Joint Development Agreement

JOINT DEVELOPMENT AGREEMENT


AMONG


U.S. GENERATING COMPANY


MILESBURG ENERGY, INC.


AND


ENVIRONMENTAL POWER CORPORATION


TABLE OF CONTENTS


SECTION PAGE - - ------- ----


1. Purpose.............................................................................................................. 1


2. Term................................................................................................................. 2


3. Mutual Responsibilities.............................................................................................. 2


4. MEI Responsibilities................................................................................................. 2


5. USGen Responsibilities............................................................................................... 2


6. Project Company...................................................................................................... 3


7. Engineering, Procurement and Construction Contract................................................................... 3


8. Operations and Maintenance Contract and Management Service Agreement................................................. 3


9. MEI's Previous Development Costs..................................................................................... 3


10. Accounting During Development Period................................................................................. 4


11. Costs Sharing During Development Period.............................................................................. 4


12. Reimbursement of Development Costs Upon Closing...................................................................... 5


13. EPC Acquisition Fee.................................................................................................. 5


14. Priority of Payments to the Parties.................................................................................. 5


15. Withdrawal and Termination........................................................................................... 6


16. Representations and Warranties of EPC and MEI........................................................................ 6


17. Representations and Warranties of USGen.............................................................................. 9


18. Management of Development Period Activities.......................................................................... 10


19. Indemnities.......................................................................................................... 11


20. Confidentiality...................................................................................................... 12


JOINT DEVELOPMENT AGREEMENT


This Joint Development Agreement ("Agreement") for the development of an approximately 43 megawatt ("Mw") electric generating facility known as the Milesburg project (the "Project") is entered into as of the 30th day of July, 1996 by and among U.S. GENERATING COMPANY ("USGen"), ENVIRONMENTAL POWER CORPORATION ("EPC") and MILESBURG ENERGY, INC. ("MEI"). USGen, MEI and EPC may be referred to individually as a Party or collectively as the Parties in this Agreement.


R E C I T A L S


WHEREAS, EPC and MEI and the owners of USGen had previously contemplated developing the Project as set forth in a Memorandum of Understanding dated March 8, 1989 (the "MOU"), which subsequently expired;


WHEREAS, the Parties have reviewed the status of the Project on a periodic basis since the expiration of the MOU;


WHEREAS, litigation and other proceedings against the Project have been resolved to the point that the Parties believe final development of the Project can now proceed; and


WHEREAS, MEI and USGen desire to complete final development of the Project;


NOW, THEREFORE, in consideration of the mutual promises and undertakings set forth in this Agreement, the Parties, intend to be legally bound, agree as follows:


1. Purpose. The Parties by this Agreement shall seek to accomplish or provide
------- for implementation of the following:


(a) Complete development of the Project as an independent power project under a structure that, unless otherwise mutually agreed to by the Parties, will prevent the regulation of EPC, MEI and USGen, or any of their affiliates, as an electric utility or an electric utility holding company under the Public Utility Holding Company Act of 1935 ("PUHCA").


(b) Structure the Project so as to maximize returns, obtain federal income tax benefits for the participants and ensure limits of liability that are acceptable to each of the Parties.


(c) Establish the terms and conditions of a Project partnership or other appropriate entity (the "Project Company") to develop, own and operate the Project.


(d) Develop a financing structure for the Project which will be consistent with the requirements of financial institutions and the Parties and will provide non-recourse financing for construction and operation of the Project.


(e) Negotiate and execute all definitive Project documents acceptable to each of the Parties that are needed to achieve a financial closing of the Project.


2. Term. This Agreement shall be in effect from the date of this Agreement to
---- December 31, 1998, unless sooner terminated in accordance with the provisions hereof. If, the financing for the construction of the Project has not occurred on or before June 1, 1998, USGen and MEI shall each have the option to purchase all or a part of the Project assets, as described in this Agreement, at their then-current fair market value. If both USGen and MEI seek to exercise their options, they shall cooperate in selling the Project assets to a third party. The proceeds of such a third-party sale shall be paid to USGen and MEI in proportion to the amounts paid by each of them with respect to the development of the Project, provided such amounts either were paid as provided in this Agreement (other than as provided in Section 19), or are Previous Development Costs (as hereinafter defined).


3. Mutual Responsibilities. In order to achieve the purposes of this
----------------------- Agreement, each Party agrees to:


(a) Identify and resolve Project issues;


(b) Negotiate a mutually agreeable capital structure and obtain Project financing; and


(c) Keep the other Party informed as to its activities regarding the Project, and, subject to Section 20, supply the other Party with such information as they may reasonably request.


4. MEI Responsibilities. MEI shall perform such tasks and shall assume such
-------------------- responsibilities with respect to the development of the Project as shall be assigned to it by USGen, including without limitation, (a) completing the negotiation with West Penn Power of the Power Purchase Agreement ("PPA"), (b) diligently endeavoring to reduce its payment obligations to any others with any rights, title or interests in the Project, (c) assisting USGen in any permitting efforts at the local and state agencies, and (d) to the extent of the expenditures required by Section 11, (i) maintain its right, title and interest in the proposed site for the Project located in Milesburg, Pennsylvania (the "Proposed Project Site"), and (ii) pay all Proposed Project Site Costs (as hereinafter defined).


5. USGen Responsibilities. USGen shall (a) lead and manage the activities of
---------------------- the Parties with respect to the development of the Project, (b) provide Project development funds and personnel as provided for in this Agreement, (c) use reasonable efforts to obtain all environmental and other permits, licenses and approvals needed to construct and operate the Project, (d) subject to MEI's approval as provided in Section 18(b), negotiate, on behalf of the Project Company, the engineering, procurement and construction contract with Bechtel Power Corporation ("BPC"), the operations and maintenance contract with U.S. Operating Services Company ("USOSC") and the Management Service Agreement with USGen described in Sections 7 and 8, respectively, (e) negotiate on behalf of the Project Company contracts for the procurement of fuel for the Project and the disposal of ash generated by the


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Project, (f) take the lead in the financial structuring of the Project, including a lease structure or such other structure as is appropriate, (g) provide equity for the Project, and (h) negotiate with lenders towards achieving a financial closing on terms acceptable to both Parties.


6. Project Company. By the Project Closing Date (as hereafter defined), an
--------------- agreement (the "Project Company Agreement") shall be executed that will replace and supersede this Joint Development Agreement and establish the Project Company. MEI shall not transfer any right, title or interest in the Proposed Project Site (as hereinafter defined) to the Project Company or USGen without the prior written consent of USGen, which consent may be withheld in its sole discretion.


7. Engineering, Procurement and Construction Contract. Subject to MEI's
-------------------------------------------------- approval as provided in Section 18(b), the Project Company shall enter into an engineering, procurement and construction contract with BPC, pursuant to which BPC shall perform the engineering procurement, construction, precommissioning and start-up of the Project facilities. The terms and conditions of said contract shall, subject to Project lender approval, be those agreed upon by the Project Company and BPC.


8. Operations and Maintenance Contract and Management Service Agreement
--------------------------------------------------------------------


(a) Subject to MEI's approval as provided in Section 18(b), the Project Company shall enter into an operations and maintenance contract with USOSC, pursuant to which USOSC shall operate and maintain the Project facilities. The terms and conditions of said contract shall, subject to Project lender approval, be those agreed upon by the Project Company and USOSC.


(b) Subject to MEI's approval as provided in Section 18(b), the Project Company shall enter into a management services contract with USGen, pursuant to which USGen will manage the Project Company and the Project. The terms and conditions of said contract shall, subject to Project lender approval, be those agreed upon by the Project Company and USGen.


9. MEI's Previous Development Costs.
--------------------------------


(a) "Previous Development Costs" means the legal, consulting, contractor, financing and other costs and fees incurred by MEI in the development of the Project prior to the date of this Agreement, which are set forth on Exhibit A.


(b) Previous Development Costs are subject to recovery at financial closing as provided for in Section 12 or from a termination of the PPA by West Penn Power as provided for in Section 15(b). Neither USGen nor its affiliates will have any obligation to reimburse MEI or EPC for any of the Previous Development Costs or for any other indebtedness, claims, liabilities or obligations incurred by EPC in connection with the Project prior to the date of this Agreement.


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10. Accounting During Development Period. Each of the Parties shall track and
------------------------------------ keep records of the following costs incurred by it in performing its responsibilities hereunder from the date of this Agreement through the Project Closing Date (the "Development Period"):


(a) Personnel Costs. The actual wages and salaries paid by MEI, EPC and
--------------- USGen to employees of themselves or their affiliates for work on the Project, multiplied by [INFORMATION OMITTED-CONFIDENTIAL TREATMENT REQUESTED] to cover payroll additives and overhead ("Personnel Costs").


(b) Budgeted Third Party Costs. Third party legal, consulting,
-------------------------- subcontractor, financing and other approved third party costs incurred by USGen, MEI and EPC in accordance with the Project development budget to be mutually agreed upon by the Parties ("Budgeted Third Party Costs").


(c) Other Development Costs. Travel expenses, application fees, site
----------------------- option payments and other miscellaneous costs incurred by USGen, MEI and EPC.


(d) Proposed Project Site Costs. Costs incurred by EPC or MEI in
--------------------------- connection with the Proposed Project Site, including, without limitation, costs associated with maintaining the Project Site, real estate taxes, insurance, costs required to secure or defend title, and environmental clean-up or remediation ("Proposed Project Site Costs"). Any such costs shall be mutually agreed upon by the Parties.


MEI, EPC and USGen each shall make its records of such costs available to the other Party upon reasonable request.


For purposes of this Agreement, "Project Closing Date" shall be the day on which funds are first advanced under the construction financing for the Project.


11. Costs Sharing During Development Period. MEI shall pay all Proposed
--------------------------------------- Project Site Costs; provided, however, MEI shall not be required to pay in excess of [INFORMATION OMITTED-CONFIDENTIAL TREATMENT REQUESTED] for Proposed Project Site Costs under this Agreement. USGen shall pay all approved Budgeted Third Party Costs on a current basis. MEI, EPC and USGen each shall bear the Personnel Costs and Other Development Costs incurred by it or at its direction. USGen, EPC and MEI shall have no obligation to pay any costs arising out of or in connection with the Project, except as expressly provided in this Section 11. Without limiting the foregoing, USGen shall have no obligation (a) to pay any amount paid or incurred by MEI or EPC on or after the date of this Agreement other than such approved Budgeted Third Party Costs, if any, as are properly incurred by MEI or EPC pursuant to Section 10, or (b) any costs associated with the remediation or environmental clean-up of the Proposed Project Site. Such costs may be recovered by USGen, EPC and MEI at financial closing as provided for in Section 12 or from a termination of the PPA by West Penn Power as provided for in Section 15(b).


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12. Reimbursement of Development Costs Upon Closing.
-----------------------------------------------


(a) Upon the Project Closing Date, MEI, EPC and USGen shall be reimbursed from the proceeds of the construction financing for the Project their Previous Development Costs, Personnel Costs, Budgeted Third Party Costs, Proposed Project Site Costs and Other Development Costs pursuant to Section 14.


(b) If this Agreement is terminated for any reason by any Party, and the other Party continues to develop the Project, either alone or with others, but without the participation of the other Party, then, upon the first release of construction funds for the Project, the non-participating Party shall be paid from Project funds an amount equal to that described in Section 12(a).


13. EPC Acquisition Fee. Upon the Project Closing Date, EPC shall be paid a
------------------- fee of [INFORMATION OMITTED-CONFIDENTIAL TREATMENT REQUESTED] (the "Acquisition Fee") out of the proceeds of the construction financing for the Project. The Acquisition Fee shall be paid to EPC, without interest, in equal monthly installments over the period of ...