PMdesigners PAZ OIL COMPANY LTD. Second Quarter 2015 Financial Results
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PAZ OIL COMPANY PAZ OIL COMPANY LTD. Euro Park, Holland Building Second Quarter 2015 Yakum 6097200, Israel Financial Results www.paz.co.il WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f
Disclaimer This document is a convenience translation from the Hebrew original of the separate financial data dated June 30, 2015 (the "Statements") issued by Paz Oil Company Ltd. (the "Company"). Only the Hebrew original of the Statements is legally binding. No reliance may by placed for any purpose whatsoever on the completeness, accuracy or fairness of information contained in this document. No warranty or representation, express or implied, is made or given by or on behalf of the Company or any of its directors, officers or employees or any other person as to the accuracy, completeness or fairness of the information contained in this document and no responsibility or liability is accepted by any person for such information.
WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. Table of Contents
A Director’s Report on the State of the Company’s Affairs B Major Changes and Developments in the Description of the Company’s Business C Condensed Consolidated Interim Financial Statement WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f A Director’s Report on the State of the Company’s Affairs
WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
Report of the Board of Directors on the State of Affairs of the Corporation for the Period of Six Months ended June 30, 2015
We are pleased to present the report of the Board of Directors of Paz Oil Company Ltd. ("Paz" or "the Company") and the consolidation of the Group companies ("the Paz Group" or "the Group") for the period of six months ended June 30, 2015 ("the Reporting Period"), prepared in accordance with the Israeli Securities Regulations (Periodic and Immediate Reports), 1970. Part One - Explanations of the Board of Directors regarding the Business Affairs of the Corporation
1. The corporation and its business environment
1.1 For details of the Company's organizational structure, see paragraph 1.1.1 to the Chapter of the Description of the Company's Business to the Periodic Report for 2014 ("the Periodic Report").
1.2 The global geopolitical and security situation has a direct and material impact on the economic situation, the import of crude oil into Israel, global prices of oil and oil distillates and the refining margins.
The first half of 2015 was primarily characterized by the oversupply of crude oil which was expressed by low prices. The dramatic drop in prices began in the second half of 2014 with one of the main reasons for the excess of supply being, as the Company estimates, OPEC's decision not to modify the quantity of production of crude oil barrels along with the increasing production capabilities of oil and related products from oil shale deposits in the United States. The excess supply and the drop in oil price led to a change in the market structure (from backwardation to contango) and improved refining margins in the immediate term. Despite a certain drop in the number of active oil wells in the U.S. and an increase in global consumption, the excess supply continued due to record oil outputs in Saudi Arabia and Russia as well as enhanced production in Iraq and Libya- while in the backdrop, oil barrels from Iran are expected to enter the market following the recent Iran nuclear deal.
The average price of Brent oil in H1 2015 was approximately $ 58 a barrel. The maximum price was approximately $ 67 a barrel whereas the minimum price was about $ 45 a barrel. At the end of the second quarter of 2015, the price per barrel was approximately $ 61 a barrel. July 2015 presented a downward trend in the price per barrel and near the Report's publication date (August 18, 2015), the price of Brent oil was approximately $ 47 a barrel. As mentioned above, this decline in price is attributed to the high levels of oil supply arising from OPEC's continued record oil production despite the level of demand remaining relatively high.
The world's leading international energy consulting firms predict a continuation of the trend of low oil prices with a forecasted average oil price ranging between $ 51 and $ 54 per barrel in the third quarter of 2015, with this trend lasting at least until the end of 2016.
The information regarding such evaluations, projections and expectations represents forward-looking information, as this term is defined in the Israeli Securities Law, and may not materialize or may materialize in a considerably different manner.
For additional data regarding the prices per barrel of Brent oil and the refining margin per barrel, see paragraph 3.3.4 below. As for impairment of inventories, see paragraph 3.3.6 below.
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The constant political and security threats which Israel faces are liable to expose the Company to potential risks such as trading restrictions, commercial sanctions (by entities operating abroad), difficulties in the purchase and supply of crude oil, difficulties in the production and supply of oil distillates (including shutdown caused by emergency situations), damage caused by hostile acts to the Company's facilities (in Haifa and Ashdod Refinery) and/or the import ports and/or airports and/or the crude oil storage tanks used by the Group for import and/or storage of crude oil and oil distillates and a decline in the number of incoming flights into Israel and in domestic flights.
1.3 The Company is contending with the impact of the economic events in Israel and abroad from a position of business and financial strength, which is reflected in most of its activities:
1.3.1 The variety of the Company's activities in the areas of energy, industry and services, and the natural vertical synergy of all of Paz's value and supply chain, from the import, refining and distribution of crude oil and the production and sale of electricity by the Refining and Logistics Division ("the Refining Division" or "Paz-Refining" or "the Refining Segment") through the marketing of oil distillates by the Retail and Wholesale Division ("the R&W Division" or "Paz-R&W" or "the R&W Segment") and the Industries and Services Division ("the Industries Division" or "Paz- Industries" or "the Industries Segment"), while taking into account the consolidated profitability of the Group, spread out the risks of the Company and provide it a position of relative advantage.
1.3.2 The high level of complexity of the Ashdod Refinery ("the Ashdod Refinery") that is operated by Paz Ashdod together with the improvements that were made in it in the last few years, including the construction of new plants in 2011 and 2012 and the cogeneration power stations all enable Paz Ashdod's increased production capacity, the manufacture of an optimal product mix that tends toward light distillates (gasoline and naphtha) and intermediate distillates, marketing distillates to various markets, expanding Paz Ashdod's operational flexibility and saving raw material costs. All these may reduce the negative impact on the profitability of the Company at times of low margins around the world. See additional information of Paz Ashdod's facilities including the second power station in paragraphs 5.11.12 and 5.16 to the Periodic Report.
A refinery's ability to manufacture high added value oil products by using complex refining facilities is measured based on the Nelson Complexity Index (NCI). The higher the index the better the refinery's ability to manufacture higher added value oil products and/or distill types of lower quality crude oil. Paz Ashdod's Refinery's NCI is 9.5 (the NCI in the Mediterranean Basin refineries ranges between 3 and 18.8).
1.3.3 The Company acts in conformity with the financial policies established by the Company's Board according to market terms in order to create hedges against market exposures, including currency, interest, linkage, commodity, inventory and refining margin related risks. However, the risk from changes in the prices of crude oil and of oil distillates cannot be fully hedged. See further details in paragraph 3.3.2 below, Note 7 to the financial statements for the second quarter of 2015 and Note 30 to the financial statements for 2014.
1.3.4 The Company's financial policy is also reflected in its debt structure. The Company has no major debts to financial institutions other than to holders of debentures which mature before 2019.
The Group's average nominal adjusted interest rate in respect of financial liabilities in the Reporting Period is about 2.0%.
1.3.5 The Company has adopted certain streamlining and optimization steps to reduce its costs and retain its working capital level.
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1.3.6 The Company is taking steps to dispose of real estate properties that are not at the core of its business and might yield the Company capital gains. In January 2015, the Company signed agreements for the sale of real estate in the Pi-Glilot complex and for the sale of its interests in Pi- Glilot Petroleum Terminals and Pipelines Ltd. ("Pi-Glilot") which are likely to yield pre-tax capital gains in an aggregate of approximately NIS 112 million. In Q2 2015, the Company recognized a capital gain of approximately NIS 27 million (before tax) from the sale of the real estate in the Pi- Glilot complex, out of total capital gains of approximately NIS 112 million. See additional information in paragraph 3.11.2 to the Periodic Report.
The information included in this section regarding the Company's expected capital gains represents forward-looking information, as defined in the Securities Law, based on the Company's evaluations. There is no certainty that the Company's expectations will be realized, among others, due to the buyer's noncompliance with the terms of the agreement for the sale of the shares and/or the non- fulfillment of any suspending conditions in the share transaction.
2. Significant events during and after the Reporting Period
2.1 On June 24, 2015, the Company declared the distribution of a dividend to its shareholders in the amount of NIS 250 million, representing approximately NIS 24.633 per share. The dividend was paid to the Company's shareholders on July 20, 2015.
2.2 See additional information about material events in the Reporting Period in Note 6 to the financial statements.
3. Operating results
3.1 Following are condensed consolidated statements of income for accounting purposes and on an adjusted basis (adjusted for certain effects as defined in paragraphs 3.3.2 and 3.5-3.10 below, so as to present the current income of the Group without the aforesaid effects ("the adjusted income")):
3.1.1 Condensed reported statement of income (NIS in millions):
Total for the period Total 1-6/2015 Q2/2015 Q1/2015 2014 Q4/2014 Q3/2014 Q2/2014 Q1/2014 Total 2013 Net sales 6,799 3,581 3,218 18,516 4,394 4,706 4,577 4,836 19,635 Cost of sales 5,684 3,060 2,624 16,695 3,952 4,106 4,242 4,395 18,214 Gross profit 1,115 521 594 1,818 442 600 335 441 1,421 Selling and marketing expenses 480 244 236 977 253 240 241 243 982 General and administrative expenses 101 56 45 179 42 44 41 52 202 Other expenses (income), net (14) (14) -(18) (11) (1) 6 (12) (17) Operating income 548 235 313 680 158 317 47 158 254 Net financial expenses (income) 4 (67) 71 430 151 223 10 46 51 Share of earnings of investees ------1 Income before income tax 544 302 242 250 7 94 37 112 204 Income tax expense (income) 110 59 51 77 13 26 8 30 91 Net income 434 243 191 173 (6) 68 29 82 113 Attributable to equity holders of the Company 433 243 190 172 (7) 67 29 83 110 Attributable to minority interests 1 - 1 1 1 1 - (1) 3
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3.1.2 Condensed reported interim operating income (loss) according to operating segments (NIS in millions):
Total for the period Total Total 1-6/2015 Q2/2015 Q1/2015 2014 Q4/2014 Q3/2014 Q2/2014 Q1/2014 2013 Paz-R&W 185 102 83 397 109 102 101 85 391 Paz-Industries 111 41 70 178 47 34 36 61 164 Paz-Refining 298 112 186 212 32 203 (63) 40 (201) Unallocated (46) (20) (26) (107) (30) (22) (27) (28) (100) Total reported operating income 548 235 313 680 158 317 47 158 254 Total reported EBITDA 746 334 412 1,083 261 418 146 258 642 Total reported net income attributable to equity holders of the Company 433 243 190 172 (7) 67 29 83 110
3.1.3 Condensed reported interim gross profit (loss) according to operating segments (NIS in millions):
Total for the period Total Total 1-6/2015 Q2/2015 Q1/2015 2014 Q4/2014 Q3/2014 Q2/2014 Q1/2014 2013 Paz-R&W 532 276 256 1,082 263 283 282 254 1,118 Paz-Industries 249 111 138 453 118 100 103 132 444 Paz-Refining 335 135 200 292 64 219 (48) 57 (134) Intercompany transactions (1) (1) -(9) (3) (2) (2) (2) (7) Total reported gross profit 1,115 521 594 1,818 442 600 335 441 1,421
3.1.4 Condensed adjusted statement of income (NIS in millions):
Total for the period Total Total 1-6/2015 Q2/2015 Q1/2015 2014 Q4/2014 Q3/2014 Q2/2014 Q1/2014 2013 Net sales 6,799 3,581 3,218 18,513 4,394 4,706 4,577 4,836 19,635 Cost of sales 5,669 3,020 2,649 16,744 3,894 4,255 4,154 4,441 17,953 Adjusted gross profit 1,130 561 569 1,769 500 451 423 3951,682 Selling and marketing expenses 480 244 236 977 253 240 241 243 982 General and administrative expenses 101 56 45 179 42 44 41 52 202 Other expenses (income), net (14) (14) -(18) (11) (1) 6 (12) (17) Adjusted operating income 563 275 288 631 216 168 135 112 515 Adjusted financial expenses, net 125 54 71 141 34 34 36 37 155 Share of earnings of investees ------1 Adjusted income before income tax 438 221 217490 182 134 99 75361 Adjusted income tax expense 95 46 49 113 39 32 19 23 87 Adjusted net income 343 175 168 377 143 102 80 52 274 Attributable to equity holders of the Company 342 175 167 376 142 101 80 (53 271 Attributable to non-controlling interests 1 - 1 1 1 1 - (1) 3
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3.1.5 Condensed adjusted interim operating income (loss) according to operating segments (NIS in millions):
Total for the period Total Total 1-6/2015 Q2/2015 Q1/2015 2014 Q4/2014 Q3/2014 Q2/2014 Q1/2014 2013 Paz-R&W 185 102 83 397 109 102 101 85 391 Paz-Industries 111 41 70 178 47 34 36 61 164 Paz-Refining 313 152 161 163 90 54 25 (6) 60 Unallocated (46) (20) (26) (107) (30) (22) (27) (28) (100) Total adjusted operating income 563 275 288 631 216 168 135 112 515 Total adjusted EBITDA 761 374 387 1,034 319 269 234 212 903 Total adjusted net income attributable to equity holders of the Company 342 175 167 376 142 101 80 53 271
3.1.6 Condensed adjusted interim gross profit (loss) according to operating segments (NIS in millions):
Total for the period Total Total 1-6/2015 Q2/2015 Q1/2015 2014 Q4/2014 Q3/2014 Q2/2014 Q1/2014 2013 Paz-R&W 532 276 256 1,082 263 283 282 254 1,118 Paz-Industries 249 111 138 453 118 100 103 132 444 Paz-Refining 350 175 175 243 122 70 40 11 127 Intercompany transactions (1) (1) -(9) (3) (2) (2) (2) (7) Total adjusted gross profit 1,130 561 569 1,769 500 451 423 395 1,682
3.2 Revenues from sales and services
3.2.1 Sales less government levies ("net sales") in Q2 2015 amounted to approximately NIS 6,799 million, compared with approximately NIS 9,413 million in Q2 2014, a decrease of approximately NIS 2,614 million or about 28%.
Net sales in Q2 2015 amounted to approximately NIS 3,581 million, compared with approximately NIS 4,577 million in Q2 2014, a decrease of approximately NIS 996 million or about 22%.
The decrease in sales arises mainly from the drop in prices of oil and oil distillates in the Reporting Periods compared to the corresponding periods of last year. See more details in paragraphs 3.2.2.- 3.2.4 below.
3.2.2 Net sales of Paz-R&W in Q2 2015 amounted to approximately NIS 3,568 million, compared with approximately NIS 5,007 million in Q2 2014, a decrease of approximately NIS 1,439 million or about 29%.
Net sales of Paz-R&W in Q2 2015 amounted to approximately NIS 1,887 million, compared with approximately NIS 2,513 million in Q2 2014, a decrease of approximately NIS 626 million or about 25%.
The main decrease in Paz-R&W net sales in the Reporting Periods compared to the corresponding periods of last year arises from the decrease in the prices of fuels.
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The sales turnover of the Yellow convenience stores (including sales through concessionaires) in the Reporting Period amounted to approximately NIS 356 million, an increase of about 2% compared with the corresponding period of 2014.
3.2.3 Net sales of Paz-Industries in H1 2015 amounted to approximately NIS 810 million, compared with approximately NIS 931 million in H1 2014, a decrease of approximately NIS 121 million or about 13%.
Net sales of Paz-Industries in Q2 2015 amounted to approximately NIS 362 million, compared with approximately NIS 417 million in Q2 2014, a decrease of approximately NIS 55 million or about 13%.
The decrease in net sales of Paz-Industries in the Reporting Periods compared to the corresponding periods of last year is mainly due to the decrease in prices of oil products.
3.2.4 Net sales of Paz-Refining in H1 2015 amounted to approximately NIS 5,231 million compared with approximately NIS 7,689 million in H1 2014, a decrease of approximately NIS 2,458 million or about 32%.
Net sales of Paz-Refining in Q2 2015 amounted to approximately NIS 2,815 million, compared with approximately NIS 3,750 million in Q2 2014, a decrease of approximately NIS 935 million or about 25%.
The decrease in net sales of Paz-Refining arises from the decrease in prices of fuels.
3.3 Gross profit
3.3.1 Reported gross profit in H1 2015 amounted to approximately NIS 1,115 million, compared with approximately NIS 776 million in H1 2014, an increase of approximately NIS 339 million or about 44%.
Gross profit in Q2 2015 amounted to approximately NIS 521 million, compared with approximately NIS 335 million in Q2 2014, an increase of approximately NIS 186 million or about 56%.
The increase in reported gross profit in the Reporting Periods compared to the corresponding periods of last year is mainly due to the increase in the profits of Paz-Refining.
3.3.2 Adjusted gross profit in H1 2015 amounted to approximately NIS 1,130 million, compared with approximately NIS 818 million in H1 2014, an increase of approximately NIS 312 million or about 38%.
Adjusted gross profit in Q2 2015 amounted to approximately NIS 561 million, compared with approximately NIS 423 million in Q2 2014, an increase of approximately NIS 138 million or about 33%.
The increase in adjusted gross profit in the Reporting Periods compared to the corresponding periods of last year is mainly a result of the increase in the profits of Paz-Refining.
Adjusted gross profit is the profit after neutralizing the following effects: the effects of the economic hedge on crude oil price component before timing differences between the date of purchase of crude oil and the date of sale of the products, unhedged inventory losses/gains, provision for impairment of inventory and the effect of the classification of exchange rate differences on credit to finance inventory. These effects are detailed in paragraph 3.5.5 below ("certain effects").
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The Company has a policy of holding unhedged inventories at a scope that does not exceed 250 thousand tons but not more than US$ 300 million. The Company manages the unhedged inventories using a flexible approach based on market terms and forecasts of price fluctuations. See more details of the Company's inventory hedging policy in Note 30.4.3.2 to the financial statements as of December 31, 2014.
As of the financial statement date, the Company has unhedged inventories at a scope of about 90 thousand tons (excluding self-consumption and loss).
In Q2 and H1 2015, the Company recorded gains on unhedged inventories of approximately NIS 16 million and NIS 3 million, respectively.
As of the date of approval of the financial statements, the Company has unhedged inventories at a scope of about 90 thousand tons (excluding self-consumption and loss). The change in the prices of crude oil and related products affects the Company's financial statements.
If the current prices per barrel remain the same as on the date of publication of the financial statements, the Company will record an impairment loss in respect of inventories in the third quarter of 2015 which will be neutralized in the adjusted report presented in the Report of the Board of Directors.
From the end of 2012 through the end of the second quarter of 2014, Paz Ashdod fully hedged the value of the crude oil component in inventory (excluding self-consumption and loss). During the majority of this period, the oil market was in a state of backwardation (where the current price per crude oil barrel (Ice Brent) is higher than the future price). In addition, during most of said period, the physical oil price (Dtd Brent) was higher than the derivative price used in the hedge (Ice Brent). When fully hedging inventories, the Company examines the expense or income for irregular effects that do not reflect its business results and therefore neutralizes these effects from the adjusted financial statements in order to reflect the real economic activity in the Refining Segment.
When the market is in a state of backwardation, losses are incurred on the Company's hedges of the timing differences between the date of purchase of crude oil and the date of sale of the products based on the market curve. These losses arise from the market situation and not as a result of the Company's normal operating course of business. When the Company chooses a fully hedged policy, the method of reducing the aforementioned losses from the market structure is by reducing the inventory levels, to the extent possible under certain operating limitations.
Starting from the third quarter of 2014, there have been several significant changes in the business environment such as a sharp decline in the price of oil per barrel, a drop in prices of crude oil premiums, the transition of the market to contango (when the current price per crude oil barrel (Ice Brent) is lower than the future price), the physical oil price (Dtd Brent) being lower than the derivative price used in the hedge (Ice Brent) and the improvement in the indicative margins.
In light of these changes in its business environment, the Company is taking the appropriate business and economic steps to improve its performances for the period.
Therefore, in view of the decline in crude oil prices, the Company decided to increase its inventories and unhedged inventories (in the context of its policy of holding unhedged inventories discussed above).
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Accordingly, effective from the third quarter of 2014, the Company does not adjust the effects of the inventory hedging activity since the Company has unhedged inventories. If the Company holds unhedged inventories, it believes that the costs or income from the hedging activity should not be adjusted since it forms part of the Company's normal operating course of business. Adjustments of hedging costs are performed when inventories are fully hedged.
The effect of the hedges in Q2 and H1 2015 amounted to income of approximately NIS 67 million and NIS 117 million, respectively, a positive effect which was not neutralized from the financial results since the Company had unhedged inventories as opposed to hedging costs of approximately NIS 14 million incurred in Q2 2014 and approximately NIS 44 million in H1 2014 which were neutralized due to the inventory hedges (excluding self-consumption and loss).
3.3.3 Paz Ashdod's adjusted refining margin ("the margin")
The following table presents the margin and Paz Ashdod's financial costs for the Reporting Period and for the second quarter of 2015 compared with the corresponding periods of 2014. The margin includes the gap between the prices of the crude oil mix and the prices of the distillates, electricity and distribution, less consumption and loss. As customary, the margin does not include variable and other fixed expenses, energy expenses, depreciation and amortization and is also neutralized of the effects of hedges and curve structure when inventories are fully hedged (as explained in paragraph 3.3.2 above).
Cumulative Cumulative 1-6/2015 1-6/2014 Q2 2015 Q2 2014 Adjusted margin – dollar per ton 75.0 48.0 72 53 Adjusted margin – dollar per barrel 10.1 6.4 9.8 7.1 Adjusted financial costs * - dollar per barrel 1.5 0.6 1.6 0.6 Margin adjustments ** - dollar per barrel (0.2) 0.4 0.3 2.4
* According to the Group's average interest rate. ** See details of the adjustments in paragraph 3.5.5 below.
3.3.4 For the purpose of comparison to the business environment in which the Company operates, presented below are details of the average Ural margin, the average KBC margin (the Europe FCC+VB Brent margin published by KBC) ("Europe KBC/IEA margin") and the prices of Brent crude oil barrels in dollars. These margins, similarl to other margins being published, offer a relevant indication, but do not sufficiently reflect the new environment in which the Ashdod Refinery operates in terms of crude oil mix, composition of products and facility configuration.
Average Average Average Average 1-6/2015 1-6/2014 Q2 2015 Q2 2014 Europe KBC/IEA margin * per barrel (in dollars) 7.0 1.2 7.3 1.5 Ural margin per barrel ** (in dollars) * 5.4 0.4 4.9 0.4 Average price of crude oil barrel *** (in dollars) 58 109 62 110
* Source of data – KBC Energy Economics Report. ** Source of data – Reuters. *** Source of data – Platts.
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In addition, following is the average indicative margin of the products detailed below (the margin is derived from the prices of products and crude oil, as published by Platts) for the second quarter of 2015:
The product ($/barrel) Q2/2015 Q2/2014 Change in % Gasoline (Gasoline barges/ICE brent crk) 17.0 12.9 32% Diesel oil (ULSD Fob Med/ICE Brt crk) 15.8 14.9 6% Jet fuel (Jet CIF NEW/ICE Brt crk) 13.0 13.3 (2%) Fuel oil (F.01% Fob Med/ICE Brent crk) ()10.8) (9.3 (16%)
The margin on the products represents the gap between the consideration from the sale of the products and the cost of the raw materials excluding timing differences.
Following is the breakdown of the Ashdod Refinery's production outputs according to products (in thousands of tons):
H1 2015 % H1 2014 % Q2 2015 % Q2 2014 % Gasoline and naphtha 921 37% 876 37% 462 37% 426 36% Diesel oil 771 31% 720 30% 382 30% 355 30% Jet fuel and kerosene 284 11% 298 12% 145 12% 146 13% Fuel oil 431 17% 382 16% 220 17% 191 16% Other 97 4%109 5% 51 4%56 5% Total 2,504 100% 2,385 100% 1,260 100% 1,174 100%
3.3.5 Due to the volatility in the prices of crude oil in the Reporting Period, the Company recorded in the second quarter of 2015 expenses in the amount of approximately NIS 44 million in respect of hedges on the crude oil component, unrealized inventory as of the end of the second quarter of 2015, and in respect of the partial hedge of the refining margin, which all reduced the gross profit.
Such hedges are considered to be speculative for accounting purposes; due to their being economic hedges that are not recognized as accounting hedges.
In addition, in the second quarter of 2015, the Company recorded income in the amount of approximately NIS 9 million on the realization of the hedged inventory at the end of the first quarter of 2015, against which expenses in respect of hedges were recorded in the first quarter of 2015.
The effect of the unrealized inventory hedges in second quarter of 2015 amounted to expenses of approximately NIS 35 million, which reduced the gross profit.
In the first quarter of 2015, the Company recorded expenses in the amount of approximately NIS 76 million on the realization of the hedged inventory at the end of 2014, against which income in respect of hedges were recorded in the fourth quarter of 2014. The effect of the unrealized inventory hedges in H1 2015 amounted to expenses of approximately NIS 120 million, which reduced the gross profit
3.3.6 At the end of the second quarter of 2015, the Company recorded a provision for impairment of inventory to its net realizable value in the amount of approximately NIS 13 million. On the other hand, in the second quarter of 2015 the Company recorded income from the realization of inventory as it was at the end of the first quarter of 2015, in the amount of approximately NIS 17 million, against which expenses were recorded in the first quarter of 2015. The net effect of the provision for impairment on gross profit in the second quarter of 2015 resulted in income of approximately NIS 4 million.
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In the first quarter of 2015, the Company recorded income from the realization of inventory as it was at the end of 2014, in an amount of approximately NIS 123 million, against which expenses were recorded in the fourth quarter of 2014. The net effect of the provision for impairment on gross profit in H1 2015 resulted in income of approximately NIS 110 million.
3.3.7 The Company has a currency hedging policy on balances in the statement of financial position in foreign currency (in this respect inventory is considered mostly to be a dollar item). In H1 and Q2 2015, due to the decrease in the exchange rate of the dollar, the Company recorded financial income from exchange rate gains in an amount of approximately NIS 8 million and NIS 25 million, respectively, in respect of oil supplier balances and dollar liabilities for financing the realized inventory. In contrast, the gross profit in H1 and Q2 2015 decreased by similar amounts due to a higher cost of sales in NIS, which reflects the realization of inventory of crude oil purchased at higher exchange rates. See also paragraph 3.7.2 below and Note 30.4.2 to the financial statements as of December 31, 2014.
3.3.8 The adjusted gross profit margin (out of the Company's income) in H1 2015 was about 17%, compared with about 9% in H1 2014. The improvement in gross profit margin is mainly a result of the decline in oil prices and the improvement in the refining margin.
3.4 Expenses
Net operating expenses in H1 and Q2 2015 amounted to approximately NIS 567 million and NIS 286 million, respectively, compared with approximately NIS 571 million and NIS 288 million in the corresponding periods of 2014, respectively.
The main decrease in expenses arises from the increase in capital gains from the sale of assets as opposed to the corresponding period of last year, which was partly offset by the increase in the provisions for legal claims and in the allowance for doubtful accounts. Total non-recurring effects in the second quarter of 2015 amounted to income of approximately NIS 7 million.
3.5 Operating income
3.5.1 Consolidated
3.5.1.1 Reported operating income in H1 2015 amounted to approximately NIS 548 million, compared with approximately NIS 205 million in H1 2014, an increase of approximately NIS 343 million or about 167%.
Reported operating income in Q2 2015 amounted to approximately NIS 235 million, compared with approximately NIS 47 million in Q2 2014, an increase of approximately NIS 188 million or about 400%.
The increase in reported operating income in H1 and Q2 2015 as opposed to the corresponding periods of last year arises mainly from the increase in the gross profit of Paz-Refining.
3.5.1.2 After neutralizing the certain effects, as described in paragraph 3.3 above and in the table in paragraph 3.5.5 below, the adjusted operating income in H1 2015 amounted to approximately NIS 563 million, compared with approximately NIS 247 million in H1 2014, an increase of approximately NIS 316 million or about 128%.
Adjusted operating income in Q2 2015 amounted to approximately NIS 275 million, compared with approximately NIS 135 million in Q2 2014, an increase of approximately NIS 140 million or about 104%.
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The increase in the adjusted operating income in the Reporting Periods as opposed to the corresponding periods of last year derives mainly from the increase in the gross profit in Paz- Refining.
Following are details regarding the change in operating income according to operating segments:
3.5.2 Paz-R&W
The operating income of Paz-R&W amounted to approximately NIS 185 million in H1 2015 and approximately NIS 102 million in Q2 2015, with no significant change from the corresponding periods of last year.
3.5.3 Paz-Industries
The operating income of Paz-Industries in H1 2015 amounted to approximately NIS 111 million, compared with approximately NIS 97 million in H1 2014, an increase of approximately NIS 14 million or about 14%,.
The operating income of Paz-Industries in Q2 2015 amounted to approximately NIS 41 million, compared with approximately NIS 36 million in Q2 2014, an increase of approximately NIS 5 million or about 14%.
The increase in the operating income of Paz-Industries in the Reporting Periods compared with the corresponding periods of last year arises mainly from the profits of Pazgas owing to reduced cost of sales and increased quantities sold.
3.5.4 Paz-Refining
3.5.4.1 The reported operating income of Paz-Refining in H1 2015 amounted to approximately NIS 298 million, compared with reported operating loss of approximately NIS 23 million in H1 2014, an increase of approximately NIS 321 million arising mainly from the increase in the refining margin and the increase in the dollar exchange rate in relation to the NIS, see information in the table in paragraph 3.5.5 below.
The reported operating income of Paz-Refining in Q2 2015 amounted to approximately NIS 112 million, compared with a reported operating loss of approximately NIS 63 million in Q2 2014, an increase of approximately NIS 175 million arising mostly from the increase in the refining margin which was partly offset by the decrease in income from electricity due to the update in the electricity rates in the sector and the malfunction in the national power grid which occurred in June 2015 and which led to a sudden shutdown of the plant's operations. In the Company's estimate, the damages of the malfunction amount to several millions of NIS, some of which will be expressed in the third quarter of 2015.
See more information in the table in paragraph 3.5.5 below.
3.5.4.2 The adjusted operating income of Paz-Refining in H1 2015 amounted to approximately NIS 313 million, compared with adjusted operating income of approximately NIS 19 million in H1 2014, an increase of approximately NIS 294 million which arises mainly from the increase in the adjusted refining margin and the increase in the dollar exchange rate in relation to the NIS.
The adjusted operating income of Paz-Refining in Q2 2015 amounted to approximately NIS 152 million, compared with adjusted operating income of approximately NIS 25 million in Q2 2014, an increase of approximately NIS 127 million which arises mainly from the increase in the adjusted refining margin and the increase in the dollar exchange rate in relation to the NIS.
A-11 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
3.5.5 The following table presents the operating income in the Reporting Periods according to operating segments as compared with the corresponding periods of last year, adjusted for certain effects as explained below, in order to present the Group's current operating income without extraordinary influences ("the adjusted operating income").
The adjustments to operating income, broken down into the Company's operating segments, as detailed in the following table, allow an understanding of the Group's business results, less the effects detailed in the following table. The Company estimates that the income from the Group's business operations without such effects provides a better comparison of the business results of the Group in the Reporting Periods compared with the corresponding periods of last year and reflects the trends in ordinary operations without such effects.
Paz- Paz- Unallocated Paz-R&W Industries Refining expenses Total NIS in millions H1 2015 Reported operating income (loss) in H1 2015 185 111 298 (46 ) 548 Expenses (income) from timing differences in respect of inventory hedges (1) - - 120 - 120 Classification of financial income (expenses) in respect of inventory credit (2) - - 8 - 8 Expenses (income) from provision for impairment of inventory to net realizable value (3) - -(110 ) - (110) Losses (gains) of economically unhedged inventories (5) - -(3 ) - (3) Adjusted operating income (loss) in H1 2015 185 111 313 (46 ) 563 H1 2014 Reported operating income (loss) in H1 2014 186 97(23 ) (55) 205 Expenses (income) from timing differences in respect of inventory hedges (1) - -(10 ) - (10) Classification of financial income (expenses) in respect of inventory credit (2) - - 18 - 18 Expenses (income) from provision for impairment of inventory to net realizable value (3) - -(10 ) - (10) Effect of full inventory hedges (4) - - 44 - 44 Adjusted operating income (loss) for H1 2014 186 97 19 (55 ) 247
Paz- Paz- Unallocated Paz-R&W Industries Refining expenses Total NIS in millions Q2 2015 Reported operating income (loss) in Q2 2015 102 41 112 (20 ) 235 Expenses (income) from timing differences in respect of inventory hedges (1) - - 35 - 35 Classification of financial income (expenses) in respect of inventory credit (2) - - 25 - 25 Expenses (income) from provision for impairment of inventory to net realizable value (3) - -(4 ) - (4) Losses (gains) of economically unhedged inventories (5) - -(16 ) - (16) Adjusted operating income (loss) in Q2 2015 102 41 152 (20 ) 275 Q2 2014 Reported operating income (loss) in Q2 2014 101 36(63 ) (27) 47 Expenses (income) from timing differences in respect of inventory hedges (1) - - 64 - 64 Classification of financial income (expenses) in respect of inventory credit (2) - - 10 - 10 Effect of full inventory hedges (4) - - 14 - 14 Adjusted operating income (loss) for Q2 2014 101 36 25 (27 ) 135
A-12 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
(1) Expenses (income) deriving from hedging transactions on the prices of crude oil, classified as speculative in accordance with IFRS, as opposed to their classification as hedging transactions pursuant to generally accepted accounting principles in Israel, as if the economic hedges had been recognized as accounting hedges. The differences in accounting principles are expressed as timing differences.
(2) Exchange rate differences on liabilities in dollars used to finance inventory, which are included in financial expenses, with the difference in respect of exchange rate changes on the inventory carried to cost of sales.
(3) Provision for impairment of inventory to net realizable value at the end of the period.
(4) When the inventories are fully hedged, the gap between the market price per crude oil barrel for immediate delivery (spot) and its price in the future market (Ice Brent) (backwardation/contango) and the gap between the physical oil price (Dtd Brent) and the price of the hedging derivative (Ice Brent) are both neutralized. For explanations of the method of presentation of adjusted gross profit, including the change that is effected from the third quarter of 2014 regarding unhedged inventories and the adjustment of the hedging activity, see paragraph 3.3.2 above.
(5) Effects of change in crude oil prices and distillates in respect of unhedged inventory activity.
3.6 Operating income before depreciation and amortization (EBITDA)
3.6.1 The reported EBITDA in H1 2015 amounted to approximately NIS 746 million, compared with approximately NIS 404 million in H1 2014, an increase of approximately NIS 342 million or about 85%.
The reported EBITDA in Q2 2015 amounted to approximately NIS 334 million, compared with approximately NIS 146 million in Q2 2014, an increase of approximately NIS 188 million or about 129%.
3.6.2 After neutralizing the special effects, the adjusted EBITDA for H1 2015 amounted to approximately NIS 761 million, compared with approximately NIS 446 million in H1 2014, an increase of approximately NIS 315 million or about 71%.
The adjusted EBITDA in Q2 2015 amounted to approximately NIS 374 million, compared with approximately NIS 234 million in Q2 2014, an increase of approximately NIS 140 million or about 60%.
The increase in adjusted EBITDA in the Reporting Periods arises mainly from the increase in the operating income of the Refining Division, as explained above.
3.7 Financial expenses, net
3.7.1 Net financial expenses in H1 2015 amounted to approximately NIS 4 million, compared with net financial expenses of approximately NIS 56 million in H1 2014, a decrease of approximately NIS 52 million.
Net financial income in Q2 2015 amounted to approximately NIS 67 million, compared with net financial expenses of approximately NIS 10 million in Q2 2014, an increase of approximately NIS 77 million in financial income.
A-13 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
The decrease in financial expenses in the Reporting Periods compared with the corresponding periods of last year arises from the decrease in interest on debentures following the repayment of debentures (series A and B) at the end of 2014 and from exchange rate gains in respect of the dollar- NIS exchange rate.
In H1 2015, net exchange rate gains totaling approximately NIS 8 million were recorded on inventory realized during the Reporting Period against expenses in an amount that is equivalent to the gross profit. In H1 2014, net exchange rate gains were recorded in a total of approximately NIS 18 million.
In Q2 2015, the Company recorded net exchange rate gains of approximately NIS 25 million, on inventory realized during the period against expenses in an amount that is equivalent to the gross profit. In Q2 2014, net exchange rate gains were recorded in a total of approximately NIS 10 million.
In H1 2015, net exchange rate gains were recorded on unrealized inventory totaling approximately NIS 113 million compared with net exchange rate losses of approximately NIS 3 million in H1 2014.
In Q2 2015, net exchange rate gains were recorded on unrealized inventory in a total of approximately NIS 96 million compared with net exchange rate gains of approximately NIS 16 million in Q2 2014.
See more information in paragraph 3.3.7 above and in Note 30.4.2 to the financial statements as of December 31, 2014.
3.7.2 After neutralizing the financial items mentioned above and set out in the table in paragraph 3.7.4 below, the adjusted financial expenses in H1 2015 amounted to approximately NIS 125 million compared with approximately NIS 73 million in H1 2014, an increase of approximately NIS 52 million.
Adjusted financial expenses in Q2 2015 amounted to approximately NIS 54 million compared with approximately NIS 36 million in Q2 2014, an increase of approximately NIS 18 million.
The main increase in adjusted financial expenses in the Reporting Periods compared with the corresponding periods of 2014 is due to expenses in respect of dollar economic hedges realized in the Reporting Period and in Q2 2015 totaling approximately NIS 85 million and NIS 38 million, respectively. See details in Note 7.3 to the financial statements for the second quarter of 2015 and Note 30.4.2 to the financial statements as of December 31, 2014.
The increase in expenses in respect of dollar economic hedges was partly offset by the decrease in interest expenses in respect of debentures following the repayment of debentures (series A and B) at the end of 2014.
A-14 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
The following table presents the financial expenses for the Reporting Periods compared with the corresponding periods of last year, adjusted for certain effects as explained above. The Company estimates that the Group's financial expenses without such effects allow a better analysis of the financial expenses in the Reporting Periods compared with the corresponding periods of last year and expresses ordinary financial costs:
NIS in millions H1 2015 H1 2014 Difference Reported net financial expenses 456 (52) Income (expenses) from adjustment to fair value of debentures and IRS transactions according to IFRS 9 (1) -2 (2) Income (expenses) from exchange rate differences on unrealized inventory (2) 30 (3) 33 Income (expenses) from future foreign currency hedges (4) 83- 83 Classification of financial income (expenses) in respect of inventory credit (3) 818 (10) Adjusted financial expenses 125 73 52
NIS in millions Q2 2015 Q2 2014 Difference Reported net financial expenses (income) (67) 10 (77) Income (expenses) from exchange rate differences on unrealized inventory (2) 32 16 16 Income (expenses) from future foreign currency hedges (4) 64- 64 Classification of financial income (expenses) in respect of inventory credit (3) 25 10 15 Adjusted financial expenses 54 36 18
(1) Fair value differences on financial instruments (debentures) in respect of which interest rate swap transactions were executed and the hedging instrument (IRS), versus the accrual basis as would have been presented in accordance with generally accepted accounting principles. The differences between accounting principles are expressed as timing differences which were closed on the date of repayment of the debentures (series A and B) in October and November 2014.
(2) The neutralization of exchange rate differences on liabilities relating to unrealized inventory as of the statement of financial position date.
(3) Exchange rate differences on liabilities in dollars for financing inventory which are included in financial expenses whereby the difference in respect of the exchange rate differences on inventory is included in cost of sales.
(4) The neutralization of unrealized economic hedges on the dollar exchange rate. See details of dollar hedges performed by the Company in Note 30.4.2 to the financial statements as of December 31, 2014.
3.8 The Company's share of the results of investees
The Group's share of results of investees is immaterial.
A-15 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
3.9 Income tax
3.9.1 Income tax in H1 2015 amounted to a tax expense of approximately NIS 110 million, compared with a tax expense of approximately NIS 38 million in H1 2014, an increase of approximately NIS 72 million in tax expenses, arising mainly from an increase in pre-tax reported income.
Income tax in Q2 2015 amounted to a tax expense of approximately NIS 59 million, compared with a tax expense of approximately NIS 8 million in Q2 2014, an increase of approximately NIS 51 million in tax expense, arising mainly from an increase in pre-tax reported income.
The reported effective tax rate in H1 2015 was about 20%, compared with about 25% in H1 2014 due to the increase in the profit of Paz-Refining whose preferred enterprise benefits from a reduced tax rate.
3.9.2 After neutralizing the tax component in respect of the certain effects defined in paragraph 3.3.2 above, the adjusted tax expenses in H1 2015 amounted to approximately NIS 95 million compared with approximately NIS 42 million in H1 2014, an increase of approximately NIS 53 million, arising from an increase in pre-tax adjusted income.
Adjusted tax expenses in Q2 2015 amounted to approximately NIS 46 million compared with approximately NIS 19 million in Q2 2014, an increase of approximately NIS 27 million, arising from an increase in pre-tax adjusted income.
3.10 Net income
3.10.1 Reported net income (excluding non-controlling interests) in H1 2015 amounted to approximately NIS 433 million, compared with reported net income of approximately NIS 112 million in H1 2014, an increase of approximately NIS 321 million or 287%.
Reported net income (excluding non-controlling interests) in Q2 2015 amounted to approximately NIS 243 million, compared with reported net income of approximately NIS 29 million in Q2 2014, an increase of approximately NIS 214 million or 738%.
The increase in reported net income in the Reporting Periods compared with the corresponding periods of last year mainly derives from the increase in the profits of Paz-Refining.
3.10.2 After neutralizing certain effects, the adjusted net income in H1 2015 amounted to approximately NIS 342 million, compared with adjusted net income of approximately NIS 133 million in H1 2014, an increase of approximately NIS 209 million or 157%.
Adjusted net income in Q2 2015 amounted to approximately NIS 175 million, compared with adjusted net income of approximately NIS 80 million in Q2 2014, an increase of approximately NIS 95 million or 119%.
The increase in adjusted net income in the Reporting Periods compared with the corresponding periods of last year mainly derives from the increase in the profits of Paz-Refining.
A-16 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
The following table presents the net income (excluding non-controlling interests) in the Reporting Periods compared with the corresponding periods of last year, adjusted for certain effects, in order to present the current net income of the Group without extraordinary effects. The Company estimates that the Group's net income without such effects, as detailed in the following table, provides a better analysis of the Group's business results in the Reporting Periods compared with the corresponding periods of last year and gives expression to the trends underlying the Group's operating activities:
NIS millions (net of tax effect) H1 2015 H1 2014 Difference Net income in the statement of income 433 112 321 Expenses (income) from timing differences in respect of inventory hedges (1) 101 (9) Expenses (income) in respect of provision for impairment of inventory to net realizable value (4) (94) (7) Loss (gain) from adjustment to fair value of debentures and IRS transactions according to IFRS 9 (2) - (2) Expenses (income) from exchange rate differences on unrealized inventory (3) (25) 2 Income (expenses) from future foreign currency hedges (7) (70) - Effect of hedges (5) -37 Losses (gains) on economically unhedged inventory (6) (3) - Adjusted net income less the above effects 342 133 209
NIS millions (net of tax effect) Q2 2015 Q2 2014 Difference Net income in the statement of income 243 29 214 Expenses (income) from timing differences in respect of inventory hedges (1) 30 53 Expenses (income) in respect of provision for impairment of inventory to net realizable value (4) (3) - Loss (gain) from adjustment to fair value of debentures and IRS transactions according to IFRS 9 (2) -- Expenses (income) from exchange rate differences on unrealized inventory (3) (27) (14) Income (expenses) from future foreign currency hedges (7) (54) - Effect of hedges (5) -12 Losses (gains) on economically unhedged inventory (6) (14) - Adjusted net income less the above effects 175 80 95
Note: the tax effect on the adjustments in the Reporting Period was calculated mainly according to a tax rate of Paz Ashdod, which is 16%.
(1) Expenses (income) deriving from hedging transactions on the prices of crude oil, classified as speculative in accordance with IFRS, versus the classification as hedging transactions according to generally accepted accounting principles, as if the economic hedges were recognized as an accounting hedge.
(2) Fair value differences on financial instruments (debentures) in respect of which interest rate swap transactions were executed and the hedging instrument (IRS), versus the accrual basis as would have been presented in accordance with generally accepted accounting principles. The differences between the accounting principles are expressed as timing differences. See also paragraph 3.7.4, Note (1) above.
(3) The neutralization of exchange rate differences on liabilities relating to unrealized inventory as of the statement of financial position date.
A-17 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
(4) Provision for impairment of inventory to net realizable value at the end of the period.
(5) When the inventories are fully hedged, the gap between the market price per crude oil barrel for immediate delivery (spot) and its price in the future market (Ice Brent) (backwardation/contango) and the gap between the physical oil price (Dtd Brent) and the price of the hedging derivative (Ice Brent) are both neutralized. For explanations of the method of presentation of adjusted gross profit, including the change that is effected from the third quarter of 2014 regarding unhedged inventories and the adjustment of the hedging activity, see paragraph 3.3.2 above.
(6) Effects of change in crude oil prices and distillates in respect of unhedged inventory activity.
(7) The neutralization of unrealized economic hedges on the dollar exchange rate. See details of dollar hedges performed by the Company in Note 30.4.2 to the financial statements as of December 31, 2014.
4. Financial position
The Company's consolidated statement of financial position as of June 30, 2015 amounted to approximately NIS 10,612 million, compared with approximately NIS 10,486 million as of December 31, 2014.
4.1 Current assets
4.1.1 Total current assets as of June 30, 2015 amounted to approximately NIS 3,299 million, compared with approximately NIS 3,444 million as of December 31, 2014, a decrease of approximately NIS 145 million.
The decrease in current assets derives mainly from a decrease of approximately NIS 113 million in the balance of assets held for sale following the sale of an asset held for sale.
The balance of trade receivables as of June 30, 2015 amounts to approximately NIS 1,810 million, including balances of approximately NIS 350 million in respect of indirect taxes (VAT and excise duty) and balances of export customers which were repaid in early July 2015.
4.1.2 Total current assets as of June 30, 2015 constitute about 32% of the total statement of financial position, compared with about 33% as of December 31, 2014.
4.2 Non-current assets
4.2.1 Total non-current assets as of June 30, 2015 amounted to approximately NIS 6,997 million, compared with approximately NIS 7,042 million as of December 31, 2014, a decrease of approximately NIS 45 million. The decrease derives mainly from a decrease in the balance of fixed assets of approximately NIS 105 million due to excess current depreciation over investments in the period and a decrease in the balance of deferred tax assets totaling approximately NIS 29 million against an increase in long-term receivables of approximately NIS 102 million following the divestiture of assets in the Reporting Period.
4.2.2 Total non-current assets as of June 30, 2015 constitute about 68% of the total statement of financial position, similarly to about 67% of the total statement of financial position as of December 31, 2014.
A-18 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
4.3 Current liabilities
4.3.1 Current liabilities as of June 30, 2015 amounted to approximately NIS 2,867 million, compared with approximately NIS 3,226 million as of December 31, 2014, a decrease of approximately NIS 359 million. The decrease derives mainly from a decrease in the balance of trade payables of approximately NIS 768 million which was partly offset by the increase in a dividend payable in the amount of NIS 250 million, an increase in short-term loans and credit of approximately NIS 91 million and an increase in the balance of other accounts payable, liabilities in respect of taxes and provisions in a total of approximately NIS 68 million.
4.3.2 Current liabilities as of June 30, 2015 constitute about 28% of the total statement of financial position, compared with about 31% of the total statement of financial position as of December 31, 2014.
4.4 Working capital
Operating working capital (trade receivables and inventories less trade payables) as of June 30, 2015 amounted to approximately NIS 1,409 million, compared with approximately NIS 523 million as of December 31, 2014. The increase in working capital of approximately NIS 886 million derives mainly from the material decrease in the balance of trade payables due to the drop in oil prices.
The accounting working capital (current assets less current liabilities) as of June 30, 2015 amounted to approximately NIS 432 million, compared with approximately NIS 218 million as of December 31, 2014, an increase of approximately NIS 214 million.
4.5 Non-current liabilities
4.5.1 Non-current liabilities as of June 30, 2015 amounted to approximately NIS 4,232 million, compared with approximately NIS 4,241 million as of December 31, 2014, a decrease of approximately NIS 9 million, mainly in deferred tax liabilities.
4.5.2 Non-current liabilities as of June 30, 2015 constitute about 41% of the total statement of financial position, similar to the approximate 40% of the total statement of financial position as of December 31, 2014.
4.6 Equity
4.6.1 Equity attributable to equity holders of the Company as of June 30, 2015 amounted to approximately NIS 3,187 million, compared with approximately NIS 3,010 million as of December 31, 2014.
4.6.2 The increase in equity in the amount of approximately NIS 177 million derives mainly from the increase of approximately NIS 433 million to income in the Reporting Period less a dividend declared in the amount of NIS 250 million and less the repurchase of shares in the amount of approximately NIS 6 million. See details of the plan for the repurchase of shares in paragraph 15.2 below and in paragraph 1.3.2(b) to the Update to the Description of the Corporation's Business Affairs.
4.6.3 Total equity as of June 30, 2015 constitutes about 31% of the total statement of financial position, compared with about 29% of the total statement of financial position as of December 31, 2014.
A-19 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
5. Financing sources
5.1 The average scope of loans and debentures, net in H1 2015 amounted to approximately NIS 4.9 billion, compared with approximately NIS 5.1 billion in 2014, a decrease of approximately NIS 0.2 billion.
As of June 30, 2015, the scope of short-term bank credit (including current maturities) amounts to approximately NIS 0.3 billion.
The total cash flow debt (bank loans and debentures) as of June 30, 2015 is approximately NIS 4,185 million (excluding accrued interest). The total carrying amount of this debt amounts to approximately NIS 4,194 million. The difference mainly arises from premiums, accrued interest and expenses in respect of issuance of non-cash flow debentures.
The Group's net financial debt balance for accounting purposes, less cash balances (of approximately NIS 73 million) is approximately NIS 4,121 million as of the report date.
5.2 As of June 30, 2015 and the report date, the Company has non-binding credit facilities from financial institutions.
5.3 The average scope of customer credit in H1 2015 totaled approximately NIS 1.8 billion. The average scope of supplier credit in H1 2015 totaled approximately NIS 2.0 billion. A portion of the supplier credit bears market interest.
6. Liquidity
6.1 The current ratio as of June 30, 2015 was about 1.2, compared with about 1.1 as of December 31, 2014.
6.2 On April 1, 2015, S&P Maalot raised the rating of the Company (including the debentures of the Company and of Paz Ashdod) from ilA(+) to ilAA(-) with a stable outlook. See more details in the Company's immediate report of April 1, 2015 (TASE reference: 2015-01-071197).
6.3 Cash flows provided by operating activities in H1 2015 amounted to approximately NIS 43 million, compared with cash flows used in operating activities of approximately NIS 61 million in H1 2014.
Cash flows provided by operating activities in Q2 2015 amounted to approximately NIS 247 million, compared with cash flows provided by operating activities of approximately NIS 205 million in Q2 2014.
The main change in cash flows from operating activities in the Reporting Periods compared with the corresponding periods of 2014 is a result of the increase in income which was partly offset by the increase in working capital.
6.4 Cash flows used in investing activities in H1 2015 amounted to approximately NIS 29 million, compared with cash flows used in investing activities of approximately NIS 19 million in H1 2014.
Cash flows used in investing activities in Q2 2015 amounted to approximately NIS 11 million, with no significant change compared to the corresponding quarter of 2014.
A-20 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
6.5 Cash flows used in financing activities in H1 2015 amounted to approximately NIS 58 million, compared with cash flows provided by financing activities of approximately NIS 59 million in H1 2014, a decrease of approximately NIS 117 million mainly stemming from the issuance of debentures in Q2 2014 which was partly offset by the repayment of long-term loans and the payment of a dividend.
Cash flows used in financing activities in Q2 2015 amounted to approximately NIS 241 million, compared with cash flows provided by financing activities of approximately NIS 343 million in Q2 2014, a decrease of approximately NIS 584 million. The decrease mainly stems from the issuance of debentures in Q2 2014 which was partly offset by the repayment of long-term loans.
6.6 The balance of cash and cash equivalents as of June 30, 2015 amounted to approximately NIS 73 million, a decrease of approximately NIS 67 million compared with December 31, 2014.
7. Information on sensitivity of instruments to changes in market factors
There has been no change in the sensitivity analysis compared with the details provided in the Report of the Board of Directors as of December 31, 2014.
8. Remuneration of senior officers
8.1 For details of the approval of a restricted stock unit-based payment plan to senior officers (excluding directors) and other managers in the Company and the outline of the offering of securities issued by the Company, see paragraph 6.1.5.3 to the Update to the Description of the Corporation's Business Affairs.
8.2 For details of the approval of a bonus and salary increments to senior officers, see paragraph 6.1.6.2 to the Update to the Description of the Corporation's Business Affairs.
8.3 For details of the amendment of the employment terms of the Company's CEO, see paragraph 6.1.7 to the Update to the Description of the Corporation's Business Affairs.
Part Two – Exposure to and Management of Market Risks
9. Exposure to market risks
9.1 For details of the officers in the Company in charge of managing market risks and of the Company's risk management policy and exposure to market, credit and liquidity risks, see Note 30 to the financial statements for 2014. For details of the education, skills, business experience and other duties of the various officers in the Corporation that are in charge of the Group's risk management, as detailed in Note 30 to the financial statements for 2014, see also paragraph 16 to Chapter D to the Periodic Report - Additional Information about the Corporation.
9.2 As for a linkage basis report, see Appendix A below.
9.3 It should be noted that the Company takes ongoing steps for identifying opportunities for conducting hedges on the margins of distillates and the market curve, all based on the assessment of their economic profitability and according to the prevailing market terms on the date of conducting such hedges based on the policy determined by the Company's Board as described in Note 30 to the financial statements for 2014.
A-21 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
Part Three – Corporate Governance Issues
10. The process of approval of the financial statements
10.1 The entity responsible for the entity-level controls of the financial statements of the Company is the Board of Directors of the Company.
10.2 The Company has ongoing control processes, which include the review of the financial statements by the auditors of the subsidiaries and by the auditors of the Company. The Company's management carries out a series of additional control processes in the various subsidiaries and the various business units.
10.3 The control processes include, among other things, regular discussions by management of the results as reflected in the financial statements of the Company and the subsidiaries, the review of the financial statements by the finance department at Company headquarters, special discussions with the CEOs and CFOs of the Company and the major subsidiaries regarding the business activity of the company in the Reporting Period and regarding the major details and the changes that occurred in the financial statements of the Company and/or the subsidiaries.
10.4 In addition, the Company's internal auditor, as part of the work plan, examines the Company's internal control framework.
10.5 In advance of the meetings of the Financial Statements Examination Committee ("the Committee"), management sends, within reasonable time in advance, a draft of the financial statements, together with explanations, to the members of the Committee and the Board of Directors for review and assessment.
The approval of the financial statements as of June 30, 2015 involved two meetings of the Committee, held on August 17, 2015 and August 20, 2015 (in which the Committee evaluated the application of its recommendations from August 17, 2015).
In the meetings, the Committee discussed the analyses of the performance of the Company in the Reporting Period, the draft of the financial statements (all parts of the financial statements), the completeness and adequacy of the disclosures in the financial statements, the significant accounting policies adopted, the accounting treatment applied, significant estimates and test of indicators of potential impairment of cash-generating units, including the underlying assumptions and estimates, upon which data in the financial statements are based. In addition, the Committee discussed the effectiveness of internal control over financial reporting and disclosure for the Reporting Period. The Committee received an update from the Company's management that there was no change or event that requires a change in the assessment of effective control as presented in the Periodic Report.
The discussions were based on the materials presented to the Committee by the Company's management and on questions and answers raised and addressed during the discussions, including the comments of the auditors on such issues.
10.6 In the meeting of the Board of Directors on August 20, 2015, the Board of Directors discussed the recommendations of the Committee and approved the financial statements of the Company as of June 30, 2015.
For additional details regarding the process of approval of the financial statements, see the corporate governance questionnaire in Chapter D of the Periodic Report.
A-22 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
11. Enforcement plans and code of ethics
Regarding enforcement plans and the Company's code of ethics, see paragraph 6.1.4 of the Periodic Report.
12. The Company's authorized signatories
As of the date of this report, the Company does not have any independent authorized signatory, as defined in the Securities Law, 1968.
13. The Board of Directors of the Company
13.1 Directors possessing accounting and financial expertise
As of the date of the report, all members of the Board other than Mrs. Hadar Bino-Shmueli are directors possessing accounting and financial expertise in accordance with the provisions of Section 92(A)(12) of the Companies Law and the Expertise Regulations, based on their education and experience. For additional information regarding the experience of these directors, see paragraph 15 (Regulation 26) to Chapter D of the Periodic Report - Additional Information about the Corporation.
13.2 Updating the remuneration of outside directors
In the Reporting Period, the remuneration of outside directors has not been updated.
13.3 Changes in the Board of Directors of the Company and in senior officers
On May 19, 2015, Mr. Garry Stock terminated his tenure as director in the Company. Mr. Garry Stock served as the representative of Instanz Holdings Ltd. ("Instanz") and Dolphin Energies Ltd. ("Dolphin"), controlling shareholders in the Company, on the Company's Board. As per Mr. Stock's declaration, since the joint holdings of Instanz and Dolphin in the Company dropped below an effective stake of 8%, according to the shareholders' agreement, they are no longer entitled to have a representative on their behalf on the Company's Board.
On June 25, 2015, Mr. Aharon Fogel terminated his service as director in the Company. See more information in an immediate report of June 25, 2015 (TASE reference: 2015-01-057057).
Part Four – Disclosure Provisions regarding the Corporation's Financial Reporting
14. Critical accounting estimates
14.1 For details of critical accounting estimates, see Note 2.5 to the annual financial statements as of December 31, 2014.
14.2 For information regarding data pertaining to a material valuation pursuant to Regulation 8B of the Securities Regulations (Periodic and Immediate Reports), 1970, see Appendix C to the Report of the Board of Directors as of December 31, 2014.
A-23 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
Part Five – Repurchases
15. Repurchase of debentures and shares by the Company
15.1 Repurchases of debentures by the Company:
The Company has a policy for the repurchase of Company debentures. On November 27, 2014, the Company's Board extended the plan for the repurchase of debentures (series C) effective from January 1, 2015 through December 31, 2015. The Board also approved the application of the repurchase plan to the debentures (series D) for the same period. For more details see paragraph 1.3.2 of the Periodic Report.
15.2 Repurchases of shares by the Company:
On May 20, 2015, the Company adopted a share repurchase plan according to which the Company may repurchase up to 22,000 Ordinary shares of the Company during the periods and under the terms set forth in the repurchase plan. The repurchase plan is designed to allow the purchase of Company shares that will be held as dormant shares for their allocation to a trustee in respect of restricted stock units (RSUs) that will vest and be exercised into shares based on the share-based payment plan approved by the Company, as discussed in paragraph 8.1 above, and also to allow the controlling shareholders and the Company to comply with the required minimum holding rate in Paz Refinery's control permits.
According to the terms of the repurchase plan and in keeping with the allocation of RSUs to executives in the Company (on June 24, 2015 and June 29, 2015), 16,964 shares were purchased (instead of 22,000 shares). See more details of repurchase plan in paragraph 1.3.2(b) to the Update to the Description of the Corporation's Business Affairs.
Part Six – Designated Disclosure to Debenture Holders
16. Liability certificates
For information regarding the Company's liability certificates - see Appendix B herein.
A-24 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
Part Seven – Additional Issues
17. Drawing of attention in the auditors' report on the financial statements
In the auditors' report as of August 20, 2015, the auditors of the Company draw attention to the content of Note 5.3 to the financial statements as of June 30, 2015 regarding a legal claim filed against the Company and other contingent liabilities. The Company's management, based on legal, professional and other opinions, estimates that at this stage the effect of the aforementioned on the financial statements, if any, cannot be assessed and therefore no provision was recorded in this respect in the financial statements.
18. Determination of criteria for immaterial transactions and extraordinary transactions with controlling shareholders
18.1 As for criteria underlying immaterial and extraordinary transactions with controlling shareholders and the Company's management's authorization to enter into certain immaterial transactions pursuant to these criteria, see paragraph 10.2.2 to Chapter D - Additional Information about the Corporation as of December 31, 2014.
The Board of Directors of the Company would like to thank the employees and managements of the Group companies for their contribution to the results in the reporting Period and for the efforts dedicated by them toward the advancement of the Company.
Zadik Bino – Chairman of the Board Yona Fogel – CEO
Date: August 20, 2015
A-25 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
Appendix A
Linkage bases report as of June 30, 2015
NIS millions
NIS Foreign currency Other Unlinked CPI-linked Dollar Other items Total
Assets Cash and cash equivalents 62 - 10 1 - 73 Trade receivables 1,479 - 330 1 - 1,810 Other accounts receivable 42 1 - - 103 146 Inventories (*) - - - - 1,172 1,172 Other investments, including derivatives 68 - - - - 68 Current tax assets -- -- 7 7 Assets held for sale - - - - 23 23
Total current assets 1,651 1 340 2 1,305 3,299
Non-current assets Income receivable from the State -85- - - 85 Long-term deposits -70- - - 70 Long-term loans and receivables 162 139 - - 63 364 Investment property, net - - - - 32 32 Investments in investees accounted for at equity - - - - 29 29 Loans to investees accounted for at equity 6--- - 6 Fixed assets, net - - - - 5,552 5,552 Intangible assets, net - - - - 825 825 Prepaid lease fees - - - - 23 23 Deferred tax assets - - - - 11 11
Total non-current assets 168 294 - - 6,535 6,997
Total assets 1,819 295 340 2 7,840 10,296
(*) Most of the operating inventories (oil products) are priced in dollars against dollar liabilities.
A-26 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
Appendix A (Cont.)
NIS millions
NIS Foreign currency Other Unlinked CPI-linked Dollar Other items Total
Liabilities Short-term loans and credit 311 7 - - - 318 Trade payables 364 - 1,203 6 - 1,573 Other accounts payable, including derivatives 344 198 36 - 314 892 Current tax liabilities - - - - 42 42 Provisions - - - - 42 42
Total current liabilities 1,019 205 1,239 6 398 2,867
Debentures 3,876 - - - - 3,876 Liabilities to banks ------Other long-term liabilities 347- - 1 51 Employee benefits - - - - 53 53 Deferred tax liabilities - - - - 252 252
Total non-current liabilities 3,879 47 - - 306 4,232
Total liabilities 4,898 252 1,239 6 704 7,099
Total equity - - - - 3,197 3,197
Total liabilities and equity 4,898 252 1,239 6 3,901 10,296
Total net balance sheet balances (433,079) ()899)(4 3,939 -
(*) Most of the operating inventories (oil products) are priced in dollars against dollar liabilities.
A-27 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
Appendix B – Information Regarding the Liability Certificates of the Corporation
Revalued nominal par Carrying Total par Nominal value amount of Interest value as Effective Listed par value pursuant to debentures payable of date of interest for as of indexation as of accrued as Market value Name of issue as of trade Interest Principal 30.06.15 terms as of 30.06.15 of 30.06.15 as of 30.06.15 Date of rating Current (NIS in Interest Nominal report (yes / payment payment Linkage (NIS in 30.06.15 (NIS (NIS in (NIS in (NIS in issue company rating millions) type interest date no) dates dates basis million) in million) million)* million) millions) Series 5/2009 Ma'alot A+ 3,117 Variable BoI 1.4% Yes Four times May 25, None 3,117 3,117 3,117 0.2 3,226 C and quarterly +2.2% a year, 2019 expanded interest 30/3, 29/6, in 29/9 and 4/2010, 30/12 4/2011, between 12/2012 2009 – and 2019 06/2013 Series 06/2014 Ma'alot A+ 752 Variable BoI 1.7% Yes Four times May 31, None 752 752 753 1.0 758 D quarterly +1.65% a year, 2024 interest 28/2, 31/5, 31/8 and 30/11 between 2014 – 2024
* Excluding issuance expenses in the amount of approximately NIS 17 million and premium of approximately NIS 24 million. (1) The trustee for the debentures (Series C) is Reznik Paz-Nevo Trustees 2007 Ltd. , 14 Yad Harutzim, Tel Aviv, Tel: 03-6389200, Fax: 03-6389222, Contact: Adv. Adi Maayan. (2) The trustee for the debentures (Series D) is Strauss Lazer Trustees (1992) Ltd., 17 Yitzhak Sadeh Street, Tel-Aviv 67775, Tel: 03-6237777, Fax: 03-5613824, Contact: Adv. Ori Lazer.
All of the debentures series outstanding, as detailed in the table above, are material. As of the date of the report and during the Reporting Period, the Company is in compliance with all the terms and obligations under the trust deeds (including the financial covenants prescribed in the deed of trust of the debentures (series D)), and no conditions are in place that give rise to cause for the immediate repayment of the debentures. Regarding the updated rating of the debentures see immediate reports from April 13, 2014 (TASE reference: 2014-01-045258), May 19, 2014 (TASE reference: 2014-01-067260), June 10, 2014 (TASE reference: 2014-01-087510) and April 1, 2015 (TASE reference: 2015-01-071197). Following is the history of the rating of the debentures as of their issuance date: March 2010: Stable ilAA-; August 2011: Negative ilAA-; December 2011: Stable ilA+; July 2013: Negative ilA+; April 2014: Stable ilA+; April 2015: Stable ilAA-.
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A-28 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f B Major Changes and Developments in the Description of the Company’s Business WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd.
Update to the description of the Corporation's business affairs for the periodic report for 2014
Pursuant to Regulation 39a to the Israeli Securities Regulations (Immediate and Periodic Reports), 1970 ("the Reporting Regulations"), following is a description of the material changes or developments in the Company's business affairs during the second quarter of 2015 through the date of issuance of this report. The changes and developments are presented herein based on the original order and number of the sections in the chapter on the description of the Corporation's business affairs in the Company's periodic report for 2014 issued on March 22, 2015 (TASE reference: 2015-01-056215) ("the Periodic Report"). The terms used in this document are ascribed the same meaning as in the Periodic Report, unless expressly stated otherwise. In certain cases, in order to present a complete picture of the Company's business affairs, the Company might also provide details of changes and developments that are independently immaterial but might assist in understanding the Company's business.
Part 1 - Description of the General Development of the Company's Business
1.3 - Investments in the Company's Capital and Transactions in its Shares
1.3.2b - Repurchase of shares by the Company
On May 20, 2015, the Company adopted a share repurchase plan according to which the Company may repurchase up to 22,000 Ordinary shares of the Company during the periods and under the terms set forth in the repurchase plan. The repurchase plan is designed to allow the purchase of Company shares that will be held as dormant shares for their allocation to a trustee in respect of restricted stock units (RSUs) that will vest and be exercised into shares based on the share-based payment plan approved by the Company, as discussed in paragraph 6.1.5.3 below, and also to allow the controlling shareholders and the Company to comply with the required minimum holding rate in Paz Refinery's control permits. See more details in an immediate report of May 20, 2015 (TASE reference: 2015-01-023556).
According to the terms of the repurchase plan and in keeping with the allocation of RSUs to executives in the Company, on June 24, 2015 (TASE reference: 2015-01056148) and June 29, 2015 (TASE reference: 2015- 01-059820), 16,964 shares were purchased (instead of 22,000 shares). See more details of the allocation of RSUs to the Company's CEO and other executives in paragraphs 6.1.5.3 and 6.1.7 below, respectively.
1.3.3 - Significant Transactions in the Company's Shares by Interested Parties
On March 23, 2015, Bino Holdings sold 584,197 Ordinary shares of the Company in an off-market transaction at a price of NIS 550 per share ("the share price") to a financial entity which distributed the shares to institutional entities ("the financial entity"). According to the Company's shareholders' agreement, on March 30, 2015 and March 31, 2015, Dolphin Energies Ltd. and Instanz Holdings Ltd., two of the controlling shareholders in the Company, joined this transaction and sold to the financial entity 71,061 and 107,742 shares of the Company, respectively, in an off-market transaction and at the same share price. The financial entity distributed the shares to institutional entities. See details in immediate reports of March 23, 2015 and March 31, 2015 (TASE references: 2015-01-057523, 2015-01-067804 and 2015-01-069202, respectively).
B-1
WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd.
Update to the description of the Corporation's business affairs for the periodic report for 2014
1.4 - Distribution of Dividends
On June 24, 2015, the Company's Board decided on an allowed distribution of a cash dividend of NIS 250 million. See more details in an immediate report of June 24, 2015 (TASE reference: 2015-01-056136), an immediate report of July 7, 2015 (TASE reference: 2015-01-067890) and an immediate report of July 16, 2015 (TASE reference: 2015-01-074532).
Part 2 - Other Information
2.2 - General Environment and Effect of External Factors on the Company's Activity
2.2.8 - Regulatory Developments
2.2.8.1 - Regulatory Developments
In June 2015, the Company, and to the best of its knowledge other fuel companies, received a demand from the Antitrust Authority for producing comprehensive data regarding filling stations with the Company's brand name. The Company provided the requested data.
2.2.8.3 - The Law for Promotion of Competition and Reduction of Centralization, 5772-2012
The Company was informed that the controlling shareholders in the Company occasionally receive applications from parties who wish to receive information about the possible acquisition of the controlling shareholders' interests in the Company. The Company was also informed that by the date of issuance of this report no advanced negotiations are being held with any of those parties. See more details in an immediate report of August 20, 2015 (TASE reference: 2015-01-100848).
2.2.8.6 - Electricity rates
In August 2015, the Plenum of the Public Utilities Authority - Electricity ("the Electricity Authority") decided on a decrease of 7% in the electricity rates. This decrease, if executed, is not expected to have a material impact on the Company's results. However, it should be noted that the purchase price of natural gas, as determined in an agreement signed in April 2012 between Paz Ashdod and the Tamar Reservoir Partnership, is linked to the electricity production rate, as it is determined from time to time by the Electricity Authority, and includes a floor price. See more details of the agreement for the purchase of natural gas in paragraph 5.19.4 to the Periodic Report.
B-2 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd.
Update to the description of the Corporation's business affairs for the periodic report for 2014
Part 3 - The Retail and Wholesale Division
3.5 - Customers of the Division
3.5.2 - Direct Marketing Customers
3.5.2.4 - Car Fleet Customers
In May 2015, the Car Administration extended the period of supply of fuels and related services by the Company in accordance with a tender won by the Company until August 2016.
3.11 - Fixed Assets, Land and Installations in the Division
3.11.2 - Pi-Glilot
On March 26, 2015, Glilot Corner Ltd. ("Glilot Corner") notified the Company of a right of first refusal granted in keeping with the articles of association of Pi-Glilot Petroleum Terminals and Pipelines Ltd. ("Pi- Glilot") in connection with the acquisition of the Company's entire shares in Pi-Glilot at the same price and under the same terms as those detailed in the agreement signed on January 22, 2015 between the Company and B.V.B. Madaf 32 Ltd. (in trust for Glilot Development Limited Partnership) (collectively and severally, "Glilot Development LP"). In view of the position assumed by Glilot Development LP whereby Glilot Corner does not have a right of first refusal with respect to the purchase of the Company's shares in Pi-Glilot, on April 2, 2015, the Company filed an interpleader with the Tel-Aviv District Court in which the Court is asked to decide who is entitled to purchase the Company's shares in Pi-Glilot - Glilot Corner or Glilot Development LP - and to grant the Company an injunction that protects it from any claims filed by either of the parties. See more information in an immediate report of March 26, 2015 (TASE reference: 2015-01- 062659). The parties are taking steps to reach an agreement that will define the buyer and the collaboration between the parties in order to meet all the suspending conditions according to the agreement, including the approval of the Minister of Finance. Once the agreement is reached, it will be submitted for the court's approval.
3.18 - Restrictions and Supervision of the Company's Activity in the Division
3.18.11 - Universal Fueling Device Regulations
On July 6, 2015, the Israeli Parliament's Finance Committee approved an amendment to the Fuel Industry (Stimulating Competition) (Rules for General Automatic Fueling Devices) Regulations, 5772-2011 which provides a four-month deferral (to April 1, 2016) of the date of applying the mandatory gradual deployment of the universal fueling device during the transition period and another deferral of the additional stage of the mandatory gradual deployment during the transition period.
3.18.20 - Preferred Labor
The State's budget and the Economic Plan Law for 2015 and 2016, both approved in August 2015, do not remove the filling station industry from the list of recognized preferred employment industries for discharged soldiers.
B-3 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd.
Update to the description of the Corporation's business affairs for the periodic report for 2014
Part 4 - The Industries and Services Division
4.1 - The Structure of the Division and the Changes Therein
4.1.3 - Airplane Refueling Services - Distribution, Supply and Sale of Jet Fuel and Aviation Gasoline
The Israel Airports Authority ("IAA") published a new tender for licensing the supply of fueling and ancillary services to aircraft at Ben-Gurion Airport. The period of the services will begin on March 3, 2016 and end on March 2, 2021. The IAA may extend the period under any scheme chosen by it by several additional periods to be determined by it by providing an advance notice of 60 days each time, provided that the extension period does not exceed 59 months. In August 2015, Aviation Services filed an offer for participating in the tender.
In June 2015, Aviation Services and IAA signed an agreement which extends the validity of agreement for the sale of jet fuel and aviation gasoline and for the provision of fueling services in domestic airports, under the changes agreed upon between the parties, for the period from May 1, 2015 until the date of shutting down the Sde Dov Airport, which is expected in June 2016.
4.11 Fixed Assets, Land and Installations in the Division
4.11.1 - Fixed Assets and Installations in the Field of LPG
4.11.1.1 - LPG Storage, Filling and Distribution Facilities
The Kiryat Ata facility
As of the date of this report, work is being carried out at the Kiryat Ata facility for upper burial of gas containers. The Kiryat Ata facility's poison permit was extended until June 2, 2016.
The Be'er-Sheva facility
In July 2015, Pazgas, the Be'er-Sheva Municipality, the Ministry of Environmental Protection and the Ministry of National Infrastructures, Energy and Water Resources signed an agreement in the context of which it was agreed to discontinue Pazgas' operations in the Be'er-Sheva gas facility. The agreement stipulates a 24-month transition period from the date of signing (with a possible extension by another six months) during which the Be'er-Sheva gas facility will operate under a minimized capacity. At the end of the transition period, the storage of LPG and odorless gas in the containers and the filtering and treatment of odorless gas will all be halted. According to the agreement, Pazgas will receive compensation in an amount which is immaterial to the Company. The agreement is contingent on the approval of the Ministry of the Interior. The Be'er-Sheva Municipality has undertaken to take steps for the preparation of an alternative space which has been located, inspected and found appropriate by all the parties and which will be allocated for setting up the facilities for the buried gas containers.
The minimization of the Be'er-Sheva gas facility's operations and its shutdown are not expected to have an adverse material effect on the Company's financial results. The Be'er-Sheva gas facility's poison permit was extended until August 10, 2016.
B-4 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd.
Update to the description of the Corporation's business affairs for the periodic report for 2014
4.11.5 - Pazkar Plant
Due to regulatory changes and a delay in the activity of the distribution company, the planned date for terminating the conversion of the Pazkar plant to use of LPG-backed natural gas has been changed to the end of the second quarter of 2016.
4.17 - Environmental Protection in the Division Environmental Risks and Ways of Managing them
4.17.2.1 - LPG Marketing Activity
Pazgas has a poison permit for the Kiryat Ata facility which is in effect until June 2, 2016 and a poison permit for the Be'er-Sheva facility which is in effect until August 2016.
4.17.2.2 - Marketing Activity for Lubricants and Chemicals
A land survey executed by Paz Lubricants in its plant revealed three sources of pollution. In August 2015, Paz Lubricants submitted a plan to the Water Authority for pumping and treating the sources of pollution. The Company estimates that the expected expenses in respect of conducting the plan are immaterial to the Company.
The above information regarding the expected expenses for treating the sources of pollution is forward- looking information, as defined in the Securities Law, which is based, among others, on the results of the land survey executed by Paz Lubricants and the plans submitted by it to the Water Authority. It is possible that actual costs will differ from the Company's estimate and have an adverse effect on the results of Paz Lubricants, also due to additional unforeseen costs and/or any changes in the plans required by the Water Authority and/or regulatory authorities.
The validity of Paz Lubricants' business licenses needed for its processing and production activities, for storing and selling hazardous substances and for Paz Lubricants' lab was extended until September 2015.
4.18 - Restrictions and Supervision of the Company's Activity in the Division
4.18.1 - Quality Standards
In March 2015, Paz Lubricants received approval for compliance with Israeli Standard 2004: ISO 14001 (Quality of the Environment) and Israeli Standard 2007: ISO 18001 (Safety).
4.18.6 - The State Economy Arrangements (Legislative Amendments) (Sale of Gas by Refineries and Gas Suppliers), 5770-2009 ("the Appropriations Regulations")
In June 2015, the Ministry of National Infrastructures, Energy and Water Resources issued for public reference a proposed amendment for the Appropriations Regulations which changes, among others, the surplus distribution and appropriation mechanism, the procedure of assigning appropriations in the event of large customer transfers, the procedure of assigning appropriations in the event of home consumer transfers and providing incentives for small suppliers who offer competitive prices. Pazgas submitted its reference to the proposed amendment in which it objects to the expansion of the protections offered to small gas suppliers and to the procedure for assigning the appropriations to home consumer transfers and requested to add other topics regarding the calculation of the appropriations to large consumer transfers and the joining of new home consumers not as a result of gas supplier transfer.
B-5 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd.
Update to the description of the Corporation's business affairs for the periodic report for 2014
4.18.17 - State Economy Arrangement Regulations (Legislative Amendments) (Delivery of Information regarding Gas Supply), 5775-2015
In June 2015, the State Economy Arrangement Regulations (Legislative Amendments) (Delivery of Information regarding Gas Supply), 5775-2015 became effective. Pazgas produced the required data of the average prices to the Director of the Gas Administration.
4.18.19 - the Draft Gas Decree (Safety and Licensing) (Gas Incidents), 5775-2015 ("the Draft Gas Incidents Decree")
In June 2015, the Ministry of National Infrastructures, Energy and Water Resources issued for public reference the Draft Gas Incidents Decree which imposes certain duties on gas suppliers in order to improve their conduct during and following gas incidents. Pazgas delivered its reference to the Draft Gas Incidents Decree and suggested other adjustments that will allow gas suppliers optimal conduct in the occurrence of gas incidents. Pazgas also expressed its objection to certain provisions, mainly for reasons of unlikelihood (such as time of arrival at the facility, restricting the renewal of gas supply etc.).
Part 5 - The Refining and Logistics Division
5.11 - Fixed Assets, Land and Installations in the Division
5.11.3 - Cogeneration Power Stations
On August 10, 2015, Paz Ashdod was informed of Resolution no. 4 (989) of the Public Utilities Authority - Electricity ("the Authority") which establishes rates for electricity system management services (system tariffs) applicable to all private consumers ("the Resolution"). According to the Resolution, Paz Ashdod's future income from the sale of electricity is expected to be reduced due to the transfer of certain costs which are known to the IEC from the production component to the system management service rate. Moreover, Paz Ashdod may be required to pay for system management services supplied by the IEC to the two cogeneration power stations operated by it in an amount estimated by the Authority at approximately NIS 40 million for the period from June 2013 through July 2015.
Based on the opinion of the Company's legal advisors, the Company's Management believes that the Resolution is illegal and oversteps authority and in Paz Ashdod's opinion is against the Government's policy of encouraging competition in the electricity sector through private electricity manufacturers. Furthermore, Paz Ashdod has factual arguments pertaining to the calculation of the alleged debt stating that an error has occurred in the calculation of the past debt due to the inclusion of components that have already been paid to the IEC. It should be noted that Paz Ashdod intends to present its data to the Authority and take the necessary legal action against applying the Resolution.
Paz Ashdod is at the stage of studying the significance of the Resolution, including its implications for the future, but an initial estimate indicates that it will lead to a decrease of approximately NIS 20 million in Paz Ashdod's annual income from the sale electricity. Nevertheless, the impairment in Paz Ashdod's income will be fully or partially compensated by the reduction in the price of the natural gas which Paz Ashdod purchases from Tamar Partnership since the natural gas price is expected to be reduced, among others, in view of the gas outline approved by the Israeli Government and the Electricity Authority's resolution (as discussed in paragraph 2.2.8.6 above). It should be noted that the price of natural gas, which is mainly used by the cogeneration power stations operated by Pas Ashdod, is linked to the electricity production rate (including the floor price) based on the agreement signed between Paz Ashdod and the Tamar Reservoir Partnership in April 2012.
B-6 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd.
Update to the description of the Corporation's business affairs for the periodic report for 2014
See additional information on the cogeneration power stations operated by Pas Ashdod in paragraphs 5.11.3 and 5.11.4(d) (additional investments planned by Paz Ashdod) to the Periodic Report. See additional information on the agreement for the purchase of natural gas from Tamar Partnership in paragraph 5.19.4(b) to the Periodic Report. See also an immediate report of August 11, 2015 (TASE reference: 2015-093918).
The information in this paragraph regarding the effect of the Authority's Resolution on Paz Ashdod's results is forward-looking information as defined in the Securities Law, which is based on Paz Ashdod's initial estimates. The effect could differ from the above mentioned effect after studying the Resolution and thoroughly examining its implications on Paz Ashdod and/or due to legal proceedings filed against the Resolution and regulatory changes.
5.16 - Investments in the Division
Additional investments planned by Paz Ashdod:
(b) Desalination facility - in July 2015, Paz Ashdod decided not to construct a desalination facility. As a result of the decision, the Company wrote down the outstanding costs invested in the construction of the desalination facility which were in an immaterial amount. It should be noted that these investments could serve the Company in the future but there is no guarantee for that.
5.17 - Environmental Protection in the Division - Environmental Risks and Ways of Managing Them
5.17.2 - Major Ramifications of Legal Provisions on the Company
5.17.2.7 - Sea Dumping Permit
Paz Ashdod's petition for a re-hearing of the standards set forth in the sea dumping permit of Paz Ashdod's waste was accepted by the Sea Dumping Permits Committee at the Ministry of Environmental Protection and in July 2015 a hearing was held. The decision of the Committee has not yet been rendered.
5.17.2.10 - Permit to Use Radioactive Substances
The validity of Paz Ashdod's permit to use a radioactive substance or a product that contains a radioactive substance and its permit to set up a radioactive facility was extended until July 2016.
5.18 - Restrictions and Supervision of the Company's Activity in the Division
5.18.4 - Regulatory Approvals
5.18.4.6 - Import Permit
The validity of Paz Ashdod's import permit pursuant to the Free Import Order, 5766-2006 was extended to March 2016.
5.18.7 - Price Control
In June 2015, the Commissioner of Prices at the Ministry of National Infrastructures, Energy and Water Resources applied to Paz Ashdod, and to the best of the Company's knowledge to other companies as well, with a request for producing comprehensive data regarding Paz Ashdod's sales. Paz Ashdod delivered the requested data.
B-7 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd.
Update to the description of the Corporation's business affairs for the periodic report for 2014
5.18.9 - The State Economy Arrangements (Legislative Amendments) (Sale of Gas by Refineries and Gas Suppliers), 5770-2009 ("the Appropriations Regulations")
As for the proposed amendment to the Appropriations Regulations, see paragraph 4.18.6 above. Paz Ashdod submitted its response to the proposed amendment and also included suggested amendments regarding the production forecast, the sale obligation, the mandatory supply to large gas suppliers and consumers and the surplus distribution mechanism after the initial allocation to the gas suppliers. In August 2015, Paz Ashdod had an oral hearing.
5.19 - Significant Agreements in the Division
5.19.4 - Agreements to Purchase Natural Gas
(a) On July 1, 2015, the Antitrust Authority extended the period of refraining from taking any enforcement proceedings in connection with the Tamar Agreement until the earlier of September 30, 2015 or until a resolution is passed in the motion for exemption filed in respect of the Tamar Agreement.
(b) In March 2015, an agreement was signed between Paz Ashdod and Delek Natural Gas Company Ltd. ("Delek") according to which Paz Ashdod will purchase from Delek natural gas at a volume of up to 700 MMBTU a day for a period of about four years (until the end of 2018). The agreement includes standard items in natural gas marketing contracts such as obligation to purchase minimum annual volumes, price linkage, force majeure, volume increase mechanism etc. The agreement also includes exit points for Paz Ashdod at the end of each calendar year throughout the term of the agreement.
Part 6 - Further Information about the Company
6.1 - Human Resources
6.1.5 - Remuneration Plans for the Employees
6.1.5.3 - Stock-based Payment Plans
On May 20, 2015, following the approval of the Company's Remuneration Committee, the Company's Board approved a restricted stock unit (RSU)-based payment plan to senior officers (who are not directors) and other managers in the Company based on the vesting terms set forth in the plan, including meeting a predetermined financial target, in keeping with article 7 to the Company's remuneration policy ("the stock- based payment plan"). The stock-based payment plan is designed to replace the multiannual bonus mechanism for senior officers that had been approved in the Company's remuneration policy and is contingent on waiving the multiannual bonus plan by the senior officers. See details of the stock-based payment plan in an outline of the offering of up to 22,000 RSUs to employees issued by the Company in an immediate report of May 20, 2015 (TASE reference: 2015-01-023547).
On June 24, 2015, the Company allocated 14,648 RSUs to senior officers (who are not directors) and other managers in the Company (excluding the Company's CEO). For more details see immediate reports of June 24, 2015 (TASE references: 2015-01-056148, 2015-01-056154 and 2015-01-056157). On June 29, 2015, following the approval of the Company's general meeting of June 25, 2015, the Company allocated 2,316 RSUs to the Company's CEO. See more details in paragraph 6.1.7 below and immediate reports of June 29, 2015 (TASE references: 2015-01-059820, 2015-01-059826 and 2015-01-059829).
B-8 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd.
Update to the description of the Corporation's business affairs for the periodic report for 2014
6.1.6 - Benefits and the Nature of Employment Agreements
6.1.6.2 - Contracts with Senior Officers and Senior Management Employees
On May 20, 2015, following the approval of the Company's Remuneration Committee, the Company's Board approved a grant for senior officers (other than directors and the CEO) in the amount of up to 1.8 monthly salaries to each of the senior officers pursuant to article 4.9 to the Company's remuneration policy. See details of the officers' remuneration policy in the Company's immediate reports of July 29, 2013 (TASE reference: 2013-01-102693), September 3, 2013 (TASE reference: 2013-01-136893), August 20, 2014 (TASE reference: 2014-01-138213), September 21, 2014 (TASE reference: 2014-01-161652) and October 1, 2014 (TASE reference: 2014-01-167808).
On May 20, 2015, following the approval of the Company's Remuneration Committee, the Company's Board approved salary increments for officers in the Company (other than directors) in keeping with the Company's remuneration policy, among others, subject to having officers who have not already signed Section 14 to the Severance Pay Law, 1963 sign this section.
6.1.7 - The Employment Agreement of the CEO of the Company
On June 25, 2015, following the approval of the Company's Remuneration Committee and the Board, the Company's general meeting approved an amendment to the Company's CEO's service and employment terms, consisting of a salary increase in return for which the CEO agreed that for his service from July 1, 2015 and thereafter, the Company's pension contributions in respect of the CEO's severance pay will fully replace severance pay pursuant to Section 14 to the Severance Pay Law, 1963. See more details of the CEO's main service and employment terms in paragraph 8.1.2 to Chapter D to the Periodic Report. See also details in an immediate report of May 20, 2015 (TASE reference: 2015-01-023637) and an immediate report of June 25, 2015 (TASE reference: 2015-01-057006).
On June 25, 2015, following the approval of the Company's Remuneration Committee and the Board, the Company's general meeting approved the share-based payment plan for the Company's CEO in keeping with article 7 to the Company's remuneration policy. Accordingly, on June 29, 2015, the Company allocated 2,316 RSUs to the Company's CEO. See more details in an immediate report of May 20, 2015 (TASE reference: 2015-01-023637), an immediate report of June 25, 2015 (TASE reference: 2015-01-057006), immediate reports of June 29, 2015 (TASE references: 2015-01-059820, 2015-01-059829 and 2015-01- 059826) and paragraph 6.1.5.3 above.
6.4 - Financing
6.4.3 - Shelf Prospectus
On April 27, 2015, the ISA approved extending the Company's shelf prospectus of May 29, 2013 by an additional 12 months until May 28, 2016. See details in an immediate report of April 27, 2015 (TASE reference: 2015-01-006720).
6.4.9 - The Company's Credit Rating
On April 1, 2015, S&P Maalot raised the rating of the Company (including debentures of the Company and of Paz Ashdod) from ilA(+) to ilAA(-) with a stable outlook. See more details in the Company's immediate report of April 1, 2015 (TASE reference: 2015-01-071197).
B-9 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd.
Update to the description of the Corporation's business affairs for the periodic report for 2014
6.8 - Legal Proceedings
Update of the table of claims in the Periodic Report
Paragraph 2 to the table of claims - regarding the appeal on the verdict in the real station case, at the Company's request, the Court ordered a temporary stay of the verdict.
Paragraph 5 to the table of claims - regarding a petition to the High Court of Justice filed against the General Director of the Antitrust Authority and fuel companies, in July 2015, the High Court of Justice dismissed the petition.
Paragraphs 6 and 7 to the table of claims - regarding claims filed by disabled IDF veterans, the Company filed several counterclaims whereby if the claims of the disabled IDF veterans are granted, the Company will be entitled to receive usage fees for its proprietary rights in lands on which the stations are located, and alternatively will be entitled to recovery of its investments in the filling stations. The Company also filed monetary claims against the disabled IDF veterans. In the opinion of the Company's Management, based on its legal counsel, the Company's chances to win the declaratory relief claims exceed the plaintiffs' chances and the chances that the outcome will be different are lower than 50%.
Paragraph 16 to the table of claims - regarding proceedings initiated by Paz Ashdod against local authorities, in April 2015, a settlement agreement was signed with the Ashdod Municipality according to which Paz Ashdod paid the Ashdod Municipality an immaterial amount as development levies (road paving and tunneling).
Paragraph 17 to the table of claims - regarding a petition filed to the High Court of Justice by the Kiryat Ata Municipality and the Kiryat Ata Local Planning and Building Committee in connection with the operation of the Kiryat Ata gas facility, in June 2015, the High Court of Justice dismissed the petition.
Paragraph 44 to the table of claims - regarding an indictment filed by the Ministry of National Infrastructures, Energy and Water Resources against Pazgas et al, in March 2015, the Court approved a plea bargain in the context of which Pazgas and its subsidiary paid a fine in an immaterial amount.
In May 2015, Pazgas received an indictment filed by the Ministry of National Infrastructures, Energy and Water Resources, among others, against Pazgas, an officer in Pazgas, an agency of Pazgas and its owners alleging illegal use of a warehouse as a gas storage facility. Based on legal opinion, the Company's Management estimates that the chances of the legal proceeding cannot be assessed at this early stage.
In June 2015, a claim and motion to approve the claim as a class action were filed against 11 defendants, including the Company and a wholly-owned subsidiary, in connection with alleged air pollution in the Haifa bay area and the damages caused to the population of the area. The overall scope of the claim is approximately NIS 14.4 billion (the amount of the claim against the Company and the subsidiary was not determined). Based on legal opinion, the Company's Management believes that in view of the early stage of the proceeding, the chances of the claim cannot yet be assessed. See more details in an immediate report of June 11, 2015 (TASE reference: 2015-01-045777).
B-10 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd.
Update to the description of the Corporation's business affairs for the periodic report for 2014
In August 2015, a claim and motion to approve a class action were filed against the Company for alleged violation of the Law for Environmental Treatment of Electric and Electronic Equipment and Batteries, 5772- 2012. According to the claim and motion, the Company does not allow customers to return batteries at its convenience stores and does not display visible signs that announce the possibility to return batteries. The amount of the claim has not been determined. In the opinion of the Company's Management, based on its legal counsel, despite the very early stage of the case, based on known information, the chances that the motion for approval of a class action will result in the Company's charge in a material amount are lower than 50%.
Miscellaneous
1. Changes in the Status of Senior Officers in the Corporation (Regulation 26 to the Reporting Regulations)
1.1 On May 19, 2015, Mr. Garry Stock terminated his tenure as director in the Company. Mr. Garry Stock served as the representative of Instanz Holdings Ltd. ("Instanz") and Dolphin Energies Ltd. ("Dolphin"), controlling shareholders in the Company, on the Company's Board. As per Mr. Stock's declaration, since the joint holdings of Instanz and Dolphin in the Company dropped below an effective stake of 8%, according to the shareholders' agreement, they are no longer entitled to have a representative on their behalf on the Company's Board. See more details in an immediate report of May 19, 2015 (TASE reference: 2015-01-022722).
1.2 On June 25, 2015, Mr. Aharon Fogel terminated his service as director in the Company. See more information in an immediate report of June 25, 2015 (TASE reference: 2015-01-057057).
2. Insurance Exemption or Undertaking for Indemnification of Officer (Regulation 29a(4) to the Reporting Regulations)
2.1 On June 25, 2015, following the approval of the Company's Remuneration Committee and the Board, the Company's general meeting approved extending by three years and under the same terms the validity of the letter of indemnification granted to officers (including directors) that currently serve and/or will serve in the Company and/or in the subsidiaries from time to time who and/or whose relatives are controlling shareholders in the Company on said date and/or in whose indemnification the controlling shareholders in the Company have personal interest. See more details in an immediate report of May 20, 2015 (TASE reference: 2015-01-023637) and an immediate report of June 25, 2015 (TASE reference: 2015-01-057006).
2.2 On June 25, 2015, following the approval of the Company's Remuneration Committee and the Board, the Company's general meeting approved the following resolutions regarding the insurance or obligation for indemnification of officers:
2.2.1 Signing a director's and officer's (D&O) liability insurance policy with an Israeli insurer for the directors and officers in the Company (including the Company's CEO) and its subsidiaries, including officers (and directors) who and/or whose relatives are controlling shareholders in the Company on said date and/or in whose inclusion in the D&O insurance policy the controlling shareholders in the Company have personal interest, for the period from April 1, 2015 through March 31, 2016 (inclusive) at a premium of $ 116,500 for the insurance period, with a liability limit of up to $ 132 million per claim and on a cumulative basis.
B-11 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f Paz Oil Company Ltd.
Update to the description of the Corporation's business affairs for the periodic report for 2014
2.2.2 Approving in advance the Company's occasional engagement for a period of three (3) years from April 1, 2015 in a D&O liability insurance policy for directors and officers in the Company (including the Company's CEO) and its subsidiaries, including officers (and directors) who and/or whose relatives are controlling shareholders in the Company on said date and/or in whose inclusion in the D&O insurance policy the controlling shareholders in the Company have personal interest, at an annual premium of $ 175,000 and with an annual markup of up to 20%, with a liability limit of up to $ 150 million per claim and on a cumulative basis.
See more details in an immediate report of May 20, 2015 (TASE reference: 2015-01-023637) and an immediate report of June 25, 2015 (TASE reference: 2015-01-057006).
B-12 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f C Condensed Consolidated Interim Financial Statement WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f
PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
AS OF JUNE 30, 2015
UNAUDITED
INDEX
Page
Auditors' Review Report 3
Condensed Consolidated Interim Statements of Financial Position 4 - 5
Condensed Consolidated Interim Statements of Income 6
Condensed Consolidated Interim Statements of Comprehensive Income 7
Condensed Consolidated Interim Statements of Changes in Equity 8 - 12
Condensed Consolidated Interim Statements of Cash Flows 13 - 15
Notes to Condensed Consolidated Interim Financial Statements 16 - 31
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WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f
Somekh Chaikin Tel 03 684 8000 KPMG Millennium Tower Fax 03 684 8444 17 Ha'arba'a St., PO Box 609 Internet www.kpmg.co.il Tel Aviv 61006
Review Report of the Auditors to the Shareholders of Paz Oil Company Ltd.
Introduction
We have reviewed the accompanying financial information of Paz Oil Company Ltd. and its subsidiaries ("the Group"), comprising of the condensed consolidated interim statement of financial position as of June 30, 2015, and the related condensed consolidated interim statements of income, comprehensive income, changes in equity and cash flows for the six and three month periods then ended. The Board of Directors and Management are responsible for the preparation and presentation of this interim financial information in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, and are also responsible for the preparation of financial information for this interim period in accordance with Section D of the Securities Regulations (Periodic and Immediate Reports) – 1970. Our responsibility is to express a conclusion on this interim financial information based on our review.
We did not review the condensed interim financial information of equity accounted investees, the investment in which amounted to approximately NIS 28,960 thousand as at June 30, 2015. The condensed interim financial information of those companies was reviewed by other auditors whose review reports were furnished to us, and our conclusion, insofar as it relates to amounts emanating from the financial information of such companies, is based solely on the said review reports of the other auditors.
Scope of Review
We conducted our review in accordance with Standard on Review Engagements 1, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" of the Institute of Certified Public Accountants in Israel. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards in Israel and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review and the review reports of other auditors, nothing has come to our attention that causes us to believe that the accompanying interim financial information was not prepared, in all material respects, in accordance with IAS 34.
In addition to that mentioned in the previous paragraph, based on our review and the review reports of other auditors, nothing has come to our attention that causes us to believe that the accompanying interim financial information does not comply, in all material respects, with the disclosure requirements of Section D of the Securities Regulations (Periodic and Immediate Reports), 1970.
Without qualifying our aforementioned conclusion, we draw attention to that mentioned in Note 5.3 to the financial statements regarding a legal claim filed against the Company and other contingencies, which in the opinion of Company Management, based on its legal, professional and other counsels, it is not possible at present to assess the impact, if any, of the above on the financial statements and, therefore, no additional provision was made in respect thereof.
Somekh Chaikin Certified Public Accountants (Isr.)
August 20, 2015
Somekh Chaikin, a partnership registered under the Israeli Partnership Ordinance, is the Israeli member firm of KPMG International, a Swiss cooperative.
C-3 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION
June 30, December 31, 2015 2014 2014 Unaudited Audited NIS in millions
ASSETS
CURRENT ASSETS: Cash and cash equivalents 73 1,864 140 Trade receivables 1,810 1,937 1,789 Other accounts receivable 146 159 206 Inventories 1,172 1,850 1,075 Other investments 68 506 83 Current tax assets 7 19 15 Assets held for sale 23 147 136
Total current assets 3,299 6,482 3,444
NON-CURRENT ASSETS: Income receivable from the State 85 82 84 Long-term deposits 70 70 70 Long-term loans granted and receivables 364 252 262 Investment property 32 32 32 Investments in investees accounted for at equity 29 30 30 Loans to investees accounted for at equity 6 5 5 Property, plant and equipment, net 5,552 5,721 5,657 Intangible assets, net 825 857 839 Prepaid lease fees 23 23 23 Deferred tax assets 11 16 40
Total non-current assets 6,997 7,088 7,042
Total assets 10,296 13,570 10,486
The accompanying notes are an integral part of the condensed consolidated interim financial statements.
C-4 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION
June 30, December 31, 2015 2014 2014 Unaudited Audited NIS in millions LIABILITIES AND EQUITY
CURRENT LIABILITIES: Short-term loans and credit, including current maturities of debentures 318 2,567 227 Trade payables 1,573 2,812 2,341 Other accounts payable 642 506 622 Dividend payable 250 - - Current tax liabilities 42 6 5 Provisions 42 37 31
Total current liabilities 2,867 5,928 3,226
NON-CURRENT LIABILITIES: Debentures 3,876 3,877 3,877 Liabilities to banks - 201 - Other long-term liabilities 51 53 53 Employee benefit liabilities 53 54 51 Deferred tax liabilities 252 247 260
Total non-current liabilities 4,232 4,432 4,241
Total liabilities 7,099 10,360 7,467
EQUITY: Non-controlling interests 10 9 9
Share capital 194 194 194 Treasury shares (186) (180) (180) Capital reserves 1,830 1,837 1,830 Other capital reserves - (5) - Retained earnings 1,695 1,701 1,512
3,533 3,547 3,356
Foreign currency translation adjustments (346) (346) (346)
Total equity attributable to equity holders of the Company 3,187 3,201 3,010
Total equity 3,197 3,210 3,019
Total liabilities and equity 10,296 13,570 10,486
The accompanying notes are an integral part of the condensed consolidated interim financial statements.
Zadik Bino Yona Fogel Sharona Novak Chairman of the Board CEO CFO
Date of approval of the financial statements: August 20, 2015.
C-5 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONDENSED CONSOLIDATED INTERIM STATEMENTS OF INCOME
Six months ended Three months ended Year ended June 30, June 30, December 31, 2015 2014 2015 2014 2014 Unaudited Audited NIS in millions (except per share data)
Revenues 6,799 9,413 3,581 4,577 18,513 Cost of sales 5,684 8,637 3,060 4,242 16,695
Gross profit 1,115 776 521 335 1,818
Selling and marketing expenses 480 484 244 241 977 General and administrative expenses 101 93 56 41 179 Other expenses (income), net (14) (6) (14) 6 (18)
Total operating expenses 567 571 286 288 1,138
Operating income 548 205 235 47 680
Finance income 50 * 37 94 * 48 38 Finance expenses 54 * 93 27 * 58 468
Finance expenses (income), net 4 56 (67) 10 430
Income before taxes on income 544 149 302 37 250
Taxes on income 110 38 59 8 77
Net income for the period 434 111 243 29 173
Attributable to: Equity holders of the Company 433 112 243 29 172 Non-controlling interests 1 (1) -- 1
Net income for the period 434 111 243 29 173
Net earnings per share: Basic net earnings per share (in NIS) 42.64 11.04 23.98 2.9 16.93 Diluted net earnings per share (in NIS) 42.62 11.04 23.97 2.9 16.92
* Reclassified.
The accompanying notes are an integral part of the condensed consolidated interim financial statements.
C-6 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME
Six months ended Three months ended Year ended June 30, June 30, December 31, 2015 2014 2015 2014 2014 Unaudited Audited NIS in millions
Net income for the period 434 111 243 29 173
Items of other comprehensive income not carried to profit and loss: Net change in fair value of debentures designated at fair value through profit and loss attributed to change in credit risk - 12 -- 9 Re-measurement of defined benefit plan - (--1) 1 Taxes in respect of items of other comprehensive income (loss) not carried to profit and loss - (3) - - (2)
Total other comprehensive income (loss) for the period not carried to profit and loss, net of taxes - 8-- 8
Total comprehensive income for the period 434 119 243 29 181
Total comprehensive income (loss) attributable to: Equity holders of the Company 433 120 243 29 180 Non-controlling interests 1)(--1 1
Total comprehensive income for the period 434 119 243 29 181
The accompanying notes are an integral part of the condensed consolidated interim financial statements.
C-7 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY
Attributable to equity holders of the Company Foreign currency Non- Share Capital translation Treasury Retained controlling Total capital reserves adjustments shares earnings Total interests equity NIS in millions
Six months ended June 30, 2015 (unaudited):
Balance as of January 1, 2015 (audited) 194 1,830 (346) (180) 1,512 3,010 9 3,019
Total comprehensive income for the period: Net income for the period - - - - 433 433 1 434
Total comprehensive income for the period - - - - 433 433 1 434
Transactions with controlling shareholders, carried directly to equity and distributions to owners: Share-based payments --- -**-* Purchase of treasury shares --- (6) - (6) - (6) Dividend declared --- -(250) (250) - (250)
Balance as of June 30, 2015 194 1,830 (346) (186) 1,695 3,187 10 3,197
* Represents an amount lower than NIS 0.5 million.
The accompanying notes are an integral part of the condensed consolidated interim financial statements.
C-8 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY
Attributable to equity holders of the Company Capital reserve from net change in fair value of debentures designated to fair Capital reserve value through Foreign from financial profit and loss, currency assets at other attributed to Non- Share Capital translation comprehensive change in credit Treasury Retained controlling Total capital reserves adjustments income risk shares earnings Total interests equity NIS in millions
Six months ended June 30, 2014 (unaudited):
Balance as of January 1, 2014 (audited) 194 1,837 (346) (7) (7) (180) 1,840 3,331 11 3,342
Total comprehensive income for the period: Net income (loss) for the period ------112 112 (1) 111 Other comprehensive income for the period, net of taxes - - - - 9 - (1) 8- 8
Total comprehensive income (loss) for the period - - - - 9 - 111 120 (1) 119
Transactions with controlling shareholders, carried directly to equity: Dividend to non-controlling interests ------(1) (1) Share-based payments ------* * - * Dividend declared and paid ------(250) (250) - (250)
Balance as of June 30, 2014 194 1,837 (346) (7) 2 (180) 1,701 3,201 9 3,210
* Represents an amount lower than NIS 0.5 million.
The accompanying notes are an integral part of the condensed consolidated interim financial statements.
C-9 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY
Attributable to equity holders of the Company Foreign currency Non- Share Capital translation Treasury Retained controlling Total capital reserves adjustments shares earnings Total interests equity NIS in millions
Three months ended June 30, 2015 (unaudited):
Balance as of April 1, 2015 194 1,830 (346) (180) 1,702 3,200 10 3,210
Total comprehensive income for the period: Net income for the period - - - - 243 243 - 243
Total comprehensive income for the period - - - - 243 243 - 243
Transactions with controlling shareholders, carried directly to equity and distributions to owners: Purchase of treasury shares --- (6) - (6) - (6) Dividend declared --- -(250) (250) - (250) Share-based payments --- -**-*
Balance as of June 30, 2015 194 1,830 (346) (186) 1,695 3,187 10 3,197
* Represents an amount lower than NIS 0.5 million.
The accompanying notes are an integral part of the condensed consolidated interim financial statements.
C-10 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY
Attributable to equity holders of the Company Capital reserve from net change in fair value of debentures designated to fair Capital reserve value through Foreign from financial profit and loss, currency assets at other attributed to Non- Share Capital translation comprehensive change in credit Treasury Retained controlling Total capital reserves adjustments income risk shares earnings Total interests equity NIS in millions
Three months ended June 30, 2014 (unaudited):
Balance as of April 1, 2014 194 1,837 (346) (7) 2 (180) 1,672 3,172 10 3,182
Total comprehensive income for the period: Net income for the period ------29 29 - 29
Total comprehensive income for the period ------29 29 - 29
Transactions with controlling shareholders, carried directly to equity: Dividend to non-controlling interests ------(1) (1) Share-based payments ------* * - *
Balance as of June 30, 2014 194 1,837 (346) (7) 2 (180) 1,701 3,201 9 3,210
* Represents an amount lower than NIS 0.5 million.
The accompanying notes are an integral part of the condensed consolidated interim financial statements.
C-11 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY
Attributable to equity holders of the Company Capital reserve from net change in fair value of debentures designated to fair value through Foreign profit and loss, currency attributed to Non- Share Capital translation change in credit Treasury Retained controlling Total capital reserves adjustments risk shares earnings Total interests equity NIS in millions
Year ended December 31, 2014 (audited):
Balance as of January 1, 2014 194 1,830 (346) (7) (180) 1,840 3,331 11 3,342
Total comprehensive income for the period: Net income for the period - - - - - 172 172 1 173 Other comprehensive income for the period, net of taxes - - - 7 - 1 8 - 8
Total comprehensive income for the period - - - 7 - 173 180 1 181
Transactions with controlling shareholders, carried directly to equity: Dividend to non-controlling interests in subsidiary ------(3) (3) Share-based payments --- - -(1) (1) - (1) Dividend declared and paid --- - -(500) (500) - (500)
Balance as of December 31, 2014 194 1,830 (346) - (180) 1,512 3,010 9 3,019
The accompanying notes are an integral part of the condensed consolidated interim financial statements.
C-12 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
Six months ended Three months ended Year ended June 30, June 30, December 31, 2015 2014 2015 2014 2014 Unaudited Audited NIS in millions
Cash flows from operating activities:
Net income for the period 434 111 243 29 173
Adjustments:
Depreciation and amortization 198 199 99 99 403 Capital gain from disposal of property, plant and equipment and investment property (34) (12) (33) (1) (28) Share-based payment transactions * * * * 1 Finance expenses, net 4 56 (67) 10 430 Taxes on income 110 38 59 8 77
Income for the period after adjustments to income 712 392 301 145 1,056
Decrease (increase) in trade receivables, other accounts receivable and long-term receivables 42 (36) 135 119 130 (Increase) decrease in inventories (97) (282) 97 (165) 492 Increase (decrease) in trade payables and other accounts payable (631) (59) (299) 129 (773) (Decrease) increase in provisions and employee benefits 13 (8) 16 (1) (17) Change in derivative financial instruments in respect of goods 48 13 18 5 (22)
(625) (372) (33) 87 (190)
Income tax paid (44) (81) (21) (27) (126)
Net cash provided by (used in) operating activities 43 (61) 247 205 740
* Represents an amount lower than NIS 0.5 million.
The accompanying notes are an integral part of the condensed consolidated interim financial statements.
C-13 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
Six months ended Three months ended Year ended June 30, June 30, December 31, 2015 2014 2015 2014 2014 Unaudited Audited NIS in millions
Cash flows from investing activities:
Purchase of property, plant and equipment (87) (96) (43) (49) (221) Proceeds from sale of property, plant and equipment, investment property and assets held for sale 63 26 41 7 39 Betterment tax in respect of sale of property, plant and equipment (13) - (13) - - Dividend received from investees and other investments 4 - 2 - 7 Loans granted to filling station operators, agents, employees, fuel companies and others (2) (3) (1) (1) (4) Repayment of loans granted to filling station operators, agents, employees, fuel companies and others 5 9 2 3 14 Investment in intangible assets, deferred charges and prepaid lease fees (4) 91) (2) (1) (1) Interest received 5 9 3 4 9 Exercise of derivatives in respect of interest differences - 37 - 37 484
Net cash provided by (used in) investing activities (29) (19) (11) - 327
The accompanying notes are an integral part of the condensed consolidated interim financial statements.
C-14 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
Six months ended Three months ended Year ended June 30, June 30, December 31, 2015 2014 2015 2014 2014 Unaudited Audited NIS in millions
Cash flows from financing activities:
Issuance of debentures less issuance expenses - 743 - 743 743 Purchase of treasury shares (6) - (6) - - Repayment of long-term loans from banks and others - (306) - (306) (306) Dividend to non-controlling interests in subsidiary - (1) - (1) (3) Increase (decrease) in short-term credit from banks 105 (9) (167) (7) (11) Repayment of debentures (1) - (1) - (2,061) Dividends paid - (250) - - (500) Interest paid (57) (118) (26) (86) (680) Repayment of exercised derivatives (99) - (41) - (37)
Net cash provided by (used in) financing activities (58) 59 (241) 343 (2,855)
Increase (decrease) in cash and cash equivalents (44) (21) (5) 548 (1,788)
Cash and cash equivalents at the beginning of the period 140 1,888 98 1,320 1,888
Effect of exchange rate changes on cash and cash equivalents held in foreign currency (23) (3) (20) (4) 40
Cash and cash equivalents at the end of the period 73 1,864 73 1,864 140
The accompanying notes are an integral part of the condensed consolidated interim financial statements.
C-15 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 1:- THE REPORTING ENTITY
Paz Oil Company Ltd. ("the Company") is an Israeli-resident company incorporated in Israel whose registered address is Europark, Yakum Industrial Zone, Kibbutz Yakum. The condensed consolidated interim financial statements of the Company as of June 30, 2015 comprise the financial statements of the Company and its subsidiaries (collectively - "the Group"), and the Group's interests in associates and joint arrangements. The controlling shareholders in the Company are Bino Holdings Ltd., Dolphin Energy Ltd. and Instanz Holdings Ltd. whether by virtue of holding the Company's shares or based on agreements signed between them. The Group is engaged mainly in the refining of crude oil into oil products and the sale thereof for industrial use and private consumption including inside filling stations (which are operated, among others, by the Company) and outside filling stations, and in additional business activities in the field of retail marketing on the premises of the Company's filling stations, including the operation of the Yellow convenience store chain, retail marketing of LPG, production, import, marketing and sale of lubricants and chemicals and sealing and insulation products, and in complementary services and industries. The securities of the Company are listed for trade on the Tel-Aviv Stock Exchange ("TASE").
NOTE 2:- BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS
2.1 Statement of compliance with International Financial Reporting Standards
These condensed consolidated interim financial statements have been prepared in accordance with IAS 34, "Interim Financial Reporting", and they do not include all of the information required for full annual financial statements. They should be read in conjunction with the financial statements as of December 31, 2014 and for the year then ended ("annual financial statements"). Furthermore, these financial statements have been prepared in accordance with the provisions of Chapter D of the Securities Regulations (Periodic and Immediate Reports), 1970.
These condensed consolidated interim financial statements were authorized for issue by the Group's Board of Directors on August 20, 2015.
2.2 Use of estimates and judgments
The preparation of these condensed consolidated interim financial statements in conformity with IFRSs requires Management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
The estimates and their underlying assumptions are reviewed on a regular basis. Changes in accounting estimates are recognized in the period in which the estimates were corrected and in all future affected periods.
C-16 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 2:- BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Cont.)
The assessments and judgments used by management in the adoption of the accounting policies and the preparation of the interim financial statements are identical to those used in the preparation of the annual financial statements.
2.3 In the statement of changes in equity for the period of six and three months ended June 30, 2014, the Company reclassified the capital reserve from financial assets in a total of NIS (7) million from other comprehensive income to other capital reserves. The Company also reclassified certain amounts relating to finance income and expenses in the statements of income for the six and three months ended June 30, 2014 for the sake of consistency with the annual financial statements.
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES
The accounting policies applied by the Group in these condensed consolidated interim financial statements are consistent with those applied by the Group in the annual financial statements.
3.1 New standards and interpretations not yet adopted
3.1.1 IFRS 15, "Revenue from Contracts with Customers" ("the Standard")
In keeping with the disclosure of new standards and interpretations not yet adopted in Note 3, "Significant Accounting Policies, in the annual financial statements, the date of the first-time adoption of the Standard was deferred to annual periods beginning on January 1, 2018.
The Group has begun examining the implications of the adoption of the Standard on its financial statements.
C-17 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 4:- SEGMENT REPORTING
The Group has three reportable segments, as described below, which form the Group's strategic business units. The strategic business units offer different products and services and the allocation of resources and evaluation of performance are managed separately. For each of the strategic business units, the Group's chief operating decision maker reviews internal management reports on at least quarterly basis.
The accounting policies of the reportable segments are consistent with the accounting principles applied in the preparation and presentation of the Group's consolidated financial statements.
Segment results reported to the chief operating decision maker include items directly attributable to a segment as well at those that can be allocated on a reasonable basis. Unallocated items comprise mainly general and administrative costs.
Segment capital expenditure is the total cost incurred during the period to acquire fixed assets and intangible assets.
The divisions and areas of activity, which are also the operating segments in the financial statements, are as follows:
Paz Retail and Wholesale ("Paz-R&W") - this division includes three subdivisions operated by the Company itself and by several subsidiaries. The first subdivision, the Retail Subdivision, markets oil and fuel products at filling stations and food and convenience products at the Yellow market stores. The second subdivision, the Entrepreneurship and Assets Subdivision, focuses on expanding the Company's retail infrastructure by building locating and developing lands for establishing filling stations, convenience stores, and other retail complexes. This subdivision also performs the ongoing management of agreements involving this activity, in leasing assets and providing engineering, maintenance and logistic services for the retail complexes and retail infrastructure customers. This subdivision operates through two channels: (1) operation and real estate and (2) real estate development. The third subdivision, the Wholesale Subdivision, focuses on the direct marketing of fuels to institutional customers, industry and other large enterprises, as well as on the marketing of fuels to car fleets.
Paz Industries and Services ("Paz-Industries") - this division includes Paz Industries and Services which directly and indirectly holds the subsidiaries: Pazgas, Pazkar, Paz Lubricants and Chemicals, Paz Aviation Services and Paz Aviation Assets. Through the various units, Paz- Industries focuses on manufacturing, import, storage, marketing, sale of products, export, recycling and development of new products along with creating synergies between the different units.
Paz Refining and Logistics ("Paz-Refining") - this division includes the subsidiary Paz Ashdod Refinery Ltd. ("Paz Ashdod") and manages the refinery it owns in Ashdod, imports crude oil and related products, manufactures oil distillates, generates electricity and steam for self-use and generates electricity for sale to external customers. Paz-Refining consolidates the logistic services of the Paz Group, including the storage and distribution of fuels (on and off of the refinery's premises and in and outside the storage and distribution facilities in Haifa), supply and purchasing services. The entire inventory of crude oil and related products, except for the operational inventory at the filling stations, is managed by Paz-Refining.
The head office activity of the Company consolidates all the services rendered to the entire Paz Group in the areas of finance, legal counseling, HR, IT and strategic planning and supports the achievement of the objectives of the divisions.
C-18 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 4:- SEGMENT REPORTING (Cont.)
Information on profit and loss:
Six months ended June 30, 2015 (unaudited):
Industries Adjustments Wholesale and to Consolidated and Retail Services Refining consolidation total NIS in millions
Revenues from external customers 3,493 601 2,705 - 6,799 Revenues from inter-segment sales 75 209 2,526 (2,810) -
Segment revenues 3,568 810 5,231 (2,810) 6,799
Segment results 185 111 298 - 594
Unallocated expenses (46)
Operating income 548
Finance expenses, net (4) Share of earnings of investees accounted for at equity -
Income before taxes on income 544
Depreciation and amortization 54 24 111 189
Unallocated depreciation and amortization 9
Total depreciation and amortization 198
C-19 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 4:- SEGMENT REPORTING (Cont.)
Six months ended June 30, 2014 (unaudited):
Industries Adjustments Wholesale and to Consolidated and Retail Services Refining consolidation total NIS in millions
Revenues from external customers 4,903 673 3,837 - 9,413 Revenues from inter-segment sales 104 258 3,852 (4,214) -
Segment revenues 5,007 931 7,689 (4,214) 9,413
Segment results 186 97 (23) - 260
Unallocated expenses (55)
Operating income 205
Finance expenses, net (56) Share of earnings of investees accounted for at equity -
Income before taxes on income 149
Depreciation and amortization 55 26 108 189
Unallocated depreciation and amortization 10
Total depreciation and amortization 199
C-20 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 4:- SEGMENT REPORTING (Cont.)
Three months ended June 30, 2015 (unaudited):
Industries Adjustments Wholesale and to Consolidated and Retail Services Refining consolidation total NIS in millions
Revenues from external customers 1,849 269 1,463 - 3,581 Revenues from inter-segment sales 38 93 1,352 (1,483) -
Segment revenues 1,887 362 2,815 (1,483) 3,581
Segment results 102 41 112 - 255
Unallocated expenses (20)
Operating income 235
Finance income, net 67 Share of earnings of investees accounted for at equity -
Income before taxes on income 302
Depreciation and amortization 27 12 56 - 95
Unallocated depreciation and amortization 4
Total depreciation and amortization 99
C-21 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 4:- SEGMENT REPORTING (Cont.)
Three months ended June 30, 2014 (unaudited):
Industries Adjustments Wholesale and to Consolidated and Retail Services Refining consolidation total NIS in millions
Revenues from external customers 2,462 298 1,817 - 4,577 Revenues from inter-segment sales 51 119 1,933 (2,103) -
Segment revenues 2,513 417 3,750 (2,103) 4,577
Segment results 101 36 (63) - 74
Unallocated expenses (27)
Operating income 47
Finance income, net (10) Share of earnings of investees accounted for at equity -
Income before taxes on income 37
Depreciation and amortization 27 13 54 94
Unallocated depreciation and amortization 5
Total depreciation and amortization 99
C-22 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 4:- SEGMENT REPORTING (Cont.)
Year ended December 31, 2014 (audited):
Industries Adjustments Wholesale and to Consolidated and Retail Services Refining consolidation total NIS in millions
Revenues from external customers 9,216 1,284 8,013 - 18,513 Revenues from inter-segment sales 210 444 7,131 (7,785) -
Segment revenues 9,426 1,728 15,144 (7,785) 18,513
Segment results 397 178 212 - 787
Unallocated expenses (107)
Operating income 680
Finance expenses, net 430
Income before taxes on income 250
Capital expenditures 126 56 40 222
Depreciation and amortization 112 52 219 383
Unallocated depreciation and amortization 20
Total depreciation and amortization 403
C-23 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 5:- CONTINGENT LIABILITIES
5.1 In the ordinary course of business, legal claims have been filed and various legal proceedings are pending against Group companies (in this paragraph, "legal claims"). The managements of the Group companies believe, among others based on the opinion of legal counsel, adequate provisions have been recorded in the financial statements in order to cover the potential exposure of these legal claims.
The aggregate amount of legal claims filed against the Group companies regarding various issues which are more likely not to materialize as of June 30, 2015 totals approximately NIS 1,761 million.
The amounts presented in this Note are not linked to the CPI and do not include interest based on the interest and linkage legislation.
Total Total provision exposure Group of claims Nature of claims NIS in millions Restrictive trade Mainly declaratory claims for declaring the - 19 practices cancellation of filling station operating agreements alleging the existence of restrictive trade practices and/or depriving condition in standard contract Proceedings with local Mainly disputes regarding current and 6 (a) 211 authorities and retroactive municipal taxes, fees and levies; indictments indictments for absence of business license, legal violations and building permits Class actions Various motions for approval of claims as class 21 1,371 (b) actions against the Company and its subsidiaries, among others, alleging noncompliance with laws, damage to the environment, collection of various fees, misleading of consumers etc. Various claims Mainly claims which are individually in the 4 191 amount of up to NIS 10 million each, Palkal related claims and other monetary claims or demands Total 31 1,792
Comments
(a) The main provision in included in accrued expenses.
(b) In claims filed against the Group and other companies in respect of which the specific exposure for the Group could not be assessed, the relative market share of the relevant Group company was taken into account.
C-24 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 5:- CONTINGENT LIABILITIES (Cont.)
5.2 Events after the financial statement date
a. On August 10, 2015, Paz Ashdod was informed of Resolution no. 4 (989) of the Public Utilities Authority - Electricity ("the Authority") which establishes rates for electricity system management services (system tariffs) applicable to all private consumers ("the Resolution"). According to the Resolution, Paz Ashdod may be required to pay for system management services supplied by the IEC to the two cogeneration power stations operated by it an amount estimated by the Authority at approximately NIS 40 million for the period from June 2013 through July 2015. Based on the opinion of the Company's legal advisors, the Company's Management believes that the Resolution is illegal and oversteps authority and in Paz Ashdod's opinion is against the Government's policy of encouraging competition in the electricity sector through private electricity manufacturers. Furthermore, Paz Ashdod has factual arguments pertaining to the calculation of the alleged debt stating, among others, that an error has occurred in the calculation of the past debt due to the inclusion of components that have already been paid to the IEC. It should be noted that Paz Ashdod intends to present its data to the Authority and take the necessary legal action against applying the Resolution.
b. In August 2015, a claim and motion to approve a class action were filed against the Company for alleged violation of the Law for Environmental Treatment of Electric and Electronic Equipment and Batteries, 5772-2012. According to the claim and motion, the Company does not allow customers to return batteries at its convenience stores and does not display visible signs that announce the possibility to return batteries. The amount of the claim has not been determined. In the opinion of the Company's Management, based on its legal counsel, despite the very early stage of the case, based on known information, the chances that the motion for approval of a class action will result in the Company's charge in a material amount are lower than 50%.
5.3 In the reporting period there was no material change in the chances of materialization of other contingent liabilities, as described in Note 33.2.1.1 to the annual financial statements as of December 31, 2014. In the opinion of the Company's Management, based on the opinion of its legal, professional and other advisors, their effect, if any, on the financial statements cannot be estimated at this stage and, therefore, no additional provision was made in respect thereof.
In addition, in June 2015, a claim and motion to approve the claim as a class action were filed against 11 defendants, including the Company and a wholly-owned subsidiary, in connection with alleged air pollution in the Haifa bay area and the damages caused to the population of the area. The overall scope of the claim approximates NIS 14.4 billion (the amount of the claim against the Company and the subsidiary was not determined). Based on legal opinion, the Company's Management believes that in view of the early stage of the proceeding, the chances of the claim cannot yet be assessed.
C-25 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 6:- SIGNIFICANT EVENTS DURING THE REPORTING PERIOD
6.1 In keeping with the matter discussed in Note 12b(2) to the financial statements for 2014, on March 26, 2015, Glilot Corner Ltd. ("Glilot Corner") notified the Company of a right of first refusal granted in keeping with the articles of association of Pi-Glilot Petroleum Terminals and Pipelines Ltd. ("Pi-Glilot") in connection with the acquisition of the Company's entire shares in Pi-Glilot at the same price and under the same terms as those detailed in the agreement signed on January 22, 2015 between the Company and B.V.B. Madaf 32 Ltd. (in trust for Glilot Development Limited Partnership) (collectively and severally, "Glilot Development LP"). In view of the position assumed by Glilot Development LP whereby Glilot Corner does not have a right of first refusal with respect to the purchase of the Company's shares in Pi-Glilot, on April 2, 2015, the Company filed an interpleader with the Tel-Aviv District Court in which the Court is asked to decide who is entitled to purchase the Company's shares in Pi-Glilot - Glilot Corner or Glilot Development LP - and to grant the Company an injunction that protects it from any claims filed by either of the parties. The parties are taking steps to reach an agreement that will define the buyer and the collaboration between the parties in order to meet all the suspending conditions according to the agreement, including the approval of the Minister of Finance. Once the agreement is reached, it will be submitted for the Court's approval.
6.2 In keeping with the matter discussed in Note 12b(1) to the financial statements for 2014, in the reporting period, the Company recognized a capital gain from the sale of the land in Glilot in an amount of approximately NIS 27 million before taxes (approximately NIS 20 million after taxes).
6.3 On June 24, 2015, the Company's Board decided on an allowed distribution of a cash dividend in an overall amount of NIS 250 million (NIS 24.63 per share). The dividend was paid on July 20, 2015.
6.4 On April 1, 2015, S&P Maalot raised the rating of the Company (including debentures of the Company and of Paz Ashdod) from ilA(+) to ilAA(-) with a stable outlook.
6.5 In June and July 2015, the Company purchased 16,964 shares with an overall cost of approximately NIS 10 million in the context of a plan for the repurchase of Company shares. The plan is designed for the repurchase of Company shares that will be held as dormant shares for their allocation to a trustee in respect of RSUs that will vest and be exercised into shares based on a share-based payment plan approved by the Company in order to allow the controlling shareholders in the Company to meet the minimum holding rate required in the control permit in Paz Refinery.
C-26 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 6:- SIGNIFICANT EVENTS DURING THE REPORTING PERIOD (Cont.)
6.6 On May 20, 2015, following the approval of the Company's Remuneration Committee and Audit and Finance Committee, the Company's Board decided to allocate up to 22,000 RSUs to executives and senior officers which, provided that certain conditions are met (meeting an EBITDA target), will be automatically exercised into up to 22,000 Ordinary shares of the Company of NIS 5 par value each. The RSUs will be granted at no consideration and their exercise will not be subject to any exercise increment. According to the plan, 50% of the RSUs will vest and become exercisable at the end of two years from the date of their allocation and 50% will vest at the end of three years from the date of allocation - a total of two portions - provided that the officers are employed by the Company or a subsidiary on the vesting date and subject to meeting the predetermined target. In June 2015, the Company allocated 16,964 RSUs (instead of the previously approved 22,000 RSUs) that will be exercisable into up to 16,964 Ordinary shares of the Company of NIS 5 par value each of which 2,316 RSUs were allocated to the CEO. The grant of the RSUs according to the plan is under the capital gains track with a trustee pursuant to Section 102 to the Income Tax Ordinance. The overall value of the RSUs granted in the amount of approximately NIS 10 million will be recorded over the vesting period.
6.7 On June 25, 2015, following the approval of the Company's Remuneration Committee and the Board, the Company's general meeting approved an amendment to the Company's CEO's service and employment terms, consisting of a salary increase in return for which the CEO agreed that for his service from July 1, 2015 and thereafter, the Company's pension contributions in respect of the CEO's severance pay will fully replace severance pay pursuant to Section 14 to the Severance Pay Law, 1963.
On June 25, 2015, following the approval of the Company's Remuneration Committee and the Board, the Company's general meeting approved the share-based payment plan for the Company's CEO in keeping with article 7 to the Company's remuneration policy.
Accordingly, on June 29, 2015, the Company allocated 2,316 RSUs to the Company's CEO.
C-27 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 7:- FINANCIAL INSTRUMENTS
7.1 Financial instruments measured at fair value for disclosure purposes only
The carrying amount of certain financial assets and liabilities, including cash and cash equivalents, trade receivables, other accounts receivable, other short-term investments, derivatives, short-term loans and borrowings, trade payables and other accounts payable approximates their fair value. The fair value of the other financial assets and liabilities and the carrying amount as shown in the statement of financial position are as follows:
June 30, 2015 (unaudited) Carrying Fair amount value NIS in millions
Non-current assets: Loans to operators and agents 158 183 Loans to investees 6 6
Non-current liabilities: Debentures (including current maturities and accrued interest) 3,877 3,984
June 30, 2014 (unaudited) Carrying Fair amount Value NIS in millions
Non-current assets: Loans to operators and agents 164 184 Loans to investees 5 5
Non-current liabilities: Debentures (including current maturities and accrued interest) 6,418 6,498 Long-term bank loans (at variable interest) 201 201
December 31, 2014 (audited) Carrying Fair amount Value NIS in millions
Non-current assets: Loans to operators and agents 161 * 187 Loans to investees 6 6
Non-current liabilities: Debentures (including current maturities and accrued interest) 3,878 3,963
* Reclassified.
C-28 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 7:- FINANCIAL INSTRUMENTS (Cont.)
7.2 Fair value hierarchy of financial instruments measured at fair value
The table below analyzes financial instruments measured at fair value using a valuation technique.
The different levels have been defined as follows:
Level 1: quoted prices (unadjusted) in active markets for identical instruments. Level 2: inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly. Level 3: inputs that are not based on observable market data (unobservable inputs).
June 30, 2015 (unaudited) Level 1 Level 2 Level 3 Total NIS in millions
Financial assets at fair value through profit or loss: Financial assets - derivative instruments *- - * Investments in unquoted shares - - 68 68
- - 68 68
Financial liabilities at fair value through profit or loss: Financial liabilities - derivative instruments 10 20 - 30
10 20 - 30
June 30, 2014 (unaudited) Level 1 Level 2 Level 3 Total NIS in millions
Financial assets at fair value through profit or loss: Interest rate swap transactions -442 - 442 Financial assets - derivative instruments -5 - 5 Investments in unquoted shares - - 59 59
- 447 59 506
Financial liabilities at fair value through profit or loss: Debentures designated at fair value through profit or loss 2,418 - - 2,418 Financial liabilities - derivative instruments 11 - - 11
2,429 - - 2,429
* Represents an amount lower than NIS 0.5 million.
C-29 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 7:- FINANCIAL INSTRUMENTS (Cont.)
December 31, 2014 (audited) Level 1 Level 2 Level 3 Total NIS in millions
Financial assets at fair value through profit or loss: Derivative instruments -15 - 15 Investments in unquoted shares - - 68 68
- 15 68 83
Financial liabilities at fair value through profit or loss: Financial liabilities - derivative instruments -126 - 126
-126 - 126
7.3 In keeping with the matter discussed in Note 30.4.2.3 to the financial statements as of December 31, 2014, as of the financial statement date, the Company entered into economic hedges for the sale of dollars for a period of up to six months totaling approximately $ 40 million. The hedges consist of a minimum rate below which they expire but if the exchange rate exceeds the exercise rate, the Company will sell foreign currency in an overall amount that is three times the overall amount of the hedges.
As of the financial statement date, the fair value of these hedges represents a liability of approximately NIS 20 million (the fair value as of December 31, 2014 approximates NIS 126 million). As part of its entity-level strategy, the Company executed a partial hedge on these transactions.
In the reporting period, the Company recorded net financial expenses on the revaluation and realization of derivative transactions totaling approximately NIS 2 million. In the second quarter of 2015, the Company included income in respect of the revaluation and realization of derivative transactions totaling approximately NIS 25 million.
7.4 Financial instruments measured at fair value according to the Level 3 fair value hierarchy
The balance of the investment in the financial instrument - unquoted shares measured at fair value according to the Level 3 fair value hierarchy - amounts to NIS 68 million, NIS 59 million and NIS 68 million as of June 30, 2015, June 30, 2014 and December 31, 2014, respectively. The net proceeds were recognized in profit and loss in 2014 under financing.
C-30 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2015
NOTE 7:- FINANCIAL INSTRUMENTS (Cont.)
7.5 Valuation technique for determining the fair value of financial instruments measured at Level 2 and Level 3 according to the fair value hierarchy and the valuation processes used by the Company
As for the valuation techniques for measuring the fair value of derivative instruments and investments in unquoted shares, see Note 30.5 to the annual financial statements as of December 31, 2014.
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C-31 WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f PMdesigners PAZ OIL COMPANY LTD. 2015 Annual Report
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PAZ OIL COMPANY PAZ OIL COMPANY LTD. Euro Park, Holland Building 2015 Annual Report Yakum 6097200, Israel www.paz.co.il WorldReginfo - 8f850467-2904-45ba-8208-c70bba334b4f