2014-06-30 the israel electric corporation ltd., financial reports (english)

8/10/2019 2014-06-30 The Israel Electric Corporation Ltd., Financial Reports (English)

1/274

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


2/274

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


3/274


4/274

3

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)


5/274

4

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


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.


6/274

5

2.2.4 Section 7.4.3.4: Competition - Producers Owning production Licenses


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.


7/274

6

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%


8/274

7

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.


9/274

8

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


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.


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


10/274

9

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.


11/274

01

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.


12/274

00

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


13/274

0

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


14/274

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


15/274

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.


16/274

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.


17/274





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


18/274





5



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.


19/274





6




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


20/274





7




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


21/274





8





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%.


22/274





9





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.


23/274





1



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.


24/274







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.


25/274





2



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.


26/274





3


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%)


27/274





4


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.


28/274





5



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).


29/274





6



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

2014-06-30 the israel electric corporation ltd., financial reports (english)

Documents