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The Israel Electric
Corporation Ltd.
Financial Reports
For The Six and Three Months
Ended June 30, 2014
FILES INDEX
The financial reports, for the six and three months ended June 30, 2014, are
presented in a primary order.
Each chapter is numbered separately by its internal sequence.
Section Description Page
Chapter A Description of the CompanysBusiness Affairs 2
Chapter B Board of Directors' Report on the Status of the
Company's Affairs
14
Supplement Additional Report Regarding the Effectiveness of
the Internal Control Over Financial Reporting
76
Chapter C Consolidated Interim Financial Statements 79
Annex 1 Actuarial Valuation 217
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The Israel Electric
Corporation Ltd.
Updated Chapter A(Description of the CompanysBusiness Affairs)
for the 2013 Annual Report
For the Six and Three Months EndedJune 30, 2014
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Updated Chapter A (Description of the Companys Business
Affairs) for the 2013 Annual Report (the Periodic Report) of
the Israel Electric Corporation Ltd. (The Company)
Updated Chapter A (Description of the Companys Business Affairs) for the Periodic Report for 2013 ("The Annual
Report")1
According to Regulation 39A to the Securities Regulations (Periodic and Immediate Reports), 1970, the following are
details of material developments or changes in the Companys business affairs, in any matter that should be described
in the annual report during the six months that ended on June 30, 2014 and up to the publication date of this report,
according to the order of the sections in the Chapter of Description of the Companys Business Affairs in the annual
report.
This chapter of the quarterly report was prepared under the assumption that its reader holds the Chapter Description
of the Companys Business Affairs of the annual report.It should be noted that the terms in this chapter will have the same meaning as presented in in the Chapter
Description of the Companys Business Affairs of the annual report, unless explicitly stated otherwise.
1. Activity of the Company and Description of the Development of its Business Affairs
Section 1.3: Nature and Consequences of any Material Structural Change, Merger or Acquisition
Following the details in section 1.3 of the Chapter of Description of the Companys Business Affairs in the Annual
Report, regarding recommendations of the Steering Team for executing the reform in the electricity sector and
the Electric Company (Steering Team), on May 7, 2014, the Company delivered to the Steering Team its
reaction and initial position regarding the recommendations of the Steering Team. The Companys comments are
focused on two major issues: the scope of the future development of the electricity sector (with emphasis on thegeneration segment) and ensuring a long-term stable financial strength for the Company. Furthermore, the
Company requested to appear in front of the Steering Team in order to present its reaction in detail. To the best
of the Companys knowledge, the Steering Team and the State representatives are collecting comments from all
the entities that reacted to the published recommendations, aiming to formulate a final report. The schedule for
publication of the final report is not yet known.
For details of the sanctions taken by the employees with respect to administrative steps taken by the Company
regarding various salary issues, and regarding issues that may be related to the structural change, and details of
the decision of the National Court of Labor and the Haifa Regional Court of Labor on this matter, see section 5.2.3
below and Note 9 d to the Financial Statements as of June 30, 2014.
2.
Generation Segment
2.1.Section 7.1.3.2: Electricity Rate
2.1.1.Section 7.1.3.2 (a) (2): Electricity Rate - General - Rate Update
According to the decision of the Public Utilities Authority - Electricity (Electricity Authority)of July
10, 2014, the electricity rate for the public for 2014 will remain unchanged. The decision of the
Electricity Authority constitutes an update to its decision of March 22, 2012 with regard to spreading
the electricity rate increase, under which the rate increase following the gas crisis that befell the
State of Israel during 2011-2012 will be spread over three years (2012-2014) in three stages of rate
increases. The first stage occurred in March 2012, when the rate was increased by 8.9 %, and the
second stage of 5.5% was executed in May 2013. The third stage was supposed to take place this
year, but the Electricity Authority determined within the stated decision that the present electricity
1As published on March 25, 2014 (Ref. No.: 2014-01-022563)
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rate level makes it possible to return the debt balance that remains in favor of the Electric Company,
without needing a third increase of the electricity rate. Additionally, within the stated decision, the
Electricity Authority noted that subject to actual data at the end of 2014, the electricity rate is
expected to be significantly reduced at the end of 2014, due to completion of the collection of the
fuels balance due with respect to the fuel supply crisis that struck the Company and the Electricity
sector in 2011-2012.
2.1.2.Section 7.1.3.2 (a) (5): Electricity Rate - General - Present Electricity Rate
On July 9, 2014, the Dorad Energy Ltd. Company (Dorad) petitioned against the Electricity
Authority concerning the determination of a systems costs rate, arguing that the Authority should
refrain from reaching a decision on this matter as long as it does not have full information concerning
the types of services provided by the Company and their cost, as long as it does not have the ability
and the possibility to examine and control the stated services and sums, and as long as the Company
is not preparing audited financial statements according to the law on this matter, such that the
information will be made available for perusal by the private electricity producers.
For details of the continued advancement of the emission reduction plan, including the outline of the
Electricity Authority for recognition of the plans costs, see section 2.4.2 below and Note 3 h to theFinancial Statements of the Company of June 30, 2014.
2.2 Section 7.4: Competition
2.2.1 Section 7.4.1.1: General; the Company as a Monopoly; Private Electricity Production -
Government Policy and Decisions of the Electricity Authority - General
Following the details in section 7.4.1.1 of the Chapter of Description of the Companys Business
Affairs in the Annual Report, regarding an oral hearing held for the Company on March 17, 2014,
with regard to the Antitrust Commissionersconsideration to use his authority vested in him and
order the Company to refrain from increasing, directly or indirectly, its electricity generation
capacity, on May 26, 2014, the Company submitted its supplement to its position that waspresented to the Antitrust Commissioner. As of the date of publication of the report, the final
decision of the Antitrust Commissioner in this matter has not yet been published.
2.2.2 Section 7.4.1.5: General: the Company as a Monopoly; Private Electricity Production -
Government Policy and Decisions of the Electricity Authority
Following the details in section 7.4.1.5 of the Chapter of Description of the Companys Business
Affairs in the Annual Report, regarding the determination of a temporary rate for system
management service, the Company does not collect the system management component from
the private producers since March 2014. For additional details and actions taken by the Company
in connection with that, see Note 3 f to the Financial Statements of June 30, 2014.
2.2.3 Section 7.4.3.3 (b): Competition - Private Electricity Producers - the Actual Situation - Private
Electricity producers the Company has engaged with as of the Date of the Report
On April 13, 2014, the Electricity Authority reached a decision for providing permanent licenses to
produce electricity with conventional technology, and a supply license for the Dorad Company at
an output of 860 megawatts. Dorads commercial operation commenced on May 19, 2014 .
As of the date of publication of this report, the installed generation capacity of private electricity
producers is approximately 13.2% from the total installed generation capacity in Israel.
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2.2.4 Section 7.4.3.4: Competition - Producers Owning production Licenses
Following the details in section 7.4.3.4 of the Chapter of Description of the Companys Business
Affairs in the Annual Report, regarding a significant entry of private electricity producers into the
field of electricity production, as of the date of the report approximately 120 major customers,
purchasing electricity at approximately 1,600 consumption locations2, have transferred to private
electricity producers. The Company estimates that during the second half of 2014, approximately5 more customers, purchasing electricity at approximately 50 consumption locations, are
expected to transfer to private producers. The total production lost by the Company as a result of
customer transfer since 2013 is approximately 8 billion kWh a year. Additionally, the Company
estimates that this process is expected to continue in 2015 and onwards, although the Company
has no certainty at this stage as to the number of customers, kWh and revenues it will lose.
The estimates of the Company regarding the transfer of some of the Company customers to
private electricity producers, including the impact this will have on the Company, constitute
forward looking information as it is defined in the Securities Law - 1968, which is based on the
information the Company has as of the date of the report, as well as on forecasts of the Company
whose fulfillment depends, inter alia, on factors that are not under the Control of the Company,
such as: estimate of possible dates of production commencement in the power stations of the
various private electricity producers, agreements entered into by these producers with the
Company customers, and possible dates for production commencement in the power stations of
those producers. Therefore, these estimates are expected not to materialize or materialize
partiallyor differently than expected.
2.2.5 Section 7.7.3: Development of the Electricity Sector - Electricity Demand Forecast
The future demand for electricity is the most important factor that influences the required
capability in the generation segment, as it defines the future needs of the system and the
determination of the required capability in the generation system results from it.
Since the planning range of the generation system is especially long and holds in store high
uncertainty as to the future economic position of the State and the climate conditions, the risk
analysis of the generation system development should also consider the variety of electricity
demand forecasts3.
The electricity consumption development is affected by economic, climatic and demographic
factors. The connection between electricity consumption and these variable factors is expressed
with the aid of an econometric model that was developed with the assistance of an external
consultant, in cooperation with the Company. Increasing energy efficiency in electricity
consumption over the years was taken into account in the future demand forecasts and as a
result in the generation system planning as well.
According to the estimate of the management of the Company, the demand forecast, which
serves for long-term planning of the generation system, assumes an average annual increase ofbetween 2.7% to 3% in peak demand in the years 2014 to 2020. This forecast constitutes an
update to a previous demand forecast that assumed an average annual increase of 3.8% in these
years.
2Consumption location - an area of real estate, or several real estate areas, with respect to which a connection to the electricity
grid was provided, and a certain consumer was recorded for them in the books of the essential service supplier, including his
registration on a meter, insofar as one was installed at the location (the number of consumption locations noted here is those
that transferred or are expected to transfer to private producers. There are customers that some of their locations are not
transferring to private producers).
3The demand is mainly affected by the following: size of the population and its geographical spread, climate, standard of living and
consumption habits, economys activity, electricity rates and technological developments.
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The Company is examining the implications and believes, at this stage, that such a change will not
have any adverse effect on the forecast for gaps between the peak demand and the available
generation capability, which appears in the Chapter of Description of the Business Affairs of the
Company in the annual report.
2.2.6 Section 7.7.5: Development of the Electricity Sector - an Expected Development of Additional
Production Capacity
Following the details in section 7.7.5 of the Chapter of Description of the Companys Business
Affairs in the Annual Report of the Company, regarding non-binding documents of understandings
that were signed between the Company and Electricite De France S.A., a company owned by the
Government of France, upon publication of the recommendations draft of the Steering Team that
includes, inter alia, recommendations that are not consistent with the direction of operation
looked into between the two companies, the companies reached a joint decision to suspend the
operation for the time being until the situation is clarified.
2.2.7 Section 7.7.8: Development of the Electricity Sector
On June 26, 2014, the five-year financial plan (for 2014-2018) was approved. The plan is based on
decreasing investments from 2015, in order to reduce the extent of the Companys
comprehensive debt. The cutback was executed at the level of the entire Company and the
average investment for 2015-2018 is expected to be approximately NIS 4.2 billion instead of
approximately NIS 5.3 billion, in forecasted prices for the end of 2014 in accordance with a price
forecast on which the 2014 budget was based.
2.3 Section 7.10: Raw Materials and Suppliers
2.3.1 Section 7.10.2
The table below presents the generation distribution rate (in percentage) according to types offuels used in the generation segment for generating electricity in the six months ended on June
30, 2014 and on June 30, 2013.
For the six months ended June 30
2014 2013
Coal 61.35% 59.94%
Crude 0.02% 1.16%
Natural Gas 38.53% 34.11%
Diesel oil 0.1% 4.79%
Total 100% 100%
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2.3.2 Section 7.10.3
The table below presents the total fuels costs (including attributed wages) used to generate
electricity in the generation segment in the six months ended on June 30, 2014 and on June 30,
2013.
For the six months ended June 30
2014 2013
(in June 2014 NIS millions)
Coal 2,053 2,608
Crude 22 242
Natural Gas 1,637 2,311
Diesel oil 44 1,122
Transfer of regulatory asset
to fuels 2,866 1,243
Total 6,622 7,526
2.3.3 Section 7.10.6: Raw materials and suppliers- Coal
Based on various publications, the Company has learned that the Ministry of Finance intends to
raise the excise tax for coal. The significance of the raise for the Company cannot be assessed at
this stage, both in terms of the rate and in terms of the electricity demand, but it might be
material.
2.3.4 Section 7.10.9.2: Raw materials and suppliers- Natural gas- Contracts for the purchase of natural
gas
2.3.4.1 Section 7.10.9.2(b): "Tamar" field
Following the details in section 7.10.9.2 (b) of the Chapter of Description of the Companys Business
Affairs in the Annual Report of the Company, regarding the last date until which the Company is
required to announce the exercise of the option to increase the contractual quantity supplied by the
"Tamar" field, the Antitrust Commissioner published a public hearing draft at the end of March, 2014,
according to which the date of notice of continued exercise of the option beyond 2019 is postponed
by a year from April 2015 to June 2016 (at least).
The Antitrust Commissioner is of the opinion that the postponement was required to enable the saleof the Tanin and Karish gas fields and to enable the new owner to prepare for the process of gas
sale from these reservoirs to potential gas consumers.
On April 23, 2014, the Company sent its written reaction to the Antitrust Commissioner, expressing its
support with regard to the postponement of the stated option exercise date.
2.3.4.2 Section 7.10.9.2(c): Importing liquid natural gas (LNG)
In May, 2014, the Company started a procedure to receive offers from LNG suppliers to supply a
complement cargo of liquid natural gas of approximately 35 thousand cubic meters by the beginning
of July 2014, and an additional cargo of 110-130 thousand cubic meters, in the first half of August,
2014. The last date to submit offers was on May 21, 2014.
On July 9, 2014, the Company entered into an agreement to supply a partial cargo of approximately 70
thousand cubic meters of liquid natural gas, which was supplied through the loading of the gasification
ship in the middle of August, 2014.
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2.3.4.3 Section 7.10.9.2 (d): EMG
Following the details in section 7.10.9.2 (d) of the Chapter of Description of the Companys Business
Affairs in the Annual Report of the Company, regarding the arbitration process taking place between
the Company and the Egyptian gas companies and EMG, the Company submitted an application, as
part of its written summaries, to amend the interest rate it is claiming, so If the application will be
accepted, an amount of approximately USD 300 million will be added to the action. The summaries ofall parties have been submitted and the concluding hearing was held as scheduled, practically, except
for filing an application for reimbursement of expenses (that are mainly legal expenses) in the
beginning of June, and the Company is waiting to receive the decision of the arbitrators which is
expected to be received in the last quarter of 2014.
2.4 Section 7.13.2: Environmental Risks and the Manner of their Management - Air
2.4.1 Section 7.13.2.1: Clean Air Law
Following the details in section 7.13.2.1 of the Chapter of Description of the Companys Business
Affairs in the Annual Report, regarding the Clean Air Law - 2008, in April, 2014, the approval of the
Ministry for Environmental Protection for submitting the integrative licensing documents gradually
and at alternative dates was received.
2.4.2 Section 7.13.2.3 - Instructions pertaining to use of Backup Fuel in Stations operating with
Natural Gas and Section 7.13.2.4 - Emission Reduction Plan
Following the details in sections 7.13.2.3 and 7.13.2.4 of the Chapter of Description of the Companys
Business Affairs in the Annual Report, the Electricity Authority notified the Company that the
professional team of the Electricity Authority intends to recommend that at this stage only 70% of the
comprehensive investment budget of the Company for the emission reduction project for 2013, with
respect to units 5-6 at Orot Rabin and units 1-4 at Rutenberg, will be recognized for the Company.
Regarding rate recognition for converting units 1-4 at Orot Rabin to natural gas, the Authority notified
the Company in March 2014 that in view of the draft of recommendations of the Steering Team, that
includes a recommendation to appoint a dedicated team that will examine, inter alia, the financial
necessity and worthiness of converting units 1-4 to gas, the discussions regarding a rate recognition
for this part of the project should not continue until the work of the dedicated team that will be
appointed is completed.
The Electric Company updated the Ministry for Environmental Protection of the position of the
Electricity Authority and the difficulty it presents for the completion of the emission reduction project,
and in April, 2014, letters were received from the Director-General of the Ministry for Environmental
Protection and the Minister for Environmental protection, under which the Company has to meet the
dates of the emission reduction plan as determined in the individual lateral order that was signed in
December 2010 and applies to all the power stations of the Company.
In May, 2014, the Electric Company approached the Director General of the Government Companies
Authority, the Director General of the Ministry of National Infrastructures, Energy and Water, the
Director General of the Ministry for Environmental Protection, the Chairman of the ElectricityAuthority and the Attorney General of the Government, requesting clear and uniform guidance with
respect to the continuation of the emission reduction project, in light of the existing uncertainty
regarding the covering of the project costs, being able to comply with the timetables set for the
project, and the recommendations of the Steering Team, and in light of the schedules set for the
execution of the project.
In July, 2014, the position of the Electricity Authority was received, within which it was clarified that at
first the Authority will recognize 70% of the costs of the project, and recognition of the complete
project budget will be determined after costs control (less exceptional costs in the generation segment
and renovation costs that are in any case included in the operational costs of the generation segment
and less unauthorized pension components). Regarding the conversion of units 1-4 at the Orot Rabin
site, it was determined that a condition to recognizing the fuel and operation costs and conversion
costs is a determination that the operation regime of the units is their operation during the summer
and winter seasons.
Following the details in section 7.13.2.4 of the Chapter of Description of the Companys Business
Affairs in the Annual Report regarding the dates of implementation of the Companys emission
reduction project, the Company applied the Ministry for Environmental Protection on June 5, 2014 in
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order to warn it that there exists a real concern that the Company will not be able to meet the
schedules that were set by the Ministry for Environmental Protection in connection with the emission
reduction project at the Orot Rabin and Rutenberg sites, because the Company was compelled to
release hundreds of employees that were essential to the Companys operation in the field of the
emission reduction project. According to the letter from the Ministry for Environmental Protection,
received by the Company on July 14, 2014, the position of the Ministry is that halting or postponing
the emission reduction project contrary to individual orders given to the Company under theAbatement of Nuisances Law, 1961, will be in contradiction to some of the environmental laws
applying to the Company. Violating these laws may amount to taking criminal and civil legal action
against the Company and its managers.
The Company estimates that although it has invested considerable efforts and resources to advance
the emission reduction project, it might not meet the schedules set for it regarding the emission
reduction project at the Orot Rabin and Rutenberg sites, in light of the shortage of in manpower
resulting from the release of employees as described above and from the continued sanctions of the
employees union that prevented the intake of new employees. For details of sanctions and labor
disputes see section 5.2.3 below and Note 9d to the Companys Financial Statements of June 30, 2014.
In addition to the above, on August 18, 2014, the Company applied to the Ministry for Environmental
Protection with regard to an initial update regarding the effects of Operation Tzuk Eitan on theadvancement of the emission reduction project at the Orot Rabin and Rutenberg sites. The major
effects are: declaration of a state of emergency at the Rutenberg site, failure to supply materials from
plants in the south to the Orot Rabin and Rutenberg sites, and departure of experts that are essential
for the projects advancement in the two stated sites.
The estimate of the Company, according to which the Company might not meet the schedules set for it
with regard to the emission reduction project at the Orot Rabin and Rutenberg sites is forward looking
information, as this term is defined in the Securities Law - 1968. This information is based on forecasts
and estimates of the Company that exist at the Company as of the date of the report, and which may
or may not materialize or materialize partially or differently than expected due to, inter alia, the fact
that their materialization depends on various factors, some of which are not under the control of the
Company.
2.5 Section 7.13.3: Soil and Water
As part of the Companys activities to fulfill the conditions required in its business licenses, the Co mpany has
prepared a multi-annual plan for executing approval tests for its fuel tanks at a cost of approximately NIS 150
million, spread over 6 years. The plan was approved by the Company CEO for implementation within the
current work plans of the Company.
2.6 Section 7.13.9: Protecting the Coastal Environment
On June 29, 2014, the Electric Company received a summons to a hearing on the subject of alleged pollution
of the seashore with coal leachates from the Rutenberg power station. This is about a spilling of watermixed with approximately 1 Kg. of coal powder that reached the sea via the drainage channels. The Company
is preparing to present its position at the hearing that will be held during the month of August.
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3. Transmission and Transforming Segment
Section 8.6.4: Developing the Electricity Sector
Following the details in section 8.6.4 of the Chapter of Description of the Companys Business Affairs in the
Annual Report with respect to burying the line to Eilat in the Ramon Crater area, and in light of the combined
alternative (that includes burying the line in the Ramon Crater area) being adopted by the National Infrastructures
Planning and Building Board in its meeting of March 3, 2014, the Company intends to take operational measuresin the matter.
4. Distribution Segment
Section 9.11.2: Environmental Risks and the Manner of their Management - Non-ionizing Radiation
Following the details in section 9.11.2.1 of the Chapter of Description of the Companys Business Affairs in the
Annual Report, terms that prevent the Company from operating and planning certain installations were
integrated into some of the radiation permits. The Company continues its discussions with the Ministry for
Environmental Protection in order to reach an understanding with regard to the wording of these terms.
5.
Description of the Companys business affairs matters relating to all of the Companys operations
5.1 Section 10.2: Customers - electricity consumers
On May 8, 2014, the Company submitted an action to the Jerusalem District Court against the East Jerusalem
Electricity Company, in the amount of approximately NIS 531 million. Within this action, the East Jerusalem
Electricity Company is being sued to pay the Company part of the debt accumulated by it to the Company
with respect to electricity supplied to it during the period until October 2013, which has not yet been paid,
and the Company is examining the possibility of also submitting an action for the remainder of the debt of
the East Jerusalem Electricity Company. On May 15, 2014, the Jerusalem District Court gave its decision,
within which the Court agreed to the Companys application impose provisional attachment.
According to the decision, given the existence of allegedly reliable evidence for the existence of a cause of
action, the Court granted the Companys application, imposing a provisional attachment order (by registry) inthe amount of NIS 380 million over the office building of the East Jerusalem Electricity Company and all its
assets that are held by banks and credit companies, except for current accounts insofar as they have a debit
balance. As of the date of publication of the report, a hearing of this action is expected to be held on
September 30, 2014.
Additionally, on June 12, 2014, the Electric Company submitted to the High Court of Justice an application for
an injunction against the Minister of Finance, the Government of Israel, the Minister of Defense, the Minister
of National Infrastructures, Energy and Water, the Electricity Authority and the Palestinian Authority, within
which the Minister of Finance was requested to use his authority and offset the total debt sum owed by the
Palestinian Authority to the Electric Company from the money transferred to the Palestinian Authority.
Alternatively, the Court was requested to provide a solution within the States budget or by any other
manner for the deficit incurred by the Electric Company as a result of non-payment of the total debt the
Palestinian Authority owes the Electric Company.
For additional details regarding the debt of the Palestinian Authority and the East Jerusalem Electricity
Company, including the activity carried on by the Company to collect the debt, see Note 4 to the Financial
Statements of June 30, 2014.
5.2 Section 14: Human capital
5.2.1 Section 14.2: Workforce according to fields of activity
As of June 30, 2014, the Company has 13,030 employees.
5.2.2 Section 14.5.3: Employee remuneration plans, benefits and employment agreements
For details of a partial judgment given on August 20, 2014 by the Haifa Regional Court of Labor,
regarding the decision of the Commissioner of Wages and labor agreements in the Ministry of
Finance regarding alleged salary exceptions on various topics, see Note 6 g to the Financial
Statements of June 30, 2014.
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5.2.3 Section 14.9: Work disputes
Following the details in section 1.3 and section 14.9 of the Chapter of Description of the Companys
Business Affairs in the Annual Report, regarding the decision of the Court that was reached with
respect to the sanctions taken by the employees with respect to administrative steps taken by the
Company regarding various salary issues and the decision of the Court that was reached in connection
with these sanctions, and the States request for leave to appeal this decision, on July 16, 2014, theNational Court ruled that as long as there is a valid injunction preventing the employees from taking
sanctions, the Company and the State are obliged to conduct intensive negotiations with the
employee representatives, in a manner that will not create a fait accompli in the field that unilaterally
and irrevocably prejudice the rights of the employees, their working conditions and employment
security.
On July 28, 2014, the National Federation of Labor and the Employee Union applied to the Haifa
Regional Court of Labor with an urgent party application within the collective dispute requesting to
permit them to exercise the right to strike. On August 5, 2014, the Court gave its decision, determining
that the hearing will be postponed to September 2, 2014, and up to that date the parties are obligated
to act according to the decision of the Regional Court of April 3, 2014 and the National Court of July
16, 2014, under which, inter alia, they should refrain from performing actions that could irrevocably
affect the rights of the employees. For additional details see Note 9 d. to the Financial Statements ofJune 30, 2014.
For details of the possible implications of the employee sanctions on the Companys emission
reduction plan, see section 2.4.2 above.
Following the details in section 14.9 of the Chapter of Description of the Companys Business Affairs in
the Annual Report, with regard to the announcement of the Chairman of the Professional Union
Division of the New National Labor Federation of May 15, 2014 announcing a work dispute, as of the
middle of July, 2014, the employees union started sanctions which do not enable to recruit new
employees. On July 28, 2014, the Company applied to the Regional Court of Labor and requested an
injunction against these sanctions. In its decision of August 7, 2014, the Regional Court of Labor
rejected this application and instructed the parties to hold discussions on the matter, and present the
Court with a report of the results of the discussions by September 15, 2014. The Company submittedan appeal against this decision to the National Court, which is expected to conduct a hearing of the
appeal on September 9, 2014.
5.3 Section 19.4: Credit that has been obtained from the date of the statements until the date of signing this
report
On May 1, 2014, the Company issued debentures to institutional bodies4. For details regarding foreign capital
raisings by the Company and material repayments see Note 8 c to the Financial Statements of the Company
as of June 30, 2014.
In accordance with its raising needs, the Company is considering the possibility of raising additional capital in
the capital markets in Israel and/or abroad during 2014. For details see section d. 5. of the Board of Directors
Report on the Status of the Company's Affairs as of June 30, 2014 (Board of Directors Report).
The information included in this report, in the Board of Directors Report, and in the Financial Statements of
the Company, with regard to the measures the Company is considering to take in order to raise the sums it
requires, constitute forward looking information, as defined in the Securities Law - 1968. This information is
based on forecasts and estimates that exist in the Company as of the date of the report, which may not
materializeor may materialize partially or differently than expected, and this, inter alia, in light of the fact
that their materialization depends on various factors, some of whom are not under the control of the
Company, such as receiving the required approvals for executing operations as stated and market conditions.
4See Immediate Report of the Company of May 1, 2014, reference number: 2014-01-055842
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5.4 Section 19.8: Credit Rating
On July 3, 2014, after the balance sheet date, the local rating company Standard and Poors Maalot and
the international rating company Standard and Poors (the Rating Companies) announced that they are
raising both the local and international credit rating of the Company to ilAAand BBB, respectively, with a
stable outlook. The rating companies noted that, inter alia, the financial relations are in a sustainable
improvement trend and that raising the rating reflects stabilization of the financial position of the Company.
5.5 Section 26.3 (i): Objectives and Business Strategy - Information Regarding Business Entrepreneurship -
Agreement with the Palestinian Energy Authority to Construct Sub-stations
Following the agreement with the Palestinian Energy Authority (PA) to construct 4 sub-stations in the Judea
and Samaria area, arrears in payment by the PA to the Company were created from time to time from April,
2014. In view of this, the Electric Company notified the PA of the cessation of all works if the current debt is
not paid by August 28, 2014.
5.6.Section 28: An Event or Matter Outside the Regular Corporate Business
For details of the discussions being conducted on the subject of the existence of a deep market in Israel, and
the possible effect on the Company if it will be decided that there is such a deep market, see Note 2 a. 7) to
the Financial Statements of the Company of June 30, 2014.
5.7.Section 29: Discussion of the Risk Factors
Following the details in section 29 of the Chapter of Description of the Companys Business Affairs in the
Annual Report, regarding the extent of the effect that risk factors may have on the operation of the
Company, the extent of the effect that the safety risk factor may have on the operation of the Company
has risen from low to medium rating due to materialization of events, and the extent of effect of the
planning development and advancement of the development plan in the generation and transmission
segments risk factor has risen from medium to high rating doe to the implications of non-recognition of allthe costs of the emission reduction project which may compel the Company to halt the project and not
comply with the generation system development plan. Additionally, the Deputy CEO Corporate Sustainability
was appointed as Risk manager instead of Deputy CEO Finances and Economics.
Eliyahu Glickman
Chief Executive Officer
Dr. Ziv Reich
Chairman, Committee
for Reviewing the FinancialStatements
Yiftah Ron-Tal
Chairman of the
Board of Directors
Date of Approval: August 21, 2014
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The Israel Electric
Corporation Ltd.
Chapter B
Board of Directors Report on the
Status of the Company's Affairs
For the Six and Three Months Ended
June 30, 2014
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2
Prominent Disclaimer
This English translation of the "Company's Board of Directors' Report
on the Status of the Company's Affairs" for the six and three monthsended June 30, 2014 ("English Translation") is provided for
informational purposes only.
In the event of any conflict or inconsistency between the terms of
this English Translation and the original version prepared in Hebrew,
the Hebrew version shall prevail and holders of the Notes should
refer to the Hebrew version for any and all financial or other
information relating to the Company.
The Company and its Directors make no representations as to the
accuracy and reliability of the financial information in this English
Translation, save that the Company and its Directors represent that
reasonable care has been taken to correctly translate and reproduce
such information, yet notwithstanding the above, the translation of
any technical terms are, in the absence of generally agreed
equivalent terms in English, approximations to convey the general
sense intended in the Hebrew version.
The Company reserves the right to effect such amendments to this
English Translation as may be necessary to remove such conflict or
inconsistency.
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THE ISRAEL ELECTRIC CORPORATION LIMITED
BOARD OF DIRECTORS' REPORT
ON THE STATUS OF THE COMPANY'S AFFAIRS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014
3
The Board of Directors of the Israel Electric Corporation (the Company") hereby presents the Directors Report on
the status of the Company's affairs for the six and three months ended on June 30, 2014, ("The Report Period")
according to the directives of the Securities Regulations (Periodic and Immediate Reports) 1970 ("The Securities
Regulations") and the provisions of circulars of the Government Companies Authority ("The Companies Authority"),
including the "Financial Statements Circular 2013-5-1" ("Financial Statements Circular").
The Report of the Board of Directors for the period was prepared while taking into account that the reader of the
Report retains the Annual Report of the Board of Directors of December 31, 2013.
a. Explanations of the Board of Directors on the Business Condition of the Company
1. Brief Description of the Company and its Business Environment
a) General
The Company acts as one combined and coordinated system that deals in supplying electricity to
consumers, starting from the electricity generation stage through transmission, distribution and supply ofand commerce in electricity, all in accordance with licenses granted to each type of activity, which are
effective, as of the date of the signing of this report, up to January 1, 2015. The Company also deals in the
construction of the infrastructure required for these activities. Company operations include three main
fields: generation, transmission and transformation of electricity and its distribution, and it also operates
as the Electricity Grid Administrator. The Company provides electricity to most of the States consumers of
electricity. The Company is owned by the State of Israel which holds about 99.85% of its share capital,
therefore the Company and its operations are subject, inter alia, to the directives of the Government
Companies Law 975 (the Government Companies Law). As of March 5, 996, the Company operate s
according to the Electricity Sector Law 996 (the Electricity Sector Law) and its regulations. The
Electricity Sector Law replaced the Electricity Concessions Order and the Public Utilities Authority -
Electricity (the Electricity Authority") was founded according to this ordinance. The duties of the
Electricity Authority are, among others, to set electricity rates and define rate update processes, to awardlicenses and to supervise fulfillment of instructions specified in the licenses. For additional details on the
Electricity Sector Law, see Note 1b to the Financial Statements.
b) Condensed Review of the Changes in the Business Environment
1) On March 23, 2014, the draft of recommendations of the Steering Team on the subject of the reform
in the Electric Company and the Electricity sector was published, and on May 7, 2014, the Company
sent its response to the Steering Team. To the best of the Companys knowledge, the Steering Team
and the representatives of the State are gathering remarks from all the entities that responded to the
published recommendations in order to formulate a final report. A timetable for publishing the final
report is not yet known. For additional details see Note 1 e to the Financial Statements.
2) On July 3, 2014, after the balance sheet date, the local rating company Standard and Poors Maalotand the international rating company Standard and Poors announced that they are raising the local
and international credit rating of the Company to ilAA-and BBB-, respectively, with a stable outlook.
According to the rating companies, raising the rating reflects stabilization of the financial position of
the Company. For additional details of the rating of the Company see Note 8d to the Financial
Statements.
3) Entry of private Producers - on May 19, 2014, Dorad began its commercial operation, and its
commercial outline is selling most of the electricity to private consumers and selling surplus electricity
to the Company on a competitive basis, by method of price bidding. For details of private producers
see Note 9 b to the Financial Statements.
4) For details of the proceedings at the Court of Labor concerning the sanctions taken, inter alia due to
managerial steps taken by the Company regarding various wage issues, as well as in connection with
the publication of the Steering Teams draft report, see Note 9 d 10) to the Financial Statements.
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THE ISRAEL ELECTRIC CORPORATION LIMITED
BOARD OF DIRECTORS' REPORT
ON THE STATUS OF THE COMPANY'S AFFAIRS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014
4
a. Explanations of the Board of Directors on the Business Condition of the Company (continued)
1. Brief Description of the Company and its Business Environment (continued)
c) Information Required in Accordance with the Directives of the Government Companies Authority
Targets and Strategy
1) For general details of the targets and strategy of the Company, including the Environmental Plan of
the Company (the strategic plan for sustainable development of the Company), see Section F 1 in this
report and section 26 in Chapter A Description of the Business Affairs of the Corporation in the
Companys periodic report for the year ending December 3, 2013.
In December, 2013, the Companies Authority, in collaboration with the Ministry of Environmental
Protection, published a guidebook for sustainable development in Government Companies, in order to
assist companies to assimilate principles of sustainable development and corporate responsibility.
Following this, a Companies Authority circular on the subject of Sustainable Development in
Government Companies - Implementation Instructions was sent in December 2013.
In June, 2014, the Company delivered its policy and strategy report for corporate sustainability on itsbehalf according to the instructions of the guidebook.
2) The major financial targets of the Company.
The long term targets are presented below:
(a) Financial debt ratio to EBITDA of 6.5 (based on the data of the last four quarters as of June 30,
2014, the ratio without excluding regulatory assets is 7.84. The ratio before regulatory assets is
4.56. For an explanation regarding the calculation of the EBITDA see section a.3.g)4) below).
(b) Total debt ratio to total balance will gradually decrease to 81% (as of June 30, 2014, the ratio
stands at approximately 84%).
(c) Maintaining the 'BBB-' international rating (for additional details, see Note 8d to the Financial
Statements).
(d) Cash in hand balancenot less than NIS 2.2 billion. In accordance with the decision of the Board of
Directors that the fuels inventory up to a value of NIS 800 million constitutes completion of the
safety cushion in the amount of NIS 3 billion. (As of June 30, 2014, the balance is approximately
NIS 2.4 billion).
(e) According to the five-year financial plan, decreasing financial debt by NIS 0.5 billion per year.
3) Strategic emergency awareness and readiness plan:
There have been no changes in the subject regarding the disclosure provided in the Board of DirectorsReport of 2013.
4) For additional details in accordance with the Government Companies Authority directives, see also
Note 14 to the Financial Statements
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THE ISRAEL ELECTRIC CORPORATION LIMITED
BOARD OF DIRECTORS' REPORT
ON THE STATUS OF THE COMPANY'S AFFAIRS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014
5
a. Explanations of the Board of Directors on the Business Condition of the Company (continued)
1. Brief Description of the Company and its Business Environment (continued)
d) Estimate of the Financial Impact of the Difference between Financial Reporting Principles as Applied in
the Financial Statements of the Company and the Financial Reporting Standards as Applied inInternational Standards (hereinafter: IFRS Standards)
(1) General
The Financial Statements of the Company are prepared in accordance with the Government
Companies Regulations as detailed in Note 2 a 1) to the Financial Statements.
As of January 1, 2015, the Company has to prepare its financial statements with full implementation of
the IFRS.
(2) The Company provided a qualitative disclosure with regard to the gaps between the IFRS and the
financial reporting principles implemented in the Financial Statements. See Note 2 a 5 to the Financial
Statements.
(3) On August 21, 2013, the Securities Authority provided its reply to the preliminary application of the
Company according to which the Company was given a possibility for an exemption from the duty to
include comparative figures for two years in its first financial statements that are prepared according
to full IFRS (the statements of 2015 only), and the Company will be permitted to include, in these
statements alone, comparative figures for one year (the year 2014), and to determine accordingly the
date of transition to IFRS on January 1, 2014.
(4) In January 2014, Interim Standard IFRS 14 was published which enables the recognition of regulatory
assets / liabilities in financial statements prepared under complete IFRS. See details in Note 2 c 3 in the
Financial Statements.
(5) Under the Government Companies Regulations (The Principles for Preparing Financial Statements of
the Israel Electric Corporation Ltd.) (temporary order), 2004 (hereafter: "Government Companies
Regulations for Preparing Financial Statements"), the Company is required to present the estimated
impact of the implementation of the financial reporting rules in its Financial Statements as compared
with International Financial Reporting Standards.
(6) The impact of the transition to IFRS
Under the instructions of the Securities Authority concerning disclosure with regard to adoption of
IFRS published by virtue of section 36a(b) of the Securities Law, 1968, the Company prepares
estimates regarding the impact of the transition from principles under the Government Companies
Regulations as of the reporting date, to principles under the IFRS standards (hereinafter: "IFRS"). Theprocess of estimations has not yet been completed and its completion is expected with the submission
of the reports as of December 31, 2014, within which a quantitative note, regarding the stated
transition, will also be included.
Material changes may occur in the information presented below, deriving inter alia from the
continuing process of collecting the information and studying it with regard to the principles of IFRS,
as well as with regard to the interpretation given to them.
The Company is preparing to adopt the IFRS standards and is examining the material impacts that are
expected to be caused to the Company as a result of adopting these standards. Based on the state of
preparations as of the date of the report and subject to the possibility that changes will occur, which
may derive from the continued process of collecting the information and adopting it to the IFRS
principles, and to changes that will occur (if any) in their interpretation and implementation,
assessments concerning the material financial impacts of the transition from the financial reporting
principles of the Company under the Government Companies Regulations to the IFRS standards, the
consolidated financial position of the Company as of January 1, 2014 (date of transition), and the
results of its operation and changes in equity for the period from the transition date until June 30,
2014, will be presented below.
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THE ISRAEL ELECTRIC CORPORATION LIMITED
BOARD OF DIRECTORS' REPORT
ON THE STATUS OF THE COMPANY'S AFFAIRS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014
6
a. Explanations of the Board of Directors on the Business Condition of the Company (continued)
1. Brief Description of the Company and its Business Environment (continued)
d) Estimate of the Financial Impact of the Difference between Financial Reporting Principles as Applied in
the Financial Statements of the Company and the Financial Reporting Standards as Applied inInternational Standards (hereinafter: IFRS Standards) (continued)
(6) The impact of the transition to IFRS (continued)
As stated, since the approval of the initial financial statements in which the IFRS will first be
implemented or information will be provided according to them in the primary financial statements
will be in the future, the Board of Directors reserves the right, if it sees fit to do so, to change the
accounting policy on which the information above is based as stated. According to the provisions of
the Government Companies Regulations, Principles for Preparation of Financial Statements, in these
reports a disclosure was also provided for material financial impacts of the transition on the financial
position of the Company as of June 30, 2014.
It should be emphasized that due to the nature of the stated information which is also initial
information, the possibility that more changes may occur to it (which may be material changes), andthe fact that it is not yet based on a comprehensive set of financial statements, the management and
Board of Directors of the Company are of the opinion that it should not serve as a basis or be used for
reaching investment decisions of one kind or another. The information below is neither reviewed nor
audited.
a. Following are details of the items in the consolidated balance sheet as of January 1, 2014 (IFRS)
that are expected to be materially impacted by the transition to reporting under the IFRS
standards:
Notes
Reporting under
the GovernmentCompanies
Regulations
Estimated impactof the adoption
of IFRS
Estimate of datareported under
IFRS
in NIS millions
Asset items:
Inventory - fuel - current
assets................................ 1 1,067 (5) 1,062
Inventory - fuel - non-
current assets................... 1 1,736 (40) 1,696
Liability items:
Credit from banks and
other credit providers....... 1 7,118 5 7,123
Debentures....................... 1 32,770 10 32,780
Liabilities to banks............ 1 8,572 11 8,583
Deferred taxes, net........... 5,088 (12) 5,076
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THE ISRAEL ELECTRIC CORPORATION LIMITED
BOARD OF DIRECTORS' REPORT
ON THE STATUS OF THE COMPANY'S AFFAIRS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014
7
a. Explanations of the Board of Directors on the Business Condition of the Company (continued)
1. Brief Description of the Company and its Business Environment (continued)
d) Estimate of the Financial Impact of the Difference between Financial Reporting Principles as Applied in
the Financial Statements of the Company and the Financial Reporting Standards as Applied in
International Standards (hereinafter: IFRS Standards) (continued)(6) Continued:
b. Following are details of the items in the consolidated balance sheet as of June 30, 2014 (IFRS)
that are expected to be materially impacted by the transition:
Notes
Reporting under
the Government
Companies
Regulations
Estimated impact
of the adoption
of IFRS
Estimate of data
reported under
IFRS
in NIS millions
Asset items:
Inventory - fuel - current
assets................................ 1 1,104 (7) 1,097
Inventory - fuel - non-
current assets................... 1 1,614 (38) 1,576
Fixed assets, net and
intangible assets, net........ 1,2 65,505 103 65,608
Regulatory assets, net...... 3 15 47 62
Liability items:
Credit from banks andother credit providers....... 1 9,136 5 9,141
Debentures....................... 1 31,204 9 31,213
Liabilities to banks............ 1 6,668 7 6,675
Deferred taxes, net........... 4,424 24 4,448
c. The following is an estimate of the impact on the shareholders equity of the Company for the
period:
June 30, 2014
December 31
2013(in NIS millions)
Impact on Shareholders Equity
Shareholders equity according to financial statements prepared in
accordance with the Government Companies Regulations for
preparing Financial Statements......................................................... ......... 12,944 14,811
Impact of equity balance as of January 1, 2014 due to cessation of
adjustment of the statements to changes in the CPI .................................. (60) (60)
Impact on the total loss for the period....................................................... 121 -
Shareholders equity after full implementation of the IFRS.......................
13,005 14,751
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THE ISRAEL ELECTRIC CORPORATION LIMITED
BOARD OF DIRECTORS' REPORT
ON THE STATUS OF THE COMPANY'S AFFAIRS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014
8
a. Explanations of the Board of Directors on the Business Condition of the Company (continued)
1. Brief Description of the Company and its Business Environment (continued)
d) Estimate of the Financial Impact of the Difference between Financial Reporting Principles as Applied in
the Financial Statements of the Company and the Financial Reporting Standards as Applied in
International Standards (hereinafter: IFRS Standards) (continued)
(6) Continued:
d. Assessment of the impact in the consolidated profit and loss statement for the period of six
months ended on June 30, 2014, in the transition to reporting under IFRS:
Notes
Reporting
under the
Government
CompaniesRegulations
Impact of
implementing
IFRS 14 due to
classification
of deferred
accountbalances (3)
Estimated
impact of the
adoption ofIFRS
Estimate of
data
reportedunder IFRS
in NIS millions
Revenues........................................... 1 12,471 (634) (54) 11,783
Cost of operating the electricity
system...............................................1
11,108 (2,792) (176) 8,140
Profit from operating the
electricity system..............................1,2
1,363 2,158 122 3,643
Sales and marketing expenses........... 1 461 - (3) 458
Administrative and general
expenses............................................
1 656 - (3) 653Expenses for liabilities to
pensioners, net.................................. 4 - - 4
1,121 - (6) 1,115
Profit from ordinary operations....... 1 242 2,158 128 2,528
Financing expenses, net.................... 1 1,753 (34) (20) 1,699
Profit (loss) before income tax......... 1 (1,511) 2,192 148 829
Income tax * ...................................... 1 (385) 583 22 220
Profit (loss) after income tax............ 1 (1,126) 1,609 126 609
Companys share of the loss ofincluded companies, net 2 - - 2
Net transactions in balances of
deferred regulatory accounts, net..... - 1,609 - 1,609
Loss for the period............................ 1 (1,128) - 126 (1,002)
Other comprehensive loss for the
period, after tax................................1 (740) - (5) (745)
Comprehensive loss for the period.. (1,868) - 121 (1,747)
(*) The tax rate in 2014 is 26.5%.
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THE ISRAEL ELECTRIC CORPORATION LIMITED
BOARD OF DIRECTORS' REPORT
ON THE STATUS OF THE COMPANY'S AFFAIRS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014
9
a. Explanations of the Board of Directors on the Business Condition of the Company (continued)
1. Brief Description of the Company and its Business Environment (continued)
d) Estimate of the Financial Impact of the Difference between Financial Reporting Principles as Applied in
the Financial Statements of the Company and the Financial Reporting Standards as Applied in
International Standards (hereinafter: IFRS Standards) (continued)(6) Continued:
e. Following is the assessment of the impact on the Companys comprehensive loss for the period:
For the six
months ended
June 30, 2014
(in NIS millions)
Impact on comprehensive loss for the period
Comprehensive loss for the period under the Government Companies Regulations
for Preparing Financial Statements............................................................... ....................
(1,868)
Depreciation differences including cancellation of amortization in accordance with
the provisions of SFAS 90 after tax impact............................................................. .......... 104
Others after tax impact........................................................... .......................................... 22
Adjustment of remeasurements of a defined benefit plan after tax impact.................... (5)
Comprehensive loss for the period after full implementation of IFRS............................. (1,747)
* The tax rate in 2014 is 26.5%.
Notes and explanations concerning the abovementioned information:
(1) Under the IFRS, the financial statements cannot be prepared according to the changes in the generalpurchasing power of the currency, except in a situation of high inflation (hyperinflation).
Also see Note 2 a 5 d to the Financial Statements.
(2) Fixed assets - see Note 2 a 5 a, b, c and Note 2 a 4 b to the Financial Statements.
(3) Regulatory assets - according to IFRS 14, presentation of the regulatory assets / liabilities, net, and
their transactions are different in the financial statements under full international standards. The total
regulatory accounts in credit and the total regulatory accounts in debt will be presented as separate
items in the balance sheet itself and will be separated as a separate category. The net transaction in
deferred regulatory accounts that relates to profit and loss will be included as a separate item in the
statement of profit and loss and will be separated by subtotals from the remaining income and
expenses of the Company, net, without tax impact.See Note 2 a 4 b to the Financial Statements and Note 2 a 5 c to the Financial Statements.
The Company believes that the transition to full implementation of the IFRS, as stated, should be
accompanied by an appropriate rate or accounting solution that will reflect the Companys costs and
ensure the appropriate yield for the capital and also by updates of the rate, to prevent a significant delay
between amounts due to the Company or to electricity consumers and their collection date, in order to
prevent severe damage in the future which will erode the equity of the Company and impair its ability to
raise funds. For additional details see Note 3e to the Financial Statements.
On August 10, 2014, the Company again applied to the Companies Authority, explicitly noting that at this
point in time the Company does not have a comprehensive solution to prevent the expected damage to
the capital, and that the Company is going to be involved in a situation of damage to its equity and to the
results of its operation in the future as of January 1, 2015.
Additionally, the Company is maintaining ongoing discussions with the professional team of the Electricity
Authority in order to solve this issue, and on August 10, 2014, the Company applied to the Electricity
Authority, requesting a response and a solution to the stated issues, as were presented to it.
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THE ISRAEL ELECTRIC CORPORATION LIMITED
BOARD OF DIRECTORS' REPORT
ON THE STATUS OF THE COMPANY'S AFFAIRS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014
1
a. Explanations of the Board of Directors on the Business Condition of the Company (continued)
1. Brief Description of the Company and its Business Environment (continued)
e) Electricity Rate
1) For details on the electricity rate and its updating see Note 3 to the Financial Statements.
2) Comparison between Income of the Company according to the Rate Formula and the Expenses of the
Company for the Period JanuaryJune 2014, In Millions NIS, at June 2014 NIS
Income of the
Company
according to
the formula of
the rate
Expenses of
the Company
according to
the Financial
Statements * Gap
Return on
equity
approved by
the Electricity
Authority
Total loss
before income
taxes
Fuel and electricity purchases..
7,449 7,322 127Operation................................. 1,699 2,554 (855)
Depreciation and
amortization............................. 1,811 2,214 (403)
Financing expenses.................. 832 1,753 (921)
Expenses with respect to
pensioners................................ 11 4 7
Advance due to new rate
base for transmission and
distribution segments.............. 182 - 182
Miscellaneous and
differences............................... (421) (172) (249)
Total.........................................
11,563 13,675 (2,112) 601 (1,511)
* After performing necessary entries of classification for the adjustment of the rate formula. In
addition, the data relates to regulatory assets/liabilities. See further details in Note 5 to the
Financial Statements and in the sections of the Statement of Operations.
Notes:
1. For the transmission and distribution segments the Electricity Authority applies reduction
coefficients, to all components of the income and does not specify the specific component as to
which the Company should become more efficient.
It was assumed, for the calculation that the reduction coefficient is identical for all income
components in these segments.
2. In determining the rate, the Authority recognized some of the expense items other than by the
classifications recorded in the Financial Statements. This table includes adjustments to both the
revenues and expenses of the items which the Electricity Authority recognized in a different
classification than that recorded in the Financial Statements of the Company, to obtain an
adequate comparison between the income and expenses of the Company.
3. The Companys income for every segment was calculated based on the average rate and according
to the energy that is transmitted in that segment.
The Main Explanations for the Gaps according to Components are detailed below:
a) Fuel
(1) A gap in quantities deriving from the normative recognition of the Electricity Authority, whichdiffers from the actual performance of the Company.
(2) A gap in the recognized prices of fuels, which may derive, inter alia, from recognition of
marginal fuels prices, while fuels costs are recorded in the expense column at average costs.
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THE ISRAEL ELECTRIC CORPORATION LIMITED
BOARD OF DIRECTORS' REPORT
ON THE STATUS OF THE COMPANY'S AFFAIRS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014
a. Explanations of the Board of Directors on the Business Condition of the Company (continued)
1. Brief Description of the Company and its Business Environment (continued)
e) Electricity Rate (continued)
2) Comparison between the Income of the Company according to the Rate Formula and the Expenses of
the Company for the Period JanuaryJune 2014, (continued)The Main Explanations for the Gaps according to Components are detailed below: (continued)
b) Operation
The gap in the operation component derives mainly from non-recognition of the full renovation
costs of power stations and the continuous delay in updating the base rate of the transmission and
distribution segments. In addition, provision for reserve for doubtful debts in light of debts that are
difficult to collect.
c) Depreciation
The gap in the depreciation component derives mainly from the prolonged delay in updating the
rates base for the transmission and distribution segments, amounting to hundreds of millions of
NIS each year.
In addition there are other non-recognized items, such as: non-recognition of the full depreciation
expenses with respect to spare parts inventory etc.
d) Financing Expenses
The increase in the financing expenses compared with the same period the previous year derives
mainly from net exposures less foreign currency hedging, while the financing component in the
income is determined normatively and a material change did not occur to it compared to the same
period the previous year.
3) Comparison between the Income of the Company according to the Rate Formula and the Expenses of
the Company for the Period JanuaryJune 2013, In Millions NIS, at June 2014 NIS
Income of the
Company
according to
the formula of
the rate
Expenses of
the Company
according to
Financial
Statements* Gap
Return on
equity
approved by
the Electricity
Authority
Total loss
before income
taxes
Fuel and electricity purchases.. 7,557 7,992 (435)
Operation................................. 1,836 2,286 (450)
Depreciation and
amortization............................. 1,900 2,104 (204)
Financing expenses.................. 899 1,042 (143)
Expenses with respect to
pensioners................................
11 9 2
Advance due to new rate
bases for transmission and
distribution segments.............. 161 - 161
Miscellaneous and
differences............................... (469) (91) (378)
Total......................................... 11,895 13,342 (1,447) 624 (823)
* After transferring necessary classification entries for the adjustment of the rate formula. In
addition, the data is after regulatory assets/liabilities. See further details in Note 5 to the Financial
Statements and in the sections of the Statement of Operations.
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THE ISRAEL ELECTRIC CORPORATION LIMITED
BOARD OF DIRECTORS' REPORT
ON THE STATUS OF THE COMPANY'S AFFAIRS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014
2
a. Explanations of the Board of Directors on the Business Condition of the Company (continued)
1. Brief Description of the Company and its Business Environment (continued)
e) Electricity Rate (continued)
3) Comparison between the Rate and the Expenses of the Company for the Period January June 2013,
In Millions NIS, at June 2014 NIS (continued)
Notes:
1. For the transmission and distribution segments, the Electricity Authority applies reduction
coefficients to all components of the income and does not specify the specific component as to
which the Company should become more efficient.
It was assumed, for the calculation, that the reduction coefficient is at an equal rate to all income
components in these segments. However, it is not certain that the Electricity Authority interprets
the application of the reduction coefficients to all components of the recognized costs in a similar
way to the Company (equal rate).
2. In determining the rate, the Authority recognized some of the expense items not by the
classifications recorded in the Financial Statements. This table includes adjustments to both the
revenues and expenses of the items which the Electricity Authority recognized in a differentclassification than that recorded in the Financial Statements of the Company, to obtain an
adequate comparison between the income and expenses of the Company.
3. The Companys income was calculated based on the average rate, according to net generation for
the generation segment which is received from the generation division, and in accordance with the
electricity consumers consumptions for the rest of the segments which are obtained from the
Statistics and Market Research Department of the Company.
The Main Explanations for the Gaps according to Components are detailed below:
(a) Fuel
The gaps in fuel are due to the following:
(1) A gap in quantities deriving from the normative recognition of the Electricity Authority, whichdiffers from the actual performance of the Company.
(2) A gap in the recognized prices of fuels, which may derive, inter alia, from recognition of
marginal fuels prices, while fuels costs are recorded in the expense column at average costs.
(b) Operation
Gaps in the operation component derive mainly from non-recognition of the full renovation costs
of power stations and the continuous delay in updating the base rate of the transmission and
distribution segments.
(c) Depreciation
The gaps in the depreciation component derive mainly from the prolonged delay in updating the
rates base for the transmission and distribution segments, amounting to hundreds of millions of
NIS each year.
In addition there are other non-recognized items, such as non-recognition of the full depreciation
expenses with respect to spare parts inventory etc.
(d) Financing Expenses
The gap in the financing costs derives from the non-recognition of the Companys fixed assets and
this gap is partially offset as a result of a decrease in the financing expenses that mainly arise from
the transition from financing expenses to income as a result of changes between the known index
and the index in lieu and the erosion of unlinked NIS loans.
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THE ISRAEL ELECTRIC CORPORATION LIMITED
BOARD OF DIRECTORS' REPORT
ON THE STATUS OF THE COMPANY'S AFFAIRS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014
3
a. Explanations of the Board of Directors on the Business Condition of the Company (continued)
2. Financial Position
Data on the Company's financial position on June 30, 2014 and December 31, 2013 are as follows:
NIS in millions, in June 2014 NIS
June 30, 2014
December 31,
2013
Increase
(decrease)
Percent
% Note No.
CURRENT ASSETS
Cash and cash equivalents............................... 2,356 3,401 (1,045) (31%) a)1)
Short term investments................................... 414 493 (79) (16%) a)2)
Trade receivables for sales of electricity............ 4,201 4,345 (144) (3%) a)3)
Accounts receivable........................................ 778 377 401 106% a)4)
Inventoryfuel............................................... 1,104 1,067 37 3% a)5)
Inventorystores........................................... 141 144 (3) (2%)
Regulatory assets, net.....................................
2,370 2,972 (602) (20%) a)6)
11,364 12,799 (1,435) (11%)
NON-CURRENT ASSETS
Inventory - fuel............................................... 1,614 1,736 (122) (7%) a)5)
Long-term receivables .................................... 1,248 1,178 70 6%
Investment in associate................................... 96 98 (2) (2%)
Regulatory assets ........................................... - 696 (696) (100%) a)6)
Assets with respect to benefits after
employment termination:
Excess pension plan assets over pension liability 1,040 2,020 (980) (49%) c)
Funds in trust.................................................. 1,860 1,728 132 8%
2,900 3,748 (848) (23%)
Fixed assets, net:
Fixed assets in use, net.................................... 58,540 58,646 (106) - d)
Fixed assets under construction....................... 5,989 6,075 (86) (1%)
64,529 64,721 (192) -
Intangible assets, net...................................... 976 948 28 3%
Total debit......................................................
82,727 85,924 (3,197) (4%)
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THE ISRAEL ELECTRIC CORPORATION LIMITED
BOARD OF DIRECTORS' REPORT
ON THE STATUS OF THE COMPANY'S AFFAIRS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014
4
a. Explanations of the Board of Directors on the Business Condition of the Company (continued)
2. Financial Position (continued)
Data on the Company's financial condition on June 30, 2014 and December 31, 2013 are as follows: (continued)
NIS in millions, in June 2014 NIS
June 30, 2014
December 31,
2013
Increase
(decrease)
Percent
% Note No.
CURRENT LIABILITIES
Credit from banks and other credit providers..... 9,136 7,118 2,018 28% e)1)
Trade payables ................................................ 1,542 1,726 (184) (11%) e)2)
Accounts payable and accruals.......................... 1,632 1,742 (110) (6%)
Customer advances, net of work in progress...... 390 398 (8) (2%)
Provisions........................................................ 748 730 18 2%
13,448 11,714 1,734 15%
NON CURRENT LIABILITIES
Debentures...................................................... 31,204 32,770 (1,566) (5%) f)
Liabilities to banks............................................ 6,668 8,572 (1,904) (22%)
Liabilities with respect to other benefits after
employment termination..................................
3,192 2,924 268 9%
Regulatory liabilities ........................................ 2,355 1,397 958 69% a)6)
Provision for refunding amounts to consumers.. 2,623 2,565 58 2%
Deferred taxes, net .......................................... 4,424 5,088 (664) (13%)
Debentures to the State of Israel....................... 2,532 2,536 (4) -
Liabilities to the State of Israel.......................... 2,699 2,856 (157) (5%)
Other liabilities................................................ 638 691 (53) (8%)
56,335 59,399 (3,064) (5%)
SHAREHOLDERS EQUITY
Share capital.................................................... 1,137 1,137 - -
Capital reserves................................................ 1,030 1,030 - -
Capital remeasurement reserve........................ (1,764) (1,025) (739) 72%
Retained earnings............................................ 12,541 13,669 (1,128) (8%)
12,944 14,811 (1,867) (13%)
Total credit 82,727 85,924 (3,197) (4%)
The following are explanations of the financial data of the Company, as detailed in the tables above, to June
30, 2014 compared to December 31, 2013 at Company level and according to segments of operation (for
information of the sectorial reporting of the Company see Note 11 to the Financial Statements).
a) Current Assets
1) Cash and Cash Equivalents
The decrease in cash arises from the decision of the Board of Directors of the Company regarding the
balance of cash on hand. See section a.1.c)2)(d) above.
2) Short Term Investments
The decrease in short term investments arises from withdrawals from the dedicated bank account
with respect to stage B of the emergency plan.
For details, see Note 14j to the Annual Financial Statements.
3) Customers
For details of the balance and developments of the Palestinian Authority and the East Jerusalem
Electricity Company see Note 4 b to the Financial Statements.
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THE ISRAEL ELECTRIC CORPORATION LIMITED
BOARD OF DIRECTORS' REPORT
ON THE STATUS OF THE COMPANY'S AFFAIRS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014
5
a. Explanations of the Board of Directors on the Business Condition of the Company (continued)
2. Financial Position (continued)
a) Current Assets (continued)
4) Accounts ReceivableThe increase mainly derives from an increase in prepaid expenses with respect to vehicle insurance,
employee benefits and municipal tax, as well as from the deposits with respect to hedging
transactions and from various receivables.
5) InventoryFuels
The decrease in fuels inventory (current and non-current) mainly derives from a decrease in the coal
inventory that is partially offset by an increase in liquid gas inventory.
The fuels inventory presented in the current assets reflects the Company forecast for fuels use in the
period of July 2014 - June 2015. The remainder of the fuels inventory, which will serve the Company
for the period of July 2014 - June 2015 according to its forecast, is presented in the non-current assets
item.
6) Regulatory Assets / Liabilities
For details regarding regulatory assets/liabilities and the changes in them during the reporting period
see note 5 to the Financial Statements.
(a)
Fulfillment of FAS 71 Directives
The Company periodically examines the situation of the electricity industry and the regulatory
directives in Israel in order to determine whether it is continuing to fulfill the conditions of RE6.
The Company's position is that it complies with the application conditions of RE6. For more details,
see Section a2a5 in the Board of Directors report for the year ended December 31, 2013.
(b) Regulatory assets
The decrease in regulatory assets balance, net (presented in the current assets and non-current
assets and in the long term liabilities) in the amount of NIS 2,256 million is mainly due to:
A decrease in the fuels regulatory asset in the amount of approximately NIS 2,834 million with
respect to:
(1) continued collection of the 2012 fuels debt asset (the gas crisis that started in 2011 and
caused high fuels costs in 2012) from the consumers starting from May 2013 according to
the decision of the Authority of May 6, 2013, regarding the update of the spread of the
rate increase.(2) excess collection with respect to fuels during the period of January - June 2014, since the
collection in this year is based on the fuels basket determined in May 2013, which is
higher than the final fuels basket expected to be recognized by the Authority for 2014
(see Note 5h to the Financial Statements).
An increase in regulatory assets in the amount of approximately NIS 201 million deriving from a
reduction in liability for repayment of debt to consumers for financing Stage B of the
Emergency Plan (see Note 5i to the Financial Statements).
An increase in regulatory asset in the amount of approximately NIS 176 million deriving from
the decrease of liability with respect to the hedging mechanism (see Note 5c to the Financial
Statements).
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THE ISRAEL ELECTRIC CORPORATION LIMITED
BOARD OF DIRECTORS' REPORT
ON THE STATUS OF THE COMPANY'S AFFAIRS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014
6
a. Explanations of the Board of Directors on the Business Condition of the Company (continued)
2. Financial Position (continued)
a) Current Assets (continued)
6) Regulatory Assets / Liabilities (continued)
(b) Regulatory assets (continued)
An increase in regulatory asset in the amount of NIS 139 million due to cover of fixed operation
costs recognized in the generation segment following the entry of private producers (see Note
5k to the Financial Statements).
An increase in a regulatory compensation asset due to delay in continuous update of the rate
(without the fuel component) in the amount of approximately NIS 121 million (see Note 5d to
the Financial Statements).
A decrease in regulatory asset due to purchase of electricity from private electricity producers
and photo voltaic installations and arrangements to manage the load in the amount of NIS 58
million due to the excess collection during the period of January - June 2014 since the collectionin this year is based on the advances with respect to purchase of electricity that were given
within the rate in accordance with the data known at the beginning of the year 2013 and that
were higher than the actual purchase of electricity in the period January - June 2014 (see Note
5f to the Financial Statements).
An increase in regulatory asset for needy populations in the amount of approximately NIS 46
million (see Note 5e to the Financial Statements).
Following are details of the current assets according to electricity chain segments:
- Generation segment- NIS 7,460 million, mainly deriving from customer receivables with respect to
electricity sales in the amount of approximately NIS 3,272 million (this section is attributed tosegments according to income ratio), fuels inventory (attributed in full to the generation segment) in
the amount
Recommended