and knowledge of the promoter, whether tax benefits are
the focus of marketing, whether advanced royalty payments are
disproportionate, whether reasonable efforts are made to engage in
the activity, and whether the property that was the basis for the
venture was overvalued. As of now the only significant tax benefit
for the limited partners is approximately $300 business investment
tax credit (per unit) which was available to investors during 1985
and 1986. Due to at-risk limitations it is possible that many of
the limited partners were not able to use the business tax credit.
It would appear that there have not been significant tax benefits
generated by the partnership.
opinion of Tax Advisor
In our opinion if the sale occurs as set forth in the Purchase and
Sale Agreement and as described herein, it is more likely than not:
(a) The proposed sale will result in dissolution of the
partnership under Article XVII (ii) of the Certificate and
Agreement of Limited Partnership of Far West Hydroelectric Fund
Ltd.
(b) Any cash received by the Limited Partners of the Fund will be
treated as having been received in redemption of the limited
partner units so cashed out, and will result in taxable gain or
loss. The amount of such gain or loss will be the difference
between the cash received and the basis of the units surrendered in
exchange thereof.
(c) The partnership is not a "generic" tax shelter under the
two-pronged test and loss if any will be allowed.
(d) The $100,000 cancellation of indebtedness from First Security
Bank will result in taxable income and increase earnings and
profits to the Partnership.
(e) The debt to FWC will be transferred to equity in the new
entity and is not forgiveness of debt and should not be recognized
as a distribution of money by the partnership to the limited
partners.
(f) Partners that did not receive tax benefits from the
energy tax credit are entitled to 50% of the basis
reduction as a
credit on their income tax return.
(g) Because the Partnership records income on an accrual
basis for tax purposes there will not be any unrealized
receivables
or appreciated inventory sold that should be recognized as ordinary
income.
An opinion of a tax practitioner is not binding upon the IRS or the
Courts. It is uncertain whether the IRS would issue a
favorable ruling on the Proposed Sale. An opinion of Tax Advisors
does not provide the same degree of assurance with respect to the
consequences of a transaction as would a private letter ruling from
the IRS. The Tax Advisor's opinion is subject to a number of
assumptions and qualifications that are critical to the opinion and
is based on certain factual assumptions, and upon certain
representations and assurances made by FWC, the Fund, USE and SBE.
if such factual information or the representations, warranties, or
assumptions are not true when made or subsequently change, the Tax
Advisor's opinion may be inapplicable. Robison, Hill & Co. has
expressed no opinion concerning the consequences of the proposed
sale on the Limited Partners under applicable state or local income
tax laws.
The preceding is intended to be only a summary of income tax
consequences relating to the Proposed Sale. LIMITED PARTNERS OF
FAR WEST ELECTRIC ENERGY FUND, L.P. SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO ISSUES NOT COVERED BY THE OPINION OR
REGARDING THEIR OWN PARTICULAR CIRCUMSTANCES.
Respectfully submitted,
Robison Hill & Company
Public Accountants
Salt Lake City, Utah
EXHIBIT 3
FAIRNESS OPINION
CORPORATE CAPITAL
December 12, 1995 CONSULTANTS INC.
1185 AVENUE OF THE AMERICAS
18th FLOOR
NEW YORK, NEW YORK 10036-2601
TEL: (212) 843-0352
Far West Electric Energy Fund, L.P.
FAX: (212) 843-0574
c/o Far West Capital, Inc., General Partner 921 Executive Park
Drive, Suite "B" Salt Lake City, Utah 84117
Gentlemen:
You have requested our opinion as to the fairness to the Limited
Partners, (other than Far West Capital, Inc. ('FWC")), of Far West
Electric Energy Fund, L.P. (the "Fund") of the $1,250,000 proposed
to be paid by U.S. Envirosystems, Inc. C'USE") for the geothermal
plant known as SB-1 and certain other assets of the Fund after the
date of closing, pursuant to the draft Purchase and Sale Agreement
dated December 7, 1995.
Corporate Capital Consultants, Inc. ('CCC") is a specialist
investment banking firm which, since its inception in 1974,
performs services in the area of financial consulting, corporate
valuation and fairness opinions, and mergers and acquisitions. In
the valuation area, CCC has provided corporate valuations, often in
conjunction with pending purchase offers, plans to sell or
recapitalizations, for both public and privately-held companies in
a broad range of industries. In the case of public companies, CCC
has furnished several fairness opinions with a number of tender
offers, going-private transactions, and the purchase of minority
interests.
In connection with this opinion, we have reviewed, among other
things, a draft of the Purchase and Sale Agreement with attendant
documents; Annual Reports on Form 10K of the Fund for the five
years ended December 31, 1994, as well as tax returns for the same
period; certain Quarterly Reports on Form 10-Q of the Fund; certain
internal financial analyses and forecasts for the Fund prepared by
the management of the Fund; and certain internal financial analyses
and forecasts for the Fund if operated by USE as prepared by the
management of USE, We have also reviewed other documents such as
the current Power Purchase Agreement with Sierra Pacific Power,
loan documents, royalty agreements, draft to the proposed USE SB-2,
and a two-year old appraisal of the plant. We also have held
discussions with members of the senior management of the Fund and
USE regarding the past and current business operations, financial
condition and future prospects of the SB-1 plant and the Fund. We
have held discussions with the senior lender, Westinghouse Credit
Corporation, and Sierra Pacific Power. We have reviewed
information on certain other companies in the independent power
production industry specifically and in other industries generally
and considered such other information, held such other discussions
and performed such other studies and analyses as we considered
appropriate.
2 -
Far West Electric Energy Fund, L.P.
December 12,1995
We have relied without independent verification upon the accuracy
and completeness of all of the financial information and other
information reviewed by us for purposes of this opinion. In
addition, we have not made an independent evaluation or appraisal
of the assets and liabilities of the plant or the Fund.
Based upon and subject to the foregoing an d such other matters as
we considered relevant, we are of the opinion that, as of December
12, 1995, the consideration to be received by the Limited Partners
(other than FWC) are fair to those Limited Partners from a
financial point of view.
Very truly yours,
CORPORATE CAPITAL CONSULTANTS, INC.
Carl A. Goldman
President
FORM 10-QSB
[As last amended in Release No. 34-32231, April 28, 1993, 58 F.R.
26509]
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from ________________ to ______________
Commission file number 0-14452
Far West Electric Energy Fund, L.P.
(Exact name of small business issuer as specified in its charter)
Delaware 87-0414725
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification
No.)
921 Executive Park Drive, Suite B, Salt Lake City, Utah 84117
(Address of principal executive offices)
(801) 268-4444
Issuer's telephone number
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
FAR WEST ELECTRIC ENERGY FUND, L.P.
Balance Sheets
December 31, 1994 and September 30, 1995
(Unaudited)
Assets 09/30/95 12/31/94
Utility plant:
Plant in service $15,998,000 $ 18,716,000
Equipment 590,000 335,000
Construction in progress 118,000 118,000
Accumulated depreciation (5,226,000) (6,010,000)
Net utility plant 11,480,000 13,159,000
Restricted cash 1,012,000 1,145,000
Other assets 110,000 124,000
Current assets:
Cash and cash equivalents 193,000 278,000
Receivables - trade 260,000 437,000
Receivables - other --- 6,000
Prepaid insurance 16,000 12,000
Total current assets 469,000 733,000
Total assets $ 13,071,000 $ 15,161,000
The accompanying notes are an integral
part of these financial statements.
FAR WEST ELECTRIC ENERGY FUND, L.P.
Balance Sheets
December 31, 1994 and September 30, 1995
(Unaudited)
Partners' Capital and Liabilities 09/30/95 12/31/94
Partners' capital:
Limited partners (10,305 units
issued and outstanding) $4,679,723 $4,867,823
General Partner (1 unit issued
and outstanding) (12,723) (10,823)
Total partners' capital 4,667,000 4,857,000
Other liabilities --- 150,000
Long-term debt:
Long-term debt, excluding
current portion 537,000 0
Notes payable - related party 203,000 230,000
Partners' capital and long-term
liabilities 5,407,000 5,237,000
Current liabilities:
Current portion - long-term debt 4,746,000 7,140,000
Note payable - related party 1,069,000 1,043,000
Payable - related party 546,000 414,000
Accrued liabilities
Operations 289,000 495,000
Royalties 76,000 220,000
Interest 938,000 612,000
Total current liabilities 7,664,000 9,924,000
Total partners' capital
and liabilities $ 13,071,000 $15,161,000
The accompanying notes are an integral
part of these financial statements
FAR WEST ELECTRIC ENERGY FUND, L.P.
Statements of Operations
(Unaudited)
For The For The For The For The
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
09/30/95 09/30/94 09/30/95 09/30/94
Revenues
Electric power sales $ 494,000 $463,000 $1,794,000 1,882,000
(note 8)
Pumping charges 22,000 20,000 47,000 45,000
Royalty income 22,000 28,000 63,000 63,000
Interest income 18,000 14,000 50,000 31,000
Other income 0 0 0 7,000
Total Revenues 556,000 525,000 1,954,000 2,028,000
Expenses
Interest 143,000 237,000 924,000 665,000
Depreciation 158,000 160,000 462,000 480,000
Royalty 82,000 72,000 290,000 291,000
Professional Services 1,000 4,000 42,000 43,000
Administrative services -
general partner 13,000 8,000 95,000 73,000
Amortization 4,000 4,000 13,000 13,000
Insurance 11,000 14,000 34,000 42,000
Maintenance 164,000 129,000 443,000 366,000
Travel 7,000 0 7,000 0
Taxes 1,000 0 1,000 0
Other 6,000 3,000 21,000 18,000
Total Expenses 590,000 631,000 2,332,000 1,991,000
Net Income (Loss)
Before Gain on Sale (34,000) (106,000) (378,000) 37,000
Gain on Sale of Crystal
Springs Project 0 0 188,000 0
Net Income $ (34,000) $(106,000) $(190,000) $ 37,000
Net Income (loss) per
limited partnership
unit $ (3.27) $ (10.18) $ (18.25) $ 3.55
The accompanying notes are an integral
part of these financial statements.
FAR WEST ELECTRIC ENERGY FUND, L.P.
Statements of Cash Flows
For the Nine Months Ended September 30, 1995 and 1994
(Unaudited)
09/30/95 09/30/94
Cash flows from operating activities:
Net income (loss) $ (190,000) $ 37,000
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 475,000 493,000
Gain on sale of Crystal Springs (188,000) 0
Change in assets and liabilities
Decrease (increase) in receivables 183,000 78,000
Decrease (increase) in prepaid insurance (4,000) (15,000)
Decrease (increase) in other assets 14,000 14,000
Increase (decrease) in accounts
payable and accrued expenses (55,000) (156,000)
Total Adjustments 425,000 414,000
Net cash provided by (used in)
operating activities 235,000 451,000
Cash flows from investing activities:
Purchase of plant and equipment (255,000) (106,000)
Net proceeds on sale of Crystal Springs 1,528,000 0
Increase (decrease) in restricted
cash 133,000 (89,000)
Net cash provided by (used in)
investing activities 1,406,000 (195,000)
Cash flows from financing activities:
Payment of principal on long-term debt (1,857,000) (592,000)
Increase (decrease) in amount due to
general partner 26,000 191,000
Increase (decrease) in amount due to
related party 105,000 55,000
Net cash provided by (used in)
financing activities (1,726,000) (346,000)
Increase (decrease) in cash (85,000) (90,000)
Cash at beginning of period 278,000 280,000
Cash and Cash Equivalents
at the end of the period $ 193,000 $ 190,000
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 205,000 441,000
The accompanying notes are an integral
part of these financial statements.
Far West Electric Energy Fund, L.P.
September 30, 1995
Notes to Financial Statements
1. Interim Reporting
The accompanying unaudited financial statements have been pre-
pared in accordance with generally accepted accounting principles
and with Form 10-QSB requirements. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for
the nine month period ended September 30, 1995, are not necessarily
indicative of the results that may be expected for the year ended
December 31, 1995. For further information, refer to the financial
statements and footnotes thereto included in the Partnership's
annual report on Form 10-K for the year ended December 31, 1994.
2. Related Party Transactions
Under the terms of the Partnership Agreement, the General
Partner is allowed reimbursements of expenses incurred to manage
the Partnership. For the nine month periods ended September 30,
1994 and 1995, the Partnership accrued, but did not pay, fees and
reimbursements to the general partner of $73,000 and $95,000
respectively.
3. Long-term Debt
In January 1990, the Partnership received the proceeds of an
$8,000,000 non-recourse refinancing of its Steamboat Springs
Project ("Project" or "Steamboat Springs Plant") with Westinghouse
Credit Corporation ("WCC"). The WCC loan, which is secured by the
Project assets including the resource lease, plant and equipment
and related contract rights, bears interest at 11.5% per annum and
must be repaid over ten years in 40 quarterly payments of principal
and interest. This loan is currently in default, primarily because
the loan reserves have not been maintained at required levels.
Item 2. Management's Discussion and Analysis of Results of Opera-
tions and Financial Condition.
Overall electric power sales increased about 4% this past
quarter as compared to the third quarter of 1994. This increase in
power sales was mainly due to plant upgrades. Maintenance and
repair costs this past quarter were about 30% higher than those of
the third quarter of 1994, due to such plant upgrades.
The Steamboat Springs Plant is in compliance with
environmental and regulatory agencies.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes in the status of legal
proceedings since the Partnership's report on Form 10-Q dated June
30, 1995.
Item 5. Other Information
The general partner has received an offer to purchase the
Steamboat 1 and 1-A power plants which is currently in the form of
a Letter of Intent. A more definitive agreement is being prepared.
We expect that a description of the proposed transaction and its
tax effect will be submitted to you for your approval within the
next sixty days. The reason for the delay is the necessity of
obtaining tax and fairness opinions and review of the form of
Solicitation of Consent by the SEC.
Item 6. Exhibits and Reports on Form 8-K
The Partnership did not file a report on Form 8-K during the
three months ended September 30, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned duly authorized persons.
Registrant: Far West Electric Energy Fund, L.P.
By: Far West Capital, Inc.,
General Partner
DATE: November 14, 1995 By: /s/
Thomas A. Quinn
Vice President
DATE: November 14, 1995 By: /s/
Jody Rolfson
Controller
Exhibit 5
Reply Card
Far West Capital, Inc., the general partner of the Far West
Electric Energy Fund, L.P., a Delaware limited partnership (the
"Fund"), hereby solicits from the limited partners of the Fund
written consent to the following Proposed Transaction:
The sale of substantially all of the Fund's assets for
$1,250,000;
Distribution of the proceeds of sale to the Limited Partners as
a final liquidating distribution (estimated to be approximately $33
per limited partnership Unit); and
Termination of the Fund (generally resulting in approximately $33
of taxable gain per Unit).
The undersigned limited partner hereby votes all of his or her
Units as follows:
___ Approve ___ Disapprove ___ Abstain
This consent is being solicited by the general partner of the
partnership, and must be postmarked on or before _____, 1996 to be
counted. When dated and properly executed, this consent will be
voted as directed by the Unit holder.
Dated:
_____________________________________
Signature of Unit holder
______________________________________
Name of Unit holder (please print)
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For Fiscal Year Ended: December 31, 1995
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ______________
Commission file number 0-14452
Far West Electric Energy Fund, L.P.
(Name of small business issuer in its charter)
Delaware 87-0414725
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
921 Executive Park Drive, Suite B, Salt Lake City, Utah 84117
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (801) 268-4444
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Total pages: 60
Exhibit Index Page: 52
Form 10-KSB
Check if there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year.
$ 2,674,000
The registrant is a limited partnership and has no voting
stock. At this time there is no market for trading a partnership
interest in the registrant. 93.9% of the partnership interests are
owned by non affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
PART I
Item 1. Description of Business.
Far West Electric Energy Fund L.P., a Delaware limited partner-
ship (the "Partnership"), was originally organized in September 1984
under the Uniform Limited Partnership Act of Utah as Far West
Hydroelectric Fund, Ltd. On December 20, 1988, the Partnership
changed its name to Far West Electric Energy Fund, L.P. and changed
its domicile to Delaware.
The Partnership owns a geothermal power plant, (the "Steamboat
Springs Plant") located in Nevada, and until March 16, 1995, owned a
hydroelectric plant located in Idaho (the "Crystal Springs Plant")
which was sold to Crystal Springs Hydroelectric, L.P., a Washington
limited partnership pursuant to a Purchase and Sale Agreement dated
February 28, 1995, which was attached as Exhibit (10)(aai) to Form
10-K for fiscal year ended December 31, 1994.
The principal revenue-producing activities of the Partnership
commenced as of December 31, 1985, following the completion in
November 1985 of a public offering of its Units of limited
partnership interests registered under the Securities Act of 1933.
Since 1986, the Partnership has realized revenues from its business
of selling power generated by its plants to public utilities pursuant
to the Public Utility Regulatory Policies Act ("PURPA"), and in
accordance with regulations of the Federal Energy Regulatory
Commission ("FERC") and of the state public utility commissions of
Idaho and Nevada.
Electricity has been generated by the Partnership's hydro-
electric and geothermal power plant and sold to the Idaho Power
Company and to the Sierra Pacific Power Company, pursuant to
long-term contracts for 35 and 20 years, respectively. 100% of the
power generated by the Crystal Springs Plant was sold to Idaho Power
Company and 100% of the power generated by the Steamboat Springs
Plant is sold to Sierra Pacific Power Company. Since the sale of the
Crystal Springs Plant, the Partnership is dependent upon the
continued financial stability of Sierra Pacific Power Company to
honor its power purchase contract.
In addition to its ownership of the Steamboat Springs Plant, the
Partnership owns certain piping and accessory equipment and is
entitled to receive pumping fees and a net subordinated royalty in
connection with the operation of the 1-A Plant located adjacent to
the Steamboat Springs Plant. See "Item 2. Properties."
The Partnership's two power plants were operated on a day-to-day
basis by contract operators, Ormat, Inc. ("Ormat") through October
10, 1990, and by SB GEO, Inc. thereafter in the case of the Steamboat
Springs Plant and in the case of the Crystal Springs Plant by
Bonneville Pacific Corporation ("BPC"), until December, 1991, then by
CHI until December, 1992 and by Little Mac Power Services Co. from
December 1, 1992 until sold. The Partnership has no employees, but
relies on the staff of Far West Capital, Inc. ("Far West Capital"),
a General Partner of the Partnership together with Alan O. Melchior
and Thomas A. Quinn, who are officers, directors, and 80% sharehold-
ers of Far West Capital and were also General Partners of the
Partnership until they resigned as General Partners effective January
1, 1995. The term "General Partner" as used herein, means Far West
Capital and includes Messrs. Melchior and Quinn until they resigned
as General Partners effective January 1, 1995. The Partnership also
employs outside consultants as necessary. As of the date of this
filing, Far West Capital has nine employees who have varied amounts
of responsibility for the Partnership and for other partnerships for
which Far West Capital is the General Partner.
Protection of the environment is a major priority for the
Partnership. The Partnership engages in activities within the
jurisdiction of federal, state and local regulatory agencies. Those
agencies have issued the Partnership permits for these activities
subject to air quality, water quality, and waste management laws and
regulations. The Partnership is currently in compliance with such
laws and regulations. See "Item 2. Properties."
Item 2. Description of Properties
Steamboat Springs thermal-hydroelectric plant.
The Steamboat Springs Plant is located ten miles south of Reno,
Nevada on property leased from Sierra Pacific Power Company pursuant
to a Geothermal Resource Lease in the Steamboat Known Geothermal
Resource Area. The plant has gross capacity of approximately 6.5
megawatts and consists of seven separate modules, utilizing binary
rankine cycle turbines.
In 1987 it was determined that to achieve the expected capacity
and the performance requirements specified in the Steamboat Springs
Plant's purchase contract, Ormat would have to install additional
equipment and make some modifications to existing equipment. These
corrections were made at no cost to the Partnership (although the
down-time for modifications and testing adversely impacted revenues).
The modifications and repairs were completed in the summer of 1988,
and the Partnership was informed that the plant was performing near
projected levels by the fall of 1988. However, during 1989 the plant
produced approximately 36,000,000 kwh (about the same as 1988) which
is substantially less than the 42,000,000 kwh which was the annual
production for the plant, as modified, projected by Ormat and the
43,800,000 kwh called for by the Purchase Agreement.
After reviewing the Steamboat Springs Plant performance with
independent consultants, the General Partner concluded that the
deficiencies in plant performance were attributable to both poor
operating practices employed by Ormat, the former operator, and
certain problems in plant design. Consequently, notice was given to
Ormat that the Partnership believed that Ormat was in default under
both its Operating and Purchase Agreements with the Partnership. The
General Partner replaced Ormat as plant operator on October 11, 1990,
and sought redress for plant deficiencies under the arbitration
clause of the Purchase Agreement. Arbitration proceedings began
October 29, 1990.
The claims of the petitioners as well as the counter claims of
Ormat were numerous and complex, making it difficult to summarize the
ruling of the Arbitration panel. However, in essence the panel
denied the bulk of Petitioners' claims and Ormat's counter claims.
Petitioners were awarded $175,000 for well field problems, and Ormat
was awarded $254,000 for unpaid operating and warranty service, the
payment of which had been withheld pending the completion of the
Arbitration. The Parties have all complied with and satisfied the
ruling of the Arbitrators, including payment of all awards. (See
Part IV, Item 14, Exhibits, Form 10-K dated December 31, 1992.
The present operating agreement provides for SB Geo, Inc. ("SB
GEO") to operate and maintain the plant for a period of 10 years. SB
GEO is to operate the plant on a no profit basis.
In October 1991, the Partnership assigned its 77% ownership
interest and 1-A Enterprises assigned its 23% ownership in SB GEO to
Messrs. Melchior and Quinn, who accepted the assignments and SB GEO's
liabilities. According to an independent valuation firm, SB GEO had
no value as of the transfer date due to its obligations and its cost
basis operating status. Consequently, no gain or loss was recognized
as a result of the assignment.
On October 23, 1992 Westinghouse Credit Corporation ("WCC")
gave the Partnership a notice of default with regard to the long-term
financing of the project for the Partnership allowing the reserve
account to fall below its reserve requirement without adequate
replenishment and because the Award of Arbitrators in the Ormat
Arbitration exceeded $25,000.
Crystal Springs hydroelectric plant.
The Crystal Springs Plant is located ten miles west and seven
miles north of Twin Falls, Idaho. Its leased site is located in
Cedar Draw which flows into the Snake River Canyon. Its primary
components consist of four horizontal Francis-type turbines with an
installed total capacity of 2.88 megawatts. Until March 16, 1995, it
was owned by the Partnership through Crystal Springs Hydroelectric
Company ("CSHC"), a general partnership owned by the Partnership.
The Crystal Springs Plant was placed into operation during
December, 1985, but did not generate significant revenues until the
first quarter of 1986, primarily due to seasonal water shortage
conditions. During the last quarter of 1987, the Partnership
received information which suggests that the Crystal Springs Plant
design was based on overly optimistic water flow assumptions and that
it would not be able to consistently achieve projected average annual
production figures. On July 7, 1988, the Partnership entered into a
Purchase Option Agreement, effective October 1, 1987, with Bonneville
Pacific Corp. ("BPC"), the company which sold the project to the
Partnership. In conjunction therewith, as an accommodation, the
Partnership signed refinancing loan documents ("Loan") with First
Security Bank of Utah ("Bank").
A Restated Operation and Maintenance Agreement ("O&M Agreement")
entered into as of October 1, 1987, dated July 7, 1988, between CSHC
and BPC, served to install BPC, or a representative of its choice, as
the operator of the Crystal Springs Plant. This O&M Agreement also
set forth BPC's duties as the operator. The terms of this O&M
Agreement would run through September 30, 1997, unless terminated
earlier, as provided in the O&M Agreement.
Under this O&M Agreement, BPC was responsible for the daily
operation and maintenance of the plant, maintenance of accounting
records, disbursements from available power revenues, supervision of
employees interaction with power purchasers, and maintenance of the
facility in a safe operating condition. In return, BPC was
compensated a minimum of $20,000 per year; subject to increases by an
amount equal to 10% of all profits between $0 and $20,000, plus 95%
of all profits which exceed $20,000 per year.
BPC accounted for revenues and expenses incurred by BPC in
connection with the operation and maintenance of the Crystal Springs
Plant; CSHC was responsible for insurance expenses and property tax
expenses. In view of the limited participation of CSHC in the
operations, including profits and losses, as described elsewhere
herein, operations of the project were not included in the financial
statements for the years ended December 1990, 1991, or 1992. The net
cost of the Crystal Springs Plant, related long-term debt and related
depreciation, interest, insurance, and tax expenses were included in
the financial statements of the Partnership. The debt service
payments paid by the BPC were included as other income in the
financial statements.
On December 5, 1991, BPC filed for protection under Chapter 11
of the United States Bankruptcy Laws and stopped making option
payments to the Partnership and debt service payments to the Bank.
This action terminated BPC's rights under the Purchase Option
Agreement and the O&M Agreement. BPC's failure to make debt service
payments to the Bank resulted in a default notice from the Bank.
The Partnership received such default notice from the Bank by
letter dated February 3, 1992, maintaining that CSHC was in default
of its loan obligations to the Bank.
CSHC, the Partnership and Far West filed a complaint in the
Third Judicial District Court for Salt Lake County, State of Utah,
naming the Bank as defendant and seeking a declaratory judgment that
plaintiffs were not obligated to perform the obligations under the
Loan documents because they signed them merely as accommodation
parties and seeking injunctive relief against the Bank, enjoining the
Bank from naming any of the plaintiffs in litigation seeking money
damages under the Loan documents.
The Bank subsequently filed a complaint in the District Court of
the Fifth Judicial District of the State of Idaho seeking to
foreclose on the real property security pursuant to the Mortgage.
On July 17, 1992, CSHC, the Partnership and its General Partners
("Crystal Affiliates") entered into an agreement with the Bank
whereby the parties agreed to forbear from further action on both
above complaints. Under such agreement CSHC agreed to pay to the
Bank, on or before September 30, 1992, the sum of $1,800,000. Upon
payment of this settlement sum the Bank was to release the parties
from obligations under the Bank's loan documents.
That agreement expired prior to the Partnership's ability to
refinance or sell the Crystal Springs Plant in order to pay the Bank
the agreed upon $1,800,000 amount. The parties thereafter entered
into a subsequent settlement agreement ("Agreement") effective
December 31, 1992 which provided for dismissal of each of the two
lawsuits and payment of the $1,800,000 to the Bank by December 1,
1993.
It also provided for a mutual waiver of claims between the
parties ("Mutual Release Agreement") and in addition provided for a
$50,000 line of credit for use in repair of certain items of
equipment for the Crystal Springs Plant for startup of operations in
1993 ("Repair Loan"). The Partnership also agreed therein to
exercise its best efforts to sell the Crystal Springs Plant on or
before December 1, 1993, the proceeds to be used in satisfying the
Repair Loan and the $1,800,000 payoff of the Loan to the Bank. There
were no amounts owing on the repair loan as of December 31, 1994 and
February 28, 1995 (date of sale).
The Mutual Release Agreement also contemplated the execution by
the Parties of an Extension and Modification Agreement with respect
to the Loan which agreement was also entered into as of December 31,
1992 together with an Amendment to Mortgage and an Amendment to
Security Agreement which amended the original Loan documents to
provide for the issues resolved in the Mutual Release Agreement.
In addition, effective the first day of December, 1992, a new
operator of the Project, Little Mac Power Services Co., was put in
place through an Operation and Maintenance Agreement of that date.
A restated Operation and Maintenance Agreement was entered into
effective December 1, 1994.
The Partnership was unable to refinance or sell the Crystal
Springs plant by December 1, 1993 in order to pay the Bank the agreed
upon $1,800,000 amount. In order to extend the term of the loan for
an additional nine (9) months, the parties thereafter entered into a
Second Extension Agreement as of December 1, 1993. This agreement
extended the date until September 1, 1994 for Crystal affiliates to
be able to sell the Crystal Springs plant and use the proceeds to pay
off the $1,800,000 agreed upon to the Bank.
The Crystal Springs Plant was sold as described in Item 1.
above. A Third Extension and Modification Agreement was entered into
by the parties on March 15, 1995 concurrently with such sale which
provides for the Bank's consent to the sale, the Bank's accepting a
principal payment under the loan in the amount of $1,100,000 and
reducing the remaining principal balance of the note to $537,000;
extending its term for five years. It also provides that if the note
is paid in full within two years after the payment of $1,100,000, the
Lender will discount the amount of the principal due by $100,000
(requiring a principal payment of only $437,000), and if paid within
three years, the Lender will discount the amount of the principal due
by $50,000 (requiring a principal payment of only $487,000). There
will be no discount if paid after the third anniversary. That
agreement was attached to the December 31, 1994 Form 10-K as Exhibit
(10)(aas).
Revenues from the 1-A thermal-hydroelectric plant
The 1-A geothermal plant (the "1-A Plant") is located adjacent
to the Steamboat Springs Plant. The 1-A Plant consists of two
separate modules, utilizing binary rankine cycle turbines with a
combined net output of 1.8 megawatts.
The 1-A Plant was originally a Steamboat Springs expansion
project, but was sold in 1988 to a general partnership entitled 1-A
Enterprises which is owned 74% by Alan O. Melchior and Thomas A.
Quinn, who were also General Partners of the Partnership and
currently are officers and shareholders of Far West Capital. Use of
the geothermal resource by the 1-A Plant has no adverse effect on the
operation of the Partnership's Steamboat Springs Plant.
In a Second Amendment to Geothermal Resources Lease provision
was made to accommodate the 1-A Plant on the Steamboat Springs
Plant's lease. A Geothermal Resources Sublease was entered into
granting rights and defining terms and conditions for the sitting and
operation of the 1-A Plant and setting forth a method of calculating
royalty payments to be made to the Partnership. This Sublease was
Revised and Restated on October 9, 1989.
As consideration for the sale of the 1-A Plant rights to 1-A
Enterprises, the Partnership received a royalty interest in the net
operating income of the 1-A Plant. Such royalties equal 10% in 1988
through 1992, 15% in 1993 through 1998, 40% in 1999 through 2010, and
45% in 2011, and thereafter. In addition, the Partnership is paid an
amount equivalent to the net profit that would be realized by the
Partnership if the 1-A Plant were bearing 150 KW of parasitic power
load (power consumed by the Plant itself). The net profit equivalent
is calculated as follows: 1,200,000 KWH x the rate at which power is
sold to Sierra Pacific Power Company under the power purchase
agreement applicable to the 1-A Plant, less any royalties, note
payments, or net revenue interest or other expenses associated with
or payable out of such additional revenues assuming that the 1-A
Plant produced an additional 1,200,000 KWH per annum. In 1995 the
Partnership was paid $86,905 in royalty revenues from the 1-A Project
and $58,191 in pumping charges.
Item 3. Legal Proceedings
Nevada Department of Transportation
The Department of Transportation of the State of Nevada ("NDOT")
commenced action in the Second Judicial District Court of the State
of Nevada in and for the County of Washoe against the Partnership and
others to obtain, for highway purposes, ownership of approximately
2.79 acres of the property owned by Sierra Pacific Power Company
("SPPC") at the extreme north of the land upon which the Steamboat
Springs Plant is located pursuant to the SPPC lease. The Partnership
is defending the action insofar as is necessary to protect a stand-by
injection well located on the lease in the proximity of the land
being taken and a monitoring well in an adjacent area which is being
taken. It is presently negotiating a settlement which will leave the
stand-by injection well and the Partnership's rights in and use
thereof intact and available. The Partnership has constructed a new
monitoring well and is attempting to recover the cost thereof from
the State. The Partnership has an agreement in principle with the
State relative to this reimbursement, the cost of which is
approximately $5,000. The Partnership is also attempting to obtain
a portion of the $273,500 offered and deposited into Court by NDOT as
compensation for the taking. SPPC is claiming all of such funds as
the owner of the land. The Court has granted NDOT the right to
possess and occupy the property while the amount of compensation to
be finally awarded is being contested. WCC, the Partnership's
principal creditor, has claimed that under the financing agreements
with respect to the Steamboat Springs and 1-A Plants, all funds
recovered from NDOT must be applied to reduce the principal balance
of the loans outstanding.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters.
No market exists for the Partnership's Units. As of March 15,
1996, the 10,306 outstanding Units of the Partnership were held by
1,103 investors, including 530 units owned by the General Partner.
No cash distributions were made to the Limited Partners during
the years ended December 31, 1991 through 1995.
Item 6. Management's Discussion and Analysis or Plan of
Operations.
Liquidity and Capital Resources
The sale of electricity to Sierra Pacific Power Company
("Sierra") continues to be the Partnership's primary source of
working capital. Power is sold pursuant to a long-term power
contract ("Power Purchase Agreement") (see "Item 1. Business")
which provides for purchase of all power produced by the Steamboat
Springs Plant at a fixed rate. However, in December of 1996 the
rate at which the plant will sell power goes from 7.17 cents per KW to
short-term avoided cost (which presently is believed to be
approximately 2.8 cents). The Partnership will not be able to continue
to operate the plant selling power at that rate. The General
Partner has been unsuccessful in its attempts to renegotiate the
rate at which power would be sold to Sierra Pacific Power Company
during the second 10 years of the Power Purchase Agreement
beginning in December of 1996. However, Sierra has tentatively
agreed that it will release the Partnership from its agreement to
sell power to Sierra from Steamboat 1 at short term avoided cost if
the Partnership can find a market for the Steamboat 1 output
outside to Sierra's system. To date the Partnership has not
identified such a market. If the Partnership were forced to sell
power at 2.8 cents per KW as opposed to the 7.17 cents currently being paid
it would not be able to pay debt service and operating cost and the
plant might be foreclosed by WCC.
The Steamboat Springs Plant operating revenues have, in the
past, provided cash balances to pay for operating expenses,
including repairs and maintenance of the plant, during times of
interrupted operations. However, in the event of failure of the
Steamboat Springs geothermal resource, the Partnership would be un-
protected from interruption of its revenues. Management believes
that the likelihood of this event occurring is remote.
As shown in the financial statements for the year ended
December 31, 1995, the Partnership's current liabilities exceed
current assets by $6,595,000. Of this amount, $4,563,000 relates
to the note default involving the Steamboat Springs Plant with WCC.
This is more fully described under "Item 2. Properties".
Cumulative income for the three-year period ended December 31, 1995
amounted to $883,000 before extraordinary items. The General
Partner is seeking to resolve the current liquidity concerns by
taking steps to increase future production by improving maintenance
and operation procedures and, if necessary, deferral of payment of
general and administrative expenses to the General Partner. During
1995, 1994 and 1993 the General Partner made loans in the amounts
of $112,000; $83,000; and $171,000 respectively in addition to
deferring fees and administrative expenses of $98,000; $118,000 and
$70,000 respectively. Partnership electric power revenue decreased
in 1995 by 2% from 1994 and 14% from 1993. The general partner
believes that 1995 revenues are representative of what can be
expected in the future until the rate change becomes effective in
December of 1996 at which time revenues will decrease drastically.
With the winding down of the Partnership's litigation and
administrative proceedings, professional fees and general and
administrative expenses charged by the General Partner decreased in
1995 by 21% from the preceding year, in 1994 by 45% from the
preceding year and in 1993 by 49% from 1992. The General Partner
also believes that these expenses will continue to stay at this
lower level in 1996 because of the termination of such litigation
and decreasing administrative costs.
In a report dated September 4, 1993 the General Partner
reported to the Limited Partners on its efforts to restructure the
business of the Partnership so as to be able to resume
distributions to the Limited Partners. In summary the General
Partner concluded that the Partnership would be unable to generate
significant positive cash flow or resume distributions without the
infusion of cash sufficient to make capital improvements in the
Steamboat Springs Plant and/or buy out the Westinghouse loan and
certain royalty interests at a discount. The Partnership does not
have the financial resources to accomplish these goals. At present
and in the foreseeable future the Partnership is generating taxable
income without any cash distributions to pay the tax liabilities.
Therefore, it appears to the General Partner that it may be
advantageous to the Partnership to consider a sale of all the
Partnership assets.
The General Partner has recently executed a contract on behalf
of the Partnership with U.S. Envirosystems, Inc. (a Delaware
corporation) to sell the Steamboat Springs Power Plant. The sale
is conditioned on the approval of the Limited Partners. That
Contract was attached to a draft proxy statement describing the
details of the transaction, its tax effect and an opinion as to the
fairness of the proposed transaction, which has been submitted to
the Securities and Exchange Commission for its review. See Exhibit
10(aau). It is anticipated that these materials will be mailed to
the Limited Partners for their review and vote within thirty days.
If the proposed sale of the Steamboat Springs Plant is approved the
General Partner proposes to distribute all proceeds of the sale to
limited partners (after payment of debts and accounts to third
parties) and terminate the Partnership.
The General Partner estimates that within approximately 40
days of the date of a favorable vote, the purchaser will transfer
$1,200,000 ($50,000 deposit has already been received) to the Fund.
As an incentive to the Limited Partners to vote in favor of the
proposed sale, and contingent upon such approval, the General
Partner will transfer to the purchaser all obligations owed by the
Fund to the General Partner (as of December 31, 1995, approximately
$2.3 million consisting of cash advances, interest on those cash
advances and uncompensated services) and decline its share of the
final liquidating distribution (1%) to which it is entitled as the
General Partner and holder of 530 Limited Partner units (5.14%).
The General Partner estimates that due in part to this combination
of transfer of debt and declination of distribution it will be
possible for the Limited Partners to receive approximately $33 per
unit in liquidating distributions if the proposed transaction is
consummated.
Results of Operations
In 1987 the Steamboat Springs Plant produced electric power
and generated revenues at approximately 75% of expected operating
levels. The production shortfall was primarily due to shutdowns
required to effect certain equipment changes and modifications, and
to operation of that plant at a lower level than expected. It was
determined that to achieve the expected capacity and the
performance requirements specified in the plant's purchase
contract, the vendor/operator would have to install additional
equipment and make some modifications to existing equipment. These
corrections were made at no cost to the Partnership (although the
down-time for modifications and testing impacted revenues). The
modifications and repairs were completed in the summer of 1988, and
the Partnership was informed by Ormat that the plant was performing
at a level that would produce 42,000,000 KWH per year as opposed to
the 43,800,000 represented by Ormat in the original acquisition
agreement.
The Steamboat Springs Plant increased production of electric
power from 32,797,000 KWH in 1987 to 36,142,000 KWH in 1988.
Ormat, the vendor/operator of the plant, installed additional
equipment and made equipment modifications which increased the
plant's capacity and performance. These additions and
modifications were made at no additional cost to the Partnership.
In 1989 the Steamboat Springs Plant produced $2,564,000 in
gross revenues which was $448,000 and $576,000 less than would have
been received under the Ormat projected 42,000,000 and 43,800,000
kwh agreed to under the purchase agreement per year respectively.
In 1990 the plant produced $2,765,000 in gross revenues which was
an increase over 1989's revenues, but about $247,000 and $376,000
less than would have been received under the projected 42,000,000
and 43,800,000 kwh per year respectively. In 1991 the plant
produced $2,791,000 in gross revenues which was $220,000 and
$349,000 less than would have been received under the projected
42,000,000 and 43,800,000 kwh per year respectively. In 1992 the
plant produced about $2,360,000 in gross revenues which was
$651,400 and $780,460 less than would have been received under the
projected 42,000,000 and 43,800,000 kwh per year respectively. The
poor performance in 1992 was directly due to excessive equipment
failures and breakdowns which resulted in plant downtime. In 1993
the Plant produced $2,625,000 in gross revenues which was an
increase over 1992's revenues but about $386,391 and $515,451 less
than would have been received under the projected 42,000,000 and
43,800,000 kwh per year respectively. This made 1993 a better than
average year for revenues. In addition, during 1993 $424,000 was
included in other revenues that was the result of a performance
guarantee with the original developer. The performance guarantee
and a related note payable to the developer were extinguished
during 1993. In 1994 and 1995 revenues declined slightly and are
more indicative of what can be expected until the rate change in
December, 1996 at which time revenues will decline drastically.
During 1995, operating expenses as a percentage of revenues
increased from 62% in the prior year to 66%. The increase is
primarily the result of increased maintenance and repairs during
1995.
The following table shows the annual production for the
Steamboat Springs Plant:
Year $'s KWH
1987 $2,352,000 32,797,000
1988 $2,591,000 36,142,000
1989 $2,564,000 35,760,000
1990 $2,765,000 38,563,000
1991 $2,791,000 38,926,000
1992 $2,360,000 32,915,000
1993 $2,625,000 36,611,000
1994 $2,564,000 35,767,000
1995 $2,529,000 35,270,000
The Crystal Springs Plant produced power at approximately 51%
of expected levels during 1987 and 1988, about 80%, 70%, 58% and
14% during 1989, 1990, 1991 and 1992, respectively, due chiefly to
lower than normal precipitation in the Snake River Basin. In 1993
it produced a record 8,265,000 kwh for revenues of $537,000. This
was a result of increased water flow resulting from greater
precipitation and additional water released by the Twin Falls Canal
Company as a result of the agreement with it. In 1994, due to the
drought in southeastern Idaho, it was shut down for most of the
year and produced 3,101,000 kwh for revenues of $163,000.00. See
Item 2. Properties herein. The Crystal Springs Plant was sold on
March 16, 1995 (as described in Item 1 above) for $1,100,000 which
was paid directly to first Security Bank to pay down the note
secured by the Crystal Springs Plant. The Fund did not receive any
proceeds from the sale.
The 1-A Plant from which the Partnership receives royalties
was put on line and began operations in December, 1988. That plant
reached full scale production levels during the first quarter of
1989. The Partnership began to receive its 10% net operating
royalty and pumping fee when the plant was accepted and
commissioned during the first quarter of 1989. A total of $95,000,
$94,000, $115,000, $102,000, $135,000, $144,000 and $145,000 in
royalties and pumping fees in the years ended December 31, 1989,
1990, 1991, 1992, 1993, 1994 and 1995 respectively, were paid to
the Partnership from this plant.<PAGE>
Item 7. Financial Statements.
Index to Financial Statements Page
and Supplementary Data
FAR WEST ELECTRIC ENERGY FUND, L.P.
Independent Auditors' Report 18
Balance Sheets, December 31, 1995 and 1994 19
Statements of Income, for the Years Ended 21
December 31, 1995, 1994, and 1993
Statements of Partners' Capital, for the 22
Years Ended
December 31, 1995, 1994, and 1993
Statements of Cash Flows, for the Years ended 23
December 31, 1995, 1994, and 1993
Notes to Financial Statements 25
Schedule I, Condensed Financial Information
of Registrant (All Required Information
Reported in Financial Statements and Notes
to the Financial Statements)
Schedule II, Valuation of Qualifying Accounts
(All Required Information Reported in Note 2)
Accountants' Compilation Report 36
FAR WEST CAPITAL, INC. (General Partner)
Unaudited Consolidated Balance Sheet (Unaudited) of the
General Partner, Far West Capital, Inc. 37
Notes to the Unaudited Consolidated Balance Sheet
(Unaudited) of the General Partner, Far West Capital,
Inc. 39
FAR WEST ELECTRIC ENERGY FUND, L. P.
A DELAWARE LIMITED PARTNERSHIP
- : -
INDEPENDENT AUDITOR'S REPORT
DECEMBER 31, 1995 AND 1994
CONTENTS
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . .18
Balance Sheets, December 31, 1995 and 1994 . . . . . . . . . . . . . . .19
Statements of Income, For the Years Ended
December 31, 1995, 1994, and 1993. . . . . . . . . . . . . . . . . . .21
Statements of Partners' Capital, For the Years Ended
December 31, 1995, 1994, and 1993. . . . . . . . . . . . . . . . . . .22
Statements of Cash Flows, For the Years Ended
December 31, 1995, 1994, and 1993. . . . . . . . . . . . . . . . . . .23
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . .25
Schedule I, Condensed Financial Information
of Registrant (All Required Information
Reported in Financial Statements and Notes
to the Financial Statements) . . . . . . . . . . . . . . . . . . . . .
Schedule II, Valuation of Qualifying Accounts
(All Required Information Reported in Note 2). . . . . . . . . . . . .
INDEPENDENT AUDITOR'S REPORT
General Partner
Far West Electric Energy Fund, L.P.
Salt Lake City, Utah
We have audited the balance sheet of Far West Electric Energy
Fund, L.P. as of December 31, 1995 and 1994, and the related
statements of income, partners' capital and cash flows for each of
the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Far West Electric Energy Fund, L.P. as of December 31, 1995 and
1994, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Respectfully submitted,
/s/ Robison, Hill & Co.
Certified Public Accountants
Salt Lake City, Utah
February 29, 1996
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
1995 1994
Assets
Utility Plant:
Plant in Service $15,999,000 $18,716,000
Equipment 588,000 335,000
Construction in Progress 118,000 118,000
Accumulated Depreciation (5,377,000) (6,010,000)
Net Utility Plant 11,328,000 13,159,000
Restricted Cash 1,026,000 1,145,000
Other Assets 106,000 124,000
Current Assets:
Cash and Cash Equivalents 263,000 278,000
Receivables - Trade 399,000 437,000
Receivables - Other 6,000 6,000
Receivable - Related Party 238,000 159,000
Prepaid Expenses 4,000 12,000
Total Current Assets 910,000 892,000
Total Assets $13,370,000 $15,320,000
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(Continued)
1995 1994
Partners' Capital and Liabilities
Partners' Capital:
Limited Partners - 10,306 units $ 5,148,000 $ 4,868,000
General Partner - 1 Percent (8,000) (11,000)
Total Partners' Capital 5,140,000 4,857,000
Other Liabilities - 150,000
Long-term Debt:
Notes Payable - Related Party 188,000 230,000
Notes Payable 537,000 -
Partners' Capital and Long-Term
Liabilities 5,865,000 5,237,000
Current Liabilities:
Current Portion - Long-term Debt 4,563,000 7,140,000
Note Payable - Related Party 1,159,000 1,043,000
Payable-Related Party 671,000 573,000
Accrued Liabilities
Operations 402,000 495,000
Royalties 96,000 220,000
Interest 614,000 612,000
Total Current Liabilities 7,505,000 10,083,000
Total Partners' Capital and
Liabilities $13,370,000 $15,320,000
See accompanying notes to the financial statements.
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
Revenues:
Electric Power Revenues $ 2,529,000 $ 2,728,000 $ 3,162,000
Other Revenues 145,000 151,000 622,000
Total Revenues 2,674,000 2,879,000 3,784,000
Expenses:
Operations 1,755,000 1,779,000 2,163,000
Bad Debt Expense - - 31,000
General and Administrative:
Professional Services 55,000 54,000 72,000
General Partners - Related
Party 98,000 123,000 223,000
Total General and
Administrative 153,000 177,000 295,000
Total Expenses 1,908,000 1,956,000 2,489,000
Income From Operations 766,000 923,000 1,295,000
Other Income (Expense):
Interest Income 73,000 52,000 38,000
Interest Expense (744,000) (902,000) (806,000)
Loss on Sale of Property (170,000) - -
Net Other Expense (841,000) (850,000) (768,000)
Net Income (Loss)
Before Extraordinary
Item (75,000) 73,000 527,000
Extraordinary Item - Early
Extinguishment of Debt 358,000 - 175,000
Net Income $ 283,000 $ 73,000 $ 702,000
Net Income Per Limited
Partnership Unit:
Income Before Extraordinary
Item $ (7.28) $ 7.08 $ 51.14
Extraordinary Item 34.74 - 16.98
Net Income $ 27.46 $ 7.08 $ 68.12
See accompanying notes to the financial statements.
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
General Partner Limited Partners
% Income Number Total
Allocation Amount of Units Amount Amount
Balances at
December 31, 1992 1 $ (18,573) 10,306 $ 4,100,573 $ 4,082,000
Net Income - 7,020 - 694,980 702,000
Balances at
December 31, 1993 1 (11,553) 10,306 4,795,553 4,784,000
Net Income - 730 - 72,270 73,000
Balances at
December 31, 1994 1 $ (10,823) 10,306 $ 4,867,823 $ 4,857,000
Net Income - 2,830 - 280,170 283,000
Balances at
December 31, 1995 1 $ (7,993) 10,306 $ 5,147,993 $ 5,140,000
See accompanying notes to the financial statements.
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
Cash Flows From Operating
Activities:
Net Income (Loss) $ 283,000 $ 73,000 $ 702,000
Adjustments to Net Income (Loss):
Depreciation and Amortization 613,000 661,000 716,000
Sale of Assets (188,000) - -
Gain on Debt Restructure - - (175,000)
(Increase) Decrease in
Receivables (41,000) (124,000) (59,000)
(Increase) Decrease in Prepaid
Insurance (1,000) - (9,000)
(Increase) Decrease in Other
Assets 18,000 18,000 18,000
Accrued Income Restricted Cash (63,000) (43,000) (31,000)
Increase (Decrease) in Accrued
Liabilities 41,000 120,000 (234,000)
Increase (Decrease) in
Amount Due to General
Partner 98,000 100,000 214,000
Total Adjustments 477,000 732,000 440,000
Net Cash Provided by
Operating Activities 760,000 805,000 1,142,000
Cash Flows From Investing
Activities:
Cash Draws Restricted Cash 181,000 - 207,000
Transfers to Restricted Cash - - (205,000)
Capital Expenditures (253,000) (139,000) (222,000)
Net Cash Provided by (Used)
in Investing Activities (72,000) (139,000) (220,000)
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
Cash Flows From Financing
Activities:
Principal Payments on Long-
term Debt $ (815,000) $ (751,000) $(1,109,000)
Proceeds From the Issuance
of Debt 112,000 83,000 171,000
Net Cash Provided by (Used)
in Financing Activities (703,000) (668,000) (938,000)
Increase (Decrease) in Cash
and Cash Equivalents (15,000) (2,000) (16,000)
Cash and Cash Equivalents at
Beginning of Year 278,000 280,000 296,000
Cash and Cash Equivalents at
End of Year $ 263,000 $ 278,000 $ 280,000
Supplemental Disclosure of
Cash Flow Information:
Cash Paid During the Year
For Interest $ 743,000 $ 727,000 $ 755,000
Non-Cash Activities:
The Partnership reduced a contract payable for the year ended
December 31, 1993 by $13,000, and recognized income relating to option
payments not made.
An extraordinary gain of $175,000 for the year ended December 31,
1993, was recognized relating to the extinguishment and restructuring of
debt and accrued interest; see Note 4.
Notes payable and accrued interest were reduced and other income
recognized for the year ended December 31, 1993 in the amount of
$424,000, relating to offsets allowed under the performance guaranty on
the Steamboat Springs project; see Note 7.
The Partnership sold the Crystal Springs Project for $1,100,000, the
proceeds of which were was paid directly to First Security Bank to pay
down the note secured by the Crystal Springs Project in accordance with
the sales agreement dated February 28, 1995. In addition, the note
referred to above was restructured as described in Note 13. A net gain
on the sale of $188,000 has been reported in net income for December 31,
1995 as other income.
See accompanying notes to the financial statements.
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by Far
West Electric Energy Fund, L.P. in preparing and presenting the
financial statements, and are to assist the users in understanding the
financial statements.
Organization
Far West electric Energy Fund L.P., a Delaware limited partnership
(the "Partnership"), was originally organized in September 1984 under
the Uniform Limited Partnership Act of Utah as Far West Hydroelectric
Fund, Ltd. On December 20, 1988, the Partnership changed its name to
Far West Electric Energy Fund, L.P. and changed its domicile to
Delaware.
The Partnership owns a geothermal power plant, (the "Steamboat
Springs Plant") located in Nevada, and until March 16, 1995, owned a
hydroelectric plant located in Idaho (the "Crystal Springs Plant") which
was sold to Crystal Springs Hydroelectric, L.P., a Washington limited
partnership pursuant to a Purchase and Sale Agreement dated February 28,
1995.
Utility Plant and Equipment
Utility plants and equipment are carried at cost or adjusted cost
(see Note 2). Fixed assets are depreciated over their estimated useful
life (utility plants - thirty years, equipment - five to ten years).
Cash Equivalents
For purposes of the statement of cash flows, the Partnership's
policy is that all investments with maturities of three months or less
are considered cash equivalents.
Income Taxes
No provision for income taxes has been made since the Partnership
files partnership return under provisions for federal and state tax
laws. The assets and liabilities of the Partnership for tax purposes
are lower than the financial statements for 1995 by $8,066,000 and
$552,000; and for 1994 by $11,154,000 and $2,208,000, respectively.
Income Per Limited Partnership Unit
The income per partnership unit on income before extraordinary item
and on net income is calculated on the weighted average units
outstanding during the year. The weighted average of units outstanding
during 1995, 1994, and 1993 were 10,306.
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
Certain amounts in 1994 and 1993 have been reclassified to conform
with financial statement presentations adopted in 1994 1995.
NOTE 2 - UTILITY PLANT
Plant in service consists of the following at December 31, 1995 and
1994:
Estimated
1995 1994 Useful Lives
Steamboat Springs Thermal
Hydroelectric Power Plant $15,599,000 $15,599,000 30 Years
Expansion Pipeline 400,000 400,000 5 to 7 Years
Crystal Springs Hydroelectric
Power Plant - 4,738,000 30 Years
Valuation Allowance - (2,021,000)
$15,599,000 $18,716,000
The valuation allowance relates to the Crystal Springs
Hydroelectric Power Project. The valuation allowance is a result of the
rights to a purchase option being waived and a decline in the value of
the project.
NOTE 3 - OTHER ASSETS
Other assets consist of the following at December 31, 1995 and
1994:
1995 1994
Loan Origination Fees $183,000 $183,000
Organization Costs 65,000 65,000
Other Assets 35,000 35,000
Accumulated Amortization (177,000) (159,000)
Total Other Assets $106,000 $124,000
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3 - OTHER ASSETS (Continued
The loan origination fees are being amortized on a straight-line
basis over the respective lives of the loans. Organization costs are
amortized over a five year period on a straight-line basis.
Amortization was $18,000, $18,000, $18,000 for the years ended December
31, 1995, 1994, and 1993, respectively.
NOTE 4 - LONG-TERM DEBT - NOTES PAYABLE
Long-term debt as of December 31, 1995 and 1994 consists of the
following:
1995 1994
Note Payable to Westinghouse Credit
Corp. is in default as of 10/23/92
and is immediately due and payable.
Note is secured by the Steamboat
Springs Project and all associated
rights. Interest rate is 11.5% $ 4,563,000 $5,340,000
Note Payable to a bank was due and
payable in full originally on December
1, 1993, extended to September 30,
1994 and has been modified due to the
sale of the Crystal Springs Project.
The principal amount owing after
the modification is $537,000.
Interest is due in semiannual
installments. With all remaining
principal and interest due 3/2/2000.
Interest rate is prime which was 8.75%
at year end (See Note 13 -
Sale of Crystal Springs Project). 537,000 1,800,000
5,100,000 7,140,000
Less Current Installments Due 4,563,000 7,140,000
$ 537,000 $ -
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 4 - LONG-TERM DEBT - NOTE PAYABLE (Continued)
The aggregate maturities of long-term debt for each of the five
years subsequent to December 31, 1995 are as follows:
Year Ending December 31,
1996 $ 4,563,000
1997 -
1998 -
1999 -
2000 537,000
Thereafter -
$ 5,100,000
A note payable to Ormat, Inc. was extinguished in the amount of
$175,000 in December 1993. The extinguishment was a result of
negotiations to settle litigation on the performance guaranty. The
principal note amount and related accrued interest are shown as an
extraordinary item in the statement of operations for the year ended
December 31, 1993.
During December 1992, a note payable to a bank was restructured
resulting in a reduction of principal amount, accrued interest, and a
renegotiation of terms. Interest payments relating to the reduced
note were offset to accrued interest payable. The total amount offset
against accrued interest payable in 1994 was $26,000.
NOTE 5 - RESTRICTED CASH
The Partnership is required to maintain an escrowed bank account
as security under the terms of the note payable to Westinghouse Credit
Corp. with the note payable balance as of December 31, 1995 of
$4,563,000. The reserve account was drawn down to $1,026,000 due to
insufficient operating funds needed for plant repairs of $188,000.
The note is in default due to the reserve account being drawn below
required amounts. The reserve includes the initial deposit of
$1,000,000 and requires an additional $70,000 annually for the first
seven years, interest income is also retained in the reserve account.
Disbursements from the reserve account for principal and interest
payments on the note are allowed to the extent that there are
insufficient funds in the Partnership's operating accounts.
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6 - NOTE PAYABLE-RELATED PARTY
The Partnership had notes payable to related parties for the
years ended December 31, 1995, and 1994 as follows:
1995 1994
Notes Payable to General Partner
payable on demand, unsecured.
Interest rate is 13% $ 1,117,000 $1,005,000
Note Payable to 1-A Enterprises,
a partnership, due in quarterly
installments, including interest;
commencing April 16, 1990, re-
maining principal due January 16,
2000; unsecured. Interest rate
is 11% 230,000 268,000
1,347,000 1,273,000
Less Current Installments Due 1,159,000 1,043,000
$ 188,000 $ 230,000
NOTE 7 - PURCHASE AND OPERATING AGREEMENTS
Steamboat Springs Thermal Hydroelectric Power Plant (Steamboat
Springs)
Under the terms of the Steamboat Springs purchase agreement (the
Agreement), the Partnership is required to pay royalties to non-
affiliated parties aggregating 14.05 percent of annual gross revenues
for the life of the project plus an annual lump sum of $50,000 for the
first ten years. As of December 31, 1995 all royalty obligations were
current. For the years ended December 31, 1995, 1994, and 1993, royalty
expense related to these commitments is as follows:
1995 1994 1993
Sierra Pacific Power Company (10%) $253,000 $257,000 $263,000
Benson Schwarzhoff & Helzel (3.888%) 98,000 99,000 102,000
Geothermal Development Associates
($50,000) 50,000 50,000 50,000
G. Martin Booth (.081%) 2,000 2,000 2,000
Richard W. Harris (.081%) 2,000 2,000 2,000
Total $405,000 $410,000 $419,000
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 7 - PURCHASE AND OPERATING AGREEMENTS (Continued)
As part of the Agreement, the original developer of Steamboat
Springs (the Developer) guaranteed annual net operating revenues, as
defined (Net Operating Revenues) of $2,000,000 for a period of ten years
following the date of commissioning, March 31, 1987 (the Guarantee). In
1993, the debt and related performance guarantee with the original
developer was extinguished. Pursuant to the Guarantee and included in
other revenues in the statements of income for the years ended December
31, 1993, and 1992 are $424,000, and $387,000, respectively. Pursuant
to the contract and in accordance with FIN-39, amounts due to the
Partnership under the Guarantee are offset annually against a note
payable to the Developer, and the Bonneville corporation which
subsequently sold the project to the Partnership. The note payable to
the developer and Bonneville have been fully offset as of December 31,
1993. The following Table summarizes these transactions:
1993
Guaranteed Net Operating Revenues $2,000,000
Net Operating Revenues 1,288,000
Offset Available 712,000
Gross Debt Subject to Offset 424,000
Debt to be Offset in Future $ -
The Partnership is also required to pay the Developer annual
royalties equal to 50 percent of the first $100,000 over the guaranteed
Net Operating Revenues and 75 percent of amounts in excess of the
$100,000 each year for the first ten years following the date of
commissioning. For years 11 through 20 after commissioning, the royalty
equals 30 percent of Net Operating Revenues; principal debt service
payments incurred to finance construction or operations are not deducted
in determining the revised net operating revenues (Revised Net Operating
Revenues). For years 21 inclusive and thereafter, the royalty is equal
to 50 percent of Revised Net Operating Revenues. As revenues have not
exceeded the guaranteed net operating revenues, no royalties have been
earned and no royalties have been paid pursuant with this commitment.
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 8 - RELATED PARTY TRANSACTIONS
Under the terms of the Partnership agreement, the general partner
is allowed various fees and reimbursements of expenses incurred to
manage the Partnership. For each of the years in the three-year period
ended December 31, 1995, the Partnership expensed the following amounts
as cost reimbursements to the general partner:
1995 1994 1993
General and Administrative
Expenses $ 98,000 $123,000 $223,000
In addition, during the year ended December 31, 1993, the
Partnership paid $3,300 to a Utah partnership for private air
transportation, in the ordinary course of business, in lieu of
commercial airfare. The general partners are partners of the Utah
Partnership.
As a term of the amended and restated Partnership agreement, the
General Partner is entitled to 5 percent of the limited partnership
units (Units) as compensation. Limited Partnership units for each of
the three-year period ended December 31, 1995 are as follows:
1995 1994 1993
General Partner 530 530 530
Limited Partners 9,776 9,776 9,776
Total 10,306 10,306 10,306
During 1988, the Partnership assigned its rights to build an
expansion unit to Steamboat Springs to a Nevada general partnership
owned mostly by Alan O. Melchior and Thomas A. Quinn, officers and
owners of the General Partner of the Partnership. As consideration for
the rights, the Nevada general partnership deeded the Partnership rights
and title to piping and valves installed from Steamboat Springs to the
expansion unit and agreed to pay the Partnership royalties equaling 10
percent of net operating income from the expansion for the years ended
December 31, 1988 through 1992, 15 percent for 1993 through 1998, 40
percent for 1999 through 2010, 45 percent thereafter, and an annual
pumping charge. Included in other revenues in the statement of
operations for the years ended December 31, 1995, 1994 and 1993, are
$145,000, $144,000 and $135,000, respectively related to this agreement.
As of December 31, 1994 and 1993, two of the general partners held a 75
percent ownership in the Nevada general partnership.
During 1991, the Partnership assigned its 77% ownership in SB Geo,
Inc. a Utah Corporation, to Alan O. Melchior and Thomas A. Quinn, two of
the officers and owners of the General Partner of the Partnership. SB
Geo, Inc. operates the Partnership's Steamboat Springs Thermal
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 8 - RELATED PARTY TRANSACTIONS (Continued)
Hydroelectric Power Plant and a related expansion unit. At the time of
the transfer, SB Geo, Inc. had no assets and operated on a cost
reimbursement basis. No gain or loss was recognized as a result of the
assignment.
NOTE 9 - MAJOR CUSTOMER
The Partnership has contracted with Sierra Pacific Power Company to
sell electric energy from Steamboat Springs for a term of 20 years. The
contract entitles the Partnership to a rate of 71.7 mills per kilowatt
hour for the first 10 years and a variable amount related to the short-
term cost of power to Sierra Pacific Power Company for the second 10
years. Sales to Sierra Pacific Power Company account for 100 percent of
electric power sales. The Partnership is dependent upon this customer
for the purchase of all electricity generated from this power plant.
NOTE 10 - LITIGATION
Ormat Arbitration
The arbitrators during 1993 made their award regarding the lawsuit
against Ormat alleging breach of contract on the Steamboat Springs
project and Ormat's counter-suit regarding the cancellation of the
operating agreement. The Partnership was awarded $188,000 in damages
including a portion of previously restricted cash. Ormat was awarded
$255,000 for past fixed operating fees of which the majority had been
held in an escrow account.
Subsequent to the arbitrators award the Partnership and Ormat
reached an additional agreement which cancels the note payable to Ormat
which was previously offset by the performance guaranty.
Bonneville Pacific Corporation Bankruptcy
The Partnership has filed a claim in the Chapter 11 filing of
Bonneville Pacific Corporation. The claim relates to fraud claims and
other transactions on the Crystal Springs project.
This claim is a general unsecured claim; it is unliquidated and
contingent, meaning that the amount of the claim has yet to be fixed in
the bankruptcy forum. It is estimated that the claim is no more than
$100,000.00. There is no economy for the partnership in attempting to
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 10 - LITIGATION (Continued)
resolve the amount of the claim at this juncture, without certainty that
Bonneville Pacific Corporation will succeed in confirming a plan of
reorganization, since general unsecured claims cannot receive payment
absent confirmation of a plan of reorganization. If and when a plan of
reorganization is confirmed, it is expected that, post-confirmation,
there will be a claims liquidation and resolution process, during which
the claim of the partnership will be fixed by the bankruptcy court. The
Chapter 11 reorganization proceeding of the Bonneville Pacific
Corporation has been ongoing for some years. It is a large and complex
proceeding. The success of the reorganization effort will turn in major
part upon complex litigation which the trustee in the case, Roger Segal,
has commenced against various parties in interest. Counsel for Mr.
Segal, Vernon Hopkinson, estimates at the present time that this
litigation may be concluded and a plan of reorganization proposed no
earlier than year-end, 1997. As noted above, payment on account of
general unsecured claims cannot occur unless and until a plan of
reorganization is confirmed by the bankruptcy court. Mr. Hopkinson
estimates at the present time that the size of the dividend to general
unsecured creditors could be anywhere from 20 percent to payment in
full, depending upon the outcome of the aforementioned litigation.
Nevada Department of Transportation
The Department of Transportation of the State of Nevada ("NDOT")
commenced action on 12/10/93 in the Second Judicial District Court of
the State of nevada in and for the County of Washoe against the
Partnership and others to obtain, for highway purposes, ownership of
approximately 2.79 acres of the property owned by Sierra Pacific Power
Company ("SPPC") at the extreme north of the land upon which the
Steamboat Springs Plant is located pursuant to the SPPC lease. The
Court entered an Order for occupancy of the condemned property on
12/29/93. The NDOT deposited the sum of $273,500 on 12/29/93; which
remains on deposit as of 12/31/95. The Partnership is defending the
action insofar as is necessary to protect a stand-by injection well
located on the lease in the proximity of the land being taken and a
monitoring well in an adjacent area which is being taken. It is
presently negotiating a settlement which will leave the stand-by
injection well and the Partnership's rights in and use thereof intact
and available. The Partnership has constructed a new monitoring well
and is attempting to recover the cost thereof from the State. The
Partnership has an agreement in principle with the State relative to
this reimbursement, the cost of which is approximately $5,000. That sum
will likely be disbursed in May or June of 1996. The Partnership is
also attempting to obtain a portion of the $273,500 offered and
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 10 - LITIGATION (Continued)
deposited into Court by NDOT on 12/29/93 as compensation for the taking.
SPPC is claiming all of such funds as the owner of the land. The Court
has granted NDOT the right to possess and occupy the property while the
amount of compensation to be finally awarded is being contested. WCC,
the Partnership's principal creditor, has claimed that under the
financing agreements with respect to the Steamboat Springs and 1-A
Plants, all funds recovered from NDOT must be applied to reduce the
principal balance of the loans outstanding. The funds will not likely
be disbursed until the fourth quarter of 1996 or the first quarter of
1997, unless the Partnership, SPPC, and WCC reach some settlement before
that time.
NOTE 11 - NOTE DEFAULTS
Due to insufficient funds being in restricted cash, the Partnership
received a notice of default as of 10/23/92 on a note to Westinghouse
Credit Corp. The balance as of December 31, 1995 and 1994 was
$4,563,000 and $5,340,000, respectively. Under the terms of the note
all principal and interest is immediately due and payable. The note is
secured by the Steamboat Springs project and related revenues and other
assets.
The Partnership was in default on a note payable to a bank as of
9/30/94. The balance as of December 31, 1994 and 1993 was $1,800,000.
Due to the sale of the Crystal Springs Project subsequent to December
31, 1994, this note has been reduced to $537,000 (see Note 13) and is no
longer in default.
NOTE 12 - LIQUIDITY
As shown in the accompanying financial statements for the year
ended December 31, 1995, current liabilities exceeded current assets by
$6,595,000. Of this amount $4,563,000 relates to the note defaults
described in Note 11.
NOTE 13 - SALE OF CRYSTAL SPRINGS PROJECT
The Partnership signed an agreement dated February 28, 1995 to sell
the Crystal Springs project. The sale included all the assets and
liabilities associated with the Crystal Springs Project except the note
payable to First Security Bank which has been modified as follows:
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 13 - SALE OF CRYSTAL SPRINGS PROJECT (Continued)
Upon receipt of First Security (Lender) of a principal payment
on the loan in the amount of $1,100,000, the note was modified
to provide that the remaining principal balance owed shall be
$537,000 and interest and costs on the loan shall be deemed
current.
If the note is paid in full within two years after the payment
of $1,100,000, the Lender will discount the principal amount
owing by $100,000 (requiring a principal payment of only
$437,000), and if paid within three years, the Lender will discount
the amount of the principal due by $50,000 (requiring a principal
payment of only $487,000). There will be no discount if paid after
the third anniversary.
The modification has resulted in a gain on early extinguishment of
debt of $358,000.
The net loss on sale of the Crystal Springs Project of $170,000 has
been reported on the Statement of Income for the year ended December 31,
1995 as Other Income.
At February 28, 1995, no amount was due on the $50,000 line of
credit acquired in 1992 for use in repair of certain items of equipment
for the Crystal springs Plant for start up operations in 1993.
The following pro forma statement of operations give effect to the
above events as if they had occurred on January 1, 1995:
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
DECEMBER 31, 1995
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 13 - SALE OF CRYSTAL SPRINGS PROJECT (Continued)
PRO FORMA STATEMENT OF OPERATIONS
As Reported Pro Forma
in Adjustments
Accompanying For Pro Forma
Financial Subsequent Statement of
Statements Events Operations
REVENUES
Electric Power Sales $ 2,529,000 $ - $ 2,529,000
Other Revenues 145,000 - 145,000
Total Revenues 2,674,000 (163,000) 2,674,000
EXPENSES
Interest 671,000 (16,000) (A) 655,000
Depreciation 613,000 - 613,000
Royalty 405,000 - 405,000
Professional Services 54,000 (4,000) (A) 50,000
Administrative Services -
General Partner 98,000 (38,000) (A) 60,000
Amortization 18,000 - 18,000
Insurance 47,000 - 47,000
Maintenance 583,000 (5,000) (A) 578,000
Taxes 31,000 - 31,000
Other 59,000 (1,000) (A) 58,000
Total Expenses 2,579,000 (64,000) 2,515,000
Net Income (Loss)
Before Gain on Sale 95,000 64,000 159,000
Gain on Sale of Crystal
Springs Project (170,000) - (170,000)
Extraordinary Item - Early
Extinguishment of Debt 358,000 (195,000) (B) 163,000
Net Income (Loss) $ 283,000 $ (131,000) $ 152,000
Net Income (Loss) Per
Limited Partnership Unit $ 27.46 $ (12.71) $ 14.75
A - Operating expenses attributable to Crystal Springs Project.
B - Accrued interest and expenses from January 1, 1995 through date of sale of
Crystal Springs Project.
NOTE 14 - SUBSEQUENT EVENTS
Steamboat Springs Project
The Fund has received a cash offer to sell substantially all of the assets
of the Fund to U.S. Envirosystems, Inc. for $1,250,000. The sale would
result in the termination of the Fund and distribution of the proceeds to
limited partners of approximately $33 per limited partnership unit.
FAR WEST CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30,
1995 1994
ASSETS
Current Assets:
Cash and Cash Equivalents $ 506,368 $ 110,309
Accounts Receivable 186,043 196,006
Other Receivables 1,354,231 1,260,702
Prepaid Expenses 101,554 250,088
Total Current Assets 2,148,196 1,817,105
Restricted Cash 3,030,664 3,635,100
Fixed Assets:
Wellfield, Net of Amortization 2,975,930 3,145,983
Transportation and other Equipment,
Net of Accumulated Depreciation 411,142 230,655
Net Fixed Assets 3,387,072 3,376,638
Other Assets:
Investments in Partnerships 492,711 201,003
Deposits and Other Assets 199,977 198,110
Advances to Stockholders - 231,000
Total Other Assets 692,688 630,113
Total Assets $ 9,258,620 $ 9,458,956
FAR WEST CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(continued)
June 30,
1995 1994
LIABILITIES AND EQUITY
Current Liabilities:
Accounts Payable $ 372,744 $ 322,694
Accrued Expenses 1,170,767 906,209
Long Term Debt,
Current Portion 95,505 35,107
Retention Payable 641,625 1,711,000
Total Current Liabilities 2,280,641 2,975,010
Other Liabilities:
Notes Payable 1,958,618 2,067,198
Loans from Stockholders 15,380 15,380
Deferred Gain on Sale, Net
of Amortization 366,223 317,649
Deferred Tax Liability -
Non-Current 415,000 423,000
Total Other Liabilities 2,755,221 2,823,227
Total Liabilities 5,035,862 5,798,237
Minority Interests 177,557 118,437
Equity:
Common Stock 15 Shares authorized,
11.25 shares issued and
outstanding, no par value) 29,000 29,000
Advances to Affiliated Companies (309,287) (155,698)
Retained Earnings 4,325,488 3,668,980
Total Equity 4,045,201 3,542,282
Total Liabilities and Equity $ 9,258,620 $ 9,458,956
See Accountants' Compilation Report
The accompanying notes are an integral part of the financial statements.
FAR WEST CAPITAL, INC.
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1994
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by Far
West Capital, Inc. in preparing and presenting the financial statements,
and are presented to assist the users in understanding the financial
statements.
Organization
Far West Capital, Inc., a Utah corporation, was incorporated on May
9, 1983 to facilitate the financing and operation of geothermal and
hydro-electric power plants. Far West Capital owns all the common stock
of Steamboat Development Corp. (a Utah corporation), and 53% of the
partners' equity in Twin Falls Hydro, Ltd. (a Utah limited partnership).
In the accompanying financial statements, Far West Capital, Inc. and its
subsidiaries are collectively referred to as "the Company". Far West
Capital operates on a fiscal year of June 30.
Consolidation
The accompanying consolidated financial statements include the
accounts of Far West Capital, Inc. and its 50% or more owned
subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
Investments in Partnerships
Investments in partnerships consist primarily of non-marketable
securities that are either partnerships or limited liability companies
and are stated at cost that does not exceed estimated net realizable
value. During 1995 and 1994, certain investments were written down to
their estimated realizable value. Far West Capital, Inc. is the general
partner for Far West Electric Energy Fund, L.P. for which it owns a 6%
equity interest.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company's policy
is that all investments with maturities of three months or less are
considered cash equivalents.
NOTE 2 - RESTRICTED CASH
The Company has entered into several agreements regarding the
construction, financing, and sale-leaseback of two geothermal plants.
Pursuant to these agreements monies have been set aside pending the
FAR WEST CAPITAL, INC.
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1994
Unaudited
(Continued)
NOTE 2 - RESTRICTED CASH (Continued)
final completion and acceptance of the projects, and specific funding of
certain future expenditures. These funds are set aside exclusively for
specific uses and was $3,030,664 and $3,635,100 at June 30, 1995 and
1994 respectfully.
NOTE 3 - PREPAID EXPENSES
Prepaid expenses consist of the following at June 30, 1995 and
1994:
1995 1994
Prepaid Maintenance $ - $ 134,334
Prepaid Insurance 98,554 112,754
Prepaid Rent 3,000 3,000
Total Prepaid Expenses $ 101,554 $ 250,088
NOTE 4 - FIXED ASSETS
Fixed assets consist of the following at June 30, 1995 and 1994:
1995 1994
Wellfield $ 3,401,063 $ 3,401,063
Equipment 429,459 167,086
Transportation Equipment 250,252 243,634
Total Fixed Assets 4,080,774 3,811,783
Less Allowances For Depreciation
and Amortization 693,702 435,145
Net Fixed Assets $ 3,387,072 $ 3,376,638
The wellfield is being amortized over the life of the lease which is 20
years on a straight-line basis. Equipment and vehicles are depreciated
over their estimated useful lives, five to seven years, on a straight-
line basis.
FAR WEST CAPITAL, INC.
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1994
(Unaudited)
(Continued)
NOTE 5 - LONG TERM DEBT
Long-term debt as of June 30, 1995 and 1994 consists of the
following:
1995 1994
Note payable to a corporation pay-
able in monthly payments of
interest only for six months be-
ginning October 15, 1994 and, com-
mencing April 15, 1995, payments
of $18,013, including principal
and interest, due September 15,
2009. Interest rate is 6% $ 2,054,123 $2,090,000
Note payable to a corporation in
monthly installments of $245
for the purchase of equipment,
including principal and interest,
due November 29, 1994, Interest
rate is 15.9% - 12,305
2,054,123 2,102,305
Less Current Portion 95,505 35,107
$ 1,958,618 $2,067,198
NOTE 6 - RELATED PARTY TRANSACTIONS
Under the terms of a support agreement effective December 31, 1992,
with a related corporation, the Company pays a monthly amount for the
supervision, monitoring, and administering the project. The fees
include the materials, personnel, labor, supervision, and other items
related to performing the contract. For the year ended June 30, 1995
and 1994 the Company paid for support services $451,971 and $384,536,
respectively.
The Company has entered into an Operating and Maintenance Agreement
with a related corporation to act as the operator of the project. This
agreement provides for operator to perform the duties of the operator
including operating and regular maintenance of the plant for a monthly
fee and additional fees for variable
maintenance. The Company paid $2,211,227 for the year ended June 30,
1995 and $1,804,429 for June 30, 1994.
FAR WEST CAPITAL, INC.
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1994
(Unaudited)
(Continued)
NOTE 7 - LEASE AND OPERATING AGREEMENTS
Pursuant to a financing agreement, the Company borrowed $62,000,000
and constructed two geothermal facilities known as Steamboat II and
Steamboat III near Reno, Nevada (which contain renewable energy supply
in the form of 320 degree hot water at a depth of less than 1000 feet).
Upon completion and commercial operation of the plants, the Company
entered into a sale-leaseback arrangement with the finance company in
exchange for cancellation of the related $60,000,000 note payable. A
lease agreement was entered into with the purchaser for a period of 20
years, with basic rent to be paid monthly pursuant to a lease schedule.
Additional rent is required to be paid based on distributable cash as
defined in the escrow agreement. The lease has renewal options of five
years or the remaining period on any related agreements for power or
related geothermal agreements. The Company has entered into a power
purchase agreement for the sale of electricity to an Investor Owned
Utility for a period of 30 years. The Company has an option to purchase
the facilities on the last day of the lease term, based on the fair
market value of the property.
The leaseback has been accounted for as an operating lease. The
gain of $339,264 realized in this transaction has been deferred and will
be amortized to income in proportion to rental expense over the term of
the lease.
Based on geothermal leases, the Company pays royalties on the power
revenues generated by the facilities of between 3.5% and 4.0%.
NOTE 8 - INCOME TAXES
The provisions for income taxes consisted of the following amounts:
Year Ended June 30,
1995 1994
Current:
Federal $ 157,471 $ 337,846
Deferred:
Federal (8,000) 43,152
Total Income Tax Provision $ 149,471 $ 380,998
Deferred taxes result from temporary differences in the recognition of
income and expense for income tax reporting and financial statement
reporting purposes. Deferred benefit of $8,000 for the year ending June
30, 1995 and deferred expense of $43,152 for the year ended June 30,
FAR WEST CAPITAL, INC.
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1994
(Unaudited)
(Continued)
NOTE 8 - INCOME TAXES (Continued)
1994 are the result of timing differences in the recording of the
deductions for intangible drilling costs and the sale of the plant. The
Company has recorded a net deferred income tax liability in the
accompanying balance sheets as follows:
June 30,
1995 1994
Net operating losses $ - $ 21,400
Future taxable temporary
differences related to
depreciation and amortization (827,600) (806,400)
Future deductible temporary
differences related to
alternative minimum tax
credit carryforward 300,400 249,800
Future deductible energy tax
credit 112,200 112,200
Net deferred income tax liability $ (415,000) $ (423,000)
The differences between the effective income tax rate and the
federal statutory income tax rate is presented below:
Year Ended June 30,
1995 1994
Provision at the federal
statutory rate of 34 percent $ 107,745 $ 258,334
Nondeductible expenses 421 402
Alternative Minimum Tax 50,210 79,110
Deferred tax expense (benefit) (8,000) 43,152
Surtax exemption (905) -
Total income tax provision $ 149,471 $ 380,998
NOTE 9 - CONTRACTS SUBJECT TO RENEGOTIATION
A contractor was hired to construct the facilities known as
Steamboat II and Steamboat III for a contracted price subject to certain
adjustments.
The terms of the contract provide that after completion and prior
to acceptance of the project the amount due and payment schedule under
the 12% subordinated note payable are subject to renegotiation.
Included in the financial statements are restricted cash, subordinated
FAR WEST CAPITAL, INC.
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1994
(Unaudited)
(Continued)
NOTE 9 - CONTRACTS SUBJECT TO RENEGOTIATION (Continued)
note payable and retention payable which were all subject to adjustment.
On September 20, 1994 the Company entered into a settlement agreement
whereby the subordinated note payable was converted to a 6% note payable
in monthly installments due September 15, 2009.
NOTE 10 - GAIN CONTINGENCY
A condemnation action was filed by the State of Nevada in order to
condemn approximately 15 acres of land for use as a highway and/or
interchange. The condemned 11.72 acre tract is part of a parcel of land
owned by the Guisti family on which Steamboat has a geothermal lease.
The State has paid $135,000 as compensation for its taking of the land.
Steamboat has counterclaimed against the State, asserting that the
condemnation has and will damage Steamboat in amounts exceeding
$10,000,000. Steamboat has also cross-claimed against the other
defendants for declaratory relief in order to ensure that any
compensation paid by the State is fairly apportioned among the several
defendants. Chances for settlement appear to be good at this time, due
to recent mediation and settlement discussions in which the State has
offered to pay between $1.5 and $2 million in compensation to be divided
among all defendants. The Company is proceeding to arbitration to
determine the exact figure to be paid. An unfavorable outcome in this
case is unlikely. The amount of potential loss is zero. Following
arbitration, the remainder of the issues in the case are set for trial
beginning October 30, 1995.
<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The Partnership has no executive officers. Its business
affairs are managed by its General Partner, Far West Capital, and,
until they resigned as General Partners effective January 1, 1995,
the following individuals, who are also 80% shareholders of Far
West Capital:
ALAN O. MELCHIOR, Chairman and Director of Far West Capital
until March 19, 1996, age 49. Mr. Melchior was a founder of Far
West Capital, which was organized in May, 1983. He was its
President from its inception to March 19, 1996. From December,
1981 to May, 1983, he was an account executive with Westlake
Securities, Inc., of Angora Hills, California. Mr. Melchior
received a B.S. in business from Brigham Young University in 1971
and an M.B.A. degree from the University of Utah in 1974.
THOMAS A. QUINN, Vice President, General Counsel and Director
of Far West Capital, age 60. Mr. Quinn was also a founder of Far
West Capital. Since February, 1985, Mr. Quinn has been serving
full-time in his capacities with Far West Capital. From 1968 to
February, 1985, he was engaged in the private practice of law in
Salt Lake City, Utah. He received a B.S. degree in political
science from Brigham Young University in 1959, and a Juris Doctor,
with honors, from George Washington University Law School in 1963.
On January 29, 1993, a Final Judgment of Permanent Injunction
("Injunction") was entered by the United States District Court, District
of Utah, Central Division, restraining and enjoining the Partnership,
Far West Capital, Inc. and Alan O. Melchior, previously a general
partner until his resignation effective January 1, 1995, from violating
provisions of the Securities Act of 1933. A copy of the Injunction is
appended as an exhibit to Form 8-K dated January 29, 1993.
The action filed against the Partnership, Far West Capital, Inc.,
Alan O. Melchior, previously a General Partner until his resignation
effective January 1, 1995, and others on December 7, 1992 by the Arizona
Corporation Commission and reported in the December 31, 1992 Form 10-K
and the December 31, 1993 Form 10-K has been settled pursuant to a cease
and desist order without any expense to the Partnership.
<PAGE>
Item 10. Executive Compensation.
Pursuant to the Amended and Restated Agreement of Limited Partner-
ship of Far West Electric Energy Fund, L.P., as consideration for
providing management services to the Partnership, the General Partner is
entitled to the following compensation: (i) a one percent (1%) interest
in the profits, losses, and net income of the Partnership; (ii) Units
equal to five percent (5%) of the Units outstanding, to be increased
proportionately if and as additional Units are issued in the future;
(iii) if and when Units are listed for public trading, or the Limited
Partners have received an amount equal to their capital contributions to
the Partnership (reduced by the amount of tax credits allocated to the
Limited Partners) together with a sum equal to a cumulative annual
return of 8%, the General Partner shall receive additional Units equal
to ten percent (10%) of the Units outstanding, and a total of 15% of any
new Units issued. The General Partner may receive compensation in
connection with the purchase of projects from the General Partner or its
affiliates, and provision of services to the Partnership which are
normally provided by outside consultants, provided any such payments are
competitive with charges for similar projects or services.
Following the reorganization of the Partnership in Delaware,
Units equal to 5% of the Units outstanding were issued to the
General Partner, together with a certificate evidencing a one
percent (1%) General Partner's interest in the Partnership.
The Partnership has no employees and therefore relies on the
personnel of Far West Capital and contracts with others to perform
needed management operating and professional services. Far West
Capital provides services on an hourly basis at rates competitive
with third party sources.
Far West Capital is also entitled to be reimbursed on a
monthly basis for all direct expenses it incurs on behalf of the
Partnership and for that portion of its administrative expenses
allocable to the Partnership.
For the years ended December 31, 1995, December 31, 1994 and
December 31, 1993 Far West Capital was entitled to receive $98,000,
$123,000 and $223,000 respectively as reimbursement for allocable
administrative costs and services rendered and direct expenses in
connection with the above matters. During 1995 the Partnership
paid nothing toward these amounts, leaving the amount of $671,000
still due to Far West Capital for these unpaid costs, services, and
expenses.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
Security Ownership of Certain Beneficial Owners
The Partnership is not aware of any beneficial owner of more
than five percent interest in the Partnership other than the
General Partner. The General Partner owns 5.14% of the Partnership
in Limited Partnership Units and a 1% General Partner interest.
Security Ownership of Management
As of March 15, 1996 the General Partner owns the following
interest in the Partnership:
Name of
Title of Class Beneficial Owner Ownership %
Limited Partner- Far West Capital 530 5.14%
ship Units Limited
Partnership
Units
General Partner Far West Capital Certificate
Interest of General
Partner's
Interest 1%
Total 6.14%
Item 12. Certain Relationships and Related Transactions.
General Partner's Compensation and Reimbursement
Far West Capital is entitled to receive certain compensation
and reimbursement under the terms of the Amended and Restated
Partnership Agreement. See "Item 11. Executive Compensation" as
to amounts paid to the General Partner in 1995.
1-A Expansion to the Steamboat Springs Plant
In 1988 the Partnership sold rights to develop the 1-A
Expansion Project to the Steamboat Springs Project to an entity
owned mostly by Alan O. Melchior and Thomas A. Quinn, officers and
owners of the General Partner of the Partnership. For a discussion
of the Partnership's interest in this Project, see "Item 2.
Properties -- Revenues from the 1-A thermal- hydroelectric Plant."
As consideration for the sale of the 1-A Plant rights to 1-A
Enterprises, the Partnership received a royalty interest in the net
operating income of the 1-A Plant. Such royalties equaled 15% in
1995. This amounted to $87,000 earned by the Partnership.
In addition the Partnership is paid an amount equivalent to
the net profit that would be realized by the Partnership if the 1-A
Plant were bearing 150 KW of parasitic power load (power consumed
by the Plant itself). In 1995 this amounted to $58,000 received by
the Partnership.
$400,000 Loan
Simultaneous with its January 17, 1990 loan to the
Partnership, Westinghouse made a $3,000,000 non-recourse loan to 1-
A Enterprises on the 1-A Plant on the same terms as the loan made
to the Partnership but secured by the assets associated with the 1-
A Plant. $400,000 of the loan on the 1-A Plant has been reloaned
by 1-A Enterprises to the Partnership at 11% per annum for ten
years on a non-recourse basis.
Assignment of Ownership Interest in SB GEO
In October, 1991 the Partnership assigned its 77% ownership
interest in SB GEO to Alan O. Melchior and Thomas A. Quinn, two of
the officers and owners of the General Partner in exchange for
their assuming all outstanding liabilities of SB GEO. See "Item 2.
Properties" for further information.
Loans From General Partner
During the past 5 years the General Partner made unsecured loans to
the Partnership to help the Partnership meet its financial obligations.
The loans accrue interest at 13% and are payable upon demand. As of
December 31, 1995, 1994 and 1993 loans from General Partners totaled
$1,117,000, $1,005,000, and $922,000 respectively.
PART IV
Item 13. Exhibits and Reports on Form 10-K.
(a) 1. The following financial statements are included in Part II,
Item 7;
Page
Independent Auditors' Report 18
Financial Statements:
Balance Sheets, December 31, 1995 and 1994 19
Statements of Operations, Years ended 21
December 31, 1995, 1994, and 1993
Statements of Partners' Capital, Years ended 22
December 31, 1995, 1994, and 1993
Statements of Cash Flows, Years ended 23
December 31, 1995, 1994, and 1993
Notes to Financial Statements 25
Accountants' Compilation Report 36
Unaudited Consolidated Balance Sheet of the
General Partner, Far West Capital, Inc. 37
Notes to the Unaudited Consolidated Balance Sheet
of the General Partner, Far West Capital, Inc. 39
2. The following financial schedules for the period from January
1, 1994, to December 31, 1995, are submitted herewith.
All schedules are omitted because they are not applicable or
the required information is shown in the financial statements or
notes thereto.
3. Exhibits:
The following exhibits are included as part of this report:
SEC
Exhibit Reference
Number Number Title of Document Location
Item 3. Articles of Incorporation and Bylaws
3(a) 3 Certificate and Agreement of Limited Partner- Incorporated
ship of Far West Electric Energy Fund, L.P. by Reference
filed with the Delaware Secretary of State on
December 20, 1988 (Steamboat Springs Project).
(Incorporated by reference to Exhibit 10(ab)
filed with Form 10-K for the fiscal year ended
December 31, 1988.)
3(b) 3 Amendment to Certificate and Agreement of Incorporated
Limited Partnership of Far West Electric by Reference
Energy Fund, L.P.
Item 4. Instruments Defining the Rights of Security Incorporated
4 4 Holders See Exhibit (3)(a) with respect to by Reference
rights of Limited Partners.
Item 10. Material Contracts
10(a) 10 Purchase Agreement (Steamboat Springs--form- Incorporated
erly "Sierra Pacific"--Project). (Incorp- by Reference
orated by reference to Exhibit 10(a) filed
with Form 8 dated June 20, 1986.)
10(b) 10 Offset Agreement (Steamboat Springs Project). Incorporated
(Incorporated by reference to Exhibit 10(b) by Reference
filed with Form 8, dated June 20, 1986.)
10(c) 10 Agreement for the Purchase and Sale of Elec- Incorporated
tricity (Steamboat Springs Project). (In- by Reference
corporated by reference to Exhibit 10(c) filed
with Form 8 dated June 20, 1986.)
10(d) 10 Memorandum of Lease, Assignment of Lease, and Incorporated
Purchase Agreement (Steamboat Springs Project). by Reference
(Incorporated by reference to Exhibit 10(d)
filed with Form 8 dated June 20, 1986.)
10(e) 10 Operating Agreement (Steamboat Springs Pro- Incorporated
ject). (Incorporated by reference to Exhibit by Reference
10(e) filed with Form 8 dated June 20, 1986.)
10(f) 10 Demand Note (Steamboat Springs Project). Incorporated
(Incorporated by reference to Exhibit 10(f) by Reference
filed with Form 8 dated June 20, 1986.)
10(g) 10 Assignment and Security Agreement (Steamboat Incorporated
Springs Project). (Incorporated by reference by Reference
to Exhibit 10(g) filed with Form 8 dated June
20, 1986.)
10(h) 10 Accommodation Agreement (Steamboat Springs Incorporated
Project). (Incorporated by reference to by Reference
Exhibit 10(h) filed with Form 8 dated June
20, 1986.)
10(i) 10 Leasehold Trust Deed (Steamboat Springs Pro- Incorporated
ject). (Incorporated by reference to Exhibit by Reference
10(i) filed with Form 8 dated June 20, 1986.)
10(j) 10 Construction Loan Agreement (Steamboat Incorporated
Springs Project). (Incorporated by reference by Reference
to Exhibit 10(j) filed with Form 8 dated
June 20, 1986.)
10(k) 10 Consents to Assignment of Geothermal Re- Incorporated
sources Lease and Agreement for the Purchase by Reference
and Sale of Electricity (Steamboat Springs
Project). (Incorporated by reference to
Exhibit 10(k) filed with Form 8 dated
June 20, 1986.)
10(l) 10 Construction Agreement (Steamboat Springs Incorporated
Project). (Incorporated by reference to by Reference
Exhibit 10(l) filed with Form 8 dated June
20, 1986.)
10(m)10Assignment of Construction Agreement (Steam- Incorporated
boat Springs Project). (Incorporated by by Reference
reference to Exhibit 10(m) filed with Form 8
dated June 20, 1986.)
10(n) 10 Promissory Note ($7.1 Million) (Steamboat Incorporated
Springs Project). (Incorporated by reference by Reference
to Exhibit 10(n) filed with Form 8 dated
June 20, 1986.)
10(o) 10 Purchase Agreement (Steamboat Springs Pro- Incorporated
ject). (Incorporated by reference to Exhibit by Reference
10(o) filed with Form 8 dated June 20, 1986.)
10(p) 10 Amendment to Agreement for Purchase and Sale Incorporated
of Electricity Between Far West Hydroelectric by Reference
Fund, Ltd. and Sierra Pacific Power Company
(Steamboat Springs Project). (Incorporated
by reference to Exhibit 10(p) filed with Form
10-K for the fiscal year ended December 31,
1986.)
10(q) 10 Location and Occupancy Agreement (Steamboat Incorporated
Springs Project). (Incorporated by reference by Reference
to Exhibit 10(q) filed with Form 10-K for the
fiscal year ended December 31, 1986.)
10(r) 10 Insurance Policy (Steamboat Springs Project). Incorporated
(Incorporated by reference to Exhibit 10(r) by Reference
filed with Form 10-K for the fiscal year ended
December 31, 1986.)
10(s) 10 Insurance Policy (Crystal Springs Project). Incorporated
(Incorporated by reference to Exhibit 10(s) by Reference
filed with Form 10-K for the fiscal year
ended December 31, 1986.)
10(t) 10 Certificate of Insurance (Crystal Springs Incorporated
Project). (Incorporated by reference to by Reference
Exhibit 10(t) filed with Form 10-K for the
fiscal year ended December 31, 1986.)
10(u) 10 Memorandum of Agreement Regarding Crystal Incorporated
Springs Lease (Crystal Springs Project). by Reference
(Incorporated by reference to Exhibit 6.(a)(1)
filed with Form 10-Q for the quarter ended
September 30, 1987.)
10(v) 10 Steamboat Springs Geothermal Hydroelectric Incorporated
Plant Loan Agreement and Security Agreement by Reference
(Steamboat Springs Project). (Incorporated
by reference to Exhibit 6.(a)(2) filed with
Form 10-Q for the quarter ended September
30, 1987.)
10(w) 10 Letter of Intent to Purchase Steamboat Incorporated
Springs 1-A Project (Steamboat Springs by Reference
Project). (Incorporated by reference to
Exhibit 6.(a)(1) filed with Form 10-Q for
the quarter ended June 30, 1987.)
10(x) 10 Restated Operation and Maintenance Agreement, Incorporated
Purchase Option Agreement, Promissory Note, by Reference
Credit Agreement, Security Agreement, Mortgage,
Assignment of Contract Rights, and Security
Agreement, and Collateral Assignment of Water
Rights (Steamboat Springs Project). (Incorp-
orated by reference to Exhibits filed with
Form 10-Q for the quarter ended June 30, 1988.)
10(y) 10 Amendment to Steamboat Springs Geothermal Incorporated
Hydroelectric Plant Security Agreement by Reference
(Steamboat Springs Project). (Incorporated
by reference to Exhibit 6.(a)(1) filed with
Form 10-Q for the quarter ended September
30, 1988.)
10(z) 10 Agreement re Acquisition of 1-A Expansion to Incorporated
the Steamboat Nevada Geothermal Power Plant by Reference
(Steamboat Springs Project). (Incorporated
by reference to Exhibit 10(w) filed with Form
10-K for the fiscal year ended December 31,
1987.)
10(aa) 10 1-A Assignment to the Partnership of Piping Incorporated
and Valves necessary to carry Geothermal by Reference
fluids to and from the Steamboat Springs
Geothermal power plants to the 1-A Expansion
Facility, dated January 18, 1989 (Steamboat
Springs Project). (Incorporated by reference
to Exhibit 10(ac) filed with Form 10-K for
the fiscal year ended December 31, 1988.)
10(ab) 10 Second Amendment to Geothermal Resources Incorporated
Lease between Sierra Pacific Power Company by Reference
and Far West Hydroelectric Fund, Ltd.,
dated October 29, 1988 (Steamboat Springs
Project). (Incorporated by reference to
Exhibit 10(ad) filed with Form 10-K for
the fiscal year ended December 31, 1988.)
10(ac) 10 Geothermal Resources Sublease between Far Incorporated
West Hydroelectric Fund, Ltd. and Far West by Reference
Capital, Inc., dated October 28, 1988 (Steam-
boat Springs Project). (Incorporated by
reference to Exhibit 10(ae) filed with Form
10-K for the fiscal year ended December 31,
1988.)
10(ad) 10 Purchase Option Agreement between Crystal Incorporated
Springs Hydroelectric Company and BPC, dated by Reference
July 7, 1988 (Crystal Springs Project).
(Incorporated by reference to Exhibit 19(a)
filed with Form 10-K for the fiscal year
ended December 31, 1988.)
10(ae) 10 Restated Operation and Maintenance Agreement Incorporated
between Crystal Springs Hydroelectric Company by Reference
and BPC, dated July 7, 1988 (Crystal Springs
Project). (Incorporated by reference to
Exhibit 19(b) filed with Form 10-K for the
fiscal year ended December 31, 1988.)
10(af) 10 Term Loan Agreement with Westinghouse Credit Incorporated
Corporation dated December 28, 1989 (Steamboat by Reference
Springs Project). Incorporated by reference
to Exhibit 7.(c)(1) filed with Form 8-K dated
January 17, 1990.)
10(ag) 10 Note in the principal amount of $400,000 to Incorporated
1-A Enterprises (Steamboat Springs Project). by Reference
(Incorporated by reference to Exhibit 7.(c)(2)
filed with Form 8-K dated January 17, 1990.)
10(ah) 10 The following Exhibits relate to the Westing- Incorporated
house Loan financing on the Steamboat Springs by Reference
Project:
1. Promissory Note.
2. Leasehold Trust Deed and Security
Agreement.
3. Security Agreement.
4. Collateral Assignment.
5. Financing Statement.
6. Escrow Agreement.
7. Escrow Instructions.
8. Consent to Assignment and Agreement
of Sierra Pacific Power Company.
(Incorporated by reference to Exhibit (19)
(ah) filed with Form 10-K for the fiscal
year ended December 31, 1989.)
10(ai) 10 Third Amendment to Geothermal Resources Lease Incorporated
(Steamboat Springs Project). (Incorporated by Reference
by reference to Exhibit (10) (ai) filed with
Form 10-K for the fiscal year ended December
31, 1989.)
10(aj) 10 Amended Memorandum of Lease (Steamboat Incorporated
Springs Project). (Incorporated by ref- by Reference
erence to Exhibit 10-K for the fiscal year
ended December 31, 1989.)
10(ak) 10 Revised and Restated Geothermal Resources Incorporated
Sublease (Steamboat Springs Project). by Reference
(Incorporated by reference to Exhibit (10)
(ak) filed with Form 10-K for the fiscal year
ended December 31, 1989.)
10(al) 10 Memorandum of Revised and Restated Geothermal Incorporated
Resources Sublease (Steamboat Springs Project). by Reference
(Incorporated by reference to Exhibit (10)
(al) filed with Form 10-K for the fiscal year
ended December 31, 1989.)
10(am) 10 Amendment to Operating Agreement (Steamboat Incorporated
Springs Project). (Incorporated by reference by Reference
to Exhibit (10) (am) filed with Form 10-K for
the fiscal year ended December 31, 1989.)
10(an) 10 Compromise Agreement (Steamboat Springs Pro- Incorporated
ject). (Incorporated by reference to Exhibit by Reference
(10) (an) filed with Form 10-K for the fiscal
year ended December 31, 1989.)
10(ao) 10 Agreement Re Disputed Invoice and Interest Incorporated
Due Under Steamboat 1 Operating Agreement by Reference
(Steamboat Springs Project). (Incorporated
by reference to Exhibit (10) (ao) filed with
Form 10-K for the fiscal year ended December
31, 1989.)
10(ap) 10 Agreement for Services (Steamboat Springs). Incorporated
(Incorporated by reference to Exhibit 10 by Reference
filed with Form 10-Q for the quarter ended
June 10, 1990.)
10(aq) 10 Revised Agreement for Services (Steamboat Incorporated
Springs) (Incorporated by reference to Ex- by Reference
hibit 10 (a) filed with Form 10-Q for the
quarter ended June 30, 1990.)
10(ar) 10 Revised Operating Agreement (Steamboat Incorporated
Springs). (Incorporated by reference to by Reference
Exhibit 10 (b) filed with Form 10-Q for the
quarter ended June 31, 1990.)
10(as) 10 Waiver Operating Agreement (Steamboat Incorporated
Springs). (Incorporated by reference to by Reference
Exhibit 10(b) filed with Form 10-Q for the
quarter ended June 30, 1990.)
10(at) 10 First Amendment to collateral Assignment Incorporated
(Steamboat Springs). (Incorporated by ref- by Reference
erence to Exhibit (10) (qt) filed with Form
10-K for the fiscal year ended December 31,
1990.)
10(au) 10 First Amendment to Security Agreement (Steam- Incorporated
boat Springs). (Incorporated by reference to by Reference
Exhibit (10) (au) filed with Form 10-K for the
fiscal year ended December 31, 1990.)
10(av) 10 Fifth Amendment to Escrow Agreement (Steam- Incorporated
boat Springs). (Incorporated by reference to by Reference
Exhibit (10) (av) filed with Form 10-K for the
fiscal year ended December 31, 1990.)
10(aw) 10 Assignment of Ownership (Steamboat Springs). Incorporated
(Incorporated by reference to Exhibit (10)(aw) by Reference
filed with Form 10-K for the fiscal year ended
December 31, 1991).
10(ax) 10 Crystal Springs Agreement (Crystal Springs Incorporated
Project). (Incorporated by reference to Ex- by Reference
hibit (10)(a) filed with Form 10-Q for the
quarter ended June 30, 1992).
10(ay) 10 Award of Arbitrators (Steamboat Springs Pro- Incorporated
ject). (Incorporated by reference to Exhibit by Reference
(10)(a) filed with Form 10-Q for the quarter
ended September 30, 1992).
10(az) 10 Agreement (Crystal Springs Project). (In- Incorporated
corporated by reference to Exhibit (10) (a) by Reference
filed with Form 10-K for the fiscal year ended
December 31, 1992).
10(aaa) 10 Mutual Release Agreement (Crystal Springs Incorporated
Project). (Incorporated by reference to Ex- by Reference
hibit (10) (a) filed with Form 10-K for the
fiscal year ended December 31, 1992).
10(aab) 10 Extension and Modification Agreement (Crystal Incorporated
Springs Project). (Incorporated by reference by Reference
to Exhibit (10) (a) filed with Form 10-K for
the fiscal year ended December 31, 1992).
10(aac) 10 Amendment to Mortgage (Crystal Springs Pro- Incorporated
ject). (Incorporated by reference to Exhibit by Reference
(10) (a) filed with Form 10-K for the fiscal
year ended December 31, 1992).
10(aad) 10 Amendment to Security Agreement (Crystal Incorporated
Springs Project). (Incorporated by reference by Reference
to Exhibit (10) (a) filed with Form 10-K for
the fiscal year ended December 31, 1992).
10(aae) 10 Operation and Maintenance Agreement (Crystal Incorporated
Springs Project). (Incorporated by reference by Reference
to Exhibit (10) (a) filed with Form 10-K for
the fiscal year ended December 31, 1992).
10(aaf) 10 Mutual Satisfaction of Arbitration Award Incorporated
(Steamboat Springs Project). (Incorporated by Reference
by reference to Exhibit (10) (a) filed with
Form 10-K for the fiscal year ended December
31, 1992).
10(aag) 10 Second Extension Agreement (Crystal Springs Incorporated
Project). by Reference
10(aah) 10 Agreement (Crystal Springs Project). Incorporated
by Reference
10(aai) 10 Purchase and Sale Agreement (Crystal Springs Incorporated
Project). by Reference
10(aaj) 10 Bill of Sale (Crystal Springs Project). Incorporated
by Reference
10(aak) 10 Release of All Claims (by Lessor) (Crystal Incorporated
Springs Project). by Reference
10(aal) 10 Consent to Assignment (Crystal Springs Incorporated
Project). by Reference
10(aam) 10 Consent and Agreement (Crystal Springs Incorporated
Project). by Reference
10(aan) 10 Assignment of Interest (Crystal Springs Incorporated
Project). by Reference
10(aao) 10 Certificate As To Fulfillment of Crystal Incorporated
Springs Hydroelectric Company ("Seller") by Reference
and Obligations (Crystal Springs Project).
10(aap) 10 Certificate As To Fulfillment of Crystal Incorporated
Springs Hydroelectric, L.P. ("Purchaser") by Reference
Conditions (Crystal Springs Project).
10(aaq) 10 Release of all claims (by Crystal Springs Incorporated
Hydroelectric Company) (Crystal Springs by Reference
Project).
10(aar) 10 Release of Security Agreement (Crystal Incorporated
Springs Project). by Reference
10(aas) 10 Third Extension and Modification Agreement Incorporated
(Crystal Springs Project). by Reference
10(aat) 10 Amended and Substituted Promissory Note Incorporated
(Crystal Springs Project). by Reference
10(aau) 10 Purchase and Sale Agreement and related Incorporated
documents (Steamboat Springs Plant) by Reference
(Incorporated by Reference to
preliminary Proxy materials filed
January 11, 1996)
Item 23. Consents of Experts and Counsel
23(a) 23 Consent of Independent Public Accountants Incorporated
(Robison Hill and Company). by Reference
The Partnership agrees to furnish to the Securities and
Exchange Commission a copy of any long-term debt instrument or loan
agreement that it may request.
(b) No reports on Form 8-K were filed during the 4th
Quarter of 1995.
(c) The exhibits listed in Item 14(a)(3) are
incorporated by reference.
(d) No financial statement schedules required by this
paragraph are required to be filed as a part of
this form.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Registrant: Far West Electric Energy Fund, L.P.
By: Far West Capital, Inc.,
General Partner
DATE: March 15, 1996 By: /s/
Ronald E. Burch, President
In accordance with the Exchange Act, this report has been
signed by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
DATE: March 15, 1996 By: /s/
Ronald E. Burch, Director and
Principal Executive Officer
DATE: March 15, 1996 By: /s/
Alan O. Melchior, Director and
Principal Financial Officer
DATE: March 15, 1996 By:/s/
Thomas A. Quinn, Director
DATE: March 15, 1996 By:/s/
Kenneth R. Beck, Director
DATE: March 15, 1996 By:/s/
Jody Rolfson
Principal Accounting Officer
Ronald P. Baldwin
1043 North Bundy Drive
Los Angeles, CA 90049
Ph/Fax 310-476-0168
September 20, 1993
Far West Electric Energy Fund, L.P.
921 Executive Park Drive
Suite B
Salt Lake City, Utah 84117
Attention: General Partner
Re: Appraisal Report
Steamboat Springs 1 Thermal Hydroelectric Project
Washoe County, Nevada
In accordance with the agreement dated June 24, 1993, I am pleased
to present this Appraisal Report for the Steamboat I Geothermal
Power Plant, the associated Sierra Pacific Power company ("Sierra")
Agreement for the Purchase and Sale of Electricity and Geothermal
Resource Lease (collectively, "SB#1 or the "Facility"). SB#l is
located ten miles south of Reno, Nevada and sells electricity to
Sierra.
This report concludes that the appraised value of SB#l is
$5,000,000 estimated on the basis of the expected current sale
price for the Facility that would be agreed between a willing buyer
and a willing seller. This value would not be currently obtainable
upon sale of the Facility unless the existing default dated October
23, 1992 on the Westinghouse Electric Corporation ("Westinghouse")
loan secured on the SB#l assets is eliminated. The current
Westinghouse loan balance due is approximately $5 million net of
debt reserves. Accordingly, there is no present value of SB#l net
of secured debt.
Background
Par West Electric Energy Fund, L.P. ("Fund"), a Delaware limited
partnership (formerly Far West Hydroelectric Fund, Ltd., a Utah
limited partnership formed on September 19, 1984) is the owner of
SB#l. The Fund raised $8,467,000, net of underwriting costs, in a
public offering of limited partnership interests registered with
the Securities and Exchange Commission on January 18, 1985.
The SB#l Facility was purchased by Far West Capital, Inc.(IIFWCII),
general partner of the Fund, on behalf of the Fund from Bonneville
Pacific Corporation (IIBPCII) under the terms of a purchase
agreement dated September 16, 1985. The purchase price was
$14,850,000 plus the assumption of certain royalty and net profits
obligations. BPC provided $600,000 of its own financing and agreed
to arrange permanent long-term financing for an additional
$7,100,000. The construction contractor provided an additional
$1,500,000 of financing. The Fund provided equity funding for the
remaining $5,650,000.
Further SB#l acquisition costs incurred included a FWC fee of
$684,000 for acquiring the Facility. Later additions of gathering
system piping of $400,000 and miscellaneous other costs of $60,683
have resulted in the total cost of the SB#I Facility of
$15,994,683.
The SB#l power plant assets consist of seven binary Ormat Energy
Converter Units designed to produce 5 MWs, net saleable
electricity, utilizing geothermal fluids in conjunction with
N-Pentane, the gas activating the turbines. The plant was
originally designed to use a water cooled condensing process. The
plant was later changed to an air cooled system due to limited
accessibility of cooling water.
SB#l fuel is provided from three down hole pumped hot water
geothermal wells. After utilization by SB#l, the geothermal fluids
are transferred for additional use to a 1.7 MWs net, adjacent
geothermal power plant not owned by the Fund. The geothermal
fluids are returned to SB#l for injection at the site using two
injector wells. The adjacent geothermal power plant pays a fee to
the Fund equal to that plant's electricity value of 150 KWH, net of
associated royalty costs, as reimbursement for the costs associated
with moving the geothermal fluids. In addition, the Fund obtained
a net profits interest in the cash flow of the adjacent geothermal
power plant currently at 15% but rising to 40% in 1999 and 45% in
the year 2011.
Initially, SB#l was designed to be supplied with 1.3 million pounds
of geothermal fluid per hour at an average temperature of 335
degrees F. from two production wells but, after changing the plant
design to an air cooled system, it was necessary to increase the
fluid supply to 1.7 million pounds per hour and an additional
production well was added. Currently, the three production wells
supply 1.7 million pounds of geothermal fluid per hour (4,000
gallons per minute) at an average temperature of 334 degrees F. All
extracted fluid is injected back into the reservoir after
utilization. Production and injection data to date indicate that
the geothermal field will be able to continue to provide fuel for
the plant at least for the life of the Sierra Agreement for the
Purchase and Sale of Electricity.
The construction contractor provided a ten year performance
guaranty that SB#l would earn annually at least $2,000,000 of net
operating revenue on a cash flow basis after all costs except debt
service and income taxes. This guaranty was subsequently
eliminated in consideration for the elimination of a note payable
to the contractor (see Financing section below).
SB#l is sited on land leased to the Facility under the terms of a
geothermal resource lease dated November 18, 1983 from Sierra
subsequently assigned to FWC and the Fund as part of the September
16, 1985 purchase agreement with BPC. Site consent is contained in
the Location and Occupancy Agreement dated December 31, 1985
between Sierra and the Fund. The Sierra geothermal resource lease
continues as long as commercial quantities of geothermal fluid are
produced from the property.
SB#l sells electricity to Sierra under the terms of the Agreement
for the Purchase and Sale of Electricity dated November 18, 1983
("Power Sales Contract") subsequently assigned to FWC and the Fund
as part of the September 16, 1985 purchase agreement with BPC. The
Power Sales Contract was amended on March 6, 1987 primarily to
extend the term of the agreement. The Power Sales Contract, as
amended, expires on December 6, 2006 but, continues year to year
thereafter unless terminated by either Sierra or the Fund.
For the initial ten year period of the Power Sales Contract ending
December 5, 1996, the combined non-time differentiated energy and
capacity selling price for all electricity provided up to
43,800,000 KWH per calendar year is $.0717 per KWH. The selling
price for electricity for 1997 and subsequent years is dependent on
Sierras non-time differentiated short-term avoided cost rates for
both energy and capacity as approved by the Public Service
Commission of Nevada for the first quarter of 1997 but, no higher
than $.09 per KWH. Current estimates indicate that this 1997 rate
may be significantly lower than the present $.0717 per KWH. The
Fund is currently in negotiation to achieve a satisfactory rate for
1997 and beyond.
Royalty and Net Profits Interests
The Fund purchase of SB#l included the assumption of obligations to
pay monthly royalties aggregating 14.05% of the gross revenue
received from the sale of electricity to Sierra. Most of these
royalties, 10 of the 14.05%, are payable to Sierra in consideration
for the geothermal resource lease. In addition, the Fund assumed
an obligation to pay a fixed royalty of $4,167 per month. These
royalties are not subordinated to the Westinghouse Facilities loan.
The initial acquisition of the Facility also included the
assumption of several net profits interest obligations. In the
first ten years of operation, the net profits interests only apply
to net operating cash flow before debt service and income taxes in
excess of $2,000,000 per year; therefore, no payments have been
required.
Commencing in 1997, various parties retain an aggregate of 30% net
profits interests in the cash flow of the Facility, rising to 50%
after the year 2,007.
Financing
The Fund refinanced SB#l on January 17, 1990 with Westinghouse,
formerly Westinghouse Credit Corporation. The refinancing was a
$8,000,000 non-recourse loan repayable in forty quarterly
installments of interest and principal at 11% interest per annum.
The interest rate was later raised to 11.5% per annum. $1,100,000
of the proceeds were held in an interest bearing debt reserve
account by Westinghouse. Loan repayments are current. The unpaid
balance of the loan as of July 20, 1993 is $6,140,685 and
$1,082,000 is being held in the debt reserve account. As
previously noted, the Westinghouse loan is presently in default
primarily due to the Fund's failure to keep the debt reserve
account at the proper level. The debt reserve balance as of the
end of July, 1993 should be $1,380,000. Westinghouse declared a
default on the loan on October 23, 1992 but has not accelerated the
debt repayment at this date.
The construction contractor provided $1,500,000 of unsecured
funding upon sale of SB#l to the Fund that was later subordinated
to Westinghouse. As previously noted, the construction contractor
had also, provided a performance guaranty that the Facility would
earn annual net operating cash flow of at lease $2,000,000. Net
cash flow in excess of the annual guaranty was to be shared with
the construction contractor and failure to meet the guaranty
resulted in reductions in the amount due on the $1,500,000
construction contractors note. The Facility has never produced net
operating revenue of $2,000,000 per year thereby resulting in
continual reductions in the $1,500,000 construction contractor's
note. In 1992, as part of negotiations for settlement of various
issues relating to performance of the Facility, the remaining
amount due on this construction contractor's note was eliminated.
BPC provided $600,000 of unsecured financing upon sale of SB#l to
the Fund that was later subordinated to Westinghouse. BPC
simultaneously entered into a Offset Agreement that also permitted
the Fund to offset amounts due on the BPC note for failure of SB#l
to meet the construction contractor's performance guaranty. Due to
the lack of performance by SB#l, as well as certain fraud and other
claims filed by the Fund against BPC in the BPC bankruptcy
proceeding, this note is not payable.
operations
SB#l commenced commercial operations in December, 1985 but had
immediate operating problems which delayed commissioning until
March of 1987. The Fund self-certified the Facility as a
"Qualifying Facility" before the Federal Energy Regulatory
Commission on April 27, 1987. Although the Facility was designed
to produce 5 MWs of net electricity for sale to Sierra, the
Facility has only been producing a average maximum of 4.1 MWs net,
per annum or a total of 35,900,000 KWH per year. In addition, the
Facility has had numerous and continual equipment failures.
As a consequence, the Facility operating cash flow has only been
sufficient to pay the annual Westinghouse debt service payment
which approximates $1,300,000 annually and the required $70,000 per
year additions to the debt reserve account. In 1992, the
Westinghouse debt service payment could only be met by utilizing
funds from the debt reserve which gave rise to the loan default.
The Fund is in the process of restoring the reserve from operations
in 1993. Cash flow before debt service is expected to continue at
about $1,400,000 per year through 1996, the final year of Sierra
fixed KWH rates.
The Fund has attempted to improve the operations including changing
operators. Presently, the Fund engages SB GEO, Inc., a Utah
corporation owned by the principals of FWC, to operate the
Facility. The operating agreement provides that SB GEO, Inc. will
only charge the Fund the actual cost of operations.
Book Value
For financial accounting purposes, SB#l is primarily depreciated
over 30 years. Accumulated depreciation as of July 31, 1993 will
be approximately $3,900,000. As described above, the original cost
of the Facility was $15,994,683. Therefore, the net book value of
the Facility is about $12,100,000 as of July 31, 1993. However,
$2,100,000 of original cost consisting of the notes to BPC and the
construction contractor have been canceled by negotiation.
Accordingly, a more accurate, revised net book value amount would
be $10,000,000.
Tax Matters
The Fund, as a limited partnership, is not subject to federal or
state income taxes. The Fund's taxable income or loss on an annual
basis is includible on the income tax returns of the general and
limited partners-'in proportion to the taxable income and loss
sharing ratios of the partners as provided in the limited
partnership agreement.
The Fund has utilized allowable accelerated amortization of the
Facility for income tax purposes and the Facility was eligible for
various income tax credits at the date of commercial start-up.
These tax benefits have reduced the tax basis of the Facility at
July 31, 1993 to zero.
Appraised Value
In order to arrive at an appraised value, the undersigned visited
the SB#l site as well as the offices where the financial records of
the Facility are maintained. Discussions were held with Mr. Alan
0. Melchior, representing the general partner of the Fund, the
geothermal reservoir consultant and with several other operating
and administrative employees of FWC and SB GEO, Inc. involved with
SB#l. All key contracts and agreements affecting SB#l were
reviewed as well as accounting and tax records including the Fund
partnership tax returns for 1991 and 1992 and the annual Form 10-K
filed by the Fund with the Securities and Exchange Commission for
the years 1985 through 1992.
At the current level of operations of net saleable electricity
produced at an average of 4.1 NW per annum, the Facility should
yield cash flow through 1996, the last year of fixed payments for
delivered KWH on the sale of electricity to Sierra, sufficient to
continue scheduled debt service and debt reserve payments through
1996. At that time, the remaining amount owed to Westinghouse
should be approximately $3,500,000 and Westinghouse should be
holding a debt reserve of about $1,590,000. Therefore, the
Facility will require operations at substantially improved levels
of efficiency, royalty reductions or continued ability to sell
electricity to Sierra at near current prices in 1997 and 1998 just
to amortize the Westinghouse loan in accordance with the existing
loan repayment schedule. Further, the operations will be
additionally burdened with net profits interests aggregating about
30% of net cash flow.
Alternatively, the used equipment value of the Facility must be
worth at least $2,000,000, and be realizable from a willing buyer,
as of the end of 1996 in order to repay the Westinghouse loan in
accordance with the existing loan repayment schedule.
one or a combination of these alternatives appears feasible.
Therefore, it is concluded that SB#l, in its present operating
condition, would be valued at $5,000,000 as of July 31, 1993 by a
willing buyer and seller. The Facilities' probable low electricity
sale price after 1996 and the net profits interests that commence
in 1997 contribute to this valuation. This valuation approximates
the current balance due on the Westinghouse loan secured on the
Facility net of the cash debt service reserves held by
Westinghouse.
Please advise if you require any further information.
Yours very truly,
/s/
Ronald P. Baldwin
STEAMBOAT 1 GEOTHERMAL PLANT - PROJECTED CASH FLOW: 1996 - 2006
1996 1997 1998
Annual KWH Maximum 39,000,000 39,000,000 39,000,000
Availability % 97% 97% 97%
Saleable KWH 37,830,000 37,830,000 37,830,000
Energy rate $ 0.0717 $ 0.0420 $ 0.0420
Total Power Revenues 2,712,411 1,588,860 1,588,860
Royalty Income 144,000 144,000 45,578
Interest Income 72,000 72,000 72,000
Total Revenues 2,928,411 1,804,860 1,706,438
Operating Expenses:
SPPC Royalty 271,241 158,886 158,886
Royalty -
Booth, Harris, BSH 109,853 64,349 64,349
Royalty - GDA 50,000 - -
Oper'ns & Maintenance 640,000 665,600 692,224
Insurance 40,000 40,800 41,616
Personal Property Taxes 33,000 32,670 32,343
Net Proceeds of Mines Tax 5,000 5,050 5,101
Total Opertg Expenses 1,149,094 967,355 994,519
G & A Expenses
Legal & Accounting 30,000 30,900 31,827
Technical Consulting 10,000 10,300 10,609
Management Fees 25,000 25,750 26,523
Total G & A Expenses 65,000 66,950 68,959
Net Operating Income 1,714,317 770,555 642,961
Debt Service
(Westinghouse) 1,542,886 396,254 396,254
Cash Flow before
NOI net royalty; 171,432 374,301 246,707
NOI net royalty - 231,167 192,888
Cash flow before
NOI net royalty 171,432 374,301 246,707
Less, NOI net royalty - (231,167) (192,888)
Cash flow before accrued
NOI net royalty 143,135 53,819
Less, accrued NOI net royalty - -
Terminal Value:
Less, remaining accrued
NOI net royalty
Total: 171,432 143,135 53,819
Accrued NOI net royalty - - -
1999 2000 2001
Annual KWH Maximum 39,000,000 39,000,000 39,000,000
Availability % 97% 97% 97%
Saleable KWH 37,830,000 37,830,000 37,830,000
Energy rate $ 0.0420 $ 0.0420 $ 0.0420
Total Power Revenues 1,588,860 1,588,860 1,588,860
Royalty Income 109,508 109,508 109,508
Interest Income 72,000 72,000 72,000
Total Revenues 1,770,368 1,770,368 1,770,368
Operating Expenses:
SPPC Royalty 158,886 158,886 158,886
Royalty -
Booth, Harris, BSH 64,349 64,349 64,349
Royalty - GDA - - -
Oper'ns & Maintenance 719,913 748,709 778,658
Insurance 42,448 43,297 44,163
Personal Property Taxes 32,020 31,700 31,383
Net Proceeds of Mines Tax 5,152 5,203 5,255
Total Opertg Expenses 1,022,767 1,052,144 1,082,694
G & A Expenses
Legal & Accounting 32,782 33,765 34,778
Technical Consulting 10,927 11,255 11,593
Management Fees 27,318 28,138 28,982
Total G & A Expenses 71,027 73,158 75,353
Net Operating Income 676,573 645,066 612,322
Debt Service
(Westinghouse) 396,254 396,254 396,254
Cash Flow before
NOI net royalty; 280,319 248,812 216,068
NOI net royalty 202,972 193,520 183,696
Cash flow before
NOI net royalty 280,319 248,812 216,068
Less, NOI net royalty (202,972) (193,520) (183,696)
Cash flow before accrued
NOI net royalty 77,347 55,292 32,371
Less, accrued NOI net royalty - - -
Terminal Value:
Less, remaining accrued
NOI net royalty
Total: 77,347 55,292 32,371
Accrued NOI net royalty - - -
2002 2003 2004
Annual KWH Maximum 39,000,000 39,000,000 39,000,000
Availability % 97% 97% 97%
Saleable KWH 37,830,000 37,830,000 37,830,000
Energy rate $ 0.0420 $ 0.0420 $ 0.0420
Total Power Revenues 1,588,860 1,588,860 1,588,860
Royalty Income 109,508 109,508 109,508
Interest Income 72,000 72,000 72,000
Total Revenues 1,770,368 1,770,368 1,770,368
Operating Expenses:
SPPC Royalty 158,886 158,886 158,886
Royalty -
Booth, Harris, BSH 64,349 64,349 64,349
Royalty - GDA - - -
Oper'ns & Maintenance 809,804 842,196 875,884
Insurance 45,046 45,947 46,866
Personal Property Taxes 31,069 30,758 30,451
Net Proceeds of Mines Tax 5,308 5,361 5,414
Total Opertg Expenses 1,114,462 1,147,497 1,181,850
G & A Expenses
Legal & Accounting 35,822 36,896 38,003
Technical Consulting 11,941 12,299 12,668
Management Fees 29,851 30,747 31,669
Total G & A Expenses 77,613 79,942 82,340
Net Operating Income 578,293 542,929 506,178
Debt Service
(Westinghouse) 396,254 396,254 396,254
Cash Flow before
NOI net royalty; 182,039 146,675 109,924
NOI net royalty 173,488 162,879 151,853
Cash flow before
NOI net royalty 182,039 146,675 109,924
Less, NOI net royalty (173,488) (146,675) (109,924)
Cash flow before accrued
NOI net royalty 8,551 - -
Less, accrued NOI net royalty - - -
Terminal Value:
Less, remaining accrued
NOI net royalty
Total: 8,551 - -
Accrued NOI net royalty - 16,204 58,133
2005 2006
Annual KWH Maximum 39,000,000 39,000,000
Availability % 97% 97%
Saleable KWH 37,830,000 37,830,000
Energy rate $ 0.0420 $ 0.0420
Total Power Revenues 1,588,860 1,588,860
Royalty Income 109,508 109,508
Interest Income 72,000 72,000
Total Revenues 1,770,368 1,770,368
Operating Expenses:
SPPC Royalty 158,886 158,886
Royalty -
Booth, Harris, BSH 64,349 64,349
Royalty - GDA - -
Oper'ns & Maintenance 910,920 947,356
Insurance 47,804 48,760
Personal Property Taxes 30,146 29,845
Net Proceeds of Mines Tax 5,468 5,523
Total Opertg Expenses 1,217,573 1,254,719
G & A Expenses
Legal & Accounting 39,143 40,317
Technical Consulting 13,048 13,439
Management Fees 32,619 33,598
Total G & A Expenses 84,810 87,355
Net Operating Income 467,985 428,295
Debt Service
(Westinghouse) 396,254 396,254
Cash Flow before
NOI net royalty; 71,731 32,041
NOI net royalty 140,396 128,488
Cash flow before
NOI net royalty 71,731 32,041
Less, NOI net royalty (71,731) (32,041)
Cash flow before accrued
NOI net royalty - -
Less, accrued NOI net royalty - -
Terminal Value: 2,998,063
Less, remaining accrued (223,245)
NOI net royalty
Total: - 2,774,819
Accrued NOI net royalty 126,797 223,245
Assumed energy rate - 1997: $ 0.04200
Terminal Value Capitaliz'n rate: 10%
PV of Net Cash Flow at: 10% $ 1,396,954
12% 1,203,970
14% 1,046,091
Note: This projection assumes that certain generator overhauls
are successful in raising output throughout the period
covered, and that Far West Capital is able to renegotiate
its Purchase Power Purchase Agreement to provide for
energy purchases for the second ten years of the
agreement at a flat rate significantly above current
market rates, but substantially below the rate for the
first ten years of the agreement. Given current short-
term avoided costs, this rate assumption appears highly
unlikely. Operations & Maintenance expenses are based on
higher of company's projected O & M expenses for 1997
($640 K) and annualization of latest 6- month Maintenance
expenses per partnership's 6/30/95 10-QSB ($558 k).
Changes per year from 1997 forward reflected in this
schedule are as follows: 4% increase in Operations and
Maintenance, 2% increase in Insurance, 1% decrease in
Property Taxes, 1% increase in Mines Tax Proceeds, and a
3% increase to account for inflation in each category
under G & A expenses.
Note: Saleable KWH assumes that generator overhauls are able to
increase output just over 5% on an annual basis from the
average output level of 1987-94.
Note: This projection further assumes that Far West is able to
renegotiate its indebtedness with Westinghouse Credit,
reducing the principal balance to the same extent as USE
has been able to do (by appx. 26%) and extending the term
of the loan to ten years commencing in 1996 at the same
interest rate, and that the company is able to apply 90%
of net cash flow in 1996 towards reducing the principal
of the loan, thus reducing subsequent payments of
principal and interest over the next nine years.
Note: Since the net royalty to BSH (30% of Net Operating
Income) is subordinated to debt service, it is assumed
that this royalty accrues until such time as the cash
flow of the project can begin to pay it. The projection
also assumes that whatever cash flow remains available
after debt service is applied to reducing the accrued
amount, after that year's royalty interest is paid.
Note: Terminal Value computation assumes constant growth in net
cash flow beyond 2006, and uses capitalization rate of
10%, which is applied to the net cash flow before
accumulated net royalty for 2006. It is assumed that the
accrued net royalty is subtracted from the terminal value
at this point, assuming hypothetical sale at ten times
net cash flow for this year.
STEAMBOAT 1 GEOTHERMAL PLANT - PROJECTED CASH FLOW: 1996 - 2006
1996 1997 1998
Annual KWH Maximum 39,000,000 39,000,000 39,000,000
Availability % 97% 97% 97%
Saleable KWH 37,830,000 37,830,000 37,830,000
Energy rate $ 0.0717 $ 0.0259 $ 0.0259
Total Power Revenues 2,712,411 978,662 978,662
Royalty Income 144,000 144,000 45,578
Interest Income 72,000 72,000 72,000
Total Revenues 2,928,411 1,194,662 1,096,240
Operating Expenses:
SPPC Royalty 271,241 97,886 97,886
Royalty -
Booth, Harris, BSH 109,853 39,636 39,636
Royalty - GDA 50,000 - -
Oper'ns & Maintenance 640,000 665,600 692,224
Insurance 40,000 40,800 41,616
Personal Property Taxes 33,000 32,670 32,343
Net Proceeds of Mines Tax 5,000 5,050 5,101
Total Opertg Expenses 1,149,094 881,622 908,786
G & A Expenses
Legal & Accounting 30,000 30,900 31,827
Technical Consulting 10,000 10,300 10,609
Management Fees 25,000 25,750 26,523
Total G & A Expenses 65,000 66,950 68,959
Net Operating Income 1,714,317 246,090 118,496
Debt Service
(Westinghouse) 1,542,886 396,254 396,254
Cash Flow before
NOI net royalty; 171,432 (150,164) (277,758)
NOI net royalty - 73,827 35,549
Cash flow before
NOI net royalty 171,432 (150,164) (277,758)
Less, NOI net royalty - - -
Cash flow before accrued
NOI net royalty (150,164) (277,758)
Less, accrued NOI net royalty - -
Terminal Value:
Less, remaining accrued
NOI net royalty
Total: 171,432 (150,164) (277,758)
Accrued NOI net royalty - 73,827 109,376
1999 2000 2001
Annual KWH Maximum 39,000,000 39,000,000 39,000,000
Availability % 97% 97% 97%
Saleable KWH 37,830,000 37,830,000 37,830,000
Energy rate $ 0.0259 $ 0.0259 $ 0.0259
Total Power Revenues 978,662 978,662 978,662
Royalty Income 109,508 109,508 109,508
Interest Income 72,000 72,000 72,000
Total Revenues 1,160,170 1,160,170 1,160,170
Operating Expenses:
SPPC Royalty 97,886 97,886 97,886
Royalty -
Booth, Harris, BSH 39,636 39,636 39,636
Royalty - GDA - - -
Oper'ns & Maintenance 719,913 748,709 778,658
Insurance 42,448 43,297 44,163
Personal Property Taxes 32,020 31,700 31,383
Net Proceeds of Mines Tax 5,152 5,203 5,255
Total Opertg Expenses 937,035 966,411 996,961
G & A Expenses
Legal & Accounting 32,782 33,765 34,778
Technical Consulting 10,927 11,255 11,593
Management Fees 27,318 28,138 28,982
Total G & A Expenses 71,027 73,158 75,353
Net Operating Income 152,108 120,601 87,856
Debt Service
(Westinghouse) 396,254 396,254 396,254
Cash Flow before
NOI net royalty; (244,146) (275,653) (308,397)
NOI net royalty 45,632 36,180 26,357
Cash flow before
NOI net royalty (244,146) (275,653) (308,397)
Less, NOI net royalty - - -
Cash flow before accrued
NOI net royalty (244,146) (275,653) (308,397)
Less, accrued NOI net royalty - - -
Terminal Value:
Less, remaining accrued
NOI net royalty
Total: (244,146) (275,653) (308,397)
Accrued NOI net royalty 155,008 191,188 217,545
2002 2003 2004
Annual KWH Maximum 39,000,000 39,000,000 39,000,000
Availability % 97% 97% 97%
Saleable KWH 37,830,000 37,830,000 37,830,000
Energy rate $ 0.0259 $ 0.0259 $ 0.0259
Total Power Revenues 978,662 978,662 978,662
Royalty Income 109,508 109,508 109,508
Interest Income 72,000 72,000 72,000
Total Revenues 1,160,170 1,160,170 1,160,170
Operating Expenses:
SPPC Royalty 97,886 97,886 97,886
Royalty -
Booth, Harris, BSH 39,636 39,636 39,636
Royalty - GDA - - -
Oper'ns & Maintenance 809,804 842,196 875,884
Insurance 45,046 45,947 46,866
Personal Property Taxes 31,069 30,758 30,451
Net Proceeds of Mines Tax 5,308 5,361 5,414
Total Opertg Expenses 1,028,729 1,061,765 1,096,117
G & A Expenses
Legal & Accounting 35,822 36,896 38,003
Technical Consulting 11,941 12,299 12,668
Management Fees 29,851 30,747 31,669
Total G & A Expenses 77,613 79,942 82,340
Net Operating Income 53,828 18,464 (18,287)
Debt Service
(Westinghouse) 396,254 396,254 396,254
Cash Flow before
NOI net royalty; (342,426) (377,790) (414,541)
NOI net royalty 16,148 5,539 -
Cash flow before
NOI net royalty (342,426) (377,790) (414,541)
Less, NOI net royalty - - -
Cash flow before accrued
NOI net royalty (342,426) (377,790) (414,541)
Less, accrued NOI net royalty - - -
Terminal Value:
Less, remaining accrued
NOI net royalty
Total: (342,426) (377,790) (414,541)
Accrued NOI net royalty 233,694 239,233 239,233
2005 2006
Annual KWH Maximum 39,000,000 39,000,000
Availability % 97% 97%
Saleable KWH 37,830,000 37,830,000
Energy rate $ 0.0259 $ 0.0259
Total Power Revenues 978,662 978,662
Royalty Income 109,508 109,508
Interest Income 72,000 72,000
Total Revenues 1,160,170 1,160,170
Operating Expenses:
SPPC Royalty 97,886 97,886
Royalty -
Booth, Harris, BSH 39,636 39,636
Royalty - GDA - -
Oper'ns & Maintenance 910,920 947,356
Insurance 47,804 48,760
Personal Property Taxes 30,146 29,845
Net Proceeds of Mines Tax 5,468 5,523
Total Opertg Expenses 1,131,840 1,168,986
G & A Expenses
Legal & Accounting 39,143 40,317
Technical Consulting 13,048 13,439
Management Fees 32,619 33,598
Total G & A Expenses 84,810 87,355
Net Operating Income (56,480) (96,170)
Debt Service
(Westinghouse) 396,254 396,254
Cash Flow before
NOI net royalty; (452,734) (492,424)
NOI net royalty - -
Cash flow before
NOI net royalty (452,734) (492,424)
Less, NOI net royalty - 492,424
Cash flow before accrued
NOI net royalty (452,734) -
Less, accrued NOI net royalty - -
Terminal Value: (673,192)
Less, remaining accrued (731,657)
NOI net royalty
Total: (452,734) (1,404,849)
Accrued NOI net royalty 239,233 731,657
Assumed energy rate - 1997: $ 0.02587
Terminal Value Capitaliz'n rate: 10%
PV of Net Cash Flow at: 10% $ (1,883,641)
12% (1,638,760)
14% (1,432,160)
Note: This projection assumes that certain generator overhauls
are successful in raising output throughout the period
covered, and that Far West Capital is able to renegotiate
its Purchase Power Purchase Agreement to provide for
energy purchases for the second ten years of the
agreement at a flat rate significantly above current
market rates, but substantially below the rate for the
first ten years of the agreement. Given current short-
term avoided costs, this rate assumption appears highly
unlikely. Operations & Maintenance expenses are based on
higher of company's projected O & M expenses for 1997
($640 K) and annualization of latest 6- month Maintenance
expenses per partnership's 6/30/95 10-QSB ($558 k).
Changes per year from 1997 forward reflected in this
schedule are as follows: 4% increase in Operations and
Maintenance, 2% increase in Insurance, 1% decrease in
Property Taxes, 1% increase in Mines Tax Proceeds, and a
3% increase to account for inflation in each category
under G & A expenses.
Note: Saleable KWH assumes that generator overhauls are able to
increase output just over 5% on an annual basis from the
average output level of 1987-94.
Note: This projection further assumes that Far West is able to
renegotiate its indebtedness with Westinghouse Credit,
reducing the principal balance to the same extent as USE
has been able to do (by appx. 26%) and extending the term
of the loan to ten years commencing in 1996 at the same
interest rate, and that the company is able to apply 90%
of net cash flow in 1996 towards reducing the principal
of the loan, thus reducing subsequent payments of
principal and interest over the next nine years.
Note: Since the net royalty to BSH (30% of Net Operating
Income) is subordinated to debt service, it is assumed
that this royalty accrues until such time as the cash
flow of the project can begin to pay it. The projection
also assumes that whatever cash flow remains available
after debt service is applied to reducing the accrued
amount, after that year's royalty interest is paid.
Note: Terminal Value computation assumes constant growth in net
cash flow beyond 2006, and uses capitalization rate of
10%, which is applied to the net cash flow before
accumulated net royalty for 2006. It is assumed that the
accrued net royalty is subtracted from the terminal value
at this point, assuming hypothetical sale at ten times
net cash flow for this year.
February 28, 1996
James Budge
United States Securities and Exchange Commission
4450 Fifth Street, N.W.
Washington, D.C. 20549
Via Fax
(202) 942-9525
Dear Mr. Budge:
The Edgar filing of our September 30, 1995 Form 10-QSB filed
on November 14, 1995 (accession number 0000939802-95-000007)
mistakenly included the computer files for June 30, 1995 rather
than September 30, 1995. Simultaneously on November 14, 1995 a
paper copy of the September 30, 1995 Form 10-QSB was filed with
OFIS Filer Support. The paper copy of the filing did include the
proper September 30, 1995 financial statements. On February 28,
1996 at 10:15 am Eastern Time we refiled the September 30, 1995
Form 10-QSB (accession number 0000939802-96-000003). Mr. George
Young confirmed that the Form 10-QSB for Far West Electric Energy
Fund has been accepted.
We therefore respectfully request that the filing under
accession number 0000939802-95-000007 be removed and that we be
granted an adjustment of the filing date under regulation S-T
section 232.13 (b). The error was not the result of willful
neglect of SEC regulations, but was an electronic oversight that we
corrected as soon as we were made aware of that error.
Respectfully submitted,
Far West Electric Energy Fund,
L.P.
Far West Capital, Inc.
General Partner
STEAMBOAT ENVIROSYSTEMS POWER PLANTS
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
The following pro forma statement of operations reflects the
combined results of operations of the Steamboat Facilities for the
year ended December 31, 1995, adjusted to eliminate those costs
which will no longer exist as a result of the purchase of interests
by the Company and Far West Capital, Inc. This statement is not
necessarily indicative of what results of operations would have
been had the Company acquired its interest in the Steamboat
Facilities operations at the beginning of 1995 or of what future
results of operations may be. This statement should be read in
conjunction with that of Far West Electric Energy Fund L.P. (of
which Steamboat 1 is a part) and 1A Enterprises (Steamboat 1A)
included elsewhere in this Prospectus.
1 and 1A Pro Forma
Historical 1 and 1A
Combined Adjustments Adjusted
Revenue:
Electric Power $3,404,000 $3,404,000
Other 145,000 145,000
Total Revenues 3,549,000 3,549,000
Expenses:
Operations:
Depreciation 727,000 (547,000) (1) 180,000
Royalty 615,000 (275,000) (2) 340,000
Other 1,074,000 1,074,000
Interest 816,000 (816,000) (3)
Total Expenses (3,232,000) (1,638,000) 1,594,000
Net Income $ 317,000 $1,638,000 $1,955,000
Resulting Income to U.S.
Envirosystems, Inc.:
Preferred 18% $1,800,000
50% of Balance 77,000
Total $1,877,000
Notes to proforma condensed combined statement of operations
(1) To record estimated reduction of depreciation for new basis
in assets acquired, assuming a 30 year depreciation period.
(2) To eliminate royalty expense of certain royalty agreements
cancelled.
(3) To eliminate interest expense due to elimination of all debt
including debt owed to Westinghouse Electric Corporation.
